<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
---------------------
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
---------------------
RYMAC MORTGAGE INVESTMENT CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
RYMAC MORTGAGE INVESTMENT CORPORATION
(NAME OF PERSON(S) FILING PROXY STATEMENT)
---------------------
Payment for Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(2)
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share
2) Aggregate number of shares to which transaction applies:
9,734,600(1)
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $2.375 per share of Common
Stock(2)
4) Proposed maximum aggregate value of transaction: $48,623,675(3)
5) Total fee paid: $9,725
- ---------
(1) Includes (1) 5,210,600 shares issuable in the Merger to existing holders of
RYMAC Mortgage Investment Corporation (the "Company"), (2) 4,264,000 shares
issuable as part of the Acquisition to Navistar International Transportation
Corp. ("Navistar") and (3) 260,000 shares issuable upon the exercise of
outstanding options.
(2) For purposes of calculating the filing fee only (calculated based on the
average of the high and low reported price of the Company's Common Stock on
the American Stock Exchange on October 4, 1996).
(3) The proposed maximum aggregate value of the transactions described in the
preliminary proxy materials is equal to $48,623,675, which is equal to the
sum of (i) $23,119,675 (the value of the Common Stock to be issued in the
transaction) (calculated based on the average of the high and low reported
price of the Company's Common Stock on the American Stock Exchange on
October 4, 1996) and (ii) $25,504,000 (the principal amount of the Secured
Note to be issued to Navistar in the transaction). The fee paid herewith is
$9,725, which represents 1/50 of 1% of the proposed maximum aggregate value
of the transaction.
[X] Fee paid previously with preliminary materials.
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<PAGE> 2
RYMAC MORTGAGE INVESTMENT CORPORATION
100 North Fourth Street
Suite 813
P.O. Box 250
Steubenville, Ohio 43952
(800) 666-6960
November 8, 1996
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of
RYMAC Mortgage Investment Corporation (the "Company") to be held at the American
Stock Exchange, 86 Trinity Place, New York, New York 10006-1881 on December 19,
1996, at 10:00 a.m., Eastern time (the "Special Meeting").
At the Special Meeting, you will be asked to consider and approve (a) the
terms and conditions of an Asset Purchase Agreement, dated as of September 12,
1996 and as amended on October 31, 1996 (as so amended, the "Asset Purchase
Agreement"), between the Company and Navistar International Transportation Corp.
("Navistar") pursuant to which the Company will acquire the assets, properties
and business, subject to the assumption of certain liabilities, of the Columbus
Plastics Operation of Navistar (the "Acquisition") and (b) the issuance of
4,264,000 shares of common stock of Core Materials (as defined below) to
Navistar pursuant to the Asset Purchase Agreement, which amount is subject to
adjustment pursuant to the provisions of the Asset Purchase Agreement but shall
not exceed 45% of the total number of shares of Core Materials issued and
outstanding on a fully diluted basis (the "Stock Issuance").
At the Special Meeting, you will also be asked to consider and approve an
Agreement and Plan of Merger between the Company and Core Materials Corporation,
a Delaware corporation ("Core Materials"), pursuant to which the Company will
change its state of incorporation from Maryland to Delaware by merging into Core
Materials, which is a wholly-owned subsidiary of the Company. The consummation
of the proposed merger is contingent upon the approval by the stockholders of
the Company of the terms of the Asset Purchase Agreement, including the Stock
Issuance. The proposed merger would be consummated shortly before the
consummation of the Acquisition.
The accompanying Proxy Statement/Prospectus provides detailed information
concerning the Acquisition, the proposed reincorporation of the Company and the
other items on the agenda at the Special Meeting. You are urged to read the
Proxy Statement/Prospectus carefully and in its entirety.
YOUR BOARD OF DIRECTORS STRONGLY RECOMMENDS THAT YOU VOTE FOR THE
ACQUISITION AND THE MERGER. The Board believes that the terms of the Asset
Purchase Agreement are in the best interests of the Company and its
stockholders. The Board of Directors has approved the Acquisition and recommends
that you vote to approve the terms and conditions of the Asset Purchase
Agreement, including the Stock Issuance. The Board also recommends that you
approve each of the other items to be voted on at the Special Meeting.
Please give these proxy materials careful attention. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL MEETING REGARDLESS OF THE
SIZE OF YOUR HOLDINGS. Accordingly, whether or not you plan to attend the
Special Meeting, please promptly mark, sign and date the enclosed proxy and
return it in the enclosed postage-paid envelope to assure that your shares will
be represented at the Special Meeting.
STOCKHOLDERS OF THE COMPANY SHOULD NOT SEND IN ANY STOCK CERTIFICATES FOR
EXCHANGE AFTER THE MERGER UNTIL THEY RECEIVE A TRANSMITTAL LETTER FOR THAT
PURPOSE.
Sincerely,
/s/ RICHARD R. CONTE
Richard R. Conte
Chairman of the Board
<PAGE> 3
RYMAC MORTGAGE INVESTMENT CORPORATION
100 North Fourth Street
Suite 813
P.O. Box 250
Steubenville, Ohio 43952
(800) 666-6960
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held December 19, 1996
---------------------
To Our Stockholders:
Notice is hereby given that a Special Meeting of stockholders of RYMAC
Mortgage Investment Corporation (the "Company") will be held on December 19,
1996 at 10:00 a.m., Eastern time, at the American Stock Exchange, 86 Trinity
Place, New York, New York 10006-1881, for the following purposes:
(1) to consider and vote upon a proposal to approve (a) the terms and
conditions of an Asset Purchase Agreement between Navistar International
Transportation Corp. ("Navistar") and the Company dated as of September 12, 1996
and as amended on October 31, 1996 (as so amended, the "Asset Purchase
Agreement"), a copy of which is attached as Annex I to the accompanying Proxy
Statement/Prospectus, pursuant to which the Company will acquire the assets,
properties and business, subject to the assumption of certain liabilities, of
the Columbus Plastics Operation of Navistar and (b) the issuance of 4,264,000
shares of common stock of Core Materials (as defined below) to Navistar pursuant
to the Asset Purchase Agreement, which amount is subject to adjustment pursuant
to the provisions of the Asset Purchase Agreement but shall not exceed 45% of
the total number of shares of Core Materials issued and outstanding on a fully
diluted basis, all as more fully described in the accompanying Proxy
Statement/Prospectus; and
(2) to consider and vote upon a proposal to approve an Agreement and Plan
of Merger, a copy of which is attached as Annex IV to the accompanying Proxy
Statement/Prospectus, pursuant to which (a) the Company would be merged with and
into Core Materials Corporation, a Delaware corporation ("Core Materials"), with
Core Materials continuing as the surviving corporation and (b) each outstanding
share of Common Stock of the Company would be automatically converted into one
share of common stock of Core Materials, all as more fully described in the
accompanying Proxy Statement/Prospectus.
Proposal 2 is conditional upon approval of Proposal 1 and will not be
implemented if Proposal 1 is not approved by stockholders and implemented by the
Board. Accordingly, a vote against Proposal 1 will have the effect of a vote
against Proposal 2.
The foregoing matters are described in more detail in the Proxy
Statement/Prospectus which is attached hereto and made a part hereof.
Only stockholders of record at the close of business on November 4, 1996,
the record date, will be entitled to receive notice of and to vote at the
Special Meeting.
Management desires to have maximum representation at the Special Meeting
and respectfully requests that you date, execute and deliver the enclosed proxy
in the postage-paid envelope provided. A proxy may be revoked by a stockholder
by notice in writing to the Secretary of the Company at any time prior to its
use, by presentation of a later dated proxy, or by attending the Special Meeting
and voting in person.
By Order of The Board of Directors
/s/ MYRNA J. LEA
Myrna J. Lea
Secretary
Dated: November 8, 1996
<PAGE> 4
PROXY STATEMENT
OF
RYMAC MORTGAGE INVESTMENT CORPORATION
A MARYLAND CORPORATION
---------------------
PROSPECTUS
OF
CORE MATERIALS CORPORATION
A DELAWARE CORPORATION
---------------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.01 per share ("Company Common Stock"), of RYMAC Mortgage
Investment Corporation, a Maryland corporation (the "Company"), in connection
with the solicitation of proxies by the management of the Company for use at a
Special Meeting of the stockholders of the Company to be held on December 19,
1996 at 10:00 a.m., Eastern time, at the American Stock Exchange, 86 Trinity
Place, New York, New York 10006-1881. At the Special Meeting, the holders of
Company Common Stock will be asked to consider and vote upon the following
proposals: (1) to approve the terms and conditions of an Asset Purchase
Agreement between the Company and Navistar International Transportation Corp.
("Navistar") dated as of September 12, 1996 and as amended on October 31, 1996
(as so amended, the "Asset Purchase Agreement"), pursuant to which the Company
has agreed, subject to the terms and conditions set forth therein, (a) to
purchase substantially all of the assets and liabilities of the Columbus
Plastics Operation ("Columbus Plastics") of Navistar (the "Acquisition") and (b)
to issue 4,264,000 shares of Core Materials Common Stock (as defined below),
which amount is subject to adjustment pursuant to the provisions of the Asset
Purchase Agreement but shall not exceed 45% of the total number of shares of
Core Materials issued and outstanding on a fully diluted basis, to Navistar (the
"Stock Issuance") ("Proposal 1"); and (2) to approve and adopt an Agreement and
Plan of Merger (the "Merger Agreement") between the Company and Core Materials
Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company
("Core Materials"), dated as of November 1, 1996, pursuant to which the Company
has agreed to merge with and into Core Materials (the "Merger") ("Proposal 2").
This Proxy Statement/Prospectus also constitutes the Prospectus of Core
Materials with respect to (i) the shares of common stock, par value $.01 per
share ("Core Materials Common Stock"), of Core Materials to be issued to holders
of Company Stock pursuant to the Merger and (ii) the shares of Core Materials
Common Stock to be issued in the Stock Issuance. Core Materials is a newly
formed, wholly-owned subsidiary of the Company. Upon consummation of the Merger,
the separate existence of the Company will cease and each share of Company
Common Stock will be automatically converted into one share of Core Materials
Common Stock.
Consummation of the Acquisition is subject to various conditions which must
be waived or satisfied, including approval of the Merger by the holders of
two-thirds of the outstanding shares of Company Common Stock entitled to vote at
the Special Meeting.
Proposal 2 is conditional upon approval of Proposal 1 and will not be
implemented if Proposal 1 is not approved by stockholders and implemented by the
Board. Accordingly, a vote against Proposal 1 will have the effect of a vote
against Proposal 2.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING PROPOSALS 1
AND 2, SEE "RISK FACTORS" BEGINNING ON PAGE 20.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to the stockholders of the Company on or about November 8,
1996. A stockholder who has given a proxy may revoke it at any time prior to its
exercise.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus is dated November 8, 1996.
<PAGE> 5
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION
TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR
SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROXY STATEMENT/ PROSPECTUS NOR THE ISSUANCE OR SALE OF ANY
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED HEREIN
SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the
following Regional Offices of the Commission: Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and New York Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material and
other information concerning the Company may also be inspected at the offices of
the American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881, on
which the Company Common Stock is listed. In addition, the Commission maintains
a site on the World Wide Web portion of the Internet that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such site is
http://www/sec.gov.
Core Materials has filed with the Commission a registration statement on
Form S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), covering shares of Core Materials Common Stock issuable in
connection with the proposed Merger. This Proxy Statement, which also
constitutes the Prospectus of Core Materials filed as part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits relating thereto, certain parts of which are omitted
in accordance with the rules and regulations of the Commission. Reference is
made to the Registration Statement for further information with respect to Core
Materials and the Core Materials Common Stock offered hereby. Statements
contained herein or incorporated herein by reference concerning the provisions
of documents are summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document if filed with
the Commission or attached as an exhibit or appendix hereto.
INCORPORATION BY REFERENCE
The following documents previously filed with the Commission are
incorporated herein by reference (including documents incorporated by reference
into such documents):
1. Annual Report of the Company on Form 10-K for the fiscal year ended
December 31, 1995.
2. Quarterly Reports of the Company on Form 10-Q for the fiscal
quarters ended March 31, 1996 and June 30, 1996.
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<PAGE> 6
3. Current Reports of the Company on Form 8-K dated May 22, 1996 and
September 17, 1996, relating to the proposed Acquisition.
A copy of the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 are included in this Proxy Statement/ Prospectus as Annexes VII and
VIII, respectively.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purpose of this Proxy Statement/Prospectus to the extent that a statement
contained herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN REQUEST FROM ANY
PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, INCLUDING ANY
BENEFICIAL OWNER, TO THE SECRETARY OF THE COMPANY, AT P.O. BOX 250,
STEUBENVILLE, OHIO 43952; TELEPHONE NUMBER: (800) 666-6960. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST THEREFOR SHOULD BE MADE BY
DECEMBER 5, 1996.
3
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary....................................................................... 5
Risk Factors.................................................................. 20
Introduction.................................................................. 26
Proposal No. 1--Approval of the Acquisition................................... 28
Reasons for and Background of the Acquisition................................. 28
Recommendation of the Board of Directors...................................... 30
Opinion of Nomura............................................................. 32
Interests of Certain Persons in the Transactions.............................. 35
Business of the Company....................................................... 37
Business of Columbus Plastics................................................. 38
Selected Financial Data of Columbus Plastics.................................. 43
Management's Discussion and Analysis of Results of Operations and
Financial Condition of Columbus Plastics.................................... 44
Unaudited Pro Forma Combined Financial Information of Core Materials.......... 47
Business of Core Materials After the Acquisition.............................. 55
Management of Core Materials After the Acquisition............................ 57
Principal Stockholders of Core Materials...................................... 60
The Asset Purchase Agreement.................................................. 60
General.................................................................. 60
Purchase Price Adjustments............................................... 62
Representations and Warranties; Conditions to Closing; Amendments;
Termination............................................................ 64
Certain Covenants........................................................ 65
Survival of Representations and Warranties; Indemnification.............. 70
Ancillary Agreements.......................................................... 72
The Secured Note......................................................... 72
The Supply Agreement..................................................... 81
The Transitional Services Agreement...................................... 84
The Registration Rights Agreement........................................ 84
Proposal No. 2--Approval of the Merger........................................ 85
Introduction.................................................................. 85
Description of Core Materials Capital Stock................................... 86
Certain Effects of the Merger................................................. 89
Significance of Differences Between the Company and Core Materials............ 98
Significant Charter and By-law Provisions Not Materially Affected by the
Merger...................................................................... 100
No Dissenters' Rights of Appraisal............................................ 101
Federal Income Tax Consequences of the Merger and the Acquisition............. 101
Accounting Treatment.......................................................... 103
Legal Matters................................................................. 103
Experts....................................................................... 103
Financial Statements of Columbus Plastics..................................... F-1
Balance Sheet of Core Materials............................................... F-10
Asset Purchase Agreement...................................................... Annex I
Fairness Opinion of Nomura Securities International, Inc...................... Annex II
Form of Secured Note.......................................................... Annex III
Form of Agreement and Plan of Merger.......................................... Annex IV
Company Charter............................................................... Annex V
Core Materials Charter........................................................ Annex VI
Annual Report on Form 10-K.................................................... Annex VII
Quarterly Report on Form 10-Q................................................. Annex VIII
</TABLE>
4
<PAGE> 8
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained, or
incorporated by reference, in this Proxy Statement/Prospectus and the Annexes
hereto. Stockholders are urged to read this Proxy Statement/Prospectus and the
Annexes hereto in their entirety. In addition to the historical information
contained herein, certain statements in this Proxy Statement/Prospectus
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act (the "Reform Act") which involve risks and uncertainties. Core
Materials' actual results may differ significantly from those discussed herein.
Factors that might cause such a difference include, but are not limited to,
those discussed under the captions "Risk Factors" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition of Columbus
Plastics" as well as those discussed elsewhere in this Proxy
Statement/Prospectus. See "Risk Factors--Forward-Looking Statements".
THE COMPANIES
THE COMPANY
RYMAC Mortgage Investment Corporation was incorporated in the state of
Maryland on July 1, 1988 and has elected to be taxed as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
Prior to 1994, the Company was primarily engaged in making investments in
mortgage derivative securities and, to a lesser extent, mortgage related
investments. Due to difficulties encountered in its historical business and a
substantially altered mortgage-backed securities market, since mid-1994 the
Company has been investigating transactions which would allow the Company to
enter into alternative businesses. The principal executive offices of the
Company are located at 100 N. Fourth Street, Suite 813, Steubenville, Ohio 43952
and the telephone number is (800) 666-6960.
NAVISTAR INTERNATIONAL CORPORATION AND NAVISTAR
Navistar International Corporation is a holding company and its principal
operating subsidiary is its wholly-owned subsidiary, Navistar International
Transportation Corp. ("Navistar").
Navistar operates in two principal business segments: manufacturing and
financial services. Manufacturing operations are responsible for the manufacture
and marketing of medium and heavy trucks, including school buses, mid-range
diesel engines and service parts primarily in the United States and Canada as
well as in selected export markets. Based on assets and revenues, manufacturing
operations represent the majority of Navistar's business activities. The
financial services operations consist of Navistar Financial Corporation
("Navistar Financial"), its domestic insurance subsidiary and foreign finance
and insurance companies. Navistar Financial's primary business is the retail and
wholesale financing of products sold by the manufacturing operations and its
dealers within the United States and the providing of commercial physical damage
and liability insurance to the manufacturing operations' dealers and retail
customers and to the general public through an independent insurance agency
system. Navistar is the industry market share leader in the combined Class 5
through 8 truck market in the United States and Canada, offering a full line of
diesel-powered product in the common carrier, private carrier,
government/service, leasing, construction, energy/ petroleum and student
transportation markets. Navistar also produces mid-range diesel engines for use
in its Class 5, 6 and 7 medium trucks and for sale to original equipment
manufacturers. Navistar's principal executive offices are located at 455 North
Cityfront Plaza Drive, Chicago, Illinois 60611 and the telephone number is (312)
836-2000.
Other than Navistar's interest in Columbus Plastics described herein, the
Company will not acquire any interest in Navistar International Corporation or
Navistar as a result of the transactions contemplated by the Asset Purchase
Agreement.
CORE MATERIALS
Core Materials Corporation is a recently formed Delaware corporation which
is a wholly-owned subsidiary of the Company. To date, Core Materials has
conducted no business other than its participation in
5
<PAGE> 9
the transactions leading to the proposed Merger and the Acquisition. Pursuant to
the Merger, the Company will be merged with and into Core Materials with Core
Materials as the surviving corporation and each outstanding share of Company
Common Stock will be automatically converted into the right to receive one share
of Core Materials Common Stock. In connection with the Acquisition, Navistar
will transfer to Core Materials substantially all of the assets and liabilities
of Navistar's business currently conducted by Navistar at 800 Manor Park Drive,
Columbus, Ohio primarily relating to the manufacture, marketing and sale of
fiberglass reinforced plastic component parts (the "Columbus Plastics
Operations" or "Columbus Plastics"). The principal executive offices of Core
Materials are located at 100 N. Fourth Street, Suite 813, Steubenville, Ohio
43952 and the telephone number is (800) 666-6960.
THE SPECIAL MEETING
<TABLE>
<S> <C>
Time, Date and Place......................... A Special Meeting of stockholders of the
Company will be held on December 19, 1996 at
the American Stock Exchange, located at 86
Trinity Place, New York, New York 10006-1881,
commencing at 10:00 a.m., Eastern time
(together with any adjournments or
postponements thereof, the "Special
Meeting").
See "INTRODUCTION--Date, Time and Place."
Purpose of the Meeting....................... The purpose of the Special Meeting is to
consider and vote upon proposals (i) to
approve and adopt the terms and conditions of
the Asset Purchase Agreement including the
Stock Issuance, (ii) contingent on the
approval of the Asset Purchase Agreement, to
approve and adopt the Merger Agreement and
(iii) such other matters as may properly be
brought before the Special Meeting.
See "INTRODUCTION--Matters To Be Considered
at the Special Meeting."
Record Date; Shares Entitled to Vote......... Holders of record of shares of Company Common
Stock at the close of business on November 4,
1996 are entitled to notice of, and to vote
at, the Special Meeting. At such date there
were 5,210,600 shares of Company Common Stock
outstanding, each of which will be entitled
to one vote on each matter to be acted upon
or which may properly come before the Special
Meeting.
See "INTRODUCTION--Record Date; Shares
Entitled to Vote."
</TABLE>
6
<PAGE> 10
<TABLE>
<S> <C>
Quorum; Vote Required........................ The presence in person or by proxy of the
holders of a majority of Company Common Stock
is required to constitute a quorum at the
Special Meeting. The approval and adoption of
the terms and conditions of the Asset
Purchase Agreement requires the affirmative
vote of a majority of the votes cast at the
Special Meeting. The approval and adoption of
the Merger Agreement requires the affirmative
vote of the holders of two-thirds of the
Company Common Stock entitled to vote at the
Special Meeting.
See "INTRODUCTION--Quorum and Voting of
Proxies."
Security Ownership of Management
and Certain Other Persons.................. Directors and executive officers of the
Company and their affiliates who beneficially
owned approximately 1.7% of the outstanding
shares of Company Common Stock as of the
Record Date have advised the Company that
they presently intend to vote or direct the
vote of all the outstanding shares of Company
Common Stock over which such persons have
voting control in favor of approval and
adoption of the proposals described herein.
See "INTRODUCTION--Record Date; Shares
Entitled to Vote."
</TABLE>
THE ACQUISITION
GENERAL
The Company has entered into the Asset Purchase Agreement with Navistar to
acquire substantially all of the assets and liabilities of Navistar's Columbus
Plastics Operations. In order to consummate the Acquisition, the Company, among
other things, will be required under the terms of the Asset Purchase Agreement
to reincorporate in Delaware. To effect the reincorporation, the Company has
entered into an Agreement and Plan of Merger (the "Merger Agreement") with Core
Materials, a Delaware corporation and a wholly-owned subsidiary of the Company.
Pursuant to the terms of the Merger Agreement, the Company will be merged with
and into Core Materials with Core Materials as the surviving corporation and
each outstanding share of Company Common Stock being converted into the right to
receive one share of Core Materials Common Stock. As soon as practicable after
the Merger, the Acquisition will be consummated and as part of the consideration
to be paid to Navistar Core Materials will issue 4,264,000 shares of Core
Materials Common Stock to Navistar, representing approximately 45% of the total
number of shares of Core Materials Common Stock issued and outstanding on a
fully diluted basis after giving effect to the Acquisition. The purchase price
payable under the Asset Purchase Agreement is subject to adjustment as described
below under "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--The Asset Purchase
Agreement-- Purchase Price Adjustments."
The Company's stockholders are asked to approve the terms of the Asset
Purchase Agreement and the consummation of the transactions contemplated
thereby, including the Merger and the Stock Issuance. If the terms of the Asset
Purchase Agreement are not approved by the Company's stockholders, neither the
Acquisition nor the Merger will be consummated. In addition, consummation of the
Merger is a condition to Navistar's obligations under the Asset Purchase
Agreement; therefore, if the Merger is not approved by the Company's
stockholders, Navistar will not be obligated to consummate the Acquisition.
7
<PAGE> 11
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Company's Board of Directors has unanimously approved the Asset
Purchase Agreement and the transactions contemplated thereby, including the
Stock Issuance and the Merger and recommends that the Company's stockholders
vote in favor of approval and adoption of the Asset Purchase Agreement and the
Merger Agreement. See "PROPOSAL NO. 1--APPROVAL OF THE
ACQUISITION--Recommendation of the Board of Directors."
OPINION OF NOMURA
Nomura Securities International, Inc. ("Nomura"), the financial advisor to
the Company, has delivered to the Company's Board of Directors its opinions
dated September 6, 1996, September 12, 1996 and the date hereof, to the effect
that, as of the dates of such opinions, based upon the assumptions made which
did not give effect to Section 1(g)(iii) of the Asset Purchase Agreement (which
section is referred to elsewhere herein by the Company as the NOL Adjustment
Provision), matters considered and limits of its review, the proposed
consideration to be paid by the Company pursuant to the Asset Purchase Agreement
is fair to the stockholders of the Company from a financial point of view. For
additional information concerning the assumptions made, matters considered and
limits of the review by such financial advisor in reaching its opinion and the
fees received and to be received by it, see "PROPOSAL NO. 1--APPROVAL OF THE
ACQUISITION--Opinion of Nomura" and Annex II attached hereto.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendation of the Company's Board of Directors,
stockholders should be aware that certain persons involved with the Acquisition
have certain interests in the Acquisition that are in addition to the interests
of the Company and the Company's stockholders generally. See "PROPOSAL NO. 1--
APPROVAL OF THE ACQUISITION--Interests of Certain Persons in the Transactions."
THE ASSET PURCHASE AGREEMENT
The Asset Purchase Agreement provides for the acquisition by the Company of
substantially all of the assets, properties and business, subject to the
assumption of certain liabilities, of Navistar's business conducted at 800 Manor
Park Drive, Columbus, Ohio relating primarily to the manufacture, marketing and
sale of fiberglass reinforced plastic component parts (the "Assets"). In
consideration for the Assets, Navistar will receive upon closing ("Closing") of
the Acquisition (1) $25,504,000, subject to adjustment as described below,
payable by the Company in the form of a secured promissory note (the "Secured
Note") and (2) 4,264,000 shares of Core Materials Common Stock representing
approximately 45% of the total number of shares of Core Materials Common Stock
issued and outstanding on a fully diluted basis after the Acquisition. The
Company may reduce the principal amount of the Secured Note by delivering to
Navistar on the date of the Closing (the "Closing Date") by wire transfer of
immediately available funds an amount equal to such reduction pursuant to
financing arrangements that, in the opinion of the Company and Navistar, would
not reasonably be expected to have a material adverse effect on the ability of
Core Materials to secure loans for working capital and project finance use after
the Closing.
The purchase price payable under the Asset Purchase Agreement is subject to
adjustment as described under "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--The
Asset Purchase Agreement-- Purchase Price Adjustments."
The Asset Purchase Agreement contains certain representations and
warranties by Navistar and the Company which will expire at, and not survive,
the Closing. Each party's obligation to consummate the Acquisition is subject to
a number of conditions, including, among other things, the receipt of
satisfactory legal opinions, the accuracy of their respective representations
and warranties as of the Closing Date, receipt by the parties of all third
party, stockholder and governmental consents and approvals required to
consummate the Acquisition and the other transactions contemplated by the Asset
Purchase Agreement, the execution and delivery by Navistar and the Company of
the Supply Agreement, the Transitional Services Agreement and the Registration
Rights Agreement (each as defined below), and the Company and the International
Association of Machinists and Aerospace Workers ("IAM") entering into a
collective bargaining agreement for the
8
<PAGE> 12
employment of IAM represented employees of the Company at Columbus Plastics and
compliance by all parties with their respective obligations prior to the Closing
Date. The obligation of the Company to consummate the Acquisition is also
subject to the approval of the Company's stockholders of the transactions
contemplated by the Asset Purchase Agreement, including the approval of the
Merger by the affirmative vote of no less than two-thirds of the Company Common
Stock present and entitled to vote at the Special Meeting. The obligation of
Navistar to consummate the Acquisition is also subject to, among other things,
the Company having consummated the Merger, the Company having terminated the
RYMAC Salary Reduction Simplified Employee Pension Plan ("SEP") in accordance
with applicable law, the Company having amended its charter and by-laws in a
manner satisfactory to Navistar, the Company having effected the registration
under the Securities Act, and having obtained approval for listing on the
American Stock Exchange, of the shares of Core Materials Common Stock to be
issued to Navistar under the Asset Purchase Agreement, each of the individuals
serving on the Company's Board of Directors tendering his or her resignation to
the Company effective as of the Closing Date. See "PROPOSAL NO. 1--APPROVAL OF
THE ACQUISITION--The Asset Purchase Agreement--Representations and Warranties;
Conditions to Closing; Amendments; Termination."
For a description of the terms and conditions pursuant to which the
respective obligations of the parties to the Asset Purchase Agreement may be
terminated, see "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--The Asset Purchase
Agreement--Representations and Warranties; Conditions to Closing; Amendments;
Termination."
Navistar has agreed under the Asset Purchase Agreement to indemnify the
Company, its affiliates and each of their respective officers, directors,
employees and agents and hold them harmless from any Loss (as hereinafter
defined) suffered or incurred by any such indemnified party or to which any such
indemnified party becomes subject to the extent directly or indirectly arising
from (i) any breach of (or in the event any third party alleges facts that if
true would mean Navistar has breached) any covenant of Navistar contained in the
Asset Purchase Agreement or the other agreements and instruments contemplated
thereby; (ii) any liability of Navistar not specifically assumed by the Company
("Excluded Liabilities") and (iii) any statements or information contained in
this Proxy Statement/Prospectus relating to Columbus Plastics or Navistar or its
related entities requested by the Company for inclusion in this Proxy
Statement/Prospectus and supplied by Navistar, provided the Company presents
such information in conformity in form and substance with the information
supplied to it by Navistar. The Company has agreed under the Asset Purchase
Agreement to indemnify each of Navistar, its affiliates, officers, directors,
employees and agents against and hold them harmless from any Loss suffered or
incurred by any such indemnified party or to which any such indemnified party
becomes subject to the extent directly or indirectly arising from (i) any breach
of (or in the event any third party alleges facts that if true would mean the
Company has breached) any covenant of the Company contained in the Asset
Purchase Agreement or the other agreements and instruments contemplated thereby,
(ii) any liability of Navistar assumed by the Company pursuant to the Asset
Purchase Agreement and (iii) any discontinuance, suspension or modification of
any benefit plans maintained by the Company as contemplated by the Asset
Purchase Agreement. The Company has also agreed to indemnify each of Navistar,
its affiliates, officers, directors, employees and agents against and hold them
harmless from its Proportionate Share (as defined below) of any Loss suffered or
incurred by the Company or any of its subsidiaries from and after the Closing
Date (including Losses suffered or incurred by the Company to its present or
former stockholders) (x) in respect of any actions, omissions, events,
circumstances or state of facts existing or arising on, at or prior to the
Closing Date or (y) arising in connection with any statements or information
contained in this Proxy Statement/Prospectus (other than information relating to
Columbus Plastics or the Navistar Entities requested by the Company for
inclusion in this Proxy Statement/Prospectus and supplied by Navistar, provided
the Company presents such information in this Proxy Statement/ Prospectus in
conformity in form and substance with the information supplied to it by
Navistar); provided no indemnity will be made by the Company in respect of (i)
except as provided in clause (y), any actions, omissions, events, circumstances
or state of facts existing or arising on, at or prior to the Closing Date
relating to the Asset Purchase Agreement, the matters referred to in the
resolutions adopted by the Company's Board of Directors authorizing the
Acquisition (other than the ancillary agreements) or any of the transactions
contemplated thereby, (ii) any Loss suffered or incurred by the Company or any
of its subsidiaries from and after the Closing Date that arises from certain
specifically listed liabilities or (iii) any inability of the
9
<PAGE> 13
Company to be able to use its net operating losses ("NOLs") for federal income
tax purposes after the Closing. For purposes of the Asset Purchase Agreement, at
the time of any Loss, the "Proportionate Share" of each of Navistar, its
affiliates, officers, directors, employees and agents shall be the ratio,
expressed as a percentage, of the total number of shares of the Common Stock
owned by such person at the time of such Loss divided by the total number of
shares of the Common Stock issued and outstanding at the time of such Loss.
"Loss" means, with respect to any person, any damage, injury, liability, demand,
claim, action, cause of action, cost, deficiency, tax, penalty, fine or other
loss, payment or expense, whether or not arising out of a claim, including all
interest, penalties, reasonable attorneys' fees and expenses and all amounts
paid or incurred in connection with any action, demand, proceeding,
investigation or claim by any third party (including any government entity)
against or affecting such person, together with interest thereon from the date
on which such person provides the written notice of the related claim through
and including the date on which the total amount of the claim, including such
interest, is recovered or recouped pursuant to the indemnity provisions of the
Asset Purchase Agreement.
ANCILLARY AGREEMENTS
The Secured Note
The Secured Note will require the Company to pay principal installments as
follows: (i) within ninety (90) days after the end of each fiscal year during
the term of the Secured Note, the Company will pay principal in an amount equal
to the amount, if any, by which the total cash and cash equivalents of the
Company, as shown on its audited balance sheet and statement of financial
condition for the end of each such year, exceed $3,000,000; (ii) in the event
the Company obtains, from time to time, any loan, extension of credit or other
financial accommodation (other than a revolving line of credit for working
capital purposes) to refinance the Secured Note, the Company will promptly upon
obtaining such loan pay principal in an amount equal to the proceeds of such
loan; and (iii) if not paid earlier, the Company shall pay the entire
outstanding principal amount of the Secured Note in November 2006. The Secured
Note will bear interest at the rate of 8.0% per annum, payable semi-annually on
the last business day of each May and November. The Secured Note will be secured
by a first priority lien upon and security interest in all of the Company's
assets. For a more detailed description of the Secured Note, see " PROPOSAL NO.
1--APPROVAL OF THE ACQUISITION--Ancillary Agreements--The Secured Note."
The Supply Agreement
As a condition to the consummation of the Acquisition, Navistar and Core
Materials will enter into the Comprehensive Supply Agreement (the "Supply
Agreement"). Under the terms of the Supply Agreement, for a period of five
years, Navistar will agree to purchase from Core Materials, and Core Materials
will agree to sell to Navistar, all of Navistar's original equipment and service
requirements for Fiberglass Reinforced Parts using the Sheet Molding Composite
process for components currently being manufactured by Columbus Plastics as they
currently exist and detailed in the Supply Agreement or as they may be improved
or modified (if such improvements and modifications are approved by Navistar in
writing) (the "Products"). For a more detailed description of the Supply
Agreement, see "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Ancillary
Agreements--The Supply Agreement."
The Transitional Services Agreement
As a condition to the consummation of the Acquisition, Navistar and Core
Materials will enter into the Transitional Services Agreement (the "Transitional
Services Agreement"). Under the terms of the Transitional Services Agreement,
Navistar will (i) provide internal financial reporting, accounting, budgeting
and tax planning and return preparation services and computer services to Core
Materials for a period of one year after the Closing and Core Materials will pay
for such services based on the actual hours incurred, determined based on (a)
all compensation costs for direct personnel of Navistar who perform the
services, (b) travel expenses (including meals and lodging expenses) and (c)
ordinary and necessary business expenses incurred by Navistar and (ii) provide
office support services to Core Materials and procure insurance on Core
Materials' behalf for various periods of time after the Closing depending upon
the service (up to a period of three years) and Core Materials will pay for such
services based on the actual hours incurred (determined as
10
<PAGE> 14
provided above) plus the cost to Navistar in providing such services. For a more
detailed description of the Transitional Services Agreement, see "PROPOSAL NO.
1--APPROVAL OF THE ACQUISITION-- Ancillary Agreements--The Transitional Services
Agreement."
The Registration Rights Agreement
As a condition to the consummation of the Acquisition, Navistar and Core
Materials will enter into a Registration Rights Agreement (the "Registration
Rights Agreement"). Under the terms of the Registration Rights Agreement, Core
Materials will grant Navistar certain demand and "piggy-back" rights with
respect to the registration for sale under the Securities Act of the shares of
Core Materials Common Stock received pursuant to the Asset Purchase Agreement.
For a more detailed description of the Registration Rights Agreement, see
"PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Ancillary Agreements-- The
Registration Rights Agreement."
SUMMARY OF BUSINESS OF COLUMBUS PLASTICS
Columbus Plastics has historically constituted a part of Navistar's
business operations. Columbus Plastics has never existed as a separate entity
apart from Navistar. Navistar has used its Columbus Plastics Operations to
manufacture fiberglass and plastic component parts for use by Navistar in
Navistar's business of manufacturing and marketing of diesel trucks and for
sales to third party customers, primarily Yamaha Motor Manufacturing Corporation
("Yamaha"), for use in the personal watercraft business. Prior to the
Acquisition, in excess of 60% of all of component parts produced by Columbus
Plastics were sold to Navistar at the standard cost basis of Columbus Plastics
which was substantially below the market value of such component parts.
SUMMARY OF BUSINESS OF CORE MATERIALS AFTER THE ACQUISITION
In connection with the Acquisition, Core Materials will acquire
substantially all of the assets and liabilities, including the property and
business, of Columbus Plastics (other than certain excluded assets and
liabilities). After the Acquisition, Core Materials will continue to hold the
Company's remaining investments in mortgage securities but the principal
business of Core Materials will consist of operating the business and property
of Columbus Plastics. See "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--
Unaudited Pro Forma Combined Financial Information of Core Materials" and "--
Business of Core Materials After the Acquisition."
MANAGEMENT OF CORE MATERIALS
Pursuant to the terms of the Asset Purchase Agreement, the Board of
Directors of Core Materials appointed on the Closing Date will have five
directors and will consist of the following persons: (i) two persons designated
by Navistar; (ii) two persons designated by the Company's existing Board of
Directors and (iii) one person to be selected by mutual agreement of Navistar
and the Company. See "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Management of
Core Materials After the Acquisition."
THE MERGER
GENERAL
One of the conditions to Navistar's obligation to consummate the
Acquisition is the reincorporation of the Company in the State of Delaware. To
effect this reincorporation, the Company has incorporated Core Materials, a
wholly-owned subsidiary of the Company, as a Delaware corporation. If the Asset
Purchase Agreement and the Merger Agreement are approved by the Company's
stockholders and the other conditions to the Asset Purchase Agreement are
satisfied or waived, the Company will be merged with and into Core Materials
with Core Materials as the surviving corporation and each outstanding share of
Company Common Stock being automatically converted into the right to receive one
share of Core Materials Common Stock. The Merger will become effective upon the
filing of certificate of merger with the Secretary of State of the State of
Delaware and the filing of articles of merger with the State Department of
Assessments and Taxation of Maryland ("SDAT") (the "Effective Time"). It is
presently anticipated that such filings will be made as soon
11
<PAGE> 15
as practicable after approval and adoption of the Asset Purchase Agreement and
the Merger Agreement at the Special Meeting. COMPANY STOCKHOLDERS SHOULD NOT
SEND IN THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL FROM THE COMPANY'S EXCHANGE AGENT, AMERICAN STOCK TRANSFER & TRUST
CO., WITH INSTRUCTIONS REGARDING THE EXCHANGE OF STOCK CERTIFICATES.
COMPARISON OF STOCKHOLDER RIGHTS
The rights of stockholders of the Company currently are governed by
Maryland corporation law, the Company's Amended and Restated Articles of
Incorporation, as amended, and the Company's Amended and Restated By-laws, as
amended. Upon completion of the Merger, stockholders of the Company will become
stockholders of Core Materials, and their rights as stockholders of Core
Materials will be governed by Delaware corporation law, the Core Materials
Certificate of Incorporation and the Core Materials By-laws.
Material differences between the rights of stockholders of Core Materials
and the rights of stockholders of the Company include the following: (i)
Maryland law provides stockholders with more limited rights of inspection than
does Delaware law; (ii) the By-laws of the Company require that a majority of
the Company's Board of Directors be unaffiliated directors, whereas Core
Materials' By-laws do not; (iii) Maryland law provides that any director or
officer may be removed with or without cause by the affirmative vote of a
majority of all the votes entitled to be cast in the election of directors,
unless the Charter of the corporation provides otherwise, which the Articles of
Incorporation of the Company does not, whereas the Certificate of Incorporation
and By-laws of Core Materials provide that a director may be removed with or
without cause by the holders of at least 80% of the voting power of the
outstanding shares of capital stock of Core Materials entitled to vote generally
in the election of directors; (iv) as permitted by Maryland law, the Company's
Articles of Incorporation limit the liability of officers to the corporation or
its stockholders for money damages to the same extent as directors, whereas
under Delaware law the liability of officers may not be limited; (v) the By-laws
of the Company contain a limitation on the ability of the Company to incur
indebtedness, whereas the By-laws of Core Materials do not contain a provision
restricting the incurrence of indebtedness; (vi) the Articles of Incorporation
of the Company contain provisions restricting the transfer of shares of Company
Common Stock in order to preserve the Company's status as a REIT, whereas Core
Materials' Certificate of Incorporation does not contain a similar provision;
(vii) Core Materials' Certificate of Incorporation contains provisions
prohibiting certain transfers of Core Materials Common Stock intended to
preserve the corporation's NOLs, whereas the Company's Articles of Incorporation
does not contain a similar provision; (viii) Core Materials will be subject to
Delaware's annual franchise tax (which under current law will be approximately
$34,800 per year), while the Company is not subject to any similar tax in
Maryland; (ix) under Maryland law, the exclusive power to change the By-laws may
be left with the stockholders, vested in the directors or shared by both groups,
while under Delaware law, the power to change the By-laws belongs to the
stockholders and, although it may be shared with directors, the stockholders may
never be divested of this power; (x) Maryland permits the charter of a
corporation to deny all voting rights to shares of any class of stock, while
Delaware prohibits denying voting rights to shares of a class in connection with
an amendment to the certificate of incorporation if the amendment would change
the par value of the class or would adversely affect the powers, preferences of
special rights of the class; and (xi) in connection with the voluntary
dissolution of the corporation, Maryland law requires the approval of
stockholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter, while Delaware law requires the approval of stockholders
by the affirmative vote of a majority of the votes entitled to be cast on the
matter. The material similarities and differences between Maryland corporation
law and the Company's Articles of Incorporation and By-laws, on the one hand,
and Delaware corporation law and the Core Materials Certificate of Incorporation
and By-laws, on the other, which should be considered in connection with the
Merger, are summarized in "PROPOSAL NO. 2--APPROVAL OF THE MERGER."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company's stockholders will not recognize gain or loss for federal
income tax purposes as a result of the Acquisition. In addition, the Company
does not anticipate incurring any federal income tax liability as a result of
the Acquisition. However, after the Acquisition, the Company will no longer
elect to be a REIT for federal income tax purposes.
12
<PAGE> 16
The Merger must qualify as a reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), for stockholders to not
be required to recognize a gain from their exchange of the Common Stock of the
Company for the Common Stock of Core Materials and for Core Materials to succeed
to the tax attributes of the Company. Although the matter is not free from
doubt, the Merger should be treated as a reorganization for purposes of Code
Section 368. Accordingly, stockholders should not recognize gain or loss upon
their exchange of Common Stock of the Company for Common Stock of Core
Materials. In addition, Core Materials should succeed to the tax attributes of
the Company including its NOLs, earnings and profits, and capital loss
carryforwards. However, the Company has not requested a ruling that the Merger
so qualifies and it is possible that the Internal Revenue Service (the "IRS")
will disagree that the Merger qualifies as a reorganization. See "PROPOSAL NO.
2--APPROVAL OF THE MERGER--Federal Income Tax Consequence of the Merger and the
Acquisition--The Merger."
The consideration paid to Navistar under the Asset Purchase Agreement has
been structured such that Navistar should be treated as owning less that 50% of
the stock value of Core Materials. If the consideration paid to Navistar results
in Navistar owning more than 50% of the stock value of Core Materials or results
in Navistar and certain stockholders of the Company owning more than 50% of the
stock value of Core Materials then a change in control will occur for purposes
of Code Section 382 (a "Change in Control"). If a Change in Control occurs, Core
Materials' ability to utilize the NOLs of the Company will be severely
restricted. No ruling has been or will be sought from the IRS. See "PROPOSAL NO.
2--APPROVAL OF THE MERGER--Federal Income Tax Consequences of the Merger and the
Acquisition."
The Asset Purchase Agreement contains certain adjustments to the amount of
Core Materials Common Stock that Navistar can receive that are designed to
prevent the consideration paid to Navistar from resulting in a Change in
Control. In addition, the Certificate of Incorporation of Core Materials
contains certain restrictions on share ownership to prevent a Change in Control.
However, it is possible that certain non stock consideration that Navistar is
receiving would be required to be treated as stock for purposes of determining
whether the Acquisition will result in a Change in Control. In addition, there
can be no assurance that the restrictions contained in the Asset Purchase
Agreement or in the Certificate of Incorporation will prevent a Change in
Control. See "PROPOSAL NO. 2--APPROVAL OF THE MERGER--Federal Income Tax
Consequences of the Merger and the Acquisition--Utilization of Net Operating
Losses and Capital Loss Carryforwards."
ACCOUNTING TREATMENT
Based upon the terms of the proposed Acquisition, for financial reporting
and accounting purposes the transaction will be accounted for as a reverse
acquisition whereby Columbus Plastics will be deemed to have acquired Core
Materials. However, Core Materials, subsequent to the merger, will be the
continuing legal entity and registrant for both Securities and Exchange
Commission filing purposes and income tax reporting purposes. Consistent with
reverse acquisition accounting treatment, Core Materials will carry forward the
historical basis of the acquired assets and assumed liabilities of Columbus
Plastics and will revalue the basis of its net assets to fair value. Should
there be an additional contingent earn-out adjustment, it will be accounted for
by increasing the amount of the Secured Note, and by reducing the amount of Core
Materials' retained earnings. See "PROPOSAL NO. 1--APPROVAL OF THE
ACQUISITION--Unaudited Pro Forma Combined Financial Information of Core
Materials."
NO APPRAISAL RIGHTS
Holders of shares of Company Common Stock will not have any statutory
appraisal rights under Maryland law to elect to have the fair value of their
shares of Company Common Stock judicially appraised and paid to them in cash in
connection with or as a result of the matters to be acted upon at the Special
Meeting. See "PROPOSAL NO. 2--APPROVAL OF THE MERGER--No Dissenters' Rights of
Appraisal."
13
<PAGE> 17
INVESTMENT CONSIDERATIONS
In deciding how to vote their shares at the Special meeting, holders of
Company Common Stock should carefully consider all of the information contained
in this Proxy Statement/Prospectus and in particular, the information provided
under "RISK FACTORS".
SUMMARY FINANCIAL DATA-COLUMBUS PLASTICS
The following summary financial data concerning Columbus Plastics as of
October 31, 1995 and 1994 and for each of the three fiscal years in the period
ended October 31, 1995 are derived from the audited financial statements of
Columbus Plastics. The following selected financial data concerning Columbus
Plastics with respect to the nine months ended July 31, 1996 is unaudited and in
management's opinion includes all adjustments necessary to present fairly such
information. The capital structure of Core Materials after the Acquisition will
differ significantly from the capital structure of Columbus Plastics. See Note 2
of the Notes to Financial Statements of Columbus Plastics and the Notes to the
Unaudited Pro Forma Combined Financial Statements. The information set forth
below should be read in conjunction with "PROPOSAL NO. 1-- APPROVAL OF THE
ACQUISITION--Management's Discussion and Analysis of Results of Operations and
Financial Condition of Columbus Plastics" and the historical and pro forma
financial statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FOR THE YEAR ENDED OCTOBER 31,
JULY 31, 1996 1995 1994 1993
------------- ------- ------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues(1)....................................... $ 39,249 $59,505 $44,191 $39,767
Direct costs and expenses:
Cost of operations.............................. 38,339 53,319 40,487 38,393
Postretirement benefits expense................. 804 857 833 934
Marketing and administrative expense............ 337 484 390 369
Other--net...................................... 12 55 15 4
-------- ------- ------- -------
Income (loss) before interest and taxes(2)........ $ (243) $ 4,790 $ 2,466 $ 67
======== ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Accounts receivable............................... $ 2,547 $ 7,233 $ 1,238
Inventory......................................... 3,413 3,362 3,019
Net property, plant and equipment................. 24,530 21,652 15,734
Total assets...................................... 30,796 32,591 20,281
Accounts payable and accrued expenses............. 6,199 12,451 5,791
Owner's equity investment......................... 24,596 20,140 14,489
</TABLE>
- ---------
(1) Columbus Plastics provides Navistar's truck assembly operations with all of
its sheet molding composite plastic component requirements, which represents
greater than 60% of its output in all periods presented, at standard cost,
with the remainder sold to unrelated third party customers at negotiated
prices.
(2) Interest, income taxes and earnings per share have been omitted because
Columbus Plastics was not a separate stand alone division or subsidiary of
Navistar and was generally not accounted for separately. In addition,
Navistar's systems and procedures do not provide sufficient information to
develop a reasonable cost allocation of income taxes, corporate debt and
interest expense.
14
<PAGE> 18
SUMMARY CONSOLIDATED FINANCIAL DATA--THE COMPANY
The following summary consolidated financial data for the Company as of and
for each of the five fiscal years in the period ended December 31, 1995 are
derived from the audited consolidated financial statements of the Company. The
following selected consolidated financial data for the Company as of and for the
six month periods ended June 30, 1996 and 1995 is unaudited and in management's
opinion includes all adjustments necessary to present fairly such information.
The information set forth below should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and the Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Data:
Revenues.................. $ 599 $ 156 $ 898 $ 4,085 $(13,588) $ 21,861 $ 52,182
Expenses.................. 673 880 1,654 3,280 12,036 23,729 44,244
Net income (loss)......... (74) (724) (756) 805 (25,624) (1,868) 7,938
Net income (loss)
per share............... (0.02) (0.14) (0.15) 0.15 (4.92) (0.36) 1.52
Taxable income
(loss) (1).............. (88) (296) (638) (8,425) (10,823) (16,656) 9,190
Taxable income (loss)
per share (1)........... (0.02) (0.06) (0.12) (1.62) (2.08) (3.20) 1.76
Weighted average shares
outstanding............. 211 5,211 5,211 5,211 5,211 5,211 5,211
Dividends paid per
share................... 0.00 0.00 0.003 0.00 0.04 0.90 1.75
Mortgage related
investments............. 0 11,395 9,814 12,430 65,248 142,396 332,998
Mortgage derivative
securities.............. 0 1,170 1,014 1,990 7,161 40,727 41,720
Mortgage-backed
securities.............. 3,252 0 3,397 0 0 0 0
Total assets.............. 6,130 18,344 16,602 19,892 81,097 197,860 394,026
Funding notes payable..... 0 11,782 10,114 12,538 44,892 94,329 230,781
CMOs payable.............. 0 0 0 0 25,042 54,886 106,585
Notes payable............. 0 0 0 0 3,814 14,833 12,241
Total liabilities......... 117 12,081 10,387 12,905 74,915 166,184 355,455
Total stockholders'
equity.................. 6,013 6,263 6,215 6,987 6,182 31,676 38,571
Shares of common stock
outstanding............. 5,211 5,211 5,211 5,211 5,211 5,211 5,211
</TABLE>
- ---------
(1) Estimated for 1996.
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<PAGE> 19
CORE MATERIALS
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
The following Summary Pro Forma Combined Financial Data should be read in
conjunction with the Unaudited Pro Forma Combined Financial Statements and
related notes included elsewhere herein. The pro forma income statement data
illustrates the effect of certain adjustments to Core Materials' and Columbus
Plastics' historical financial statements that would result from reflecting the
acquisition as though such transaction had occurred at the beginning of the
periods presented. The pro forma balance sheet data illustrates the effect of
certain adjustments to Core Materials' and Columbus Plastics' historical
financial statements that would result from the acquisition as though such
transactions had occurred on July 31, 1996. This pro forma financial information
should not be regarded as indicative of the results of operations or financial
condition of Core Materials for any future period or at any future date.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
JULY 31, 1996 OCTOBER 31, 1995
-------------- -----------------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues................................................... $ 43,281 $65,599
Cost and expenses:
Cost of operations....................................... 38,339 53,319
Postretirement benefits expense.......................... 804 857
Marketing and administrative expenses.................... 997 1,404
-------- -------
Operating income........................................... 3,141 10,019
Interest expense........................................... 1,394 2,082
-------- -------
Income before provision for income taxes................... 1,747 7,937
Provision for income taxes (1)............................. 734 3,334
-------- -------
Net income................................................. $ 1,013 $ 4,604
======== =======
Earnings per share (2)..................................... $ 0.10 $ 0.48
======== =======
Weighted average shares outstanding........................ 9,645,400 9,645,400
========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and investment........................................ $ 3,424
Accounts receivable........................................ 2,547
Inventory.................................................. 3,413
Deferred tax assets........................................ 12,000
Net property, plant and equipment.......................... 24,530
Total assets............................................... 46,195
Accounts payable and accrued liabilities................... 3,522
Long-term debt............................................. 27,904
Total stockholders' equity................................. 14,768
</TABLE>
- ---------
(1) The provision for income taxes reflects the statutory Federal tax rate.
However, due to Core Materials' substantial net operating losses and capital
loss carryforwards, actual Federal tax payments will be de minimis until
such loss carryforwards are fully utilized or expired.
(2) On a pro forma basis there would be no difference between the primary and
fully diluted earnings per share.
16
<PAGE> 20
PRO FORMA CAPITALIZATION OF CORE MATERIALS
The following table sets forth the consolidated capitalization of the
Company, as adjusted to give pro forma effect to the Acquisition and related
transactions as if such transactions occurred as of July 31, 1996. The
information should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SHORT-TERM DEBT:
Short-term borrowings and current maturities of long-term notes payable... $ 0
--------
Total short-term debt.................................................. 0
--------
LONG-TERM DEBT:
Secured Note payable to Navistar....................................... 27,904
--------
Total long-term debt................................................... 27,904
--------
STOCKHOLDERS' EQUITY:
Common stock:
Par value $0.01 per share, 50,000,000 shares authorized,
9,645,400 shares outstanding........................................... 95
Capital in excess of par value.............................................. 15,230
Accumulated deficit......................................................... (557)
--------
Total stockholders' equity............................................. 14,768
--------
TOTAL CAPITALIZATION........................................................ $ 42,672
========
</TABLE>
17
<PAGE> 21
HISTORICAL MARKET PRICE AND DIVIDEND DATA
Company Common Stock. Shares of Company Common Stock are listed for trading
on the American Stock Exchange under the symbol "RM". The table below sets
forth, for the calendar quarters indicated, the reported high and low sale
prices of Company Common Stock as quoted on the American Stock Exchange based on
published financial sources and distributions and dividends paid on the Company
Common Stock. As of October 1, 1996, the Company had 431 holders of record of
its Common Stock. The closing market price for Company Common Stock on May 14,
1996, the day prior to the announcement of an agreement in principle relating to
the proposed Acquisition, was $1.5625, on September 12, 1996, the day prior to
the announcement of the execution of the Asset Purchase Agreement, the closing
market price was $2.125, and on November 7, 1996 the closing market price was
$2.125. At the Effective Time of the Merger, the shares of Company Common Stock
will cease to be traded on the American Stock Exchange.
<TABLE>
<CAPTION>
COMPANY COMMON STOCK
-------------------------------
HIGH LOW DIVIDENDS
----- ---- ----------
<S> <C> <C> <C>
1994
First Quarter.............................................. $1 7/16 $1 1/8 $ 0.00
Second Quarter............................................. 1 1/8 11/16 0.00
Third Quarter.............................................. 1 11/16 0.00
Fourth Quarter............................................. 1 1/4 11/16 0.00
1995
First Quarter.............................................. $1 5/16 $ 15/16 $ 0.00
Second Quarter............................................. 1 3/4 1 0.00
Third Quarter.............................................. 1 3/4 1 1/16 0.003(1)
Fourth Quarter............................................. 1 7/1 1 0.00
1996
First Quarter.............................................. $1 7/16 $1 $ 0.00
Second Quarter............................................. 2 7/8 1 0.00
Third Quarter.............................................. 2 5/8 1 1/2 0.00
Fourth Quarter (through November 7, 1996).................. 2 7/16 1 15/16 0.00
</TABLE>
- ---------
(1) Three tenths of one cent.
Core Materials Common Stock. Shares of Core Materials Common Stock will not
be publicly traded prior to the Merger. Core Materials intends to file an
application to list the Core Materials Common Stock on the American Stock
Exchange and the Core Materials Common Stock is expected to commence trading on
the American Stock Exchange as of the Effective Time of the Merger.
Core Materials Dividend Policy. Core Materials does not currently expect to
declare or pay dividends on its Common Stock in the foreseeable future. The
policy of the Core Materials' Board of Directors will be to reinvest earnings in
the business of Core Materials. Moreover, Core Materials will be prohibited from
paying dividends on its Common Stock by covenants contained in the Secured Note.
See "PROPOSAL NO. 1-- APPROVAL OF THE ACQUISITION--Management's Discussion and
Analysis of Results of Operations and Financial Condition of Columbus
Plastics--Liquidity and Capital Resources" and "--Ancillary Agreements--The
Secured Note--Covenants--Negative Covenants."
18
<PAGE> 22
COMPARATIVE PER SHARE DATA
The following table of certain comparative per share data is based upon the
data used in compiling the Unaudited Pro Forma Combined Financial Statements and
upon the respective financial statements of Columbus Plastics and the
consolidated financial statements of the Company incorporated by reference
herein, and should be read in conjunction with those financial statements and
the related notes. Historical per share data of Columbus Plastics is not
presented as Columbus Plastics was not a stand alone division or subsidiary of
Navistar and was generally not accounted for separately during the periods
presented. Historical per share data of Core Materials is not presented as Core
Materials has had no operations.
<TABLE>
<CAPTION>
YEAR
NINE MONTHS ENDED
ENDED OCTOBER 31,
CORE MATERIALS JULY 31, 1996 1995
------------- -----------
<S> <C> <C>
Pro Forma:
Net income per common share--primary................................. $0.10 $0.48
Net income per common share--fully diluted........................... $0.10 $0.48
Dividends per common share........................................... $ -- $ --
Book value per common share (at end of period)....................... $1.53
</TABLE>
<TABLE>
<CAPTION>
YEAR
NINE MONTHS ENDED
ENDED DECEMBER 31,
THE COMPANY JUNE 30, 1996 1995
------------- ------------
<S> <C> <C>
Historical:
Net income (loss) per common share--primary........................ $ (0.02) $(0.15)
Net income (loss) per common share--fully diluted.................. $ (0.02) $(0.15)
Dividends per common share......................................... $ -- $ 0.003
Book value per common share (at end of period)..................... $ 1.15
</TABLE>
19
<PAGE> 23
RISK FACTORS
In addition to the other information contained in this Prospectus/Proxy
Statement, the stockholders of the Company should carefully consider the
following factors in determining whether to approve and adopt the Asset Purchase
Agreement and the transactions contemplated thereby and the other proposals set
forth in this Prospectus/Proxy Statement.
CYCLICAL MARKETS FOR PRODUCTS
The markets for and profitability of Columbus Plastics products have been
and are likely to continue to be cyclical. Periods of high demand, high capacity
utilization and increasing operating margins tend to result in new plant
investment and increased production, followed by periods of declining demand,
declining capacity utilization and declining margins until the cycle is
repeated. A downturn in the economy could materially adversely affect Columbus
Plastics' business.
RAW MATERIALS AND DEPENDENCE ON SUPPLIERS
Columbus Plastics produces components using a variety of processes and raw
materials. Its raw materials include polyester resin, fiberglass rovings and
adhesives. The prices of such raw materials have fluctuated significantly in the
past. Significant fluctuations in the price of such raw materials, without a
coincident ability to reflect such fluctuations in selling prices, could have a
material adverse affect on Columbus Plastics' results of operations.
Columbus Plastics relies on a limited number of suppliers to provide raw
materials used to manufacture its products. Although Columbus Plastics believes
it has access to an ample supply of these raw materials, in the event that
Columbus Plastics can not obtain adequate quantities from its existing
suppliers, there can be no assurance that Columbus Plastics would be able to
access alternative sources of supply within a reasonable time or at commercially
reasonable rates. The unavailability of adequate commercial quantities, the
inability to develop alternative sources, or a significant increase in the price
of raw materials could have a material adverse effect on Columbus Plastics
ability to manufacture products. See "PROPOSAL NO. 1--APPROVAL OF THE
ACQUISITION--Business of Columbus Plastics--Products."
COMPETITION
Columbus Plastics' industry is highly competitive. Columbus Plastics faces
competition from a number of companies, some of whom are larger and have greater
financial resources, research and development facilities, and manufacturing and
marketing capabilities than Columbus Plastics. In addition, many original
equipment manufacturer ("OEM") customers manufacture, engineer and design some
components and could expand this activity, thereby reducing opportunities for
Columbus Plastics. Furthermore, there can be no assurance that developments by
Columbus Plastics' competitors or potential competitors will not make Columbus
Plastics' products obsolete. Columbus Plastics' ability to compete effectively
will depend upon its products' functional features and upon the ability of
Columbus Plastics to attract and retain qualified personnel, to maintain and
expand the capabilities of its technologies, to sell existing products to new
customers, to service its new customers and to develop new products for existing
customers. No assurance can be given that Columbus Plastics will be able to
continue to compete effectively or that Columbus Plastics' results of operations
will not be adversely affected by increased competition in its industry. See
"PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Business of Columbus
Plastics--Industry."
NEED TO RESPOND TO TECHNOLOGICAL CHANGE
The markets for Columbus Plastics' products are characterized by rapidly
changing technology and evolving industry standards. Columbus Plastics' future
success will depend in part upon its ability to enhance existing products and to
introduce new technology to meet changing customer requirements and emerging
industry standards and requirements. There can be no assurance that Columbus
Plastics will successfully complete any such developments. In addition, there
can be no assurance that products or technologies developed by others will not
render Columbus Plastics' products or technologies non-competitive or obsolete.
20
<PAGE> 24
GOVERNMENT AND ENVIRONMENTAL REGULATION
Columbus Plastics' manufacturing activities are subject to extensive and
rigorous government regulation designed to protect the environment. The United
States Environmental Protection Agency and comparable state and local regulatory
agencies actively enforce environmental regulations, and some of these agencies
conduct periodic inspections to determine compliance with government
regulations. Failure to comply with applicable regulatory requirements can
result in, among other things, fines, suspensions of approvals, seizures or
recalls of products, operating restrictions, and criminal prosecutions.
Furthermore, changes in existing regulations or adoption of new regulations
could impose costly new procedures for compliance with, or prevent Columbus
Plastics from obtaining, or affect the timing of, regulatory approvals.
The restrictions imposed by environmental regulations may change from time
to time. There can be no assurance that subsequent legislation or administrative
changes might not materially adversely affect Columbus Plastics' business and
future prospects. See "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Business of
Columbus Plastics--Environmental Compliance."
MATERIAL LABOR AGREEMENT
As of October 31, 1995, Columbus Plastics employed a total of 423
employees, 343 of whom are covered by a collective bargaining agreement with the
International Association of Machinists and Aerospace Workers ("IAM"), which
expires in August 1998. There can be no assurance that work stoppages or
slow-downs will not occur in Columbus Plastics operations in connection with the
renegotiation of this agreement. Any work stoppage or slow-down experienced by
Columbus Plastics, or any of its key customers, Navistar in particular, could
have a material adverse effect on Columbus Plastics' results of operations. See
"PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Business of Columbus
Plastics--Employees."
IMPORTANCE OF BUSINESS RELATED TO REDESIGNED MODEL INSTRUCTIONS
Columbus Plastics competes for business during the redesign of certain
existing models by its customers. There can be no assurance that Columbus
Plastics will be a successful competitor for new business in the future. If
Columbus Plastics were to fail to obtain new business for new models or to
retain or increase business for redesigned existing models, it could have an
adverse effect on Columbus Plastics' results of operations.
UTILIZATION OF THE NET OPERATING LOSSES AND CAPITAL LOSS CARRYFORWARDS
The rules relating to the utilization of NOLs and capital loss
carryforwards are complex and can result in a corporation that undergoes a
substantial change in its organization and ownership being unable to use such
losses or having its ability to utilize such losses severely restricted. The
Merger and Acquisition have been structured in a manner intended to avoid the
application of such limitations. However, the Company has not requested a ruling
from the IRS with respect to either the Merger or the Acquisition and it is
possible that the IRS will disagree with the conclusion that the Merger and
Acquisition has avoided application of such limitations. If the IRS successfully
challenges Core Materials' ability to utilize the existing NOLs and capital loss
carryforwards, the federal income tax liability of Core Materials may increase
substantially. In addition, such successful challenge could also result in
stockholders being required to recognize gain upon their exchange of Common
Stock of the Company for the Common Stock of Core Materials. See "PROPOSAL NO.
2--APPROVAL OF THE MERGER--Federal Income Tax Consequences of the Merger and the
Acquisition."
Although the Prohibited Transfer Provision to be contained in Core
Materials' Certificate of Incorporation is intended to prevent a Change in
Control, which would substantially impair Core Materials' ability to use the
Company's net operating losses and capital loss carryovers, the Company will not
seek a revenue ruling from the IRS with respect to the Prohibited Transfer
Provision and there can be no assurance that such provision will be effective.
In addition, the Asset Purchase Agreement provides that a purchase price
adjustment after the closing of the Acquisition shall occur in the event that it
is necessary to prevent an application of the limitations on the utilization of
the NOLs under Section 382 of the Code by reducing the number of shares of Core
Materials Common Stock deliverable to Navistar pursuant to the Asset Purchase
Agreement and increasing the principal amount of the Secured Note. This
adjustment would have the effect of an increase in the purchase
21
<PAGE> 25
price paid to Navistar because the amount by which the Secured Note would
increase for each share that is not delivered to Navistar is greater than the
per share prices at which the Company Common Stock has traded recently. See
"PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--The Asset Purchase
Agreement--Purchase Price Adjustments--The Adjustment Based on Closing Date
Ownership."
RELATIONSHIPS WITH AND RELIANCE ON NAVISTAR
Sales to Navistar (at historical standard cost) constituted approximately
63% and 59% (67% and 63% on a pro forma basis reflecting the provisions of the
Comprehensive Supply Agreement) of Columbus Plastics' revenues for fiscal year
1995 and the nine months ended July 31, 1996, respectively. In connection with
the Acquisition, Navistar and Core Materials will enter into the Comprehensive
Supply Agreement whereby Navistar will agree to purchase, and Core Materials
will agree to sell, all of Navistar's Products. See "PROPOSAL NO. 1--APPROVAL OF
THE ACQUISITION--Ancillary Agreements--The Supply Agreement." The Comprehensive
Supply Agreement will have an initial term of five years from the Closing. If
Navistar reasonably demonstrates to Core Materials that a particular Product is
no longer a competitive value with respect to price, performance, delivery,
reliability, technology and quality with other equivalent products then
available, then Core Materials will have sixty (60) days from such demonstration
to cure the deficiency. If Core Materials cannot remedy the situation within
such sixty (60) days, Navistar may, at its option, terminate the obligations of
the parties under the Supply Agreement with respect to the non-competitive
Products. In addition, if Core Materials defaults in performing any of its
material obligations under the Supply Agreement and such default continues
uncured for thirty (30) days after written notice thereof is given by Navistar
to Core Materials, then Navistar may terminate the Supply Agreement with respect
to the Products materially affected by the default or, if the default materially
affects all Products, terminate the Supply Agreement in its entirety. Navistar
also may terminate the Supply Agreement with regard to Products if Core
Materials does not maintain adequate quality thereof as provided in the Supply
Agreement. While Navistar will agree pursuant to the Supply Agreement to
purchase all of its requirements of Products from Core Materials, there is no
minimum amount of purchases that Navistar is required to make under the
contract. There can be no assurance that Core Materials will remain competitive
with respect to the Products, that Core Materials will maintain sufficient
quality of the Products or that Core Materials may not somehow otherwise fail to
perform under or breach the Supply Agreement. In addition, there can be no
assurance that Navistar will require the Products to the same extent as it has
in the past or that Navistar will place new products with Core Materials in the
future. If Core Materials lost any significant portion of its sales to Navistar,
it would have a material adverse effect on the business, financial condition and
results of operations of Core Materials.
In addition, pursuant to the Transitional Services Agreement, after the
Acquisition Navistar will provide several key services to Core Materials. See
"PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Ancillary Agreements--The
Transitional Services Agreement." These services consist primarily of internal
financial reporting, accounting, budgeting and tax planning and return
preparation services and computer services. Although Core Materials plans to
develop its own services to allow the transition from Navistar's services, there
can be no assurance that Core Materials will be able to develop these operations
in a timely or cost-effective manner.
DEPENDENCE ON MAJOR CUSTOMERS
Columbus Plastics derived approximately 63% and 59% (67% and 63% on a pro
forma basis reflecting the provisions of the Comprehensive Supply Agreement) of
its revenues from sales to Navistar in fiscal 1995 and the nine months ended
July 31, 1996, respectively. The medium and heavy truck industry, the market in
which Navistar competes, is highly competitive, is subject to cycles in the
overall business environment, and is particularly sensitive to the industrial
sector which generates a significant portion of the freight tonnage hauled.
Government regulations have impacted and will continue to impact specifications
of equipment as well as trucking operations and efficiency.
In addition, Columbus Plastics derived approximately 34% and 39% of its
revenues from sales (31% and 35% on a pro forma basis assuming Navistar revenues
reflect the provisions of the Comprehensive Supply Agreement) to Yamaha in
fiscal 1995 and the nine months ended July 31, 1996, respectively. Demand for
Yamaha products is related to the level of general economic activity, among
other factors, and specifically to
22
<PAGE> 26
the cyclycality of the personal watercraft industry. Columbus Plastics has no
written purchase agreement with Yamaha covering the components produced for
Yamaha. Therefore, there is no assurance that Yamaha will continue to purchase
Columbus Plastics products at the same levels as in previous years or that such
relationship will continue in the future.
There can be no assurance that Core Materials will maintain or improve
Columbus Plastics' relationship with Navistar or Yamaha or that Core Materials
will continue to supply these customers at current levels. The loss of a
significant portion of sales to Navistar or Yamaha would have a material adverse
effect on the business, financial condition and results of operations of Core
Materials.
NO PUBLIC MARKET VALUATION OF COLUMBUS PLASTICS
Columbus Plastics has no publicly-traded securities. As a result, no public
market valuations of Columbus Plastics were available to the Company and its
financial advisor, Nomura Securities International, Inc. ("Nomura"), for
purposes of evaluating the transactions contemplated under the Asset Purchase
Agreement. In rendering its fairness opinion to the Company, Nomura made
numerous assumptions for purposes of valuing Columbus Plastics; such valuation
is not necessarily indicative of the actual value of Columbus Plastics. Nomura
rendered its fairness opinion to the Company's Board of Directors on the date of
the Asset Purchase Agreement and restated its opinion on the date of this Proxy
Statement/Prospectus. See "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Opinion
of Nomura."
CONTROL BY NAVISTAR; ANTI-TAKEOVER EFFECTS
In accordance with the terms of the Asset Purchase Agreement, from and
after the Closing Date and until the first annual meeting of the stockholders of
Core Materials following the Closing Date, Core Materials' Board of Directors
shall be comprised of two representatives to be designated by Navistar (the
"Navistar Directors"); two representatives to be designated by members of the
Company's existing Board of Directors (the "Company Directors"); and one
representative to be mutually satisfactory to Navistar and the Company (the
"Independent Director"). See "PROPOSAL NO. 1--APPROVAL OF THE
ACQUISITION--Management of Core Materials After the Acquisition." In addition,
pursuant to the terms of the Asset Purchase Agreement, Navistar will receive in
the Stock Issuance 4,264,000 shares of Core Materials Common Stock, representing
approximately 45% of the total number of shares of Core Materials Common Stock
issued and outstanding on a fully diluted basis after giving effect to the
Acquisition. As a result, Navistar will have the power to significantly
influence the composition of Core Materials' Board of Directors and to approve
actions requiring stockholder approval, including (i) amendments to Core
Materials' Certificate of Incorporation and By-laws and (ii) mergers or sales of
all or substantially all of the assets of Core Materials. Furthermore, by virtue
of the provision in Core Materials' Certificate of Incorporation that requires
the affirmative vote of the holders of at least 66 2/3% of the then outstanding
shares of Capital Stock of Core Materials entitled to vote generally in the
election of directors to approve certain transactions (including mergers and the
sale, lease or exchange of substantially all of Core Materials' assets) Navistar
will have the ability to preclude any such transaction regardless of the vote of
the other stockholders. In addition, in the Asset Purchase Agreement, the
Company has agreed that until March 31, 1997 it will not take certain actions
without the prior written consent of Navistar. See "PROPOSAL NO. 1--APPROVAL OF
THE ACQUISITION--The Asset Purchase Agreement--Representations and Warranties;
Conditions to Closing; Amendments; Termination."
Furthermore, certain provisions of Core Materials' charter documents may
have the effect of deterring a takeover of Core Materials. These provisions
include (i) a requirement that 66 2/3% of the outstanding shares of capital
stock entitled to vote generally in the election of directors ("Voting Stock")
approve certain mergers, sales of assets or other transactions; (ii) limitations
on stockholder action by written consent without a meeting and a minimum
ownership requirement for stockholders to call special meetings of stockholders
of at least 20%; and (iii) the imposition of a supermajority voting requirement
to approve any amendment to certain provisions of Core Materials' Certificate of
Incorporation.
Additionally, the Prohibited Transfer Provision (as defined herein under
"PROPOSAL NO. 2-- APPROVAL OF THE MERGER--Description of Core Materials Capital
Stock--Restrictions on Transfer") to be contained in Core Materials' Certificate
of Incorporation generally would prohibit transfers of Core Materials Common
Stock under circumstances which would cause a person to hold a Prohibited
Ownership
23
<PAGE> 27
Percentage or would increase the ownership percentage of a person who has held a
Prohibited Ownership Percentage within three years prior to the proposed
transfer. The "Prohibited Ownership Percentage" is defined by reference to
complex federal tax laws and regulations, but generally means ownership of 4.5%
or more (based on value) of Core Materials' capital stock. The Prohibited
Transfer Provision generally would preclude the acquisition of Core Materials
Common Stock by a person who would hold a Prohibited Ownership Percentage and
would require the immediate sale of shares purported to have been acquired by
such person. The restriction would not prohibit the granting of proxies to Core
Materials management or others. The objective in seeking to impose the
Prohibited Transfer Provision is to avoid an "ownership change" for federal
income tax purposes, which could severely limit Core Materials' ability to use
its substantial NOLs. Although not intended, the Prohibited Transfer Provision
may adversely affect the marketability of the Core Materials Common Stock by
discouraging potential investors from acquiring stock of Core Materials, and
could have the effect of impeding an attempt to acquire a significant or
controlling interest in Core Materials, even though such attempt may be
beneficial to Core Materials and its stockholders. See "PROPOSAL NO. 2--APPROVAL
OF THE MERGER--Description of Core Materials Capital Stock."
Core Materials is governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years following the time that such stockholder became an
interested stockholder, unless (i) prior to such time either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder is approved by the board of directors of the corporation,
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (other than certain excluded shares) or (iii) on or after such time
the business combination is approved by the board and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. A "business combination" includes certain mergers,
consolidations, asset sales, transfers and other transactions resulting in an
increase in the percentage of any class or series of stock owned by the
interested stockholder or in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, in certain cases, within three years, did own) 15% or more
of the corporation's voting stock.
While the provisions of Delaware law and Core Materials' Certificate of
Incorporation and By-laws described above may have certain antitakeover effects,
the primary impediment to a potential acquiror's attempt to acquire a
controlling interest in Core Materials will be that at least initially after the
Acquisition Navistar will own approximately 45% of the Voting Stock of Core
Materials on a fully diluted basis thereby making Core Materials an unlikely
takeover target.
NEED TO ATTRACT AND RETAIN KEY PERSONNEL
The success of Core Materials will be dependent, in part, upon its ability
to hire and retain key management personnel. The Company is currently seeking to
hire a chief executive officer and a chief financial officer for Core Materials.
Until suitable candidates are hired for these management positions, the current
plant manager of Columbus Plastics will oversee the day-to-day operations of
Columbus Plastics under the supervision of the Board of Directors. There can be
no assurance that Core Materials will be successful in attracting and retaining
qualified managerial personnel sufficient to meet its requirements.
NO DIVIDENDS
Core Materials is a new entity and has never paid cash dividends on its
Common Stock. Core Materials currently intends to retain earnings to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. Moreover, Core Materials will be prohibited
from paying dividends on its Common Stock by covenants contained in the Secured
Note. See "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Management's Discussion
and Analysis of Results of Operations and Financial Condition of Columbus
Plastics--Liquidity and Capital Resources" and "--Ancillary Agreements--The
Secured Note--Covenants--Negative Covenants."
24
<PAGE> 28
DISSIMILAR NATURE OF STOCKHOLDER RIGHTS
The rights of holders of Company Common Stock are presently governed by
Maryland law and the Company's Articles of Incorporation and By-laws. Upon
consummation of the Merger, each share of Company Common Stock will be converted
into one share of Core Materials Common Stock and the rights of the holders
thereof will be governed by Delaware corporation law and Core Materials'
Certificate of Incorporation and By-laws.
Material differences between the rights of stockholders of the Company and
Core Materials include the following: (i) Maryland law provides stockholders
with more limited rights of inspection than does Delaware law; (ii) the By-laws
of the Company require that a majority of the Company's Board of Directors be
unaffiliated directors, whereas Core Materials' By-laws do not; (iii) Maryland
law provides that any director or officer may be removed with or without cause
by the affirmative vote of a majority of all the votes entitled to be cast in
the election of directors, unless the Charter of the corporation provides
otherwise, which the Articles of Incorporation of the Company does not, whereas
the Certificate of Incorporation and By-laws of Core Materials provide that a
director may be removed with or without cause by the holders of at least 80% of
the voting power of the outstanding shares of capital stock of Core Materials
entitled to vote generally in the election of directors; (iv) as permitted by
Maryland law, the Company's Articles of Incorporation limit the liability of
officers to the corporation or its stockholders for money damages to the same
extent as directors, whereas under Delaware law the liability of officers may
not be limited; (v) the By-laws of the Company contain a limitation on the
ability of the Company to incur indebtedness, whereas the By-laws of Core
Materials do not contain a provision restricting the incurrence of indebtedness;
(vi) the Articles of Incorporation of the Company contain provisions restricting
the transfer of shares of Company Common Stock in order to preserve the
Company's status as a REIT, whereas Core Materials' Certificate of Incorporation
does not contain a similar provision; (vii) Core Materials' Certificate of
Incorporation contains provisions prohibiting certain transfers of Core
Materials Common Stock intended to preserve Core Materials' NOLs, whereas the
Company's Articles of Incorporation does not contain a similar provision; (vii)
Core Materials' Certificate of Incorporation contains provisions prohibiting
certain transfers of Core Materials Common Stock intended to preserve the
corporation's net operating loss carryovers, whereas the Company's Articles of
Incorporation does not contain a similar provision; (viii) Core Materials will
be subject to Delaware's annual franchise tax (which under current law will be
approximately $34,800 per year), while the Company is not subject to any similar
tax in Maryland; (ix) under Maryland law, the exclusive power to change the
by-laws may be left with the stockholders, vested in the directors or shared by
both groups, while under Delaware law, the power to change the By-laws belongs
to the stockholders and, although it may be shared with directors, the
stockholders may never be divested of this power; (x) Maryland law permits the
charter of a corporation to deny all voting rights to shares of any class of
stock, while Delaware law prohibits denying voting rights to shares of a class
in connection with an amendment to the certificate of incorporation if the
amendment would change the par value of the class or would adversely affect the
powers, preferences of special rights of the class; and (xi) in connection with
the voluntary dissolution of the corporation, Maryland law requires the approval
of stockholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter, while Delaware law requires the approval of
stockholders by the affirmative vote of a majority of the votes entitled to be
cast on the matter. The material similarities and differences between Maryland
corporation law and the Company's Articles of Incorporation and By-laws, on the
one hand, and Delaware corporation law and the Core Materials Certificate of
Incorporation and By-laws, on the other, which should be considered in
connection with the Merger, are summarized in "PROPOSAL NO. 2-- APPROVAL OF THE
MERGER."
SHARES ELIGIBLE FOR FUTURE SALE BY NAVISTAR
The shares of Core Materials Common Stock which Navistar will receive under
the Asset Purchase Agreement may not be sold in the absence of registration
under the Securities Act or an exemption therefrom, including the exemptions
contained in Rule 145 under the Securities Act. However, at the Closing, Core
Materials will enter into a Registration Rights Agreement with Navistar pursuant
to which Navistar and its transferees will have rights to demand registration of
the resale of such shares of Core Materials Common Stock at any time after the
date of the Closing. Navistar will also be granted unlimited piggyback
registration
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rights with respect to these shares under the Registration Rights Agreement. See
"PROPOSAL NO. 1-- APPROVAL OF THE ACQUISITION--Ancillary Agreements--The
Registration Rights Agreement." No prediction can be made as to the effect, if
any, of future sales of shares of Core Materials Common Stock by Navistar, if
any, on the market price of the Core Materials Common Stock prevailing from time
to time. Sales of substantial amounts of Core Materials Common Stock by
Navistar, or the perception that such sales could occur, could adversely affect
prevailing market prices for those securities.
NO ASSURANCE AS TO MARKET PRICE.
Because there has been no prior market for the Core Materials Common Stock,
there can be no assurance as to its market price following the Merger and the
Acquisition. Moreover, there can be no assurance that the market value of the
Core Materials Common Stock held by a stockholder will equal or exceed the
market value of the Company Common Stock held by such stockholder prior to the
Merger and the Acquisition. While Core Materials intends to list the Core
Materials Common Stock on the American Stock Exchange, there can be no assurance
that the shares will be so listed or as to the development or liquidity of any
market for the Core Materials Common Stock. See "SUMMARY--Historical Market
Price and Dividend Data."
NO APPRAISAL RIGHTS
Holders of RYMAC Common Stock will have no appraisal rights under Maryland
law in connection with or as a result of the matters to be acted upon at the
Special Meeting. See "PROPOSAL NO. 2-- APPROVAL OF THE MERGER--No Dissenters'
Rights of Appraisal."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Proxy Statement/Prospectus, including,
without limitation, statements containing the words "believes", "anticipates",
"intends", "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of Core Materials to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
nationally and in those areas in which Core Materials will operate; competition;
changes in business strategy or development plans; the loss of or inability to
attract key personnel; the availability of capital to fund Core Materials'
business; and other factors referenced in this Proxy Statement/Prospectus,
including, without limitation, under the captions "Risk Factors", "Management's
Discussion and Analysis of Results of Operations and Financial Condition of
Columbus Plastics" and "Business of Columbus Plastics". Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company, Navistar and Core Materials
disclaim any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
INTRODUCTION
DATE, TIME AND PLACE
A Special Meeting will be held on December 19, 1996 at 10:00 a.m., Eastern
time, at the American Stock Exchange, 86 Trinity Place, New York, New York
10006-1881.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, holders of shares of Company Common Stock will
consider and vote upon proposals (i) to approve and adopt the terms and
conditions of the Asset Purchase Agreement including the Stock Issuance, (ii)
contingent on the approval of the Asset Purchase Agreement, to approve and adopt
the Merger Agreement and (iii) such other matters as may properly be brought
before the Special Meeting.
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RECORD DATE; SHARES ENTITLED TO VOTE
The Board of Directors has fixed November 4, 1996 as the record date for
the determination of stockholders entitled to notice of and to vote at the
Special Meeting (the "Record Date"). Accordingly, only holders of record of
shares of Company Common Stock on the Record Date will be entitled to notice of
and to vote at the Special Meeting. As of the Record Date, there were 5,210,600
shares of Company Common Stock outstanding, held by approximately 431 holders of
record. Each holder of record of shares of Company Common Stock on the Record
Date is entitled to cast one vote per share.
Directors and executive officers of the Company and their affiliates who
beneficially owned approximately 1.7% of the outstanding shares of Company
Common Stock as of the Record Date have advised the Company that they presently
intend to vote or direct the vote of all shares of Company Common Stock over
which such persons have voting control FOR approval and adoption of the Merger
Agreement.
As of the Record Date, neither Navistar nor any of its subsidiaries owned
any outstanding shares of Company Common Stock.
QUORUM AND VOTING OF PROXIES
The presence, in person or by proxy, of a majority of the outstanding
shares of Company Common Stock is necessary to constitute a quorum at the
Special Meeting. Stockholders voting or abstaining from voting on any issue will
be counted as present for purposes of constituting a quorum. If a quorum is
present, the affirmative vote of the holders of a majority of the votes cast at
the Special Meeting is required to approve the Asset Purchase Agreement. The
affirmative vote of the holders of two-thirds of the outstanding shares of
Company Common Stock entitled to vote at the Special Meeting is required to
approve the Merger Agreement. Under the rules of the American Stock Exchange,
brokers who hold shares in street name for customers will not have authority to
vote such shares on the proposal to approve the proposals described herein
unless they have received written instructions from beneficial owners.
Abstentions will have the effect of a vote against each of the proposals. To the
extent a quorum is otherwise present at the Special Meeting, shares not present
and, therefore, not voted on the Acquisition proposal (including broker
non-votes) will have no effect on the approval of the Asset Purchase Agreement.
However, shares not voted on the Merger proposal will have the same effect as
votes against the proposal.
All shares of Company Common Stock which are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not revoked, will be voted at the Special
Meeting in accordance with the instructions indicated on such proxies. IF NO
INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION
OF THE PROPOSALS DESCRIBED HEREIN. The Board of Directors of the Company knows
of no matters to be presented at the Special Meeting other than those described
in this Proxy Statement/Prospectus. If any other matters are properly presented
at the Special Meeting for consideration, including, among other things,
consideration of a motion to adjourn the Special Meeting to another time and/or
place (including, without limitation, for the purpose of soliciting additional
proxies), the persons named in the enclosed form of proxies and acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment. The By-laws of the Company provide that the Special Meeting may
be adjourned by the Company from time to time without notice to a date not more
than one hundred twenty days after the Record Date.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of the Company before the taking of the vote at
the Special Meeting or (iii) attending the Special Meeting and voting in person
(although attendance at the 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 the Company c/o American Stock Transfer & Trust Co., 40 Wall
Street, New York, New York 10005, Attention: Ms. Paula Magno, or hand delivered
to the Secretary of the Company at Penn Center West II, Suite 311, Pittsburgh,
Pennsylvania 15276, Attention: Secretary, so as to be delivered at or before the
taking of the vote at the Special Meeting.
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All expenses of this solicitation, including the cost of preparing and
mailing of this Proxy Statement/ Prospectus, will be borne by the Company. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated, but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. The Company has
retained Corporate Investor Communications, Inc., at an estimated cost of
$4,500, plus reimbursement of expenses, to assist in its solicitation of proxies
from brokers, nominees, institutions and individuals. Additionally, the
Company's stock transfer agent, American Stock Transfer & Trust Co., New York,
New York will conduct proxy solicitations on the Company's behalf and receive
reimbursement for reasonable out-of-pocket expenses. Arrangements will also be
made with brokerage firms and other custodians, nominees and fiduciaries for the
forwarding of proxy solicitation material to certain beneficial owners of the
Company Common Stock and the Company will reimburse such brokerage firms,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith. The expenses of the proxy solicitation
will be paid by the Company.
PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION
Stockholders of the Company are being asked to approve the Asset Purchase
Agreement and the consummation of the transactions contemplated thereby,
including the Acquisition and the Stock Issuance. If the Asset Purchase
Agreement is not approved by the stockholders at the Special Meeting, the
Acquisition will not be consummated and Proposal No. 2 will not be acted upon.
If the Asset Purchase Agreement is approved by the Company's stockholders but
the Merger does not receive the requisite stockholder approval, the Acquisition
will be consummated only if Navistar agrees to waive the relevant conditions in
the Asset Purchase Agreement.
REASONS FOR AND BACKGROUND OF THE ACQUISITION
As a result of the earnings difficulties and the substantial diminution in
value of the mortgage assets of the Company experienced since the second quarter
of 1992, the Company's Board of Directors determined in mid-1994 that the
Company would not pursue its historical line of business and would investigate
alternative opportunities to maximize stockholder value.
The Board of Directors determined that management should focus its efforts
on acquisition candidates that satisfied, among other things, the following
criteria: the candidate would be privately held and seeking access to the public
capital markets; the candidate would be operating in an industry in which the
candidate had growth potential; and the candidate should be one already
generating sufficient income that would render the Company's existing NOLs
attractive.
During the summer of 1995, management held discussions with the owners of
an acquisition candidate in the retail sporting goods industry with the
assistance of Hellmold Associates, Inc. ("Hellmold"), which had been retained by
the Company on June 26, 1995 to assist the Company in a possible transaction
involving this candidate. By late October, 1995, the Company's management and
the owners of such acquisition candidate had been unable to reach an agreement
on the terms of such transaction, and negotiations were abandoned.
On November 1, 1995, the Company expanded the scope of Hellmold's
engagement to identifying and contacting potential acquisition candidates and
assisting the Company in structuring and negotiating a strategic transaction.
Hellmold had previously been retained by Navistar in May 1995 to assist it in
selling its Columbus Plastics Operations. See "Interests of Certain Persons in
the Transactions." In addition, on November 28, 1995, the Board of Directors
appointed a committee consisting of Messrs. Richard Conte and Malcolm Prine to
assume primary responsibility for evaluating, structuring and negotiating an
acquisition transaction involving the Company (the "Committee").
During the period from October 1995 through February 1996, Hellmold
contacted approximately 70 companies that owned prospective acquisition
candidates to solicit indications of interest in a possible business combination
with the Company. Of these initial contacts, 51 companies requested further
information concerning the Company and possible transaction structures. The
Committee, together with Hellmold,
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evaluated 18 potential transactions and eventually concluded that Columbus
Plastics constituted the most attractive candidate identified in the search
process, based in large part on the Committee's assessment that Columbus
Plastics revenues (on a pro forma basis to give effect to market pricing of its
products) and earnings potential were substantially larger than any alternative
candidate, thereby allowing significant current utilization of the Company's
NOLs, and the projected growth prospects for the Sheet Molding Composite
industry in which Columbus Plastics operates.
On January 8, 1996, based on a descriptive memorandum of Columbus Plastics
supplied by Navistar, the Company submitted a preliminary indication of interest
of approximately $60 million, which purchase price would be paid through a note
and approximately 4.3 million shares of stock (based on a stipulated stock price
of $2.50 per share).
On January 15, 1996, Hellmold advised the Company that it was one of three
bidders (from among the bids received) that Navistar would allow to perform
detailed due diligence on Columbus Plastics. Commencing shortly thereafter, the
Company commenced a detailed due diligence review of Columbus Plastics.
On February 16, 1996, the Company engaged Nomura to render an opinion with
respect to the fairness, from a financial point of view, to the Company's
stockholders of the consideration to be paid in the Acquisition.
On February 23, 1996, Messrs. Conte and Prine, along with representatives
of Nomura, visited the Columbus Plastics facility in Columbus, Ohio, as part of
the Company's due diligence review of Columbus Plastics. In addition, Messrs.
Prine and Conte spoke with Mr. Thomas M. Hough, Treasurer of Navistar, to
discuss the terms of the proposed combination between the Company and Columbus
Plastics. Based on these discussions and the preliminary results of the
Committee's due diligence review, the Company submitted a written proposal to
Navistar on March 22, 1996, pursuant to which it proposed a transaction in which
it would acquire the assets and assume substantially all of the associated
liabilities of Navistar's Columbus Plastics division in exchange for 4,264,000
shares of Common Stock and a note of the Company in the principal amount of
$50,000,000 (the "Initial Terms").
On May 14, 1996, the Company and Navistar entered into a non-binding letter
of intent contemplating an acquisition of Columbus Plastics in a transaction
based on the Initial Terms. During the latter part of May and throughout June
1996, representatives of the Company, Navistar and their legal counsel were
engaged in negotiating the definitive documentation for the transaction set
forth in the May 14 letter of intent.
On June 4, 1996, Mr. Hough contacted Mr. Conte by telephone and advised him
that the operating results of Columbus Plastics for the first half of its fiscal
year 1996 were below the projections previously supplied to the Company by
Navistar and upon which the Company had submitted its proposal incorporating the
Initial Terms. On July 5, 1996, in a meeting with various Navistar personnel,
Mr. Prine was informed that the most recent projections that Navistar had
prepared for Columbus Plastics were substantially below the projections
previously supplied to the Company by Navistar. Further negotiations on the
definitive terms of a transaction were suspended at such time and were not
resumed until August 13, 1996, when Messrs. Prine and Conte and Mr. Ralph O.
Hellmold, the President of Hellmold Associates Inc., met with Mr. Hough and Mr.
Thomas E. Rigsby, Vice President--Truck Manufacturing of Navistar. At this
meeting, Messrs. Prine and Conte discussed the willingness of the Company to
proceed with a transaction at a reduced purchase price. Navistar and the Company
agreed that the Initial Terms would be revised as follows: (i) 4,264,000 shares
of Common Stock; (ii) a note of the Company in the principal amount of
$25,504,000; (iii) a contingent increase in the principal amount of such note
such that if (A) the Company's earnings before interest and taxes ("EBIT") for
the Company's fiscal year ended December 31, 1997 exceeded $6,512,000
("Forecasted EBIT"), the principal amount of the note would be increased by an
amount equal to the product of (x) the excess amount ("1997 Excess EBIT") and
(y) 5.55; (B) if the Company's EBIT for fiscal year ended December 31, 1998
exceeds Forecasted EBIT, the principal amount of the note would be increased by
an amount equal to the product of (x) the excess amount ("1998 Excess EBIT")
less the 1997 Excess EBIT and (y) 4.50; and (C) if the Company's EBIT for the
Company's fiscal year ended December 31, 1999 exceeds the Forecasted EBIT, the
principal amount of the note would be increased by an amount equal to the
product of (x) the excess amount less the 1998 Excess EBIT and (y) 2.75;
provided, that the total amount by which the principal amount of the note may be
increased pursuant to such contingent increases shall not exceed
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$24,496,000 in the aggregate; and (iv) a further contingent increase in the note
in the event certain events described under "-- The Asset Purchase
Agreement--Purchase Price Adjustments--The Adjustment Based on Closing Date
Ownership" occur that would result in Navistar retroactively reducing the number
of shares of Common Stock it receives at the Closing in order to preserve intact
the ability of the Company to utilize its NOLs, the specific terms of such
reduction remaining at that time the subject of further negotiations.
On August 30, 1996, after further discussion among the Company, Navistar
and their respective counsel with respect to the purchase price adjustment
referred to in clause (iv) above as well as alternative resolutions of the issue
of preserving the Company's NOLs, the Company and Navistar agreed that if the
events described under "-- The Asset Purchase Agreement--Purchase Price
Adjustments--The Adjustment Based on Closing Date Ownership" were to occur and
thereby give rise to a retroactive reduction in the number of shares of Common
Stock Navistar receives at the Closing, the $25,504,000 principal amount of the
Company's note shall be increased by an amount equal to the sum of (x) to the
extent that Navistar's ownership of Common Stock effective as of the Closing,
would, on account of the reduction caused by such event, be reduced below 40% of
the total shares of Common Stock of the Company issued and outstanding as of the
effective time of the Closing, the product derived by multiplying $7.50 times
the total number of Excess Shares (as defined below) that, if retained by
Navistar, would cause Navistar's ownership of Common Stock effective as of the
Closing to equal 40% of the total shares of Common Stock of the Company issued
and outstanding as of the effective time of Closing plus (y) the product derived
by multiplying the total number of all remaining Excess Shares times $5.00, and
the number of shares of Common Stock deliverable to Navistar shall be reduced by
such number of shares (the "Excess Shares") such that the number of shares then
deliverable to Navistar would be one share short of causing an event triggering
a restriction on the Company's ability to use its NOLs (the "NOL Adjustment
Provision").
On September 6, 1996, the Board of Directors of the Company held a special
meeting in Pittsburgh, Pennsylvania at which all members other than Mr. Walker
were present, together with Hellmold, Nomura, and the Company's counsel. At such
meeting, Messrs. Conte and Hellmold, Nomura and the Company's legal counsel made
presentations to the Board of Directors concerning the proposed transaction, and
Nomura delivered its oral opinion to the effect that as of such date the
purchase price to be paid to Navistar for the Columbus Plastics division, based
on specified assumptions which did not give effect to the NOL Adjustment
Provision in the Asset Purchase Agreement, was fair to the Company's
stockholders from a financial point of view. After representatives of Hellmold
and Nomura were excused from the meeting, the Board deliberated over the
proposed transaction and resolved that, subject to receiving final forms of
definitive documentation to reflect the terms of the transaction as reviewed and
discussed at the meeting on or prior to 5:00 p.m. September 13, 1996, it was the
sense of the Board that they would reconvene to approve the transactions on or
prior to such date.
On September 12, 1996, the Board of Directors convened a special meeting
telephonically with all members present other than Mr. Walker, together with a
representative of Nomura and the Company's legal counsel. During such meeting,
Mr. Conte confirmed that documentation had been finalized consistent with the
Board's understanding and a representative of Nomura confirmed its oral opinion
delivered at the Board meeting of September 6th. The Board of Directors then
approved, on the unanimous vote of those members present via telephone, the
Asset Purchase Agreement, certain ancillary agreements and the transactions
contemplated thereby, including the Merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors believes that the terms of the Asset Acquisition
Agreement and the transactions contemplated thereby are fair to and in the best
interests of the Company and its stockholders. Accordingly, at a special meeting
held on September 12, 1996, the Board of Directors, by the unanimous vote of all
directors present, approved the Asset Acquisition Agreement and the transactions
contemplated thereby and determined to recommend that the stockholders of the
Company approve the Asset Purchase Agreement and the consummation of the
transactions contemplated thereby, including the Stock Issuance and the Merger.
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In determining to recommend the approval of the Asset Purchase Agreement
and the consummation of the transactions contemplated thereby, including the
Stock Issuance and the approval and adoption of the Merger, to the Company's
stockholders, the Board considered a number of factors, including the following:
i. the desirability of diversifying into commercial areas beyond those
in which the Company has historically operated, which the Board anticipates
will provide the Company's stockholders with the opportunity to participate
in any potential future growth of a company which has significantly greater
business and financial resources, prospects and a larger market
capitalization than the Company were it to pursue the development of a new
line of business using only its existing resources in lieu of the
Acquisition;
ii. the Company's current potential for future cash flow and earnings
absent consummation of the Acquisition;
iii. the terms of the consideration to be paid by the Company under
the Asset Acquisition Agreement, and in particular the willingness of
Navistar to accept payment of the consideration necessary to consummate the
Acquisition partially in the form of the Secured Note and the Contingent
Earn-Out (as described below under--The Asset Purchase Agreement--Purchase
Price Adjustments--Contingent Earn-Out), thereby allowing the Company to
acquire a business having revenues and profits in the order of magnitude of
that of Columbus Plastics;
iv. the Board's favorable view of the prospects of the sheet molding
composite fiberglass parts industry;
v. the Company's historical results of operations, cash flows and
financial condition;
vi. historical data relating to the market prices and trading volumes
of the Company's Common Stock;
vii. the valuation analyses of Nomura presented to the Board of
Directors at a meeting held on September 6, 1996;
viii. the opinion of Nomura as to the fairness to the Company's
stockholders, from a financial point of view, of the consideration to be
paid by the Company under the Asset Purchase Agreement;
ix. the extraordinarily low likelihood of entering into a transaction
with a third party having more favorable terms than those of the
Acquisition, in particular, after considering the efforts of Hellmold in
soliciting indications of interest from third parties and the results of
such efforts;
x. the fact that the transaction is intended to qualify as a tax-free
reorganization to Company stockholders for federal income tax purposes; and
xi. with respect to the Merger, by reincorporating in Delaware, the
Company will be able to benefit from Delaware's comprehensive and well
developed corporate laws.
The Board also considered certain potentially negative factors in its
deliberations concerning the Acquisition, including:
i. the risk that the anticipated benefits of the Acquisition may not
be realized;
ii. the fact that effective voting control in the Company would reside
with Navistar after the Acquisition, as a result of which Navistar will
control the direction of the business affairs of the Company and public
stockholders will not have sufficient voting power to approve any potential
future strategic offer for the Company by a third party that might be
attractive to such stockholders;
iii. the risk of a significant increase in the purchase price that
would result in the event that Navistar were to receive an increase in the
principal amount of the Secured Note in exchange for a reduction of the
number of shares to be received by Navistar in the Acquisition in the event
that the NOL Adjustment Provision were triggered; and
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iv. the fact that a suitable candidate having the requisite experience
in Columbus Plastics' industry to serve as chief executive officer of the
Company after consummation of the Acquisition has not yet been identified
and retained.
The Board did not undertake a separate analysis of each of these factors
nor did the Board reach a separate conclusion with respect to each such factor
in its determination of the fairness of the terms of the Acquisition. In view of
the above, and the variety of factors, both positive and negative, considered by
the Board in reaching its conclusion as to the fairness of the Acquisition, the
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors considered in reaching their respective
determination as to the fairness of the terms of the Acquisition. However, as a
general matter, the Board believed that the positive factors heretofore
described supported its decision to approve the Acquisition and outweighed the
potentially negative factors described above.
BASED ON THE FOREGOING, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE FOR APPROVAL OF THE ASSET PURCHASE AGREEMENT AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE STOCK ISSUANCE AND THE MERGER.
OPINION OF NOMURA
On September 6, 1996 Nomura delivered its preliminary oral opinion to the
Company's Board of Directors to the effect that, as of such date, the
consideration to be paid to Navistar by the Company, based on specified
assumptions which did not give effect to Section 1(g)(iii) of the Asset Purchase
Agreement (which Section is referred to elsewhere herein by the Company as the
NOL Adjustment Provision), is fair to the stockholders of the Company from a
financial point of view. Nomura confirmed its preliminary oral opinion to the
Company's Board of Directors via a telephonic meeting on September 12, 1996.
Nomura confirmed its September 12, 1996 oral opinion by delivering its written
opinion to the Company's Board of Directors, dated the date of this Proxy
Statement/Prospectus, that, as of such date, the consideration to be paid to
Navistar by the Company, based on specified assumptions which did not give
effect to Section 1(g)(iii) of the Asset Purchase Agreement (which Section is
referred to elsewhere herein by the Company as the NOL Adjustment Provision), is
fair to the stockholders of the Company from a financial point of view.
A copy of Nomura's written opinion, which sets forth assumptions made,
general procedures followed, matters considered and limitation on the review
undertaken in connection with the opinion, is attached as Annex II hereto and
incorporated herein by reference. Stockholders of the Company are urged to read
such opinion in its entirety. The following summary is not intended to be
complete and is qualified in its entirety by reference to such opinion.
In arriving at its opinion, Nomura, among other things: (i) reviewed the
Asset Purchase Agreement and the Registration Statement; (ii) reviewed certain
historical financial statements of the Company and Columbus Plastics and certain
projected financial information of the Company and Columbus Plastics provided,
respectively, by the managements of the Company and Navistar, and reviewed
certain additional operating and financial information relating to the past and
current operations and financial condition, as well as the future prospects, of
Columbus Plastics provided to it by the management of the Company; (iii) met
with certain members of the management of the Company to discuss certain
historical financial statements and projected financial information of the
Company; (iv) met with certain members of the management of Navistar to discuss
certain historical financial statements and projected financial information, and
certain additional operating and financial information relating to the past and
current operations and financial conditions, as well as the future prospects, of
Columbus Plastics; (v) reviewed certain pro forma combined projected financial
information for the Company, after giving effect to the Acquisition, prepared by
the management of the Company, and met with certain members of the management of
the Company to discuss such projected financial information; (vi) reviewed the
historical prices and trading volumes of the Company Common Stock; (vii)
reviewed certain publicly available financial data and stock market data of
companies which it deemed generally comparable to Columbus Plastics; (viii)
reviewed the publicly available terms of certain recent acquisitions of
companies and businesses which it deemed generally comparable to Columbus
Plastics; and (ix) reviewed such other information and conducted such other
studies, analyses, inquiries and investigations as it deemed appropriate.
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In the course of its analysis, Nomura relied upon and assumed without
independent verification the accuracy and completeness of all information that
was publicly available and the operating, financial and other information
provided to them by or on behalf of the Company or Navistar or otherwise
reviewed by them, and that all such information was not misleading, and Nomura
did not assume any responsibility or liability therefor. With respect to the
projected financial information provided to Nomura, Nomura assumed that it was
reasonably prepared on bases reflecting best currently available estimates and
judgments of the Company's and Navistar's management as to the expected future
results of operations, financial condition, prospectus and performance of the
Company and Columbus Plastics. Nomura further relied upon the assurances of the
Company's and Navistar's management that they were unaware of any facts that
would make the projected financial information or other information provided to
us inaccurate, incomplete or misleading. Nomura did not perform or obtain any
appraisals of the assets or liabilities of Columbus Plastics. In arriving at its
opinion, Nomura used such valuation methodologies as it deemed necessary or
relevant. Nomura's opinion was necessarily based on economic, market and other
conditions, and the information made available to it, as of the date thereof.
The manner in which Nomura calculated the purchase price for the purposes
of its opinion did not give effect to Section 1(g)(iii) of the Asset Purchase
Agreement described in this Proxy Statement/Prospectus under "--The Asset
Purchase Agreement--Purchase Price Adjustments--The Adjustment Based on Closing
Date Ownership", which provisions could increase the amount of consideration to
be paid to Navistar. Nomura's opinion was limited solely to the purchase price
calculated as provided in its written opinion, and Nomura expressed no opinion
with respect to the consideration that may actually be paid by the Company in
the Acquisition as a result of the adjustment that may result from Section
1(g)(iii) of the Asset Purchase Agreement.
The following is a summary of the material analyses performed by Nomura in
connection with its opinion:
Transaction Analysis. Assuming a value per share of Company Common Stock
issued in the Acquisition of $2.50, the issuance of the Secured Note to Navistar
with a principal amount of $25,504,000 and a purchase price adjustment of
$2,710,000 based on the estimated difference between the Net Tangible Assets (as
defined in the Asset Purchase Agreement) as of the Closing Date and the Net
Tangible Assets as of January 31, 1996, Nomura noted that the aggregate
consideration payable to Navistar pursuant to the Acquisition represented 11.60x
estimated 1996 net income of Columbus Plastics, 1.30x estimated tangible book
equity of Columbus Plastics, 0.68x estimated 1996 revenues of Columbus Plastics,
7.19x estimated 1996 operating income ("EBIT") and 5.32x estimated 1996
operating income plus depreciation and amortization ("EBITDA") of Columbus
Plastics.
Comparable Transactions Analysis. Nomura compared the consideration payable
to Navistar pursuant to the Acquisition to the consideration paid in certain
merger and acquisition transactions in the automotive/ truck and plastic parts
industry since 1990. There have been a very limited number of publicly disclosed
transactions that have occurred over the last few years in the automotive/truck
and plastic parts industry and therefore a very wide range of multiples were
obtained from this analysis. The transactions reviewed were: Vemco Acquisition
Corp.'s acquisition of Bailey Corp.; Lear Corp.'s acquisition of Automotive
Industries Holdings; Collins & Aikman Corp.'s acquisition of Larizza Industries,
Inc. and Automotive Industries Holdings' acquisition of the Gulfstream division
of O'Sullivan Corp. The analysis showed a range of total consideration to latest
twelve months ("LTM") revenues multiples of 0.40x to 1.37x with a mean of 0.83x,
a range of total consideration to LTM EBITDA multiples of 6.00x to 11.00x with a
mean of 8.00x, a range of total equity value to tangible book value of 0.90x to
7.10x with a mean of 3.57x, and a range of total equity value to LTM net income
of 10.00x to 16.40x with a mean of 13.20x.
Comparable Public Companies Analysis. Nomura performed an analysis of the
equity value to LTM and current fiscal year ended multiples for six
automotive/truck and plastic parts supplier companies, consisting of Bailey
Corp., Mascotech, Inc., Arvin Industries, Inc., Collins & Aikman Corp.,
GenCorp., Inc. and Lear Corp, (the "Comparable Companies"). This analysis
indicated that (i) the total capitalization ratio of the Comparable Companies as
a multiple of LTM revenues ranged from 0.43x to 0.92x with a mean of 0.64x, as a
multiple of LTM EBITDA ranged from 4.67x to 9.63x with a mean of 6.50x, and as a
multiple of LTM EBIT ranged from 6.65x to 13.65x with a mean of 9.70x; (ii) the
market capitalization ratio of the Comparable
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<PAGE> 37
Companies as a multiple of LTM net income ranged from 17.15x to 28.48x with a
mean of 22.29x and as a multiple of book equity ranged from 1.21x to 20.04x with
a mean of 6.09x; and (iii) the public trading market price per share as a
multiple of current fiscal year earnings per share and next fiscal year earnings
per share ranged from 6.82x to 14.77x with a mean of 11.46x and 6.00x to 11.61x
with a mean of 9.61x, respectively.
Discounted Cash Flow Analysis. Nomura calculated and analyzed the present
value of the future stream of operating cash flows that Core Materials would
produce over the next five fiscal years through 2001 under three sets of
projected financials consisting of a base scenario, which was provided to Nomura
by the Company, a pessimistic scenario and an optimistic scenario. Under the
pessimistic scenario, Nomura assumed a decline of 10% in revenue for fiscal year
1997 and held that revenue figure constant for the next four fiscal years
through 2001, and a decline in gross margin. Under the optimistic scenario,
Nomura assumed an increase of 10% in revenues for fiscal year 1997 and held that
revenue figure constant for the next four fiscal years through 2001, and an
increase in gross margin. Nomura then capitalized the post-2001 operating cash
flows by calculating a terminal value based on a 5.50x to 6.50x range of
multiples of EBITDA projected for Core Materials under all three scenarios for
the year 2001. The cash flow streams and terminal values were then discounted to
present values using a 10% to 15% range of discount rates for all three
scenarios.
Nomura performed the discounted cash flow analysis assuming that the
Closing would occur on December 31, 1996. Nomura noted that (i) under the base
scenario projections given by the management of the Company, the holders of
Company Common Stock would have an imputed midrange per share valuation of
$2.67, (ii) under the pessimistic scenario, the holders of Company Common Stock
would have an imputed midrange per share valuation of $1.73, and (iii) under the
optimistic scenario, the holders of Company Common Stock would have an imputed
midrange per share valuation of $3.62.
Expected Stockholder's Return Analysis. Nomura analyzed and considered the
expected return on the Company Common Stock both with and without giving effect
to the Acquisition for an investment period of five years beginning in fiscal
year 1997. During this period, Nomura assumed that without the Acquisition and
without a change in the Company's operating assets which mostly consist of cash
and cash equivalents, the Company Common Stock price would increase at a rate of
5% per annum. This analysis, based on an aggregate price per share of $1.31 (the
May 6, 1996 closing price of Company Common Stock, approximately one week prior
to the public announcement of the potential Acquisition) yielded an imputed
price per share of $1.76 by the year 2001. Nomura then calculated the imputed
price per share in the year 2001 under all three scenarios for Core Materials as
described above, based on a valuation of 6.00x projected 2001 EBITDA. This
analysis yielded an imputed price per share of $3.95 under the base scenario
(representing an internal rate of return of 20.1%), $2.77 under the pessimistic
scenario (representing an internal rate of return of 13.3%), and $4.69 under the
optimistic scenario (representing an internal rate of return of 23.6%).
Qualitative Factors. Nomura considered certain qualitative factors in
evaluating the relative imputed per share values of Core Materials Common Stock,
including the cyclicality of the sheet molding plastics business, the existence
of unionized labor in the business, the ability of Core Materials to find future
funding for working capital and other such factors that may potentially impact
the future returns generated by Core Materials.
The foregoing is a summary of the financial analyses used by Nomura in
connection with rendering its opinion. The preparation of a fairness opinion is
a complex process and is not necessarily susceptible to partial analysis or
summary description. Selecting portions of the analyses or of the summary set
forth above, without considering the analyses as a whole would create an
incomplete view of the processes underlying Nomura's opinion. In arriving at its
opinion, Nomura considered the results of all such analyses. The analyses were
prepared solely for the purposes of Nomura providing its opinion as to the
fairness of the Acquisition, from a financial point of view, to the stockholders
of the Company and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. No company used
in the comparable company analyses summarized above is identical to Columbus
Plastics or the Company and no transaction used in the comparable transaction
analyses summarized above is identical to the Acquisition. Any analysis of the
fairness of the Acquisition, from a financial point of view, to the stockholders
of the Company involves complex considerations and judgments concerning
differences in the potential financial and operating characteristics of the
Comparable Companies and transactions and other factors in relation to the
trading and
34
<PAGE> 38
acquisition values of the Comparable Companies. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than those suggested by such
analyses. As described above, Nomura's opinion and the related presentations to
the Company's Board of Directors on September 6 and 12, 1996 was one of many
factors taken into consideration by the Company's Board of Directors in making
its determinations to approve the Asset Purchase Agreement. The foregoing
summary does not purport to be a complete description of the analyses performed
by Nomura.
Nomura's opinion addresses only the fairness of the Acquisition from a
financial point of view to the stockholders of the Company and does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the approval of the proposed
transactions. Although Nomura evaluated the financial terms of the Acquisition,
Nomura did not recommend the specific consideration to be paid in the
Acquisition. The consideration to be received by Navistar as a result of the
Acquisition was determined by negotiation between Navistar and the Company. In
addition, Nomura was not requested to opine as to, and its opinion does not
address, the underlying business decision of the Company's Board of Directors to
proceed with or effect the Acquisition.
The Company will pay Nomura a fee of $325,000 for its services in
evaluating the Acquisition and in rendering the opinion. The Company has also
agreed to reimburse Nomura for certain expenses reasonably incurred by Nomura
and to indemnify and hold Nomura harmless against certain expenses and
liabilities arising in connection with its engagement.
Nomura is an internationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, underwritings, secondary distribution
of listed and unlisted securities, private placements and valuations for
corporate, estate and other purposes. Nomura had no prior business relationships
with the Company. From time to time, in the ordinary course of business, Nomura
may trade equity securities of the Company and Navistar for its own account or
for the accounts of customers and accordingly may at any time hold a long or
short position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendation of the Company's Board of Directors with
respect to the Asset Purchase Agreement and the transactions contemplated
thereby, including the Stock Issuance and the Merger, stockholders should be
aware that certain members of the Company's management and Board of Directors
and Hellmold have certain interests in the transactions that are in addition to
and potentially in conflict with the interests of the Company and the Company's
stockholders generally. The Board of Directors of the Company was aware of these
interests and considered them, among other matters, in approving the Asset
Purchase Agreement and the transactions contemplated thereby.
Payment of Compensation to Mr. Prine. In recognition of Mr. Prine's
services in connection with negotiating the Acquisition, the Board of Directors
of the Company has authorized the payment of $125,000 to Mr. Prine contingent
upon the consummation of the Acquisition.
Hellmold's Dual Representation. Hellmold was engaged by the Company to
assist it in identifying and contacting potential acquisition candidates and
assisting the Company in structuring and negotiating a strategic acquisition. In
addition, Hellmold was engaged by Navistar to assist it in selling its Columbus
Plastics Operations.
Pursuant to a letter agreement dated as of November 1, 1995, as amended on
April 10, 1996 and July 18, 1996, the Company has paid Hellmold a retainer of
$75,000 and has agreed to pay to Hellmold a transaction fee upon consummation of
the Acquisition equal to the sum of (1) 3.33% of the first $15 million of the
consideration paid in the Acquisition and (2) 0.75% of the value of the
consideration paid in the Acquisition in excess of $15 million. For purposes of
the letter agreement, "consideration" means the total value of all cash,
securities, other property and any other consideration, including, without
limitation, any contingent, earned or other consideration, paid or payable,
directly or indirectly to Navistar in connection with the Acquisition and
includes any indebtedness, including, without limitation, unfunded pension
liabilities, retiree medical benefits liabilities, guarantees and other
obligations, assumed in connection with the Acquisition. The $75,000
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<PAGE> 39
previously paid to Hellmold will be credited against the transaction fee payable
to Hellmold. The Company also agreed to reimburse Hellmold for its out-of-pocket
expenses and to indemnify Hellmold against certain liabilities, arising out of
or in connection with the services rendered by Hellmold under its engagement.
Pursuant to a letter agreement dated as of May 31, 1995, Navistar
International Corporation has paid Hellmold a retainer of $75,000 and has agreed
to pay to Hellmold a transaction fee upon consummation of the sale of Columbus
Plastics, equal to the sum of (1) 2.0% of the first $15 million of the
consideration paid for Columbus Plastics, (2) 2.3% of the next $5 million of the
value of the consideration paid for Columbus Plastics, (3) 2.6% of the next $5
million of the value of the consideration paid for Columbus Plastics and (4)
2.9% of the value of the consideration paid in excess of $25 million.
Consideration for purposes of the Navistar letter agreement is substantially
equivalent to that provided for in the Company letter agreement. The $75,000
previously paid to Hellmold by Navistar will be credited against the transaction
fee payable by Navistar to Hellmold. Navistar also agreed to reimburse Hellmold
for its out-of-pocket expenses and to indemnify Hellmold against certain
liabilities arising out of or in connection with the services rendered by
Hellmold under its engagement.
Stock Option. At the time of the consummation of the Merger, each
outstanding option to purchase shares of Company Common Stock (each, a "Company
Option") granted under any stock option plan of the Company will be deemed
amended to constitute an option to acquire, at the same price per share, the
same number of Core Materials Common Stock as the holder of the Company Option
would have been entitled to receive pursuant to the Merger had such holder
exercised such Company Option in full immediately prior to the consummation of
the Merger (not taking into account whether such Company Option was in fact
exercisable at such time).
As of the Record Date, the following executive officers and directors of
the Company held outstanding Company Options:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMPANY COMMON STOCK
SUBJECT TO OUTSTANDING OPTIONS
---------------------------------------------
WEIGHTED
AVERAGE
EXERCISE
NAME OF INDIVIDUAL POSITION VESTED UNVESTED TOTAL PRICE
- --------------------- ------------------------------------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Richard R. Conte Chairman of the Board of Directors; 110,000 50,000(1) 160,000 $ 0.80
Chief Executive Officer; Principal
Financial Officer
Myrna J. Lea Vice President; 50,000 -- 50,000 $ 0.90
Secretary
Ronald L. Temple Director 50,000 -- 50,000 $ 0.75
------- ------ ------- ------
All Directors and Executive Officers as a Group (8 persons) 210,000 50,000 260,000 --
======= ====== ======= ======
</TABLE>
- ---------
(1) These options will vest at the earlier of (i) the consummation of the
Acquisition and (ii) July 1, 1997.
Indemnification. Pursuant to the Asset Purchase Agreement, Navistar has
agreed that for the period from the Closing Date through the sixth anniversary
thereof, it shall not vote in favor of or otherwise directly or indirectly
support any amendment of the provisions of Core Materials' By-laws relating to
the indemnification of officers and directors which would have an adverse effect
on the Company's present or former officers or directors of the Company (except
to the extent that withholding any such vote would be in contravention of any
applicable law).
Possible Employment of Mr. Conte. Mr. Conte and Navistar have had
discussions concerning Mr. Conte's possible employment with Core Materials as
its chief financial officer. No decision has been made as to whether Mr. Conte
will be retained as Core Materials' chief financial officer. The respective
obligations of the Company and Navistar to consummate the transactions
contemplated by the Asset Purchase Agreement are not conditioned upon Mr.
Conte's employment with Core Materials.
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<PAGE> 40
BUSINESS OF THE COMPANY
The Company was incorporated in the State of Maryland on July 1, 1988.
Prior to 1994, the Company was primarily engaged in making investments in
mortgage derivative securities and, to a lesser extent, mortgage related
investments, all of which are secured by single-family residential mortgage
loans. The Company also generates revenues from other sources, such as interest
earnings on certain investments of the Company and sales of certain investments
of the Company.
The Company has elected to be taxed as a REIT under the Code. As long as
the Company qualifies as a REIT, dividends paid to stockholders will be allowed
as a deduction for purposes of determining income subject to federal corporate
income tax. As a result, as long as the Company qualifies as a REIT, the Company
will not be subject to such tax on that portion of its net income that is
distributed to stockholders. If the Acquisition is consummated, Core Materials
will no longer qualify as a REIT and will be subject to income and franchise
taxes on its income to the extent that it cannot offset such income with net
operating losses or capital loss carryforwards.
Since May 1992, the Company has not purchased any new mortgage derivative
or mortgage related investments. During 1995, the Company purchased one 7% FNMA
guaranteed pass-through certificate backed by 30 year single-family mortgage
loans of which the Company maintains 100% ownership. The current principal
balance is approximately $3.4 million. During the period from the Company's
inception in 1988 through early 1992, mortgage interest rate levels and
prepayment speeds remained within ranges existent from 1970 to early 1992.
From early 1992 to early 1994, mortgage rates declined to levels lower than
those existent for the prior twenty year period and, in fact, in the fall of
1993, declined to the lowest level in twenty-five years. The decline in mortgage
rates and the availability of mortgage monies from a wide variety of lenders
produced an unprecedented level and sustained duration of mortgage refinancings
which directly resulted in unparalleled rapid mortgage prepayments.
Initially, the result of such prepayment levels sharply reduced interest
and dividend earnings on the Company's assets. As the duration of these rapid
prepayments extended, the Company's cash flows from interest and dividends and
returns on invested principal were severely impaired, eventually being reduced
to levels sufficient only to repay the Company's borrowings, pay operating
expenses and fund minimal dividend distributions. This deterioration of asset
performance began in the second quarter of 1992 and continued throughout 1993
and 1994, causing permanent impairment to a number of the Company's assets. For
a substantial portion of the Company's assets, especially those with substantial
cost basis premiums, the rapid prepayment scenario produced cash flows that did
not recover the Company's investment basis.
Simultaneously, generally accepted accounting principles required quarterly
asset valuations that produced write-downs in the value of a majority of Company
assets. Such write-downs were reflected as reductions to the interest revenues
on the Company's Statement of Revenues and Expenses.
The result of these earnings difficulties and the altered mortgage
securities market that emerged after the prepayment cycle of 1992-1994 caused
the Company's Board of Directors in mid-1994 to determine that the Company would
not pursue its historical line of business and would investigate alternative
opportunities to maximize stockholder value. The Company has maintained a
portfolio of assets from its historical business, selectively selling assets to
generate liquidity as market conditions were appropriate. See "--Reasons for and
Background of the Acquisition".
A complete description of the Company's business, properties and legal
proceedings, as well as audited historical financial statements of the Company
and its subsidiaries, and management's discussion and analysis of the Company's
financial condition and results of operations, is incorporated by reference to
the Company's Annual Report in Form 10-K for the year ended December 31, 1995
and Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, copies of
which are contained within this Proxy Statement/Prospectus as Annexes VII and
VIII, respectively.
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<PAGE> 41
BUSINESS OF COLUMBUS PLASTICS
In addition to the historical information contained herein, certain
statements under this caption constitute "forward-looking statements" under the
Reform Act which involve risks and uncertainties. Columbus Plastics' actual
results may differ significantly from those discussed herein. Factors that might
cause such a difference include, but are not limited to, those discussed under
the captions "Risk Factors" and "Management's Discussion and Analysis of Results
of Operations and Financial Condition of Columbus Plastics" as well as those
discussed elsewhere in this Proxy Statement/Prospectus.
General
Columbus Plastics operates principally in one business segment, the
production of high quality compression Sheet Molding Composite ("SMC")
fiberglass reinforced parts. Columbus Plastics has been a wholly-owned operating
unit of Navistar's truck manufacturing operations since Columbus Plastics'
formation in late 1980.
Industry
SMC plastics are part of a larger family of materials collectively known as
"reinforced plastics." Reinforced plastics are combinations of resins and
reinforcing fibers formed through high or low pressure fabrication techniques.
Reinforced plastics compete largely against metals and have the strength to
function well during prolonged use. Management believes that reinforced plastic
components offer many advantages over metals, including:
- heat resistance
- corrosion resistance
- lighter weight
- lower cost
- greater flexibility in product design
- part consolidation for multiple piece assemblies
- lower initial tooling costs for lower volume applications
- high strength-to-weight ratio
- dent-resistance in comparison to steel or aluminum.
The largest markets for reinforced plastics, by volume of production, are
automotive and land transportation, construction, corrosion-resistant products,
marine, and electrical and electronic applications.
Competition for OEM business usually involves a competitive selection
process in which the OEM solicits bids for the production of a component. After
assessing a supplier's ability to manufacture the component, the OEM selects a
supplier to work with the OEM's design team. The plastic supplier is generally
selected to supply a component a year or two in advance of production. Once
selected, the plastic supplier generally supplies the component for the life of
the product model. Columbus Plastics products have model lives that range from
approximately two to eight years.
Columbus Plastics' major competitors include Budd Plastics, Cambridge
Industries, Eagle-Picher, Goodyear Plastics and Molded Fiberglass Corporation.
Columbus Plastics believes that it is one of the largest producers of SMC in the
United States and Canada. Columbus Plastics competes primarily on material
design and manufacturing capability, product quality, cost, delivery and
customer service.
Major Customers
Columbus Plastics currently has two major customers, Navistar and Yamaha.
The loss of a significant portion of sales to Navistar or Yamaha would have a
material adverse effect on Columbus Plastics' business.
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<PAGE> 42
See "Risk Factors--Control by Navistar; Anti-Takeover Effects," "--Relationships
and Reliance on Navistar" and "--Dependence on Major Customers."
RELATIONSHIP WITH NAVISTAR
Columbus Plastics enjoys a long-standing relationship with Navistar's truck
manufacturing division and is currently the sole supplier to Navistar's truck
manufacturing division for all of its demand of SMC products. Navistar
manufactures and markets medium- and heavy-duty trucks, including school bus
chassis, mid-range diesel engines and service parts in North America and in
selected export markets. Columbus Plastics makes products for Navistar's Chatham
(Canada) assembly plant and Springfield, Ohio, assembly and body plants.
Columbus Plastics currently works closely on new product development with
Navistar's engineering and research personnel at Navistar's Fort Wayne, Indiana,
Technical Center. Columbus Plastics also currently receives support from
Navistar in the form of staff management, materials purchasing, and working
capital management.
The Columbus Plastics' facility was opened in 1980 to fulfill Navistar's
need for higher quality fiberglass hoods. Until the addition of Yamaha personal
watercraft products in 1990, production sales growth at Columbus Plastics was
largely driven by Navistar's increased use of SMC material in its trucks. The
facility began production in late 1980, producing hoods for Navistar medium-duty
trucks. Since 1986, air deflectors, air farings, fenders, splash panels, engine
covers and other components for Navistar trucks were added to the Columbus
Plastics product line.
The North American truck market in which Navistar competes is highly
competitive and the demand for trucks is subject to considerable volatility as
it moves in response to cycles in the overall business environment and is
particularly sensitive to the industrial sector, which generates a significant
portion of the freight tonnage hauled. Truck demand also depends on general
economic conditions, among other factors. Sales to Navistar amounted to
approximately 63%, 74% and 73% of total revenues in 1995, 1994 and 1993,
respectively.
RELATIONSHIP WITH YAMAHA
Columbus Plastics enjoys a long-standing relationship with Yamaha and
currently supplies a significant amount of the SMC products for Yamaha's
personal watercraft. The addition of Yamaha's personal watercraft component
business in 1990 represented Columbus Plastics' first major outside business
undertaking. Products produced for Yamaha include decks, hulls, engine hatches,
bulk heads, and reinforcements.
Columbus Plastics has worked closely with Yamaha over the last five years
to improve collectively the surface quality of Yamaha products and has
identified new process control techniques and improved materials.
The diversification into a new market area uncorrelated to truck demand has
allowed Columbus Plastics to fill in production gaps that would have occurred
during periods of lower demand for medium- and heavy-duty trucks. Demand for
products from Yamaha is related to the level of general economic activity and
specifically to the cyclical nature of the personal watercraft industry among
other factors.
Sales to Yamaha amounted to approximately 34%, 23% and 23% of total
revenues in 1995, 1994 and 1993, respectively.
OTHER CUSTOMERS
Columbus Plastics performs secondary operations such as assembly of
components and prime painting for its customers. The Columbus Plastics facility
is designed for continuous flow manufacturing. In addition, Columbus Plastics
sells SMC material directly to third parties.
Products
SMC SHEET MATERIAL PRODUCTION
Columbus Plastics incorporates a sophisticated computer program that
assists in the compounding of various complex SMC formulations tailored to
customer needs. The system provides for the following:
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<PAGE> 43
- Control information during various production processes; and
- Data for statistical batch controls.
Columbus Plastics will have the capacity to manufacture approximately 45
million pounds of SMC sheet material annually, once the planned installation of
an additional SMC compounding machine is completed, which is expected to occur
in January 1997. Production of SMC by Columbus Plastics for the years ended
October 31, 1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
SMC POUNDS
PRODUCED
YEAR (MILLIONS)
---- ----------
<S> <C>
1995................................................... 31
1994................................................... 22
1993................................................... 21
</TABLE>
BACKLOG
Columbus Plastics relies on production schedules provided by Navistar and
Yamaha to plan and implement production. These schedules are provided to
Columbus Plastics on a monthly basis and are considered firm for the current
period. Navistar and Yamaha can update these schedules daily for changes in
demand that allows them to run their inventories on a "just-in-time" basis.
Accordingly, the ordered backlog at Columbus Plastics was de minimis as of
October 31, 1995, 1994 and 1993.
RAW MATERIALS AND SUPPLIERS
The principal raw materials used in the SMC compounding include: polyester
resin, fiberglass rovings and adhesives. Currently, there are at least two
suppliers for each of the raw materials Columbus Plastics uses and Columbus
Plastics believes it currently has access to an ample supply of these raw
materials.
CAPACITY CONSTRAINTS
Columbus Plastics believes improvements in uptime performance offer the
best, and usually the most cost effective means of increasing existing
capacities and providing opportunities to pursue new business growth. Columbus
Plastics has on occasion in the past been required to work a seven day/three
shift schedule to meet Navistar and Yamaha production requirements.
MOLDING
Columbus Plastics currently owns or leases 17 presses, ranging in size from
500 to 4500 tons. Large presses provide Columbus Plastics with the ability to
manufacture very large molded plastic parts. Columbus Plastics believes that no
other molder has this number of large capacity presses.
Columbus Plastics has both vacuum molding and in-mold coating capabilities
and currently operates eleven robots and two automatic guided vehicles that
assist in material handling, machining, and adhesive application.
ASSEMBLY AND PAINT
Columbus Plastics has the ability to assemble and/or prime paint a wide
variety and volume of products. To enhance the surface quality and paint finish,
Columbus Plastics developed a significant in-mold coating capability. In-mold
coating is a manufacturing process performed by injecting a liquid over the
molded part surface and then applying pressure at elevated temperatures during
an extended molding cycle. The liquid coating serves to fill and/or bridge
surface porosity as well as provide a barrier against solvent penetration during
subsequent top-coating operations. Columbus Plastics believes that it is among
the industry leaders in in-mold coating applications, based on the size and
complexity of parts coated and the number of presses, 13 of 17, that are in-mold
coating capable.
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Capital Expenditures and Research and Development
Capital expenditures totaled approximately $7.3 million, $2.0 million and
$1.4 million for the years ended October 31, 1995, 1994 and 1993, respectively.
The increase in 1995 primarily relates to three large presses which were brought
on line in 1996. Capital expenditures consist of presses and other equipment to
manufacture Navistar truck components and Yamaha personal watercraft parts as
well as laboratory equipment, storage equipment, computers and office furniture
and fixtures.
Product development is a continuous process at Columbus Plastics. Research
and development activities focus on developing new SMC formulations and
improving existing products and manufacturing processes.
Columbus Plastics does not have a separate research and development
facility but uses its production equipment (compounding machines, molding
presses, and primer system), as necessary, to support these efforts and
cooperates with Navistar and its resin supplier in its research and development
efforts. Likewise, manpower to direct and advance research and development is
integrated with the existing manufacturing, engineering, production, and quality
organizations. Management of Columbus Plastics has estimated that internal costs
related to research and development activities approximate $200,000 per year.
Major research and development projects of current focus at Columbus
Plastics include the following:
- Develop low pressure SMC applications to achieve lower initial tooling
costs and shorter lead times;
- Reduce the densities of SMC formulations to mold lighter components
without sacrificing physical or cosmetic properties;
- Use recycled SMC parts as filler to be environmentally proactive and
reduce waste cost;
- Complement current liquid in-mold-coating applications with powder
in-mold-coating development to expand the number of sealed substrate
surfaces on large-sized components; and
- Develop alternate primers for environmental, quality and cost advantages.
Environmental Compliance
Columbus Plastics manufacturing operations are subject to federal, state
and local environmental laws and regulations which impose limitations on the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of hazardous waste. Columbus Plastics' policy is
to conduct its business with due regard for the preservation and protection of
the environment. Columbus Plastics environmental waste management involves the
daily auditing of all satellite hazardous waste accumulation points, weekly
audits of all hazardous waste activities and biennial audits of every authorized
treatment, storage and disposal facility. Columbus Plastics' environmental staff
also trains each new employee on waste management and other environmental issues
as part of an initial orientation process, and annually thereafter.
Columbus Plastics has submitted the information necessary for the granting
of a Title V permit, as required under the Clean Air Act. In 1989, Columbus
Plastics installed a Regenerative Thermal Oxidizer ("REECO"). The purpose of the
REECO system is to destroy volatile organic compounds from the coating
operation. Columbus Plastics' current emission permits allow for 15 lbs./day of
volatile organic compound emission. The REECO system allows Columbus Plastics to
meet these limitations by consistently achieving about 95% destruction
efficiency. Columbus Plastics has spent over $100,000 in the past year to
maintain the system, thus extending the reliability of the system another 5 to 7
years. Columbus Plastics believes that it is in compliance with all RCRA and
CERCLA laws. Compliance with these environmental laws and regulations has not
had, nor is it currently expected to have, a material effect on Columbus
Plastics' operations, competitive position or capital expenditures through
fiscal year 1997. The amount of capital expenditures currently expected to be
spent on environmental compliance over the next two years is not significant.
Employees
As of October 31, 1995, Columbus Plastics employed a total of 423
employees, 343 of whom are covered by a collective bargaining agreement. After a
15 day strike in August 1995, Columbus Plastics concluded a collective
bargaining agreement with the IAM covering the hourly employees. The contract
expires in
41
<PAGE> 45
August of 1998 and provides for 3% annual wage increases in August 1995, 1996
and 1997 with a reduction in benefit costs. This net increase was offset in part
by a new two-tier wage system for new hires.
Patents, Trade Names and Trademarks
Navistar applies for and maintains patents, trade names and trademarks
where Navistar believes that such patents, trade names and trademarks are
reasonably required to protect Columbus Plastics' rights in its products.
Navistar and Columbus Plastics do not believe that any single patent, trade name
or trademark or related group of such rights are materially important to
Columbus Plastics' business or its ability to compete.
Properties
Columbus Plastics consists of a single plant that is situated approximately
nine miles west of the center of Columbus, Ohio, at 800 Manor Park Drive. The
306,656 square-foot facility currently consists of manufacturing, office and
warehouse buildings on 28.2 acres of land.
The 306,656 square feet of available floor space at Columbus Plastics
comprises the following:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
FEET
---------
<S> <C>
Manufacturing.................................................... 258,850
Office........................................................... 23,223
Warehouse........................................................ 24,583
-------
306,656
</TABLE>
Columbus Plastics produces SMC sheet material and molds fiberglass,
reinforced parts. Currently, Columbus Plastics has SMC sheet production capacity
adequate for its production volume and there exists third parties from whom
Columbus Plastics could purchase SMC sheet material. The approximate capacity
utilization for the molding of production products was 122% in 1995, 102% in
1994 and 99% in 1993. During 1996, the three new presses put into operation at
Columbus Plastics have increased the available capacity for the molding of
production products.
Legal Proceedings
Columbus Plastics is not currently a party to any material pending legal
proceedings, other than ordinary, routine litigation incidental to the business,
nor are any such proceedings known by management to be contemplated by
government authorities.
42
<PAGE> 46
SELECTED FINANCIAL DATA
OF COLUMBUS PLASTICS
The following selected financial data concerning Columbus Plastics as of
October 31, 1995 and 1994 and for each of the three fiscal years in the period
ended October 31, 1995 are derived from the audited financial statements of
Columbus Plastics. The following selected financial data concerning Columbus
Plastics with respect to the nine months ended July 31, 1996 is unaudited and in
management's opinion includes all adjustments necessary to present fairly such
information. The capital structure of Core Materials after the Acquisition will
differ significantly from the capital structure of Columbus Plastics. See Note 2
of the Notes to Financial Statements of Columbus Plastics and the Notes to the
Unaudited Pro Forma Combined Financial Statements. The information set forth
below should be read in conjunction with "--Management's Discussion and Analysis
of Results of Operations and Financial Condition of Columbus Plastics" and the
historical and pro forma financial statements and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FOR THE YEAR ENDED OCTOBER 31,
JULY 31, -------------------------------
1996 1995 1994 1993
----------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues(1).................................... $39,249 $59,505 $44,191 $39,767
Direct costs and expenses:
Cost of operations........................... 38,339 53,319 40,487 38,393
Postretirement benefits expense.............. 804 857 833 934
Marketing and administrative expense......... 337 484 390 369
Other--net................................... 12 55 15 4
------- ------- ------- -------
Income (loss) before interest and taxes(2)..... $ (243) $ 4,790 $ 2,466 $ 67
======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Accounts receivable............................ $ 2,547 $ 7,233 $ 1,238
Inventory...................................... 3,413 3,362 3,019
Net property, plant and equipment.............. 24,530 21,652 15,734
Total assets................................... 30,796 32,591 20,281
Accounts payable and accrued expenses.......... 6,199 12,451 5,791
Owner's equity investment...................... 24,596 20,140 14,489
</TABLE>
- ---------
(1) Columbus Plastics provides Navistar's truck assembly operations with all of
its sheet molding composite plastic component requirements, which represents
greater than 60% of its output in all periods presented, at standard cost,
with the remainder sold to unrelated third party customers at negotiated
prices.
(2) Interest, income taxes and earnings per share have been omitted because
Columbus Plastics was not a separate stand alone division or subsidiary of
Navistar and was generally not accounted for separately. In addition,
Navistar's systems and procedures do not provide sufficient information to
develop a reasonable cost allocation of income taxes, corporate debt and
interest expense.
43
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF
COLUMBUS PLASTICS
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act which involve risks and uncertainties. Columbus
Plastics' actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed under the caption "Risk
Factors."
OVERVIEW
Columbus Plastics manufactures high quality compression SMC fiberglass
reinforced parts. Columbus Plastics has been a wholly-owned operating unit of
Navistar's truck manufacturing division since Columbus Plastics formation in
late 1980. Columbus Plastics has two major customers, Navistar and Yamaha. The
demand for Columbus Plastics products is affected by the volume of purchases
from these two customers, whose orders are primarily affected by economic
conditions in the United States. Columbus Plastics' manufacturing operations
have a significant fixed cost component. Accordingly, during periods of changing
demands the profitability of Columbus Plastics' operations will change
proportionately more than revenues from operations.
Columbus Plastics is not a stand alone division or subsidiary of Navistar.
Navistar provides Columbus Plastics with certain management support and
corporate treasury, legal, tax, computer, purchasing and other similar corporate
support functions. Corporate general and administrative expenses have not been
previously allocated to Columbus Plastics. For purposes of preparing the
financial statements of Columbus Plastics certain of these corporate costs along
with other Navistar Truck Group expenses were allocated using an allocation
method that management believes is reasonable and reflective of those costs that
would have been incurred on a stand alone basis. However, Navistar's systems and
procedures do not provide sufficient information to develop reasonable cost
allocations for income taxes, corporate debt and interest expense. In addition,
Columbus Plastics records sales to Navistar at its standard cost. Accordingly,
the results of operations as recorded in the financial statements and discussed
below may not be indicative of the results of operations of Columbus Plastics
had it been a stand alone company during the periods presented.
Pursuant to the Asset Purchase Agreement, Navistar and Core Materials will
enter into a Comprehensive Supply Agreement (the "Supply Agreement") with an
initial term of five years. Under the terms of the Supply Agreement, Navistar
will agree to purchase from Core Materials, and Core Materials will agree to
sell to Navistar at negotiated prices, which will approximate fair value, all of
Navistar's original equipment and service requirements for fiberglass reinforced
parts using the SMC process for components currently being manufactured by
Columbus Plastics and detailed in the Supply Agreement. The pro forma sales and
gross margin amounts have been adjusted to reflect the Supply Agreement. The pro
forma amounts are shown in parenthesis next to the historical amounts.
Results of Operations
FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
Net Sales for 1995 totaled $59.5 million ($65.6 million) up 35% (33%) over
the $44.2 million ($49.2 million) in 1994. Shipments to Navistar increased 16%
(16%) to $37.8 million ($43.6 million) from the $32.5 million ($37.6 million) in
1994. The increase in shipments to Navistar was the result of an increase in
sales of Navistar trucks due to an increase in truck industry demand in the
United States and Canada. Sales to Yamaha in 1995 increased by 95% to $20.2
million compared with the $10.4 million in 1994. This increase resulted from an
increase in demand for Yamaha's watercraft products and improved pricing.
Gross margin was 10% (19%) of sales in 1995 compared with 8% (18%) in 1994.
The increase in gross margin was primarily the result of the increase in sales
volumes, improved pricing, capacity utilization and operating efficiency. These
improvements were partially offset by higher labor and overtime costs to meet
the demand for both Navistar and Yamaha products. Gross margin in 1995 was also
adversely impacted by a 15 day strike by Columbus Plastics' hourly workers
during the fourth quarter.
44
<PAGE> 48
Marketing and administrative expenses were $484,000 in 1995 compared with
$390,000 in 1994. The increase was primarily the result of the hiring of new
employees and increased support costs to meet the increased production demand in
1995.
FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993
Net Sales for 1994 totaled $44.2 million ($49.2 million) up 11% (11%) over
the $39.8 million ($44.3 million) in 1993. Shipments to Navistar increased 12%
(12%) to $32.5 million ($37.6 million) from the $28.9 million ($33.4 million) in
1993. The increase in shipments to Navistar was the result of an increase in
sales of Navistar trucks due to an increase in truck industry demand in the
United States and Canada. Sales to Yamaha in 1994 increased by 14% to $10.4
million compared with the $9.1 million in 1993. This increase resulted from an
increase in demand for Yamaha's watercraft products and improved product mix.
Gross margin was 8% (18%) of sales in 1994 compared with 3% (13%) in 1993.
The increase in gross margin was primarily the result of the increase in sales
volumes, capacity utilization, and improved product mix. These improvements were
partially offset by higher labor and overtime costs to meet the demand for both
Navistar and Yamaha products.
Marketing and administrative expenses were $390,000 in 1994 compared with
$369,000 in 1993. The increase was primarily the result of the hiring of new
employees and increased support costs to meet the increased production demand in
1994.
NINE MONTHS ENDED JULY 31, 1996 COMPARED WITH THE NINE MONTHS ENDED JULY 31,
1995
Net Sales during the 1996 period totaled $39.2 million ($43.3 million) down
11% (10%) from the $43.9 million ($48.2 million) in 1995. Shipments to Navistar
decreased 16% (15%) to $23.2 million ($27.1 million) from the $27.5 million
($31.8 million) in 1995. The decrease in shipments to Navistar reflects lower
volume of Navistar truck sales due to a decline in truck industry demand in the
United States and Canada. Sales of $15.2 million to Yamaha in 1996 were
unchanged from the level in 1995.
Gross margin was 2% (11%) in 1996 compared with 11% (19%) in 1995. The
decrease in gross margin was primarily driven by the reduction in sales volumes
which resulted in lower capacity utilization and overhead absorption. Fixed
manufacturing costs in 1996 were higher than 1995 due to increased depreciation
expense resulting from the installation of three new SMC presses that became
operational in 1996. In addition, the 1996 gross margin was adversely impacted
by start up costs related to the tooling for a new product, increased labor
costs resulting from the new three year labor agreement with hourly employees
and increased repair and maintenance costs relating to projects that had been
deferred in 1995 due to production volumes.
Marketing and administrative expenses were $337,000 in 1996 compared with
$363,000 in 1995. The decrease was primarily the result of the decreased
production demand in 1996.
Liquidity and Capital Resources
Historically, Columbus Plastics' working capital and investment needs have
been financed by Navistar through the intercompany equity investment account and
through the sale of products to Yamaha. Subsequent to the transaction with the
Company, Columbus Plastics will need to independently fund all of its working
capital requirements. Funds necessary to meet its working capital and investment
needs will be financed through the following sources: 1) the Supply Agreement
between Navistar and Core Materials, while in effect, will require that Navistar
obtain all of its SMC plastic requirements for components currently being
manufactured by Columbus Plastics and detailed in the Supply Agreement from
Columbus Plastics at negotiated prices which approximate fair value; 2) the
Company has substantial NOLs that will be available to offset future income of
Columbus Plastics subsequent to the acquisition. The utilization of these NOLs
will substantially reduce any federal tax liability payments; and 3) Columbus
Plastics' and the Company's management will engage in best efforts to obtain a
working capital line of credit which will be available to fund the combined
companies' working capital requirements. Management believes that internally
generated funds
45
<PAGE> 49
along with the other factors noted above will be sufficient to satisfy
anticipated working capital needs and capital expenditures.
Business Outlook
Columbus Plastics is dependent on its two major customers, Navistar and
Yamaha. During the first nine months of 1996, Navistar has experienced a
significant decline in the rate of new truck orders and an increase in the
cancellation rate of existing orders. Future demand for certain Columbus
Plastics' products will be dependent on the rate at which new truck orders are
received by Navistar. Columbus Plastics believes that production levels for
Navistar for the remainder of the fiscal year will approximate the reduced
levels experienced in the first nine months of 1996. Columbus Plastics also
anticipates a decline in production of Yamaha products for the remainder of the
fiscal year due to a reduction in the Yamaha order rate. Management will balance
production with demand for the remainder of the fiscal year as appropriate to
reduce the financial impact of lower sales volumes.
46
<PAGE> 50
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OF CORE MATERIALS
The accompanying unaudited pro forma financial statements set forth the pro
forma combined balance sheet of Core Materials at July 31, 1996 as if the
Acquisition was effective on July 31, 1996; and the pro forma combined
statements of income for the year ended October 31, 1995 and the nine months
ended July 31, 1996 as if the Acquisition had occurred at the beginning of the
periods presented. These pro forma financial statements are presented to
illustrate the effect of certain adjustments to the historical financial
statements that result from the proposed transactions between the Company and
Navistar. Based upon the terms of the proposed acquisition, for financial
reporting and accounting purposes the transaction will be accounted for as a
reverse acquisition whereby Columbus Plastics will be deemed to have acquired
Core Materials. However, Core Materials, subsequent to the merger, will be the
continuing legal entity and registrant for both Securities and Exchange
Commission filing purposes and income tax reporting purposes. Consistent with
reverse acquisition accounting treatment Core Materials will carry forward the
historical basis of the acquired assets and assumed liabilities of Columbus
Plastics and will revalue the basis of its net assets to fair value. Should
there be an additional contingent earn-out adjustment, it will be accounted for
by increasing the amount of the Secured Note, and by reducing the amount of Core
Materials' retained earnings.
The pro forma information is not necessarily indicative of the actual
financial position of Core Materials at any date or the results which would have
actually occurred had the transactions occurred on such dates or which may occur
in the future. These statements should be read in conjunction with the
historical financial statements and notes thereto included elsewhere herein or
incorporated by reference herein.
47
<PAGE> 51
CORE MATERIALS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JULY 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
COLUMBUS HISTORICAL --------------------------------------- ADJUSTED
PLASTICS RYMAC ACQUISITION NOTE OTHER NOTE BALANCE
----------- ------------ ------------ ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash....................... $ 24,501 $ 2,747,000 $(2,600,000) (e) $ 171,501
Mortgage backed security,
at fair value........... 3,252,000 3,252,000
Accounts receivable........ 2,546,740 2,546,740
Inventories................ 3,413,266 3,413,266
Other current assets....... 281,178 281,178
----------- ------------ ------------ ----------- -----------
Total current assets.... 6,265,685 5,999,000 (2,600,000) 9,664,685
Property, plant and
equipment--net.......... 24,529,874 24,529,874
Deferred tax asset......... $ 12,000,000 (d) 12,000,000
----------- ------------ ------------ ----------- -----------
TOTAL ASSETS............ $30,795,559 $ 5,999,000 $ 12,000,000 $(2,600,000) $46,194,559
=========== ============ ============ =========== ===========
LIABILITIES AND EQUITY:
Accounts payable........... $ 4,487,026 $ (3,194,000) (g) $ 1,293,026
Accrued liabilities........ 1,712,391 $ 2,477,000 400,000 (c) $(2,600,000) (e) 2,229,391
240,000 (f)
----------- ------------ ------------ ----------- -----------
Total current
liabilities........... 6,199,417 2,477,000 (2,554,000) (2,600,000) 3,522,417
Secured note payable....... 27,904,000 (b) 27,904,000
Equity investment.......... 24,596,142 (24,596,142) (a) --
STOCKHOLDERS' EQUITY
Common stock--par.......... 52,100 42,600 (a) 94,700
Paid in capital............ 43,985,000 12,000,000 (d) 15,229,900
(240,000) (f)
(40,515,100) (a)
Retained
earnings(deficit)....... (40,515,100) (400,000) (c)
40,515,100 (a)
3,194,000 (g)
(27,904,000) (b) (556,458)
24,553,542 (a)
----------- ------------ ------------ ----------- -----------
Total stockholders'
equity................ -- 3,522,000 11,246,142 -- 14,768,142
----------- ------------ ------------ ----------- -----------
TOTAL LIABILITIES AND
EQUITY................ $30,795,559 $ 5,999,000 $ 12,000,000 $(2,600,000) $46,194,559
=========== ============ ============ =========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
48
<PAGE> 52
CORE MATERIALS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1995 AND THE NINE MONTHS ENDED JULY 31, 1996
Unaudited Pro forma Combined Balance Sheet:
The Unaudited Pro forma Combined Balance Sheet as of July 31, 1996 reflects
the adjustments necessary to record the proposed acquisition as though it
occurred on July 31, 1996.
Based upon the terms of the proposed acquisition, the transaction for
financial reporting and accounting purposes will be accounted for as a reverse
acquisition whereby Columbus Plastics will be deemed to have acquired Core
Materials. However, Core Materials, subsequent to the merger, will be the
continuing legal entity and registrant for both Securities and Exchange
Commission filing purposes and income tax reporting purposes. Consistent with
reverse acquisition accounting treatment Core Materials will carry forward the
historical basis of the acquired assets and assumed liabilities of Columbus
Plastics and will revalue the basis of its net assets to fair value. For
financial reporting purposes, consistent with reverse acquisition accounting
treatment, the purchase price of Core Materials should be calculated as the fair
value of the consideration paid or received whichever is more clearly evident.
Because Core Materials' stock is thinly traded and supports a company with no
current operations, the fair value of Core Materials' existing, outstanding
common stock is not appropriate to determine the purchase price. The purchase
price will be determined as the fair value of the consideration received (cash,
investment, tax benefits and accrued liabilities) by Columbus Plastics. The
purchase price, based upon reverse acquisition accounting, has been calculated
at approximately $15 million and does not include any future contingent
consideration payments. Transaction costs incurred in connection with the
acquisition of a company without operating substance should be treated similar
to that of an initial public offering as a reduction in paid-in capital. Since
the recording of Navistar's transaction costs at Columbus Plastics would result
in no net impact to Columbus Plastics' balance sheet, Navistar's transaction
costs are excluded from the purchase price.
(a) Reverse acquisition accounting treatment requires that the retained earnings
carried forward to Core Materials should consist of Columbus Plastics'
equity investment account, less an amount equivalent to Navistar's share of
Core Materials' common stock. This adjustment reclassifies Columbus
Plastics' equity investment account into Common Stock and Retained Earnings
by first allocating an amount equivalent to the par value of the shares
issued to Navistar to Common Stock-par with the remainder being allocated to
Retained Earnings. The historical retained earnings of the Company is
reclassified to paid-in-capital.
(b) Represents the recording of the Secured Note payable to Navistar as
consideration for the purchase by Core Materials of the assets and
liabilities of Columbus Plastics. The offset of this pro forma entry is to
retained earnings as reverse acquisition accounting treats the Secured Note
as a deemed dividend to Navistar. The Secured Note recorded reflects the
stated amount of the Secured Note ($25,504,000) plus an estimate of the post
closing adjustment ($2,400,000) which will be calculated as the change in
the equity investment account, as adjusted, between January 1, 1996 and the
date of closing. The Asset Purchase Agreement provides for a contingent
earn-out based upon future operations which will be paid to Navistar through
an increase in the principal amount of the Secured Note and a reduction in
Core Materials' retained earnings. As the contingent consideration is
dependent upon future operating results which can not be determined at the
time of the acquisition, no estimate of contingent earn-out has been
included in the pro forma adjustments.
(c) Represents the projected pension benefit obligation in excess of the
accumulated vested pension benefit obligation for the Columbus Plastics'
salaried employees assumed by Core Materials after the consummation of the
proposed acquisition.
(d) Represents the recognition of a deferred tax asset for the Company's net
operating losses and capital loss carryforwards and the temporary difference
between the book and tax basis of Core Materials' assets and liabilities
(approximately $17,200,000). A deferred tax asset relating to the Company's
loss carryforwards was not previously recognized due to the Company's status
as a real estate investment trust. Due to
49
<PAGE> 53
uncertainty in the ability of Core Materials to fully realize all of the
loss carryforwards prior to their expiration, a valuation allowance of
approximately $5,200,000 has been established against the deferred tax
asset. Consistent with reverse acquisition accounting treatment, the
establishment of the deferred tax asset has been offset against
paid-in-capital since Columbus Plastics is the accounting acquiror.
(e) Represents the payment of transaction costs and certain severance and
termination costs applicable to the Acquisition. See also Note (f).
(f) Represents certain severance and leasehold termination costs to close former
Company facilities and terminate certain of the Company's employees. Amounts
will be recognized at the date of the Acquisition as Columbus Plastics is
the accounting acquiror.
(g) Represents the reduction in Columbus Plastics' accounts payable for the
amount ($3,194,000) to be retained by Navistar.
50
<PAGE> 54
CORE MATERIALS
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------
HISTORICAL (A) SUPPLY & PRO FORMA
COLUMBUS HISTORICAL SERVICES ADJUSTED
PLASTICS RYMAC ACQUISITION NOTE AGREEMENTS NOTE BALANCE NOTE
----------- ---------- ----------- ---- ---------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Navistar..................... $37,777,164 $5,866,200 (b) $43,643,364
Yamaha....................... 20,221,722 20,221,722
Other--manufacturing......... 1,506,243 1,506,243
Investment income............ $ 898,000 $ (670,300) (e) 227,700
----------- ---------- ----------- ---------- -----------
59,505,129 898,000 (670,300) 5,866,200 65,599,029
Cost of operations............. 53,319,218 53,319,218
----------- ---------- ----------- ---------- -----------
Gross margin................... 6,185,911 898,000 (670,300) 5,866,200 12,279,811
Postretirement benefits
expense...................... 857,098 857,098
Marketing and administrative... 484,000 590,000 274,000 (d) -- (d) 1,348,000
Other--net..................... 55,241 55,241
Interest expense............... 1,064,000 1,018,300 (c) 2,082,300
----------- ---------- ----------- ---------- -----------
Income (loss) before
income taxes................. $ 4,789,572 $ (756,000) $(1,962,600) $5,866,200 $ 7,937,172
Income tax provision........... -- 3,333,612 (f)
---------- -----------
Net income (loss).............. $ (756,000) $ 4,603,560
========== ===========
Net income (loss)
per share.................... $ (0.15) $ 0.48
========== ===========
Weighted average number of
shares outstanding........... 5,211,000 9,645,400 (g)
========= ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
51
<PAGE> 55
CORE MATERIALS
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------
HISTORICAL (A) SUPPLY & PRO FORMA
COLUMBUS HISTORICAL SERVICES ADJUSTED
PLASTICS RYMAC ACQUISITION NOTE AGREEMENTS NOTE BALANCE NOTE
----------- ----------- ----------- ---- ---------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Navistar................... $23,212,614 $3,862,000 (b) $27,074,614
Yamaha..................... 15,194,763 15,194,763
Other--manufacturing....... 841,381 841,381
Investment income.......... $ 630,000 $ (459,300) (e) 170,700
----------- ----------- ----------- ---------- -----------
39,248,758 630,000 (459,300) 3,862,000 43,281,458
Cost of operations........... 38,338,822 38,338,822
----------- ----------- ----------- ---------- -----------
Gross margin................. 909,936 630,000 (459,300) 3,862,000 4,942,636
Postretirement benefits
expense.................... 804,081 804,081
Marketing and
administrative............. 337,000 2,707,000 (2,059,000) (d) -- (d) 985,000
Other--net................... 11,958 11,958
Interest expense............. 368,000 1,026,200 (c) 1,394,200
----------- ----------- ----------- ---------- -----------
Income (loss) before
income taxes............... $ (243,103) $(2,445,000) $ 573,500 $3,862,000 $ 1,747,397
Income tax provision......... -- 733,907 (f)
=========== ===========
Net income (loss)............ $(2,445,000) $ 1,013,490
=========== ===========
Net income (loss) per
share...................... $ (0.47) $ 0.10
=========== ===========
Weighted average number of
shares outstanding......... 5,211,000 9,645,400 (g)
========== ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
52
<PAGE> 56
CORE MATERIALS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1995 AND THE NINE MONTHS ENDED JULY 31, 1996
Unaudited Pro Forma Combined Statements of Income:
The Unaudited Pro Forma Combined Statements of Income for the twelve months
ended October 31, 1995 and the nine months ended July 31, 1996 have been
prepared assuming the proposed acquisition had occurred at the beginning of the
periods presented and reflects the effects of certain adjustments to the
historical financial statements that result from the proposed acquisition
between Core Materials and Navistar. Columbus Plastics is not a stand alone
division or subsidiary of Navistar and was generally not accounted for
separately. Navistar's systems and procedures do not provide sufficient
information to develop a reasonable cost allocation for income taxes and
interest expense. Accordingly, historical net income per share amounts have not
been included in the unaudited pro forma financial information for Columbus
Plastics.
(a) The historical statements of income for the Company are included for the
year ended December 31, 1995 and the seven months ended July 31, 1996,
respectively, in the unaudited pro forma combined statements of income for
the year ended October 31, 1995 and the nine months ended July 31, 1996,
respectively. Consistent with reverse acquisition accounting treatment,
historical statement of income information for the Company will not be
included in the historical financial information of Core Materials after
the consummation of the proposed acquisition. Accordingly, the Company's
historical statements of income have been reversed from these unaudited pro
forma financial statements as described in the adjustments noted below.
(b) Represents the additional revenues resulting from pricing sales by Core
Materials to Navistar reflecting the prices specified in the Comprehensive
Supply Agreement, rather than at Columbus Plastics historical standard
cost.
(c) Represents the estimated interest expense on the Secured Note due Navistar
at 8% per annum ($2,232,300 for the year ended October 31, 1995 and
$1,674,200 for the nine months ended July 31, 1996); less the reversal of
the Company's historical interest expense and the interest credit of
$150,000 for the year ended October 31, 1995 and $280,000 for the nine
months ended July 31, 1996, which represents the capitalization of interest
on the secured note relating to property, plant and equipment under
construction.
(d) Represents an estimate of the additional administrative expenses to be
incurred by Core Materials as a result of Columbus Plastics' status as a
stand alone, publicly owned company rather than an operating unit of a much
larger corporation. Additional costs consist primarily of executive salary
costs and legal and directors fees. Such costs are estimated at $864,000
for the year ended October 31, 1995 and $648,000 for the nine months ended
July 31, 1996. The adjustment represents these amounts less the reversal of
the Company's historical marketing and administrative expense, which
includes approximately $2.4 million of transaction costs relating to the
proposed merger and acquisition for the period ended July 31, 1996. The
historical marketing and administrative expense of Columbus Plastics
includes allocated corporate costs which are reflective of the costs that
will be charged to Columbus Plastics pursuant to the Transitional Services
Agreement between Core Materials and Navistar. Accordingly, no adjustments
have been recorded to reflect the impact of the Transitional Services
Agreement on the unaudited pro forma financial statements.
(e) Represents the estimated interest income to be earned on the mortgage backed
security at the security's effective interest rate of 7% ($227,700 for the
year ended October 31, 1995 and $170,700 for the nine months ended July 31,
1996); less the reversal of the Company's historical interest income.
(f) Represents the estimated income tax expense for Core Materials based upon a
statutory Federal tax rate of 34% and an estimated Ohio state and local tax
rate of 11%. The income tax expense recorded in the pro forma financial
statements is not necessarily indicative of the cash payments for income
taxes that Core Materials would be required to pay due to Core Materials'
substantial NOLs and capital loss carryforwards. Core Materials expects to
only be required to make minimal Federal income tax payments
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<PAGE> 57
as mandated, primarily, by the Alternative Minimum Tax regulations until
such time that the loss carryforwards are fully utilized or expired.
(g) The weighted average shares outstanding used to calculate net income per
share include the number of shares of Company common stock currently
outstanding; the number of shares of Core Materials common stock to be
issued to Navistar as consideration for the proposed acquisition; and the
effect of the exercise of 260,000 dilutive Company common stock options,
using the treasury stock method.
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<PAGE> 58
BUSINESS OF CORE MATERIALS AFTER
THE ACQUISITION
BUSINESS
In connection with the Acquisition, Core Materials will acquire
substantially all of the assets and liabilities, including the property and
business, of Columbus Plastics (other than certain excluded assets and
liabilities). To the extent that any of the contracts to which Navistar or its
affiliates are parties are included within the assets to be acquired by Core
Materials and are not assignable or require the consent of third parties prior
to assignment to Core Materials, upon request, prior to the Closing, Navistar
will cooperate with the Company in any reasonable manner in connection with the
Company's obtaining such consents; provided, however, that Navistar will not be
obligated as part of its cooperation to expend money, commence litigation or
offer or grant any accommodation to any third parties. If the Company and
Navistar are unable to obtain a required consent and unable to obtain a separate
agreement between Core Materials and the other party or parties, the Company
shall have the right to require Navistar to use reasonable efforts to perform
any such contract, to the extent it relates to Columbus Plastics, as agent for
and for the account of Core Materials, and shall promptly remit any funds
collected for the account of Core Materials, for a period of six months
following the Closing Date; provided that Core Materials reimburse Navistar for
any and all cash, expenses, losses and liabilities incurred in connection with
taking such action. As discussed above under "--Business of the Company," since
mid-1994, the Company has not pursued its historical business of engaging in
investments in mortgage derivative securities and mortgage related investments;
however, it has continued to maintain its historical business by holding such
securities. After the Acquisition, Core Materials will continue to hold the
Company's remaining investments in mortgage securities but the principal
business of Core Materials will consist of operating the business and property
of Columbus Plastics.
Core Materials' operational strategy will be to improve productivity,
implement cost controls and expand Columbus Plastics' operations by expanding
its customer base. After the Acquisition, the Company will close its current
offices and the chief executive offices of Core Materials will be located at 800
Manor Park Drive, Columbus, Ohio.
RELATIONSHIP WITH NAVISTAR
After the Acquisition, Core Materials will continue to have a substantial
relationship with Navistar. Two of Core Materials' five directors will be
Navistar designees. Moreover, Navistar will receive 4,264,000 shares of Core
Materials Common Stock in the Acquisition, which amount is subject to adjustment
but shall not exceed 45% of the total number of shares of Core Materials Common
Stock issued and outstanding on a fully diluted basis, thus giving Navistar the
power to significantly influence the composition of Core Materials' Board of
Directors and to approve actions requiring stockholder approval. See "RISK
FACTORS--Control by Navistar; Anti-Takeover Effects."
Navistar will also be Core Materials' biggest customer. Columbus Plastics
derived approximately 73%, 74%, 64% and 59% of its revenue from sales to
Navistar (at Columbus Plastics' standard cost) in fiscal years 1993, 1994 and
1995 and the nine months ended July 31, 1996, respectively. On a pro forma
basis, Core Materials would have derived approximately 67% and 63% of its
revenue from sales to Navistar in fiscal year 1995 and the first nine months
ended July 31, 1996, respectively, reflecting the Comprehensive Supply
Agreement. The loss of a significant portion of sales to Navistar would have a
material adverse effect on the business, financial condition and results of
operations of Core Materials. While Core Materials will seek to diversify its
customer base following the Acquisition, there can be no assurance that it will
be successful in doing so.
Core Materials and Navistar will also have certain contractual arrangements
following the Acquisition. See "RISK FACTORS--Relationships with and Reliance on
Navistar" and "--Ancillary Agreements."
LIQUIDITY
In connection with the Acquisition, Core Materials will issue the Secured
Note in the principal amount of $25,504,000. Among other things, the Secured
Note will restrict the ability of Core Materials or any of its
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<PAGE> 59
subsidiaries to incur additional indebtedness, make investments, pay dividends
or make other restricted payments on its capital stock, enter into any merger,
consolidation or other extraordinary transaction or sell its assets. The Secured
Note will call for periodic principal payments only if unrestricted cash of Core
Materials exceeds $3 million. If no such excess exists, no principal payments
(other than from certain proceeds of a Refinancing Loan described below) will be
required until November 2006. See "--Ancillary Agreements-- The Secured Note."
Core Materials will seek to enter into a senior credit facility to provide
working capital and for other purposes simultaneous with or shortly after the
consummation of the Acquisition. There can be no assurance that Core Materials
will be able to negotiate an acceptable senior credit facility.
Pursuant to the Secured Note, Core Materials will covenant to use
reasonable commercial efforts to obtain a Refinancing Loan (as defined below)
within six (6) months from the Closing Date in amounts and with terms reasonably
satisfactory to Core Materials and Navistar (or its permitted successors,
transferees and assigns). "Refinancing Loan" is defined by the Secured Note to
mean any loan, extension of credit or other financial accommodation (other than
a revolving line of credit for working capital purposes) made as of or after the
Closing to Core Materials by a person other than the holder of the Secured Note;
to refinance and pay indefeasibly in full or in part the outstanding principal
amount the Secured Note, and which is secured by Core Materials' equipment or
other assets securing the Secured Note, provided that (i) the proceeds of such
loan are disbursed directly to the holder of the Secured Note pursuant to
written authorization given by Core Materials to the person making the loan; and
(ii) to the extent such person intends to take a security interest in any of
Core Materials' equipment or other assets, such person has entered into an
intercreditor agreement with the holder of the Secured Note in form and
substance acceptable to the holder of the Secured Note. In the event that Core
Materials obtains any Refinancing Loan, it will be obligated pursuant to the
terms of the Secured Note to pay, promptly upon obtaining such loan, principal
on the Secured Note in an amount equal to the proceeds of such loan.
Core Materials expects that cash provided from operations, together with
borrowings under its anticipated senior credit facility, will be sufficient to
fund its interest requirements, capital expenditures and other operational
requirements.
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MANAGEMENT OF CORE MATERIALS AFTER
THE ACQUISITION
DIRECTORS
Upon consummation of the Acquisition, the Board of Directors of Core
Materials will consist of five members consisting of the following persons: (i)
two persons designated by Navistar (the "Navistar Designees"); (ii) two persons
designated by the Company's existing Board of Directors (the "Company
Designees"); and (iii) one person to be selected by mutual agreement of Navistar
and the Company (the "Independent Director"). With respect to vacancies on the
initial Board of Directors of Core Materials which exist at any time prior to
the first annual meeting of the stockholders of Core Materials following the
Closing Date, the Company Designees shall have all requisite authority to act on
behalf of Core Materials as a special committee of the Board of Directors to
fill vacancies created by the resignation or removal of a Company Designee, and
the Navistar Designees shall have all requisite authority to act on behalf of
Core Materials as a special committee of the Board of Directors to fill
vacancies created by the resignation or removal of a Navistar Designee. The
individuals listed in the table below are expected to become members of Core
Materials' Board of Directors on the Closing Date. It is anticipated that Mr.
Prine will serve as Chairman of the Board of Core Materials immediately
following the Acquisition. For organizational purposes Mr. Conte has been
appointed as the sole officer and director of Core Materials and will serve as
such until the Board of Directors described above is appointed.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS AND
NAME AGE OTHER INFORMATION
- ------------------------- ---- -------------------------------------------------------
<S> <C> <C>
Navistar Designees
Thomas M. Hough 51 Mr. Hough has served as the Vice President and
Treasurer of Navistar International Corp. and its
principal operating subsidiary, Navistar International
Transportation Corp. since October 1992. Previously, he
was Assistant Treasurer, and he also has served as
Assistant Controller of Navistar International
Transportation Corp. and as Controller of Navistar
Financial Corporation, a financial subsidiary of
Navistar International Transportation Corp. He joined
Navistar International Transportation Corp. in 1980
after twelve years with Deloitte & Touche LLP. Mr.
Hough also serves as a member of the Professional
Advisory Board of the Department of Accounting at the
University of Illinois at Chicago.
Thomas E. Rigsby 39 Mr. Rigsby is the Vice President of Truck Manufacturing
Operations at Navistar International Transportation
Corp. Prior to being appointed Vice President of Truck
Manufacturing, Mr. Rigsby served Navistar International
Transportation Corp. in various capacities during the
past five years.
</TABLE>
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<PAGE> 61
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS AND
NAME AGE OTHER INFORMATION
- ------------------------- ---- -------------------------------------------------------
<S> <C> <C>
Company Designees
Richard R. Conte 48 Mr. Conte has been a director of the Company since its
organization and its Chairman, Chief Executive Officer
and Principal Financial Officer since April 1, 1992.
Prior to April 1992, Mr. Conte was employed by
Westinghouse Financial Services, Inc., the financial
services subsidiary of Westinghouse Electric
Corporation, as Senior Vice President of Thrift &
Mortgage Investments. In connection with this
employment, he was made President and Chief Executive
Officer of Lexington Homes, Inc., an Illinois based
homebuilder, in January 1992, and President and
Chairman of Westinghouse Savings Corporation,
Westinghouse's savings bank holding company, in August
1990. From July 1988 to February 1, 1990, Mr. Conte
served as a Vice President of the Company.
Malcolm M. Prine 66 Mr. Prine has been a director of the Company since May
1992. Mr. Prine has been self-employed while acting as
a consultant for the last nine years. He is currently a
director of Equitable Resources, a natural gas utility
company, and PA Capital Bank, a Pennsylvania commercial
bank serving small businesses and individuals. He
formerly was a director of H. H. Robertson (now known
as Robertson-Ceco).
Independent Director
Ralph O. Hellmold 56 Mr. Hellmold is the founder and President of Hellmold
Associates, Inc., an investment banking boutique which
specializes in mergers, acquisitions and working with
troubled companies or their creditors and acts as
general partner of hedge funds which invest primarily
in securities of financially distressed companies. Mr.
Hellmold is also the Chairman of the Board of Directors
of Amalgamated Management Corporation, a privately
owned money management firm, and he is an independent
trustee of Ridgewood Electric Power Trusts II and III,
Delaware business trusts. Prior to forming Hellmold
Associates in 1990, Mr. Hellmold was a Managing
Director at Prudential-Bache Capital Funding, where he
served as co-head of the Corporate Finance Group,
co-head of the Investment Banking Committee and head of
the Financial Restructuring Group. From 1974 until
1987, Mr. Hellmold was a partner at Lehman Brothers and
its successors, where he worked in Corporate Finance
and co-founded the Financial Restructuring Group.
</TABLE>
COMPENSATION OF DIRECTORS
Effective April 1994, the Company's Board of Directors reduced compensation
paid to the Company's Directors to $1 per annum. At its meeting on September 12,
1996, the Board of Directors voted to pay $10,000 to each of its non-employee
directors (other than Malcolm Prine and one other director who is a former
employee of the Company) in recognition of the fact that they have served on the
Board without compensation since April 1994. In addition, the Board authorized
the payment of $125,000 to Mr. Prine for
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his services in connection with negotiating the Acquisition contingent upon the
consummation of the Acquisition.
Compensation for the Directors of Core Materials has not yet been
established. The level of such compensation will be reviewed annually by Core
Materials' Board of Directors with the goal of attracting and retaining
qualified Directors. While the level of compensation to be paid to Core
Materials' Directors has not yet been established it is anticipated that (1)
Directors of Core Materials (other than any Directors who are also employees of
Core Materials) will receive compensation in line with that paid to directors of
other public companies comparable in size to Core Materials, and (2) any
Directors who are also employees of Core Materials will not receive compensation
for serving as a Director other than reimbursement for travel and other
out-of-pocket expenses.
COMMITTEES OF THE BOARD OF DIRECTORS
Following the Acquisition, the Board of Directors of Core Materials will
establish such committees and designate members of such committees as it deems
appropriate.
EXECUTIVE OFFICERS
The Company is currently seeking to hire a chief executive officer, a chief
financial officer and other senior management for Core Materials. Upon Closing
of the Acquisition, if a final determination as to the identity of the chief
executive officer has not yet been made, Kenneth M. Schmell, age 48, will be
appointed to the office of General Manager and Acting Chief Executive Officer of
Core Materials. Mr. Schmell is among the candidates being considered for
appointment as Core Materials' chief executive officer currently. Mr. Schmell
has served Navistar International Transportation Corp. in various capacities
during the past five years, including, most recently, as Plant Manager of
Columbus Plastics.
COMPENSATION OF EXECUTIVE OFFICERS
Core Materials currently has no officers other than Mr. Conte and has not
yet paid any compensation to any of the individuals listed above. The Board of
Directors of Core Materials will rely on a compensation committee composed of
non-employee members of the Core Materials Board of Directors to recommend the
form and amount of compensation to be paid to the executive officers of Core
Materials. For information concerning the compensation paid to the executive
officers of the Company for the 1995 fiscal year, see the Company's 1996 Proxy
Statement, the relevant portions of which are incorporated by reference into the
Company's Form 10-K. See "INCORPORATION BY REFERENCE."
It is anticipated that when the compensation committee meets to determine
such compensation, which meeting will not occur until after the Closing Date,
the compensation committee will generally adhere to compensation policies which
reflect the belief that (i) Core Materials must attract and retain individuals
of outstanding ability and motivate and reward such individuals for sustained
performance, (ii) a substantial portion of an executive's compensation should be
at risk based upon the executive's performance and that of Core Materials and
(iii) within these parameters, levels of compensation should generally be in
line with that offered by comparable corporations. On an ongoing basis, the type
and amount of compensation to be paid by Core Materials to its officers will be
entirely discretionary and within the subjective judgment of the compensation
committee.
POSSIBLE GRANT OF SHARES TO EMPLOYEES
Certain of the individuals named above as prospective Directors have
discussed the possibility of granting to each employee of Core Materials (other
than its executive officers) on the Closing Date one hundred shares of Core
Materials Common Stock (representing in the aggregate approximately 42,300
shares based on the number of employees of Columbus Plastics as of October 31,
1996). No final decision or action will be taken until the Core Materials Board
of Directors is constituted of the five persons named above.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS OF CORE MATERIALS
The following table sets forth information regarding the expected
beneficial ownership of Core Materials Common Stock following the Acquisition,
based on the information as to Company Common Stock included or incorporated by
referenced herein, by (i) each person beneficially owning 5% of more of the
outstanding Core Materials Common Stock, (ii) each of Core Materials' directors
and named executive officers and (iii) all executive officers and directors of
Core Materials as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNERS OWNED CLASS
------------------------- ------------ -------
<S> <C> <C>
Navistar International Transportation Corp.(1)......... 4,264,000(2) 45 %
Richard R. Conte....................................... 6,200(3) *
Ralph O. Hellmold...................................... -- --
Thomas M. Hough........................................ -- --
Malcolm M. Prine....................................... 31,011(4) *
Thomas E. Rigsby....................................... -- --
All directors and executive officers as a group (5
persons)............................................. 37,211 *
</TABLE>
- ---------
(1) The address of Navistar International Transportation Corp. is 455 North
Cityfront Plaza Drive, Chicago, Illinois 60611.
(2) Subject to adjustment pursuant to the terms of the Asset Purchase Agreement
pursuant to the provisions described below under "--The Asset Purchase
Agreement--Purchase Price Adjustments."
(3) Includes 4,000 shares of Common Stock in an irrevocable insurance trust
account beneficially owned by Mr. Conte's son, Jerrod R. Conte, as to which
shares Mr. Conte disclaims beneficial ownership.
(4) Includes 1,011 shares of Common Stock beneficially owned by Mr. Prine's
wife, Barbara Prine, as to which shares Mr. Prine disclaims beneficial
ownership.
* Less than 1% of the class outstanding.
THE ASSET PURCHASE AGREEMENT
The description of the terms and conditions of the Asset Purchase Agreement
included in this Proxy Statement/Prospectus is qualified in its entirety by
reference to the Asset Purchase Agreement, a copy of which is attached hereto as
Annex I and is incorporated herein by reference.
GENERAL
The Asset Purchase Agreement provides for the acquisition by the Company of
substantially all of the assets, properties and business, subject to the
assumption of certain liabilities, of Columbus Plastics. In consideration
therefor, Navistar will receive upon closing ("Closing") of the Acquisition (1)
$25,504,000, subject to adjustment as described below, payable by the Company by
delivery of the Secured Note and (2) 4,264,000 shares of Core Materials Common
Stock representing approximately 45% of the total number of shares of Core
Materials Common Stock issued and outstanding on a fully diluted basis after the
Acquisition. The Company may reduce the principal amount of the Secured Note by
delivering to Navistar on the date of the Closing (the "Closing Date") by wire
transfer of immediately available funds an amount equal to such reduction
pursuant to financing arrangements that, in the opinion of the Company and
Navistar, would not reasonably be expected to have a material adverse effect on
the ability of Core Materials to secure loans for working capital and project
finance use after the Closing. The Secured Note will require the Company to pay
principal installments as follows: (i) within ninety (90) days after the end of
each fiscal year during the term of the Secured Note, the Company will pay
principal in an amount equal to the amount, if any, by which the total cash and
cash equivalents of the Company, as shown on its audited balance sheet and
statement of financial condition for the end of such year, exceed $3,000,000;
(ii) in the event the Company obtains, from time to time, any loan, extension of
credit or other financial accommodation (other than a revolving line of
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<PAGE> 64
credit for working capital purposes or for project finance use) to refinance the
Secured Note, the Company will promptly upon obtaining such loan pay principal
in an amount equal to the proceeds of such loan; and (iii) if not paid earlier,
the Company shall pay the entire outstanding principal amount of the Secured
Note in November 2006. The Secured Note will bear interest at the rate of 8.0%
per annum, payable semi-annually on the last business day of each May and
November. The Secured Note will be secured by a first priority lien upon and
security interest in all of the Company's assets. For a more detailed
description of the Secured Note, see "--Ancillary Agreements--The Secured Note".
Under the Asset Purchase Agreement, at the Closing, Navistar has agreed to
sell, convey, transfer and assign to the Company, and the Company has agreed to
purchase from Navistar, all of Navistar's rights, title and interest in the
following assets relating exclusively to Columbus Plastics (the "Assets"): (i)
all cash and cash equivalents and accounts and notes receivable of Navistar and
its affiliates (collectively, the "Navistar Entities") reflected on the Closing
Date Balance Sheet, other than intercompany accounts and notes receivable, and
all inventory in existence as of the Closing; (ii) all machinery, equipment,
vehicles, furniture and fixtures (and all spare parts inventory relating
exclusively to any of the foregoing) and other tangible assets (except certain
specified excluded assets) (A) located on the real property at 800 Manor Park
Drive, Columbus, Ohio and relating primarily to Columbus Plastics or (B) listed
or described on a schedule to the Asset Purchase Agreement (collectively, the
"Equipment"); (iii) the computer software, data, databases and documentation
listed or described on a schedule to the Asset Purchase Agreement; (iv) all
contracts, agreements, licenses, mortgages, leases (for both real and personal
property), and other agreements or arrangements, whether oral or written, (A)
that are listed or described on a schedule to the Asset Purchase Agreement and
(B) if not so listed or described, that relate exclusively to Columbus Plastics
and are in existence as of the Closing, including all commitments and orders for
the purchase and sale of goods and equipment and services (including
advertising, maintenance and other incidental services) relating exclusively to
Columbus Plastics (collectively, the "Contracts"); (v) all intellectual property
(other than (x) computer software, data, databases and documentation and (y)
other items set forth on a schedule to the Asset Purchase Agreement) relating
exclusively to fiberglass and plastic component parts produced by Columbus
Plastics or the current manufacture of products (the "Plastics Business
Intellectual Property Rights"); (vi) all existing customer and vendor lists,
price lists and other business and operational records pertaining to the conduct
of Columbus Plastics, including records relating to its third party customers
and suppliers; (vii) all right, title and interest in the real property
described on a schedule to the Asset Purchase Agreement (which real property is
the plant and surrounding grounds owned by Navistar at 800 Manor Park Drive,
Columbus, Ohio which is Columbus Plastics' sole place of business)
(collectively, the "Real Property"), together with all buildings, fixtures and
improvements located thereon; (viii) to the extent transferable, any permits or
licenses issued by any governmental agency that are used exclusively in Columbus
Plastics; (ix) all prepayments by Navistar relating to the operations of
Columbus Plastics to the extent reflected on the Closing Date Balance Sheet; and
(x) all other intangible personal property of whatever kind or character,
whether evidenced in writing or not, including current choices in action,
claims, causes of action (whether fixed or contingent), and goodwill, owned by
Navistar and relating exclusively to the Products and Columbus Plastics, but
excluding all such intangible personal property relating to assets or
liabilities not transferred to or assumed by the Company pursuant to the Asset
Purchase Agreement.
Pursuant to the Asset Purchase Agreement, the Company shall assume on the
Closing Date and shall pay, perform and discharge when due the following
obligations and liabilities relating to Columbus Plastics, the Products or the
Assets absolute or contingent, whether or not accrued, and whether arising
before, on or after the Closing Date which are (collectively, together with all
other liabilities assumed by the Company pursuant to the Asset Purchase
Agreement, the "Assumed Liabilities"): (i) all obligations and liabilities of
Navistar under the Contracts (other than, except for liabilities for which
reserves have been specifically established on the Closing Date Balance Sheet
(but only up to the amount of such reserves), liabilities with respect to claims
relating to breaches or alleged breaches of Contracts by Navistar arising prior
to the Closing Date); (ii) except as specifically provided in the Supply
Agreement, all obligations and liabilities of Navistar for claims, actions,
suits or other legal or administrative proceedings made by any person from and
after the Closing Date in respect of any and all Products (including inventory)
manufactured, formulated, marketed, sold or distributed at any time prior to, on
or after the Closing Date (including all obligations and liabilities in
connection with the manufacture, formulation, marketing, sale or distribution
thereof) in connection with
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<PAGE> 65
Columbus Plastics, including all product liability and infringement claims, all
obligations and liabilities arising out of or relating to the activities and
operations of third-party contract manufacturers, and all obligations and
liabilities for refunds, adjustments, exchanges, returns and warranty,
merchantability and other claims, actions or demands; (iii) all obligations and
liabilities of Navistar reflected on the Closing Date Balance Sheet (including
all obligations and liabilities for matters reflected in the notes thereto); and
(iv) all other obligations and liabilities relating to the Products, Columbus
Plastics or the Assets arising out of acts or omissions of the Company occurring
from and after the Closing Date or based primarily upon an event occurring or
claim arising after the Closing Date (including, without limitation, any claims
relating to a breach or alleged breach of any Contract). The Company's
obligations with respect to the Assumed Liabilities shall not be subject to
offset or reduction by reason of any actual or alleged breach of any
representation, warranty or covenant contained in the Asset Purchase Agreement
or any agreement or document delivered in connection therewith or any right or
alleged right to indemnification thereunder.
Under the Asset Purchase Agreement, the Company and Navistar have agreed
that the Company is not assuming any obligations or liabilities of Navistar not
specifically provided for in the Asset Purchase Agreement (the obligations and
liabilities of Navistar not specifically assumed by the Company being referred
to collectively herein as the "Excluded Liabilities"). Notwithstanding anything
in the Asset Purchase Agreement to the contrary and without limiting the
generality of the foregoing, the Company and Navistar agreed that the Company
shall not assume or be liable for any of the following obligations or
liabilities: (i) any other obligation or liability of Navistar under the Asset
Purchase Agreement and the other agreements with the Company contemplated
thereby; (ii) except as otherwise provided in the Asset Purchase Agreement or in
the ancillary agreements, any obligation or liability of Navistar for expenses
or fees incident to or arising out of the negotiation, preparation, approval or
authorization of the Asset Purchase Agreement and the other agreements
contemplated thereby or the consummation (or preparation for the consummation)
of the transactions contemplated by the Asset Purchase Agreement, including
attorneys' and accountants' fees; (iii) except for those expressly accrued for
and reflected on the Closing Date Balance Sheet, any obligation or liability of
Navistar relating to Columbus Plastics with respect to federal, state, local or
foreign income taxes and any liabilities for interest, penalties or additions to
any of such income taxes (except income taxes and related liabilities with
respect to Columbus Plastics relating to periods from and after the Closing Date
and other income taxes and related liabilities specifically allocated to,
prorated to or assumed by the Company under the Asset Purchase Agreement); (iv)
except for those expressly accrued for and reflected on the Closing Date Balance
Sheet or as otherwise provided in the Asset Purchase Agreement, any obligation
or liability of Navistar with respect to the Employee Benefit Plans and
Multiemployer Plans that Navistar maintains, to which it contributes, or to
which it has an obligation to contribute covering employees and former employees
of Navistar at Columbus Plastics (collectively, the "Navistar Plans" and
individually, a "Navistar Plan"); (v) except for those expressly accrued for and
reflected on the Closing Date Balance Sheet, any claim, suit, action or other
legal or administrative proceeding based primarily upon an event occurring or a
claim arising (x) on or prior to the Closing Date and regardless of whether or
not such claim, suit, action or other proceeding is disclosed pursuant to the
Asset Purchase Agreement or (y) after the Closing Date but solely in the case of
(and to the extent that) such claim, suit, action or other proceeding relates
primarily to or arises primarily out of acts or omissions of the Navistar
Entities occurring prior to the Closing Date (including, without limitation, any
claims relating to a breach or alleged breach of any Contract) other than, in
each case as contemplated by clauses (i) or (ii) of the definition of Assumed
Liability above; and (vi) any other obligation or liability with respect to or
arising out of any Products, the Assets or the conduct of Columbus Plastics
prior to the Closing Date that are not Assumed Liabilities.
PURCHASE PRICE ADJUSTMENTS
The Asset Purchase Agreement provides that the purchase price payable on
the Closing Date is subject to certain post-closing adjustments as described
below.
The Initial Purchase Price Adjustment. If Net Tangible Assets (as defined
below) as of the Closing Date exceeds Net Tangible Assets as of January 31,
1996, the amount of such excess shall be paid to Navistar, at Navistar's option
by (A) the issuance by the Company to Navistar of additional shares of the
Common Stock (valued, for purposes of this adjustment only, at $2.50 per share)
provided that the aggregate amount of shares
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<PAGE> 66
of the Core Materials Common Stock issued to Navistar by the Company pursuant to
this adjustment, together with the shares of the Core Materials Common Stock
issued to Navistar in the Stock Issuance, may, subject to the Adjustment Based
on Closing Date Ownership described below, not exceed 45% of the total number of
shares of Core Materials Common Stock issued and outstanding on a fully diluted
basis, (B) an increase in the principal amount of the Secured Note, or (C) a
combination of (A) or (B) above. If Net Tangible Assets on January 31, 1996
exceeds Net Tangible Assets as of the Closing Date, the principal amount of the
Secured Note delivered at the Closing shall be decreased by the amount of such
excess. "Net Tangible Assets" means, as of the Closing Date, the amount
reflected as (Total Assets minus Intangible Assets) minus (Total Liabilities
minus Intangible Liabilities) on the Closing Date Balance Sheet (as defined
below), and as of January 31, 1996 means the amount reflected as (Total Assets
minus Intangible Assets) minus (Total Liabilities minus Intangible Liabilities)
on Navistar's books of Columbus Plastics on such date. Within 45 days after the
Closing Date, Navistar shall prepare and deliver to the Company based upon the
books and records of Columbus Plastics and consistent with past practices, a
balance sheet of Columbus Plastics (including footnotes thereto) (the "Closing
Date Balance Sheet"), as of the Closing Date. The Company and its authorized
representatives shall be entitled to review the Closing Date Balance Sheet and
the books, records and work papers of Navistar used to prepare it and the Asset
Purchase Agreement provides procedures for reconciling any points of contention
between the Company and the Closing Date Balance Sheet.
The Adjustment Based on Closing Date Ownership. In the event that at any
time within three years prior to the Closing any person or Public Group (as
defined below) was a Five Percent Stockholder (as defined below) of the Company
and the effect of such Five Percent Stockholder(s), together with the issuance
of shares of the Core Materials Common Stock to Navistar pursuant to the terms
of the Asset Purchase Agreement, would be to cause a 49 Percentage Point
Increase (as defined below) (such event being a "Triggering Event"), then the
purchase price shall be adjusted, effective as of the Closing, as follows (the
"Adjustment Based on Closing Date Ownership"): (A) the principal amount of the
Secured Note will be increased by an amount equal to the sum of (x) to the
extent that Navistar's ownership of Core Materials Common Stock effective as of
the Closing would, on account of the operation of this adjustment, be reduced
below 40% of the total shares of Core Materials Common Stock issued and
outstanding as of the effective time of Closing, the product derived by
multiplying $7.50 times the total number of Excess Shares (as defined in clause
(B) below) that, if retained by Navistar, would cause Navistar's ownership of
Core Materials Common Stock effective as of the Closing, to equal 40% of the
total shares of Core Materials Common Stock issued and outstanding as of the
effective time of Closing plus (y) the product derived by multiplying the total
number of all remaining Excess Shares times $5.00, and (B) the number of shares
of Core Materials Common Stock deliverable to Navistar pursuant to the Asset
Purchase Agreement (collectively the "Delivered Shares") shall be reduced by
such number of shares (the "Excess Shares") such that the number of shares then
deliverable pursuant to the Asset Purchase Agreement when taken together with
ownership changes of all Five Percent Stockholder(s) of the Company within the
three year period prior to Closing would be one share short of causing a 49
Percentage Point Increase. "Five Percent Stockholder" means any Person or Public
Group whose ownership in the Company would cause such person or Public Group to
be a "5-percent stockholder" of the Company within the meaning of Treasury
Regulations Section 1.382-2T(g)(1)(i) or (ii). "49 Percentage Point Increase"
means an increase of 49 percentage points or more of the Stock (as defined
below) of the Company owned by Five Percent Stockholders over the lowest
percentage of Stock owned by such 5-percent stockholders at any time during the
three-year period preceding the Closing, such determination to be made in
accordance with Treasury Regulations Section 1.382-2T(c) as if the Closing Date
were a "testing date." "Public Group" has the meaning set forth in Treasury
Regulations Section 1.382-2T(f)(13). "Stock" means all classes of stock of the
Company, all options (as defined in Treasury Regulations Section 1.382-4(d)(g))
to acquire stock of the Company that must be treated as exercised pursuant to
Treasury Regulation Section 1.382-4(d)(2) and all other interests that would be
treated as stock in the Company pursuant to Treasury Regulations Section
1.382-2T(f)(18)(iii).
Under the Asset Purchase Agreement, the Company agrees to promptly inform
Navistar in writing as soon as it becomes aware of any facts or circumstances
which may bear upon the existence of a Five Percent Stockholder and/or 49
Percentage Point Increase. Navistar's determination at any time as to the
existence of a Five Percent Stockholder and/or 49 Percent Point Increase, the
occurrence of a Triggering Event and the
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calculation of the Adjustment Based on Closing Date Ownership, based on the
facts and circumstances known to it at such time, shall be binding on the
parties (such determination by Navistar, as from time to time revised by
Navistar, is herein the "Closing Date Ownership Determination"). Navistar shall
promptly notify the Company in writing of any Closing Date Ownership
Determination, which notice shall set forth, in reasonable detail, Navistar's
basis for determining the occurrence of a Triggering Event and the calculation
of the Adjustment Based on Closing Date Ownership (a "Notice of Closing Date
Ownership Determination"). In the event that a Triggering Event is determined to
exist pursuant to a Notice of Closing Date Ownership Determination (regardless
of whether such Notice is given before or after Closing and whether one or more
other Notices of Closing Date Ownership Determination have previously been
given), the Adjustment Based on Closing Date Ownership in respect of such
Triggering Event shall be effective as of the Closing based on the ownership of
Stock as of the time of Closing as determined pursuant to such Notice.
Notwithstanding anything herein to the contrary, no further Notice of Closing
Date Ownership Determination shall be given by Navistar after March 31, 1997
("Outside Notice Date"), so that the Closing Date Ownership Determination as in
existence on the Outside Notice Date and the Adjustment Based on Closing Date
Ownership pursuant to such Determination shall be final and binding on the
parties. Prior to the Outside Notice Date, neither Navistar nor any transferee
of the Delivered Shares shall transfer any of the Delivered Shares other than to
persons who agree to take the Delivered Shares subject to the provisions of the
Adjustment based on Closing Date Ownership (for which purpose, Excess Shares at
any time shall first be reduced from any remaining Delivered Shares then held by
Navistar and/or its affiliates, and thereafter shall be reduced from any
Delivered Shares then held by transferees on a pro rata basis).
Contingent Earn-Out. If the Company's earnings before interest and taxes
("EBIT") for the Company's fiscal year ended December 31, 1997 exceed $6,512,000
("Forecasted EBIT"), an amount equal to the product of (x) the excess amount
("1997 Excess EBIT") multiplied by (y) 5.55 shall be paid to Navistar by an
increase in the principal amount of the Secured Note. If the Company's EBIT for
the Company's fiscal year ended December 31, 1998 exceeds Forecasted EBIT, an
amount equal to the product of (x) the excess amount ("1998 Excess EBIT") less
the 1997 Excess EBIT multiplied by (y) 4.50 shall be paid to Navistar by an
increase in the principal amount of the Secured Note. If the Company's EBIT for
the Company's fiscal year ended December 31, 1999 exceeds the Forecasted EBIT,
an amount equal to the product of (x) the excess amount less the 1998 Excess
EBIT multiplied by (y) 2.75 shall be paid to Navistar by an increase in the
principal amount of the Secured Note. For purposes of this adjustment, the
Company's EBIT shall be calculated using the same methodology and based on the
same types and categories of expenses as used in the calculation of Forecasted
EBIT, and shall expressly exclude any and all other types or categories of
expenses. Notwithstanding anything herein to the contrary, the total amount by
which the principal amount of the Secured Note may be increased pursuant to this
adjustment shall not exceed $24,496,000 in the aggregate. This contingent
earn-out adjustment will be accounted for by increasing the amount of the
Secured Note and reducing the amount of Core Materials' retained earnings.
Within 90 days after the close of each such fiscal year, the Company shall
prepare and deliver to Navistar based on the books and records of the Company an
audited balance sheet and statement of income for such fiscal year prepared in
accordance with generally accepted accounting principles, together with a
certificate ("EBIT Certificate") dated as of the end of such fiscal year and
signed by the chief financial officer of the Company certifying the amount of
the Company's EBIT for such fiscal year, the amount of any excess over
Forecasted EBIT and the amount to be paid to Navistar pursuant to the adjustment
described above. Navistar and its authorized representatives shall be entitled
to review the EBIT Certificate and the books, records and work papers of the
Company used to prepare it, and the Asset Purchase Agreement provides procedures
for reconciling points of contention between the Company and Navistar with
respect to the EBIT Certificate.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO CLOSING; AMENDMENTS; TERMINATION
The Asset Purchase Agreement contains certain representations and
warranties by Navistar and the Company which will expire at, and not survive,
the Closing. Each party's obligation to consummate the Acquisition is subject to
a number of conditions, including, among other things, the receipt of
satisfactory legal opinions, the accuracy of their respective representations
and warranties as of the Closing Date, receipt by the parties of all third
party, stockholder and governmental consents and approvals required to
consummate the
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Acquisition and the other transactions contemplated by the Asset Purchase
Agreement, the execution and delivery by Navistar and the Company of the Supply
Agreement, the Transition Services Agreement and the Registration Rights
Agreement (each as defined below), and the Company and International Association
of Merchants and Aerospace Workers ("IAM") entering into a collective bargaining
agreement for the employment of IAM represented employees of the Company at
Columbus Plastics and compliance by all parties with their respective
obligations prior to the Closing Date. The obligation of the Company to
consummate the Acquisition is also subject to the approval of the Company's
stockholders of the transactions contemplated by the Asset Purchase Agreement,
including the approval of the Merger Agreement by the affirmative vote of no
less than two-thirds of the Company Common Stock present and entitled to vote at
the Special Meeting and receipt of the opinion of Nomura to the effect that the
consideration to be paid by the Company pursuant to the Asset Purchase Agreement
is fair to the stockholders of the Company from a financial point of view. The
obligation of Navistar to consummate the Acquisition is also subject to the
consummation of the Merger, the Company having terminated the RYMAC Salary
Reduction Simplified Employee Pension Plan ("SEP") in accordance with applicable
law, Core Materials having a charter and by-laws satisfactory to Navistar, the
Company having registered under the Securities Act, and having obtained approval
for listing on the American Stock Exchange of, the shares of Core Materials
Common Stock to be issued to Navistar under the Asset Purchase Agreement, each
of the individuals serving on the Company's Board of Directors tendering his or
her resignation to the Company effective as of the Closing Date.
Any provision of the Asset Purchase Agreement may be amended or waived
prior to the Closing; provided that any such amendment or waiver shall be
binding upon Navistar only if set forth in a writing executed by Navistar and
referring specifically to the provision alleged to have been amended or waived,
and any such amendment or waiver shall be binding upon the Company only if set
forth in a writing executed by the Company and referring specifically to the
provision alleged to have been amended or waived. No course of dealing between
or among any persons having any interest in the Asset Purchase Agreement shall
be deemed effective to modify, amend or discharge any part of the Asset Purchase
Agreement or any rights or obligations of any person under or by reason of the
Asset Purchase Agreement.
The Asset Purchase Agreement provides that it may be terminated and the
transactions contemplated thereby abandoned at any time prior to the Closing
Date: (i) by the mutual written consent of Navistar and the Company; (ii) by
Navistar if (y) at any time after October 31, 1996 any of the conditions to
Closing summarized above (other than those conditions which relate solely to the
obligations of the Company to consummate the Acquisition) shall have become
incapable of fulfillment, and shall not have been waived by Navistar, or (z) the
Company shall not have delivered to Navistar by September 30, 1996 copies of the
resolutions adopted by the Company's Board of Directors authorizing the
execution, delivery and performance of the Asset Purchase Agreement and the
other agreements and transactions contemplated thereby that are in form and
substance reasonably satisfactory to Navistar ("Company Resolutions"); (iii) by
the Company if (y) at any time after October 31, 1996 any of the conditions to
Closing summarized above (other than those conditions which relate solely to the
obligations of Navistar to consummate the Acquisition) shall have become
incapable of fulfillment, and shall not have been waived by the Company, or (z)
Navistar shall not have delivered to the Company by September 30, 1996 copies of
the resolutions adopted by the Navistar's Board of Directors authorizing the
execution, delivery and performance of the Asset Purchase Agreement and the
other agreements and transactions contemplated thereby that are in form and
substance reasonably satisfactory to the Company; (iv) by Navistar or the
Company if the Closing does not occur on or prior to December 31, 1996;
provided, however, that the party seeking termination pursuant to clause (ii) or
(iii) above (other than clause (ii)(y) or (iii)(y) above) is not in breach of
any of its representations, warranties, covenants or agreements contained in the
Asset Purchase Agreement, which breach has resulted in the failure of a
condition to Closing.
CERTAIN COVENANTS
The Company agrees that Navistar shall not have any liability whatsoever to
the Company arising out of or relating to the failure to obtain any consents
that may have been or may be required in connection with the transactions
contemplated by the Asset Purchase Agreement or because of the default,
acceleration or termination of any Contract as a result thereof. At the
Company's written request prior to the Closing,
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Navistar shall cooperate with the Company in any reasonable manner in connection
with the Company's obtaining any such consents; provided, however, that such
cooperation shall not include any requirement of the Navistar Entities to expend
money, commence any litigation or offer or grant any accommodation (financial or
otherwise) to any third party. With respect to any Contracts that may not be
properly assigned to the Company because of the failure to obtain a required
consent ("Nontransferable Contracts") with respect to which the Company has
requested Navistar's cooperation and with respect to which Navistar and the
Company are unable to obtain a separate agreement between the Company and the
other party or parties, the Company shall have the right to require that
Navistar use reasonable efforts to perform any such Nontransferable Contract, to
the extent it relates to Columbus Plastics, as agent for and for the account of
the Company and shall promptly remit any such funds collected for the account of
the Company, for a period up to six months following the Closing Date; provided
that the Company shall reimburse Navistar (on behalf of itself and as agent for
the other Navistar Entities) for any and all costs, expenses, losses and
liabilities incurred by the Navistar Entities in connection with taking such
action.
Each of the parties to the Asset Purchase Agreement has agreed to cooperate
with each other and to cause their respective officers, employees, agents and
representatives to cooperate with each other for a period of 60 days after the
Closing to provide for an orderly transition of the Assets and the Assumed
Liabilities to the Company and to minimize the disruption to the respective
businesses of the parties resulting from the transactions contemplated by the
Asset Purchase Agreement; provided, no party shall be required to take any
action that would unreasonably interfere with the conduct of its business.
The Company has agreed to offer to employ those employees of Navistar who
are currently employed by Navistar at Columbus Plastics and who are not
represented by a union, including such employees who are absent from active
employment for any reason as of the Closing Date. All such employees who become
the Company's employees effective on the Closing Date are referred to herein as
the "Hired Employees". The Company has agreed to employ the Hired Employees at
the same salary and wages, and with the benefits that are identical in all
material respects, as provided by Navistar immediately prior to the Closing
Date; provided, however, that the Company shall not be required to establish or
maintain any Employee Welfare Benefit Plan (as defined in the Asset Purchase
Agreement) for any Hired Employee that provides postretirement medical, dental
or life insurance benefits. Nothing in the Asset Purchase Agreement limits the
Company's right, at any time, to modify, amend or terminate any salary and wages
payable, or benefit provided, to any or all Hired Employees on or after the
Closing Date, including without limitation any Employee Welfare Benefit Plan or
any Employee Pension Benefit Plan (as defined in the Asset Purchase Agreement),
to the extent permitted by law. Navistar assumes all liability for and shall
indemnify, defend and hold the Company harmless from and against any Losses (as
defined below under "--The Asset Purchase Agreement--Survival of Representations
and Warranties; Indemnification") for any severance liability with respect to
employees of Navistar as of the Closing Date under the terms of any severance
policy, practice or plan of Navistar, which liability is triggered by or results
from Navistar's termination of each such employee's employment with Navistar
effective as of the Closing Date, without regard to whether any such employee
accepts employment with the Company.
The Company has agreed to negotiate a collective bargaining agreement with
the IAM for the employment of IAM-represented employees by the Company at
Columbus Plastics. In the Asset Purchase Agreement, Navistar and the Company
recognize that certain IAM-represented employees of Navistar who are on the
Closing Date eligible to receive a pension benefit other than a deferred vested
benefit (or would be eligible to receive such pension benefit if they did not
accept employment in a position covered by the IAM Multiemployer Plan) will be
eligible for postretirement benefits under the Navistar International
Transportation Corp. Retirement Health Benefit and Life Insurance Plan which was
established by Navistar pursuant to Shy v. Navistar. The Company has agreed to
reimburse Navistar for its cost of such coverage for any IAM represented
employees hired by the Company on a pro rata basis based on the time of service
with the Company compared to the total time of service with Navistar and the
Company. Other than Shy postretirement benefits for retirement-eligible
employees, the Company has agreed to assume all liability for any postretirement
benefit liability arising from the transactions contemplated by the Asset
Purchase Agreement or the employment of any IAM-represented employee hired by
the Company, and Navistar will not assume any such liability or reimburse the
Company for any amount of such liability. In the event that Navistar is liable
for any amount for which the Company is not also liable for any postretirement
benefit for
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any IAM-represented employee hired by the Company, the Company has agreed to
reimburse Navistar for a pro rata portion of Navistar's liability based on the
time of the employee's service for the Company compared to the total time of
service with Navistar and the Company. If the Company's collective bargaining
agreement with the IAM provides for the establishment of a Section 401(k) plan
for the employees subject to the agreement, the agreement shall permit, and the
Company shall cause its Section 401(k) plan to accept, a trust-to-trust transfer
of the assets and liabilities (including participant loans and amounts payable
to alternate payees under qualified domestic relations orders, but not including
any in-kind transfer of any Navistar International Corporation stock) of
Navistar's Section 401(k) plan, with respect to the IAM-represented employees
hired by the Company, valued as of such date as Navistar may reasonably
determine. The Company has agreed to establish its Section 401(k) plan timely
and in a form meeting the qualification requirements of the Code and provide
such evidence to Navistar as Navistar may reasonably request as to such
qualification so as to permit Navistar to transfer timely the assets and
liabilities relating to the IAM-represented employees hired by the Company.
The Company has agreed to comply with the requirements of Section 4204 of
ERISA with respect to each Multiemployer Plan (as defined in the Asset Purchase
Agreement) that Navistar maintains, to which it contributes, or to which it has
an obligation to contribute covering employees and former employees of Navistar
at Columbus Plastics and, in that regard, the Company has agreed to (A)
contribute to each such Multiemployer Plan with respect to the operations of the
Company for substantially the same contribution base units (as set forth in the
collective bargaining agreement in effect immediately prior to the Closing Date
between Navistar and the IAM) for which Navistar had an obligation to contribute
to each such Multiemployer Plan; (B) provide to each such Multiemployer Plan for
a period of five years commencing with the first plan year beginning after the
Closing Date a bond or other security as described in Section 4204(a)(1)(B) of
ERISA (unless such requirement has been released or waived in accordance with
procedures consistent with Section 4204 of ERISA), which security, if provided,
will be paid to a Multiemployer Plan if the Company withdraws from the
Multiemployer Plan or fails to make a contribution to the Multiemployer Plan
when due at any time during the first five years beginning after the Closing
Date; and (C) pay when due any withdrawal liability assessed as a result of any
complete or partial withdrawal by the Company during the five-year period
calculated in accordance with Section 4204(b)(1) of ERISA. Navistar has agreed
that if, during the first five plan years beginning after the Closing Date, the
Company withdraws in a complete or partial withdrawal, Navistar will be
secondarily liable for any withdrawal liability it would have had to the
Multiemployer Plan with respect to Navistar's operations as of the Closing Date
but for the provisions of the Asset Purchase Agreement described above. Upon its
dissolution or liquidation, Navistar has agreed to provide each Multiemployer
Plan referred to in the first sentence of this paragraph with such security as
is required pursuant to Section 4204(a)(3)(A) of ERISA, unless a release or
waiver of such security shall be granted by the Multiemployer Plan or the PBGC
consistent with the requirements of Section 4204(a)(3)(A) of ERISA. For purposes
of the immediately preceding sentence, the term "Navistar" means the Navistar
and any of its affiliates which meet the definition of "single employer" for
purposes of Section 3(37) of ERISA. Navistar and the Company have agreed to take
all actions necessary or desirable to assure that no withdrawal liability arises
with respect to each such Multiemployer Plan by reason of the transactions
contemplated by the Asset Purchase Agreement.
Navistar has agreed to retain all assets of, and liabilities under, the
Navistar Plans relating to non-represented employees, and no such Navistar Plan
or any assets or liabilities thereof shall be transferred to, or assumed by, the
Company. The Company has agreed to establish Employee Benefit Plans (as defined
in the Asset Purchase Agreement) to cover the Hired Employees as of the Closing
Date that are identical in all material respects to the Navistar Plans that
covered the Hired Employees immediately prior to the Closing Date; provided,
however, that the Company shall not be obligated under the Asset Purchase
Agreement to establish or maintain any Employee Welfare Benefit Plan for the
benefit of the Hired Employees that provides postretirement medical, dental or
life insurance benefits. The Company has no obligation to establish any "New
Hire Plans" for any Hired Employee, or any provisions of Navistar Plans that
specifically relate to "New Hires". "New Hire Plans" means plans for employees
first hired by Navistar International Transportation Corp. or an affiliate
within the meaning of Section 414 of the Code on or after January 1, 1996, and
"New Hires" means an employee first hired by Navistar International
Transportation Corp. or an affiliate within the meaning of Section 414 on or
after January 1, 1996. The Company has agreed to cause its Section 401(k) plan
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to accept a trust to trust transfer of the assets and liabilities (including
participant loans and amounts payable to alternate payees under qualified
domestic relations orders, but not including any in kind transfer of Navistar
International Corporation stock) of Navistar's Section 401(k) plan with respect
to the Hired Employees, valued as of such date as Navistar may reasonably
determine. The Company has agreed to establish its Section 401(k) plan timely
and in a form meeting the qualification requirements of the Code and provide
such evidence to Navistar as Navistar may reasonably request as to such
qualification so as to permit Navistar to transfer timely the assets and
liabilities relating to the Hired Employees.
The Company has agreed to waive pre-existing condition requirements,
evidence of insurability provisions, waiting period requirements or any similar
provisions under any Employee Benefit Plan or compensation arrangements
maintained or sponsored by or contributed to by the Company for each Hired
Employee after the Closing Date.
The Company has agreed to apply toward any deductible requirements and
out-of-pocket maximum limits under the Company's Employee Welfare Benefit Plans
any amounts paid (or accrued) by each Hired Employee under Navistar Plans that
are Employee Welfare Benefit Plans during the current plan year.
Navistar and Navistar Plans shall be responsible for expenses covered by
Navistar's medical plans; provided, however, that such expenses were incurred
prior to the Closing Date. The Company and the Company's plans shall be
responsible for expenses covered by the Company's medical plans for all health
and accident claims relating to the Hired Employees (including, without
limitation, claims arising out of medical conditions existing at or prior to the
Closing Date) and all Incidents (as defined below) relating to the Hired
Employees that occur or arise on or after the Closing Date. For purposes of the
immediately preceding sentence, the term "Incidents" includes accident, death,
disabilities, diseases and injuries. Navistar and the Company recognize that
certain Hired Employees who become entitled to a pension benefit other than a
deferred vested benefit under the Navistar International Transportation Corp.
Retirement Plan for Salaried Employees are eligible for postretirement benefits
under the Navistar International Transportation Corp. Retirement Health Benefit
and Life Insurance Plan which was established by Navistar pursuant to Shy v.
Navistar. The Company has agreed to reimburse Navistar for its cost of such
coverage of each such Hired Employee on a pro rata basis based on the time of
service with the Company compared to the total time of service with Navistar and
the Company. Other than the Shy postretirement benefits for such Hired
Employees, the Company assumes all liability for the postretirement benefit
liability arising from this transaction or the employment of any Hired Employee,
and Navistar will not assume any such liability or reimburse the Company for any
amount of such liability. The Company has agreed to establish and maintain, or
will maintain, any plan or plans necessary to satisfy such liability. In the
event that Navistar is liable for any amount for which the Company is not also
liable for any postretirement benefit for any Hired Employee, the Company has
agreed to reimburse Navistar for a pro rata portion of Navistar's liability
based on the time of the employee's service for the Company compared to the
total time of service with Navistar and the Company.
Under the Asset Purchase Agreement, Navistar has agreed that it shall be
responsible for satisfying obligations under Section 601 et seq. of ERISA and
Section 4980B of the Code, to provide continuation coverage to or with respect
to any employee of Navistar as of the Closing Date in accordance with applicable
law with respect to any "qualifying event" occurring on or prior to the Closing
Date, including any "qualifying event" resulting from the Closing hereunder. The
Company shall be responsible for satisfying obligations under Section 601 et
seq. of ERISA and Section 4980B of the Code, to provide continuation coverage to
or with respect to any Hired Employee in accordance with applicable law with
respect to any "qualifying event" which occurs after the Closing Date.
Navistar shall be responsible for all salary accrued but not yet paid as of
the Closing Date nor reflected on the Closing Date Balance Sheet and, if
applicable, 1996 bonus accrued but not yet paid as of the Closing Date nor
reflected on the Closing Date Balance Sheet (in an amount equal to the pro rata
portion of such bonus allocable to the period prior to the Closing Date) with
respect to the Hired Employees, and the Company shall be responsible for the pro
rata portion of such bonus allocable to the period on and after the Closing
Date.
Navistar shall pursuant to Article II of the Navistar International
Transportation Corp. Income Protection Plan (the "IPP") extend eligibility for
pension grow-in to each Hired Employee to the extent such employee would be
eligible for pension grow-in under the IPP if such employee were not hired by
the
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Company; provided that grow-in will not be provided unless the Hired Employee
either (1) continues employment with the Company until attaining retirement age
under the Navistar International Transportation Corp. Retirement Plan for
Salaried Employees, or (2) terminates employment with the Company under
circumstances that if the termination were from Navistar rather than from the
Company the grow-in provisions of the IPP would apply to such termination.
Navistar has agreed that for the period from the Closing Date through the
sixth anniversary thereof, it shall not vote in favor of or otherwise directly
or indirectly support any amendment of the provisions of the Company's By-Laws
relating to the indemnification of officers and directors of the Company which
would have an adverse effect on present or former officers or directors of the
Company (except to the extent that withholding any such vote would be in
contravention of any applicable law).
The Asset Purchase Agreement provides from and after the Closing Date and
until the first annual meeting of the stockholders of Core Materials following
the Closing Date, Core Materials' Board of Directors shall be comprised of the
Navistar Directors, the Company Directors and the Independent Director. With
respect to vacancies on the initial Board of Directors of Core Materials which
exist at any time prior to the first annual meeting of the stockholders of the
Company following the Closing Date (which annual meeting shall be no sooner than
12 months following the Closing Date), the Company Directors shall have all
requisite authority to act on behalf of the Company as a special committee of
the Board of Directors to fill vacancies created by the resignation or removal
of a the Company Director and the Navistar Director shall have all requisite
authority to act on behalf of the Company as a special committee of the Board of
Directors to fill vacancies created by the resignation or removal of a Navistar
Director.
The Company has agreed, from the Closing to the Outside Notice Date, to
cause Columbus Plastics to be conducted in the ordinary course consistent with
past practice of Navistar and to make all reasonable efforts consistent with
past practices of Navistar to preserve its relationship with its third party
customers and suppliers in connection with Columbus Plastics. From the Closing
to the Outside Notice Date, the Company will not do any of the following without
the prior written consent of Navistar: (i) make any material change in the
conduct of Columbus Plastics; (ii) sell, lease, license or otherwise dispose of,
any interest in any of its assets, except for sales of inventory in the ordinary
course of business consistent with past practice of Navistar; (iii) permit,
allow or subject any of its assets or any part thereof to any lien or suffer
such to be imposed, except for liens permitted by the Asset Purchase Agreement;
(iv) enter into any new, or amend or terminate any existing, Contracts or the
Company's existing contracts, other than in the ordinary course of business
consistent with past practices; (v) make any change in any method of accounting
or accounting practice or policy currently used in the preparation by Navistar
of financial statements of Columbus Plastics other than those required by
generally accepted accounting principles; (vi) issue any notes, bonds, capital
stock or other securities of any kind except to Navistar as expressly
contemplated by the Asset Purchase Agreement; (vii) borrow any amount or incur
or become subject to any liabilities except in the ordinary course of business
consistent with Navistar's past practices; (viii) declare or make any payment or
distribution of cash or other property to its security holders with respect to
its securities or purchase or redeem any shares of its securities; it being
understood that "securities" includes options and rights to acquire securities;
(ix) acquire any new assets, rights or interests, other than cash; (x) make
capital expenditures or commitments therefor that aggregate in excess of
$10,000; (xi) make any charitable contributions or pledges; (xii) hire any
employees to perform services for the Company or increase any compensation or
other amounts payable to any employees; (xiii) enter into any other material
transaction or other transaction that is not in the ordinary course of business
consistent with Navistar's past practices; or (xiv) enter into any agreement,
whether in writing or otherwise, to do any of the foregoing.
Each of the parties to the Asset Purchase Agreement has agreed to execute
and deliver, or cause to be executed and delivered, all such documents and
instruments and shall take, or cause to be taken, all such further or other
actions, as such other party may reasonably deem necessary or desirable to
consummate the transactions contemplated by the Asset Purchase Agreement.
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SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
The representations and warranties in the Asset Purchase Agreement and in
any schedules delivered in connection therewith expire at, and do not survive,
the Closing.
Navistar has agreed under the Asset Purchase Agreement to indemnify the
Company, its affiliates and each of their respective officers, directors,
employees and agents and hold them harmless from any Loss (as hereinafter
defined) suffered or incurred by any such indemnified party or to which any such
indemnified party becomes subject to the extent directly or indirectly arising
from (i) any breach of (or in the event any third party alleges facts that if
true would mean Navistar has breached) any covenant of Navistar contained in the
Asset Purchase Agreement or the other agreements and instruments contemplated
thereby, (ii) any Excluded Liabilities and (iii) any statements or information
contained in this Proxy Statement/Prospectus relating to Columbus Plastics or
Navistar or its related entitles requested by the Company for inclusion in this
Proxy Statement/Prospectus and supplied by Navistar, provided the Company
presents such information in conformity in form and substance with the
information supplied to it by Navistar. The Company has agreed under the Asset
Purchase Agreement to indemnify each of Navistar, its affiliates, officers,
directors, employees and agents against and hold them harmless from any Loss
suffered or incurred by any such indemnified party or to which any such
indemnified party becomes subject to the extent directly or indirectly arising
from (i) any breach of (or in the event any third party alleges facts that if
true would mean the Company has breached) any covenant of the Company contained
in the Asset Purchase Agreement or the other agreements and instruments
contemplated thereby, (ii) any Assumed Liabilities and (iii) any discontinuance,
suspension or modification of any benefit plans maintained by the Company as
contemplated by the Asset Purchase Agreement. The Company has also agreed to
indemnify each of Navistar, its affiliates, officers, directors, employees and
agents against and hold them harmless from its Proportionate Share (as defined
below) of any Loss suffered or incurred by the Company or any of its
subsidiaries from and after the Closing Date (including Losses suffered or
incurred by the Company to its present or former stockholders) (x) in respect of
any actions, omissions, events, circumstances or state of facts existing or
arising on, at or prior to the Closing Date or (y) arising in connection with
any statements or information contained in this Proxy Statement/Prospectus
(other than information relating to Columbus Plastics or the Navistar Entities
requested by the Company for inclusion in this Proxy Statement/Prospectus and
supplied by Navistar, provided the Company presents such information in this
Proxy Statement/Prospectus in conformity in form and substance with the
information supplied to it by Navistar); provided no indemnity will be made by
the Company in respect of (i) except as provided in clause (y), any actions,
omissions, events, circumstances or state of facts existing or arising on, at or
prior to the Closing Date relating to the Asset Purchase Agreement, the matters
referred to in the Company Resolutions (other than the ancillary agreements) or
any of the transactions contemplated thereby, (ii) any Loss suffered or incurred
by the Company or any of its subsidiaries from and after the Closing Date that
arises from certain specifically listed liability or (iii) any inability of the
Company to be able to use its NOLs for federal income tax purposes after the
Closing. For purposes hereof, at the time of any Loss, the "Proportionate Share"
of each of Navistar, its affiliates, officers, directors, employees and agents
shall be the ratio, expressed as a percentage, of the total number of shares of
the Common Stock owned by such person at the time of such Loss divided by the
total number of shares of the Common Stock issued and outstanding at the time of
such Loss. "Loss" means, with respect to any person, any damage, injury,
liability, demand, claim, action, cause of action, cost, deficiency, tax,
penalty, fine or other loss, payment or expense, whether or not arising out of a
claim, including all interest, penalties, reasonable attorneys' fees and
expenses and all amounts paid or incurred in connection with any action, demand,
proceeding, investigation or claim by any third party (including any government
entity) against or affecting such person, together with interest thereon from
the date on which such person provides the written notice of the related claim
through and including the date on which the total amount of the claim, including
such interest, is recovered or recouped pursuant to the indemnity provisions of
the Asset Purchase Agreement.
If an indemnification obligation under the Asset Purchase Agreement arises
in respect of any adjustment which results in any tax benefit to the Company or
Navistar (the "Benefitted Party"), any successor thereto or any affiliate
thereof for any taxable period (or portion thereof) beginning and ending after
the Closing Date which would not, but for such adjustment, be available, the
Benefitted Party shall pay, or shall cause to be paid, to the party making such
indemnification payment an amount equal to the actual tax saving produced by
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such tax benefit at the time such tax saving is realized by the Benefitted
Party, any successor thereto or any affiliate thereof. The amount of any such
tax saving for any taxable period shall be the amount of the reduction in taxes
payable to a taxing authority by the Benefitted Party, any successor thereto or
any affiliate thereof with respect to such tax period as compared to the taxes
that would have been payable to a taxing authority by the Benefitted Party, any
successor thereto or any affiliate thereof with respect to such tax period in
the absence of such tax benefit.
The indemnification obligations under the Asset Purchase Agreement
terminate on the sixth anniversary of the Closing Date; provided, however, that
such obligations to indemnify and hold harmless shall not terminate with respect
to any item as to which the Person to be indemnified or the related party
thereto shall have, prior to the sixth anniversary of the Closing Date,
previously made a claim by delivering a written notice (stating in reasonable
detail the nature of, and factual and legal basis for, any such claim for
indemnification, and the provisions of the Asset Purchase Agreement upon which
such claim for indemnification is made) to the indemnifying party.
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ANCILLARY AGREEMENTS
THE SECURED NOTE
The description of the terms of the Secured Note included in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the Form of
Secured Note, a copy of which is attached hereto as Annex III and is
incorporated herein by reference.
Core Materials intends to enter into a senior credit facility to provide
working capital and for other purposes prior to or simultaneous with the
consummation of the Acquisition. The lender under such senior credit facility
may require changes to the terms of the Secured Note as a condition to entering
into the facility. Therefore, the terms of the Secured Note when executed may
vary from that contained in the Form of Secured Note attached as Annex III to
this Proxy Statement/Prospectus, the provisions of which are described below.
Certain terms used in the description of the Secured Note provided below
are used herein as defined under the caption "Definitions" below.
General
Pursuant to the Secured Note, Core Materials will agree to pay to Navistar
the principal sum of $25,504,000 with interest on the unpaid principal balance
thereof from the date of the Secured Note at the rate of 8.0% per annum
(computed on the basis of a 360-day year and the actual number of days elapsed
in any year). The principal amount of the Secured Note is subject to adjustment
based upon the post-Closing adjustments provided in the Asset Purchase
Agreement. See "--The Asset Purchase Agreement--Purchase Price Adjustments."
Core Materials will pay principal installments on the Secured Note as follows:
(i) within ninety (90) days after the end of each fiscal year during the term of
the Secured Note, Core Materials will pay principal in an amount equal to the
amount, if any, by which the total cash and cash equivalents of Core Materials,
as shown on its audited balance sheet and statement of financial condition for
the end of such year, exceed $3,000,000; (ii) in the event Core Materials
obtains, from time to time, any Refinancing Loan, Core Materials will promptly
upon obtaining such loan pay principal in an amount equal to the proceeds of
such loan; or (iii) if not sooner paid, Core Materials will pay the entire
principal amount of the Secured Note in full in November 2006 (the "Maturity
Date").
Interest on the Secured Note will be payable semi-annually on the last
business day of each May and November. On the date of any scheduled interest
payment Core Materials may, subject to certain conditions, elect to add such
interest payment to the outstanding principal balance of the Secured Note.
Unless prohibited under applicable law, any accrued interest which is not paid
on the date on which it is due and payable will bear interest at the same rate
at which interest is then accruing on the principal amount of the Secured Note
until such interest is repaid. Any accrued interest which for any reason has not
therefore been paid shall be paid in full on the date on which the final
principal payment on the Secured Note is made.
Core Materials may (at its option), without premium or penalty, at any time
and from time to time, prepay all or any portion (in whole number multiples of
$50,000) of the outstanding principal amount of the Secured Note, together with
accrued interest thereon, provided that Core Materials has paid all interest on
the Secured Note through the immediately preceding scheduled interest payment
date.
In addition to all other rights and remedies available to Navistar under
the Secured Note or otherwise, Navistar will have the right, after the
occurrence and during the continuance of any Default or Event of Default, to
setoff against and to apply to the accrued and unpaid interest and outstanding
principal balance of the Secured Note (in each case, to the extent then due and
payable), any obligation owing by Navistar to Core Materials. Any such setoff
will be applied first to the payment of interest which is due and payable and
only thereafter to the outstanding principal balance of the Secured Note. A
setoff of less than all of the outstanding principal amount of the Secured Note
shall be applied to the scheduled payments of the outstanding principal amount
of the Secured Note in the inverse order of maturity.
The Secured Note will be secured by a first priority lien upon and a
security interest in all of Core Materials' assets, whether owned at the time of
issuance of the Secured Note or thereafter acquired, and will be entitled to the
benefits of the Security Documents. Notwithstanding the foregoing, Noteholder
agrees that it will (if requested to do so by the holder of the Senior
Obligations), upon terms reasonable acceptable to
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Noteholder, subordinate its security interest and lien in the Collateral (as
defined in the Security Documents) in connection with and to the extent
reasonably required to facilitate a Refinancing Loan, and promptly upon the
request of the holder of the Senior Obligations, it will execute and deliver
such documents, instruments and agreements as are necessary to evidence such
subordination.
Covenants
Affirmation Covenants. Under the Secured Note, Core Materials will agree to
comply with certain covenants relating to the payment of its obligations, the
compliance with applicable laws, the conduct of its business, the maintenance of
its property and insurance thereon, the inspection of Core Materials' property,
the maintenance of books and records, and the delivery of financial information
and notices to Navistar. In the Secured Note, Core Materials will agree to use
its best efforts to obtain a Refinancing Loan within six months from the date of
the Secured Note in amounts and with terms reasonably satisfactory to Core
Materials and the Noteholder.
Negative Covenants. Under the Secured Note, Core Materials will also agree
to certain negative covenants described below.
(i) Limitation on Indebtedness. Core Materials will agree that, so
long as any amount is owing to the Noteholder, Core Materials will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Indebtedness, except: (A) the Senior
Obligations; (B) Indebtedness of Core Materials to any Subsidiary and of
any Subsidiary to Core Materials or any other Subsidiary; (C) Indebtedness
of Core Materials or any of its Subsidiaries incurred to finance the
acquisition of fixed or capital assets (whether pursuant to a loan, a
Financing Lease or otherwise) after the date hereof; (D) Indebtedness
assumed by Core Materials pursuant to the Asset Purchase Agreement, and any
refinancings, refundings, renewals or extensions thereof; provided that the
principal amount of any such Indebtedness shall not be increased to more
than the principal amount outstanding on the Closing Date (after giving
effect to the transactions contemplated by the Asset Purchase Agreement);
(E) Indebtedness of a corporation which becomes a Subsidiary after the date
of the issuance of the Secured Note, provided that (i) such Indebtedness
existed at the time such corporation became a Subsidiary and was not
created in anticipation thereof and (ii) immediately after giving effect to
the acquisition of such corporation by Core Materials no Default or Event
of Default shall have occurred and be continuing; (F) Indebtedness of Core
Materials on an unsecured basis in an aggregate principal amount not to
exceed $3,000,000 at any one time outstanding under the lines of credit
offered by commercial banks to Core Materials or its Subsidiaries to
finance the working capital needs of Core Materials and its Subsidiaries;
and (G) Indebtedness of Core Materials in respect of the Secured Note, as
the case may be amended from time to time (including without limitation any
increase in the principal amount of the Secured Note pursuant to the Asset
Purchase Agreement).
(ii) Limitation on Liens. Core Materials will agree that, so long as
any amount is owing to the Noteholder, Core Materials will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien upon any of its property, assets
or revenues, whether now owned or hereafter acquired, except for: (A) Liens
of the type described in Sections 4(c), (d) and (e) of the Asset Purchase
Agreement; (B) Liens securing Indebtedness of Core Materials and its
Subsidiaries permitted by clause (C) of "Limitation on Indebtedness" above
incurred to finance the acquisition of fixed or capital assets, provided
that (i) such Liens shall be created substantially simultaneously with the
acquisition of such fixed or capital assets, (ii) such Liens do not at any
time encumber any property other than the property financed by such
Indebtedness, (iii) the amount of Indebtedness secured thereby is not
increased to more than the principal amount originally incurred and (iv)
the principal amount of Indebtedness secured by any such Lien shall at no
time exceed 100% of the fair value (as determined in good faith by the
board of directors of Core Materials) of such property at the time it was
acquired; (C) Liens on the property or assets of a corporation which
becomes a Subsidiary after the Closing Date securing Indebtedness permitted
by clause (E) of "Limitation of Indebtedness" above, provided that (i) such
Liens existed at the time such corporation became a Subsidiary and were not
created in anticipation thereof, (ii) any such Lien is not spread to cover
any property or assets of such corporation after the time such corporation
becomes a Subsidiary, and (iii) the amount of Indebtedness secured
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thereby is not increased to more than the principal amount originally
incurred; (D) Liens created to secure the Senior Obligations; (E) Liens for
taxes not yet due or which are being contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are
maintained on the books of Core Materials or its Subsidiaries, as the case
may be, in conformity with GAAP; (F) carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like Liens arising in the ordinary
course of business which are not overdue for a period of more than 60 days
or which are being contested in good faith by appropriate proceedings; (G)
pledges or deposits in connection with worker's compensation, unemployment
insurance and other social security legislation and deposits securing
liability to insurance carriers under insurance or self-insurance
arrangements; (H) deposits to secure the performance of bids, trade
contracts (other than borrowed money), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like
nature incurred in the ordinary course of business; (I) easements,
rights-of-way, restrictions and other similar encumbrances incurred in the
ordinary course of business which, in the aggregate, are not substantial in
amount and which do not in any case materially detract from the value of
the property subject thereto or materially interfere with the ordinary
conduct of the business of Core Materials or such Subsidiary; and (J) Liens
created by the Security Documents.
(iii) Limitation on Guarantee Obligations. Core Materials will agree
that, so long as any amount is owing to the Noteholder, Core Materials will
not, and will not permit any of its Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Guarantee
Obligation except: (A) Guarantee Obligations assumed by Core Materials
pursuant to the Asset Purchase Agreement and any refinancings, refundings,
renewals or extensions thereof, provided, that the principal amount of any
such Guarantee Obligations shall not be increased to more than the
principal amount outstanding on the Closing Date (after giving effect to
the transactions contemplated by the Asset Purchase Agreement); (B)
guarantees made in the ordinary course of business, not to exceed $250,000
in the aggregate, by Core Materials of obligations of any of its
Subsidiaries or by any Subsidiary of obligations of the Company, in each
case to the extent that guaranty obligations are otherwise permitted under
the Secured Note; (C) guarantees made in respect of the Senior Obligations;
(D) guarantees made in the ordinary course of its business by Core
Materials of indebtedness permitted by the Secured Note; (E) Guarantee
Obligations in respect of the undrawn portion of the face amount of letters
of credit issued for the account of Core Materials or any Subsidiary in an
aggregate amount not to exceed $250,000 at any one time outstanding for
Core Materials and its Subsidiaries; and (F) guarantees made in favor of
the Noteholder as contemplated by the Secured Note.
(iv) Limitation on Fundamental Changes. Core Materials will agree
that, so long as any amount is owing to the Noteholder, Core Materials will
not, and will not permit any of its Subsidiaries to, directly or
indirectly, enter into any merger, consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, lease, assign, transfer or otherwise dispose
of, all or substantially all of its property, business or assets, or make
any material change in its present method of conducting business, except;
(A) any Subsidiary of Core Materials may be merged or consolidated with or
into Core Materials (provided that Core Materials shall be the continuing
or surviving corporation) or with or into any one or more wholly-owned
Subsidiaries of Core Materials (provided that the wholly-owned Subsidiary
or Subsidiaries shall be the continuing or surviving corporation); (B) any
wholly-owned Subsidiary may sell, lease, transfer or otherwise dispose of
any or all of its assets (upon voluntary liquidation or otherwise) to Core
Materials or any other wholly-owned Subsidiary of Core Materials; and (C)
any Person may be merged with or into Core Materials, (provided that the
continuing or surviving corporation assumes all of the obligations and
liabilities of Core Materials in respect of the Secured Note, the Asset
Purchase Agreement, the Ancillary Agreements, and Related Documents) with
the prior written consent of the Noteholder.
(v) Limitation on Sale of Assets. Core Materials will agree that, so
long as any amount is owing to the Noteholder, Core Materials will not, and
will not permit any of its Subsidiaries to, directly or indirectly, convey,
sell, lease, assign, transfer or otherwise dispose of any of its property,
business or assets (including, without limitation, receivables and
leasehold interests) or any product line, whether owned at the date of the
issuance of the Secured Note or thereafter acquired, or, in the case of any
Subsidiary,
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issue or sell any shares of such Subsidiary's Capital Stock to any Person
other than Core Materials or any wholly-owned Subsidiary, except: (A) the
sale or other disposition of any property in the ordinary course of
business; (B) the sale of discount without recourse of accounts receivable
arising in the ordinary course of business in connection with the
compromise or collection thereof; (C) as permitted by the covenant
described under "Limitation on Fundamental Changes" above; (D) the sale or
other disposition of any property, provided the aggregate book value of all
property sold or disposed of by Core Materials pursuant to this Clause (D)
does not exceed $1,000,000 in any fiscal year of Core Materials; and (E)
the sale or other disposition of any assets, the net proceeds of which are
used to prepay the Secured Note or are otherwise distributed in accordance
with the Intercreditor Agreement.
(vi) Limitation on Dividends. Core Materials will agree that, so long
as any amount is owing to the Noteholder, Core Materials will not, and will
not permit any of its Subsidiaries to, directly or indirectly, declare or
pay any dividend (other than dividends payable solely in common stock or
preferred stock of Core Materials and dividends payable by any Subsidiary
of Core Materials to Core Materials, or any other Subsidiary of Core
Materials) on, or make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of Capital
Stock of Core Materials or any warrants or options to purchase any such
Capital Stock, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly, whether in
case or property or in obligations of Core Materials or any Subsidiary.
(vii) Limitation on Investments, Loans and Advances. Core Materials
will agree that, so long as any amount is owing to the Noteholder, Core
Materials will not, and will not permit any of its Subsidiaries to,
directly or indirectly, make any advance, loan, extension of credit or
capital contribution to, or purchase any stock, bonds, notes, debentures or
other securities of or any assets constituting a business unit of, or make
any other investment (collectively, "Investments") in, any Person, except:
(A) extensions of trade credit in the ordinary course of business; (B)
investments in Cash Equivalents; (C) investments by Core Materials in its
Subsidiaries and investments by such Subsidiaries in Core Materials and in
other Subsidiaries; (D) Investments in existence on the date of the
issuance of the Secured Note and disclosed in the Asset Purchase Agreement;
(E) additional Investments or acquisitions made after the date hereof and
approved by the board of directors of Core Materials; and (F) loans and
advances to employees of Core Materials or its Subsidiaries for travel and
entertainment expenses in the ordinary course of business.
(viii) Limitation on Optional Payments and Modifications of Debt
Instruments. Core Materials will agree that, so long as any amount is owing
to the Noteholder, Core Materials will not, and will not permit any of its
Subsidiaries to, directly or indirectly, (A) make any optional payment or
prepayment on or redemption or purchase of any Indebtedness for borrowed
money other than any prepayment of the Secured Note or any prepayment of
any revolving loans or term loans made under the Credit Agreement; (B)
amend, modify or change, or consent or agree to any amendment, modification
or change to any of the terms of any such Indebtedness other than any such
amendment, modification or change which would extend the maturity or reduce
the amount of any payment of principal thereof or which would reduce the
rate or extend the date for payment of interest thereon or (C) amend,
modify or change, or consent or agree to any amendment, modification or
change to the Credit Agreement to increase the interest rate on the Senior
Obligations (including any default rate).
(ix) Limitation on Changes in Fiscal Year. Core Materials will agree
that, so long as any amount is owing to the Noteholder, Core Materials will
not permit its fiscal year to end on a day other than December 31.
(x) Limitation on Negative Pledge Clauses. Core Materials will agree
that, so long as any amount is owing to the Noteholder, Core Materials will
not, and will not permit any of its Subsidiaries to, directly or
indirectly, enter into with any Person any agreement, other than (A) the
Secured Note; (B) the Credit Agreement and (C) purchase money mortgages or
Financing Leases permitted by the Secured Note (provided in the case of
clause (C), any prohibition or limitation shall only be effective against
the assets financed thereby), which prohibits or limits the ability of Core
Materials or any of its Subsidiaries to
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create, incur, assume or suffer to exist any Lien upon any of its property,
assets or revenues, whether owned at the time of the issuance of the
Secured Note or thereafter acquired.
(xi) Limitation on Amendments of Certificates of Incorporation and
By-Laws. Core Materials will agree that, so long as any amount is owing to
the Noteholder, Core Materials will not, and will not permit any of its
Subsidiaries to, directly or indirectly, permit any material modification,
amendment or supplement to the certificate of incorporation or by-laws of
Core Materials or any of its Subsidiaries.
(xii) Limitation on Certain Restrictions. Core Materials will agree
that, so long as any amount is owing to the Noteholder, Core Materials will
not, and will not permit any of its Subsidiaries to, directly or
indirectly, become subject to, or permit any of its Subsidiaries to become
subject to, (including, without limitation, by way of amendment to or
modification of) any agreement (other than the Credit Agreement) which by
its terms would (under any circumstances) restrict (A) the right of any
Subsidiary to make loans or advances or any dividend to, transfer property
to, or repay any Indebtedness owed to, Core Materials or another Subsidiary
or (B) Core Materials' right to perform the provisions of the Secured Note
(including, without limitation, provisions relating to the payment or
prepayment of principal and interest on the Secured Note).
Events of Default
For purposes of the Secured Note, an Event of Default is defined as the
occurrence of any of the following:
(i) Core Materials shall fail to pay any principal when due in
accordance with the terms of the Secured Note; or Core Materials shall fail
to pay any interest when due in accordance with the terms of the Secured
Note, or any other amount payable under the Secured Note, within five days
after any such interest or other amount becomes due in accordance with the
terms of the Secured Note; or
(ii) Any representation or warranty made or deemed made by Core
Materials in the Asset Purchase Agreement or any Related Document or which
is contained in any certificate, document or financial or other statement
furnished by it at any time under or in connection with the Secured Note,
the Asset Purchase Agreement or any Related Document shall prove to have
been incorrect in any material respect on or as of the date made or deemed
made; or
(iii) Core Materials shall default in the observance or performance of
any agreement contained in subparagraph 4(a)(vii) of the Secured Note or
contained in the Asset Purchase Agreement or any Related Document, subject
to applicable cure periods, if any; or
(iv) Core Materials shall default in the observance or performance of
any other agreement contained in the Secured Note subject to 30 day cure
(other than as provided in paragraphs (i) through (iii) of this paragraph);
or
(v) Core Materials or any of its Subsidiaries shall (A) default in any
payment of principal of any indebtedness for borrowed money in excess of
$50,000 at the final maturity thereof; or (B) default in the observance or
performance of any other agreement or condition relating to any such
Indebtedness or an Guarantee Obligation in respect of any such Indebtedness
or contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur or condition exist, the
effect of which default or other event or condition is to cause such
Indebtedness to become due prior to its stated maturity or such Guarantee
Obligation to become payable (whether by the terms of any document
evidencing such Indebtedness or Guarantee Obligation, upon the election of
any holder of Indebtedness or beneficiary of any Guarantee Obligation or
otherwise); or
(vi) (A) Core Materials or any of its Subsidiaries shall commence any
case, proceeding or other action (1) under any existing or future law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or
its debts, or (2) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for
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all or any substantial part of its assets, or Core Materials or any of its
Subsidiaries shall make a general assignment for the benefit of its
creditors; or (B) there shall be commenced against the company or any of
its Subsidiaries any case, proceeding or other action of a nature referred
to in clause (A) above which (1) results in the entry of an order for
relief or any such adjudication or appointment or (2) remains undismissed,
undischarged or unbonded for a period of 60 days; or (C) there shall be
commenced against Core Materials or any of its Subsidiaries any case,
proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part
of its assets which results in the entry of an order for any such relief
which shall not have been vacated, discharged, or stayed or bonded pending
appeal within 60 days from the entry thereof; or (D) Core Materials or any
of its Subsidiaries shall take any action in furtherance of, or indicating
its consent to, approval of, or acquiescence in, any of the acts set forth
in clause (A), (B), or (C) above; or (E) Core Materials or any of its
Subsidiaries shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or
(vii) (A) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (B) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of Core
Materials or any Commonly Controlled Entity, (C) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Plan that is a Single-Employer Plan, (D) any Plan that is a
Single-Employer Plan shall terminate for purposes of Title IV or ERISA, (E)
Core Materials or any Commonly Controlled Entity shall, or in the
reasonable opinion of Noteholder is likely to, incur any liability in
connection with a withdrawal from or the Insolvency or Reorganization of, a
Multiemployer Plan or (F) any other event or condition shall occur or exist
with respect to a Plan; and in each case in clauses (A) through (F) above,
such event or condition, together with all other such events or conditions,
if any, could reasonably be expected to have a Material Adverse Effect; or
(viii) One or more judgments or decrees shall be entered against Core
Materials or any of its Subsidiaries involving in the aggregate a liability
(not fully covered by insurance) of $1,000,000 or more, and all such
judgments or decrees shall not have been vacated, discharged, stayed or
bonded pending appeal within 60 days from the entry thereof; or
(ix) (A) Any of the Security Documents shall cease, for any reason, to
be in full force and effect, or Core Materials or any Subsidiary which is a
party to any of the Security Documents shall so assert or (B) the Lien
created by any of the Security Documents shall cease to be enforceable and
of the same effect and priority purported to be created thereby, except to
the extent, if any, otherwise provided in the Intercreditor Agreement.
If any Event of Default has occurred, the interest rate on the Secured Note
shall increase immediately by an increment of 1 percentage point(s) to the
extent permitted by law. Any increase of the interest rate resulting from the
operation of this subparagraph shall terminate as of the close of business on
the date on which no Event of Default exists.
If an Event of Default of the type described in subparagraph (vi) above has
occurred, the aggregate principal amount of the Secured Note (together with all
accrued interest thereon and all other amounts due and payable with respect
thereto) shall become immediately due and payable without any action on the part
of the Noteholder, and Core Materials shall immediately pay to the Noteholder
all amounts due and payable with respect to the Secured Note.
If any Event of Default has occurred (other than the type described under
subparagraph (vi) above), the Noteholder may declare all or any portion of the
outstanding principal amount of the Secured Note (together with all accrued
interest thereon and all other amounts due and payable with respect thereto) to
be immediately due and payable and may demand immediate payment of all or any
portion of the outstanding principal amount of the Secured Note (together with
all such other amounts then due and payable).
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The Noteholder shall also have any other rights which such holder may have
been afforded under any contract or agreement (including, without limitation,
the Security Documents) at any time and any other rights which such holder may
have pursuant to applicable law.
Amendment and Waiver
Except as otherwise expressly provided herein, the provisions of the
Secured Note may be amended and Core Materials may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if Core Materials has obtained written consent of the Noteholder.
Definitions
For purposes of the Secured Note, the following capitalized terms have the
following meanings:
"Capital Stock" shall mean any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interest in a Person (other than a corporation) and
any and all warrants or options to purchase any of the foregoing.
"Cash Equivalents" shall mean (a) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition and overnight bank deposits of any commercial bank having capital
and surplus in excess of $250,000,000, or party to the Credit Agreement (c)
repurchase obligations of any commercial bank satisfying the requirements of
clause (b) of this definition, having a term of not more than 30 days with
respect to securities issued or fully guaranteed or insured by the United States
Government, (d) commercial paper of a domestic issuer rated as least A-2 by
Standard and Poor's Ratings Group ("S&P") or P-2 by Moody's Investors Service,
Inc. ("Moody's"), (e) securities with maturities of one year or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory or by any foreign government, the securities of which state,
commonwealth, territory, political subdivision, taxing authority or foreign
government (as the case may be) are rated at least A by S&P or A by Moody's, (f)
securities with maturities of one year or less from the date of acquisition
backed by standby letters of credit issued by any commercial bank satisfying the
requirements of clause (b) of this definition or (g) shares of money market
mutual or similar funds which invest exclusively in assets satisfying the
requirements of clauses (b) through (f) of this definition;
"Commonly Controlled Entity" shall mean an entity, whether or not
incorporated which is under common control with Core Materials within the
meaning of Section 4001 of ERISA or is part of a group which includes Core
Materials and which is treated as a single employer under Section 414 of the
Code.
"Consolidated Lease Expense" shall mean for any period, the aggregate
amount of fixed and contingent rentals payable by Core Materials and its
Subsidiaries for such period with respect to leases of real and personal
property, determined in accordance with GAAP on a consolidated basis.
"Default" shall mean any of the events specified in the definition of Event
of Default, whether or not any requirement for the giving of notice, the lapse
of time, or both, or any other condition, has been satisfied.
"Employee Benefit Plan" shall have the meaning set forth in Section 3(3) of
ERISA.
"ERISA" shall mean the Employee Retirement Income Security Act of 1984, as
amended from time to time.
"Financing Lease" shall mean any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
"Guarantee Obligation" shall mean as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to induce
the creation of which the guaranteeing person has issued a reimbursement,
counterindemnity or similar obligation, in either case guaranteeing or in effect
guaranteeing any Indebtedness, leases, dividends or other obligations (the
"primary obligations") of any other third Person (the "primary obligor" in any
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manner, whether directly or indirectly, including, without limitation, any
obligation of the guaranteeing person, whether directly or indirectly,
including, without limitation, any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (ii) to advance or
supply funds (1) for the purchase or payment of any such primary obligation or
(2) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (iv) otherwise to assure or hold
harmless the owner of any such primary obligation against loss in respect
thereof; provided, however, that the term Guarantee Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing person
shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such Guarantee
Obligation of any guaranteeing person shall be deemed to be made and (b) the
maximum amount for which such guaranteeing person may be liable pursuant to the
terms of the instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by Core Materials in good
faith.
"Indebtedness" shall mean of any Person at any date, (a) all indebtedness
of such Person for borrowed money or for the deferred purchase price of property
or services (other than current rate liabilities incurred in the ordinary course
of business and payable in accordance with customary practices), (b) any other
indebtedness of such Person which is evidenced by a note, bond debenture or
similar instrument, (c) all obligations of such Person under Financing Leases,
(d) all obligations of such Person in respect of acceptances issued or created
for the account of such Person, (e) all obligations in respect of deferred
compensation and (f) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"Insolvency" shall mean with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section 4245 of
ERISA.
"Intercreditor Agreement" shall mean the intercreditor agreement entered
into between the holders of Senior Obligations and Navistar, as amended or
otherwise modified from time to time.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any financing Lease
having substantially the same economic effect as any of the foregoing).
"Material Adverse Effect" shall mean a material adverse effect on (a) the
business, operations, property or condition (financial or otherwise) of Core
Materials and its Subsidiaries taken as a whole or (b) the validity or
enforceability of the Secured Note or any of the other Related Documents (other
than the Intercreditor Agreement) or the rights or remedies of the Noteholder
thereunder.
"Multiemployer Plan" shall mean a Plan which is a multi-employer plan as
defined in Section 4001(a)(3) of ERISA.
"Noteholder" shall mean Navistar and its permitted successors, transferees
and assigns.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
"Person" shall mean an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Plan" shall mean any Employee Benefit Plan in respect of which Core
Materials or a Commonly Controlled Entity is (or, if such plan were terminated
at such time, would under Section 4069 of ERISA be deemed to be) and "employer"
as defined in Section 3(5) of ERISA.
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"Refinancing Loan" shall mean any loan, extension of credit or other
financial accommodation (other than a revolving line of credit for working
capital purposes or loans for project finance use) made as of or after the
Closing to Core Materials by a Person other than the Noteholder, to refinance
and pay indefeasibly in full or in part the outstanding principal amount now or
at any time or times after the Closing owing by Core Materials to the Noteholder
under the Secured Note, and which is secured by Core Materials' equipment or
other assets in which the Noteholder holds security interests on the Closing
Date, provided that (i) the proceeds of such loan are disbursed directly to the
Noteholder pursuant to written authorization given by Core Materials to the
Person making the loan and (ii) to the extent such Person intends to take a
security interest in any of the Core Materials' equipment or other assets, such
Person has entered into an intercreditor agreement with the Noteholder in form
and substance acceptable to the Noteholder.
"Related Documents" shall mean the Secured Note, the Security Documents and
the Intercreditor Agreement.
"Reorganization" shall mean with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section 4241
of ERISA.
"Reportable Event" shall mean any of the events set forth in Section
4043(b) of ERISA, other than those events as to which the thirty day notice
period is waived by regulation.
"Responsible Officer" shall mean the chief executive officer and the
president of Core Materials or, with respect to financial matters, the chief
financial officer of Core Materials.
"Senior Obligations" shall mean all obligations and liabilities of Core
Materials in respect of the loan agreement entered into by Core Materials in
connection with the Refinancing Loan (the "Credit Agreement") and all loan and
security documents executed and delivered in connection therewith, and any
refinancing, refunding, renewals, or extensions thereof (provided, that the
principal amount of such Indebtedness shall not be increased to more than the
principal amount outstanding as of the date of such loan agreements) including,
without limitation, any interest accruing subsequent to the commencement of any
bankruptcy, insolvency or similar proceeding with respect to Core Materials,
whether or not such interest constitutes an allowed claim in such proceeding.
"Security Documents" shall mean the security agreement, and the subsidiary
guarantees contemplated by the Secured Note.
"Single-Employer Plan" shall have the meaning set forth in Section
4001(a)(15) of ERISA.
"Subsidiary" shall mean as to any Person, a corporation, partnership or
other entity of which shares of stock or other ownership interest having
ordinary voting power (other than stock or such other ownership interests having
such power only by reason of the happening of a contingency) to elect a majority
of the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise qualified, all references to "Subsidiary" or to
"Subsidiaries" refer to a Subsidiary or Subsidiaries of Core Materials.
Cancellation
After all principal, accrued interest and all other amounts hereunder at
any time owed on the Secured Note, including all Purchase Price Adjustments,
have been paid in full, the Secured Note shall be surrendered to Core Materials
for cancellation, and the Noteholder shall take such action as Core Materials
may reasonably request to evidence such discharge and the release of the Liens
created by the Security Documents. Notwithstanding anything in the Secured Note
to the contrary, it is expressly agreed that the outstanding principal balance
under the Secured Note may be reduced to a zero balance without such repayment
operating to cancel the Secured Note or extinguish or release the Liens,
security title and security interest created by the Security Documents. The
Secured Note and the Security Documents shall remain in full force and effect as
to any subsequent Purchase Price Adjustments made after the zero balance without
loss or priority until all Indebtedness of Core Materials to the Noteholder
arising under or in connection with the Secured Note, the Asset Purchase
Agreement, or any other instrument or document now or at any time evidencing,
securing or
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guaranteeing the same is paid in full and satisfied. Core Materials waives the
operation of any applicable statute, law or regulation having a contrary effect.
Payment of Expenses and Taxes
Core Materials will agree in the Secured Note (a) to pay or reimburse the
Noteholder for all its costs and expenses incurred in connection with the
enforcement or preservation of any rights under the Secured Note and the other
Related Documents after the occurrence of any Event of Default, including,
without limitation, the fees and disbursements of counsel to the Noteholder, (b)
to pay, indemnify, and hold the Noteholder harmless from, any and all recording
and filing fees and any and all liabilities with respect to, or resulting from
any delay in paying stamp, excise and other similar taxes, if any, which may be
payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transaction
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, the Secured Note and the other Related
Documents and (c) to pay, indemnify, and hold the Noteholder harmless from and
against any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of the Secured Note and the other Related
Documents, including, without limitation, any of the foregoing relating to the
violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of Core Materials, any of its Subsidiaries or any
of their properties (all the foregoing in the clause (c), collectively, the
"indemnified liabilities"), provided that Core Materials shall have no
obligation hereunder to the Noteholder with respect to indemnified liabilities
arising from (i) the gross negligence or willful misconduct of the Noteholder,
(ii) legal proceedings commenced against the Noteholder by any security holder
or creditor thereof arising out of and based upon rights afforded any such
security holder or creditor solely in its capacity as such or (iii) any matter
relating to the Intercreditor Agreement. The agreements described in this
paragraph will survive repayment of the Secured Note and all other amounts
payable thereunder.
THE SUPPLY AGREEMENT
General
As a condition to the consummation of the Acquisition, Navistar and Core
Materials will enter into the Comprehensive Supply Agreement (the "Supply
Agreement"). Under the terms of the Supply Agreement, for a period of five
years, Navistar will agree to purchase from Core Materials, and Core Materials
will agree to sell to Navistar, all of Navistar's original Products. The Supply
Agreement is intended to be a rolling five year agreement where an extension to
the fifth year is negotiated annually.
On a pro forma basis, pursuant to the terms of the Supply Agreement,
Navistar would have paid $43.6 million and $27.1 million to Core Materials in
the year ended October 31, 1995 and the nine months ended July 31, 1996,
respectively. However, no minimum quantities of annual production of Products or
minimum purchase quantities are set forth or implied in the Supply Agreement,
and no penalties will be imposed on Navistar for volumes of products actually
ordered by Navistar below those quantities forecasted. In addition, Navistar is
not required to purchase any new products from Core Materials other than the
Products covered by the Supply Agreement, unless in Navistar's opinion Core
Materials is competitive in price, performance, delivery, reliability,
technology and quality with other manufacturers of any such products. In
addition, during the term of the Supply Agreement, Core Materials agrees that it
will not manufacture or sell the products covered by the Supply Agreement and
developed exclusively for Navistar to any other party other than Navistar,
unless authorized in writing by Navistar. In the Supply Agreement, Core
Materials will agree to quality, packaging and other Navistar specifications in
manufacturing and delivery of the Products.
Warranty
Under the Supply Agreement, Core Materials agrees to warrant its products
for Navistar's heavy duty, medium duty and school bus chassis which prove to be
defective in material and/or workmanship of Core Materials' products up to
twelve (12) months from the new vehicle delivery date to user or 100,000 miles.
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Support Services
Pursuant to the Asset Purchase Agreement Core Materials will provide at no
additional cost to Navistar such design and design qualification assistance,
manufacturing assistance, technical and field support as may be reasonably
required by Navistar.
Indemnification
Core Materials will agree to indemnify and hold harmless Navistar and its
officers, directors and affiliates from any and all damages, costs and expenses
incurred as a result of a claim by any third party regarding any harm, damage or
loss incurred (or alleged to have incurred) as a direct result of any defect in
the materials or workmanship of Core Materials' products. Navistar will agree to
indemnify and hold harmless Core Materials and its officers, directors and
affiliates from any and all damages, costs and expenses incurred as a result of
a claim by any third party regarding any harm, damage, loss or expense incurred
(or alleged to have incurred) as a result of Navistar's installation of Core
Materials' products other than as a direct result of any defect in the materials
or workmanship of Core Materials' products.
Failure to Stay Competitive
If Navistar reasonably demonstrates to Core Materials that a particular
Product is no longer a competitive value with respect to price, performance,
delivery, reliability, technology and quality with other equivalent products
then available, then Core Materials will have sixty (60) days of such
demonstration to cure the deficiency. If Core Materials cannot remedy the
situation within such sixty (60) days, Navistar may at its option terminate the
obligations of the parties under the Supply Agreement with respect to the
non-competitive Products.
Reimbursement for Non-Performance
In the Supply Agreement, the parties acknowledge that the precise amount of
damages which Navistar would sustain in the event Core Materials were to fail to
make timely or conforming deliveries of Products would be difficult to
determine. Therefore, the parties agree that Core Materials shall be responsible
for consequential or incidental damages for the correction of Products assembled
out of sequence, as a result of delivery delays by Core Materials that are not
due to circumstances beyond its control, such as weather, transportation system
failures or other acts of God, or for the correction of Products with quality
problems by making a payment of $66 per manhour required to correct such
problems. Any costs Navistar incurs in connection with Navistar's assembly line
down time caused by the failure of Core Materials to deliver on schedule, for
reasons not beyond its control but only to the extent that Navistar is not
covered by business interruption insurance, will be charged at a rate of $700
per minute. Core Materials will advise Navistar immediately in writing of any
apparent imminent problem and the parties will mutually use their best efforts
to avoid any actual assembly line down time. Core Materials shall not be
responsible for the above damages if such out-of-order (late) delivery or
non-delivery results from a cause beyond Core Materials' reasonable control
without fault or negligence, provided that Core Materials has immediately
informed Navistar in writing of the problem. It is expressly understood that a
failure by Core Materials to perform resulting from a strike, lockout or labor
difficulty of Core Materials shall not be excused, and Core Materials shall be
responsible for the above damages, except if Core Materials shall promptly
notify Navistar in writing of any anticipated labor dispute or labor shortage or
any other labor performance interruption, and Core Materials shall arrange for
advance deliveries or warehousing, at Navistar's option and at locations
acceptable to Navistar, of a one month supply of Products, or other quantity
mutually agreed upon.
Material, Labor and Overhead
Labor and overhead costs will be firm, and only raw material adjustments
will be made for the duration of the Supply Agreement. Price adjustments for raw
materials will be based on actual transaction prices and must be verified by
actual sub-supplier invoices.
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Intellectual Property Indemnity
In the Supply Agreement Core Materials will agree to defend, at its
expense, any claim or suit against Navistar or Navistar's customers, based on an
assertion or claim that a Product furnished by Core Materials to Navistar
pursuant to the Supply Agreement or the use or sale by Navistar or its customers
in the manner contemplated by the Supply Agreement infringes any patent or
copyright or is a wrongful use of third-party trade secret or proprietary
information, and further agrees to indemnify and hold Navistar harmless from any
cost and expenses, including attorneys' fees, settlements associated with said
claim or suit, or any damages, including attorneys' fees or costs, finally
awarded in any such suit, provided that Core Materials is notified promptly in
writing of the suit or claim and, at Core Materials' request and expense, is
given control of the defense to such claim or suit and all reasonable assistance
for the defense of same. If the use or sale of a Product furnished under the
Supply Agreement is enjoined as a result of such suit, Core Materials, at its
option and at no expense to Navistar, shall obtain for Navistar and its
customers the right to use and sell the Product or shall substitute an
equivalent Product acceptable to Navistar and extend the indemnity under the
Supply Agreement to the substitute Product. The indemnity under the Supply
Agreement does not extend to any claim or suit based on any infringement of any
patent by the combination of Product(s) furnished by Core Materials with other
components added thereto by Navistar, except when the Product(s) is a material
part of the invention of an asserted patent and the components furnished by
Navistar to complete the claimed combination, such as an engine, sensor, or
vehicle frame, are not novel. The indemnity under the Supply Agreement does not
extend to any infringement or alleged infringement arising solely out of Core
Materials' compliance with Navistar-required specifications, designs, or
instructions that (i) are created solely by Navistar and (ii) are thereafter
furnished to Core Materials in writing.
Termination
The Supply Agreement is subject to termination for various reasons as set
forth below:
(i) Termination for Default. At any time during the term of the Supply
Agreement should either party default in performing any of its material
obligations thereunder, the other party may give written notice of default
giving the full details thereof. If the defaulting party fails within
thirty (30) days of the receipt of written notice of default to cure the
default, then the non-defaulting party shall have the right to terminate
the Supply Agreement with regard to the particular Product materially
affected by the default, or if the default materially affects all Products,
the non-defaulting party shall have the right to terminate the Supply
Agreement in its entirety. The non-defaulting party shall give the other
party thirty (30) days written notice from the determination of the failure
to cure the default, whereupon the termination shall be effective.
(ii) Termination for Insolvency: If either party is adjudicated as
bankrupt or files a voluntary petition in bankruptcy, then, in accordance
with applicable law, the other party shall have the right to terminate the
Supply Agreement by giving such financially distressed party thirty (30)
days written notice from the determination of the bankruptcy to cure the
bankruptcy, whereupon the Supply Agreement shall automatically terminate.
(iii) Termination for Inadequate Quality: Navistar may terminate the
Supply Agreement with regard to Products if adequate quality is not
maintained in accordance with the terms of the Supply Agreement.
(iv) Termination for Failure to Remain Competitive: Navistar may
terminate the Supply Agreement with regard to non-competitive Products as
provided in the Supply Agreement as described above under "Failure to Stay
Competitive".
(v) Force Majeure: If Force Majeure delays delivery of Products past
15 days, Navistar may terminate the Supply Agreement in whole or in part
without penalty upon written notice to Core Materials.
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THE TRANSITIONAL SERVICES AGREEMENT
As a condition to the consummation of the Acquisition, Navistar and Core
Materials will enter into the Transitional Services Agreement. Under the terms
of the Transitional Services Agreement, Navistar will (i) provide internal
financial reporting, accounting, budgeting and tax planning and return
preparation services and computer services to Core Materials for a period of one
year after the Closing and Core Materials will pay for such services based on
the actual hours incurred, determined based on (a) all compensation costs for
direct personnel of Navistar who perform the services, (b) travel expenses
(including meals and lodging expenses), and (c) ordinary and necessary business
expenses incurred by Navistar and (ii) Navistar will provide office support
services to Core Materials and procure insurance on Core Materials' behalf for
various periods of time after the Closing depending upon the service (up to a
period of three years) and Core Materials will pay for such services based on
the actual hours incurred (determined as provided above) plus the cost to
Navistar in providing such services. Total costs to be paid to Navistar under
the Transitional Services Agreement are expected to approximate the amount of
corporate general and administrative costs historically allocated to Columbus
Plastics by Navistar. The Transitional Services Agreement will remain in effect
until the earlier of (i) three years after the date thereof and (ii) the
expiration of the longest time period specified under the Transitional Services
Agreement, unless an event of termination occurs prior to the end of that
period. If either party shall fail to perform or default in the performance of
any of its obligations under the Transitional Services Agreement, the other
party may give written notice that it intends to terminate the Transitional
Services Agreement if such failure or default is not cured within forty-five
days of such written notice. If any failure or default so specified is not cured
within such forty-five day period, the non-defaulting party may elect to
immediately terminate the Transitional Services Agreement; provided, however,
that if the failure or default relates to a dispute made in good faith by the
defaulting party, the non-defaulting party may not terminate the Agreement
pending the resolution of such dispute. In addition, Navistar may immediately
terminate the Agreement upon written notice to Core Materials if Core Materials
fails to make any payment under the Transitional Services Agreement within
fifteen days of the due date and either party may terminate the Agreement upon
the occurrence of certain events involving the bankruptcy, insolvency or
liquidation of the other party.
Under the terms of the Transitional Services Agreement, Navistar agrees to
indemnify Core Materials against any and all claims, liabilities, damages,
losses, costs, expenses, fines and penalties arising out of any actual injury,
loss or damage of any nature whatsoever due or relating to the provision of or
failure to provide the transitional services only if such amounts are a result
of the negligence or reckless or willful misconduct of the personnel of Navistar
or any contract personnel managed and directed by Navistar. Core Materials
agrees to indemnify Navistar against any and all claims, liabilities, damages,
losses, costs, expenses, fines or penalties arising out of any injury or death,
and any loss or damage of any nature whatsoever (including, without limitation,
loss or damage to property, or damage to the environment) arising out of the
operations and activities of Core Materials, except for losses, liabilities,
obligations, costs, expenses or damages which are the result of the negligence,
gross negligence or willful misconduct of the personnel of Navistar or any
personnel under contract with Navistar. The indemnification agreement in the
Transitional Services Agreement will survive for a period of three years after
the termination of the Transitional Services Agreement for any reason. Pursuant
to the Agreement each party has agreed to hold any information received by it in
strict confidentiality for a period of ten (10) years following the expiration
or termination of the Asset Purchase Agreement.
THE REGISTRATION RIGHTS AGREEMENT
As a condition to the consummation of the Acquisition, Navistar and Core
Materials will enter into the Registration Rights Agreement (the "Registration
Rights Agreement"). Under the terms of the Registration Rights Agreement, Core
Materials will grant Navistar certain demand and "piggy-back" rights with
respect to the registration for sale under the Securities Act of the shares of
Core Materials Common Stock received pursuant to the Asset Purchase Agreement.
Navistar shall be entitled to demand two registrations on Form S-1 or any
similar long-form registration and an unlimited number of registrations on Form
S-2 or S-3 (including shelf registrations pursuant to Rule 415 under the
Securities Act) or any similar short-form registrations. In addition, Navistar
will be entitled to piggy-back registration rights, provided however, that if
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the managing underwriter of an offering advises the Company that the inclusion
of such shares of Core Materials Common Stock would have a material adverse
effect on the offering, the Company may reduce the number of shares to be
registered in accordance with the priorities set forth in the Registration
Rights Agreement. The Company will be required to pay all expenses in connection
with any registration, except underwriting discounts and commissions. Pursuant
to the Registration Rights Agreement, the Company will agree to indemnify
Navistar, its officers, directors, legal counsel, accountants and each person
who controls Navistar against all losses, claims, damages, liabilities and
expenses caused by (i) any untrue or alleged untrue statement of material fact
contained in any registration statement, prospectus or preliminary prospectus or
any amendment thereof or supplement thereto or any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) any violation by the Company of the
Securities Act or any regulation thereunder applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, qualification or compliance.
PROPOSAL NO. 2--APPROVAL OF THE MERGER
INTRODUCTION
Navistar's obligation to consummate the Acquisition is conditioned, among
other things, on the reincorporation of the Company in the State of Delaware. To
effect the reincorporation and the desired amendments to the Company's charter
and by-laws, the Company established Core Materials, a Delaware corporation, as
a wholly-owned subsidiary. Core Materials' Certificate of Incorporation and
By-laws contain provisions which would satisfy the requirements of Navistar in
the Asset Purchase Agreement. If the Asset Purchase Agreement and the Merger
Agreement are approved by the Company's stockholders and the other conditions to
the Asset Purchase Agreement are satisfied or waived, the Company will be merged
with and into Core Materials whereupon (i) the Company will cease to exist as a
separate Maryland corporation, (ii) Core Materials will succeed, to the fullest
extent permitted by law, to all of the business, assets and liabilities of the
Company, (iii) the name of the surviving corporation will be "Core Materials
Corporation", (iv) each share of Company Common Stock will be automatically
converted into the right to receive one share of Core Materials Common Stock and
(v) the Certificate of Incorporation and By-laws of Core Materials will be the
Certificate of Incorporation and By-laws of the surviving corporation of the
Merger. The Merger will become effective upon the filing of certificate of
merger with the Secretary of State of the State of Delaware and the Secretary of
State of the filing of articles of merger with the State Department of
Assessments and Taxation of Maryland (the "Effective Time"). It is presently
anticipated that such filings will be made as soon as practicable after approval
and adoption of the Asset Purchase Agreement and the Merger Agreement at the
Special Meeting.
The Company's Board of Directors has approved, and recommends that the
stockholders of the Company approve, the Merger Agreement by and between the
Company and Core Materials, which provides for the merger of the Company with
and into Core Materials.
The Company's Board of Directors believes that by reincorporating in
Delaware the Company will be able to benefit from Delaware's comprehensive and
well developed corporate laws. For many years Delaware has followed a policy of
encouraging incorporation in that state. In furtherance of that policy, Delaware
has adopted a modern and comprehensive corporation statute that has been
periodically updated and revised to meet changing business needs. As a result,
many publicly held corporations have initially chosen Delaware for their
domicile or have subsequently reincorporated in Delaware in a manner similar to
that proposed by the Company. Because of Delaware's historic significance as the
state of incorporation for many publicly held corporations, the Delaware
judiciary has become particularly familiar with matters of corporate law and
corporate financial and business transactions, and a substantial body of court
decisions has developed construing Delaware corporate law and establishing
public policy with respect to Delaware corporations. As a consequence, a greater
measure of predictability is possible in Delaware with respect to corporate
legal affairs than is available in other states. While the Company will not be
impeded in operating its business under Maryland law, the Company believes that
Delaware law will offer clearer guidance with respect to issues that may arise,
in particular with respect to a publicly-held corporation with a substantial
stockholder having
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effective control on future decisions involving ordinary business operations as
well as extraordinary transactions.
STOCKHOLDERS OF THE COMPANY SHOULD NOT SURRENDER THEIR SHARE CERTIFICATES
FOR EXCHANGE AFTER THE MERGER UNTIL THEY RECEIVE A TRANSMITTAL LETTER FOR THAT
PURPOSE.
The approval of the Merger is contingent upon approval of the Asset
Purchase Agreement (Proposal No. 1 herein) by the Company's stockholders. The
vote required to approve this item is two-thirds of the outstanding shares of
the Company Common Stock. If the Asset Purchase Agreement and the Merger are
approved by the Company's stockholders at the Special Meeting, the Merger will
be consummated as soon as practicable after all other conditions to the Asset
Purchase Agreement are either satisfied or waived. If the Asset Purchase
Agreement is not approved by the Company's stockholders at the Special Meeting,
the Merger will not be consummated.
If the Merger is approved and completed, the Company and the rights of its
stockholders, directors and officers will be governed by the Delaware General
Corporation Law ("Delaware Law") and the Certificate of Incorporation, as
amended, of Core Materials (the "Core Materials Charter") and Core Materials'
By-laws (the "Core Materials By-laws"), rather than by the Maryland General
Corporation Law ("Maryland Law") and the Amended and Restated Articles of
Incorporation, as amended, of the Company (the "Company Charter") and the
Amended and Restated By-laws, as amended, of the Company (the "Company
By-laws"). Copies of the Company Charter and the Core Materials Charter are
attached hereto as Annexes V and VI, respectively, and copies of the Company
By-laws and the Core Materials By-laws are available for inspection at the
principal executive offices of the Company and will be sent to Company
stockholders upon request. The summary description of such documents contained
herein is qualified in its entirety by reference to such documents.
DESCRIPTION OF CORE MATERIALS CAPITAL STOCK
The authorized capital stock of Core Materials will consist of 10,000,000
shares of preferred stock issuable in series and 20,000,000 shares of Common
Stock, par value $.01 per share. The following statements are brief summaries of
certain provisions with respect to Core Materials' capital stock contained in
Core Materials' Charter or By-laws. The following summary is qualified in its
entirety by reference thereto.
Core Materials Common Stock. Each outstanding share of Core Materials
Common Stock is entitled to one vote on all matters submitted to a vote of
stockholders, including the election of directors. The Core Materials Common
Stock does not have cumulative voting rights. Dividends may be paid to the
holders of Core Materials Common Stock when and if declared by the Board of
Directors out of funds legally available for dividends. See "--Dividend Policy,"
below.
Holders of Core Materials Common Stock have no conversion, redemption or
preemptive rights. Shares of Core Materials Common Stock to be issued in the
Merger and the Stock Issuance will be fully paid and nonassessable. In the event
of any liquidation, dissolution or winding-up of the affairs of Core Materials,
the holders of Core Materials Common Stock will be entitled to share ratably in
its assets remaining after provision for payment of creditors and after the
liquidation preference of any preferred stock outstanding at the time.
Preferred Stock. The Board of Directors of Core Materials is empowered,
without approval of the stockholders, to cause shares of preferred stock to be
issued in one or more series, with the number of shares of each series and the
powers, rights, preferences and limitations of each series to be determined by
it. Among the specific matters that may be determined by the Board of Directors
are: the annual rate of dividends; the redemption price, if any; the terms of a
sinking or purchase fund, if any; the amount payable in the event of any
voluntary liquidation, dissolution or winding up of the affairs of Core
Materials; conversion rights, if any; and voting powers, if any. Satisfaction of
any dividend preferences of outstanding preferred stock would reduce the amount
of funds available for the payment of dividends on the Common Stock. Also, the
holders of preferred stock would normally be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of Core
Materials before any payment is made to the holders of the Common Stock.
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Upon any future issuance of a series of preferred stock, the holders of
preferred stock will have no voting rights except as specifically required by
statute and except for any voting rights specifically provided in the
certificate of designation creating such series. In general, the vote of a
majority of a class, voting as a class, is required to effect any change in the
Core Materials Charter which would increase or decrease the par value of the
shares of such class, or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them affect adversely
(provided, that, if only certain series are affected, then only the shares of
the series so affected shall be considered a separate class for purposes of
voting on the proposed change).
Anti-takeover Measures. Core Materials Charter and By-laws contain
provisions which may discourage certain types of transactions involving an
actual or threatened change of control of Core Materials. These provisions are
designed to make it more difficult to change majority control of the Board of
Directors without its consent, and thus to reduce the vulnerability of Core
Materials to an unsolicited proposal to restructure or sell all or part of Core
Materials. These provisions may serve to encourage any person intending to
attempt such a takeover to negotiate with the Board of Directors, and the Board
of Directors will therefore be better able to protect the interests of the
stockholders. These provisions include the following:
Removal of Directors. Core Materials Charter and By-laws provide that a
director may be removed with or without cause upon the vote of the holders of at
least 80% of the voting power of the outstanding shares of capital stock of Core
Materials entitled to vote generally in the election of directors ("Voting
Stock").
Supermajority Approval. Core Materials Charter requires that a merger and
certain other transactions be approved by the affirmative vote of the holders of
at least 66 2/3% of the then outstanding shares of Voting Stock. Such
affirmative vote is required notwithstanding the fact that a lesser percentage
may be specified by law.
Amendments. Core Materials Charter requires that any amendment to the
provisions relating to the removal of directors be approved by the holders of at
least 80% of the then outstanding shares of Voting Stock and any amendment to
provisions requiring the approval of the holders of at least 66 2/3 of the then
outstanding shares of Voting Stock be approved by the holders of at least
66 2/3% of the then outstanding shares of Voting Stock. These requirements will
make it more difficult for stockholders who in the aggregate hold only a
majority of the Common Stock from avoiding the requirements of the provisions
discussed above by simply repealing such provisions.
Restrictions on Transfer. Core Materials Charter contains a provision (the
"Prohibited Transfer Provision") designed to help assure the continued
availability of the Company's substantial NOLs following the Merger by seeking
to prevent an "ownership change" as defined under current Treasury Department
income tax regulations. Protection against an "ownership change" is accomplished
by prohibiting certain transfers of Core Materials Common Stock, preferred stock
and any other instrument that would be treated as "stock" or an option under
applicable federal income tax rules (collectively, "Stock"). Under the
Prohibited Transfer Provision, if a stockholder transfers or agrees to transfer
Stock, the transfer will be prohibited and void to the extent that it would
cause the transferee to hold a "Prohibited Ownership Percentage" (as defined in
Core Materials Charter) or if the transfer would result in the transferee's
ownership increasing if the transferee had held a Prohibited Ownership
Percentage within the three prior years or if the transferee's ownership
percentage already exceeds the Prohibited Ownership Percentage under applicable
federal income tax rules. A "Prohibited Ownership Percentage" is defined under
Core Materials Charter by reference to complex federal tax laws and regulations,
but generally means direct and indirect ownership of 4.5% or more (based on
value) of Core Materials' Stock or any other percentage that would cause a
transferee to be considered to be a 5-percent stockholder under applicable
federal income tax rules. This transfer restriction is intended to prevent any
person or group of persons from becoming a "5-percent stockholder" of Core
Materials and to prevent an increase in the percentage stock ownership of any
existing person or group of persons that constitutes a 5-percent stockholder.
The use of a 4.5% limitation rather than a 5% limitation is intended to provide
a margin of safety for market value fluctuations in avoiding an "ownership
change." The Prohibited Transfer Provision will expire fifteen years after Core
Materials Charter becomes effective, subject
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to such expiration date being extended or accelerated in the event of a change
in law upon a determination by Core Materials' Board of Directors that such
action is reasonably necessary to preserve the tax benefits, in the case of an
extension, or that the restrictions are no longer reasonably necessary for the
preservation of the tax benefits, in the case of an acceleration. The Prohibited
Transfer Provision does not prevent transfers of Stock between persons who do
not hold a Prohibited Ownership Percentage.
The acquisition of Stock from an individual or entity that owns directly 5%
of the stock of Core Materials would be deemed to result in the identification
of a separate, segregated "public group" which is a new 5-percent stockholder.
Consequently, the Prohibited Transfer Provision will prohibit certain transfers
of equity interests by, and other actions involving, persons having a Prohibited
Ownership Percentage, unless the transfer or other action is approved by Core
Materials' Board of Directors in advance or permitted by a Core Materials Board
resolution.
The Prohibited Transfer Provision does not apply to the issuance of Core
Materials Common Stock to Navistar pursuant to the Asset Purchase Agreement, to
any transfer that has been approved in advance by Core Materials' Board of
Directors, which is made in compliance with certain exceptions set forth in the
Prohibited Transfer Provision or exceptions established from time to time by
resolution of Core Materials' Board of Directors. The Board may permit an
otherwise prohibited transfer if it reasonably and in good faith determines that
a waiver would be in the best interest of the Company.
In addition to voiding prohibited transfers, the Prohibited Transfer
Provision provides a method of nullifying the effect of certain prohibited
transfers after the transfers have purportedly occurred. If such a purported
transfer is made in violation of the Prohibited Transfer Provision, the
transferee (the "Purported Transferee") will not be recognized as the owner of
the Stock. If Core Materials' Board of Directors determines that such a
purported transfer has violated the Prohibited Transfer Provision, the Company
shall require the Purported Transferee to surrender the relevant Stock and any
dividends he or she has received on them to an agent designated by the Board
(the "Agent"). The Agent will sell the Stock in an arm's length transaction (on
the American Stock Exchange, if possible). If the Purported Transferee has
resold the Stock before receiving the Company's demand to surrender them, the
Purported Transferee generally will be required to transfer to the Agent the
proceeds of the sale and any distributions he or she has received on the Stock.
After repaying its own expenses and reimbursing the Purported Transferee for the
price paid for the Stock (or the fair market value of the Stock at the time of
the attempted transfer to the Purported Transferee by gift, inheritance or
similar transfer), the Agent will pay any remaining amounts to charities
designated by the Company.
Delaware Anti-takeover Provisions. Core Materials is governed by the
provisions of Section 203 of the Delaware Law ("Section 203"), which prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the time
that such stockholder became an interested stockholder, unless (i) prior to such
time either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (other than certain excluded shares) or
(iii) on or after such time the business combination is approved by the board
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder. A "business
combination" includes certain mergers, consolidations, asset sales, transfers
and other transactions resulting in an increase in the percentage of any class
or series of stock owned by the interested stockholder or in a financial benefit
to the stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, in certain cases, within three years, did
own) 15% or more of the corporation's voting stock.
Dividend Policy. Core Materials currently intends to retain earnings to
finance the growth and development of its business and does not anticipate
paying cash dividends in the foreseeable future. Moreover, Core Materials will
be prohibited from paying dividends on its Common Stock by covenants contained
in the
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Secured Note. See "PROPOSAL NO. 1--APPROVAL OF THE ACQUISITION--Ancillary
Agreements--The Secured Note--Covenants--Negative Covenants."
Reverse Stock Split. In connection with obtaining the approval of Core
Materials' listing application for listing the Core Materials Common Stock on
the American Stock Exchange, Core Materials has agreed with the American Stock
Exchange that, in the event that the average closing price of Core Materials
Common Stock is not at least $3.00 per share for a 20 day trading period during
the six month period commencing on the date of the approval of Core Materials'
listing application, and during such 20 day period the closing price for any
five consecutive trading days in such period is less than $3.00 per share, Core
Materials shall, subject to the approval of Core Materials' stockholders as
required under Delaware law, effect a reverse stock split of the Core Materials
Common Stock with the anticipated result of increasing the trading price per
share to at least $3.00 per share. If a reverse stock split is required pursuant
to the preceding sentence, Core Materials has agreed to call a meeting of
stockholders and to solicit proxies in order to obtain the required approval of
Core Materials stockholders.
CERTAIN EFFECTS OF THE MERGER
The following table summarizes certain material differences between the
provisions of Maryland Law and the Company's Charter and By-laws, on the one
hand, and the provisions of Delaware Law and the Core Materials Charter and
By-laws, on the other hand. Although the Merger will result in substantive
changes in the Company's Charter and By-laws which could affect the stockholders
and the Company's officers and directors, the Company's management does not
believe that such changes will result in any material benefits to directors and
officers or any material detriments to stockholders. Core Materials' Charter and
By-laws are substantially different from the Company's Charter and By-laws. The
following table is not intended to be a complete description of all of the
effects of the Merger, and stockholders are advised to review the Company's
Charter and By-laws and the Core Materials Charter and By-laws.
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CAPITAL STOCK
REDEMPTION/RETIREMENT
Maryland Law prohibits the purchase or Delaware Law generally prohibits the purchase
redemption of stock if a corporation would be or redemption of stock when capital of a
unable to pay its debts in the normal course corporation is or will be impaired; except
or the corporation's total assets would be that, in certain limited cases, shares may be
less than the sum of the total liabilities purchased or redeemed out of capital if
plus, unless the charter permits otherwise retired and capital is reduced.
(which the Charter of the Company does not),
the amount needed to satisfy the preferential
rights upon dissolution of stockholders whose
preferential rights on dissolution are
superior to those receiving the distribution.
DIVIDENDS
Maryland Law provides that a corporation may Delaware Law provides that a corporation may
pay dividends unless a corporation would be pay dividends only out of surplus or, in
unable to pay its debts in the normal course certain cases, out of net profits for the
or the corporation's total assets would be current and/or immediately preceding fiscal
less than the sum of the total liabilities year.
plus, unless the charter permits otherwise
(which the Charter of the Company does not),
the amount needed to satisfy the preferential
rights upon dissolution of stockholders whose
preferential rights on dissolution are
superior to those receiving the distribution.
To qualify as a REIT, the Company is required Since Core Materials will not elect to qualify
by the Code to distribute annually at least as a REIT, it will not be subject to the Code
95% of its REIT Taxable Income (and 95% of requirements to distribute 95% of its taxable
certain other income related to foreclosure income.
property), excluding any net capital gain, to
its stockholders.
DENIAL OF VOTING RIGHTS
Under Maryland Law, holders of the outstanding Delaware Law provides that holders of the
shares of any class of stock may be denied all outstanding shares of a class of stock shall
voting rights. be entitled to vote as a class upon a proposed
amendment to the certificate of incorporation,
whether or not entitled to vote thereon by the
certificate of incorporation, if the amendment
would change the par value of the class or
would adversely affect the powers, preferences
or special rights of the class.
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STOCKHOLDERS
INSPECTION RIGHTS
Maryland Law provides one or more persons who Delaware Law provides that a stockholder may
have been holders of record for more than six inspect the stockholder list for any purpose
months of at least 5% of the outstanding stock reasonably related to such person's interest
of any class are entitled to inspect and copy as a stockholder.
the corporation's books of account and stock
ledger and receive a written statement of the
corporation's affairs and a verified list of
stockholders.
ACTION WITHOUT MEETING
Maryland Law provides that stockholders may As permitted by Delaware Law, the Core
take action without a meeting upon unanimous Materials Charter denies stockholders the
written consent (a requirement virtually right to take action without a meeting.
impossible for a public company to attain).
CALL OF STOCKHOLDERS' MEETINGS BY STOCKHOLDERS
Maryland Law permits stockholders entitled to Delaware Law provides that special meetings of
cast at least 25% of all the votes entitled to stockholders may be called by a corporation's
be cast at the meeting to call a special board of directors or by such person or
meeting of stockholders, unless this persons as may be authorized by the
percentage is increased (to not more than a corporation's certificate of incorporation or
majority) by the charter or by-laws (which the by-laws. Core Materials By-laws permits
Charter and By-laws of the Company do not). holders of at least 20% of Core Materials
Common Stock to call a special meeting of
stockholders.
AMENDMENT TO BY-LAWS
Under Maryland Law, the exclusive power to Under Delaware Law, stockholders cannot be
adopt, amend or repeal the by-laws may be divested of the power to adopt, amend or
conferred on the stockholders, vested repeal the by-laws, although this power may
exclusively with the board of directors, or also be conferred upon the board of directors.
shared by both groups. The Company By-Laws The Core Materials By- Laws provide that they
provide that they may be amended by a vote of may be amended or repealed by the stockholders
a majority of the Board of Directors by the vote of two-thirds of the shares of
(including a majority of the Unaffiliated stock present in person or by proxy at a
Directors); subject to the power of the meeting of stockholders or by the Board of
stockholders to change or repeal the By-Laws Directors by the affirmative vote of a
at any meeting duly convened after notice for majority of the entire Board of Directors.
that purpose.
DISSOLUTION OF THE CORPORATION
Under Maryland Law, a corporation may be Under Delaware Law, a corporation may be
dissolved if (i) the board of directors of the dissolved if (i) the board of directors of the
corporation by resolution adopted by a corporation, by resolution adopted by a
majority of the entire board, deems such majority of the entire board at any meeting
dissolution advisable and directs that the called for that purpose, deems such
proposed dissolution be submitted for dissolution advisable and (ii) a majority of
consideration at either an annual or special the outstanding stock of the corporation votes
meeting of stockholders and (ii) the proposed entitled to vote on the matter for the
dissolution is approved by the stockholders at proposed dissolution at a stockholders meeting
such meeting by the affirmative vote of not called for the purpose of acting on such
less than two-thirds entitled to be cast on resolution.
the matter.
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BOARD OF DIRECTORS AND OFFICERS
UNAFFILIATED DIRECTORS
The Company By-laws provide that a majority of The Core Materials By-laws do not contain a
the Board of Directors of the Company shall be similar provision.
Unaffiliated Directors (as defined below).
"Unaffiliated Director" is defined in the
Company By-laws to mean a director of the
Company who is not affiliated, directly or
indirectly, with any person or entity
responsible for directing and performing the
day-to-day business affairs of the Company
(the "Manager"), whether by ownership of,
ownership interest in, employment by, any
material business or professional relationship
with, or tenure as an officer or director of,
the Manager or any affiliate of the Manager;
provided, however, that a director shall not
be considered to be an Unaffiliated Director
if he or she is serving as a director of any
real estate investment trust (other than the
Company) organized by the Manager or any of
its affiliates.
COMPOSITION OF BOARD OF DIRECTORS
The Company By-laws provide that the Board of The Core Materials By-laws provide that the
Directors shall consist of not less than three Board of Directors shall consist of not less
(3) nor more than fifteen (15) directors. Any than one (1) nor more than seven (7)
vacancy occurring on the Board of Directors directors. The Core Materials By-laws provide
for any cause other than by reason of an that any vacancies on the Board of Directors
increase in the number of directors may be for any reason shall be filled by vote of a
filled by vote of a majority of the remaining majority of the remaining members of the Board
members of the Board of Directors. Any vacancy of Directors. However, pursuant to the Asset
occurring by reason of an increase in the Purchase Agreement, with respect to vacancies
number of directors may be filled by action of on the initial Board of Directors of Core
a majority of the entire Board of Directors, Materials which exist at any time prior to the
including a majority of Unaffiliated first annual meeting of the stockholders of
Directors. Notwithstanding any of the Core Materials following the Closing Date, the
foregoing, (i) the Unaffiliated Directors Company Designees shall have all requisite
shall nominate replacements for vacancies authority to act on behalf of Core Materials
among the Unaffiliated Directors, which as a special committee of the Board of
replacements must be elected by a majority of Directors to fill vacancies created by the
the directors, including a majority of the resignation or removal of a Company Designee
Unaffiliated Directors and (ii) following the and the Navistar Designees shall have all
election of directors to fill vacancies on the requisite authority to act on behalf of Core
Board of Directors caused by its enlargement, Materials as a special committee of the Board
a majority of the Board of Directors following of Directors to fill vacancies created by the
such elections shall be Unaffiliated resignation or removal of a Navistar Designee.
Directors.
REMOVAL
Maryland Law provides that any director or The Core Materials Charter (and By-laws)
officer may be removed with or without cause provide that a director may be removed with or
by the affirmative vote of a majority of all without cause by the vote of the holders of at
the votes entitled to be cast in the election least 80% of the voting power of the
of directors, unless the charter of the outstanding shares of capital stock of Core
corporation provides otherwise, which the Materials entitled to vote generally in the
Charter of the Company does not. election of directors.
The Core Materials Charter and By-laws do not
provide stockholders with the right to remove
officers.
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LIMITATION OF DIRECTORS' LIABILITY
The Company Charter limits the directors' The Core Materials Charter also limits the
personal liability to the full extent directors' personal liability to the full
permitted by Maryland Law, i.e., directors are extent permitted by Delaware Law, i.e.,
not liable to the corporation or its directors are not liable to the corporation or
stockholders for money damages except for its stockholders for monetary damages for
liability resulting from (i) actual receipt of breach of their fiduciary duty except in the
an improper benefit or profit in money, cases of: (i) breaches of their duty of
property or services, or (ii) active and loyalty to the corporation and its
deliberate dishonesty established by a final stockholders; (ii) acts or omissions not in
judgment as being material to the cause of good faith; (iii) acts or omissions which
action. involve intentional misconduct or a knowing
violation of law; (iv) transactions from which
a director derives improper personal benefit;
or (v) unlawful dividends or unlawful stock
repurchases or redemptions.
LIMITATION OF OFFICERS' LIABILITY
As permitted by Maryland Law, the Company's Under Delaware Law, the liability of officers
Charter limits the liability of all officers may not be limited.
to the corporation or its stockholders for
money damages to the same extent as for
directors.
INDEMNIFICATION FOR LIABILITY TO THIRD PARTIES
The Company Charter and By-laws provide for The Core Materials By-laws also provide for
the indemnification of directors, officers, the indemnification of directors and officers
employees and other agents to the full extent to the full extent permitted by Delaware Law.
permitted by Maryland Law. Under Maryland Law, The Core Materials By-laws provide that Core
directors and officers may be indemnified in Materials may, to the extent deemed advisable
third party actions against expenses, fines, by the Board of Directors, indemnify employees
settlements and judgments unless it is and other agents of the corporation. Under
established that: (i) the act or omission was Delaware Law, such directors/officers,
material to the matter giving rise to the employees and agents may be indemnified in
proceeding and either was committed in bad third party actions against expenses, fines,
faith or was the result of active and settlements and judgments if they acted in
deliberate dishonesty; (ii) the person good faith and in a manner they reasonably
actually received an improper personal benefit believed to be in or not opposed to the best
in money, property or services; or (iii) in interests of the corporation and, with respect
the case of any criminal proceeding, the to any criminal action or proceeding, had no
person had reasonable cause to believe that reasonable cause to believe their conduct was
the act or omission was unlawful. Maryland Law unlawful.
requires a corporation, unless its charter
provides otherwise (which the Company Charter
does not), to indemnify a director or officer
who has been successful, on the merits or
otherwise, in the defense of any proceeding to
which he is made a party by reason of his
service in that capacity.
INDEMNIFICATION OF LIABILITY TO THE CORPORATION
Under Maryland Law, directors and officers may The same rule applies under Delaware Law,
be indemnified in suits by or in the right of except that, where the defendant is not
the corporation to the same extent as in third successful on the merits the defendant must
party actions (see above) except no also show that he or she acted in good faith
indemnification may be made if the director or and in a manner he or she reasonably believed
officer was adjudged liable to the to be in or not opposed to the best interests
corporation. of the corporation in order to obtain
indemnification of the expenses of defense and
amounts paid in settlement.
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PRESUMPTION AGAINST INDEMNIFICATION
Under Maryland Law, termination of any Under Delaware Law, termination of any
proceeding by conviction or upon a plea of proceeding by conviction or upon a plea of
nolo contendere or its equivalent creates a nolo contendere or its equivalent shall not,
rebuttable presumption that such person is not of itself, create a presumption that such
entitled to indemnification. person is prohibited from being indemnified.
RESTRICTIONS ON OPERATIONS
INCURRENCE OF INDEBTEDNESS
The Company By-laws provide that it may not The Core Materials By-laws do not contain a
incur additional indebtedness if, after giving provision prohibiting or otherwise restricting
effect to such indebtedness, its aggregate the incurrence of indebtedness. In addition,
indebtedness (other than liabilities incurred after the Acquisition, it is anticipated that
in connection with participation in the Core Materials' Board of Directors will not
issuance of CMOs and any loans between the adopt a policy restricting Core Materials'
Company and its corporate subsidiaries), borrowings to $25,000,000. However, in the
secured and unsecured, would exceed 300% of Asset Purchase Agreement, the Company
the Company's average invested assets, in each covenants that from the Closing until March
case on a consolidated basis, as calculated at 31, 1997 the Company will not, without the
the end of each calendar quarter in accordance prior written consent of Navistar, borrow any
with generally accepted accounting principles, amount or incur or become subject to any
unless such additional indebtedness is liabilities except in the ordinary course of
approved by a majority of the Unaffiliated business consistent with Navistar's past
Directors. The Company is currently operating practices. See "PROPOSAL NO. 1-- APPROVAL OF
under a borrowing limitation pursuant to a THE ACQUISITION--The Assets Purchase
policy adopted by its Board of Directors that Agreement--Certain Covenants." In addition, it
limits total borrowings to $25,000,000, an is anticipated that the Secured Note will
amount substantially in excess of the amount contain restrictions on Core Materials'
the Company would be able to borrow under the ability to incur indebtedness. See "PROPOSAL
current operating condition of the Company. NO. 1-- APPROVAL OF THE ACQUISITION--Ancillary
Agreements--The Secured Note--Covenants--
Negative Covenants--Limitation on
Indebtedness."
RESTRICTIONS ON TRANSFER
RESTRICTIONS ON TRANSFER OF SHARES
TO PRESERVE REIT STATUS
The Company Charter provides that if the Board Since Core Materials will not elect to qualify
of Directors determines that share ownership as a REIT under the Code, the Core Materials'
of the corporation has or may become Charter does not contain a similar provision.
concentrated to an extent that would prevent
the corporation from qualifying as a REIT, the
Board is authorized to prevent the transfer
of, or redeem (by lot or otherwise), a number
of shares sufficient to maintain the
corporation's qualification as a REIT for tax
purposes.
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PROHIBITION ON TRANSFER OF SHARES
TO PRESERVE NET OPERATING LOSS CARRY OVERS
The Company Charter does not contain a The Core Materials Charter differs from the
provision prohibiting or otherwise restricting Company Charter in that the Core Materials
the transfer of shares in order to preserve Charter includes the Prohibited Transfer
the Company's NOLs. Provision in order to help ensure the
continued availability of the Company's
substantial NOLs following the Merger. As
discussed above, see "Description of Core
Materials Capital Stock--Restrictions on
Transfer", the Prohibited Transfer Provision
accomplishes this by seeking to prevent an
"ownership change", as defined under current
Treasury Department income tax regulations, by
prohibiting certain transfers of Core
Materials Common Stock, preferred stock and
any other instrument that would be treated as
"stock" or an option under applicable federal
income tax regulations that would cause a
person to hold a Prohibited Ownership
Percentage or would increase the ownership
percentage of any person who has held a
Prohibited Ownership Percentage within three
years prior to the proposed transfer.
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CHANGES IN CONTROL
SUPER-MAJORITY STOCKHOLDER APPROVAL
The Company Charter does not contain The Core Materials Charter requires that
provisions prohibiting or restricting business certain mergers and other transactions be
combinations with the Company's stockholders. approved by the affirmative vote of the
holders of at least 66 2/3% of the then
Under Maryland Law, certain "business outstanding shares of Core Materials Common
combinations" (including certain issuances of Stock.
equity securities) between a Maryland
corporation and any person who beneficially Core Materials is governed by the provisions
owns ten percent or more of the voting power of Section 203 of the Delaware General
of the corporation's shares (an "Interested Corporation Law, which prohibits a publicly
Stockholder") or an affiliate thereof are held Delaware corporation from engaging in a
prohibited for five years after the most "business combination" with an "interested
recent date on which the Interested stockholder" for a period of three years
Stockholder becomes an Interested Stockholder. following the time that such stockholder
Thereafter, any such business combination must became an interested stockholder, unless (i)
be approved by two super-majority stockholder prior to such time either the business
votes unless, among other conditions, the combination or the transaction which resulted
corporation's common stockholders receive a in the stockholder becoming an interested
minimum price (as defined under Maryland Law) stockholder is approved by the board of
for their shares and the consideration is directors of the corporation, (ii) upon
received in cash or in the same form as consummation of the transaction which resulted
previously paid by the Interested Stockholder in the stockholder becoming an interested
for its common shares. stockholder, the interested stockholder owns
at least 85% of the voting stock of the
These provisions of Maryland Law do not apply corporation outstanding at the time the
to business combinations that specifically, transaction commenced (other than certain
generally, or generally by types, as to excluded shares) or (iii) on or after such
specifically identified or unidentified time the business combination is approved by
existing or future Interested Stockholders or the board and authorized at an annual or
their affiliates, have been approved or special meeting of stockholders, and not by
exempted therefrom, in whole or in part, by written consent, by the affirmative vote of at
resolution of the board of directors of the least 66 2/3% of the outstanding voting stock
corporation prior to the most recent date on which is not owned by the interested
which the Interested Stockholder became an stockholder. A "business combination" includes
Interested Stockholder. certain mergers, consolidations, asset sales,
transfers and other transactions resulting in
To opt out of the Maryland statutory an increase in the percentage of any class or
restrictions by stockholder action requires series of stock owned by the interested
stockholders to adopt a charter amendment by a stockholder or in a financial benefit to the
vote of at least 80% of the votes entitled to stockholder. An "interested stockholder" is a
be cast by outstanding shares of voting stock person who, together with affiliates and
of the corporation, voting together as a associates, owns (or, in certain cases, within
single voting group, and two-thirds of the three years, did own) 15% or more of the
votes entitled to be cast by persons (if any) corporation's voting stock. The vote required
who are not Interested Stockholders of the to opt out of the Delaware statutory
corporation or affiliates or associates of restrictions is a majority of the voting
Interested Stockholders, voting together as a stock; however, with certain exceptions, any
single voting group, expressly electing not to such vote would not be effective until 12
be governed by these provisions in whole or in months after the stockholder approval and
part, or in either case as to business would not apply to any business combination
combinations, specifically, generally, or between such corporation and any person who
generally by types, or as to identified or became an interested stockholder prior to the
unidentified existing or future Interested adoption of the amendment of the corporation's
Stockholders or their affiliates, provided charter needed to effect the opt-out.
that the amendment may not be effective until
18 months after the vote of stockholders and
may not apply to any business combination of
the corporation with an Interested Stockholder
(or any affiliate of the Interested
Stockholder) who became
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an Interested Stockholder on or before the
date of the vote.
RESTRICTIONS ON EXERCISE OF VOTING RIGHTS OF AND THE OWNERSHIP OF CONTROL SHARES
Maryland Law provides that "control shares" of Other than pursuant to the Prohibited Transfer
a Maryland corporation acquired in a "control Provision, Core Materials is not subject to
share acquisition" have no voting rights any restrictions on the voting or ownership of
except to the extent approved by a vote of Core Materials Common Stock. Delaware Law does
two-thirds of the votes entitled to be cast on not have provisions relating to the voting
the matter, excluding shares of stock owned by rights or ownership of "control shares."
the acquiror, by officers or by directors who
are employees of the corporation. "Control
shares" are voting shares of stock which, if
aggregated with all other such shares of stock
previously acquired by the acquiror or in
respect of which the acquiror is able to
exercise or direct the exercise of voting
power (except solely by virtue of a revocable
proxy), would entitle the acquiror to exercise
voting power in electing directors within one
of the following ranges of voting power: (i)
one-fifth or more but less than one-third,
(ii) one-third or more but less than a
majority, or (iii) a majority or more of all
voting power. Control shares do not include
shares the acquiring person is then entitled
to vote as a result of having previously
obtained stockholder approval. A "control
share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a
control share acquisition, upon satisfaction
of certain conditions (including an
undertaking to pay expenses), may compel the
board of directors of the corporation to call
a special meeting of stockholders to be held
within 50 days of demand to consider the
voting rights of the shares. If no request for
a meeting is made, the corporation may itself
present the question at any stockholders
meeting.
If voting rights are not approved at the
meeting or if the acquiring person does not
deliver an acquiring person statement as
required by the statute, then, subject to
certain conditions and limitations, the
corporation may redeem any or all of the
control shares (except those for which voting
rights have previously been approved) for fair
value determined, without regard to the
absence of voting rights for the control
shares, as of the date of the last control
share acquisition by the acquiror or of any
meeting of stockholders at which the voting
rights of such shares are considered and not
approved. If voting rights for control shares
are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority
of the shares entitled to vote, all other
stockholders may exercise appraisal rights.
The fair value of the
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shares as determined for purposes of such
appraisal rights may not be less than the
highest price per share paid by the acquiror
in the control share acquisition.
The control share acquisition statutes does
not apply (a) to shares acquired in a merger,
consolidation or share exchange if the
corporation is a party to the transaction or
(b) to acquisitions approved or exempted by
the Charter or By-laws of the corporation. The
Charter and By-laws of the Company do not
approve or exempt any such acquisitions.
FRANCHISE TAX
As a Maryland corporation, the Company is not As a Delaware corporation, Core Materials will
subject to a franchise tax or similar taxes be subject to an annual franchise tax of
other than the personal property tax return approximately $34,800.
filing fee of $100.
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SIGNIFICANCE OF DIFFERENCES BETWEEN THE COMPANY AND CORE MATERIALS
The following is a discussion of the significance of some of the
differences between the Company and Core Materials described in the foregoing
table, in particular those relating to potential acquisitions of the corporation
and the limitation of liability and indemnification of RYMAC officers and
directors. Management does not believe any of such effects will result in any
material benefit to the Company's officers or directors or any material
detriment to stockholders.
Restrictions on Certain Business Combinations. The Core Materials Charter
contains a provision that requires the approval of at least 66 2/3% of the
outstanding shares of Core Materials' Common Stock for certain mergers, the
sale, lease or exchange of substantially all of Core Materials' assets and
approval of a plan of liquidation or dissolution. In addition, as discussed
above both Maryland Law and Delaware Law impose an additional set of statutory
restrictions which restrict business combinations with significant stockholders.
The purpose of both the Charter and the statutory restrictions is to encourage
any potential bidder for control of the corporation to attempt to negotiate an
acquisition directly with the board of directors and to discourage tender offers
made directly to the stockholders.
The Delaware statutory restrictions, which are applicable to Core
Materials, and the Maryland statutory restrictions, which are applicable to the
Company, differ in a number of ways. First, the statutory moratorium imposed by
Delaware Law for transactions with interested stockholders extends for three
years as opposed to the five year moratorium imposed by Maryland Law. Delaware
Law imposes no further restrictions once the three-year period expires, while
the prohibition imposed by Maryland Law on a proposed combination continues
indefinitely unless and until the transaction is approved by eighty percent of
the voting stock and a majority of the disinterested directors or the
transaction satisfies the fair-pricing requirement. The Delaware statutory
moratorium does not apply if the percentage of voting stock held by the
interested stockholder is less than fifteen percent, whereas the Maryland
statutory restriction applies so long as the percentage is at least 10%.
An additional distinction between Delaware Law and Maryland Law exists as
to the size of the super-majority stockholder vote required to avoid the
moratorium or prohibition. The vote required by the Delaware statute is
two-thirds of the shares of the disinterested stockholders, whereas the vote
required under Maryland Law is eighty percent of all the voting stock, including
shares held by the interested stockholder. Assuming that an interested
stockholder held fifteen percent of the outstanding voting stock (the minimum
required to trigger both sets of statutory requirements), the minimum vote
required to approve the transaction would be seventy-six percent of the
disinterested stockholders of the Company, which would be subject to the
Maryland statute, compared to two-thirds of the disinterested stockholders of
Core Materials, which would be subject to
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the Delaware statute. Thus, it would be easier for an interested stockholder to
satisfy the statutory minimum stockholder vote requirement after the Merger.
In addition to the statutory and charter provisions described above,
Navistar's ownership interest in Core Materials may have certain anti-takeover
effects. Navistar will own approximately 45% of the voting stock of Core
Materials on a fully diluted basis immediately following the Acquisition, which
will enable Navistar to preclude mergers and the sale, lease or exchange of
substantially all of Core Materials' assets pursuant to the Core Materials
Charter provisions described above. So long as Navistar owns a control block of
Core Materials stock it is unlikely that any potential acquirer will attempt a
hostile bid for control of Core Materials. There can be, however, no assurance
that Navistar will not sell some or all of its interest in Core Materials and
Navistar has entered into the Registration Rights Agreement with the Company
pursuant to which the Company has agreed to file registration statements under
the 1933 Act for that purpose.
Removal of Directors and Officers. The Company By-laws provide that the
Company's stockholders may, by the vote of a majority of the Stockholders
entitled to vote, remove any director or officer with or without cause. As
permitted by Delaware Law, The Core Materials Charter (and By-laws) provide that
a director may be removed from office with or without cause only upon the vote
of the holders of at least 80% of the voting power of the outstanding shares of
capital stock of Core Materials entitled to vote generally in the election of
directors.
The Core Materials Charter and By-laws do not provide stockholders with the
right to remove officers.
The provisions in the Core Materials Charter and By-laws that restrict the
removal of directors tend to maintain the incumbency of the existing directors
and make it more difficult for stockholders who do not agree with the policies
of the Board of Directors to replace a majority of the Board of Directors in an
relatively short period of time.
Limitations on Director Liability. The Company and Core Materials Charters
both extend the protection available to directors from monetary liability to the
corporation and its stockholders to the full extent permissible under the
respective state laws. Because Maryland Law is more advantageous to directors in
this regard, the directors will be afforded less protection from personal
liability, and the circumstances under which stockholders may be able to
establish claims for monetary damages against directors will be increased, as a
result of the Merger. However, in neither case is a director protected against
claims by third parties, claims for equitable relief such as rescission or
injunctive relief, or claims arising out of their responsibilities under the
federal securities laws. Moreover, although Maryland Law permits broader
limitations of liability than Delaware Law, the degree of difference is small.
In both cases, the inclusion of such provisions in the charter documents
enhances the corporation's ability to attract qualified directors.
Limitations on Officer Liability. The Company Charter also differs from the
Core Materials Charter in that, as permitted by Maryland Law, it protects
officers of the Company against liability to the corporation or its stockholders
for monetary damages arising from any claim for breach of fiduciary duty to the
same extent that it protects directors. Although the Core Materials Charter
cannot, under Delaware Law, limit the liability of officers, the Core Materials
Charter does provide for the indemnification of officers to an extent generally
consistent with the Maryland limitations of liability.
Indemnification. Both the Company and Core Materials charter documents
provide for the indemnification of officers and directors to the full extent
permitted by applicable state law. The two states' indemnification laws are
similar in most respects. However, Maryland Law appears to be more favorable to
an officer or director as to civil liabilities insofar as it requires, in order
to deny indemnification to any person, a finding that the person's conduct was
material to the underlying injury and was either committed in bad faith or the
result of active and deliberate dishonesty or that the person actually received
an improper personal benefit. In contrast, Delaware Law requires that
indemnification be denied unless the person shows that he acted in good faith
and in a manner in or not opposed to the best interest of the corporation, thus
shifting the burden of proof and imposing a higher standard. However, as in the
case of the limitation of officer and director liability, management believes
that in practice this distinction is unlikely to have a material effect on the
ability of an officer or director to obtain indemnification.
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Restriction on Transfer of Shares to Preserve NOLs. The Core Materials
Charter differs from the Company Charter in that the Core Materials Charter
includes the Prohibited Transfer Provision in order to help ensure the continued
availability of the Company's substantial NOLs following the Merger. As
discussed above, see "Description of Core Materials Capital Stock--Restrictions
on Transfer", the Prohibited Transfer Provision accomplishes this by seeking to
prevent an "ownership change", as defined under current Treasury Department
income tax regulations, by prohibiting certain transfers of Core Materials
Common Stock, preferred stock and any other instrument that would be treated as
"stock" or an option under applicable federal income tax regulations that would
cause a person to hold a Prohibited Ownership Percentage or would increase the
ownership percentage of any person who has held a Prohibited Ownership
Percentage within three years prior to the proposed transfer. Although the
Prohibited Transfer Provision may have the effect of impeding a stockholder's
attempt to acquire a significant or controlling interest in Core Materials, the
purpose of the Prohibited Transfer Provision is to preserve tax benefits, not to
insulate management from change. The Company believes the tax benefits outweigh
any anti-takeover effect of the Prohibited Transfer Provision. See "CERTAIN
CONSIDERATIONS." Any antitakeover effect of the Prohibited Transfer Provision
will end when the Prohibited Transfer Provision terminates.
Redemption and Prohibition on Transfer of Shares Preserving REIT Status. To
protect the Company's qualification as a REIT under the Code, the Company
Charter provides that if the Board of Directors determines that share ownership
of the corporation has or may become concentrated to an extent that would
prevent the corporation from qualifying as a REIT, the Board is authorized to
prevent the transfer of, or redeem (by lot or otherwise), a number of shares
sufficient to maintain the corporation's qualification as a REIT for tax
purposes. The Core Materials Charter does not contain a similar provision
because if the Acquisition is consummated the Company will cease to be a REIT
effective for its tax year ending December 31, 1996.
Authorized Capital. The Company has 50,000,000 shares of authorized common
stock, par value $0.01 per share; Core Materials has 20,000,000 shares of
authorized Common Stock, par value $0.01 per share. Core Materials also has
10,000,000 shares of authorized preferred stock. The Core Materials Charter
provides that the shares of preferred stock may be issued from time to time, in
one or more classes or series, each of which class or series shall have such
rights as may be fixed by the Board of Directors. Each class can have voting
rights, full or limited, or no voting powers, and such preferences or other
special rights or such qualification, limitations or restrictions thereof, as
stated in the resolution authorizing the issuance of such securities.
Satisfaction of any dividend preferences of outstanding preferred stock would
reduce the amount of funds available for the payment of dividends on the Core
Materials Common Stock. The holders of preferred stock would also normally be
entitled to receive a preference payment in the event of any liquidation,
dissolution or winding-up of Core Materials before any payment is made to the
holders of Core Materials Common Stock. In addition, a "blank check" preferred
stock provision like Core Materials' may be used by the Board of Directors as an
anti-takeover device as it allows the Board to issue preferred stock with
provisions that may help to deter hostile suitors. The Company Charter does not
have any authorized capital stock specifically designated preferred stock but
the Charter does permit the Board of Directors to authorize and issue from time
to time additional classes of stock from the Company's unissued shares of
capital stock without the necessity of further approval by the stockholders and
with such rights and preferences as the Board of Directors of the Company may
designate by resolution. This is in effect a "blank check" preferred stock
provision similar to the one contained in the Core Materials Charter.
SIGNIFICANT CHARTER AND BY-LAW PROVISIONS NOT
MATERIALLY AFFECTED BY THE MERGER
Following is a discussion of certain Charter and By-law provisions in which
management believes RYMAC stockholders may be interested even though such
provisions will not be materially affected by the Merger.
Stockholder's Inspection Rights. Although, as described above, there are
differences between Delaware Law and Maryland Law which affect stockholders'
general access to the Company's stockholder list, both the Company By-laws and
the Core Materials By-laws permit any stockholder to inspect such list at least
ten days
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prior to any stockholder meeting for any purpose germane to such meeting.
Moreover, for so long as RYMAC remains a public company and subject to the
Exchange Act, those state law differences will not affect the rights of
stockholders under federal law to require the Company and Core Materials either
to provide a list of security holders or to mail a stockholder's proxy materials
whenever the Company or Core Materials may solicit proxies for a stockholder
vote.
Preemptive Rights. Both the Company's Charter and the Core Materials
Charter disallow any stockholder any preemptive right to subscribe for any newly
issued stock or other securities of the corporation.
NO DISSENTERS' RIGHTS OF APPRAISAL
Section 3-202 of the Annotated Code of Maryland provides that stockholders
of a Maryland corporation do not have appraisal rights when a Maryland
corporation whose shares are listed on a national securities exchange merges
with and into another corporation. Consequently, since the Company Common Stock
is listed on the American Stock Exchange, dissenters' rights are not available
with respect to the Merger.
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF THE COMPANY AND RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR
OF THE MERGER.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND THE ACQUISITION
The Merger. The Merger has been structured to qualify as a "reorganization"
under Section 368 of the Code. If the Merger qualifies as a reorganization, no
gain or loss will be recognized by the holders of Company Common Stock as a
result of receiving Core Materials Common Stock. Each stockholder will have the
same basis in the shares of Core Materials Common Stock as in the shares of
Company Common Stock held immediately prior to the time the Merger becomes
effective and the holding period of the shares of Core Materials Common Stock
will include the period during which the corresponding shares of Company Common
Stock were held. In addition, no gain or loss will be recognized by the Company
upon its transfer of assets to Core Materials and Core Materials will have the
same basis as the Company in the assets transferred and will succeed to certain
tax attributes of the Company including the Company's NOLs, earnings and
profits, and capital loss carryovers.
There are certain technical legal requirements for the Merger to qualify as
a reorganization. In addition, there are certain factual requirements in that
there must be a business purpose for the Merger, Core Materials must continue to
use the historic business assets of the Company or continue the Company's
historic business, and there must be a continuity of stockholders from the
Company to Core Materials. Although the matter is not free from doubt, the
Merger should satisfy the legal and factual requirements to be treated as a
reorganization and the discussion below assumes that the Merger will so qualify.
However, the Company has not requested a ruling from the IRS with respect to the
Merger and it is possible that the IRS will disagree. If the IRS were to
successfully challenge the Merger as not qualifying as a reorganization,
stockholders would recognize gain or loss on the exchange of their shares of
stock in the Company and Core Materials would not be allowed to succeed to any
tax attributes of the Company including its NOLs, earnings and profits, and
capital loss carryovers.
Utilization of Net Operating Losses and Capital Loss Carryforwards.
Generally, a taxpayer is allowed to carry its net operating losses forward up to
15 years following the taxable year in which such losses arose. Substantially
all of the Company's net operating losses arose during or subsequent to its 1992
taxable year. As a consequence of the Merger, Core Materials will succeed to the
Company's remaining carryover period on its NOLs.
A taxpayer is able to utilize a net operating loss that arose in a year in
which it qualified as a REIT in a subsequent year in which it no longer
qualified as a REIT. Accordingly, Core Materials will not be prevented from
using the net operating losses of the Company solely because its operations and
assets will no longer allow for qualification as a REIT.
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The Company is entitled to carry a net long term capital loss forward up to
5 years following the taxable year in which such losses arose. Also as a
consequence of the Merger, Core Materials will succeed to the Company's
remaining carryover period on its capital losses. Capital losses can only be
offset by capital gains and not by ordinary income. Although most of the
Company's capital losses arose during or subsequent to its 1994 taxable year,
Core Materials is not expected to recognize any significant capital gains that
would allow it to utilize the capital loss of the Company before such capital
losses carryforwards expire.
The ability of Core Materials to utilize the NOLs of the Company will be
severely restricted under Code Section 382 if Core Materials under goes a
"change of control." Code Section 382 limits a corporation's utilization of its
net operating losses when certain changes in the ownership of the corporation's
stock occur within a three year period. If the Code Section 382 limitation is
triggered as a result of future shifts in ownership of Core Materials, combined
with shifts in ownership that have already occurred and those that will occur as
a result of the issuance and sale of the shares of Common Stock to Navistar,
Core Materials would be permitted to deduct only a limited amount of its net
operating losses in each taxable year that ends after the triggering event
occurs. This limitation could cause Core Materials' tax expense to be greater
than if no limitation existed and could cause the majority of Core Materials'
NOLs to expire before it would be permitted under the limitation imposed by Code
Section 382 to utilize such NOLs.
The Code Section 382 limitation is generally triggered when more than 50
percent of the value of a corporation's stock is acquired by one or more
stockholders during any three year period (a "Change in Control") generally
treating all shares of the same class as having the same value. The rules for
determining whether a Change in Control has occurred are complex and dependent
upon a number of factual matters, including actions taken by stockholders of the
Company with respect to Common Stock held by them. Certain acquisitions of
stock, such as purchases of stock by stockholders owning less than 5 percent of
the value of a corporations total stock, are disregarded for purposes of
determining whether a Change in Control has occurred. The Charter of Core
Materials contains certain transfer restrictions designed to prevent a Change in
Control from occurring subsequent to the Merger. In addition, the Asset Purchase
Agreement provides for a retroactive reduction of shares to be issued to
Navistar to prevent a Change in Control in the event that Core Materials learns
of share acquisitions after the Asset Purchase that occurred prior to the Merger
which create a risk that Core Materials would otherwise be treated as having a
Change in Control. The Company has not requested any ruling from the IRS that
these restrictions will prevent a Change of Control and there can be no
assurance that a Change of Control will not occur at a point in time when Core
Materials would still have substantial unutilized NOLs.
The consideration paid to Navistar has been structured to prevent a Change
in Control. However, for corporations with significant net operating losses the
treasury regulations interpreting Code Section 382 require treating as stock
interests that are not otherwise stock for purposes of determining whether there
has been a Change in Control if treating such interest as stock would result in
a Change in Control and such interest at the time it is created offers a
potential significant participation in the growth of the corporation. The scope
of these provisions is uncertain, and accordingly, it is unclear whether the
provisions of the Asset Purchase Agreement (other than the right to receive
Common Stock) create rights that could be construed as a representing interests
that must be treated as stock or a different class of stock. The Company does
not believe that any provision of the Asset Purchase Agreement other than the
rights to receive Common Stock should be treated as creating a right to an
interest that is treated as stock for purposes of Code Section 382. The Company
has not requested a ruling from the IRS with respect to this issue, and
accordingly, there can be no assurance that the IRS will not assert a contrary
position or whether such a contrary position, if asserted, would not prevail.
For alternative minimum tax purposes, net operating losses can be used to
offset no more than 90 percent of alternative minimum taxable income ("AMTI").
Thus to the extent that the net operating losses of the Company are used to
offset regular taxable income, alternative minimum tax will still be required to
be paid on 10 percent of AMTI at the alternative minimum tax rate of 20 percent.
In addition, if the Code Section 382 limitation were triggered, the amount of
NOLs that could be used to offset AMTI would be subject to limitations similar
to those described above for utilization of NOLs to offset income subject to the
regular income tax.
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In addition, to Section 382, there are other statutory and common law
restrictions on the ability of taxpayers to utilize NOLs. In particular, under
section 269 if control of a corporation (generally 50% of the vote or value of a
corporation's stock) is acquired for the principal purpose of utilizing the tax
attributes the IRS can disallow the use of such tax attributes. Although
technically stockholders of the Company are acquiring control of Core Materials,
such acquisition should not be treated as having the principal purpose of
utilizing tax attributes. In addition, if the Secured Note were to be treated as
equity for federal income tax purposes, Navistar could be treated as having
acquired control of Core Materials for purposes of Section 269 even if it would
not be treated as having acquired control of Core Materials for purposes of
Section 382 (which excludes certain types of preferred stock for purposes of
determining whether a Change in Control has occurred). As a consequence, Core
Materials would not be entitled to an interest deduction for interest paid to
Navistar and Core Materials' ability to use the NOLs and capital loss
carryforwards of the Company could be disallowed. However, based on the intent
of the parties and the terms of the debt, and that the Secured Note is held only
by Navistar and not by all stockholders, it should be respected as debt and not
treated as equity for federal income tax purposes.
Statutory or common law restrictions on the utilization of NOLs other than
those discussed above should not limit Core Materials' ability to utilize the
NOLs of the Company.
Consequences of Receiving Dividends from a Company Not Taxable as a REIT.
As a consequence of the Asset Purchase neither the Company nor Core
Materials will qualify as a REIT during 1996 or thereafter. As a consequence,
the Company and Core Materials will be subject to federal income taxes on
taxable income earned during 1996 and thereafter and will not be entitled to a
deduction for any dividends paid to stockholders. In addition, Core Materials
will not be subject to the required distribution rules applicable to REITs.
Corporate stockholders that satisfy certain holding period requirements will be
entitled to a dividends received deduction on dividends paid out of Core
Materials' accumulated or current earnings and profits. Core Materials, however,
generally does not intend to pay dividends. See "Description of Core Materials
Capital Stock--Dividend Policy"
Stockholders should consult their own tax advisors as to the effect of the
Merger under applicable state or local tax laws.
ACCOUNTING TREATMENT
Based upon the terms of the proposed Acquisition, for financial reporting
and accounting purposes the transaction will be accounted for as a reverse
acquisition whereby Columbus Plastics will be deemed to have acquired Core
Materials. However, Core Materials, subsequent to the merger, will be the
continuing legal entity and registrant for both Commission filing purposes and
income tax reporting purposes. Consistent with reverse acquisition accounting
treatment, Core Materials will carry forward the historical basis of the
acquired assets and assumed liabilities of Columbus Plastics and will revalue
the basis of its net assets to fair value. Should there be an additional
contingent earn-out adjustment, it will be accounted for by increasing the
amount of the Secured Note, and by reducing the amount of Core Materials'
retained earnings. See "Unaudited Pro Forma Combined Financial Information of
Core Materials."
LEGAL MATTERS
The validity of the Core Materials Common Stock to be issued in the Merger
and in the Stock Issuance will be passed upon by Brown & Wood LLP.
EXPERTS
The financial statements of Columbus Plastics as of October 31, 1995 and
1994, and for each of the three years in the period ended October 31, 1995
included in this Proxy Statement/Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing in this
Proxy Statement/ Prospectus, (which report expresses an unqualified opinion and
includes an explanatory paragraph referring to the fact that, since Columbus
Plastics is an operating unit of Navistar, the results of its operations are not
103
<PAGE> 107
necessarily indicative of those which may have resulted if had it been a stand
alone company,) and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of the Company at December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
incorporated by reference in the Company's Annual Report on Form 10-K (the "Form
10-K") for the year ended December 31, 1995 and incorporated by reference in
this Proxy Statement/Prospectus, have been audited by Ernst & Young LLP,
independent auditors as set forth in their report thereon incorporated by
reference in the Form 10-K and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The Balance Sheet of Core Materials as of October 8, 1996 included in this
Proxy Statement/Prospectus has been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing in this
Proxy/Prospectus, and is included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
Representatives of Deloitte & Touche LLP and Ernst & Young LLP are expected
to be present at the Special Meeting where they will have the opportunity to
make a statement if they desire to do so and will be available to respond to
appropriate questions.
104
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
FINANCIAL STATEMENTS FOR COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.) FOR THE
THREE YEARS ENDED
OCTOBER 31, 1995 AND THE PERIOD ENDED JULY 31, 1996:
INDEPENDENT AUDITORS' REPORT................................................... F-1
FINANCIAL STATEMENTS:
Statements of Assets and Liabilities and Equity Investment................... F-2
Statements of Revenues, Direct Expenses and Identified Corporate
Expenses Before Interest and Taxes........................................ F-3
Notes to Financial Statements................................................ F-4-F-9
BALANCE SHEET FOR CORE MATERIALS CORPORATION AS OF
OCTOBER 8, 1996:
INDEPENDENT AUDITORS' REPORT................................................... F-10
BALANCE SHEET.................................................................. F-11
NOTES TO BALANCE SHEET......................................................... F-12-F-13
</TABLE>
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
Columbus Plastics Operation
Columbus, Ohio
We have audited the accompanying statements of assets and liabilities and
equity investment of the Columbus Plastics Operation (an operating unit of
Navistar International Transportation Corp., ("NITC")) as of October 31, 1995
and 1994 and the related statements of revenues, direct expenses and identified
corporate expenses before interest and taxes for each of the three years in the
period ended October 31, 1995. These financial statements are the responsibility
of Columbus Plastics' 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.
As explained in Note 2, Columbus Plastics Operation is an operating unit of
NITC and the results of its operations are not necessarily indicative of those
which may have resulted had it been a stand alone Company.
In our opinion, such financial statements present fairly, in all material
respects, the assets and liabilities and equity investment of the Columbus
Plastics Operation (an operating unit of Navistar International Transportation
Corp.) as of October 31, 1995 and 1994 and the results of its direct operations
and identified corporate expenses before interest and taxes for each of the
three years in the period ended October 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
September 30, 1996
F-1
<PAGE> 110
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
STATEMENTS OF ASSETS AND LIABILITIES AND EQUITY INVESTMENT
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------
JULY 31, 1996 1995 1994
-------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................ $ 24,501 $ 11,929 $ 41,551
Accounts receivable............................. 2,546,740 7,232,646 1,237,637
Inventory:
Work in process.............................. 1,679,349 1,912,227 1,919,730
Stores....................................... 1,733,917 1,450,123 1,099,120
----------- ----------- -----------
3,413,266 3,362,350 3,018,850
Other current assets............................ 281,178 332,079 249,165
----------- ----------- -----------
Total current assets....................... 6,265,685 10,939,004 4,547,203
NET PROPERTY, PLANT AND EQUIPMENT-- At cost (Note
4).............................................. 24,529,874 21,652,220 15,733,576
----------- ----------- -----------
TOTAL...................................... $30,795,559 $32,591,224 $20,280,779
=========== =========== ===========
LIABILITIES AND EQUITY INVESTMENT
CURRENT LIABILITIES:
Accounts payable................................ $ 4,487,026 $11,235,036 $ 4,854,929
Accrued liabilities............................. 1,712,391 1,215,742 936,406
----------- ----------- -----------
Total current liabilities.................. 6,199,417 12,450,778 5,791,335
EQUITY INVESTMENT (Note 5)........................ 24,596,142 20,140,446 14,489,444
----------- ----------- -----------
TOTAL...................................... $30,795,559 $32,591,224 $20,280,779
=========== =========== ===========
</TABLE>
See notes to the financial statements
F-2
<PAGE> 111
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
STATEMENTS OF REVENUES, DIRECT EXPENSES AND
IDENTIFIED CORPORATE EXPENSES BEFORE INTEREST AND TAXES
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEARS ENDED OCTOBER 31,
JULY 31, -------------------------------------------
1996 1995 1994 1993
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES:
Navistar......................... $23,212,614 $37,777,164 $32,541,121 $28,932,841
Yamaha........................... 15,194,763 20,221,722 10,381,686 9,067,318
Other............................ 841,381 1,506,243 1,268,645 1,767,064
------------ ----------- ----------- -----------
39,248,758 59,505,129 44,191,452 39,767,223
COSTS AND EXPENSES:
Cost of sales.................... 38,338,822 53,319,218 40,487,461 38,392,949
Postretirement benefits
expense....................... 804,081 857,098 832,590 933,818
Marketing and administrative..... 337,000 484,000 390,000 369,000
Other expense.................... 11,958 55,241 15,278 4,402
------------ ----------- ----------- -----------
INCOME (LOSS) BEFORE INTEREST AND
TAXES............................ $ (243,103 ) $ 4,789,572 $ 2,466,123 $ 67,054
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 112
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<C> <S>
1. NATURE OF OPERATIONS
Columbus Plastics Operation ("Columbus Plastics"), an operating unit of Navistar
International Transportation Corp. ("NITC"), is a manufacturing plant that produces
Sheet Molding Composite ("SMC") plastic components. Columbus Plastics has two
principal customers, NITC and Yamaha, and provides NITC's truck assembly operations
with all of its SMC requirements, primarily hoods and air deflector shields.
2. BASIS OF PRESENTATION
Columbus Plastics is not a "stand alone" division or subsidiary of NITC and was
generally not accounted for separately. As a result, the distinct and separate
accounts necessary to present individual Columbus Plastics' balance sheets and income
statements as of October 31, 1995 and 1994 and for the three years in the period
ended October 31, 1995 are not maintained.
Columbus Plastics does not maintain corporate treasury, legal, tax, purchasing and
other similar corporate support functions. Corporate general and administrative
expenses have not been previously allocated to Columbus Plastics. For purposes of
preparing the financial statements certain of these corporate costs along with other
NITC Truck Group expenses were allocated using an allocation method (see Note 8).
However, NITC's systems and procedures do not provide sufficient information to
develop a reasonable cost allocation for income taxes, corporate debt and interest
expense.
With respect to cash flows; purchases of inventory, payroll, capital and other
expenditures are funded through Columbus Plastics' intercompany Equity Investment
account with NITC. Accounts payable to Columbus Plastics' third party vendors and
certain expense accruals are processed and recorded at other NITC locations.
Remittances from sales to third parties are collected by NITC and are accounted for
through the intercompany Equity Investment account as are sales to NITC's truck
assembly operations. Accordingly, Columbus Plastics has no operating cash flows.
FINANCIAL STATEMENT PRESENTATION--Based upon the above information, the following
financial information is presented:
- Statements of Assets and Liabilities and Equity Investment. Assets and Liabilities
are included therein at NITC's historical cost.
- Statements of Revenues, Direct Expenses and Identified Corporate Expenses before
Interest and Taxes, including all corporate cost allocations for which a reasonable
method of allocating the costs to the operations could be developed.
- Statements of Cash Flows are not presented, because as explained above Columbus
Plastics has no cash flows. Note 5 to the financial statements presents a
reconciliation of the Equity Investment account for all periods presented.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION--In the opinion of management, the unaudited
information presented as of and for the period ended July 31, 1996 reflects all
adjustments, which consist of normal recurring adjustments, necessary for a fair
presentation of the interim periods. Operating results for interim periods are not
necessarily indicative of the results that may be expected for a full year.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and reported
</TABLE>
F-4
<PAGE> 113
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<C> <S>
amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUE RECOGNITION--Columbus Plastics records sales to other NITC manufacturing
plants at its standard cost, at date of shipment. Sales to third party customers are
recorded at negotiated prices at date of shipment.
INVENTORIES--Inventories are stated at the lower of cost (standard cost) or market.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are recorded at cost.
Depreciation is provided on a straight line method over the estimated useful lives of
the assets. The carrying amount of long-lived assets is evaluated annually to
determine if adjustment to the depreciation period or to the unamortized balance is
warranted.
Ranges of estimated useful lives for computing depreciation are as follows:
Land improvements............................................... 20 years
Building and improvements....................................... 20-50 years
Machinery and equipment......................................... 3-25 years
Tools, dies and patterns........................................ 3-5 years
FAIR VALUE OF FINANCIAL STATEMENTS--Columbus Plastics' financial instruments consist
of accounts receivable and payable. The carrying amounts of the financial instruments
approximate their fair value.
</TABLE>
<TABLE>
<CAPTION>
4. PROPERTY, PLANT AND EQUIPMENT
Property includes the following:
OCTOBER 31,
---------------------------
JULY 31, 1996 1995 1994
-------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements.............. $ 1,607,066 $ 1,480,782 $ 1,413,489
Building and equipment.................. 29,879,559 28,473,930 26,892,823
Tools, dies and patterns................ 297,635 295,110 270,411
Construction in progress................ 9,256,560 6,608,206 1,204,079
----------- ----------- -----------
41,040,820 36,858,028 29,780,802
Less accumulated depreciation........... 16,510,946 15,205,808 14,047,226
----------- ----------- -----------
Net property, plant and equipment....... $24,529,874 $21,652,220 $15,733,576
=========== =========== ===========
Construction in progress primarily relates to the purchase and installation of SMC
presses and certain other SMC capital projects. Substantially all amounts included in
construction in progress at October 31, 1995 and July 31, 1996 are expected to be
placed in service within twelve months from each respective period end. At October
31, 1995 and July 31, 1996 commitments for capital expenditures in progress, relating
to SMC presses, were approximately $1,800,000 and $9,000, respectively. Columbus
Plastics does not record capitalized interest on construction in progress as interest
expense is not allocated by NITC to Columbus Plastics.
</TABLE>
F-5
<PAGE> 114
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
5. CHANGES IN EQUITY INVESTMENT ACCOUNT
The following summarizes the changes in the Equity Investment account for the periods
presented:
NINE YEARS ENDED OCTOBER 31,
MONTHS ENDED ----------------------------------------------
JULY 31, 1996 1995 1994 1993
-------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance--beginning of
period................ $ 20,140,446 $ 14,489,444 $ 13,350,804 $ 14,214,660
Funding of purchases.... 37,980,087 37,766,508 24,636,830 22,347,552
Net charges from NITC... 14,731,815 19,991,165 16,631,167 16,070,082
NITC funding of plant
expenses and other.... 1,751,636 2,076,547 1,700,381 1,480,442
Net charges to NITC..... (27,949,630) (37,368,465) (32,431,104) (29,277,934)
Collections from third
parties............... (21,815,109) (21,604,325) (11,864,757) (11,551,052)
Income (loss) before
interest and taxes.... (243,103) 4,789,572 2,466,123 67,054
------------ ------------ ------------ ------------
Balance--end of
period................ $ 24,596,142 $ 20,140,446 $ 14,489,444 $ 13,350,804
============ ============ ============ ============
FUNDING OF PURCHASES--represents amounts funded by NITC primarily for purchases of
materials for Columbus Plastics and capital expenditures.
NET CHARGES TO NITC--represents costs incurred by NITC on behalf of Columbus Plastics
for payroll and related expenses, for employee health and welfare plans, payments to
union sponsored pension plans and all corporate support services.
NITC FUNDING OF PLANT EXPENSES--represents amounts transferred to Columbus Plastics
from NITC for payment of expenses by Columbus Plastics.
NET CHARGES TO NITC--represents the intercompany sales and billings by Columbus
Plastics to other NITC manufacturing plants for the sale of SMC products.
COLLECTIONS FROM THIRD PARTIES--represents remittances from sales to third parties
which are collected by NITC. Amounts primarily relate to sales to Yamaha, and
billings for tooling projects.
6. LEASE COMMITMENTS
Columbus Plastics has long-term noncancellable leases for use of equipment under
operating lease agreements. Total rent expense under such agreements amounted to
approximately $560,000 in 1995, $540,000 in 1994, and $484,000 in 1993.
At October 31, 1995, the aggregate minimum future rental commitments under such
noncancellable leases with terms in excess of one year were approximately $550,000 in
1996; $569,000 in 1997; $569,000 in 1998; $273,000 in 1999; $179,000 in 2000; and
$45,000 thereafter.
7. POSTRETIREMENT BENEFITS
Columbus Plastics employees are participants in the NITC sponsored pension and
postretirement plans. NITC allocates postretirement benefit costs to Columbus
Plastics based upon the number of Columbus Plastics participants and their respective
demographic data. Total expense includes the pension expense for salaried employees,
retirees and surviving spouses, and postretirement health care
</TABLE>
F-6
<PAGE> 115
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<C> <S>
and life insurance expense for all employees, retirees and surviving spouses and
dependents. The NITC pension plan is non-contributory with benefits related to an
employee's length of service and compensation rate. The NITC postretirement plan
provides health care and life insurance for retired employees; spouses and certain
dependents and calls for cost sharing between NITC and the participants in the form
of premiums, co-payments and deductibles. In addition, all of Columbus Plastics union
employees are covered under a multi-employer defined benefit plan administered under
a collective bargaining agreement. This plan is not administered by Columbus Plastics
and contributions are determined in accordance with provisions in the negotiated
labor contract.
Pursuant to the terms of the Asset Purchase Agreement (see Note 10) NITC will
withdraw from the multi-employer plan, and, simultaneously, RYMAC will take over
NITC's former responsibilities in regards to the multi-employer plan. NITC management
has been advised by the multi-employer plan's actuary that its withdrawal from the
plan will not result in a withdrawal liability.
The costs of postretirement benefits including the effect of the corporate allocation
adjustments (see Note 8) are segregated as a separate component in the Statements of
Revenues, Direct Expenses and Identified Corporate Expenses Before Interest and Taxes
and approximate the following:
</TABLE>
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEARS ENDED OCTOBER 31,
JULY 31, ----------------------------------
1996 1995 1994 1993
------------ -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pension expense.................. $210,000 $229,000 $243,000 $319,000
Multi-employer plan
contributions.................. 386,081 393,098 348,590 386,818
Health and life insurance........ 208,000 235,000 241,000 228,000
------------ -------- -------- --------
Total postretirement benefits
expense........................ $804,081 $857,098 $832,590 $933,818
=========== ======== ======== ========
8. CORPORATE ALLOCATIONS
Columbus Plastics does not maintain corporate treasury, computer, legal, tax,
purchasing and other similar corporate support functions. Columbus Plastics does
record certain budgeted corporate expenses related primarily to employee benefits,
real estate taxes and insurance. Adjustments to these amounts to reflect actual
expenditures are not recorded by Columbus Plastics but are included in the corporate
allocation amounts noted below. For purposes of preparing the financial information
for Columbus Plastics certain corporate costs and credits along with other NITC Truck
Group expenses which were not budgeted to Columbus Plastics were allocated based upon
a variety of factors which include the size of the Columbus Plastics operation, the
number of Columbus Plastics employees, and the identification of costs specifically
attributable to Columbus Plastics. Management believes that the allocation method
used is reasonable and reflective of Columbus Plastics' proportionate share of such
expenses and is comparable to those that would have been incurred on a stand alone
basis.
The following summarizes the corporate costs (credits) allocated to Columbus Plastics
which were not budgeted and recorded by Columbus Plastics. The amounts represent
adjustments to budgeted expenses or allocations of Corporate and Truck Group
marketing and administrative expense:
</TABLE>
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEARS ENDED OCTOBER 31,
JULY 31, ------------------------------------
1996 1995 1994 1993
------------ --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cost of sales.................. $ (356,000) $(317,000) $(270,000) $ 64,000
Postretirement benefits
expense...................... $ -- $ 57,000 $(196,000) $407,000
Marketing and administrative... $ 337,000 $ 484,000 $ 390,000 $369,000
</TABLE>
F-7
<PAGE> 116
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<C> <S>
9. LABOR CONCENTRATION
At October 31, 1995, Columbus Plastics had 343 manufacturing employees all of which
were represented by the International Association of Machinists and Aerospace Workers
("IAM"). The collective bargaining agreement with the IAM expires on August 1, 1998.
10. PROPOSED ACQUISITION
On September 12, 1996 NITC entered into an Asset Purchase Agreement with Rymac
Mortgage Investment Company ("RYMAC") to sell substantially all of the assets and
liabilities of Columbus Plastics to a RYMAC subsidiary, Core Materials Corporation
("Core Materials"). RYMAC will then be merged into Core Materials. In consideration
for the net assets, NITC will receive upon closing (1) $25,504,000, subject to post
closing adjustments, payable by Core Materials in the form of a secured promissory
note ("Secured Note") and (2) 4,264,000 shares of Core Materials common stock
(subject to adjustment) which will represent approximately 45% of the total number of
shares of Core Materials common stock then issued. The Secured Note will bear
interest at the rate of 8% per annum and will be secured by a first priority lien
upon and security interest in all of Columbus Plastics' assets. The Secured Note will
be due in November 2006. The Asset Purchase Agreement allows NITC to receive in the
future additional consideration in the form of an increase in the Secured Note based
upon a multiple of the amount by which Core Materials' earnings before interest and
taxes exceed established thresholds over a three year period.
As a condition to the consummation of the acquisition, NITC and Core Materials will
enter into a Comprehensive Supply Agreement (the "Supply Agreement") and a
Transitional Services Agreement (the "Services Agreement"). Under the terms of the
Supply Agreement, for a period of five years, NITC will agree to purchase from Core
Materials, and Core Materials will agree to sell to NITC at negotiated prices, which
approximate fair value, all of NITC's original equipment and service requirements for
Fiberglass Reinforced Parts using the Sheet Molding Composite process for components
currently being manufactured by Columbus Plastics as they currently exist and are
detailed in the Supply Agreement or as they may be improved or modified. On a pro
forma basis, pursuant to the terms of the Supply Agreement, Columbus Plastics would
have charged NITC for sales of its products approximately $43,600,000, $37,600,000,
$33,400,000, and $27,100,000 for the years ended October 31, 1995, 1994 and 1993 and
the nine months ended July 31, 1996, respectively. However, no minimum quantities of
annual production of products or minimum purchase quantities are set forth or implied
in the Supply Agreement, and no penalties will be imposed on NITC for volumes of
products actually ordered by NITC below those quantities forecasted. Under the terms
of the Services Agreement, NITC will provide financial reporting, accounting,
budgeting and tax planning and return preparation services, computer services, and
office support services to Core Materials and procure insurance on Core Materials'
behalf, all for up to three years at fees based upon actual hours incurred, the cost
of NITC personnel and related expenses and any costs incurred by NITC in providing
such services and purchases. Management believes that the costs that will be incurred
pursuant to the Services Agreement will approximate the amounts historically
allocated to Columbus Plastics (see Note 8).
The proposed transaction is subject to approval by RYMAC's shareholders and is
expected to close by December 31, 1996.
Based upon the terms of the proposed acquisition, for financial reporting and
accounting purposes the transaction will be accounted for as a reverse acquisition
whereby Columbus Plastics will be deemed to have acquired Core Materials. However,
Core Materials will be the continuing legal entity and registrant for both Securities
and Exchange Commission filing purposes and income tax reporting
</TABLE>
F-8
<PAGE> 117
COLUMBUS PLASTICS OPERATION
(AN OPERATING UNIT OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<C> <S>
purposes. Consistent with reverse acquisition accounting treatment Core Materials
will carry forward the historical basis of the acquired assets and assumed
liabilities of Columbus Plastics and will revalue the basis of its net assets to fair
value. Should there be an additional contingent earn-out adjustment, it will be
accounted for by increasing the amount of the Secured Note, and by reducing the
amount of Core Materials' retained earnings.
</TABLE>
F-9
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Core Materials Corporation
We have audited the accompanying balance sheet of Core Materials
Corporation (the "Company") as of October 8, 1996. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company at October 8, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
October 8, 1996 (November 6, 1996 as to Note 4)
F-10
<PAGE> 119
CORE MATERIALS CORPORATION
BALANCE SHEET
OCTOBER 8, 1996
<TABLE>
<S> <C>
ASSETS--CASH.............................................................. $1,000
======
STOCKHOLDER'S EQUITY
Common stock, $0.01 par value, authorized 50,000,000 shares:
issued and outstanding 1,000 shares.................................. $ 10
Preferred stock, authorized 10,000,000, none issued..................... --
Additional paid-in capital.............................................. 990
------
TOTAL STOCKHOLDER'S EQUITY................................................ $1,000
======
</TABLE>
See Notes to Balance Sheet.
F-11
<PAGE> 120
CORE MATERIALS CORPORATION
NOTES TO BALANCE SHEET
OCTOBER 8, 1996
1. BASIS OF PRESENTATION
Core Materials Corporation (the "Company"), a Delaware corporation, a
wholly-owned subsidiary of RYMAC Mortgage Investment Corporation ("RYMAC") was
incorporated on October 8, 1996 and was formed for the purpose of merging with
RYMAC and acquiring substantially all of the assets and liabilities of
Navistar International Transportation Corp.'s ("Navistar") business currently
conducted by Navistar at 800 Manor Park Drive, Columbus, Ohio, primarily
relating to the manufacture, marketing and sale of fiberglass reinforced
plastic component parts ("Columbus Plastics"), in exchange for stock and a
secured promissory note of the Company. Based upon the terms of the proposed
acquisition, for financial reporting and accounting purposes the transaction
will be accounted for as a reverse acquisition whereby Columbus Plastics will
be deemed to have acquired the Company. However, the Company will be the
continuing legal entity and registrant for both Securities and Exchange
Commission filing purposes and income tax reporting purposes. The Company's
only activity has been the issuance of common stock and the receipt of cash.
2. RESTRICTIONS ON THE TRANSFER OF COMMON STOCK
Anti-takeover Measures: The Company's Certificate of Incorporation and By-laws
contain certain provisions designed to discourage specific types of
transactions involving an actual or threatened change of control of the
Company. These provisions, which are designed to make it more difficult to
change majority control of the Board of Directors without its consent, include
the following:
Removal of Directors--This provision provides that a director of the
Company may be removed with or without cause only upon the vote of the
holders of at least 80% of the voting power of the outstanding shares of
capital stock entitled to vote generally in the election of directors.
Supermajority Approval--This provision requires that a merger and
certain other transactions (as outlined in the Certificate of
Incorporation) be approved by the affirmative vote of the holders of at
least 66 2/3% of the then outstanding shares of the Company's common
stock. Such affirmative vote is required notwithstanding the fact that
no vote may be required, or that a lesser percentage may be specified by
law.
Amendments--This provision requires that any amendment to the provisions
relating to the removal of Directors be approved by the holders of at
least 80% of the then outstanding shares of voting stock, and any
amendment to provisions requiring the approval of the holders of at
least 66 2/3 of the then outstanding shares of voting stock be approved
by the holders of at least 66 2/3 of the then outstanding shares of
voting stock.
Restrictions on Transfer: The Company's Certificate of Incorporation also
contains a provision (the "Prohibited Transfer Provision") designed to help
assure the continued availability of RYMAC's substantial net operating losses
and capital loss carryforwards (NOLs) following the merger and acquisition by
seeking to prevent an "ownership change" as defined under current Treasury
Department income tax regulations. Under the Prohibited Transfer Provision, if
a stockholder transfers or agrees to transfer stock, the transfer will be
prohibited and void to the extent that it would cause the transferee to hold a
"Prohibited Ownership Percentage" (as defined in the Company's Certificate of
Incorporation, but generally, means direct and indirect ownership of 4.5% or
more of the Company's common stock) or if the transfer would result in the
transferee's ownership increasing if the transferee had held a Prohibited
Ownership Percentage within the three prior years or if the transferee's
ownership percentage already exceeds the Prohibited Ownership Percentage under
applicable Federal income tax rules. The Prohibited Transfer Provision does
not prevent transfers of stock between persons who do not hold a Prohibited
Ownership Percentage.
F-12
<PAGE> 121
3. STOCK OPTION PLAN
At the time of the consummation of the merger, each outstanding option to
purchase shares of RYMAC's common stock granted under any of RYMAC's previous
stock option plans will be deemed amended to constitute an option to acquire,
at the same price per share, the same number of shares of the Company's common
stock. Pursuant to the merger, the holder of a former RYMAC option will be
entitled to the same number of shares as would have been received had such
holder exercised the option in full immediately prior to the consummation of
the merger (not taking into account whether such RYMAC option was in fact
exercisable at such time).
As of October 8, 1996, all of the outstanding RYMAC common stock options,
representing 260,000 shares of common stock, were held by the executive
officers and directors of RYMAC, 210,000 of which represent vested options and
50,000 of which represent non-vested options at that date. The non-vested
options vest at the earlier of (i) the consummation of the proposed
acquisition and (ii) July 1, 1997.
4. SUBSEQUENT EVENT
Effective November 6, 1996, the Company's Certificate of Incorporation was
amended to, among other things, reduce the total number of shares of common
stock which the Company shall have authority to issue from 50,000,000 to
20,000,000 shares.
F-13
<PAGE> 122
ANNEX I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPOSITE CONFORMED COPY
[GIVING EFFECT TO AMENDMENT NO. 1]
ASSET PURCHASE AGREEMENT
BETWEEN
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND
RYMAC MORTGAGE INVESTMENT CORPORATION
DATED AS OF SEPTEMBER 12, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 123
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
1. Purchase and Sale of Assets; Assumption of Liabilities.......................... I-1
(a) Certain Definitions......................................................... I-1
(b) Purchase and Sale of Assets................................................. I-2
(c) Excluded Assets............................................................. I-3
(d) Assumed Liabilities......................................................... I-4
(e) Excluded Liabilities........................................................ I-4
(f) Purchase Price.............................................................. I-5
(g) Purchase Price Adjustment................................................... I-5
(h) Allocation of Purchase Price................................................ I-9
2. Closing......................................................................... I-9
3. Conditions to Closing........................................................... I-10
(a) Buyer's Obligation.......................................................... I-10
(b) Seller's Obligation......................................................... I-12
4. Representations and Warranties of Seller........................................ I-13
(a) Authority................................................................... I-13
(b) No Conflicts................................................................ I-14
(c) Title to Tangible Assets Other than Real Property Interests................. I-14
(d) Title to Real Property...................................................... I-14
(e) Intellectual Property....................................................... I-14
(f) Contracts................................................................... I-15
(g) Litigation; Decrees......................................................... I-16
(h) Financial Statements........................................................ I-16
(i) Compliance with Applicable Laws............................................. I-16
(j) Asset Sufficiency........................................................... I-16
(k) Seller's Employee Benefit Plans............................................. I-16
(l) Condition of Assets......................................................... I-16
(m) Absence of Undisclosed Liabilities.......................................... I-16
5. Covenants of Seller............................................................. I-17
(a) Access...................................................................... I-17
(b) Ordinary Conduct............................................................ I-17
6. Representations and Warranties of Buyer......................................... I-17
(a) Authority; No Conflicts..................................................... I-17
(b) Capital Stock............................................................... I-18
(c) Subsidiaries; Investments................................................... I-19
(d) Financial Statements........................................................ I-19
(e) Absence of Undisclosed Liabilities.......................................... I-19
(f) Absence of Certain Developments............................................. I-19
(g) Assets...................................................................... I-19
(h) Contracts................................................................... I-20
(i) Intellectual Property....................................................... I-20
(j) Reports with the Securities and Exchange Commission......................... I-20
(k) Tax Matters................................................................. I-20
(l) Buyer's Employee Benefit Plans.............................................. I-21
(m) Litigation; Decrees......................................................... I-22
(n) Compliance with Applicable Laws............................................. I-22
(o) Guidelines or Policies...................................................... I-22
</TABLE>
I-i
<PAGE> 124
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
7. Covenants of Buyer.............................................................. I-22
(a) Confidentiality............................................................. I-22
(b) No Additional Representations............................................... I-23
(c) Board of Directors; Officers................................................ I-23
(d) Certain Other Actions....................................................... I-23
(e) New IAM Agreement........................................................... I-23
8. Additional Covenants............................................................ I-23
(a) Proxy Statement/Prospectus; Registration Statement.......................... I-23
(b) Consents.................................................................... I-24
(c) Cooperation................................................................. I-24
(d) Notification................................................................ I-24
(e) Publicity................................................................... I-24
(f) Governmental Approvals...................................................... I-24
(g) Sales and Transfer Taxes, etc............................................... I-25
(h) Supply Agreement............................................................ I-25
(i) Registration Rights Agreements.............................................. I-25
(j) Transition Services Agreement............................................... I-25
(k) Employees................................................................... I-25
(l) IAM Agreement............................................................... I-25
(m) Employee Benefit Plans for Non-Represented Employees........................ I-26
(n) Miscellaneous Employee Benefit Matters...................................... I-28
(o) By-Laws of Buyer............................................................ I-29
(p) No Authority To Bind........................................................ I-29
(q) Records..................................................................... I-29
(r) Initial Board of Directors; Vacancies of Board.............................. I-29
(s) Ordinary Conduct of Buyer................................................... I-29
9. Further Assurances.............................................................. I-30
10. Indemnification................................................................. I-30
(a) Indemnification by Seller................................................... I-30
(b) Indemnification by Buyer.................................................... I-30
(c) Exclusive Remedy............................................................ I-31
(d) Losses Net of Insurance and Tax Benefit..................................... I-31
(e) Termination of Indemnification.............................................. I-32
(f) Procedures Relating to Indemnification...................................... I-32
(g) Offset...................................................................... I-33
11. Assignment...................................................................... I-33
12. No Third-Party Beneficiaries.................................................... I-33
13. Termination..................................................................... I-33
14. Survival of Representations..................................................... I-34
15. Expenses........................................................................ I-34
16. Amendment and Waiver............................................................ I-34
17. Notices......................................................................... I-34
18. Interpretation.................................................................. I-35
19. No Strict Construction.......................................................... I-35
20. Counterparts.................................................................... I-35
21. Entire Agreement................................................................ I-36
22. Brokerage....................................................................... I-36
23. Disclaimer Regarding Estimates and Projections.................................. I-36
</TABLE>
I-ii
<PAGE> 125
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
24. Schedules....................................................................... I-36
25. Reserved........................................................................ I-36
26. Severability.................................................................... I-36
27. Bulk Transfer Laws.............................................................. I-37
28. Governing Law................................................................... I-37
29. Exhibits and Schedules.......................................................... I-37
30. Dispute Resolution.............................................................. I-37
(a) Negotiation................................................................. I-37
(b) Arbitration................................................................. I-37
</TABLE>
I-iii
<PAGE> 126
EXHIBITS AND SCHEDULES
<TABLE>
<S> <C> <C>
Exhibit A Buyer Note
Exhibit B Special Warranty Deed
Exhibit C Supply Agreement
Exhibit D Registration Rights Agreement
Exhibit E Transition Services Agreement
Schedule 1(b) (ii) Equipment
Schedule 1(b) (iii) Computer Software
Schedule 1(b) (iv) Contracts
Schedule 1(b) (vii) Real Property
Schedule 1(g) (vi) Categories and Methodology
Schedule 1(h) Allocation of Purchase Price
Schedule 3(a) (iv) Company and Third Party Approvals
Schedule 3(a) (v) Governmental Approvals
Schedule 3(b) (xv) Disclosed Liabilities
Schedule 4(c) Liens
Schedule 4(d) Existing Leases, Liens and Possession or Occupancy Agreements
Schedule 4(e) Intellectual Property
Schedule 4(f) Disclosure with respect to non-binding Contracts
Schedule 4(g) Litigation
Schedule 4(h) Financial Statements
Schedule 4(i) Compliance with Laws
Schedule 4(j) Asset Sufficiency
Schedule 4(k) Seller Plans
Schedule 4(m) Undisclosed Liabilities
Schedule 5(b) Non-Ordinary Conduct
Schedule 6(b) (i) Certain Stock
Schedule 6(b) (ii) Articles and By-Laws
Schedule 6(b) (iii) Recourse Against Buyer
Schedule 6(b) (iv) Stockholder Agreements
Schedule 6(c) Subsidiaries; Investments
Schedule 6(d) Buyer Financial Schedules
Schedule 6(h) (i) Buyer Contracts
Schedule 6(h) (ii) Non-terminable Contracts without penalty or premium
Schedule 6(h) (iii) Contracts in breach or default
Schedule 6(k) (i) Tax Matters
Schedule 6(k) (ii) NOL's
Schedule 6(k) (iii) Territories Buyer Required to File Tax Returns
Schedule 6(m) Buyer Litigation
Schedule 6(n) Compliance with Laws
Schedule 6(o) Guidelines or Policies
Schedule 8(k) Hired Employees of Seller
Schedule 30 Representatives of Buyer
</TABLE>
I-iv
<PAGE> 127
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1997 Excess EBIT...................................................................... I-8
1998 Excess EBIT...................................................................... I-8
49 Percentage Point Increase.......................................................... I-7
Adjustment Based on Closing Date Ownership............................................ I-6
Affiliated Group...................................................................... I-1
Agreement............................................................................. I-1
Ancillary Agreements.................................................................. I-11
Assets................................................................................ I-2
Assumed Liabilities................................................................... I-4
Assumption Agreement.................................................................. I-9
Benefitted Party...................................................................... I-32
Bill of Sale.......................................................................... I-10
Buyer................................................................................. I-1
Buyer Contracts....................................................................... I-18
Buyer Directors....................................................................... I-29
Buyer Financial Schedules............................................................. I-19
Buyer Note............................................................................ I-5
Buyer Resolutions..................................................................... I-9
Claim................................................................................. I-32
Closing............................................................................... I-9
Closing Date.......................................................................... I-9
Closing Date Balance Sheet............................................................ I-6
Closing Date Ownership Determination.................................................. I-7
Code.................................................................................. I-9
Common Stock.......................................................................... I-5
Common Technical Information.......................................................... I-3
Company and Third-Party Approvals..................................................... I-11
Confidentiality Agreement............................................................. I-22
Contracts............................................................................. I-2
Defined Benefit Plan.................................................................. I-22
Definitive Proxy Statement/Prospectus................................................. I-23
Delivered Shares...................................................................... I-7
EBIT.................................................................................. I-8
EBIT Certificate...................................................................... I-8
Employee Benefit Plan................................................................. I-16
Employee Pension Benefit Plan......................................................... I-16
Employee Welfare Benefit Plan......................................................... I-16
Environmental Report.................................................................. I-11
Equipment............................................................................. I-2
ERISA................................................................................. I-16
Excess Shares......................................................................... I-7
Excluded Assets....................................................................... I-3
Excluded Liabilities.................................................................. I-4
Financial Statements.................................................................. I-16
Five Percent Shareholder.............................................................. I-7
Forecasted EBIT....................................................................... I-8
Governmental Approvals................................................................ I-11
Hired Employees....................................................................... I-25
HSR Act............................................................................... I-11
IAM................................................................................... I-1
IAM Agreement......................................................................... I-1
</TABLE>
I-v
<PAGE> 128
<TABLE>
<CAPTION>
PAGE
<S> <C>
</TABLE>
<TABLE>
<S> <C>
IPP................................................................................... I-28
Incidents............................................................................. I-27
indemnified party..................................................................... I-32
Independent Director.................................................................. I-29
Information Memorandum................................................................ I-23
Institute............................................................................. I-37
Intellectual Property................................................................. I-1
Inventory............................................................................. I-1
knowledge............................................................................. I-1
Latest Balance Sheet.................................................................. I-19
Liens................................................................................. I-14
Loss.................................................................................. I-1
New Hire Plans........................................................................ I-27
New Hires............................................................................. I-27
Net Tangible Assets................................................................... I-6
NOL................................................................................... I-21
Nontransferable Contracts............................................................. I-24
Notice of Closing Date Ownership Determination........................................ I-7
Outside Notice Date................................................................... I-8
PBGC.................................................................................. I-21
Permitted Liens....................................................................... I-14
Person................................................................................ I-2
Plant................................................................................. I-2
Plastics Business..................................................................... I-2
Plastics Business Intellectual Property Rights........................................ I-3
Products.............................................................................. I-2
Proportionate Share................................................................... I-31
Proxy Statement/Prospectus............................................................ I-23
Public Group.......................................................................... I-7
Purchase Price........................................................................ I-5
Real Property......................................................................... I-3
Records............................................................................... I-29
Registration Rights Agreement......................................................... I-25
REIT.................................................................................. I-21
Representatives....................................................................... I-37
Responsible Party..................................................................... I-32
Seller................................................................................ I-1
Seller Directors...................................................................... I-29
Seller Entities....................................................................... I-2
Seller Information.................................................................... I-22
Seller Plan........................................................................... I-16
Seller Plans.......................................................................... I-16
Seller Resolutions.................................................................... I-10
SEP................................................................................... I-21
Stock................................................................................. I-7
Supply Agreement...................................................................... I-25
Survey................................................................................ I-11
Tangible Assets....................................................................... I-14
Tax................................................................................... I-2
Tax Returns........................................................................... I-2
Transition Services Agreement......................................................... I-25
Triggering Event...................................................................... I-6
Union................................................................................. I-1
</TABLE>
I-vi
<PAGE> 129
This ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of September 12,
1996, by and between NAVISTAR INTERNATIONAL TRANSPORTATION CORP., a Delaware
corporation ("Seller"), and RYMAC MORTGAGE INVESTMENT CORPORATION, a Maryland
corporation ("Buyer");
W I T N E S S E T H:
WHEREAS, Seller desires to sell or cause to be sold to Buyer all of the
Assets, and Buyer desires to purchase such Assets and to assume all of the
Assumed Liabilities, upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Purchase and Sale of Assets; Assumption of Liabilities.
(a) Certain Definitions. As used in this Agreement (including the Schedules
and Exhibits hereto), the following definitions shall apply:
(i) "Affiliated Group" means an affiliated group as defined in Section
1504 of the Code (or any analogous combined, consolidated or unitary group
defined under state, local or foreign income Tax law).
(ii) "IAM Agreement" means the August 1, 1995 collective bargaining
agreement between Seller and the International Association of Machinists
and Aerospace Workers ("IAM"), its district No. 28, region 2, lodge number
1471 ("Union").
(iii) "Intellectual Property" means all (A) patents, patent
applications, patent disclosures and inventions, (B) trademarks, service
marks, trade dress, trade names, logos and legal names and registrations
and applications for registration thereof together with all of the goodwill
associated therewith, (C) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration
thereof, (D) mask works and registrations and applications for registration
thereof, (E) computer software, data, data bases and documentation thereof,
(F) trade secrets and other confidential information (including ideas,
formulas, compositions, inventions (whether patentable or unpatentable and
whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable
works, financial and marketing plans and customer and supplier lists and
information), (G) other intellectual property rights and (H) copies and
tangible embodiments thereof (in whatever form or medium).
(iv) "Inventory" means, as of any date, all inventories of raw
materials, packaging materials, work-in-process, and finished Products that
are held or used in connection with the conduct of the Plastics Business as
of such date, but expressly excluding (A) all inventories of raw materials,
packaging materials and work-in-process not held or used primarily in
connection with the conduct of the Plastics Business and (B) all finished
Products that have been sold to, or otherwise incorporated into other
products of, Seller or its affiliates or any third party customer.
(v) The term "knowledge," when used in the phrase "to the knowledge of
Buyer," shall mean, and shall be limited to, the actual knowledge of the
following individual after reasonable inquiry: Richard Conte. The term
"knowledge," when used in the phrase "to the knowledge of Seller," shall
mean, and shall be limited to, the actual knowledge of the following
individuals after reasonable inquiry: Thomas M. Hough and for purposes of
Section 4(l) only, Thomas E. Rigsby.
(vi) "Loss" means, with respect to any Person, any damage, injury,
liability, demand, claim, action, cause of action, cost, deficiency, Tax,
penalty, fine or other loss, payment or expense, whether or not arising out
of a claim, including all interest, penalties, reasonable attorneys' fees
and expenses and all amounts paid or incurred in connection with any
action, demand, proceeding, investigation or claim by any third party
(including any government entity) against or affecting such Person,
together with interest thereon from the date on which such Person provides
the written notice of the related claim as described
I-1
<PAGE> 130
in Section 10(f) through and including the date on which the total amount
of the claim, including such interest, is recovered or recouped pursuant to
Section 10.
(vii) "Person" shall mean any individual, corporation, estate, trust,
association, company, partnership, joint venture, or similar organization,
or any other entity described in Treasury Regulations Section
1.382-3(a)(1)(i).
(viii) "Plastics Business" means the business currently conducted by
Seller at Seller's facility at 800 Manor Park Drive, Columbus, Ohio (the
"Plant") primarily relating to the manufacture, marketing and sale of the
Products.
(ix) "Products" means any fiberglass and plastic component parts
produced by the Plastics Business at the Plant, but expressly excluding all
other products manufactured, processed, marketed or sold by any of Seller
or its affiliates (including fiberglass and component parts not produced by
the Plastics Business at the Plant).
(x) "Tax" means, with respect to any Person any (A) federal, state,
local or foreign income, gross receipts, franchise, estimated, alternative
minimum, add-on minimum, sales, use, transfer, registration, value added,
excise, natural resources, severance, stamp, occupation, premium, windfall
profit, environmental, customs, duties, real property, personal property,
capital stock, social security, unemployment, disability, payroll, license,
employee or other withholding, or other tax, of any kind whatsoever,
including any interest, penalties or additions to tax or additional amounts
in respect of the foregoing; (B) liability of such Person for the payment
of any amounts of the type described in clause (A) arising as a result of
being (or ceasing to be) a member of any Affiliated Group (or being
included (or required to be included) in any Tax Return relating thereto);
and (C) liability of such Person for the payment of any amounts of the type
described in clause (A) as a result of any express or implied obligation to
indemnify or otherwise assume or succeed to the liability of any other
Person.
(xi) "Tax Returns" means returns, declarations, reports, claims for
refund, information returns or other documents (including any related or
supporting schedules, statements or information) filed or required to be
filed in connection with the determination, assessment or collection of
Taxes of any party or the administration of any laws, regulations or
administrative requirements relating to any Taxes.
(b) Purchase and Sale of Assets. On the terms and subject to the conditions
of this Agreement, at the Closing Seller shall sell, convey, transfer and assign
to Buyer, and Buyer shall purchase from Seller all of Seller's rights, title and
interest in the following assets relating exclusively to the Plastics Business
(collectively, the "Assets"):
(i) all cash and cash equivalents and accounts and notes receivable of
Seller and its affiliates (collectively, the "Seller Entities") reflected
on the Closing Date Balance Sheet, other than intercompany accounts and
notes receivable, and all Inventory in existence as of the Closing;
(ii) all machinery, equipment, vehicles, furniture and fixtures (and
all spare parts inventory relating exclusively to any of the foregoing) and
other tangible assets (except any items excluded pursuant to Section 1(c))
(A) located on the Real Property at the Plant and relating primarily to the
Plastics Business, or (B) listed or described on Schedule 1(b)(ii)
(collectively, the "Equipment");
(iii) the computer software, data, databases and documentation listed
or described on Schedule 1(b)(iii) attached hereto;
(iv) all contracts, agreements, licenses, mortgages, leases (for both
real and personal property), and other agreements or arrangements, whether
oral or written, (A) that are listed or described on Schedule 1(b)(iv)
attached hereto and (B) if not so listed or described, that relate
exclusively to the Plastics Business and are in existence as of the
Closing, including all commitments and orders for the purchase and sale of
goods and equipment and services (including advertising, maintenance and
other incidental services) relating exclusively to the Plastics Business
(collectively, the "Contracts");
(v) all Intellectual Property (other than (x) computer software, data,
databases and documentation and (y) other items set forth on Schedule 4(j))
relating exclusively to the Products or the current
I-2
<PAGE> 131
manufacture of the Products (the "Plastics Business Intellectual Property
Rights"); provided, however, that it is recognized by Buyer and Seller that
certain Plastics Business Intellectual Property Rights including, without
limitation, engineering drawings, specifications, test results and
analyses, engineering standards, material specifications, computer software
and manufacturing methods ("Common Technical Information"), is and has been
also used by Seller in the conduct of its other businesses. Buyer expressly
agrees that, notwithstanding anything contained in this Agreement to the
contrary, Seller has the absolute right to also use such Common Technical
Information in its other businesses and to sell, pledge, or otherwise
dispose of any of such Common Technical Information to any third party.
Buyer agrees to exercise reasonable efforts to maintain such Common
Technical Information in confidence except to the extent that such
information would be disclosed to the public in the ordinary course of the
Plastics Business.
(vi) subject to Section 8(q), all existing customer and vendor lists,
price lists and other business and operational records pertaining to the
conduct of the Plastics Business, including records relating to its third
party customers and suppliers;
(vii) all right, title and interest in the real property listed or
described on Schedule 1(b)(vii) attached hereto (collectively, the "Real
Property"), together with all buildings, fixtures and improvements located
thereon;
(viii) to the extent transferable, any permits or licenses issued by
any governmental agency that are used exclusively in the Plastics Business;
(ix) all prepayments by Seller relating to the operations of the
Plastics Business to the extent reflected on the Closing Date Balance
Sheet; and
(x) all other intangible personal property of whatever kind or
character, whether evidenced in writing or not, including current choices
in action, claims, causes of action (whether fixed or contingent), and
goodwill, owned by Seller and relating exclusively to the Products and the
Plastics Business, but expressly excluding all such intangible personal
property relating to Excluded Assets or Excluded Liabilities.
SELLER MAKES NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE ASSETS,
EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY MADE IN SECTION 4 WHICH SHALL EXPIRE
AT THE CLOSING , INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO THE
CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF
ANY OF THE ASSETS AND INCLUDING ANY REPRESENTATION OR WARRANTY OF ANY KIND WITH
RESPECT TO THE PHYSICAL OR STRUCTURAL CONDITION OF THE REAL PROPERTY, THE REAL
PROPERTY'S COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT, OR WITH RESPECT
TO THE EXISTENCE OR ABSENCE OF TOXIC OR HAZARDOUS SUBSTANCES OR WASTES OR
STORAGE TANKS IN, ON, UNDER OR AFFECTING THE REAL PROPERTY, AND IT IS UNDERSTOOD
THAT, EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER CONTAINED
IN SECTION 4 WHICH SHALL EXPIRE AT THE CLOSING, BUYER TAKES THE ASSETS ON AN "AS
IS" AND "WHERE IS" BASIS.
(c) Excluded Assets. The Assets shall not include any assets other than the
assets listed or described in Section 1(b), and, without limiting the generality
of the foregoing, shall expressly exclude the following (collectively, the
"Excluded Assets"):
(i) all securities and investments of the Seller Entities;
(ii) all insurance policies and claims thereunder of the Seller
Entities, claims for and rights to receive tax refunds, all tax returns
relating to the Plastics Business and any notes, worksheets, files or
documents relating thereto, and any legal files or other documents covered
by an evidentiary privilege that are not primarily related to the Assumed
Liabilities;
(iii) all books, documents, records and files of the Seller Entities,
except as otherwise described in Section 1(b)(vi);
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(iv) all of Seller's rights under or pursuant to this Agreement and
the other agreements between Buyer and Seller contemplated hereby;
(v) all minute books and stockholder and stock transfer records and
similar corporate records of the Seller Entities;
(vi) all Intellectual Property of the Seller Entities (except as
otherwise listed or described in Sections 1(b)(iii) and 1(b)(v));
(vii) all assets of the Seller Plans;
(viii) all leaseholds and fee simple real property and improvements
thereon of the Seller Entities (except for the assets listed or described
in Sections 1(b)(iv) and 1(b)(vii)); and
(ix) all other assets which are listed or described on Schedule 4(j).
(d) Assumed Liabilities. Buyer shall assume on the Closing Date and shall
pay, perform and discharge when due the following obligations and liabilities
relating to the Plastics Business, the Products or the Assets absolute or
contingent, whether or not accrued, and whether arising before, on or after the
Closing Date which are (collectively, together with all other liabilities
assumed by Buyer pursuant to Sections 8 (l), (m) and (n) of this Agreement and
the Schedules hereto, the "Assumed Liabilities"):
(i) all obligations and liabilities of Seller under the Contracts
(other than, except for liabilities for which reserves have been
specifically established on the Closing Date Balance Sheet (but only up to
the amount of such reserves), liabilities with respect to claims relating
to breaches or alleged breaches of Contracts by Seller arising prior to the
Closing Date);
(ii) except as specifically provided in the Supply Agreement, all
obligations and liabilities of Seller for claims, actions, suits or other
legal or administrative proceedings made by any Person from and after the
Closing Date in respect of any and all Products (including Inventory)
manufactured, formulated, marketed, sold or distributed at any time prior
to, on or after the Closing Date (including all obligations and liabilities
in connection with the manufacture, formulation, marketing, sale or
distribution thereof) in connection with the Plastics Business, including
all product liability and infringement claims, all obligations and
liabilities arising out of or relating to the activities and operations of
third-party contract manufacturers, and all obligations and liabilities for
refunds, adjustments, exchanges, returns and warranty, merchantability and
other claims, actions or demands;
(iii) all obligations and liabilities of Seller reflected on the
Closing Date Balance Sheet (including all obligations and liabilities for
matters reflected in the notes thereto);
(iv) all other obligations and liabilities relating to the Products,
the Plastics Business or the Assets arising out of acts or omissions of the
Buyer occurring from and after the Closing Date or based primarily upon an
event occurring or claim arising after the Closing Date (including, without
limitation, any claims relating to a breach or alleged breach of any
Contract).
Buyer's obligations under this Section 1(d) shall not be subject to offset
or reduction by reason of any actual or alleged breach of any representation,
warranty or covenant contained in this Agreement or any agreement or document
delivered in connection herewith or any right or alleged right to
indemnification hereunder.
(e) Excluded Liabilities. Except as specifically provided in this Agreement
and the Schedules hereto, Buyer shall not assume any obligations or liabilities
of Seller (the obligations and liabilities of Seller not specifically assumed by
Buyer being referred to collectively herein as the "Excluded Liabilities").
Notwithstanding anything in this Agreement to the contrary and without limiting
the generality of the foregoing, Buyer shall not assume or be liable for any of
the following obligations or liabilities:
(i) any other obligation or liability of Seller under this Agreement
and the other agreements with Buyer contemplated hereby;
(ii) except as otherwise provided in Sections 3(a), 8(f), 8(g) and 15
of this Agreement or in the Ancillary Agreements (including the Related
Documents, as defined in the Buyer Note), any obligation
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or liability of Seller for expenses or fees incident to or arising out of
the negotiation, preparation, approval or authorization of this Agreement
and the other agreements contemplated hereby or the consummation (or
preparation for the consummation) of the transactions contemplated hereby
and thereby, including attorneys' and accountants' fees;
(iii) except for those expressly accrued for and reflected on the
Closing Date Balance Sheet, any obligation or liability of Seller relating
to the Plastics Business with respect to federal, state, local or foreign
income Taxes and any liabilities for interest, penalties or additions to
any of such income Taxes (except income Taxes and related liabilities with
respect to the Plastics Business relating to periods from and after the
Closing Date and other income Taxes and related liabilities specifically
allocated to, prorated to or assumed by Buyer under this Agreement);
(iv) except for those expressly accrued for and reflected on the
Closing Date Balance Sheet or as otherwise provided in Section 8, any
obligation or liability of Seller with respect to the Seller Plans;
(v) except for those expressly accrued for and reflected on the
Closing Date Balance Sheet, any claim, suit, action or other legal or
administrative proceeding based primarily upon an event occurring or a
claim arising (x) on or prior to the Closing Date and regardless of whether
or not such claim, suit, action or other proceeding is disclosed on
Schedule 4(i) or (y) after the Closing Date but solely in the case of (and
to the extent that) such claim, suit, action or other proceeding relates
primarily to or arises primarily out of acts or omissions of the Seller
Entities occurring prior to the Closing Date (including, without
limitation, any claims relating to a breach or alleged breach of any
Contract) other than, in each case as contemplated by Sections 1(d) (i) or
(ii) above; and
(vi) any other obligation or liability with respect to or arising out
of any Products, the Assets or the conduct of the Plastics Business prior
to the Closing Date that are not Assumed Liabilities.
(f) Purchase Price. The purchase price (the "Purchase Price") for the
Assets shall be:
(i) $25,504,000 subject to adjustment as provided in Section 1(g),
payable to Seller at the Closing by delivery of a secured promissory note
(the "Buyer Note") in the form of Exhibit A attached hereto (with such
changes thereto and to the related documentation as may be reasonably
requested by the parties providing the financing to the Buyer under the
Credit Agreement (as defined in the Buyer Note) and which are acceptable to
Seller in its sole discretion); provided that Buyer shall reduce the
principal amount of the Buyer Note by delivering to Seller at Closing by
wire transfer of immediately available funds an amount equal to such
reduction pursuant to financing arrangements that, in the opinion of Buyer
and Seller, would not reasonably be expected to have a material adverse
effect on the ability of Buyer to secure loans for working capital and
project finance use after the Closing; and
(ii) 4,264,000 shares of Buyer's Common Stock, par value $.01 per
share (the "Common Stock") representing approximately 45% of the total
number of shares of the Common Stock issued and outstanding on a fully
diluted basis after giving effect to the transactions contemplated hereby
and the payment of any fees contemplated by Section 22.
(g) Purchase Price Adjustment.
(i) If Net Tangible Assets as of the Closing Date exceeds Net Tangible
Assets as of January 31, 1996, the amount of such excess shall be paid to
Seller, at Seller's option by (A) the issuance by Buyer to Seller of
additional shares of the Common Stock (valued, for purposes of this
adjustment only, at $2.50 per share) by delivery of certificates
representing such shares of the Common Stock, duly endorsed in blank or
accompanied by stock powers duly endorsed in blank in proper form for
transfer, with appropriate transfer stamps, if any, affixed thereto,
provided that the aggregate amount of shares of the Common Stock issued to
Seller by Buyer pursuant to this Section 1(g)(i), together with the shares
of the Common Stock referred to in Section 1(f)(ii) that are to be issued
to Seller by Buyer at the Closing, may, subject to Section 1(g)(iii), not
exceed 45% of the total number of shares of the Common Stock issued and
outstanding on a fully diluted basis after giving effect to the
transactions contemplated hereby and the payment of any fees contemplated
by Section 22, (B) an increase in the principal amount of the Buyer Note
delivered at the Closing by delivery of an amended Buyer Note increased in
principal amount
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by the amount of such increase, in exchange for the Buyer Note delivered at
Closing which amended Buyer Note shall be identical to the Buyer Note
delivered at Closing except for the principal amount of such Buyer Note, or
(C) a combination of any or all of the options described in clauses (A) or
(B) above. If Net Tangible Assets on January 31, 1996 exceeds Net Tangible
Assets as of the Closing Date, the principal amount of the Buyer Note
delivered at the Closing shall be decreased by the amount of such excess by
delivery of an amended Buyer Note reduced in principal by the amount of
such decrease, in exchange for the Buyer Note delivered at Closing which
amended Buyer Note shall be identical to the Buyer Note delivered at
Closing except for the principal amount of such Buyer Note. For purposes
hereof "Net Tangible Assets" means, as of the Closing Date, the amount
reflected as (Total Assets minus Intangible Assets) minus (Total
Liabilities minus Intangible Liabilities) on the Closing Date Balance
Sheet, and as of January 31, 1996 means the amount reflected as (Total
Assets minus Intangible Assets) minus (Total Liabilities minus Intangible
Liabilities) on Seller's books of the Plastics Business on such date. Net
Tangible Assets as of January 31, 1996 is $25,969,000.
(ii) The adjustment described in Section 1(g)(i) shall be effected no
later than seven business days after preparation and final determination,
pursuant to this Section 1(g)(ii), of the Closing Date Balance Sheet.
Within 45 days after the Closing Date, Seller shall prepare and deliver to
Buyer based upon the books and records of the Plastics Business and
consistent with past practices, a balance sheet of the Plastics Business
(including footnotes thereto) (the "Closing Date Balance Sheet"), as of the
Closing Date. Buyer and its authorized representatives shall be entitled to
review the Closing Date Balance Sheet and the books, records and work
papers of the Seller used to prepare such Closing Date Balance Sheet. If
Buyer disagrees with any item on the face of the Closing Date Balance
Sheet, Buyer shall notify Seller in writing of such disagreement (stating
the reasons therefor) within 30 days after Buyer's receipt of the Closing
Date Balance Sheet from Seller, and Buyer and Seller shall attempt to
resolve such disagreement. If Buyer does not provide such notice within
such 30 days, the Closing Date Balance Sheet shall be deemed to be the
initial balance sheet submitted by Seller under this Section 1(g)(ii) for
all purposes of this Agreement, and Net Tangible Assets as of the Closing
Date shall be the amount reflected on the Closing Date Balance Sheet. If
Buyer and Seller are unable to resolve any disagreement (with respect to
which timely notice of such disagreement has been provided) within 15 days
after Seller receives such notice of disagreement, Buyer and Seller shall
submit the disagreement to a national independent public accounting firm
acceptable to Buyer and Seller. If Buyer and Seller are unable to agree
upon the selection of such firm within 20 days after Seller receives the
above notice of disagreement, an accounting firm of national reputation
will be selected within five days thereafter by lot after eliminating (A)
Deloitte & Touche LLP (Seller's independent accountants), (B) Ernst & Young
LLP (Buyer's independent accountants) and (C) one additional accounting
firm for each of Buyer and Seller, should either Buyer or Seller or both,
find such accounting firm(s) to be objectionable. Buyer and Seller shall
cause the accounting firm so selected, within 15 days after its selection,
to resolve such disagreement, which resolution shall be binding on the
parties, and the Closing Date Balance Sheet shall be so finally adjusted in
accordance with such resolution for all purposes of this Agreement. The
fees and expenses of such accounting firm shall be paid 100% by Buyer
unless Net Tangible Assets as determined pursuant to this Section 1(g)(ii)
is not within 20% of the Net Tangible Assets reflected on the initial
balance sheet submitted by Seller under this Section 1(g)(ii), in which
case, the fees and expenses of such accounting firm shall be paid one-half
by Buyer and one-half by Seller.
(iii) In the event that at any time within 3 years prior to the
Closing any Person(s) or Public Group(s) was (were) or became Five Percent
Shareholder(s) of Buyer and the effect of such Five Percent Shareholder(s)
together with the issuance of shares of Buyer's Common Stock to Seller
pursuant to Section 1(f) (ii) and Section 1(g)(i) would be to cause a 49
Percentage Point Increase (such event being herein a "Triggering Event"),
then the Purchase Price as determined under clauses (i) and (ii) of Section
1(f) (as adjusted pursuant to Section 1(g)(i) and (vi)) shall be adjusted,
effective as of the Closing, as follows (the "Adjustment Based on Closing
Date Ownership"):
(A) the $25,504,000 payment under Section 1(f)(i) (as adjusted pursuant to
Section 1(g)(i)) shall be increased by an amount equal to the sum of
(x) to the extent that Seller's ownership of Common Stock of Buyer
effective as of the Closing, would, on account of the operation of this
Sec-
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tion 1(g)(iii) be reduced below 40% of the total shares of Common Stock
of Buyer issued and outstanding as of the effective time of Closing,
the product derived by multiplying $7.50 times the total number of
Excess Shares (as defined in subparagraph (B) below) that, if retained
by Seller, would cause Seller's ownership of Common Stock of Buyer
effective as of the Closing, to equal 40% of the total shares of Common
Stock of Buyer issued and outstanding as of the effective time of
Closing plus (y) the product derived by multiplying the total number of
all remaining Excess Shares times $5.00, and
(B) the number of shares of Buyer's Common Stock deliverable to Seller
under Section 1(f)(ii) and Section 1(g)(i) (collectively the "Delivered
Shares") shall be reduced reducing first shares deliverable under
Section 1(f)(ii) and then shares deliverable under Section 1(g)(i) by
such number of shares (the "Excess Shares") such that the number of
shares then deliverable under such Sections when taken together with
ownership changes of all Five Percent Shareholder(s) of Buyer within
the 3 year period prior to Closing would be one share short of causing
a 49 Percentage Point Increase.
All Excess Shares shall be void ab initio, with the effect that the Excess
Shares shall be treated as never having been issued. Seller shall immediately
return to Buyer all certificates evidencing Excess Shares, together with all
dividends and distributions at any time received by Seller with respect to
Excess Shares.
(iv) For purposes of this Agreement:
"Five Percent Shareholder" shall mean any Person or Public Group whose
ownership in Buyer would cause such Person or Public Group to be a
"5-percent shareholder" of Buyer within the meaning of Treasury
Regulations Section 1.382-2T(g)(1)(i) or (ii);
"49 Percentage Point Increase" shall mean an increase of 49 percentage
points or more of the Stock of Buyer owned by Five Percent Shareholders
over the lowest percentage of Stock owned by such 5-percent shareholders
at any time during the three-year period preceding the Closing, such
determination to be made in accordance with Treasury Regulations Section
1.382-2T(c) as if the Closing Date were a "testing date."
"Public Group" shall have the meaning set forth in Treasury Regulations
Section 1.382-2T(f)(13).
"Stock" shall mean all classes of stock of Buyer, all options (as
defined in Treasury Regulations Section 1.382-4(d)(g)) to acquire stock
of Buyer that must be treated as exercised pursuant to Treasury
Regulation Section 1.382-4(d)(2) and all other interests that would be
treated as stock in Buyer pursuant to Treasury Regulations Section
1.382-2T(f)(18)(iii).
(v) From and after the date of this Agreement, Buyer, as soon as it becomes
aware of any facts or circumstances which may bear upon the existence of a Five
Percent Shareholder and/or 49 Percentage Point Increase (including knowledge of
any report on Schedule 13D or 13G filed under the Securities Exchange Act of
1934, as amended, with respect to Buyer), shall promptly inform Seller thereof
in writing. Seller's determination at any time as to the existence of a Five
Percent Shareholder and/or 49 Percent Point Increase, the occurrence of a
Triggering Event and the calculation of the Adjustment Based on Closing Date
Ownership, based on the facts and circumstances known to it at such time, shall
be binding on the parties, subject to Section 30, and Seller's right from time
to time to revise its determination based on the discovery of new facts and
circumstances (such determination by Seller, as from time to time revised by
Seller, is herein the "Closing Date Ownership Determination"). Seller shall
promptly notify Buyer in writing of any Closing Date Ownership Determination,
which notice shall set forth, in reasonable detail, Seller's basis for
determining the occurrence of a Triggering Event and the calculation of the
Adjustment Based on Closing Date Ownership (herein a "Notice of Closing Date
Ownership Determination"). In the event that a Triggering Event is determined to
exist pursuant to a Notice of Closing Date Ownership Determination (regardless
of whether such Notice is given before or after Closing and whether one or more
other Notices of Closing Date Ownership Determination have previously been
given), the Adjustment Based on Closing Date Ownership in respect of such
Triggering Event shall be effective as of the Closing based on the ownership of
Stock as of the time of Closing as determined pursuant to such Notice.
Notwithstanding anything herein to the contrary, no further Notice of Closing
Date Ownership Determination shall be given by Seller after March 31, 1997
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("Outside Notice Date"), so that the Closing Date Ownership Determination as in
existence on the Outside Notice Date and the Adjustment Based on Closing Date
Ownership pursuant to such Determination shall be final and binding on the
parties. Prior to the Outside Notice Date, neither Seller nor any transferee of
the Delivered Shares shall transfer any of the Delivered Shares other than to
persons who agree to take the Delivered Shares subject to the provisions of
Sections 1(g)(iii), (iv) and (v) (for which purpose, Excess Shares at any time
shall first be reduced from any remaining Delivered Shares then held by Seller
and/or its affiliates, and thereafter shall be reduced from any Delivered Shares
then held by transferees on a pro rata basis). The certificates evidencing the
Delivered Shares shall bear a legend reflecting that the Delivered Shares are
subject to the restrictions set forth in Sections 1(g)(iii), (iv) and (v) of
this Agreement; provided that such legend shall be removed at any time after the
Outside Notice Date upon request by any holder of the Delivered Shares. The
provisions of Sections 1(g)(iii), (iv) and (v) shall not be construed to limit
Seller's right not to consummate the transactions contemplated by this Agreement
if the condition set forth in Section 3(b)(xviii) has not been satisfied.
(vi) If Buyer's earnings before interest and taxes ("EBIT") for Buyer's
fiscal year ended December 31, 1997 exceed $6,512,000 ("Forecasted EBIT"), an
amount equal to the product of (x) the excess amount ("1997 Excess EBIT")
multiplied by (y) 5.55 shall be paid to Seller by an increase in the principal
amount of the Buyer Note by delivery of an Amended Buyer Note increased in
principal amount by such amount. If Buyer's EBIT for Buyer's fiscal year ended
December 31, 1998 exceeds Forecasted EBIT, an amount equal to the product of (x)
the excess amount ("1998 Excess EBIT") less the 1997 Excess EBIT multiplied by
(y) 4.50 shall be paid to Seller by an increase in the principal amount of the
Buyer Note by delivery of an Amended Buyer Note increased in principal amount by
such amount. If Buyer's EBIT for Buyer's fiscal year ended December 31, 1999
exceeds the Forecasted EBIT, an amount equal to the product of (x) the excess
amount less the 1998 Excess EBIT multiplied by (y) 2.75 shall be paid to Seller
by an increase in the principal amount of the Buyer Note by delivery of an
Amended Buyer Note increased in principal amount by such amount. For purposes of
this Section 1(g)(vi), Buyer's EBIT shall be calculated using the same
methodology and based on the same types and categories of expenses as used in
the calculation of Forecasted EBIT, which categories and types of expenses and
methodology are more particularly described in Schedule 1(g)(vi) attached
hereto, and shall expressly exclude any and all other types or categories of
expenses. Notwithstanding anything herein to the contrary, the total amount by
which the principal amount of the Buyer Note may be increased pursuant to this
Section 1(g)(vi) shall not exceed $24,496,000 in the aggregate.
(vii) The adjustment described in Section 1(g)(vi) shall be effected no
later than 7 business days after preparation and final determination, pursuant
to this Section 1(g)(vii), of Buyer's EBIT for each such fiscal year. Within 90
days after the close of each such fiscal year, Buyer shall prepare and deliver
to Seller based on the books and records of Buyer and calculated in accordance
with Section 1(g)(vi) an audited balance sheet and statement of income for such
fiscal year prepared in accordance with generally accepted accounting
principles, together with a certificate ("EBIT Certificate") dated as of the end
of such fiscal year and signed by the chief financial officer of Buyer
certifying the amount of Buyer's EBIT for such fiscal year, the amount of any
excess over Forecasted EBIT and the amount to be paid to Seller pursuant to
Section 1(g)(vi) above. Seller and its authorized representatives shall be
entitled to review the EBIT Certificate and the books, records and work papers
of the Buyer used to prepare such EBIT Certificate. If Seller disagrees with any
item on the face of the EBIT Certificate, Seller shall notify Buyer writing of
such disagreement (stating the reasons therefor) within 30 days after Seller's
receipt of such EBIT Certificate from Buyer, and Seller and Buyer shall attempt
to resolve such disagreement. If Seller does not provide such notice within such
30 days, the EBIT Certificate for such fiscal year shall be deemed accepted by
Seller and for purposes of Section 1(g)(vi) above Buyer's EBIT for such fiscal
year shall be the amount reflected on such EBIT Certificate. If Seller and Buyer
are unable to resolve any disagreement (with respect to which timely notice of
such disagreement has been provided) within 15 days after Buyer receives such
notice of disagreement, Seller and Buyer shall submit the disagreement to a
national independent public accounting firm acceptable to Buyer and Seller. If
Buyer and Seller are unable to agree upon the selection of such firm within 20
days after Buyer receives the above notice of disagreement, an accounting firm
of national reputation shall be selected within 5 days thereafter by lot after
eliminating (a) Deloitte & Touche LLP (Seller's independent accountants) and (b)
Ernst & Young LLP (Buyer's independent accountants) and (c) one additional
accounting firm for each of Buyer and Seller, should either Buyer or Seller or
both, find such accounting firm to be objectionable. Buyer and Seller shall
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cause the accounting firms so selected, within 15 days after its selection, to
resolve such disagreement, which resolution shall be binding on the parties, and
the Buyer's EBIT for such fiscal year shall be so finally adjusted in accordance
with such resolution for purposes of Section 1(g)(vi) above. The fees and
expenses of such accounting firm shall be paid 100% by Seller unless Buyer's
EBIT for such fiscal year as determined pursuant to this Section 1(g)(vii) is
not within 20% of the Buyer's EBIT reflected on Buyer's initial EBIT Certificate
for such fiscal year submitted by Buyer under this Section 1(g)(vii), in which
case, the fees and expenses of such accounting firm shall be paid one-half by
Buyer and one-half by Seller.
(h) Allocation of Purchase Price. As promptly as practicable following the
date hereof, but in any event within ten business days prior to the Closing
Date, Buyer shall deliver to Seller its reasonable, good faith determination of
the fair market value of the Assets, which determination shall be made in
accordance with applicable tax laws and shall be subject to Seller's consent
(which consent shall not be unreasonably withheld or delayed). Buyer and Seller
shall then set forth such determination on Schedule 1(h) attached hereto, which
shall include an allocation of the Purchase Price among the Assets on the basis
of the fair market values thereof and which, if necessary, shall be amended to
take into account any adjustments which may be required by Section 1(g). For tax
purposes, the Purchase Price shall be allocated among the Assets (which
allocation shall be consistent with the allocation set forth on Schedule 1(h))
and such Purchase Price shall be allocated in accordance with Section 1060 of
the Code. Neither Buyer nor Seller, nor any of their respective affiliates,
shall take any position (whether in financial statements, audits, tax returns or
otherwise) which is inconsistent with the allocation of the Purchase Price,
taking into account any adjustments which may be required by Section 1(g),
unless required to do so by applicable law. The parties shall exchange drafts of
any information returns required by Section 1060 of the Code and any similar
state statute at least 60 days prior to filing such returns and shall discuss in
good faith any modifications suggested by the receiving party. For purposes of
this Agreement, the term "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any reference to any particular Code provision shall be interpreted
to include any revision of or successor to such provision regardless of how
numbered or classified.
2. Closing.
The closing (the "Closing") of the purchase and sale of the Assets and the
assumption of the Assumed Liabilities shall be held at the offices of Seller, at
10:00 a.m., local time, on the first Monday or fiscal month-end (determined with
reference to Seller's accounting policies) that is at least three business days
following satisfaction or, if permissible, waiver of the conditions to Closing
set forth in Sections 3(a) and 3(b). The date on which the Closing shall occur
is hereinafter referred to as the "Closing Date," and the Closing shall be
deemed effective as of the opening of business on the Closing Date.
(a) At the Closing, subject to and on the terms and conditions set forth in
this Agreement, Buyer shall deliver to Seller (A) the Purchase Price, without
giving effect to any adjustment which may be required pursuant to Section 1(g),
by (x) delivery of the Buyer Note, duly executed, and (y) delivery of
certificates representing 4,264,000 shares of the Common Stock, duly endorsed in
blank or accompanied by stock powers duly endorsed in blank in proper form for
transfer, with appropriate transfer stamps, if any, affixed thereto,(B)
instruments of assumption (collectively, the "Assumption Agreement") in form and
substance reasonably satisfactory to Seller and its counsel evidencing and
effecting the assumption by Buyer of the Assumed Liabilities, (C) certified
copies of resolutions duly adopted by Buyer's board of directors and, where
appropriate, shareholders (collectively the "Buyer Resolutions") authorizing the
execution, delivery and performance of this Agreement and the other agreements
and transactions contemplated hereby (including Buyer's reincorporation into
Delaware and the amendments to Buyer's Articles of Incorporation and By-laws, as
contemplated hereby) and the issuance to Seller of the shares of Common Stock
contemplated hereby, (D) certified copies of Buyer's Articles of Incorporation
and By-laws, as amended as contemplated hereby and as in effect on the Closing
Date, and the other Ancillary Agreements to which Seller is not a party, (E) a
certificate of the Secretary or an Assistant Secretary of Buyer as to the
incumbency of the officer(s) of Buyer (who shall not be such Secretary or
Assistant Secretary) executing this Agreement or any Ancillary
Agreement,(F)short-form certificates of good standing of Buyer, certified by the
Secretaries of State of Buyer's state of incorporation, of Ohio and of each
other state where the failure of Buyer to qualify to do business would subject
Buyer to monetary penalties by such state, respectively, as of a date not more
than
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three business days prior to the Closing Date and (G) the other documents
specified in Section 3(b) that are required to be delivered to Seller as a
condition to the Closing.
(b) At the Closing, subject to and on the terms and conditions set forth in
this Agreement, Seller shall deliver or cause to be delivered to Buyer (i) such
duly executed instruments of sale, assignment, transfer and conveyance
(collectively, the "Bill of Sale") in form and substance reasonably satisfactory
to Buyer and its counsel to transfer all of Seller's right, title and interest
in and to the Assets and to evidence and effect the sale and transfer to Buyer
of the Assets (it being understood, however, that such instruments shall not
require Seller or any other Person to make any additional representations,
warranties or covenants, express or implied, not contained in this Agreement),
(ii) certified copies of resolutions duly adopted by Seller's board of directors
("Seller Resolutions") authorizing the execution, delivery and performance of
this Agreement and the other agreements and transactions contemplated hereby,
(iii) certified copies of Seller's Certificate of Incorporation and By-laws, as
in effect on the Closing Date, (D) a certificate of the Secretary or an
Assistant Secretary of Seller as to the incumbency of the officer(s) of Seller
(who shall not be such Secretary or Assistant Secretary) executing this
Agreement or any Ancillary Agreement, (E) a short-form certificate of good
standing of Seller, certified by the Secretary of State of Delaware, and (F) the
other documents specified in Section 3(a) that are required to be delivered to
Buyer as a condition to the Closing. With respect to the Real Property included
in the Assets, such instruments to be delivered at the Closing shall consist of
a limited or special warranty deed in the form of Exhibit B attached hereto.
(c) Notwithstanding any other provision of this Agreement to the contrary,
the purchase and sale of the Assets as contemplated by this Agreement shall be
subject to the additional provisions of this paragraph (c) and Section 8(b).
Seller and Buyer shall cooperate with each other regarding, and shall use their
reasonable efforts to cause, the sale to Buyer of all of the Assets on the
Closing Date on the terms and conditions set forth in this Agreement, and to
otherwise consummate the transactions contemplated hereby; provided, however,
that such cooperation and reasonable efforts by Seller shall not include any
requirement of the Seller Entities to expend money, commence any litigation or
offer or grant any accommodation (financial or otherwise) to any third party.
Nothing in this Agreement shall be construed as an attempt or agreement to
assign (x) any Contract which is nonassignable without the consent of the other
party or parties thereto unless such consent shall have been obtained (subject
to the right of Buyer under Sections 3(a)(iv) and 3(a)(v) and the right of
Seller under Section 3(b)(iii)) or (y) any Contract or claim as to which the
remedies for the enforcement thereof enjoyed by Seller would not pass to Buyer
as an incident of the assignments provided for by this Agreement. The Purchase
Price shall not be subject to adjustment by reason of the fact that any
Contracts or claims may not be assigned to Buyer under the circumstances
described in clauses (x) and (y) above. Any Contract which is not properly
assigned to Buyer because of the failure to obtain a required consent shall be
governed by, and subject to the provisions of, Section 8(b).
3. Conditions to Closing.
(a) Buyer's Obligation. The obligation of Buyer to purchase and pay for the
Assets and assume the Assumed Liabilities is subject to the satisfaction (or
waiver by Buyer) as of the Closing of the following conditions:
(i) The representations and warranties of Seller made in this
Agreement shall be true and correct in all material respects as of the date
hereof and on and as of the Closing Date, as though made on and as of the
Closing Date, except for representations and warranties that speak as of a
specific date or time (which need only be true and correct as of such date
or time), and Seller shall have performed or complied in all material
respects with all obligations and covenants required by this Agreement to
be performed or complied with by Seller by the time of the Closing, and
Seller shall have delivered to Buyer a certificate dated the Closing Date
and signed by a Vice President of Seller confirming the foregoing.
(ii) No injunction or order of any court or administrative agency of
competent jurisdiction shall be in effect or pending as of the Closing
which would restrain or prohibit the purchase and sale of the Assets or the
exercise by Buyer of control over the Assets.
(iii) Reserved.
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(iv) Buyer and Seller shall have received or obtained all third party,
board of directors and stockholder consents and approvals that are
necessary for the consummation of the transactions contemplated hereby or
that are required in order to prevent a breach of or default under, a
termination or modification of, or acceleration of the terms of, any
Contract or any Buyer Contract and that are identified on Schedule
3(a)(iv)attached hereto (collectively "Company and Third-Party Approvals"),
except for any such Company and Third-Party Approval, the failure to obtain
of which would not have a material adverse effect on the transactions
contemplated hereby or on the Plastics Business as a whole.
(v) Buyer and Seller shall have received or obtained all governmental
and regulatory consents, approvals, licenses and authorizations that are
necessary for the consummation of the transactions contemplated hereby and
identified on Schedule 3(a)(v) attached hereto (collectively, "Governmental
Approvals"), except for any such Governmental Approval, the failure to
obtain of which would not have a material adverse effect on the
consummation of the transactions contemplated hereby or on the Plastics
Business as a whole.
(vi) The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), shall have expired or
been terminated, if applicable.
(vii) Seller and Buyer shall have entered into the Supply Agreement,
the Transition Services Agreement and the Registration Rights Agreement
(collectively, with the amendment to Buyer's Articles of Incorporation and
By-laws, all as contemplated hereby, the "Ancillary Agreements").
(viii) Seller shall have delivered to Buyer at Buyer's expense (A) a
location survey (the "Survey") of the Real Property (1) certified as being
prepared in accordance with the Minimum Standard Detail Requirements for
ALTA/ACSM Land Title Surveys as adopted in 1992 for an "Urban" Survey, (2)
locating all improvements, easements and other encumbrances, (3) indicating
the portion of the Real Property in a flood plain and (4) which have been
certified to Buyer, Buyer's title insurance company and any lenders
designated by Buyer and (B) a title commitment from a reputable title
insurance company to be marked up and dated as of the Closing Date in an
amount equal to the fair market value of the Real Property as set forth on
Schedule 1(h) or as reasonably determined by Buyer and notified to Seller
not later than twenty (20) business days prior to the Closing Date.
(ix) Buyer shall have received a customary opinion from in-house
counsel to Seller, dated the Closing Date, in form and substance reasonably
satisfactory to Buyer and its counsel relating to good standing, authority,
authorization and enforceability of this Agreement.
(x) Promptly after they are available, and in no event later than 60
days after the date of this Agreement, Seller shall deliver an unqualified
report of independent public accountants stating that they have audited the
Financial Statements and that the Financial Statements present fairly in
all material respects the financial position of the Plastics Business as of
and for the periods referred to therein in accordance with generally
accepted accounting principles; it being understood that this condition
shall be deemed to be automatically waived by Buyer if Buyer is delivered a
report that does not satisfy this condition, but fails to object in writing
to Seller within 30 days after the receipt of such report.
(xi) Seller shall have delivered to Buyer a certificate dated the
Closing Date and signed by a Vice President of Seller confirming that since
the date of this Agreement, to the knowledge of Seller, there has been no
material adverse change in the Plastics Business taken as a whole, other
than changes relating to economies in general or the Plastics Business's
industry in general (including, without limitation, changes due to
seasonality) and not specifically relating to the Plastics Business.
(xii) Seller shall have caused to be delivered to Buyer a Phase I
environmental report ("Environmental Report") on the Real Property, the
results of which are satisfactory to Buyer, in Buyer's sole but reasonable
discretion; it being understood that this condition shall be deemed to be
automatically satisfied if Buyer has not notified Seller in writing that it
is not satisfied with the results described in the Environmental Report
within 30 days after the receipt of the Environmental Report. Buyer and
Seller agree to share equally the expenses of the Environmental Report.
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(xiii) Buyer and the IAM shall have entered into a collective
bargaining agreement for the employment of IAM represented employees of
Buyer at the Plastics Business.
(b) Seller's Obligation. The obligation of Seller to sell and deliver or
cause to be sold and delivered the Assets to Buyer is subject to the
satisfaction (or waiver by Seller) as of the Closing of the following
conditions:
(i) The representations and warranties of Buyer made in this Agreement
shall be true and correct in all material respects as of the date hereof
and on and as of the Closing Date, as though made on and as of the Closing
Date, except for representations and warranties that speak as of a specific
date or time (which need only be true and correct as of such date or time),
and Buyer shall have performed or complied in all material respects with
the obligations and covenants required by this Agreement to be performed or
complied with by Buyer by the time of the Closing; and Buyer shall have
delivered to Seller a certificate dated the Closing Date and signed by the
President or a Vice President of Buyer confirming the foregoing.
(ii) No injunction or order of any court or administrative agency of
competent jurisdiction shall be in effect or pending as of the Closing
which would restrain or prohibit the purchase and sale of the Assets.
(iii) Buyer and Seller shall have received or obtained all
Governmental Approvals and Company and Third Party Approvals, except for
any such Governmental Approval and any such Company and Third Party
Approval, the failure to obtain of which would not have a material adverse
effect on the transactions contemplated hereby or on the Plastics Business
as a whole.
(iv) The waiting period under the HSR Act shall have expired or been
terminated, if applicable.
(v) Buyer shall have reincorporated into Delaware and the shares of
Common Stock issued to stockholders of Buyer upon reincorporation shall
contain an appropriate legend restricting the transferability of such
shares in form and substance satisfactory to Seller.
(vi) Reserved.
(vii) Buyer shall have terminated the SEP in accordance with
applicable law.
(viii) Buyer shall have duly amended and restated its Articles of
Incorporation in a manner satisfactory to Seller to among other things (x)
reflect that Buyer will cease to be a REIT effective for its tax year
ending December 31, 1996, subject to consummation of the transactions
contemplated by this Agreement, (y) provide that Buyer may not engage in
extraordinary transactions without prior approval of a supermajority of its
stockholders and (z) provide for restriction on transfer provisions that
protect against a change in ownership of Buyer within the meaning of Code
Section 382. Buyer's Articles of Incorporation shall be in full force and
effect as of the Closing as so amended and shall not have been further
amended or modified.
(ix) Buyer's By-laws shall have been duly amended and restated in a
manner satisfactory to Seller to among other things (A) reflect that Buyer
will cease to be a REIT effective for its tax year ending December 31,
1996, subject to consummation of the transactions contemplated by this
Agreement, (B) permit the holders of at least 20% of the Common Stock to
call for a meeting of Buyer's stockholders in the shortest period of time
permitted by applicable law, (C) permit any member of Buyer's board of
directors to call a meeting of the board of directors in the shortest
period of time permitted by applicable law and (D) permit the board of
directors to establish the size of the board from 3 to 7 directors. Buyer's
By-laws shall be in full force and effect as of the Closing as so amended
and shall not have been further amended or modified.
(x) Buyer and Seller shall have entered into each of the other
Ancillary Agreements and Related Documents (as defined in the Buyer Note),
which shall be in full force and effect as of the Closing.
(xi) Buyer shall have (A) registered under the Securities Act of 1933,
as amended and (B) obtained approval for listing on the American Stock
Exchange, all of the shares of Common Stock which may be issued hereunder
to Seller.
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(xii) INTENTIONALLY DELETED
(xiii) Each of the individuals serving on Buyer's board of directors
prior to the Closing Date (other than the Buyer Directors) shall have
tendered his or her resignation to Buyer effective as of the Closing Date.
(xiv) From and after the Closing Date and until the first annual
meeting of the Buyer's Board of Directors following the first annual
meeting of Buyer's stockholders following the Closing Date, the officers of
Buyer shall be comprised of individuals mutually acceptable to Buyer and
Seller, and each of the other individuals serving as an officer of Buyer
prior to the Closing Date shall have tendered his or her resignation to
Buyer effective as of the Closing Date.
(xv) Buyer shall have delivered to Seller a schedule marked "Schedule
3(b)(xv)," which Schedule 3(b)(xv) shall provide an itemized list of all
liabilities of Buyer and its subsidiaries in existence as of the Closing
Date, immediately prior to giving effect to the transactions contemplated
hereby and be in form and substance reasonably satisfactory to Seller.
(xvi) Seller shall have received a customary opinion from external
counsel to Buyer, dated the Closing Date, in form and substance
satisfactory to Seller and its counsel relating to, among other things,
good standing, authority, authorization and enforceability of this
Agreement and the other Ancillary Agreements and capital structure of Buyer
after giving effect to transaction contemplated hereby.
(xvii) Seller shall have obtained the Environmental Report, the
results of which are satisfactory to Seller, in Seller's sole but
reasonable discretion; it being understood that this condition shall be
deemed to be automatically satisfied if Seller has not notified Buyer in
writing that it is not satisfied with the results described in the
Environmental Report within 30 days after the delivery of the Environmental
Report by the Seller to Buyer.
(xviii) Buyer and the IAM shall have entered into a collective
bargaining agreement for the employment of IAM represented employees of
Buyer at the Plastics Business in form and substance reasonably
satisfactory to Seller and Buyer.
(xix) Buyer shall have delivered to Seller a certificate dated the
Closing Date and signed by the Chief Executive Officer of Buyer confirming
that, to the best of Buyer's knowledge, Buyer has not had within the 3 year
period prior to the Closing any Five Percent Shareholder other than a
single Public Group within the meaning of Treasury Regulation Section
1.382-2T(g)(1)(iii).
(xx) (i) Buyer shall have amended Buyer's Stock Option Plan in a
manner such that the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby shall not
result in any increase in the number of stock options held by each holder
of stock options as of the date of this Agreement, and (ii) each holder of
stock options received pursuant to Buyer's Stock Option Plan shall have
consented to such amendment.
(xxi) Buyer shall have established Employee Benefit Plans to cover the
Hired Employees in accordance with the provisions of Section 8(m).
4. Representations and Warranties of Seller.
Seller hereby represents and warrants to Buyer as follows:
(a) Authority. Seller is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Seller has or prior to
the Closing will have all requisite corporate power and authority to enter into
this Agreement and the Ancillary Agreements as are contemplated hereby to be
executed and delivered by it and to consummate the transactions contemplated
hereby and thereby. All corporate acts and other proceedings required to be
taken by Seller to authorize the execution, delivery and performance of this
Agreement and such Ancillary Agreements and the consummation of the transactions
contemplated hereby and thereby have or prior to the Closing will have been duly
and properly taken. This Agreement has been duly executed and delivered by
Seller, and such Ancillary Agreements as are contemplated hereby to be executed
and delivered by Seller shall be duly and validly executed and delivered by
Seller. This Agreement and such Ancillary Agreements constitute, or will
constitute, as applicable, valid and binding obligations of Seller, enforceable
against Seller in accordance with their respective terms.
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(b) No Conflicts. Subject to the matters disclosed on Schedules 1(b)(iv),
3(a)(iv) and 3(a)(v), the execution and delivery by Seller of this Agreement and
the Ancillary Agreements as are contemplated hereby to be executed and delivered
by Seller do not, and the consummation by Seller of the transactions
contemplated hereby and thereby and compliance by Seller with the terms hereof
and thereof will not, conflict with, or result in any violation of or default
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a benefit under, or result in the creation of any
Lien of any kind upon any of the Assets under, or require any consent,
authorization or approval under (A) the Certificate of Incorporation or By-Laws
of Seller, (B) any Contract or (C) any judgment, order or decree or any material
statute, law, ordinance, rule or regulation applicable to the Plastics Business
or the Assets, other than any such conflicts, violations, defaults, rights or
Liens that, individually or in the aggregate would not have a material adverse
effect on Seller, or on the ability of Seller to consummate the transactions
contemplated hereby, and other than any such consents, authorizations or
approvals that may be required by reason of Buyer's participation in the
transactions contemplated hereby.
(c) Title to Tangible Assets Other than Real Property Interests. Seller has
good and valid title to or a valid leasehold interest in, all of the material
tangible assets included in the Assets which are reflected on the unaudited
balance sheet dated January 31, 1996 included in the Financial Statements or
were acquired after January 31, 1996, except those sold or otherwise disposed of
since the date hereof in the ordinary course of business consistent with past
practice (collectively, the "Tangible Assets"), free and clear of all mortgages,
liens, security interests or encumbrances (collectively, "Liens") of any nature
whatsoever, except (i) such as are disclosed on Schedule 4(c) or the other
Schedules hereto, (ii) mechanics', carriers', workmen's, repairmen's or other
like Liens arising or incurred in the ordinary course of business, Liens arising
under original purchase price conditional sales contracts and equipment leases
with third parties entered into in the ordinary course of business, Liens
arising in connection with sale-leaseback transactions and Liens for taxes and
other governmental charges which are not due and payable or which may thereafter
be paid without penalty and (iii) other imperfections of title, restrictions or
encumbrances, if any, which imperfections of title, restrictions or encumbrances
do not, individually or in the aggregate, materially interfere with the
continued use and operation of, or materially detract from the value of, the
Assets to which they relate in the operation of the Plastics Business as
currently conducted (collectively, the "Permitted Liens"). To Seller's
knowledge, Seller has in all material respects performed all the obligations
required to be performed by it with respect to all the Tangible Assets leased by
it. This Section 4(c) does not relate to real property or interests in real
property, such items being the subject of Section 4(d).
(d) Title to Real Property. Schedules 1(b)(iv) and 1(b)(vii) sets forth a
list of all real property and interests in real property owned in fee or leased
by Seller and relating exclusively to the Plastics Business. Seller has good and
insurable fee title to the Real Property, free and clear of all Liens of any
nature whatsoever, except (i) Permitted Liens, (ii) easements, covenants,
rights-of-way and other similar restrictions of record, (iii) any conditions
that may be shown by a current, accurate survey or physical inspection of the
Real Property made prior to Closing, (iv) current general real estate taxes and
installments for special assessments which are not yet due and payable, (v)
existing leases, licenses and possession or occupancy agreements set forth on
Schedule 4(d), and (vi) (A) zoning, building, fire, health, environmental and
pollution control laws, ordinances, rules and safety regulations and other
similar restrictions, (B) mortgages, liens, security interests or encumbrances
of record and (C) unrecorded easements, covenants, rights-of-way or other
similar restrictions, none of which items set forth above individually or in the
aggregate materially interfere with the continued use and operation of the Real
Property in the Plastics Business as currently conducted or materially detract
from the value of the Real Property.
(e) Intellectual Property. To Seller's knowledge: (i) Seller has not
interfered with, infringed upon or misappropriated any intellectual property
rights of third parties in the conduct of the Plastics Business; (ii) Seller has
not received any complaint, claim or notice alleging any such interference,
infringement or misappropriation; (iii) no third party has interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
Plastics Business Intellectual Property Rights; (iv) Seller owns or has a valid
license to use and has the right to transfer and assign all Plastics Business
Intellectual Property Rights; and (v) none of such Plastics Business
Intellectual Property Rights is subject to any Lien (except Liens in favor of
the licensor, sublicensor or other owner of such Plastics Business Intellectual
Property Rights). Except as set forth
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on Schedule 4(e), to the knowledge of Seller, no licenses, sublicenses or
agreements pertaining to any such Plastics Business Intellectual Property have
been granted or entered into by or on behalf of Seller. For purposes of this
Section 4(e), "Plastics Business Intellectual Property Rights" shall not include
any software license or similar agreement which is generally available to the
public.
(f) Contracts. Except as set forth on Schedule 1(b)(iv) or 1(b)(vii), to
the knowledge of Seller, none of the Seller Entities is party to any written or
oral agreement or arrangement as of the date of this Agreement that relates
primarily to the Plastics Business in the following categories:
(i) employment agreement or employment contract that has an aggregate
future liability in excess of $50,000 and is not terminable by notice of
not more than 60 days for a cost of less than $50,000;
(ii) employee collective bargaining agreement or other contract with
any labor union;
(iii) covenant not to compete;
(iv) agreement, contract or other arrangement with any officer,
director or senior employee of the Seller Entities (other than employment
agreements covered by clause (i) above or not covered by clause (i) because
such agreements do not meet the thresholds set forth in clause (i) above);
(v) lease or similar agreement under which any Seller Entity is a
lessor or sublessor of or makes available for use by any third party, any
real property owned or leased by any Seller Entity and used exclusively in
the Plastics Business;
(vi) lease or similar agreement under which (A) the Seller is a lessee
of, or holds or uses any Tangible Assets owned by a third party and used
exclusively in the Plastics Business or (B) the Seller is a lessor or
sublessor of, or makes available for use by any third party, any Tangible
Assets owned or leased by the Seller and used exclusively in the Plastics
Business, in any such case which has an aggregate future liability in
excess of $100,000 and is not terminable by notice of not more than 60 days
for a cost of less than $100,000;
(vii) (A) continuing contract for the future purchase of materials,
supplies or equipment, (B) management, service, consulting or other similar
type of contract or (C) advertising agreement or arrangement, in each case
relating exclusively to the Plastics Business and in any such case which
has an aggregate future liability in excess of $100,000 and is not
terminable by notice of not more than 60 days for a cost of less than
$100,000;
(viii) material license or other agreements relating in whole or in
part to patents, trademarks, tradenames, service marks or copyrights
(including any license or other agree ment under which the Seller has the
right to use any of the same owned or held by a third party);
(ix) mortgage, pledge, security agreement, deed of trust or other
document granting a Lien upon the Real Property or the Tangible Assets; or
(x) other agreement, contract, lease, license, commitment or
instrument exclusively relating to the Plastics Business to which any
Seller Entity is a party or by which any of the assets of the Plastics
Business is bound or subject which has an aggregate future liability in
excess of $100,000 and is not terminable by notice of more than 60 days for
a cost of less than $100,000.
Except as disclosed on Schedule 1(b)(iv) or Schedule 4(f), to the knowledge of
Seller, each material Contract is (x)a valid and binding obligation of Seller,
(y) in full force and effect and (z) enforceable by the Seller in accordance
with its terms, except as such enforceability may be limited by (A) bankruptcy,
insolvency, reorganization, moratorium or other similar laws, now or hereafter
in effect, relating to or limiting creditors' rights generally and (B) general
principles of equity (whether considered in an action in equity or at law).
Except as disclosed on Schedule 4(f), to the knowledge of Seller, Seller has
performed all material obligations required to be performed by it to date under
the Contracts and, to the knowledge of Seller, Seller is not (with or without
the lapse of time or the giving of notice or both) in any breach or default in
any material respect thereunder and, to the knowledge of Seller, no other party
to any of the material Contracts is in breach or default in any material respect
thereunder.
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(g) Litigation; Decrees. Schedule 4(g) sets forth a list, as of the date of
this Agreement, of all pending claims, proceedings, actions or lawsuits of which
Seller has received service of process, and to the knowledge of Seller all
threatened claims, proceedings, actions or lawsuits, which (i) relate to or
affect the Plastics Business, (ii) seek any injunctive relief which would affect
Buyer's acquisition, ownership or operation of the Assets or (iii) directly
relate to the transactions contemplated by this Agreement. To the knowledge of
Seller, except as disclosed on Schedule 4(g), Seller, with respect to the
Plastics Business, is not in default under any material judgment, order or
decree of any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, applicable to the Plastics
Business or the Assets.
(h) Financial Statements. The pro forma balance sheet as of October 31,
1995 and the pro forma statements of income and cash flow for the year ended
October 31, 1995 and the pro forma balance sheet as of January 31, 1996,
prepared on the basis described in the notes thereto (the "Financial
Statements") are attached hereto as Schedule 4(h). The Financial Statements to
the knowledge of Seller, present fairly the consolidated financial condition and
results of operations and cash flow of the Plastics Business as at the dates and
for the periods then ended, except as otherwise provided in the notes thereto.
(i) Compliance with Applicable Laws. Without in any way limiting or
modifying the scope of the other representations and warranties of Seller,
except as set forth on Schedule 4(i), to the knowledge of Seller the Plastics
Business is being conducted in compliance in all respects with all applicable
statutes, laws, ordinances, rules, orders and regulations of any governmental
authority or instrumentality (including, without limitation, all applicable
environmental laws, rules and regulations) the noncompliance of which would have
a material adverse effect on the Plastics Business taken as a whole. Except as
set forth on Schedule 4(i), to the knowledge of Seller, since December 31, 1995
to the date of this Agreement, Seller has not received any written communication
from a governmental authority that alleges that the Plastics Business is not in
compliance, in all respects, with all applicable federal, state, foreign or
local laws, rules and regulations (including, without limitation, all
applicable, environmental laws, rules and regulations), the noncompliance with
which would have a material adverse effect on the Plastics Business taken as a
whole.
(j) Asset Sufficiency. To the knowledge of Seller, except as disclosed on
Schedule 4(j) and except for the Excluded Assets, the Assets include all of the
Tangible Assets and all of the trade secrets, know-how, processing procedures
and the Plastic Business Intellectual Property currently used by Seller that,
together with Buyer's rights under Section 8(b) and Section 9 and under the
Ancillary Agreements, are necessary to manufacture the Products in substantially
the same manner as the Products were manufactured by Seller since December 31,
1995 to the date of this Agreement.
(k) Seller's Employee Benefit Plans. For purposes of this Agreement,
"Employee Benefit Plan" means any (a) qualified or nonqualified "Employee
Pension Benefit Plan" (as such term is defined in sec. 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")); (b) "Employee
Welfare Benefit Plan" (as such term is defined in sec. 3(1) of ERISA), or (c)
fringe benefit plan, policy, program, and arrangement, whether or not subject to
ERISA; provided that "Employee Benefit Plan" shall not include any
"Multiemployer Plan" (as that term is defined in sec. 3(37) of ERISA). Schedule
4(k) sets forth a true, complete and correct list of all Employee Benefit Plans
and Multiemployer Plans that Seller maintains, to which it contributes, or to
which it has an obligation to contribute covering employees and former employees
of Seller at its Plastics Business (collectively, the "Seller Plans" and
individually, a "Seller Plan").
(l) Condition of Assets. To the knowledge of Seller, as of the date of this
Agreement and ordinary wear and tear excepted, none of the items of machinery
and equipment constituting a part of the Equipment and having a fair market
value exceeding $1,000,0000 is operating with any significant and extraordinary
defects that would cause Seller to have to expend, as of the date of this
Agreement, more than $100,000 on any one such item of machinery and equipment in
order for such item of machinery and equipment to no longer operate with
significant and extraordinary defects.
(m) Absence of Undisclosed Liabilities. To the knowledge of Seller, Seller
will not on the Closing Date be subject to any obligation or liability of
whatever kind and nature (whether accrued, absolute, contingent, direct,
indirect, primary, or secondary, whether due or to become due and regardless of
when asserted) arising out of transactions entered into at or prior to the
Closing, or any action or inaction of the Seller Entities at or prior to the
Closing, or any state of facts existing at or prior to the Closing and
exclusively relating to the
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Plastics Business other than (A) liabilities reflected on the Closing Date
Balance Sheet, (B) obligations and liabilities under the Contracts and (C)
obligations and liabilities disclosed on Schedule 4(m) and in the other
Schedules hereto.
5. Covenants of Seller. Seller covenants and agrees as follows:
(a) Access. Prior to the Closing, Seller shall grant to Buyer or cause to
be granted to Buyer and its representatives, employees, counsel and accountants
reasonable access, during normal business hours and upon reasonable notice, to
the personnel, properties, books and records of Seller relating to the
transition of the Plastics Business to Buyer; provided, however, that such
access does not unreasonably interfere with the normal operations of Seller or
the Plastics Business; and provided further, however, that all requests for
access shall be directed to Thomas M. Hough, Vice President and Treasurer of
Seller, or such other Person as Seller may designate from time to time. Buyer
shall indemnify and hold Seller and its affiliates and their respective
officers, shareholders, directors and employees harmless against any and all
losses, liabilities, expenses and damages or actions or claims with respect
thereto suffered or incurred by Seller and its affiliates or any of their
respective officers, shareholders, directors and employees, arising out of, or
with respect to, Buyer's or its representatives', agents' or employees' exercise
of Buyer's rights under this Section 5(a). Notwithstanding any provision in this
Agreement to the contrary, Buyer's indemnity under this Section 5(a) shall
survive the termination of this Agreement and the consummation of the
transactions contemplated hereby.
(b) Ordinary Conduct. Except as permitted by the terms of this Agreement or
as set forth in Schedule 5(b), from the date hereof to the Closing, Seller will
cause the Plastics Business to be conducted in the ordinary course consistent
with past practice and will make all reasonable efforts consistent with past
practices to preserve its relationship with its third party customers and
suppliers with whom Seller deals in connection with the Plastics Business.
Except as provided in this Agreement or Schedule 5(b), from the date hereof
until the Closing, Seller will not do any of the following without the prior
written consent of Buyer:
(i) make any material change in the conduct of the Plastics Business;
(ii) sell, lease, license or otherwise dispose of, any interest in any
of the Assets, except for sales of inventory in the ordinary course of
business consistent with past practice and except for any such sales,
leases, licenses or other dispositions in the ordinary course of business
which do not exceed $250,000 in the aggregate;
(iii) permit, allow or subject any of the Assets or any part thereof
to any Lien or suffer such to be imposed, except for Permitted Liens;
(iv) enter into any new, or amend or terminate any existing,
Contracts, other than in the ordinary course of business consistent with
past practices;
(v) grant to any Hired Employee any increase in compensation or
benefits, except as may be required under existing agreements or in the
ordinary course of business consistent with past practice;
(vi) make any change in any method of accounting or accounting
practice or policy currently used in the preparation by Seller of financial
statements of the Plastics Business other than those required by generally
accepted accounting principles; or
(vii) enter into any agreement, whether in writing or otherwise, to do
any of the foregoing.
6. Representations and Warranties of Buyer.
Buyer hereby represents and warrants to Seller as follows:
(a) Authority; No Conflicts.
(i) Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland and, subject to the
simultaneous closing of the purchase and sale of the Assets contemplated
hereby, on the Closing Date shall be duly organized, validly existing and
in good standing under the laws of the State of Delaware. Buyer has or
prior to the Closing Date will have all requisite corporate power and
authority to enter into this Agreement and the Ancillary Agreements and to
consummate the transactions contemplated hereby and thereby. All corporate
acts and other proceedings
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required to be taken by Buyer (including its shareholders) to authorize the
execution, delivery and performance of this Agreement and the Ancillary
Agreements and the consummation of the transactions contemplated hereby and
thereby and all other actions contemplated by the Buyer Resolutions have
been or prior to the Closing Date will be, duly and properly taken. This
Agreement has been duly executed and delivered by Buyer, and the Ancillary
Agreements to be executed and delivered by Buyer shall be duly and validly
executed and delivered by Buyer. This Agreement and the Ancillary
Agreements constitute, or will constitute, as the case may be, valid and
binding obligations of Buyer, enforceable against Buyer in accordance with
their terms.
(ii) Subject to the matters described in Schedule 3(a)(iv) and
3(a)(v), the execution and delivery by Buyer of this Agreement and the
Ancillary Agreements do not, and the consummation by Buyer of the
transactions contemplated hereby, thereby and by the Buyer Resolutions and
compliance by Buyer with the terms hereof and thereof will not, conflict
with, or result in any violation of or default under, or give rise to a
right of termination, cancellation or acceleration of any obligation or to
loss of a benefit under, or result in the creation of any Lien of any kind
upon any of the properties or assets of Buyer or any of its affiliates
under, or require any consent, authorization or approval under any
provision of (A) the Articles of Incorporation or By-laws of Buyer or any
of its affiliates as in effect as of the date hereof, and as hereafter
amended as contemplated hereby, (B) any note, bond, mortgage, indenture,
deed of trust, license, lease, contract, document, instrument, commitment,
plan (employee benefit or otherwise), agreement or arrangement, whether
written or oral, to which Buyer or any of its affiliates is a party or by
which any of its or their properties or assets are bound (the "Buyer
Contracts"), or (C) any judgment, order or decree, or any material statute,
law, ordinance, rule or regulation applicable to Buyer or any of its
affiliates or its property or assets other than any such conflicts,
violations, defaults, rights or Liens that, individually or in the
aggregate, would not have a material adverse effect on the Buyer or on the
ability of Buyer to consummate the transactions contemplated hereby, and
other than any such consents, authorizations or approvals that may be
required by reason of Seller's participation in the transactions
contemplated hereby.
(b) Capital Stock.
(i) As of the Closing and immediately thereafter, the authorized
capital stock of Buyer shall consist of 50,000,000 shares of Common Stock,
of which 9,474,600 shares shall be issued and outstanding. Except as set
forth on Schedule 6(b)(i), as of the Closing, Buyer shall not have
outstanding any stock or securities convertible or exchangeable for any
shares of its capital stock or securities containing any profit
participation features, nor shall it have outstanding any rights or options
to subscribe for or to purchase its capital stock or any stock or
securities convertible into or exchangeable for its capital stock or any
stock appreciation rights or phantom stock plans. As of the Closing and
immediately thereafter, Buyer shall not be subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any
shares of its capital stock or any warrants, options or other rights to
acquire its capital stock. As of the Closing and immediately thereafter,
all of the outstanding shares of Buyer's capital stock shall be validly
issued, and, assuming, in the case of the shares of Common Stock to be
issued pursuant to Section 1(f), valid transfer of the Assets, fully paid
and nonassessable.
(ii) There are no statutory or, to the best of Buyer's knowledge,
contractual stockholders preemptive rights or rights of refusal with
respect to the issuance of the Common Stock hereunder. Buyer has not
violated and will not violate any applicable federal or state corporate or
securities laws, rules or regulations in connection with the offer, sale or
issuance of any of its capital stock, its reincorporation into Delaware or
its amendment of its Articles of Incorporation or By-Laws, as contemplated
hereby, or any applicable state securities laws. Except as set forth on
Schedule 6(b)(ii), Buyer's Articles of Incorporation and By-Laws, as in
effect on the Closing Date, shall be enforceable on all stockholders of
Buyer and no present or former stockholder of Buyer shall have any
appraisal rights, except as set forth on Schedule 6(b)(iii), or other
recourse against Buyer as a result of the transactions contemplated by this
paragraph. Except as otherwise set forth on Schedule 6(b)(iv), to the best
of Buyer's knowledge, there are no agreements between Buyer's stockholders
with respect to the voting or transfer of Buyer's capital stock or with
respect to any other aspect of Buyer's affairs.
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(c) Subsidiaries; Investments. Except as set forth on Schedule 6(c), Buyer
does not own or hold any rights to acquire any shares of stock or any other
security or interest in any other Person (including, without limitation, a
subsidiary).
(d) Financial Statements. Schedule 6(d) sets forth Buyer's consolidated
balance sheet, income statement and statement of cash flows as of and for the
period ended December 31, 1995, in each case together with the notes thereto
(collectively, the "Buyer Financial Schedules"). The Buyer Financial Schedules
have been derived from the accounting books and records of Buyer and its
affiliates and to the knowledge of Buyer, present fairly in all material
respects the consolidated financial position and the results of operations and
cash flow of Buyer and its subsidiaries as of and for the period ended December
31, 1995, in each case in accordance with United States generally accepted
accounting principles, consistently applied, except as otherwise provided in the
notes to the Buyer Financial Schedules.
(e) Absence of Undisclosed Liabilities. To the knowledge of Buyer, Buyer
and its subsidiaries do not (and on the Closing Date will not) have any
obligation or liability of whatever kind and nature (whether accrued, absolute,
contingent, direct, indirect, primary, secondary, unliquidated or otherwise,
whether or not known to Buyer or any subsidiary, whether due or to become due
and regardless of when asserted) arising out of transactions entered into at or
prior to the Closing, or any action or inaction at or prior to the Closing, or
any state of facts existing at or prior to the Closing other than: (i)
liabilities reflected on the latest balance sheet provided by Buyer pursuant to
Section 6(d) above (the "Latest Balance Sheet"),(ii)liabilities and obligations
to third parties which have arisen after the date of the Latest Balance Sheet in
the ordinary course of business or in connection with the transactions
contemplated hereby, and liabilities under employment agreements in effect on
the date hereof for base salary and benefits as described therein (without
giving effect to any amendment or modification thereof).
(f) Absence of Certain Developments. Since the date of the Latest Balance
Sheet to the date of this Agreement, neither Buyer nor any of its subsidiaries
has, and since the date of the Latest Balance Sheet to the Closing Date, neither
Buyer nor any of its subsidiaries will have:
(i) issued any notes, bonds, capital stock or other securities of any
kind;
(ii) borrowed any amount or incurred or become subject to any
liabilities except as enumerated in Section 6(e);
(iii) declared or made any payment or distribution of cash or other
property to its security holders with respect to its securities or
purchased or redeemed any shares of its securities;
(iv) subjected any of its properties or assets to any Lien;
(v) sold, assigned or transferred any of its assets for other than
fair value in exchange for cash, or acquired any new assets, rights or
interests, other than cash;
(vi) made capital expenditures or commitments therefor that aggregate
in excess of $10,000;
(vii) made any charitable contributions or pledges;
(viii) hired any employees to perform services for Buyer or increased
any compensation or other amounts payable to any employees; or
(ix) entered into a new, or modified or terminated any existing, Buyer
Contract;
(x) entered into any other transaction other than in the ordinary
course of business and in furtherance of consummating the transactions
contemplated hereby or entered into any other material transaction, whether
or not in the ordinary course of business; or
(xi) agreed (whether in writing or otherwise) to do any of the
foregoing.
(g) Assets. Except as set forth on the Latest Balance Sheet, Buyer does not
own any assets. On the Closing Date, Buyer will own no assets other than assets
set forth on the Latest Balance Sheet and cash. Buyer has good and marketable
title to all of the assets listed on the Latest Balance Sheet, free and clear of
all Liens, except for properties and assets disposed of in the ordinary course
of business for fair value since the date of
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the Latest Balance Sheet and except for Liens disclosed on the Latest Balance
Sheet (including any notes thereto).
(h) Contracts. Except for this Agreement, the Ancillary Agreements or as
set forth on the attached Schedule 6(h)(i), to the knowledge of Buyer, neither
Buyer nor any subsidiary is a party to or bound by any Buyer Contract. All of
the Buyer Contracts other than those designated with an asterisk beside its name
shall be terminated by Buyer without any premium or penalty no later than 30
days prior to the Closing. Except as set forth on Schedule 6(h)(ii), all of the
Buyer Contracts designated with an asterisk beside its name may be terminated by
Buyer without any premium or penalty on no more than 30 days prior written
notice. All of the Contracts set forth on Schedule 6(h)(i) are valid, binding
and enforceable in accordance with their respective terms. Except as set forth
on Schedule 6(h)(iii), to the knowledge of Buyer, Buyer and its subsidiaries
have performed all material obligations required to be performed by them to date
under the Buyer Contracts and have not received written notice of any breach or
default in any material request thereunder.
(i) Intellectual Property. Buyer does not (and on the Closing Date will
not) own or posses rights to any Intellectual Property.
(j) Reports with the Securities and Exchange Commission. Buyer has
furnished Seller with complete and accurate copies of its annual report on Form
10-K for its three most recent fiscal years, and has furnished or will furnish
promptly after filed all other reports or documents required to be filed by
Buyer with the Securities and Exchange Commission since the filing of the most
recent annual report on Form 10-K and its most recent annual report to its
stockholders up to the Closing Date. Such reports and filings do not as of the
date of hereof (other than to the extent any representation, warranty or
disclosure made or given pursuant to this Agreement, the Schedules hereto or any
document delivered pursuant hereto revises, supersedes or is inconsistent with
the statements made therein) contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Buyer has made and will make all filings with
the Securities and Exchange Commission which it is required to make, and Buyer
has not received any request from the Securities and Exchange Commission to file
any amendment or supplement to any of the reports described in this paragraph.
(k) Tax Matters.
(i) Buyer has timely filed (including extensions) all Tax Returns
required to be filed by it, each such Tax Return has been prepared in
compliance with all applicable laws and regulations, and all such Tax
Returns are true and accurate in all respects. All Taxes due and payable by
Buyer have been paid whether or not such Taxes are required to be shown on
a Tax Return.
(ii) Except as set forth in Schedule 6(k)(i) attached hereto:
(A) Buyer has not requested or been granted an extension of the
time for filing any Tax Return which has not yet been filed or consented
to extend to a date later than the date hereof the time in which any Tax
may be assessed or collected by any taxing authority;
(B) no taxable period of the Buyer is currently under audit and the
Buyer has not filed an extension of the period for assessment of any
taxes with any taxing authority;
(C) no deficiency or proposed adjustment which has not been settled
or otherwise resolved for any amount of Tax has been proposed, asserted
or assessed by any taxing authority against Buyer and there is no
action, suit, taxing authority proceeding or audit now in progress,
pending or, to Buyer's knowledge, threatened against or with respect to
Buyer;
(D) Buyer has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third
party;
(E) Buyer does not reasonably expect any taxing authority to claim
or assess any amount of additional Taxes against Buyer;
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(F) no claim has ever been made by a taxing authority in a
jurisdiction where Buyer does not file Tax Returns that Buyer is or may
be subject to Taxes assessed by such jurisdiction;
(G) Buyer has not been a member of an Affiliated Group other than
one of which Buyer was the common parent, or filed or been included in a
combined, consolidated or unitary income Tax Return, other than one
filed by Buyer;
(H) the Assumed Liabilities do not include any obligation to make
any payments that will be nondeductible under Section 280G of the Code
(or any corresponding provision of state, local or foreign income Tax
law);
(I) the net operating loss ("NOL") of Buyer available to be carried
forward for federal income tax purposes at December 31, 1995 was not
less than $31,717,000 and at the Closing, shall not be less than
$31,717,000; and the capital loss carryforward of Buyer available to be
carried forward for federal income tax purposes at December 31, 1995 was
not less than $4,811,000, and at the Closing will not be less than
$4,811,000, assuming in each case that the tax year of Buyer ended at
the Closing after giving effect to the transaction contemplated hereby;
(J) the NOL's arose in the years set forth in Schedule 6(k)(ii) in
the amounts set forth therein;
(K) Buyer, since its inception through the tax year ending December
31, 1995 has been and is a Real Estate Investment Trust as defined in
Code sec. 856 ("REIT"). During such period, the Buyer has fully
satisfied all of the requirements for REIT status as set out in Code
sec.sec. 856-859, including all formation and operating requirements;
(L) To the knowledge of Buyer, Buyer has not undergone an ownership
change within the meaning of Code Section 382 with respect to any of its
NOL's described in clauses (I) and (J) above. Buyer does not have, and
has not had since January 1, 1993, any Five Percent Shareholder; and
(M) no adverse tax consequences shall result from Buyer revoking
its election and/or ceasing to be a REIT pursuant to Code sec. 856(c)
other than that Buyer shall no longer be entitled to claim a dividend
paid deduction pursuant to Code Section 561 et. seq.
(iii) Schedule 6(k)(iii) contains a list of states, territories and
jurisdictions (whether foreign or domestic) in which Buyer is required to
file Tax Returns.
(l) Buyer's Employee Benefit Plans. Buyer does not maintain, contribute to,
have an obligation to contribute to, or have any other liability or potential
liability with respect to any Employee Benefit Plan or any Multiemployer Plan,
whether or not terminated, other than the Rymac Salary Reduction Simplified
Employee Pension Plan (the "SEP"). For purposes of this Section 6(1), the term
"Buyer" includes the Buyer and each member of the controlled group of companies
(within the meaning of Section 414 of the Code) of which Buyer is a member.
(i) The SEP and all related trusts, insurance contracts, and funds
have been maintained, funded and administered in compliance in all material
respects with all applicable laws and regulations, including but not
limited to ERISA and the Code. No transaction has occurred with respect to
any Buyer Plan which could subject Buyer, Seller, or any trustee or
administrator of the SEP, or any party dealing with the SEP, to any tax or
penalty imposed by ERISA or the Code. No actions, suits, claims,
complaints, charges, proceedings, hearings, investigations, or demands with
respect to the SEP (other than routine claims for benefits) are pending or
threatened, and Buyer has no knowledge of any facts which could give rise
to or be expected to give rise to any actions, suits, claims, complaints,
charges, proceedings, hearings, investigations, or demands. Buyer has no
liability or potential liability to the Pension Benefit Guaranty
Corporation (the "PBGC"). None of the assets of Buyer is the subject of any
lien arising under Section 302(f) of ERISA or Section 412(n) of the Code,
Buyer has not been required to post any security pursuant to Section 307 of
ERISA or Section 401(a)(29) of the Code, and Buyer has no knowledge of any
facts which could be expected to give rise to such lien or such posting of
security.
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(ii) No underfunded "Defined Benefit Plan" (as such term is defined in
Section 3(35) of ERISA) has been, during the five years preceding the
Closing Date, transferred out of the controlled group of companies (within
the meaning of Code Section 414) of which Buyer is a member or was a member
during such five-year period.
(iii) With respect to the SEP, all required or recommended payments,
premiums, contributions, or accruals for all periods ending prior to or as
of the Closing Date shall have been made or properly accrued.
(iv) With respect to the SEP, Buyer has provided Seller with true,
complete and correct copies, to the extent applicable, of (A) all documents
pursuant to which the SEP is maintained, funded and administered, (B) the
three most recent financial statements, and (C) all governmental rulings,
determinations, and opinions (and pending requests for governmental
rulings, determinations, and opinions), including, but not limited to, all
Internal Revenue Service approval and opinion letters and private letter
rulings.
(m) Litigation; Decrees. Except as set forth on the Schedule 6(m) delivered
to Seller as of the date of this Agreement, there is no (and as of the Closing
Date there shall be no) pending, or to the knowledge of Buyer, threatened,
claims, proceedings, actions or lawsuits against Buyer or any of its
subsidiaries.
(n) Compliance with Applicable Laws. Without in any way limiting or
modifying the scope of the other representations and warranties of Buyer, except
as set forth on Schedule 6(n), (i) to Buyer's knowledge the business of Buyer is
being conducted in compliance in all material respects with all applicable
statutes, laws, ordinances, rules, orders and regulations of any governmental
authority or instrumentality; and (ii) Buyer has not received and prior to the
Closing Date will not have received any written communication from a
governmental authority that alleges that its business is not in compliance, in
all material respects, with all material federal, state, foreign or local laws,
rules and regulations.
(o) Guidelines or Policies. Except as set forth on Schedule 6(o), Buyer's
board of directors have not adopted any policies or guidelines (investment or
otherwise). Buyer's board of directors shall take such action as is necessary
and appropriate to permit consummation of the transactions contemplated hereby
and operation by Buyer of the Plastics Business after the Closing Date.
7. Covenants of Buyer.
Buyer covenants as follows:
(a) Confidentiality.
(i) Buyer acknowledges that all information provided to any of it and
its affiliates, agents and representatives by Seller and its affiliates,
agents and representatives is subject to the terms of a confidentiality
agreement dated December 4, 1995 between Seller and Buyer or one of its
affiliates or other beneficial owners (the "Confidentiality Agreement"),
the terms of which are hereby incorporated herein by reference. Effective
upon, and only upon, the Closing, the Confidentiality Agreement shall
terminate provided, however, that Buyer acknowledges that the
Confidentiality Agreement shall terminate only with respect to information
provided to Buyer or its affiliates, agents or representatives that relates
solely to the Plastics Business, the Assets and the Assumed Liabilities;
and provided further, however, that Buyer acknowledges that any and all
information provided or made available to it and its affiliates, agents and
representatives by or on behalf of Seller concerning the Seller Entities
(other than information relating solely to the Plastics Business, the
Assets and the Assumed Liabilities) that is not publicly available shall
remain subject to the terms and conditions of the Confidentiality Agreement
after the Closing Date.
(ii) Buyer agrees that, after the Closing Date, Buyer shall, and shall
use all reasonable efforts to cause its directors, officers, employees,
advisors and affiliates to, at all times keep the Seller Information
confidential following the Closing Date, except that any such Seller
Information required by law or legal or administrative process to be
disclosed may be disclosed without violating the provisions of this Section
7(a)(ii). For purposes of this Agreement, the term "Seller Information"
shall mean all information concerning the Seller Entities, other than
information that relates solely to the Plastics Business, the
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Assets and the Assumed Liabilities and other than any such information that
is available to the public on the Closing Date, or thereafter becomes
available to the public other than as a result of a breach of this Section
7(a)(ii).
(b) No Additional Representations. Buyer acknowledges that none of the
Seller Entities nor any other Person has made any representation or warranty,
express or implied, as to the accuracy or completeness of any information
regarding the Assets, the Assumed Liabilities or the Plastics Business, except
for the representations and warranties expressly set forth in this Agreement
which shall expire at the Closing, and Buyer further agrees that none of the
Seller Entities nor any other Person will have or be subject to any liability to
Buyer or any other Person resulting from the distribution to Buyer, or Buyer's
use of, any information, including the Information Memorandum prepared by
Hellmold Associates, Inc. dated November 1995 (the "Information Memorandum") and
any information, document, or material made available to Buyer in certain "data
rooms," management presentations or any other form in expectation of the
transactions contemplated by this Agreement.
(c) Board of Directors; Officers. Buyer shall cause the actions
contemplated by Sections 3(b)(xiii) and 3(b)(xiv) to occur effective as of the
Closing Date. Promptly after the date of this Agreement, Buyer shall provide to
Seller a plan and procedure reasonably satisfactory to Seller that describes how
Buyer shall cause such actions to occur.
(d) Certain Other Actions. Buyer covenants and agrees that it will take or
omit to take all actions required to be taken by it in order to cause its
representations and warranties contained herein to be and remain true and
correct in all material respects on and as of the date made.
(e) New IAM Agreement. Buyer shall use its reasonable efforts to negotiate
and enter into a collective bargaining agreement with the IAM for the employment
of IAM represented employees of Buyer at the Plastic Business that is in form
and substance satisfactory to Seller and Buyer.
8. Additional Covenants.
Seller and Buyer covenant and agree as follows:
(a) Proxy Statement/Prospectus; Registration Statement. Buyer shall cause
to be prepared and filed with the Securities and Exchange Commission a
preliminary draft of its proxy statement/prospectus to be used in connection
with the special meeting of stockholders of Buyer to solicit the requisite
approval of the transactions contemplated hereby (the "Proxy
Statement/Prospectus") as soon as practicable after the date hereof. Buyer shall
use its best efforts, and Seller shall cooperate with Buyer's efforts, to
prepare and file such preliminary draft and to respond to the comments of the
staff of the Securities and Exchange Commission in connection therewith and to
furnish all information required from it to prepare the definitive Proxy
Statement/ Prospectus. Seller shall cooperate with Buyer in its efforts to have
such Registration Statement declared effective. Promptly after the effectiveness
of the registration statement of the Buyer, Buyer shall cause the definitive
Proxy Statement/Prospectus, together with appropriate proxies (the "Definitive
Proxy Statement/ Prospectus"), to be mailed to its stockholders, and, if
necessary, after the definitive Proxy Statement/ Prospectus shall have been
mailed, promptly circulate amended, supplemented or supplemental proxy
materials, and, if required in connection therewith, resolution proxies. Except
as otherwise provided herein, each of the parties, at its own expense, shall
furnish the other with all information concerning itself, its directors,
officers, stockholders and properties (including audited financial statements)
and such other matters as may be necessary or advisable for the preparation of
the registration statement, the Proxy Statement/ Prospectus, and any filings
under state blue sky laws in connection with the transactions contemplated by
this Agreement. Buyer acknowledges that Seller is providing information to Buyer
pursuant to this Section 8(a) solely as an accommodation to Buyer and, except as
otherwise explicitly provided herein, Seller shall have no obligation or
liability to Buyer, its affiliates and their stockholders, officers, directors
and agents for any information provided by Seller pursuant to this Section 8(a).
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(b) Consents.
(i) Buyer acknowledges that certain consents to the transactions
contemplated by this Agreement may be required from parties to the
Contracts and such consents have not been obtained. Buyer agrees Seller
shall not have any liability whatsoever to Buyer arising out of or relating
to the failure to obtain any consents that may have been or may be required
in connection with the transactions contemplated by this Agreement or
because of the default, acceleration or termination of any Contract as a
result thereof. Buyer further agrees that no representation, warranty or
covenant of Seller contained herein shall be breached or deemed breached
and no condition of Buyer (other than the conditions set forth in Sections
3(a)(iv) and 3(a)(v)) shall be deemed not to be satisfied as a result of
(A) the failure to obtain any consent or as a result of any such default,
acceleration or termination or (B) any lawsuit, action, claim, proceeding
or investigation commenced or threatened by or on behalf of any Persons
arising out of or relating to the failure to obtain any consent or any such
default, acceleration or termination. At Buyer's written request prior to
the Closing, Seller shall cooperate with Buyer in any reasonable manner in
connection with Buyer's obtaining any such consents; provided, however,
that such cooperation shall not include any requirement of the Seller
Entities to expend money, commence any litigation or offer or grant any
accommodation (financial or otherwise) to any third party.
(ii) With respect to any Contracts that may not be properly assigned
to Buyer because of the failure to obtain a required consent
("Nontransferable Contracts") with respect to which Buyer has requested
Seller's cooperation in accordance with Section 8(b)(i) and with respect to
which Seller and Buyer are unable to obtain a separate agreement between
Buyer and the other party or parties, Buyer shall have the right to require
that Seller use reasonable efforts to perform any such Nontransferable
Contract, to the extent it relates to the Plastics Business, as agent for
and for the account of Buyer and shall promptly remit any such funds
collected for the account of Buyer, for a period up to six months following
the Closing Date; provided that Buyer shall reimburse Seller (on behalf of
itself and as agent for the other Seller Entities) for any and all costs,
expenses, losses and liabilities incurred by the Seller Entities in
connection with taking such action.
(c) Cooperation. Buyer and Seller shall cooperate with each other and shall
cause their respective officers, employees, agents and representatives to
cooperate with each other for a period of 60 days after the Closing to provide
for an orderly transition of the Assets and the Assumed Liabilities to Buyer and
to minimize the disruption to the respective businesses of the parties hereto
resulting from the transactions contemplated hereby. No party shall be required
by this Section 8(c) to take any action that would unreasonably interfere with
the conduct of its business.
(d) Notification. Prior to the Closing, each party shall promptly notify
the other party if such party obtains knowledge that the representations and
warranties of the other party in this Agreement and the Schedules hereto are not
true and correct in all material respects, or if such party obtains knowledge of
any material errors in, or omissions from, the Schedules of the other party to
this Agreement.
(e) Publicity. Seller and Buyer agree that, from the date hereof through
the Closing Date, no public release or announcement concerning the transactions
contemplated hereby (including any announcement (public or otherwise) to
customers, suppliers and other business relations of Seller) shall be issued or
made by any party without the prior consent of the other party (which consent
shall not be unreasonably withheld), except (i) as such release or announcement
may be required by law or the rules or regulations of any United States
securities exchange, and (ii) Seller may make such an announcement to employees
of Seller. Notwithstanding the foregoing, Seller and Buyer shall cooperate to
prepare a joint press release to be issued on the Closing Date and, upon the
request of either Seller or Buyer, at the time of the signing of this Agreement.
Seller and Buyer agree to keep the terms of this Agreement confidential, except
to the extent disclosed as permitted pursuant to the immediately preceding
exception or for financial reporting purposes and except that the parties may
disclose such terms to their respective accountants and other representatives as
necessary in connection with the ordinary conduct of their respective businesses
(so long as such Persons agree to keep the terms of this Agreement
confidential).
(f) Governmental Approvals. Buyer and Seller shall each file or cause to be
filed with the Federal Trade Commission and the United States Department of
Justice, to the extent applicable, any notifications required
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to be filed under the HSR Act with respect to the transactions contemplated
hereby, and any other acts, statutes, legislation or regulations as may be
applicable with respect to the transactions contemplated hereby. Buyer and
Seller shall bear the costs and expenses of their respective filings; provided
that Buyer shall pay all filing fees in connection therewith. Buyer and Seller
shall use their respective best efforts to make such filings promptly (and in
any event within 30 business days) following the date hereof, to respond to any
requests for additional information made by any applicable agencies and to cause
the waiting periods under the HSR Act to terminate or expire at the earliest
possible date and to resist in good faith, at each of their respective cost and
expense (including the institution or defense of legal proceedings), any
assertion that the transactions contemplated hereby constitute a violation of
applicable antitrust or competition laws, all to the end of expediting
consummation of the transactions contemplated hereby.
(g) Sales and Transfer Taxes, etc. Buyer shall pay all Taxes, duties or
expenses that may be imposed as a result of the sale and transfer of the Assets,
and all filing fees that may be required to be paid in connection with the
consummation of the transactions contemplated hereby, together with any and all
penalties, interest and additions to tax with respect thereto, and Seller and
Buyer shall cooperate (and Seller shall cause the Seller Entities to cooperate)
in timely making all filings, returns, reports and forms as may be required to
comply with the provisions of such laws. Buyer and Seller shall also cooperate
in providing each other with appropriate resale exemption certifications and
other similar tax and fee documentation.
(h) Supply Agreement. At the Closing, Buyer and Seller shall execute and
deliver the form of Supply Agreement attached hereto as Exhibit C (the "Supply
Agreement").
(i) Registration Rights Agreements. At the Closing, Buyer and Seller shall
execute and deliver the form of Registration Rights Agreement attached hereto as
Exhibit D (the "Registration Rights Agreement").
(j) Transition Services Agreement. At the Closing, Buyer and Seller shall
execute and deliver the form of Transition Services Agreement attached hereto as
Exhibit E (the "Transition Services Agreement").
(k) Employees. Buyer shall offer to employ those employees of Seller who
are currently employed by Seller at the Plastics Business and who are not
represented by a union, including such employees who are absent from active
employment for any reason as of the Closing Date. All such employees who become
Buyer's employees effective on the Closing Date are referred to herein as the
"Hired Employees". Buyer shall employ the Hired Employees at the same salary and
wages, and with the benefits that are identical in all material respects, as
provided by Seller immediately prior to the Closing Date; provided, however,
that Buyer shall not be required to establish or maintain any Employee Welfare
Benefit Plan for any Hired Employee that provides postretirement medical, dental
or life insurance benefits. Nothing in this Agreement shall limit Buyer's right,
at any time, to modify, amend or terminate any salary and wages payable, or
benefit provided, to any or all Hired Employees on or after the Closing Date,
including without limitation any Employee Welfare Benefit Plan or any Employee
Pension Benefit Plan, to the extent permitted by law. Seller shall terminate the
employment of all Hired Employees effective as of the Closing. Seller makes no
representation as to whether any such employee will accept employment with
Buyer. Seller assumes all liability for and shall indemnify, defend and hold
Buyer harmless from and against any Losses (as defined in Section 10(a)) for any
severance liability with respect to employees of Seller as of the Closing Date
under the terms of any severance policy, practice or plan of Seller, which
liability is triggered by or results from Seller's termination of each such
employee's employment with Seller effective as of the Closing Date, without
regard to whether any such employee accepts employment with Buyer. Schedule 8(k)
sets forth a list of each employee of Seller at the Plastics Business who is not
represented by a union, his or her date of hire, title, hourly rate of pay or
base salary and target bonus, as applicable and if any such employee is absent
from active employment with Seller as of the Closing Date, the reason for the
absence and estimated date returning to active employment.
(l) IAM Agreement.
(i) Buyer will negotiate a collective bargaining agreement with the
IAM for the employment of IAM-represented employees by Buyer at the
Plastics Business. Seller and Buyer recognize that certain IAM-represented
employees of Seller who are on the Closing Date eligible to receive a
pension benefit other than a deferred vested benefit (or would be eligible
to receive such pension benefit if they did not accept employment in a
position covered by the IAM Multiemployer Plan) will be eligible for post-
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retirement benefits under the Navistar International Transportation Corp.
Retirement Health Benefit and Life Insurance Plan which was established by
Seller pursuant to Shy v. Navistar. Buyer will reimburse Seller for its
cost of such coverage for any IAM-represented employees hired by Buyer on a
pro rata basis based on the time of service with Buyer compared to the
total time of service with Seller and Buyer. Other than Shy postretirement
benefits for retirement-eligible employees, Buyer assumes all liability for
any postretirement benefit liability arising from the transactions
contemplated by this Agreement or the employment of any IAM-represented
employee hired by Buyer, and Seller will not assume any such liability or
reimburse Buyer for any amount of such liability. In the event that Seller
is liable for any amount for which Buyer is not also liable for any
postretirement benefit for any IAM-represented employee hired by Buyer,
Buyer will reimburse Seller for a pro rata portion of Seller's liability
based on the time of the employee's service for Buyer compared to the total
time of service with Seller and Buyer. If Buyer's collective bargaining
agreement with the IAM provides for the establishment of a Section 401(k)
plan for the employees subject to the agreement, the agreement shall
permit, and Buyer shall cause its Section 401(k) plan to accept a
trust-to-trust transfer of the assets and liabilities (including
participant loans and amounts payable to alternate payees under qualified
domestic relations orders, but not including any in-kind transfer of any
Navistar International Corporation stock) of Seller's Section 401(k) plan,
with respect to the IAM-represented employees hired by Buyer, valued as of
such date as Seller may reasonably determine. Buyer shall establish its
Section 401(k) plan timely and in a form meeting the qualification
requirements of the Internal Revenue Code and provide such evidence to
Seller as Seller may reasonably request as to such qualification so as to
permit Seller to transfer timely the assets and liabilities relating to the
IAM-represented employees hired by Buyer.
(ii) Buyer agrees that it shall comply with the requirements of
Section 4204 of ERISA with respect to each Multiemployer Plan described on
Schedule 4(k) and, in that regard, Buyer agrees to (A) contribute to each
such Multiemployer Plan with respect to the operations of Buyer for
substantially the same contribution base units (as set forth in the
collective bargaining agreement in effect immediately prior to the Closing
Date between Seller and the IAM) for which Seller had an obligation to
contribute to each such Multiemployer Plan; (B) provide to each such
Multiemployer Plan for a period of five years commencing with the first
plan year beginning after the Closing Date a bond or other security as
described in Section 4204(a)(1)(B) of ERISA (unless such requirement has
been released or waived in accordance with procedures consistent with
Section 4204 of ERISA), which security, if provided, will be paid to a
Multiemployer Plan if Buyer withdraws from the Multiemployer Plan or fails
to make a contribution to the Multiemployer Plan when due at any time
during the first five years beginning after the Closing Date; and (C) pay
when due any withdrawal liability assessed as a result of any complete or
partial withdrawal by Buyer during the five-year period calculated in
accordance with Section 4204(b)(1) of ERISA. Seller agrees that if, during
the first five plan years beginning after the Closing Date, Buyer withdraws
in a complete or partial withdrawal, Seller will be secondarily liable for
any withdrawal liability it would have had to the Multiemployer Plan with
respect to Seller's operations as of the Closing Date but for the
provisions of this Section 8(m). Upon its dissolution or liquidation,
Seller will provide each Multiemployer Plan set forth on Schedule 4(k) with
such security as is required pursuant to Section 4204(a)(3)(A) of ERISA,
unless a release or waiver of such security shall be granted by the
Multiemployer Plan or the PBGC consistent with the requirements of Section
4204(a)(3)(A) of ERISA. For purposes of the immediately preceding sentence,
the term "Seller" shall mean the Seller and any of its affiliates which
meet the definition of "single employer" for purposes of Section 3(37) of
ERISA. Seller and Buyer agree to take all actions necessary or desirable to
assure that no withdrawal liability arises with respect to each such
Multiemployer Plan by reason of the transactions contemplated by this
Agreement.
(m) Employee Benefit Plans for Non-Represented Employees.
(i) Seller shall retain all assets of, and liabilities under, the
Seller Plans relating to non-represented employees, and no such Seller Plan
or any assets or liabilities thereof shall be transferred to, or assumed
by, Buyer. Buyer shall establish Employee Benefit Plans to cover the Hired
Employees as of the Closing Date that are identical in all material
respects to the Seller Plans that covered the Hired Employees immediately
prior to the Closing Date; provided, however, that Buyer shall not be
obligated under this
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Agreement to establish or maintain any Employee Welfare Benefit Plan for
the benefit of the Hired Employees that provides postretirement medical,
dental or life insurance benefits. Buyer shall have no obligation to
establish any "New Hire Plans" for any Hired Employee, or any provisions of
Sellers Plans that specifically relate to "New Hires". For the purpose of
the preceding sentence, "New Hire Plans" means plans for employees first
hired by Navistar International Transportation Corp. or an affiliate within
the meaning of Section 414 of the Code on or after January 1, 1996, and
"New Hires" means an employee first hired by Navistar International
Transportation Corp. or an affiliate within the meaning of Section 414 on
or after January 1, 1996. Buyer's shall cause its Section 401(k) plan to
accept a trust to trust transfer of the assets and liabilities (including
participant loans and amounts payable to alternate payees under qualified
domestic relations orders, but not including any in kind transfer of
Navistar International Corporation stock) of Seller's Section 401(k) plan
with respect to the Hired Employees, valued as of such date as Seller may
reasonably determine. Buyer shall establish its Section 401(k) plan timely
and in a form meeting the qualification requirements of the Code and
provide such evidence to Seller as Seller may reasonably request as to such
qualification so as to permit Seller to transfer timely the assets and
liabilities relating to the Hired Employees.
(ii) Buyer shall waive pre-existing condition requirements, evidence
of insurability provisions, waiting period requirements or any similar
provisions under any Employee Benefit Plan or compensation arrangements
maintained or sponsored by or contributed to by Buyer for each Hired
Employee after the Closing Date.
(iii) Buyer shall apply toward any deductible requirements and
out-of-pocket maximum limits under Buyer's Employee Welfare Benefit Plans
any amounts paid (or accrued) by each Hired Employee under Seller's Plans
that are Employee Welfare Benefit Plans during the current plan year.
(iv) Seller and Seller's Plans shall be responsible for expenses
covered by Seller's medical plans; provided, however, that such expenses
were incurred prior to the Closing Date. Buyer and Buyer's plans shall be
responsible for expenses covered by Buyer's medical plans for all health
and accident claims relating to the Hired Employees (including, without
limitation, claims arising out out of medical conditions existing at or
prior to the Closing Date) and all Incidents relating to the Hired
Employees that occur or arise on or after the Closing Date. For purposes of
the immediately preceding sentence, the term "Incidents" includes accident,
death, disabilities, diseases and injuries. Seller and Buyer recognize that
certain Hired Employees who become entitled to a pension benefit other than
a deferred vested benefit under the Navistar International Transportation
Corp. Retirement Plan for Salaried Employees are eligible for
postretirement benefits under the Navistar International Transportation
Corp. Retirement Health Benefit and Life Insurance Plan which was
established by Seller pursuant to Shy v. Navistar. Buyer will reimburse
Seller for its cost of such coverage of each such Hired Employee on a pro
rata basis based on the time of service with Buyer compared to the total
time of service with Seller and Buyer. Other than the Shy postretirement
benefits for such Hired Employees, Buyer assumes all liability for the post
retirement benefit liability arising from this transaction or the
employment of any Hired Employee, and Seller will not assume any such
liability or reimburse Buyer for any amount of such liability.
Notwithstanding any other provision of this Agreement, Buyer will establish
and maintain, or will maintain, any plan or plans necessary to satisfy such
liability. In the event that Seller is liable for any amount for which
Buyer is not also liable for any postretirement benefit for any Hired
Employee, Buyer will reimburse Seller for a pro rata portion of Seller's
liability based on the time of the employee's service for Buyer compared to
the total time of service with Seller and Buyer.
(v) Except as otherwise provided in Section 8(n)(x) below, Seller
shall recognize solely for purposes of vesting under any qualified pension
plan of accrued benefits under the Seller Plans the service of each Hired
Employee with Buyer on and after the Closing Date.
(vi) Buyer shall recognize for purposes of participation, eligibility
to commence receiving benefits (including early retirement, disability and
other subsidized benefits), vesting and benefit accruals under its Employee
Benefit Plans, the service of each Hired Employee with Seller or Seller's
affiliates prior to the Closing Date and the service of each Hired Employee
with all other prior employers to the extent such service is credited under
the Seller Plans; provided, however, that Buyer will be permitted to offset
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the accrued benefits of each Hired Employee under each Employee Benefit
Plan of Buyer that is an Employee Pension Benefit Plan by such Hired
Employee's vested accrued benefits, if any, as of the Closing Date under
each corresponding Seller Plan.
(vii) Seller shall be responsible for satisfying obligations under
Section 601 et seq. of ERISA and Section 4980B of the Code, to provide
continuation coverage to or with respect to any employee of Seller as of
the Closing Date in accordance with applicable law with respect to any
"qualifying event" occurring on or prior to the Closing Date, including any
"qualifying event" resulting from the Closing hereunder. Buyer shall be
responsible for satisfying obligations under Section 601 et seq. of ERISA
and Section 4980B of the Code, to provide continuation coverage to or with
respect to any Hired Employee in accordance with applicable law with
respect to any "qualifying event" which occurs after the Closing Date.
(viii) Seller shall be responsible for all salary accrued but not yet
paid as of the Closing Date nor reflected on the Closing Date Balance Sheet
and, if applicable, 1996 bonus accrued but not yet paid as of the Closing
Date nor reflected on the Closing Date Balance Sheet (in an amount equal to
the pro rata portion of such bonus allocable to the period prior to the
Closing Date) with respect to the Hired Employees, and Buyer shall be
responsible for the pro rata portion of such bonus allocable to the period
on and after the Closing Date.
(ix) Seller shall pursuant to Article II of the Navistar International
Transportation Corp. Income Protection Plan (the "IPP") extend eligibility
for pension grow-in to each Hired Employee to the extent such employee
would be eligible for pension grow-in under the IPP if such employee were
not hired by Buyer; provided that grow-in will not be provided unless the
Hired Employee either (1) continue employment with Buyer until attaining
retirement age under the Navistar International Transportation Corp.
Retirement Plan for Salaried Employees, or (2) terminates employment with
Buyer under circumstances that if the termination were from Seller rather
than from Buyer the grow-in provisions of the IPP would apply to such
termination. No other benefits under the IPP are being extended to any
Hired Employee, and no benefits are being provided under this provision to
any Hired Employee who would not otherwise be eligible for pension grow-in
under the terms and conditions of the IPP.
(n) Miscellaneous Employee Benefit Matters.
(i) Seller shall remain responsible for all workers' compensation
claims of Hired Employees and IAM-represented employees hired by Buyer with
respect to which all events giving rise to the claim in each case have
occurred prior to the Closing Date without regard to the date on which such
claims are actually reported; provided, however, that Buyer shall be
responsible for all such claims accrued for and reflected on the Closing
Date Balance Sheet. Buyer shall be responsible for all other workers'
compensation claims of Hired Employees and IAM-represented employees hired
by Buyer, including workers' compensation claims with respect to which
some, but not all, events giving rise to the claim in each case have
occurred prior to the Closing Date.
(ii) Buyer shall indemnify, defend and hold the Seller Entities
harmless from and against any Losses (as defined in Section 10(a)) for
severance liability suffered by any of the Seller Entities with respect to
any Hired Employee or IAM-represented employee hired by Buyer, which
employee is terminated by Buyer on or after the Closing Date.
(iii) Seller and Buyer agree that the responsibilities for payroll
taxes with respect to the Hired Employees and IAM-represented employees
hired by Buyer shall be assigned under the Alternative Procedure described
in Section 5 of Rev. Proc. 84-77.
(iv) Buyer represents that it does not currently contemplate a plant
closing or mass lay-off of Hired Employees and/or IAM-represented employees
hired by Buyer, or any terminations that, in the aggregate, would
constitute, within one year following the Closing, a mass lay-off of Hired
Employees and/or IAM-represented employees hired by Buyer. Buyer shall
indemnify and defend the Seller Entities and hold each of them harmless
from and against any Losses which may be incurred or suffered by any of
them under the Worker Adjustment and Retraining Notification Act or any
similar state law arising out of, or relating to, any actions taken by
Buyer on or after the Closing Date.
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(v) Effective as of the Closing Date, Buyer shall assume from Seller
all liabilities and obligations with respect to all vacation earned but not
taken as of the Closing Date by the Hired Employees and IAM-represented
employees hired by Buyer.
(vi) Effective as of the Closing Date, Buyer shall terminate the SEP
in accordance with applicable law.
(o) By-Laws of Buyer. Seller covenants and agrees that for the period from
the Closing Date through the sixth anniversary thereof, it shall not vote in
favor of or otherwise directly or indirectly support any amendment of the
provisions of Buyer's By-Laws relating to the indemnification of officers and
directors of Buyer which would have an adverse effect on present or former
officers or directors of Buyer (except to the extent that withholding any such
vote would be in contravention of any applicable law).
(p) No Authority To Bind. Buyer covenants and agrees that from and after
the Closing Date, without the prior written consent of Seller, it will not hold
itself out as an affiliate of Seller or take any actions or omit to take any
actions which would have the effect of creating or making binding any obligation
on Seller.
(q) Records. Buyer and Seller agree that Seller may maintain copies of any
books and records and other financial data (collectively, the "Records") that
are included in the Assets and that are delivered to Buyer hereunder. Buyer
agrees to maintain such Records for a period of not less than ten years from the
Closing Date (plus any additional time during which a party has been advised
that (A) there is an ongoing tax audit with respect to periods prior to the
Closing Date, or (B) such period is otherwise open to assessment). During such
period, Buyer agrees to give Seller and its representatives reasonable
cooperation, access (including copies) and staff assistance, as needed, during
normal business hours and upon reasonable notice, with respect to the Records
delivered to Buyer hereunder, and Seller agrees to give Buyer and its
representatives reasonable cooperation, access and staff assistance, as needed,
during normal business hours and upon reasonable notice, with respect to the
books and records and other financial data relating to the Plastics Business and
retained by the Seller Entities, in each case as may be necessary for general
business purposes, including the preparation of tax returns and financial
statements, the management and handling of tax audits and reviewing the
calculation (and preparing its own calculation) of the post-closing adjustments
described in Section 1(g); provided that such cooperation, access and assistance
does not unreasonably disrupt the normal operations of Buyer or any of the
Seller Entities. Buyer shall not destroy or otherwise dispose of the Records for
the period set forth in the immediately preceding sentence without the written
consent of Seller.
(r) Initial Board of Directors; Vacancies of Board. From and after the
Closing Date and until the first annual meeting of the stockholders of Buyer
following the Closing Date, the Buyer's board of directors shall be comprised of
two representatives to be designated by Seller (the "Seller Directors"); two
representatives to be designated by members of Buyer's existing board of
directors (the "Buyer Directors"); and one representative to be mutually
satisfactory to Seller and Buyer (the "Independent Director"). With respect to
vacancies on the initial board of directors of Buyer which exist at any time
prior to the first annual meeting of the stockholders of Buyer following the
Closing Date (which annual meeting shall be no sooner than 12 months following
the Closing Date), the Buyer Directors shall have all requisite authority to act
on behalf of Buyer as a special committee of the Board of Directors of Buyer to
fill vacancies created by the resignation or removal of a Buyer Director and the
Seller Director shall have all requisite authority to act on behalf of Buyer as
a special committee of the Board of Directors of Buyer to fill vacancies created
by the resignation or removal of a Seller Director.
(s) Ordinary Conduct of Buyer. From the Closing to the Outside Notice Date,
Buyer will cause the Plastics Business to be conducted in the ordinary course
consistent with past practice of Seller and will make all reasonable efforts
consistent with past practices of Seller to preserve its relationship with its
third party customers and suppliers in connection with the Plastics Business.
From the Closing to the Outside Notice Date, Buyer will not do any of the
following without the prior written consent of Seller:
(i) make any material change in the conduct of the Plastics Business;
(ii) sell, lease, license or otherwise dispose of, any interest in any
of its assets, except for sales of inventory in the ordinary course of
business consistent with past practice of Seller;
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(iii) permit, allow or subject any of its assets or any part thereof
to any Lien or suffer such to be imposed, except for Permitted Liens;
(iv) enter into any new, or amend or terminate any existing, Contracts
or Buyer Contracts, other than in the ordinary course of business
consistent with past practices;
(v) make any change in any method of accounting or accounting practice
or policy currently used in the preparation by Seller of financial
statements of the Plastics Business other than those required by generally
accepted accounting principles;
(vi) issue any notes, bonds, capital stock or other securities of any
kind except to Seller as expressly contemplated hereby;
(vii) borrow any amount or incur or become subject to any liabilities
except in the ordinary course of business consistent with Seller's past
practices;
(viii) declare or make any payment or distribution of cash or other
property to its security holders with respect to its securities or purchase
or redeem any shares of its securities; it being understood that
"securities" includes options and rights to acquire securities;
(ix) acquire any new assets, rights or interests, other than cash;
(x) make capital expenditures or commitments therefor that aggregate
in excess of $10,000;
(xi) made any charitable contributions or pledges;
(xii) hire any employees to perform services for Buyer or increase any
compensation or other amounts payable to any employees;
(xiii) enter into any other material transaction or other transaction
that is not in the ordinary course of business consistent with Seller's
past practices; or
(xiv) enter into any agreement, whether in writing or otherwise, to do
any of the foregoing.
9. Further Assurances.
From time to time, as and when requested by any party hereto, the other
party hereto shall execute and deliver, or cause to be executed and delivered,
all such documents and instruments and shall take, or cause to be taken, all
such further or other actions (subject to the limitations set forth in Section
8(a) and Section 8(b)), as such other party may reasonably deem necessary or
desirable to consummate the transactions contemplated by this Agreement.
10. Indemnification.
(a) Indemnification by Seller. Seller shall indemnify Buyer, its affiliates
and each of their respective officers, directors, employees and agents and hold
them harmless from any Loss suffered or incurred by any such indemnified party
or to which any such indemnified party becomes subject to the extent directly or
indirectly arising from (i)any breach of (or in the event any third party
alleges facts that if true would mean Seller has breached) any covenant of
Seller contained in this Agreement or the other agreements and instruments
contemplated hereby; (ii) any Excluded Liability and (iii) any statements or
information contained in the Definitive Proxy Statement/Prospectus relating to
the Plastics Business or the Seller Entities requested by Buyer for inclusion in
the Definitive Proxy Statement/Prospectus and supplied by Seller, provided Buyer
presents such information in the Definitive Proxy Statement/Prospectus in
conformity in form and substance with the information supplied by it to Seller.
(b) Indemnification by Buyer. Buyer shall indemnify each of Seller, its
affiliates, officers, directors, employees and agents against and hold them
harmless from any Loss suffered or incurred by any such indemnified party or to
which any such indemnified party becomes subject to the extent directly or
indirectly arising from (i) any breach of (or in the event any third party
alleges facts that if true would mean Buyer has breached) any covenant of Buyer
contained in this Agreement or the other agreements and instruments contemplated
hereby, (ii) any Assumed Liability (other than any Loss of Seller solely in its
capacity as a shareholder of Buyer arising from any Assumed Liability described
in Section 1(d)(iv)) and (iii) any
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discontinuance, suspension or modification of any Benefit Plans maintained by
Buyer as contemplated by Section 3(b)(vii) hereof. Buyer shall also indemnify
each of Seller, its affiliates, officers, directors, employees and agents
against and hold them harmless from its Proportionate Share of any Loss suffered
or incurred by Buyer or any of its subsidiaries from and after the Closing Date
(including Losses suffered or incurred by Buyer to its present or former
shareholders) (x) in respect of any actions, omissions, events, circumstances or
state of facts existing or arising on, at or prior to the Closing Date or (y)
arising in connection with any statements or information contained in the
Definitive Proxy Statement/Prospectus (other than information relating to the
Plastics Business or the Seller Entities requested by Buyer for inclusion in the
Definitive Proxy Statement/Prospectus and supplied by Seller, provided Buyer
presents such information in the Definitive Proxy Statement/Prospectus in
conformity in form and substance with the information supplied to it by Seller);
provided no indemnity will be made by Buyer in respect of (A) except as provided
in clause (y) of this sentence, any acts, omissions, events, circumstances or
state of facts existing or arising on, at or prior to the Closing Date relating
to this Agreement, the matters referred to in the Buyer Resolutions (other than
the Ancillary Agreements) or any of the transactions contemplated hereby or
thereby, (B) any Loss suffered or incurred by Buyer or any of its subsidiaries
from and after the Closing Date that arises from a liability that is
specifically listed (but only up to the amount listed) on Schedule 3(b)(xv) or
(C) any inability of Buyer to be able to use the NOLs described in Sections
6(k)(ii) (I) and 6(k)(ii)(J) after the Closing. For purposes hereof, at the time
of any Loss, the "Proportionate Share" of each of Seller, its affiliates,
officers, directors, employees and agents shall be the ratio, expressed as a
percentage, of the total number of shares of the Common Stock owned by such
Persons at the time of such Loss divided by the total number of shares of the
Common Stock issued and outstanding at the time of such Loss.
(c) Exclusive Remedy. Except in connection with the exercise of remedies
for breaches of Sections 5(a), 7(a), 8(e) and 22, and except as otherwise
provided in Section 1(g), the Ancillary Documents or the Related Documents (as
defined in the Buyer Note), each of Buyer and Seller acknowledges and agrees
that, from and after the Closing, its sole and exclusive remedy with respect to
any and all claims relating to the subject matter of this Agreement and the
other agreements contemplated hereby (other than tort claims of, or causes of
action arising from, fraudulent misrepresentation) shall be pursuant to the
indemnification provisions set forth in this Section 10. In furtherance of the
foregoing, each of Buyer and Seller hereby waives, from and after the Closing,
to the fullest extent permitted under applicable law, any and all rights, claims
and causes of action (other than tort claims of, or causes of action arising
from, fraudulent misrepresentation) it may have against each other relating to
the subject matter of this Agreement and the other agreements contemplated
hereby arising under or based upon any federal, state, local or foreign statute,
law, ordinance, rule or regulation or otherwise, including without limitation,
any cause of action for contribution or otherwise under the Comprehensive
Environmental Response, Liability and Compensation Act, as amended, or any other
federal, state, local or foreign law giving rise to liability for disposal or
release of hazardous substances. Buyer further acknowledges and agrees that, (i)
other than the representations and warranties of Seller specifically contained
in this Agreement (which expire at the Closing), there are no representations or
warranties of any of the Seller Entities or their representatives or any other
Person either express or implied with respect to the Plastics Business, the
Assets, the Real Property or the Assumed Liabilities and (ii) it shall have no
claim or right to indemnification with respect to any information, documents or
materials furnished by the Seller Entities or their representatives or any other
Person or any of their officers, directors, employees, agents or advisors,
including the Information Memorandum and any information, documents or material
made available to Buyer in certain "data rooms," management presentations or any
other form in expectation of the transactions contemplated by this Agreement.
Nothing contained herein shall be deemed to limit or otherwise impair the
ability of Seller to exercise its rights and remedies (x) as a stockholder of
Buyer from and after the Closing Date, including, without limitation, the right
to bring claims and causes of action against Buyer for matters arising or
accruing after the Closing Date and (y) pursuant to Section 1(g).
(d) Losses Net of Insurance and Tax Benefit.
(i) The amount of any and all Losses under this Section 10 shall be
determined net of any amounts recovered or recoverable by the indemnified
party under insurance policies with respect to such Losses. Each party
hereby waives, to the extent permitted under its applicable insurance
policies, any subrogation
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rights that its insurer may have with respect to any indemnifiable Losses.
Any indemnity payment under this Agreement shall be treated as an
adjustment to the Purchase Price for tax purposes.
(ii) If an indemnification obligation under this Section 10 arises in
respect of any adjustment which results in any Tax benefit to Buyer or
Seller (the "Benefitted Party"), any successor thereto or any affiliate
thereof for any taxable period (or portion thereof) beginning and ending
after the Closing Date which would not, but for such adjustment, be
available, the Benefitted Party shall pay, or shall cause to be paid, to
the party making such indemnification payment an amount equal to the actual
Tax saving produced by such Tax benefit at the time such Tax saving is
realized by the Benefitted Party, any successor thereto or any affiliate
thereof. The amount of any such Tax saving for any taxable period shall be
the amount of the reduction in Taxes payable to a taxing authority by the
Benefitted Party, any successor thereto or any affiliate thereof with
respect to such tax period as compared to the Taxes that would have been
payable to a taxing authority by the Benefitted Party, any successor
thereto or any affiliate thereof with respect to such tax period in the
absence of such Tax benefit.
(e) Termination of Indemnification. The obligations to indemnify and hold
harmless a party hereto, pursuant to Sections 10(a) and 10(b), shall terminate
on the sixth anniversary of the Closing Date; provided, however, that such
obligations to indemnify and hold harmless shall not terminate with respect to
any item as to which the Person to be indemnified or the related party thereto
shall have, prior to the sixth anniversary of the Closing Date, previously made
a claim by delivering a written notice (stating in reasonable detail the nature
of, and factual and legal basis for, any such claim for indemnification, and the
provisions of this Agreement upon which such claim for indemnification is made)
to the indemnifying party.
(f) Procedures Relating to Indemnification.
(i) In order for a party (the "indemnified party") to be entitled to
any indemnification provided for under this Agreement with respect to any
matter (including any matter in respect of, arising out of or involving a
claim or demand made by any Person, firm, governmental authority or
corporation against the indemnified party (a "Claim")), such indemnified
party must notify the indemnifying party in writing, and in reasonable
detail, of the Claim as promptly as reasonably possible after receipt by
such indemnified party of notice of the Claim; provided, however, that
failure to give such notification on a timely basis shall not affect the
indemnification provided hereunder except to the extent the indemnifying
party shall have been actually prejudiced as a result of such failure.
Thereafter, the indemnified party shall deliver to the indemnifying party,
within five business days after the indemnified party's receipt thereof,
copies of all notices and documents (including court papers) received by
the indemnified party relating to the Claim.
(ii) Upon receipt by either Buyer or Seller of notice that it bears
responsibility for any matter under this Section 10, or with respect to any
matter for which either party affirmatively undertakes responsibility
hereunder, and assuming that the indemnifying party provides the
indemnified party with evidence reasonably acceptable to the indemnified
party that the indemnifying party will have the financial resources to
defend against the Claim and fulfill its indemnification obligations
hereunder, such party (the "Responsible Party") shall have the authority,
at its option, to undertake control over all aspects and settlements of
such matter, including without limitation, negotiations and settlements
with interested government agencies and third parties. The Responsible
Party shall keep the other party apprised of major developments relating to
such matter and shall, subject to applicable legal privileges, make all
reports, filings, and other documents relating to such matter available for
inspection by the other party upon request. So long as the Responsible
Party is managing the defense of the Claim in accordance with this Section
10(f)(ii), the indemnified party may retain separate co-counsel or other
representatives at its sole cost and expense and participate in the
management of the Claim. The parties agree to reasonably cooperate with one
another in connection with any matter addressed hereunder, including
without limitation allowing one another reasonable access to relevant
personnel, records, and facilities. In the course of addressing any such
matter, the Responsible Party and its representatives shall make best
efforts to prevent any unreasonable interference with day-to-day operations
at the Real Property on and after the Closing. In the event the Responsible
Party declines to undertake control over a Claim or does not have the
authority to undertake such Claim in accordance with this Section
10(f)(ii),(a) the
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indemnified party may manage the Claim in any manner it reasonably may deem
appropriate, with consent from the Responsible Party, which consent will
not be unreasonably withheld, (b) the indemnifying parties will reimburse
the indemnified party as and when incurred for the costs of defending
against or otherwise managing the Claim (including reasonable attorneys'
fees and expenses), and (c) the indemnifying parties will remain
responsible for any Losses the indemnified party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Claim to
the fullest extent provided in this Section 10(f)(ii).
(g) Offset. In the event that Buyer shall be entitled to indemnification
under Section 10(a), the amount of any Losses, at Seller's option, shall be
reimbursed by, first, forgiving interest accrued to the date on which Buyer and
Seller agree Buyer is entitled to indemnification or as of the date of
determination of the amount to which Buyer is entitled pursuant to Section 30
(to the extent theretofor unpaid) plus future interest payments when and as the
same become due under the Buyer Note and, second, by forgiving principal
payments on the Buyer Note as the same become due, in each case in an amount
equal to the total amount of such Losses.
11. Assignment.
This Agreement shall be binding upon the respective parties and their
respective successors and assigns; provided, however, this Agreement and any
rights and obligations hereunder shall not be assignable or transferable by
Buyer (including by operation of law in connection with a merger or sale of
stock, or sale of substantially all the assets, of Buyer) without the prior
written consent of Seller and any purported assignment without such consent
shall be void and without effect.
12. No Third-Party Beneficiaries.
This Agreement is for the sole benefit of the parties hereto, and their
permitted assigns and nothing herein express or implied (including Sections
8(k), 8(l), 8(m), 8(n) and 10) shall give or be construed to give to any Person,
other than the parties hereto, and such permitted assigns, any legal or
equitable rights hereunder and, in the case of Section 8(o) only, the present or
former officers or directors of Buyer, who are the intended beneficiaries of
Section 8(o).
13. Termination.
(a) Anything contained herein to the contrary notwithstanding, this
Agreement may be terminated and the transactions contemplated hereby abandoned
at any time prior to the Closing Date:
(i) by the mutual written consent of Seller and Buyer;
(ii) by Seller if (x) at any time after October 31, 1996 any of the
conditions set forth in Section 3(b) shall have become incapable of
fulfillment, and shall not have been waived by Seller, (y) Seller has
delivered to Buyer on or prior to September 15, 1996 a notice that it is
terminating this Agreement because it is not completely satisfied in all
respects with its business, legal, environmental and accounting due
diligence review and investigation of Buyer or (z) Buyer shall not have
delivered to Seller by September 30, 1996 copies of the Buyer Resolutions
that are in form and substance reasonably satisfactory to Seller;
(iii) by Buyer if (x) at any time after October 31, 1996 any of the
conditions set forth in Section 3(a) shall have become incapable of
fulfillment, and shall not have been waived by Buyer, (y) Buyer has
delivered to Seller on or prior to September 15, 1996 a notice that it is
terminating this Agreement because it is not completely satisfied in all
respects with its business, legal, environmental and accounting due
diligence review and investigating of the Plastics Business or (z) Seller
shall not have delivered to Buyer by September 30, 1996 copies of the
Seller Resolutions that are in form and substance reasonably satisfactory
to Buyer;
(iv) by Seller or Buyer if the Closing does not occur on or prior to
December 31, 1996; provided, however, that the party seeking termination
pursuant to clause (ii) or (iii) above (other than clause (ii)(y) or
(iii)(y) above) is not in breach of any of its representations, warranties,
covenants or agreements contained in this Agreement, which breach has
resulted in the failure of a condition in Section 3(a) or 3(b), as
applicable.
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(b) In the event of termination by Seller or Buyer pursuant to this Section
13, written notice thereof shall forthwith be given to the other party and the
transactions contemplated by this Agreement shall be terminated, without further
action by any party. If the transactions contemplated by this Agreement are
terminated as provided herein:
(i) Buyer shall return all documents and copies and other materials
received from or on behalf of Seller relating to the transactions
contemplated hereby, whether so obtained before or after the execution
hereof, to Seller; and
(ii) all confidential information received by Buyer with respect to
the Assets, the Assumed Liabilities and the Plastics Business shall be
treated in accordance with the Confidentiality Agreement, which shall
remain in full force and effect notwithstanding the termination of this
Agreement.
(c) If this Agreement is terminated and the transactions contemplated
hereby are abandoned as described in this Section 13, this Agreement shall
become void and of no further force and effect, except for the provisions of (i)
Section 7(a) relating to the obligation of Buyer to keep confidential certain
information and data obtained by it, (ii) Section 8(e) relating to publicity,
(iii) Section 5(a) relating to indemnification in connection with the matters
contemplated thereby, (iv) Section 15 relating to certain expenses, (v) Section
22 relating to finder's fees and broker's fees and (vi) this Section 13. Nothing
in this Section 13 shall be deemed to release any party from any liability for
any breach by such party of the terms and provisions of this Agreement or to
impair the right of any party to compel specific performance by another party of
its obligations under this Agreement.
14. Survival of Representations.
The representations and warranties in this Agreement and in any Schedules
delivered in connection herewith shall expire at, and not survive, the Closing.
15. Expenses.
Whether or not the transactions contemplated hereby are consummated, and
except as otherwise specifically provided in this Agreement or in any other
agreement, all costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party incurring such
costs or expenses; provided that all costs and expenses incurred by Seller in
connection with the preparation and delivery to Buyer of audited financial
statements of the Plastics Business prior to the Closing Date shall be shared
equally by Buyer and Seller.
16. Amendment and Waiver.
This Agreement may be amended, or any provision of this Agreement may be
waived; provided that any such amendment or waiver shall be binding upon Seller
only if set forth in a writing executed by Seller and referring specifically to
the provision alleged to have been amended or waived, and any such amendment or
waiver shall be binding upon Buyer only if set forth in a writing executed by
Buyer and referring specifically to the provision alleged to have been amended
or waived. No course of dealing between or among any Persons having any interest
in this Agreement shall be deemed effective to modify, amend or discharge any
part of this Agreement or any rights or obligations of any Person under or by
reason of this Agreement.
17. Notices.
All notices or other communications required or permitted to be given
hereunder shall be in writing and shall be delivered by hand or sent by prepaid
telex, cable or telecopy, or sent, postage prepaid, by registered, certified or
express mail, or reputable overnight courier service and shall be deemed given
when so delivered by hand, telexed, cabled or telecopied, or if mailed, three
days after mailing (one business day in the case of express mail or overnight
courier service), as follows:
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(i) if to Buyer,
Chief Executive Officer
Rymac Mortgage Investment Corporation
Penn Center West II
Suite 311
Pittsburgh, PA 15276
Attention: Chief Executive Officer
Facsimile: (412)788-3691
with a copy to:
Brown & Wood
One World Trade Center
New York, New York 10048
Attention: Edward J. Fine, Esq.
Facsimile No: (212) 839-5599
(ii) if to Seller,
Navistar International
455 North City Front Plaza Drive
Chicago, Illinois 60611
Attn: Vice President/Treasurer
Facsimile No.: (312)836-2573
with a copy to:
Navistar International
455 North City Front Plaza Drive
Chicago, Illinois 60611
Attn: General Counsel
Facsimile No.: (312)836-3982
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Michael H. Kerr, P.C.
Facsimile No.: (312) 861-2000
18. Interpretation.
The headings and captions contained in this Agreement, in any Exhibit or
Schedule hereto and in the table of contents to this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Any capitalized terms used in any Schedule or Exhibit and not
otherwise defined therein shall have the meanings set forth in this Agreement.
The use of the word "including" herein shall mean "including without
limitation." The use of the word "or" shall not be exclusive.
19. No Strict Construction.
Notwithstanding the fact that this Agreement has been drafted or prepared
by one of the parties, both Buyer and Seller confirm that both they and their
respective counsel have reviewed, negotiated and adopted this Agreement as the
joint agreement and understanding of the parties, and the language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be applied
against any Person.
20. Counterparts.
This Agreement may be executed in one or more counterparts (including by
means of telecopied signature pages), all of which shall be considered one and
the same instrument, and shall become effective when one or more such
counterparts have been signed by each of the parties and delivered to the other
party.
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21. Entire Agreement.
This Agreement and the other agreements referred to herein (including the
Confidentiality Agreement) contain the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and
supersede all prior agreements and understandings, whether written or oral,
relating to such subject matter.
22. Brokerage.
Buyer has not used a broker or finder in connection with the transactions
contemplated by this Agreement, and there are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement by or on behalf of Buyer, other than with Hellmold Associates, Inc.
and Nomura Securities International, Inc., for which Buyer is solely
responsible. Seller has not retained any broker or finder or incurred any
liability or obligation for any brokerage fees, commissions or finder's fees
with respect to this Agreement or the transactions contemplated hereby, except
pursuant to an arrangement with Hellmold Associates, Inc., for which Seller is
solely responsible. Notwithstanding anything to the contrary in Section 10,
Buyer shall indemnify and hold Seller harmless for any breach of its
representation in this Section 22, and Seller shall indemnify and hold Buyer
harmless for any breach of its representation in this Section 22.
23. Disclaimer Regarding Estimates and Projections.
In connection with Buyer's investigation of the Plastics Business, Buyer
has received from or on behalf of Seller certain projections, including
projecting set forth in the Information Memorandum. Buyer acknowledges that
there are uncertainties inherent in attempting to make such estimates,
projections and other forecasts and plans, that Buyer is familiar with such
uncertainties, that Buyer is taking full responsibility for making its own
evaluation of the adequacy and accuracy of all estimates and projections and
other forecasts and plans so furnished to it (including the reasonableness of
the assumptions underlying such estimates, projections and forecasts), and that
Buyer shall have no claim against the Seller Entities with respect thereto
(other than for fraudulent misrepresentation). Accordingly, Seller makes no
representation or warranty with respect to such estimates and projections and
other forecasts and plans (including the reasonableness of the assumptions
underlying such estimates and projections and forecasts). In addition, except
for the representations and warranties set forth in this Agreement which expire
at the Closing, Seller makes no representation or warranty with respect to
information relating to historical income from operations set forth in the
Information Memorandum, in any "data room," in connection with any management
presentation, or otherwise, and Buyer acknowledges and agrees that it is not
relying on such information in any manner whatsoever.
24. Schedules.
The inclusion of information in the Schedules hereto shall not be construed
as an admission that such information is material to the Assets, the Plastics
Business, Seller or Buyer, as applicable. In addition, matters reflected in the
Schedules are not necessarily limited to matters required by this Agreement to
be reflected in such Schedules. Such additional matters are set forth for
informational purposes only and do not necessarily include other matters of a
similar nature. Prior to the Closing, each party shall have the right, without
the prior consent of the other party, to supplement, modify or update the
Schedules hereto, but only in order to reflect changes in the information set
forth in the Schedules that have arisen in the ordinary course of its business
prior to the Closing, and such supplements, modifications or updates shall be
given effect and shall be deemed to have modified the applicable representations
and warranties for purposes of Section 3; provided that, notwithstanding
anything contained herein to the contrary, no supplement, modification or update
of Schedule 6(m) or a material supplement, modification or update of Schedule
3(b)(xv) may be made by Buyer or given any effect, without the prior written
consent of Seller.
25. Reserved.
26. Severability.
Whenever possible, each provision of this Agreement shall be interpreted in
such manner as to be valid and effective under applicable law, but if any
provision of this Agreement or the application of any such provision to any
Person or circumstance shall be held invalid, illegal or unenforceable in any
respect by a court
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of competent jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision hereof.
27. Bulk Transfer Laws.
Buyer hereby waives compliance by Seller with the provisions of any
so-called bulk transfer laws of any jurisdiction in connection with the sale of
the Assets.
28. Governing Law.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Ohio applicable to agreements made and to be
performed entirely within such State, without regard to the conflicts of law
principles of such State.
29. Exhibits and Schedules.
All Exhibits and Schedules annexed hereto or referred to herein are hereby
incorporated in and made a part of this Agreement as if set forth in full
herein.
30. Dispute Resolution.
(a) Negotiation. Except as otherwise provided in Section 1(g), in the event
of any dispute or disagreement between Seller and Buyer as to the interpretation
of any provision of this Agreement (or the performance of obligations
hereunder), the matter, upon written request of either party, shall be referred
to representatives of the parties (the "Representatives") for decision, it being
understood that representatives of Buyer shall be the individuals listed on
Schedule 30, whom shall have all requisite authority to unanimously act on
behalf of Buyer as a special committee of the Board of Directors of Buyer,
including the authority to initiate proceedings on behalf of Buyer solely with
respect to claims against any Seller Entity under this Agreement. The
Representatives shall promptly meet in a good faith effort to resolve the
dispute. If the Representatives do not agree upon a decision within 30 calendar
days after reference of the matter to them, each of Buyer and Seller shall be
free to exercise the remedies available to it under Section 30(b).
(b) Arbitration. Any controversy, dispute or claim arising out of or
relating in any way to this Agreement or the other agreements contemplated
hereby (other than the Supply Agreement or the Registration Rights Agreements)
or the transactions arising hereunder or thereunder that cannot be resolved by
negotiation pursuant to Section 30(a) shall (except as otherwise provided by
Section 1(g)) be settled exclusively by arbitration in the City of Chicago,
Illinois. Such arbitration shall be administered by the Center for Public
Resources Institute for Dispute Resolutions (the "Institute") in accordance with
its then prevailing Rules for Non-Administered Arbitration of Plastics Business
Disputes (except as otherwise provided herein), by three independent and
impartial arbitrators, one of whom shall be appointed by Seller and one of whom
shall be appointed by Buyer. Notwithstanding anything to the contrary provided
in Section 28 hereof, the arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. sec. 1 et seq. The fees and expenses of the Institute
and the arbitrators shall be shared equally by the parties and advanced by them
from time to time as required; provided that at the conclusion of the
arbitration, the arbitrators shall award costs and expenses (including the costs
of the arbitration previously advanced and the fees and expenses of attorneys,
accountants and other experts) and interest at the Applicable Rate to the
prevailing party. No pre-arbitration discovery shall be permitted, except that
the arbitrators shall have the power in their sole discretion, on application by
either party, to order pre-arbitration examination of the witnesses and
documents that the other party intends to introduce in its case-in-chief at the
arbitration hearing. The arbitrators shall render their award within 90 days of
the conclusion of the arbitration hearing. Notwithstanding anything to the
contrary provided in this Section 30(b) and without prejudice to the above
procedures, either party may apply to any court of competent jurisdiction for
temporary injunctive or other provisional judicial relief if such action is
necessary to avoid irreparable damage or to preserve the status quo until such
time as the arbitration panel is convened and available to hear such party's
request for temporary relief. The award rendered by the arbitrators shall be
final and not subject to judicial review and judgment thereon may be entered in
any court of competent jurisdiction.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
By: /s/ T. M. HOUGH
---------------------------------
Name: T. M. Hough
Title: Vice President and Treasurer
RYMAC MORTGAGE INVESTMENT CORPORATION
By: /s/ RICHARD R. CONTE
-----------------------------------
Name: Richard R. Conte
Title: Chief Executive Officer
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<PAGE> 167
ANNEX II
ART WORK
November 8, 1996
The Board of Directors
RYMAC Mortgage Investment Corporation
Penn Center West
Building 2, Suite 311
Pittsburgh, Pennsylvania 15276
Gentlemen:
We understand that RYMAC Mortgage Investment Corporation ("RYMAC") and Navistar
International Transportation Corp. ("Navistar") have entered into an Asset
Purchase Agreement, dated as of September 12, 1996, and as amended as of October
31, 1996 (the "Agreement"), pursuant to which Navistar will sell and RYMAC will
purchase all of the assets relating exclusively to the business currently
conducted at Navistar's Columbus Plastics Operation ("CPO"), primarily relating
to the manufacture, marketing and sale of fiberglass and plastic component
parts, as described in the Agreement (such sale and purchase being the
"Transaction"). For purposes of this opinion, where appropriate, "RYMAC"
includes RYMAC Mortgage Investment Corporation after giving effect to the
Transaction.
The consideration that RYMAC will pay to Navistar in the Transaction will be
calculated in accordance with Sections 1(f) and 1(g) of the Agreement. You have
asked us to render our opinion as to whether such consideration is fair, from a
financial point of view, to the stockholders of RYMAC. For purposes of this
opinion, we have with your approval assumed that such consideration will consist
solely of (a) a secured promissory note of RYMAC (the "Note") in an aggregate
principal amount equal to the sum of (i) $25,504,000, plus or minus (ii) the
difference between CPO's Net Tangible Assets (as defined in the Agreement) as of
January 31, 1996 and CPO's Net Tangible Assets as of the closing date of the
Transaction, calculated in accordance with Section 1(g)(i) of the Agreement, (b)
4,264,000 shares of the common stock, par value $.01 per share (the "Common
Stock"), of RYMAC, and (c) certain contingent payments during each of the three
fiscal years following the closing date of the Transaction, calculated in
accordance with Section 1(g)(vi) of the Agreement and based on the excess, if
any, between RYMAC's actual earnings before interest and taxes for each period
over its projected earnings before interest and taxes for each period
(collectively, the consideration described in clauses (a), (b) and (c) being the
"Purchase Price"). You have provided us with a copy of the final Agreement and
the registration statement on Form S-4 of Core Materials Corporation with
respect to the transactions contemplated by the Agreement as filed with, and
declared effective by, the Securities and Exchange Commission on the date hereof
(the "Registration Statement").
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The Board of Directors
RYMAC Mortgage Investment Corporation
In arriving at our opinion we have:
1. reviewed the Agreement and the Registration Statement;
2. reviewed certain historical financial statements of RYMAC and CPO provided,
respectively, by the managements of RYMAC and Navistar, and reviewed
certain additional operating and financial information relating to the past
and current operations and financial condition, as well as the future
prospects, of CPO provided to us by the management of RYMAC;
3. met with certain members of the management of RYMAC to discuss certain
historical financial statements and projected financial information of
RYMAC;
4. met with certain members of the management of Navistar to discuss certain
historical financial statements and projected financial information, and
certain additional operating and financial information relating to the past
and current operations and financial condition, as well as the future
prospects, of CPO;
5. reviewed certain pro forma combined projected financial information for
RYMAC, after giving effect to the Transaction, prepared by the management
of RYMAC, and met with certain members of the management of RYMAC to
discuss such projected financial information;
6. reviewed the historical prices and trading volumes of the Common Stock;
7. reviewed certain publicly available financial data and stock market data of
companies which we deemed generally comparable to CPO;
8. reviewed the publicly available terms of certain recent acquisitions of
companies and businesses which we deemed generally comparable to CPO; and
9. reviewed such other information and conducted such other studies, analyses,
inquiries and investigations as we deemed appropriate.
In the course of our analysis, we have relied upon and assumed without
independent verification the accuracy and completeness of all information that
was publicly available and the operating, financial and other information
provided to us by or on behalf of RYMAC or Navistar or otherwise reviewed by us,
and that all such information is not misleading, and we have not assumed, and do
not assume, any responsibility or liability therefor. With respect to the
projected financial information provided to us, we have assumed that they have
been reasonably prepared on bases reflecting best currently available estimates
and judgments of RYMAC's and Navistar's management as to the expected future
results of operations, financial condition, prospects and performance of RYMAC
and CPO. We have further relied upon the assurances of RYMAC's and Navistar's
management that they are unaware of any facts that would make the projected
financial information or other information provided to us inaccurate, incomplete
or misleading. With your concurrence, we have not performed or obtained any
appraisals of the assets or liabilities of CPO. In arriving at our opinion, we
have used such valuation methodologies as we have deemed necessary or relevant.
Our opinion is necessarily based on economic, market and other conditions, and
the information made available to us, as of the date hereof.
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The Board of Directors
RYMAC Mortgage Investment Corporation
In addition to the assumptions and limitations described in the preceding
two paragraphs, we call your attention to the fact that the manner in which the
Purchase Price has been calculated in the second paragraph of this letter for
purposes of our opinion does not give effect to Section 1(g)(iii) of the
Agreement which could increase the amount of consideration to be paid.
We have acted as financial advisor to RYMAC in connection with the
Transaction and have received, and will receive upon delivery of this letter,
fees for our services. In addition, RYMAC has agreed to indemnify us and certain
of our affiliates for liabilities arising out of our services in connection with
the Transaction, including the rendering of our opinion. In the ordinary course
of our business, we may actively trade in securities of RYMAC or Navistar for
our own account and for the account of customers, and accordingly may at any
time hold a long or short position in any such securities.
Based upon and subject to the foregoing, it is our opinion that the
Purchase Price is fair, from a financial point of view, to the stockholders of
RYMAC. Our opinion is limited solely to the Purchase Price calculated as
provided in the second paragraph of this letter, and we express no opinion with
respect to the consideration that may actually be paid by RYMAC in the
Transaction pursuant to Section 1(g)(iii) of the Agreement. In addition, we have
not been requested to opine as to, and our opinion does not in any manner
address, RYMAC's business decision to proceed with or effect the Transaction.
This letter is provided solely for benefit of the Board of Directors of
RYMAC and may not be used or relied upon by, or disclosed, referred to or
communicated by you to, any third party for any purpose whatsoever, except with
our prior written consent.
Sincerely,
NOMURA SECURITIES INTERNATIONAL, INC.
By:
Michael H. Lowry
Managing Director
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<PAGE> 170
ANNEX III
FORM OF SECURED PROMISSORY NOTE
[DATE] $
FOR VALUE RECEIVED, , a
Delaware corporation (the "Company"), hereby promises to pay to the order of
Navistar International Transportation Corp., a Delaware corporation
("Navistar"), the principal amount of $(or the unpaid principal amount from time
to time outstanding hereunder) together with interest thereon calculated from
the date hereof in accordance with the provisions of this Note.
This Note was issued pursuant to that certain Asset Purchase Agreement,
dated as of September , 1996 (as amended and modified from time to time, the
"Purchase Agreement"), between the Company and Navistar. The Purchase Agreement
contains certain terms governing the rights of the holder of this Note which are
incorporated herein by reference. Except as defined in paragraph 10 hereof and
unless otherwise indicated herein, capitalized terms used in this Note have the
same meanings set forth in the Purchase Agreement. Notwithstanding anything to
the contrary herein, it is expressly agreed that the outstanding principal
amount of this Note may, from time to time, be increased pursuant to certain
purchase price adjustments set forth in Section 1(g) of the Purchase Agreement
(the "Purchase Price Adjustments").
1. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Principal Payment. The Company shall pay principal installments under
this Note to the Noteholder as follows:
(i) Within ninety (90) days after the end of each fiscal year of the
Company during the term hereof, the Company shall pay principal in an
amount equal to the amount, if any, by which the total cash and Cash
Equivalents of the Company, as shown on the Company's audited balance sheet
and statement of financial condition as of the end of such fiscal year,
prepared in accordance with GAAP, exceeds Three Million Dollars
($3,000,000.00); and
(ii) In the event the Company obtains, from time to time, any
Refinancing Loan, the Company shall promptly upon obtaining such loan pay
principal in an amount equal to the proceeds of such loan.
If not sooner paid, the Company shall pay the entire principal amount of this
Note then outstanding to the Noteholder in full on November , 2006 (the
"Maturity Date"), together with any and all accrued and unpaid interest and any
other amounts due hereunder.
(b) Interest. Except as otherwise expressly provided herein, interest shall
accrue at the rate of eight percent (8.0%) per annum, (computed on the basis of
a 360-day year and the actual number of days elapsed in any year) on the unpaid
principal amount of this Note outstanding from time to time from and including
the date hereof until the date paid, or (if less) at the highest rate then
permitted under applicable law. The Company shall pay to the Noteholder all
accrued interest on the last business day of each May and November, beginning
after the date hereof. Notwithstanding anything to the contrary contained
herein, on the date any such scheduled interest payment becomes due the Company
may elect to add such interest payment to the outstanding principal balance of
the Note to be repaid with interest in accordance with the provisions of this
Note; provided, that (i) the board of directors of the Company by resolution
declares that the payment of such scheduled interest payment would be reasonably
expected to significantly effect the Company's and any of its Subsidiaries'
ability to fund current operations and (ii) the Noteholder shall have received
written notice of such election at least thirty (30) days before the date of
such scheduled interest payment, which notice shall be accompanied by a
certified copy of the resolution of the board of directors of the Company
referred to in clause (i) above and an amendment to this Note, in form and
substance satisfactory to the Noteholder, duly executed by the Company and dated
as of the date such scheduled interest payment becomes due, which amendment
shall increase the principal amount of this Note by the amount of such scheduled
interest payment. Payments received by the Noteholder from the Company on this
Note shall be applied first to the payment of interest which is due and payable
and only thereafter to the outstanding principal balance hereof.
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Unless prohibited under applicable law, any accrued interest which is not paid
on the date on which it is due and payable shall bear interest at the same rate
at which interest is then accruing on the principal amount of this Note until
such interest is paid. Any accrued interest which for any reason has not
theretofore been paid shall be paid in full on the date on which the final
principal payment on this Note is made.
2. PREPAYMENTS; SETOFF.
(a) Optional Prepayments. The Company may, without premium or penalty, at
any time and from time to time, prepay all or any portion (in whole number
multiples of $50,000) of the outstanding principal amount of this Note, provided
that the Company has paid all interest on this Note accrued through the
immediately preceding scheduled interest payment date. In connection with any
prepayment of principal pursuant to this paragraph 2(a), the Company shall also
pay all accrued and unpaid interest on the principal amount of this Note being
prepaid. Any prepayment of less than all of the outstanding principal amount of
this Note pursuant to this paragraph shall be applied to the scheduled payments
of the outstanding principal amount of this Note in the inverse order of
maturity.
(b) Right of Setoff. In addition to all other rights and remedies available
to Navistar hereunder or otherwise, Navistar shall have the right, after the
occurrence and during the continuance of any Default or Event of Default, to
setoff against and to apply to the accrued and unpaid interest and outstanding
principal balance of the Note (in each case, to the extent then due and
payable), any obligation owing by Navistar to the Company. Any such setoff shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance hereof. A setoff of less than
all of the outstanding principal amount of this Note shall be applied to the
scheduled payments of the outstanding principal amount of this Note in the
inverse order of maturity.
3. COLLATERAL SECURITY.
This Note is secured by a first priority lien upon and security interest in
all of the Company's assets, whether now owned or hereafter acquired, and is
entitled to the benefits of the Security Documents. Notwithstanding the
foregoing, Noteholder agrees that it will (if requested to do so by the holder
of the Senior Obligations), upon terms reasonably acceptable to Noteholder,
subordinate its security interest and lien in the Collateral (as defined in the
Security Documents) in connection with and to the extent reasonably required to
facilitate a Refinancing Loan, and promptly upon the request of the holder of
the Senior Obligations, it will execute and deliver such documents, instruments
and agreements as are necessary to evidence such subordination.
4. COVENANTS.
(a) Affirmative Covenants; Other Information. The Company hereby agrees
that, so long as any amount is owing to the Noteholder hereunder, the Company
shall and (except in the case of delivery of financial information, reports and
notices) shall cause each of its Subsidiaries to:
(i) Performance of Obligations. (A) Pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case
may be, all its obligations of whatever nature, except where the amount or
validity thereof is currently being contested in good faith by appropriate
proceedings and reserves in conformity with GAAP with respect thereto have
been provided on the books of the Company or its Subsidiaries, as the case
may be or the failure to pay, discharge or otherwise satisfy such
obligations would not be reasonably expected to have a Material Adverse
Effect; and (B) comply with all material applicable laws, rules and
regulations of all governmental authorities, except to the extent that the
failure to comply therewith would not be reasonably expected to a cause
Material Adverse Effect.
(ii) Conduct of Business and Maintenance of Existence. Continue to
engage in business of the same general type as conducted by it on the
Closing Date (after giving effect to the transactions contemplated by the
Purchase Agreement) and preserve, renew and keep in full force and effect
its corporate existence and take all reasonable action to maintain all
rights, privileges and franchises necessary or desirable in the normal
conduct of its business except as otherwise permitted pursuant to
subparagraph 4(b)(iv), and
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except to the extent that the failure to do so would not be reasonably
expected to have a Material Adverse Effect.
(iii) Maintenance of Property; Insurance. Keep all property useful and
necessary in its business in good working order and condition; maintain
with financially sound and reputable insurance companies insurance on all
its property in at least such amounts and against at least such risks (but
including in any event public liability) as are usually insured against in
the same general area by companies engaged in the same or a similar
business; and furnish to the Noteholder, upon written request, full
information as to the insurance carried.
(iv) Inspection of Property; Books and Records; Discussions. Keep
proper books of records and account in which full, true and correct entries
in conformity with GAAP and applicable law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of the Noteholder to visit and inspect any of its
properties and examine and make abstracts from any of its books and records
at any reasonable time and upon reasonable notice and as often as may
reasonably be desired and to discuss the business, operations, properties
and financial and other condition of the Company and its Subsidiaries with
officers and employees of the Company and its Subsidiaries and with its
independent certified public accountants; provided that the Noteholder
shall bear its own expenses if any such inspection, examination or
discussion occurs at a time when no Default or Event of Default shall have
occurred and be continuing.
(v) Information. Provide to Navistar:
(A) within five days after the same are sent, copies of all
financial statements and reports which the Company sends to its
stockholders, and within five days after the same are filed, copies of
all financial statements and reports which the Company may make to, or
file with, the Securities and Exchange Commission or any successor or
analogous governmental authority;
(B) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the
Company by its independent accountants (and not otherwise contained in
other materials provided hereunder); and
(C) promptly, such additional financial and other information as
the Noteholder may from time to time reasonably request.
(vi) Notices. Reasonably promptly after obtaining knowledge of any of
the following (or within such other time period designated in clause (E)
below) give notice to the Noteholder thereof:
(A) the occurrence of any Default or Event of Default;
(B) any (1) default or event of default under any contractual
obligation of the Company or any of its Subsidiaries or (2) litigation,
investigation or proceeding which may exist at any time between the
Company or any of its Subsidiaries and any governmental authority, which
in either case, if not cured or if adversely determined, as the case may
be, could reasonably be expected to have a Material Adverse Effect;
(C) any litigation or proceeding affecting the Company or any of
its Subsidiaries in which the amount involved is $250,000 or more and
not covered by insurance or in which injunctive or similar relief is
sought;
(D) the occurrence of or existence of any event or condition that,
in the judgment of Company, could be reasonably expected to give rise to
a claim for indemnification by the Noteholder under Section 10 of the
Purchase Agreement;
(E) as soon as possible and in any event within 30 days after the
Company or any Commonly Controlled Entity knows or has reason to know of
(1) the occurrence or expected occurrence of any Reportable Event with
respect to any Plan, and (2) within 15 days after the Company or any
Commonly Controlled Entity knows or has reason to know of the occurrence
or expected occurrence of any of the following events: (i) a failure to
make any required contribution to a Plan, (ii) the filing
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of a request for a minimum funding waiver under Section 412 of the Code
with respect to a Plan, (iii) the creation of any Lien in favor of the
PBGC or a Plan, (iv) any withdrawal from, or the termination,
Reorganization or Insolvency of, any Multiemployer Plan,(v) the
institution of proceedings or the taking of any other action by the PBGC
or the Company or any Commonly Controlled Entity or any Multiemployer
Plan with respect to the withdrawal from, or the termination,
Reorganization or Insolvency of, any Plan, (vi) the disqualification of
any Plan that is intended to be qualified under Section 401(a) of the
Code, (vii) the filing of a notice of intent to terminate a Plan or the
treatment of a Plan amendment as a termination under Section 4041 of
ERISA, or (viii) any other event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan
or the imposition of any liability under Title IV of ERISA;
(F) any Lien (other than security interests created by the Security
Agreement or Liens permitted hereunder) on any of the Collateral (as
defined in the Security Agreement) which is not permitted under
subparagraph 4(b)(ii) and which, in the judgment of the Company, would
be reasonably expected to materially and adversely affect the ability of
the Noteholder to exercise any of its remedies under the Security
Agreement;
(G) the occurrence of any event that, in the judgment of the
Company, would reasonably be expected to have a material adverse effect
on the aggregate value of the Collateral or on the security interests
created by the Security Agreement; and
(H) any material adverse change in the business, operations,
property or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole.
Each notice pursuant to this paragraph shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action (if any) the Company proposes to take with respect
thereto.
(vii) Additional Collateral; Subsidiaries.
(A) With respect to any assets of the type covered by the Security
Agreement acquired after the Closing Date by the Company or any of its
Subsidiaries, and, upon the occurrence and during the continuance of an
Event of Default and at the request of the Noteholder, with respect to
any other assets or property of the Company or any of its Subsidiaries,
as to which the Noteholder does not have a perfected Lien, (1) execute
and deliver to the Noteholder such amendments to the Security Agreement
or such other documents as the Noteholder reasonably requests in order
to grant to the Noteholder a security interest in such assets, (2) take
all actions reasonably requested by the Noteholder to grant to the
Noteholder a perfected security interest in such assets, including,
without limitation, the filing of Uniform Commercial Code financing
statements in such jurisdictions as may be required by the Security
Agreement or by law or as may be reasonably requested by the Noteholder
and (3) if reasonably requested by the Noteholder deliver to the
Noteholder legal opinions relating to the matters described in the
preceding clauses (1) and (2), which opinions shall be in form and
substance, and from counsel, reasonably satisfactory to the Noteholder.
(B) With respect to any Subsidiary of the Company created or
acquired after the Closing Date by the Company, prior to or concurrently
with becoming such Subsidiary (1) have the Company amend the Security
Agreement so as to grant to the Noteholder a perfected security interest
in the Capital Stock and assets of such Subsidiary, (2) deliver to the
Noteholder or its agent the certificates representing such Capital
Stock, if any, together with undated stock powers, executed in blank, in
form and substance reasonably satisfactory to the Noteholder, in respect
of such stock, (3) cause such Subsidiary to enter into a guarantee in
form and substance reasonably satisfactory to the Noteholder guarantying
the prompt payment and performance by the Company of all of its
obligations hereunder, and (4) if requested by the Noteholder, deliver
to the Noteholder legal opinions relating to the matters described in
the preceding clauses (1), (2) and (3) which opinions shall be in form
and substance, and from counsel, reasonably satisfactory to the
Noteholder.
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(viii) Obtain Refinancing Loan. To use reasonable commercial efforts
to obtain a Refinancing Loan within six (6) months from the date hereof in
amounts and with terms reasonably satisfactory to the Company and the
Noteholder.
(b) Negative Covenants. The Company hereby agrees that, so long as any
amount is owing to the Noteholder, the Company shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly:
(i) Limitation on Indebtedness. Create, incur, assume or suffer to
exist any Indebtedness, except:
(A) the Senior Obligations;
(B) Indebtedness of the Company to any Subsidiary and of any
Subsidiary to the Company or any other Subsidiary;
(C) Indebtedness of the Company or any of its Subsidiaries incurred
to finance the acquisition of fixed or capital assets (whether pursuant
to a loan, a Financing Lease or otherwise) after the date hereof;
(D) Indebtedness assumed by the Company pursuant to the Purchase
Agreement, and any refinancings, refundings, renewals or extensions
thereof; provided, that the principal amount of any such Indebtedness
shall not be increased to more than the principal amount outstanding on
the Closing Date (after giving effect to the transactions contemplated
by the Purchase Agreement);
(E) Indebtedness of a corporation which becomes a Subsidiary after
the date hereof, provided that (i) such Indebtedness existed at the time
such corporation became a Subsidiary and was not created in anticipation
thereof and (ii) immediately after giving effect to the acquisition of
such corporation by the Company no Default or Event of Default shall
have occurred and be continuing;
(F) Indebtedness of the Company on an unsecured basis in an
aggregate principal amount not to exceed $3,000,000 at any one time
outstanding under the lines of credit offered by commercial banks to the
Company or its Subsidiaries to finance the working capital needs of the
Company and its Subsidiaries; and
(G) Indebtedness of the Company in respect of this Note, as may be
amended from time to time (including without limitation any increase in
the principal amount of this Note pursuant hereto or the Purchase
Agreement).
(ii) Limitation on Liens. Create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except for:
(A) Liens and encumbrances of the type described in Sections 4(c),
(d) and (e) of the Purchase Agreement;
(B) Liens securing Indebtedness of the Company and its Subsidiaries
permitted by clause (C) of subparagraph 4(b)(i) hereof incurred to
finance the acquisition of fixed or capital assets, provided that (i)
such Liens shall be created substantially simultaneously with the
acquisition of such fixed or capital assets, (ii) such Liens do not at
any time encumber any property other than the property financed by such
Indebtedness, (iii) the amount of Indebtedness secured thereby is not
increased to more than the principal amount originally incurred and (iv)
the principal amount of Indebtedness secured by any such Lien shall at
no time exceed 100% of the fair value (as determined in good faith by
the board of directors of the Company) of such property at the time it
was acquired;
(C) Liens on the property or assets of a corporation which becomes
a Subsidiary after the date hereof securing Indebtedness permitted by
clause (E) of subparagraph 4(b)(i) hereof, provided that (i) such Liens
existed at the time such corporation became a Subsidiary and were not
created in anticipation thereof, (ii) any such Lien is not spread to
cover any property or assets of such corporation after the time such
corporation becomes a Subsidiary, and (iii) the amount of Indebtedness
secured thereby is not increased to more than the principal amount
originally incurred;
(D) Liens created to secure the Senior Obligations;
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(E) Liens for taxes not yet due or which are being contested in
good faith by appropriate proceedings, provided that adequate reserves
with respect thereto are maintained on the books of the Company or its
Subsidiaries, as the case may be, in conformity with GAAP;
(F) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business which are not overdue for a period of more than 60 days or
which are being contested in good faith by appropriate proceedings;
(G) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and
deposits securing liability to insurance carriers under insurance or
self-insurance arrangements;
(H) deposits to secure the performance of bids, trade contracts
(other than borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(I) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of the
Company or such Subsidiary; and
(J) Liens created by the Security Documents.
(iii) Limitation on Guarantee Obligations. Create, incur, assume or
suffer to exist any Guarantee Obligation except:
(A) Guarantee Obligations assumed by the Company pursuant to the
Purchase Agreement and any refinancings, refundings, renewals or
extensions thereof, provided, that the principal amount of any such
Guarantee Obligations shall not be increased to more than the principal
amount outstanding on the Closing Date (after giving effect to the
transactions contemplated by the Purchase Agreement);
(B) guarantees made in the ordinary course of business, not to
exceed $250,000 in the aggregate, by the Company of obligations of any
of its Subsidiaries or by any Subsidiary of obligations of the Company,
in each case to the extent such guaranty obligations are otherwise
permitted under this Agreement;
(C) guarantees made in respect of the Senior Obligations;
(D) guarantees by the Company or any of its Subsidiaries of
indebtedness permitted by subparagraph 4(b)(i);
(E) Guarantee Obligations in respect of the undrawn portion of the
face amount of letters of credit issued for the account of the Company
or any Subsidiary in an aggregate amount not to exceed $250,000 at any
one time outstanding for the Company and its Subsidiaries; and
(F) guarantees made in favor of the Noteholder as contemplated by
this Note.
(iv) Limitation on Fundamental Changes. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign,
transfer or otherwise dispose of, all or substantially all of its property,
business or assets, or make any material change in its present method of
conducting business, except:
(A) any Subsidiary of the Company may be merged or consolidated
with or into the Company (provided that the Company shall be the
continuing or surviving corporation) or with or into any one or more
wholly owned Subsidiaries of the Company (provided that the wholly owned
Subsidiary or Subsidiaries shall be the continuing or surviving
corporation);
(B) any wholly owned Subsidiary may sell, lease, transfer or
otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to the Company or any other wholly owned
Subsidiary of the Company; and
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(C) any Person may be merged with or into the Company, (provided
that the continuing or surviving corporation assumes all of the
obligations and liabilities of the Company in respect of this Note, the
Purchase Agreement, the Ancillary Agreements, and Related Documents)
with the prior written consent of the Noteholder.
(v) Limitation on Sale of Assets. Convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, receivables and leasehold interests) or any
product line, whether now owned or hereafter acquired, or, in the case of
any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock
to any Person other than the Company or any wholly owned Subsidiary,
except:
(A) the sale or other disposition of any property in the ordinary
course of business;
(B) the sale or discount without recourse of accounts receivable
arising in the ordinary course of business in connection with the
compromise or collection thereof;
(C) as permitted by subparagraph 4(b)(iv);
(D) the sale or other disposition of any property, provided the
aggregate book value of all property sold or disposed of by the Company
pursuant to this clause (D) does not exceed $1,000,000 in any fiscal
year of the Company; and
(E) the sale or other disposition of any assets, the net proceeds
of which are used to prepay this Note or are otherwise distributed in
accordance with the Intercreditor Agreement.
(vi) Limitation on Dividends. Declare or pay any dividend (other than
dividends payable solely in common stock or preferred stock of the Company
and dividends payable by any Subsidiary of the Company to the Company, or
any other Subsidiary of the Company) on, or make any payment on account of,
or set apart assets for a sinking or other analogous fund for, the
purchase, redemption, defeasance, retirement or other acquisition of, any
shares of any class of Capital Stock of the Company or any warrants or
options to purchase any such Capital Stock, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either
directly or indirectly, whether in cash or property or in obligations of
the Company or any Subsidiary.
(vii) Limitation on Investments, Loans and Advances. Make any advance,
loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment
(collectively, "Investments") in, any Person, except:
(A) extensions of trade credit in the ordinary course of business;
(B) investments in Cash Equivalents;
(C) investments by the Company in its Subsidiaries and investments
by such Subsidiaries in the Company and in other Subsidiaries;
(D) Investments in existence on the date hereof and disclosed in
the Purchase Agreement;
(E) additional Investments or acquisitions made after the date
hereof and approved by the board of directors of the Company; and
(F) loans and advances to employees of the Company or its
Subsidiaries for travel and entertainment expenses in the ordinary
course of business.
(viii) Limitation on Optional Payments and Modifications of Debt
Instruments. (A) Make any optional payment or prepayment on or redemption
or purchase of any Indebtedness for borrowed money other than any
prepayment of this Note or any prepayment of any revolving loans or term
loans made under the Credit Agreement; (B) amend, modify or change, or
consent or agree to any amendment, modification or change to any of the
terms of any such Indebtedness other than any such amendment, modification
or change which would extend the maturity or reduce the amount of any
payment of principal thereof or which would reduce the rate or extend the
date for payment of interest thereon) or
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(C) amend, modify or change, or consent or agree to any amendment,
modification or change to the Credit Agreement to increase the interest
rate on the Senior Obligations (including any default rate).
(ix) Limitation on Changes in Fiscal Year. Permit the fiscal year of
the Company to end on a day other than December 31.
(x) Limitation on Negative Pledge Clauses. Enter into with any Person
any agreement, other than (A) this Note, (B) the Credit Agreement and (C)
purchase money mortgages or Financing Leases permitted by this Note
(provided in the case of this clause (C), any prohibition or limitation
shall only be effective against the assets financed thereby), which
prohibits or limits the ability of the Company or any of its Subsidiaries
to create, incur, assume or suffer to exist any Lien upon any of its
property, assets or revenues, whether now owned or hereafter acquired.
(xi) Limitation on Amendments of Certificates of Incorporation and
By-Laws. Permit any material modification, amendment or supplement to the
certificate of incorporation or by-laws of the Company or any of its
Subsidiaries.
(xii) Limitation on Certain Restrictions. Become subject to, or permit
any of its Subsidiaries to become subject to, (including, without
limitation, by way of amendment to or modification of) any agreement (other
than the Credit Agreement) which by its terms would (under any
circumstances) restrict (A) the right of any Subsidiary to make loans or
advances or any dividends to, transfer property to, or repay any
Indebtedness owed to, the Company or another Subsidiary or (B) the
Company's right to perform the provisions of this Note (including, without
limitation, provisions relating to the payment or prepayment of principal
and interest on this Note).
5. INTERCREDITOR AGREEMENT.
The Noteholder hereby acknowledges and agrees that the exercise of remedies
pursuant to paragraph 6 is, and shall at all times be, subject to the
limitations on the Noteholder's remedies set forth in the Intercreditor
Agreement.
6. EVENTS OF DEFAULT.
(a) Definition. For purposes of this Note, an Event of Default shall be
deemed to have occurred if
(i) The Company shall fail to pay any principal when due in accordance
with the terms hereof; or the Company shall fail to pay any interest when
due in accordance with the terms hereof, or any other amount payable
hereunder, within five days after any such interest or other amount becomes
due in accordance with the terms hereof; or
(ii) Any representation or warranty made or deemed made by the Company
in the Purchase Agreement or any Related Document or which is contained in
any certificate, document or financial or other statement furnished by it
at any time under or in connection with this Note, the Purchase Agreement
or any Related Document shall prove to have been incorrect in any material
respect on or as of the date made or deemed made; or
(iii) The Company shall default in the observance or performance of
any agreement contained in subparagraph 4(a)(vii) of this Note or contained
in the Purchase Agreement or any Related Document, subject to applicable
cure periods, if any; or
(iv) The Company shall default in the observance or performance of any
other agreement contained in this Note subject to 30 day cure (other than
as provided in subparagraphs (i) through (iii) of this paragraph); or
(v) The Company or any of its Subsidiaries shall (A) default in any
payment of principal of any Indebtedness for borrowed money in excess of
$50,000 at the final maturity thereof; or (B) default in the observance or
performance of any other agreement or condition relating to any such
Indebtedness or any Guarantee Obligation in respect of any such
Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition
exist, the effect of
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which default or other event or condition is to cause such Indebtedness to
become due prior to its stated maturity or such Guarantee Obligation to
become payable (whether by the terms of any document evidencing such
Indebtedness or Guarantee Obligation, upon the election of any holder of
Indebtedness or beneficiary of any Guarantee Obligation or otherwise); or
(vi) (A) The Company or any of its Subsidiaries shall commence any
case, proceeding or other action (1) under any existing or future law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or
its debts, or (2) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any substantial
part of its assets, or the Company or any of its Subsidiaries shall make a
general assignment for the benefit of its creditors; or (B) there shall be
commenced against the Company or any of its Subsidiaries any case,
proceeding or other action of a nature referred to in clause (A) above
which (1) results in the entry of an order for relief or any such
adjudication or appointment or (2) remains undismissed, undischarged or
unbonded for a period of 60 days; or (C) there shall be commenced against
the Company or any of its Subsidiaries any case, proceeding or other action
seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have
been vacated, discharged, or stayed or bonded pending appeal within 60 days
from the entry thereof; or (D) the Company or any of its Subsidiaries shall
take any action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the acts set forth in clause (A), (B), or
(C) above; or (E) the Company or any of its Subsidiaries shall generally
not, or shall be unable to, or shall admit in writing its inability to, pay
its debts as they become due; or
(vii) (A) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (B) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of the
Company or any Commonly Controlled Entity, (C) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Plan that is a Single-Employer Plan, (D) any Plan that is a
Single-Employer Plan shall terminate for purposes of Title IV of ERISA, (E)
the Company or any Commonly Controlled Entity shall, or in the reasonable
opinion of Noteholder is likely to, incur any liability in connection with
a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer
Plan or (F) any other event or condition shall occur or exist with respect
to a Plan; and in each case in clauses (A) through (F) above, such event or
condition, together with all other such events or conditions, if any, could
reasonably be expected to have a Material Adverse Effect; or
(viii) One or more judgments or decrees shall be entered against the
Company or any of its Subsidiaries involving in the aggregate a liability
(not fully covered by insurance) of $1,000,000 or more, and all such
judgments or decrees shall not have been vacated, discharged, stayed or
bonded pending appeal within 60 days from the entry thereof; or
(ix) (A) Any of the Security Documents shall cease, for any reason, to
be in full force and effect, or the Company or any Subsidiary which is a
party to any of the Security Documents shall so assert or (B) the Lien
created by any of the Security Documents shall cease to be enforceable and
of the same effect and priority purported to be created thereby, except to
the extent, if any, otherwise provided in the Intercreditor Agreement.
(b) Consequences of Events of Default.
(i) If any Event of Default has occurred, the interest rate on this
Note shall increase immediately by an increment of 1 percentage point(s) to
the extent permitted by law. Any increase of the interest rate resulting
from the operation of this subparagraph shall terminate as of the close of
business on the date on which no Events of Default exist.
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(ii) If an Event of Default of the type described in subparagraph
6(a)(vi) has occurred with respect to the Company, the aggregate principal
amount of this Note (together with all accrued interest thereon and all
other amounts due and payable with respect thereto) shall become
immediately due and payable without any action on the part of the
Noteholder, and the Company shall immediately pay to the Noteholder all
amounts due and payable with respect to this Note.
(iii) If any Event of Default has occurred (other than under
subparagraph 6(a)(vi)), the Noteholder may declare all or any portion of
the outstanding principal amount of this Note (together with all accrued
interest thereon and all other amounts due and payable with respect
thereto) to be immediately due and payable and may demand immediate payment
of all or any portion of the outstanding principal amount of this Note
(together with all such other amounts then due and payable).
(iv) The Noteholder shall also have any other rights which such holder
may have been afforded under any contract or agreement (including, without
limitation, the Security Documents) at any time and any other rights which
such holder may have pursuant to applicable law.
7. WAIVER OF CERTAIN RIGHTS.
The Company hereby waives diligence, presentment, protest and demand and
notice of protest and demand, dishonor and nonpayment of this Note, and
expressly agrees that this Note, or any payment hereunder, may be extended from
time to time and that the holder hereof may accept security for this Note or
release security for this Note, all without in any way affecting the liability
of the Company hereunder.
8. ASSIGNMENT.
The rights and obligations of the Company and the Noteholder shall be
binding upon and benefit the permitted successors, assigns and transferee of the
parties; provided that in no event shall the Company assign its rights hereunder
without the prior written consent of the Noteholder. The Noteholder shall
provide the Company with notice of any assignment or transfer of Noteholder's
rights hereunder.
9. AMENDMENT AND WAIVER.
Except as otherwise expressly provided herein, the provisions of this Note
may be amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company has
obtained the written consent of the Noteholder.
10. DEFINITIONS.
For purposes of this Note, the following capitalized terms have the
following meaning:
"Capital Stock" shall mean any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interests in a Person (other than a corporation)
and any and all warrants or options to purchase any of the foregoing.
"Cash Equivalents" shall mean (a) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition and overnight bank deposits of any commercial bank 13 having capital
and surplus in excess of $250,000,000, or party to the Credit Agreement (c)
repurchase obligations of any commercial bank satisfying the requirements of
clause (b) of this definition, having a term of not more than 30 days with
respect to securities issued or fully guaranteed or insured by the United States
Government, (d) commercial paper of a domestic issuer rated at least A-2 by
Standard and Poor's Ratings Group ("S&P") or P-2 by Moody's Investors Service,
Inc. ("Moody's"), (e) securities with maturities of one year or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States or by any political subdivision or taxing
authority of any such state, commonwealth or territory or by any foreign
government, the securities of which state, commonwealth, territory, political
subdivision, taxing authority or foreign government (as the case may be) are
rated at least A by S&P or A by Moody's, (f) securities with maturities of one
year or less from the date of acquisition backed by standby letters of credit
issued by any
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commercial bank satisfying the requirements of clause (b) of this definition or
(g) shares of money market mutual or similar funds which invest exclusively in
assets satisfying the requirements of clauses (b) through (f) of this
definition;
"Commonly Controlled Entity" shall mean an entity, whether or not
incorporated, which is under common control with the Company within the meaning
of Section 4001 of ERISA or is part of a group which includes the Company and
which is treated as a single employer under Section 414 of the Code.
"Consolidated Lease Expense" shall mean for any period, the aggregate
amount of fixed and contingent rentals payable by the Company and its
Subsidiaries for such period with respect to leases of real and personal
property, determined in accordance with GAAP on a consolidated basis.
"Default" shall mean any of the events specified in paragraph 6, whether or
not any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Employee Benefit Plan" shall have the meaning set forth in Section 3(3) of
ERISA.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Event of Default" shall mean each of the events described in paragraph 6;
provided, however, that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"Financing Lease" shall mean any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
"Guarantee Obligation" shall mean as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to induce
the creation of which the guaranteeing person has issued a reimbursement,
counterindemnity or similar obligation, in either case guaranteeing or in effect
guaranteeing any Indebtedness, leases, dividends or other obligations (the
"primary obligations") of any other third Person (the "primary obligor") in any
manner, whether directly or indirectly, including, without limitation, any
obligation of the guaranteeing person, whether or not contingent, (i) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (ii) to advance or supply funds (1) for the purchase
or payment of any such primary obligation or (2) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (iii) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation or (iv) otherwise to assure or hold harmless the owner of any such
primary obligation against loss in respect thereof; provided, however, that the
term Guarantee Obligation shall not include endorsements of instruments for
deposit or collection in the ordinary course of business. The amount of any
Guarantee Obligation of any guaranteeing person shall be deemed to be the lower
of (a) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Guarantee Obligation is made and (b) the
maximum amount for which such guaranteeing person may be liable pursuant to the
terms of the instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Company in good
faith.
"Indebtedness" shall mean of any Person at any date, (a) all indebtedness
of such Person for borrowed money or for the deferred purchase price of property
or services (other than current trade liabilities incurred in the ordinary
course of business and payable in accordance with customary practices), (b) any
other indebtedness of such Person which is evidenced by a note, bond, debenture
or similar instrument, (c) all obligations of such Person under Financing
Leases, (d) all obligations of such Person in respect of acceptances issued or
created for the account of such Person, (e) all obligations in respect of
deferred compensation and (f) all liabilities secured by any Lien on any
property owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof.
"Insolvency" shall mean with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section 4245 of
ERISA.
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"Intercreditor Agreement" shall mean the intercreditor agreement entered
into between the holders of Senior Obligations and Navistar, as amended or
otherwise modified from time to time.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any Financing Lease
having substantially the same economic effect as any of the foregoing).
"Material Adverse Effect" shall mean a material adverse effect on (a) the
business, operations, property or condition (financial or otherwise) of the
Company and its Subsidiaries taken as a whole or (b)#the validity or
enforceability of this Note or any of the other Related Documents (other than
the Intercreditor Agreement) or the rights or remedies of Noteholder hereunder
or thereunder.
"Multiemployer Plan" shall mean a Plan which is a multi-employer plan as
defined in Section 4001(a)(3) of ERISA.
"Noteholder" shall mean Navistar and its permitted successors, transferees
and assigns.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
"Person" shall mean an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Plan" shall mean any Employee Benefit Plan in respect of which the Company
or a Commonly Controlled Entity is (or, if such plan were terminated at such
time, would under Section 4069 of ERISA be deemed to be) an "employer" as
defined in Section 3(5) of ERISA.
"Refinancing Loan" shall mean any loan, extension of credit or other
financial accommodation (other than a revolving line of credit for working
capital purposes or loans for project finance use) made as of or after the
Closing to the Company by a Person other than the Noteholder, to refinance and
pay indefeasibly in full or in part the outstanding principal amount now or at
any time or times hereafter owing by the Company to Noteholder under this Note,
and which is secured by Company's equipment or other assets in which Noteholder
holds security interests on the date hereof, provided that (i) the proceeds of
such loan are disbursed directly to Noteholder pursuant to written authorization
given by Company to the Person making the loan and (ii) to the extent such
Person intends to take a security interest in any of Company's equipment or
other assets, such Person has entered into an intercreditor agreement with the
Noteholder in form and substance acceptable to Noteholder.
"Related Documents" shall mean this Note, the Security Documents and the
Intercreditor Agreement.
"Reorganization" shall mean with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section 4241
of ERISA.
"Reportable Event" shall mean any of the events set forth in Section
4043(b) of ERISA, other than those events as to which the thirty day notice
period is waived by regulation.
"Responsible Officer" shall mean the chief executive officer and the
president of the Company or, with respect to financial matters, the chief
financial officer of the Company.
"Senior Obligations" shall mean all obligations and liabilities of the
Company in respect of the loan agreement entered into by the Company in
connection with the Refinancing Loan (the "Credit Agreement") and all loan and
security documents executed and delivered in connection therewith, and any
refinancing, refunding, renewals or extensions thereof (provided, that the
principal amount of such Indebtedness shall not be increased to more than the
principal amount outstanding as of the date of such loan agreement), including,
without limitation, any interest accruing subsequent to the commencement of any
bankruptcy, insolvency or similar proceedings with respect to the Company,
whether or not such interest constitutes an allowed claim in such proceeding.
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"Security Documents" shall mean the Security Agreement, and the subsidiary
guarantees contemplated hereby.
"Single-Employer Plan" shall have the meaning set forth in Section
4001(a)(15) of ERISA.
"Subsidiary" shall mean as to any Person, a corporation, partnership or
other entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests having
such power only by reason of the happening of a contingency) to elect a majority
of the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise qualified, all references to a "Subsidiary" or
to "Subsidiaries" in this Note shall refer to a Subsidiary or Subsidiaries of
the Company.
11. CANCELLATION.
After all principal, accrued interest and all other amounts hereunder at
any time owed on this Note, including all Purchase Price Adjustments, have been
paid in full, this Note shall be surrendered to the Company for cancellation,
and the Noteholder shall take such action as the Company may reasonably request
to evidence such discharge and the release of the Liens created by the Security
Documents. Notwithstanding anything herein to the contrary, it is expressly
agreed that the outstanding principal balance under this Note may be reduced to
a zero balance without such repayment operating to cancel this Note or
extinguish or release the Liens, security title and security interest created by
the Security Documents. This Note and the Security Documents shall remain in
full force and effect as to any subsequent Purchase Price Adjustments made after
the zero balance without loss or priority until all Indebtedness of the Company
to the Noteholder arising under or in connection with this Note, the Purchase
Agreement, or any other instrument or document now or at any time evidencing,
securing or guaranteeing the same is paid in full and satisfied. The Company
waives the operation of any applicable statute, law or regulation having a
contrary effect.
12. PAYMENT OF EXPENSES AND TAXES.
The Company hereby agrees (a) to pay or reimburse the Noteholder for all
its costs and expenses incurred in connection with the enforcement or
preservation of any rights under this Note and the other Related Documents after
the occurrence of any Event of Default, including, without limitation, the
reasonable fees and disbursements of counsel to the Noteholder, (b) to pay,
indemnify, and hold the Noteholder harmless from, any and all recording and
filing fees and any and all liabilities with respect to, or resulting from any
delay in paying, stamp, excise and other similar taxes, if any, which may be
payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Note and the other Related Documents and
(c) to pay, indemnify, and hold the Noteholder harmless from and against any and
all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance and
administration of this Note and the other Related Documents, including, without
limitation, any of the foregoing relating to the violation of, noncompliance
with or liability under, any Environmental Law applicable to the operations of
the Company, any of its Subsidiaries or any of their properties (all the
foregoing in this clause (c), collectively, the "indemnified liabilities"),
provided that the Company shall have no obligation hereunder to the Noteholder
with respect to indemnified liabilities arising from (i) the gross negligence or
willful misconduct of the Noteholder, (ii) legal proceedings commenced against
the Noteholder by any security holder or creditor thereof arising out of and
based upon rights afforded any such security holder or creditor solely in its
capacity as such or (iii) any matter relating to the Intercreditor Agreement.
The agreements in this paragraph shall survive repayment of this Note and all
other amounts payable hereunder.
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13. PAYMENTS.
All payments to be made to the Noteholder shall be made in the lawful money
of the United States of America in immediately available funds and, except as
otherwise expressly provided herein or as may be required by law, without any
setoff, counterclaim, withholding or deduction whatsoever.
14. PLACE OF PAYMENT.
Payments of principal and interest shall be delivered to Navistar by wire
transfer of immediately available funds to the following account:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
or to such other Noteholder at such other address or to the attention of such
other person or to such other account as specified by prior written notice to
the Company.
15. SEVERABILITY.
Whenever possible, each provision of this Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Note is held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Note.
16. DESCRIPTIVE HEADINGS; INTERPRETATION.
The descriptive headings of this Note are inserted for convenience only and
do not constitute a substantive part of this Note. The use of the word
"including" in this Note shall be by way of example rather than by limitation.
17. GOVERNING LAW.
ALL ISSUES AND QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT
AND INTERPRETATION OF THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ANY
CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE OF
ILLINOIS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF ILLINOIS.
18. WAIVERS.
TO THE EXTENT PERMITTED BY LAW, THE COMPANY HEREBY WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE
MADE BY CERTIFIED REGISTERED MAIL DIRECTED TO IT AT ITS ADDRESS SET FORTH IN
PARAGRAPH 19 HEREOF. IN ADDITION, THE COMPANY HEREBY WAIVES TRIAL BY JURY, ANY
OBJECTIONS BASED ON FORUM NON CONVENIENS AND ANY OBJECTIONS TO VENUE OF ANY
ACTION ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
TRANSACTIONS CONTEMPLATED BY OR THE RELATIONSHIPS ESTABLISHED IN CONNECTION WITH
THIS NOTE.
19. NOTICES.
All notices, requests, demands, waivers and other communication required or
permitted to be given under this Note shall be in writing and shall be deemed to
have been duly given if (i) delivered personally, (ii) mailed by first-class,
registered or certified mail, return receipt requested, postage prepaid, or
(iii) sent by
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<PAGE> 184
next-day or overnight mail or delivery or (iv) sent by telecopy (with verbal
confirmation of receipt) or telegram.
If to Navistar:
455 North City Front Plaza Drive
Chicago, IL 60611
Attn: Treasurer
Fax Number: (312) 836-2573
with a copy, which will
not constitute notice to
Navistar, to:
455 North City Front Plaza Drive
Chicago, IL 60611
Attn: General Counsel
Fax Number: (312) 836-3982
and:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Michael Kerr
Fax Number: (312) 861-2200
Confirm Number: (312) 861-2356
If to the Company:
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
with a copy, which will
not constitute notice to
the Company, to:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
---------------------------------
or, in each case, to such other Noteholder at such other address as may be
specified in writing to the other Parties.
All such notices, requests, demands, waivers and other communications shall be
deemed to have been received (i) if by personal delivery on the date after such
delivery, (ii) if by certified or registered mail, on the seventh business day
after the mailing thereof, (iii) if by next-day or overnight mail or delivery,
on the day delivered, or (iv) if by telecopy or telegram, on the next day
following the day on which such telecopy or telegram was sent, provided that a
copy is also sent by certified or registered mail.
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20. BUSINESS DAYS.
If any payment is due, or any time period for giving notice or taking
action expires, on a day which is a Saturday, Sunday or legal holiday in the
State of Illinois, the payment shall be due and payable on, and the time period
shall automatically be extended to, the next business day immediately following
such Saturday, Sunday or legal holiday, and interest shall continue to accrue at
the required rate hereunder until any such payment is made.
21. USURY LAWS.
It is the intention of the Company and the Noteholder to conform strictly
to all applicable usury laws now or hereafter in force, and any interest payable
under this Note shall be subject to reduction to the amount not in excess of the
maximum legal amount allowed under the applicable usury laws as now or hereafter
construed by the courts having jurisdiction over such matters. If the maturity
of this Note is accelerated by reason of an election by the holder hereof
resulting from an Event of Default, voluntary prepayment by the Company or
otherwise, then earned interest may never include more than the maximum amount
permitted by law, computed from the date hereof until payment, and any interest
in excess of the maximum amount permitted by law shall be canceled automatically
and, if theretofore paid, shall at the option of the holder hereof either be
rebated to the Company or credited on the principal amount of this Note, or if
this Note has been paid, then the excess shall be rebated to the Company. The
aggregate of all interest (whether designated as interest, service charges,
points or otherwise) contracted for, chargeable, or receivable under this Note
shall under no circumstances exceed the maximum legal rate upon the unpaid
principal balance of this Note remaining unpaid from time to time. If such
interest does exceed the maximum legal rate, it shall be deemed a mistake and
such excess shall be canceled automatically and, if theretofore paid, rebated to
the Company or credited on the principal amount of this Note, or if this Note
has been repaid, then such excess shall be rebated to the Company.
IN WITNESS WHEREOF, the Company has executed and delivered this Note on
, 1996.
CORE MATERIALS CORPORATION
By:
Its:
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<PAGE> 186
ANNEX IV
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of November 1, 1996, is entered
into between RYMAC Mortgage Investment Corporation, a Maryland corporation
("RYMAC"), and Core Materials Corporation, a Delaware corporation ("Core
Materials"). RYMAC and Core Materials are hereinafter sometimes collectively
referred to as the "Constituent Corporations."
W I T N E S S E T H :
WHEREAS, RYMAC is a corporation duly organized and existing under the laws
of the State of Maryland;
WHEREAS, Core Materials is a corporation duly organized and existing under
the laws of the State of Delaware;
WHEREAS, on the date of this Agreement, RYMAC has authority to issue
50,000,000 shares of capital stock, of which 5,210,600 shares of Common Stock,
par value $.01 per share ("Maryland Common Stock"), are issued and outstanding
or reserved for issuance;
WHEREAS, on the date of this Agreement, Core Materials has authority to
issue 30,000,000 shares of capital stock, consisting of 10,000,000 shares of
preferred stock issuable in series and 20,000,000 shares of Common Stock, par
value $.01 per share ("Delaware Common Stock"), of which 1,000 shares are issued
and outstanding and owned by RYMAC;
WHEREAS, the respective Boards of Directors of RYMAC and Core Materials
have determined that it is advisable and in the best interests of each of such
corporations that RYMAC merge with and into Core Materials upon the terms and
subject to the conditions set forth in this Agreement for the purpose of
effecting the change of the state of incorporation of RYMAC from Maryland to
Delaware;
WHEREAS, the respective Boards of Directors of RYMAC and Core Materials
have, by resolutions duly adopted, approved this Agreement;
WHEREAS, RYMAC has approved this Agreement as the sole stockholder of Core
Materials; and
WHEREAS, the Board of Directors of RYMAC has directed that this Agreement
be submitted to a vote of its shareholders.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, RYMAC and Core Materials hereby agree as follows:
1. Merger. RYMAC shall be merged with and into Core Materials (the
"Merger"), and Core Materials shall be the surviving corporation (hereinafter
sometimes referred to as the "Surviving Corporation"). The Merger shall become
effective upon the date and at the time of filing of appropriate articles of
merger, providing for the Merger, with the Department of Assessments and
Taxation of the State of Maryland or an appropriate certificate of merger,
providing for the Merger, with the Secretary of State of the State of Delaware,
whichever later occurs (the "Effective Time").
2. Governing Documents. The Certificate of Incorporation of Core
Materials, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation without change or
amendment until thereafter amended in accordance with the provisions thereof and
applicable laws, and the By-laws of Core Materials, as in effect immediately
prior to the Effective Time, shall be the By-laws of the Surviving Corporation
without change or amendment until thereafter amended in accordance with the
provisions thereof, of the Certificate of Incorporation of the Surviving
Corporation and applicable laws.
3. Succession. At the Effective Time, the separate existence of RYMAC
shall cease, and Core Materials shall possess all the rights, privileges, powers
and franchises of a public and private nature and be subject to all the
restrictions, disabilities and duties of each of the Constituent Corporations;
and all and singular, the rights, privileges, powers and franchises of each of
the Constituent Corporations, and all property, real, personal and
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<PAGE> 187
mixed, and all debts due to each of the Constituent Corporations on whatever
account, as well as stock subscriptions and all other things in action belonging
to each of the Constituent Corporations, shall be vested in the Surviving
Corporation; and all property, rights, privileges, powers and franchises, and
all and every other interest shall be thereafter as effectually the property of
the Surviving Corporation as they were of the respective Constituent
Corporations, and the title to any real estate vested by deed or otherwise, in
either of such Constituent Corporations shall not revert or be in any way
impaired by reason of the Merger, but all rights of creditors and all liens upon
any property of RYMAC shall be preserved unimpaired. To the extent permitted by
law, any claim existing or action or proceedings pending by or against either of
the Constituent Corporations may be prosecuted as if the Merger had not taken
place. All debts, liabilities and duties of the respective Constituent
Corporations shall thenceforth attach to the Surviving Corporation and may be
enforced against it to the same extent as if such debts, liabilities and duties
had been incurred or contracted by it. All corporate acts, plans, policies,
agreements, arrangements, approvals and authorizations of RYMAC, its
shareholders, Board of Directors and committees thereof, officers and agents
which were valid and effective immediately prior to the Effective Time, shall be
taken for all purposes as the acts, plans, policies, agreements, arrangements,
approvals and authorizations of the Surviving Corporation and shall be as
effective and binding thereon as the same were with respect to RYMAC. The
employees and agents of RYMAC shall become the employees and agents of the
Surviving Corporation and continue to be entitled to the same rights and
benefits which they enjoyed as employees and agents of RYMAC. The requirements
of any plans or agreements of RYMAC involving the issuance or purchase by RYMAC
of certain shares of its capital stock shall be satisfied by the issuance or
purchase of a like number of shares of the Surviving Corporation.
4. Directors. The number of Directors at the Effective Time shall be
increased to five and shall consist of the following persons:
Richard R. Conte
Malcolm M. Prine
Ralph O. Hellmond
Thomas M. Hough
Thomas E. Rigsby
5. Further Assurances. From time to time, as and when required by the
Surviving Corporation or by its successors or assigns, there shall be executed
and delivered on behalf of RYMAC such deeds and other instruments, and there
shall be taken or caused to be taken by it all such further and other action, as
shall be appropriate, advisable or necessary in order to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation the title to and
possession of all property, interests, assets, rights, privileges, immunities,
powers, franchises and authority of RYMAC, and otherwise to carry out the
purposes of this Agreement, and the officers and directors of the Surviving
Corporation are fully authorized in the name and on behalf of RYMAC or
otherwise, to take any and all such action and to execute and deliver any and
all such deeds and other instruments.
6. Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof:
(a) each share of Maryland Common Stock outstanding immediately prior
to the Effective Time shall be converted into the right to received one
fully paid and nonassessable share of Delaware Common Stock; and
(b) the 1,000 shares of Delaware Common Stock presently issued and
outstanding in the name of RYMAC shall be cancelled and retired and resume
the status of authorized and unissued shares of Delaware Common Stock, and
no shares of Delaware Common Stock or other securities of Core Materials
shall be issued in respect thereof.
7. Condition to Merger. The respective obligations of each party to effect
the merger shall be subject to the fulfillment at or prior to the Effective Time
of the following conditions:
(a) the Merger shall have received the requisite approval of the
holders of Maryland Common Stock pursuant to the General Corporation Law of
the State of Maryland;
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(b) no statute, rule, regulation, decree, order or injunction shall
have been promulgated, enacted, entered or enforced by any United States
federal or state government, governmental agency or authority or court
which remains in effect and prohibits, restrains, enjoins or restricts the
consummation of the Merger.
8. Stock Certificates. At and after the Effective Time, all of the
outstanding certificates which, immediately prior to the Effective Time,
represented shares of Maryland Common Stock shall be deemed for all purposes to
evidence ownership of, and to represent, shares of Delaware Common Stock into
which the shares of Maryland Common Stock, formerly represented by such
certificates, have been converted as herein provided. The registered owner on
the books and records of the Surviving Corporation or its transfer agents of any
such outstanding stock certificate shall, until such certificate shall have been
surrendered for transfer or otherwise accounted for to the Surviving Corporation
or its transfer agents, have and be entitled to exercise any voting and other
rights with respect to, and to have received any dividends and other
distributions upon, the shares of Delaware Common Stock evidenced by such
outstanding certificate as above provided.
9. Options. Each option to purchase shares of Maryland Common Stock
granted under the 1995 Stock Option Plan (the "Plan") of RYMAC which is
outstanding immediately prior to the Effective Time, shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and become an option to purchase the same number of shares of Delaware
Common Stock at the same option price per share, and upon the same terms and
subject to the same conditions as set forth in the Plan, as in effect at the
Effective Time. The same number of shares of Delaware Common Stock shall be
reserved for purposes of said Plan as is equal to the number of shares of
Maryland Common Stock so reserved as of the Effective Time. As of the Effective
Time, Core Materials hereby assumes the Plan and all obligations of RYMAC under
the Plan, including the outstanding options or awards or portions thereof
granted pursuant to the Plan, and the shares subject to such Plan shall
thereafter be the shares of Delaware Common Stock reserved for issuance
thereunder.
10. Amendment. Subject to applicable law, this Agreement may be amended,
modified or supplemented by written agreement of the parties hereto at any time
prior to the Effective Time with respect to any of the terms contained herein;
provided, however, that no such amendment, modification or supplement not
adopted and approved by the shareholders of RYMAC and Core Materials shall
affect the rights of either or both of such shareholders in a manner which is
materially adverse to either or both of them.
11. Abandonments. At any time prior to the Effective Time, this Agreement
may be terminated, and the Merger may be abandoned by the Board of Directors of
RYMAC, notwithstanding approval of this Agreement by the stockholder of Core
Materials or by the shareholders of RYMAC, or both, if, in the opinion of the
Board of Directors of RYMAC, circumstances arise which, in the opinion of such
Board of Directors, make the Merger for any reason inadvisable.
12. Counterparts. In order to facilitate the filing and recording of this
Agreement, the same may be executed in two or more counterparts, each of which
shall be deemed to be an original and the same agreement.
13. Non-Survival. The covenants and agreements in this Agreement shall not
survive the Merger, except for those covenants which by their terms survive the
Merger.
14. Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Miscellaneous. This Agreement (i) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
between the parties, with respect to the subject matter hereof, (ii) is not
intended to confer upon any other person any rights or remedies hereunder, (iii)
shall not be assigned by operation of law or otherwise and (iv) shall be
governed by the laws of the State of Delaware.
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IN WITNESS WHEREOF, RYMAC and Core Materials have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.
RYMAC Mortgage Investment
Corporation,
a Maryland corporation
By: /s/ Richard R. Conte
Name: Richard R. Conte
Title: Chief Executive Officer
ATTEST:
By: /s/ Myrna J. Lea
Name: Myrna J. Lea
Core Materials Corporation,
a Delaware corporation
By: /s/ Richard R. Conte
Name: Richard R. Conte
Title: President
ATTEST:
By: /s/ Myrna J. Lea
Name: Myrna J. Lea
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<PAGE> 190
ANNEX V
RYMAC MORTGAGE INVESTMENT CORPORATION
COMPOSITE ARTICLES OF INCORPORATION
[RESTATED TO GIVE EFFECT TO ALL AMENDMENTS TO DATE]
ARTICLE I
INCORPORATOR
The undersigned, Geoffrey R. Hartenstein, whose address is 42nd Floor, 600
Grant Street, Pittsburgh, Pennsylvania 15219, being at least eighteen years of
age, does hereby form a corporation under and by virtue of the General Laws of
the State of Maryland.
ARTICLE II
NAME
The name of the corporation is RYMAC Mortgage Investment Corporation (the
"Corporation").
ARTICLE III
PURPOSE
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the General
Laws of the State of Maryland, as amended from time to time.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the Corporation's principal office in the State
of Maryland in c/o CT Corporation System, 32 South Street, Baltimore, Maryland
21202. The name and post office address of its resident agent is CT Corporation
System, 32 South Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
SECTION 1. The total number of shares of capital stock which the
Corporation shall have the authority to issue is Fifty Million (50,000,000)
shares, all of one class and designated Common Stock, each share to have a par
value of one cent ($0.01) and having an aggregate par value of Five Hundred
Thousand Dollars ($500,000). The shares of the Corporation shall be
non-assessable.
SECTION 2. Each share of Common Stock shall entitle the owner thereof to
vote at the rate of one (1) vote for each share held.
SECTION 3. All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of these Articles of Incorporation
and the By-laws of the Corporation.
SECTION 4. The Board of Directors may classify or reclassify any unissued
shares of capital stock, whether now or hereinafter authorized, by setting or
changing the preferences, conversions or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of capital stock. Sections 1 and 2 of this Article
V are subject to the provisions of this Section 4.
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ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION, THE DIRECTORS AND STOCKHOLDERS
SECTION 1. The number of Directors of the Corporation initially shall be
three (3), which number may be changed pursuant to the By-laws of the
Corporation. The names of the persons who shall act as Directors until the first
annual meeting or until their successors are duly elected and qualified are:
Joseph P. Berghold
Richard R. Conte
Ronald L. Temple
SECTION 2. The Board of Directors of the Corporation is hereby empowered
to authorize the issuance from time to time of shares of capital stock, whether
now or hereafter authorized, for such consideration and with such
characteristics as the Board of Directors may deem advisable subject to such
limitations as may be set forth in these Articles of Incorporation, the By-laws
of the Corporation or in the General Laws of the State of Maryland.
SECTION 3. No holder of shares of any class of the Corporation shall have
any preemptive or preferential right to purchase or subscribe to (i) any shares
of any class of the Corporation, whether now or hereafter authorized; (ii) any
warrants, rights or options to purchase any such shares; or (iii) any securities
or obligations convertible into any such shares or into warrants, rights or
options to purchase any such shares other than such right, if any, as the Board
of Directors, in its discretion, may determine.
SECTION 4. The Board of Directors of the Corporation may make, alter,
amend or repeal from time to time any of the By-laws of the Corporation except
any particular By-law which is specified as not subject to alteration or repeal
by the Board of Directors.
SECTION 5. The Board of Directors may authorize, subject to such approval
of stockholders and other conditions, if any, as may be required by any
applicable statute, rule or regulation, the execution and performance by the
Corporation of one or more agreements with any person, corporation, association,
company, trust, partnership (limited or general) or other organization whereby,
subject to the control and supervision of the Board of Directors, any such
person, corporation, association, company, trust, partnership (limited or
general) or other organization shall render or make available to the Corporation
managerial, investment, advisory and/or related services, office space and other
services and facilities (including, if deemed advisable by the Board of
Directors, the management or supervision of the investments of the Corporation)
upon such terms and conditions as may be provided in such agreement or
agreements (including, if deemed fair and equitable by the Board of Directors,
the compensation payable thereunder by the Corporation).
SECTION 6. Notwithstanding any provision of the General Laws of the State
of Maryland requiring any action to be taken or authorized by the affirmative
vote of the holders of a greater proportion than a majority of the shares or of
the shares of each class, or otherwise to be taken or authorized by vote of the
stockholders, such action shall be effective and valid, except as otherwise
provided in these Articles of Incorporation, if taken or authorized by the
affirmative vote of the holders of a majority of the total number of shares
outstanding and entitled to vote thereon. The enumeration and definition of
particular powers of the Board of Directors mentioned above shall in no way be
limited or restricted by reference to or inference from the terms of any other
clause of this or any other Article of these Articles of Incorporation, or
construed as or deemed by inference or otherwise in any manner to exclude or
limit the powers conferred upon the Board of Directors under the General Laws of
the State of Maryland as now or hereafter in force.
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ARTICLE VII
RESTRICTION ON TRANSFER OF SHARES,
ACQUISITION RESTORATION AND REDEMPTION RIGHT
SECTION 1. Affidavits of Transferees. Whenever it is deemed by the Board
of Directors to be prudent in protecting the tax status of the Corporation, the
Board of Directors may require to be filed with the Corporation a statement or
affidavit from each proposed transferee of shares of capital stock of the
Corporation setting forth the number of shares already owned by the transferee
and any related person(s) specified in the form prescribed by the Board of
Directors for that purpose. All contracts for the sale or other transfer of
shares of capital stock of the Corporation shall be subject to this provision.
SECTION 2. Affidavits of Stockholders. Prior to any transfer or
transaction which would cause a stockholder to own directly or indirectly,
shares in excess of the Limit (as such term is defined in Section 4 of this
Article), and in any event upon demand of the Board of Directors, such
stockholder shall file with the Corporation an affidavit setting forth the
number of shares of capital stock of the Corporation owned directly and
indirectly by the person filing the affidavit. For purposes of this Section 2,
shares of capital stock not owned directly shall be deemed to be owned
indirectly by a person if that person would be the beneficial owner of such
shares for purposes of Rule 13d-3, or any successor rule thereto, promulgated
under the Securities Exchange Act of 1934, as amended or any successor statute
thereto (the "Exchange Act"), and/or would be considered to own such shares by
reason of the attribution rules in Section 544 of the Internal Revenue Code of
1986, as amended (the "Code") or the regulations issued thereunder. The
affidavit to be filed with the Corporation shall set forth all information
required to be reported in returns filed by stockholders under Treasury
Regulation sec. 1.857-9 issued under the Code or similar provisions of any
successor regulation, and in reports to be filed under Section 13(d); or any
successor rule thereto, of the Exchange Act. The affidavit, or an amendment
thereto, shall be filed with the Corporation within ten (10) days after demand
therefor and at least fifteen (15) days prior to any transfer or transaction
which, if consummated, would cause the filing person to hold a number of shares
of capital stock of the Corporation in excess of the Limit. The Board of
Directors shall have the right, but shall not be required, to refuse to transfer
any shares of capital stock of the Corporation purportedly transferred other
than in compliance with the provisions of this Section 2 of this Article.
SECTION 3. Prohibited Transfers. (a) Any acquisition of shares of capital
stock of the Corporation that could or would (i) result in the direct or
indirect imposition of any penalty tax on the Corporation (including the
imposition of any entity-level tax on one or more real estate mortgage
investment conduits (REMICs) in which the Corporation has acquired or plans to
acquire an interest), (ii) jeopardize the tax status of one or more REMICs in
which the Corporation has acquired or plans to acquire an interest or (iii)
result in the disqualification of the Corporation as a real estate investment
trust under the Code (collectively, a "Prohibited Transfer") will be void ab
initio to the fullest extent permitted by applicable law, and the intended
transferee of any shares that are the subject of a Prohibited Transfer will be
deemed never to have had an interest therein. If the foregoing provision is
determined to be void or invalid by virtue of any legal decision, statute, rule
or regulation, then the transferee of such shares shall be deemed, at the option
of the Corporation, to have acted as agent on behalf of the Corporation in
acquiring such shares and to hold such shares on behalf of the Corporation. In
addition, any shares of the Corporation that are the subject of a proposed,
attempted or actual Prohibited Transfer may be redeemed by the Corporation at
the discretion of the Board of Directors. Any such redemption will be effected
as provided in Section 6 of this Article.
(b) Whenever it is deemed by the Board of Directors to be prudent in order
to avoid a Prohibited Transfer, the Board of Directors may require a holder or
proposed transferee of shares to file a statement or affidavit with the
Corporation stating that the holder or proposed transferee is not a Disqualified
Organization (as defined below); and any contract for the sale or other transfer
of shares of the Corporation will be subject to this provision. For purposes of
this article, a "Disqualified Organization" means the United States, any state
or political subdivision thereof, any foreign government, any international
organization or instrumentality of the foregoing, any tax-exempt entity other
than a farmer's cooperative not subject to the unrelated business income tax,
and any rural electric or telephone cooperative. The Board of Directors may, in
its discretion,
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refuse to transfer shares on the books of the Corporation if either (i) a
statement or affidavit described above in this section has not been received or
(ii) the proposed transferee is a Disqualified Organization.
SECTION 4. Excess Shares. Notwithstanding any other provision hereof to
the contrary and subject to the provisions of Section 5 of this Article, no
person or persons acting as a group shall at any time directly or indirectly own
in the aggregate more than 9.8% of the outstanding shares of capital stock of
the Corporation (the "Limit"). Shares which but for this Article would be owned
by a person or persons acting as a group and would, at any time, be in excess of
the Limit are hereinafter referred to as "Excess Shares." For the purpose of
determining ownership of Excess Shares, "ownership" of shares shall be deemed to
include shares (i) constructively owned by a person under the provisions of
Section 544 of the Code and (ii) beneficially owned under the provisions of Rule
13d-3, or any successor rule, under the Exchange Act. For purposes of
determining whether persons are acting as a group in connection with this
Article, the term "group" shall have the same meaning as such term has for
purposes of Section 13(d)(3) of the Exchange Act. All shares of capital stock of
the Corporation which any person or persons acting as a group have the right to
acquire upon exercise of outstanding rights, options and warrants, and upon
conversion of any securities convertible into these shares, if any, shall be
considered outstanding for purposes of determining whether such person or
persons holds or hold shares in excess of the Limit if such inclusion will cause
such person or persons to own shares in excess of the Limit. The Board of
Directors shall have the right, but shall not be required, to refuse to transfer
shares of capital stock on the books of the Corporation if, as a result of the
proposed transfer, any person or persons acting as a group would hold or be
deemed to hold Excess Shares.
SECTION 5. Exemptions. The Limit set forth in Section 4 of this Article
shall not apply to the acquisition of shares of capital stock of the Corporation
by an underwriter in a public offering of such shares or in any transaction
involving the issuance of shares of capital stock by the Corporation in which
the Board of Directors of the Corporation determines that the underwriter or
other person or party initially acquiring such shares will timely distribute
such shares to or among others so that, following such distribution, none of
such shares will be deemed to be Excess Shares. The Board of Directors in its
discretion may exempt from the Limit and from the filing requirements of Section
2 of this Article ownership or transfers of certain designated shares of capital
stock of the Corporation while owned by or transferred to a person who has
provided the Board of Directors with evidence and assurances acceptable to the
Board of Directors that the qualification of the Corporation as a real estate
investment trust under the Code and the regulations issued under the Code would
not be jeopardized thereby.
SECTION 6. Redemption of Shares. At the discretion of the Board of
Directors, all Excess Shares or shares that are the subject of a proposed,
attempted or actual Prohibited Transfer (collectively, "Redemption Shares"), may
be redeemed by the Corporation. Written notice of redemption shall be provided
to all holders of Redemption Shares to be so redeemed not less than one week
prior to the date on which such shares are to be redeemed (the "Redemption
Date"), as determined by the Board of Directors and included in the notices of
redemption. The redemption price to be paid for Redemption Shares shall be the
fair market value of such Redemption Shares, which shall be (a) the closing
price on the last business day prior to the Redemption Date of those shares on
any national securities exchange on which the shares are listed or admitted to
trading, (b) if the shares are not so listed or admitted to trading, the closing
bid price on the last business day prior to the Redemption Date as reported on
the National Association of Securities Dealers, Inc. Automated Quotation System,
if quoted thereon, or (c) if the redemption price is not determinable in
accordance with either clause (a) or (b) of this sentence, the net asset value
of the shares (the proportionate interest of the shares to be redeemed in the
total market value of all the assets of the Corporation less the total
liabilities of the Corporation), determined in good faith by the Board of
Directors. The redemption price for any shares of capital stock of the
Corporation so redeemed shall be paid on the Redemption Date. From and after the
Redemption Date, the holder of any shares of capital stock of the Corporation
called for redemption shall cease to be entitled to any distributions and other
benefits with respect to those shares, except the right to payment of the
redemption price fixed as aforesaid.
SECTION 7. Application of Article. Nothing contained in this Article or
in any other provision hereof shall limit the authority of the Board of
Directors to take any and all other action as it in its sole discretion deems
necessary or advisable to protect the Corporation and the interests of its
stockholders by maintaining
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the Corporation's eligibility to be, and preserving the Corporation's status as,
a qualified real estate investment trust under the Code.
SECTION 8. Definition of "Person". For purposes of this Article only, the
term "person" shall mean any individual, corporation, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
SECTION 9. Severability. If any provision of this Article or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction, the validity of the remaining provisions shall
not be affected and other applications of such provision shall be affected only
to the extent necessary to comply with the determination of such court.
ARTICLE VIII
LIABILITY OF DIRECTORS AND OFFICERS: INDEMNIFICATION
SECTION 1. Liability of Directors and Officers. To the fullest extent
permitted and except as prohibited by the General Corporation Laws of the State
of Maryland as the same exists or may hereafter be amended, a director or
officer of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages.
SECTION 2. Indemnification of Directors, Officers, Employees and Assets.
The Corporation shall indemnify its directors, officers, employees and agents
to the fullest extent permitted and except as prohibited by the General
Corporation Laws of the State of Maryland as the same exists or may hereafter be
amended, under the procedures provided by such law.
ARTICLE IX
AMENDMENTS
The Corporation reserves the right from time to time to make any amendments
to its Articles of Incorporation which may be now or hereafter authorized by
law, including any amendments changing the terms or contract rights of any of
its outstanding stock by classification, reclassification or otherwise. Any such
amendment to the Corporation's Articles of Incorporation shall be valid if such
amendment shall have been authorized by not less than a majority of the
aggregate number of votes entitled to be cast thereon by a vote at a meeting.
All rights and powers conferred by the Articles of Incorporation of the
Corporation on stockholders, directors and officers are granted subject to these
reservations.
ARTICLE X
PERPETUAL EXISTENCE
The Corporation is to have perpetual existence.
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ANNEX VI
CORE MATERIALS CORPORATION
COMPOSITE CERTIFICATE OF INCORPORATION
------------------------------------
[RESTATED TO GIVE EFFECT TO ALL AMENDMENTS TO DATE]
ARTICLE I
NAME
The name of the Corporation is Core Materials Corporation.
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the Corporation in the State of Delaware is
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name and address of the Corporation's
registered agent is The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, Delaware 19801.
ARTICLE III
CORPORATE PURPOSES
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
CAPITAL STOCK
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is thirty million (30,000,000) shares,
of which twenty million (20,000,000) shares shall be Common Stock of the par
value of one cent ($0.01) each (hereinafter called "Common Stock") and ten
million (10,000,000) shares shall be Preferred Stock of the par value of one
cent ($0.01) each (hereinafter called "Preferred Stock").
A. RIGHTS AND RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock is
hereby authorized to be issued from time to time in one or more series, the
shares of each series to have such voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof
as shall be stated and expressed in the Certificate of Incorporation or in any
amendment thereto or in the resolution or resolutions adopted by the Board of
Directors providing for the issue thereof.
B. RIGHTS AND RESTRICTIONS OF COMMON STOCK. The powers, preferences,
rights, qualifications, limitations or restrictions thereof in respect to the
Common Stock are as follows:
(a) The Common Stock is junior to the Preferred Stock and is subject
to all the powers, rights, privileges, preferences and priorities of the
Preferred Stock as herein or in any resolution or resolutions adopted by
the Board of Directors pursuant to authority expressly vested in it by the
provisions of this Article.
(b) The Common Stock shall have voting rights for the election of
directors and for all other purposes, each holder of Common Stock being
entitled to one vote for each share thereof held by such holder, except as
otherwise required by law.
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C. INCREASE OR DECREASE IN AMOUNT OF AUTHORIZED SHARES. The number of
authorized shares of any class or classes of capital stock of the Corporation
may be increased or decreased by an amendment to this Certificate of
Incorporation authorized by the affirmative vote of the holders of a majority of
the shares of the Common Stock outstanding and entitled to vote thereon and,
except as expressly provided in the Certificate of Incorporation or in any
resolution or resolutions adopted by the Board of Directors pursuant to
authority expressly vested in it by the provisions of this Article with respect
to the Preferred Stock, no vote by holders of capital stock of the Corporation
other than the Common Stock shall be required to approve such action.
D. SHARES ENTITLED TO MORE OR LESS THAN ONE VOTE. If any class or series
of the Corporation's capital stock shall be entitled to more or less than one
vote for any share, on any matter, every reference in this Certificate of
Incorporation, the By-laws and in any relevant provision of law to a majority or
other proportion of stock shall refer to such majority or other proportion of
the votes of such stock.
E. ISSUANCES OF STOCK. All issuances of capital stock of the Corporation
must be authorized by the affirmative vote of two-thirds ( 2/3) of the entire
Board of Directors.
ARTICLE V
DENIAL OF PREEMPTIVE RIGHTS
No holder of any class of capital stock of the Corporation, whether now or
hereafter authorized, shall be entitled, as such, as a matter of right, to
subscribe for or purchase any part of any new or additional issue of capital
stock of the Corporation of any class whatsoever, or of securities convertible
into or exchangeable for capital stock of the Corporation of any class
whatsoever, whether now or hereafter authorized, or whether issued for cash,
property or services.
ARTICLE VI
STOCKHOLDER VOTE REQUIRED IN CONNECTION
WITH CERTAIN BUSINESS COMBINATIONS
SECTION 1. Vote Generally Required. Notwithstanding anything contained
herein or in the General Corporation Law of the State of Delaware, the
Corporation shall not (a) merge or consolidate with any one or more
corporations, joint-stock associations or non-stock corporations (other than in
a merger not requiring any vote of stockholders of the Corporation under the
General Corporation Law of Delaware), (b) sell, lease or exchange all or
substantially all of its property and assets or (c) adopt any plan or proposal
for the liquidation or dissolution of the Corporation, unless (1) the Board of
Directors shall, at a meeting duly called, adopt a resolution, by the
affirmative vote of at least two-thirds ( 2/3) of the entire Board of Directors,
approving such action and (2) such action shall be approved at a meeting by the
affirmative vote of the holders of 66 2/3% of the shares of capital stock of the
Corporation then outstanding and entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class and, except as
expressly provided in this Certificate of Incorporation or in any resolution or
resolutions adopted by the Board of Directors pursuant to authority expressly
vested in it by the provisions of Article IV with respect to the Preferred Stock
and except as otherwise provided by law, no vote by holders of capital stock of
the Corporation other than Voting Stock shall be required to approve such
action.
SECTION 2. Amendment or Repeal. Notwithstanding the fact that a lesser
percentage may be specified by the General Corporation Law of Delaware, the
affirmative vote of the holders of record of at least 66 2/3% of the shares of
the Voting Stock, voting together as a single class, shall be required to amend,
alter or repeal any provision of, or to adopt any provision or provisions
inconsistent with, any provision of this Article.
ARTICLE VII
CORPORATE EXISTENCE
The Corporation is to have perpetual existence.
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ARTICLE VIII
TRANSFER OF CAPITAL STOCK
SECTION 1. Certain Restrictions on the Transfer of Stock. In order to
preserve the Tax Benefits, the restrictions set forth below shall apply for the
period beginning on the Article VIII Effective Date and ending on the Expiration
Date, unless the Board of Directors shall fix an earlier or later date in
accordance with Section 6 of this Article VIII.
A. Definitions.
(1) Article VIII Effective Date. The time and date of the legal
effectiveness of the merger of RYMAC Mortgage Investment Corporation with
and into the Corporation.
(2) Control. 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. Such definition shall also apply to the terms "controlling,"
"controlled by" and "under common control with."
(3) Effective Date Tier Entity. Any Person that, as of the Article
VIII Effective Date or the date that shares of Common Stock are issued
pursuant to the Asset Purchase Agreement (as defined in B.5 below) after
giving effect to such issuance, was a First Tier Entity or a Higher Tier
Entity, for so long as such person continues to have a Prohibited Ownership
Percentage.
(4) Expiration Date. The last day of the fifteen-year period
commencing on the Article VIII Effective Date.
(5) First Tier Entity. A "first tier entity" with respect to the
Corporation, as that term is defined in Treasury Regulations Section
1.382-2T(f)(9).
(6) 47 Percentage Point Increase. An increase of 47 percentage points
or more of the Stock owned by "5-percent shareholders" of the Corporation
(as defined in A(13) below) over the lowest percentage of Stock owned by
such 5-percent shareholders at any time during the three-year period
preceding any determination date, such determination to be made in
accordance with Treasury Regulations Section 1.382-2T(c) as if the
determination date were a "testing date."
(7) Higher Tier Entity. An "higher tier entity" with respect to the
Corporation, as that term is defined in Treasury Regulations Section
1.382-2T(f)(14).
(8) Internal Revenue Code. The Internal Revenue Code of 1986, as
amended. Any reference to a particular Section or provision of the Internal
Revenue Code shall be deemed to also refer to any successor Section or
provision having similar effect.
(9) Ownership Change. An "ownership change" with respect to the
Corporation, as that term is used in Section 382(g) of the Internal Revenue
Code and Treasury Regulations Section 1.382-2T(a)(1), except that for
purposes of determining whether 5-percent shareholders have increased their
percentage interests by more than 50 percentage points, there shall be
added to the increase in their percentage interests an amount equal to 2.5%
of the total value of the Stock of the Corporation.
(10) Other Permitted Holders. Any Person, other than an Effective Date
Tier Entity or a Permitted Transferee, which has a Prohibited Ownership
Percentage permitted under Section 1, whether pursuant to a waiver under
Paragraph D of Section 1 or otherwise.
(11) Permitted Transferee. Any transferee with a Prohibited Ownership
Percentage as to which the Board of Directors has consented pursuant to
Subparagraph C(2) or C(3) of Section 1.
(12) Person. Any individual, corporation, estate, trust, association,
company, partnership, joint venture, or similar organization, or any other
entity described in Treasury Regulations Section 1.382-3(a)(1)(i).
(13) Prohibited Ownership Percentage. Any ownership in the Corporation
that would cause a Person or Public Group to be a "5-percent shareholder"
of the Corporation within the meaning of
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Treasury Regulations Section 1.382-2T(g)(1)(i) or (ii). For this purpose,
whether a Person or Public Group would be a "5-percent shareholder" shall
be determined (u) by substituting "4.5 percent" for "5 percent" each place
it appears in such provisions, (v) without giving effect to the following
provisions: Treasury Regulations Sections 1.382-2T(g)(2), 1.382-2T(g)(3),
1.382-2T(h)(2)(iii) and 1.382-2T(h)(6)(iii), (w) by treating every Person
or Public Group which owns Stock, whether directly or by attribution, as
directly owning such Stock notwithstanding any further attribution of such
Stock to other Persons and notwithstanding Treasury Regulations Section
1.382-2T(h)(2)(i)(A), (x) by substituting the term "Person" in place of
"individual" in Treasury Regulations Section 1.382-2T(g)(1)(i), (y) by
taking into account ownership of Stock at any time during the "testing
period" as defined in Treasury Regulations Section 1.382-2T(d)(1), and (z)
by treating each day during the testing period as if it were a "testing
date" as defined in Treasury Regulations Section 1.382-2T(a)(2)(i). In
addition, for the purpose of determining whether any Person or Public Group
has a Prohibited Ownership Percentage as of any date, the definition of
Stock set forth in Subparagraph A(15) of Section 1 shall be applied in lieu
of the definition in Treasury Regulations Section 1.382-2T(f)(18), except
that any option shall be treated as Stock only to the extent treating it as
Stock would cause an increase in ownership of such Person and such option
would be deemed exercised pursuant to Treasury Regulations in effect from
time to time (disregarding whether treating such option as exercised would
cause an ownership change).
(14) Public Group. A "public group" with respect to the Corporation,
as that term is used in Treasury Regulations Section 1.382-2T(f)(13),
excluding any "direct public group" with respect to the Corporation, as
that term is used in Treasury Regulations Section 1.382-2T(j)(2)(ii).
(15) Stock. All classes of stock of the Corporation, all options to
acquire stock of the Corporation and all other interests that would be
treated as stock in the Corporation pursuant to Treasury Regulations
Section 1.382-2T(f)(18)(iii), other than (x) stock described in Section
1504(a)(4) of the Internal Revenue Code and (y) stock that would be
described in such Section 1504(a)(4) but is not so described solely because
it is entitled to vote as a result of dividend arrearages. As used in this
Article VIII, the term "option" shall have the meaning set forth in
Treasury Regulations Section 1.382-2T(h)(4).
(16) Tax Benefits. The net operating loss carryovers and capital loss
carryovers to which the Corporation is entitled under the Internal Revenue
Code, free of restrictions under Section 382 of the Internal Revenue Code.
(17) Testing Date Action. Any Transfer or acquisition of Stock or any
other action (including the acquisition or issuance of an option to
Transfer or acquire Stock), if the effect of such Transfer, acquisition or
other action would be to cause a "testing date" with respect to the
Corporation within the meaning of Treasury Regulations Section
1.382-2T(a)(2)(i), determined by treating every Person and Public Group
which has a Prohibited Ownership percentage as a 5-percent shareholder as
used in such Section.
(18) Transfer. Any means of conveyance of legal or beneficial
ownership of Stock, whether such ownership is direct or indirect, voluntary
or involuntary, including, without limitation, an indirect transfer of
ownership through the transfer of any ownership interest of any entity that
owns Stock.
(19) Transferee Undertaking. A duly executed written undertaking for
the benefit of the Corporation by any transferee pursuant to which the
transferee agrees that (i) it will not take any of the following actions
without the prior consent of the Board of Directors (x) acquire any
additional Stock, (y) Transfer any Stock in violation of Paragraph B of
Section 1, or (z) take or cause to be taken any Testing Date Action, (ii)
upon request by the Corporation, it will furnish or cause to be furnished
to the Corporation all certificates representing Stock held of record or
beneficially, directly or indirectly, by it or by any Person controlling,
controlled by or under common control with it for the purpose of placing a
legend on such certificates to reflect the undertakings described in clause
(i) above, (iii) it acknowledges that stop transfer orders may be entered
with the transfer agent (or agents) and the registrar (or registrars) of
Stock against the transfer of Stock subject to the undertakings described
in clause (i) above except in compliance with the requirements of such
undertakings, and (iv) it will agree to such other actions and remedies as
the Corporation may reasonably request in order to preserve the Tax
Benefits.
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(20) Treasury Regulations. The regulations promulgated by the
Secretary of the Treasury under the Internal Revenue Code. Any reference to
a particular Treasury Regulation or Section or provision thereof shall be
deemed to also refer to any successor Regulation or Section or provision
having similar effect.
B. Transfer Restrictions.
Unless otherwise consented to or waived by the Board of Directors, the
following Transfers and actions shall be prohibited:
(1) General. No Person shall Transfer any Stock to any other Person to
the extent that such Transfer, if effected, (i) would cause the transferee
or any person or Public Group to have a Prohibited Ownership Percentage, or
(ii) would increase the ownership percentage of any transferee or any
Person or Public Group having a Prohibited Ownership Percentage.
(2) Additional Restrictions on Transfers Involving Effective Date Tier
Entities. In addition to the restrictions under Subparagraph B(1), (i) no
Effective Date Tier Entity or individual that owns a direct ownership
interest in the Corporation of five percent or more shall Transfer any
Stock, and no other Person shall Transfer any Stock to an Effective Date
Tier Entity, if, in either case, after such Transfer, there would be a 47
Percentage Point Increase, and (ii) no Effective Date Tier Entity or
individual that owns a direct ownership interest in the Corporation of five
percent or more shall take any other action (including the acquisition or
issuance of an option to Transfer or acquire Stock) if, after such action,
there would be a 47 Percentage Point Increase.
(3) Additional Restrictions on Transfers Involving Other Permitted
Holders. In addition to the restrictions under Subparagraph B(1), (i) no
Other Permitted Holder shall Transfer any Stock, and no other Person shall
Transfer any Stock to an Other Permitted Holder, if, in either case, such
Transfer would constitute a Testing Date Action, and (ii) no Other
Permitted Holder shall take any other action that would constitute a
Testing Date Action.
(4) Additional Restrictions under Transferee Undertakings. In addition
to the restrictions under Subparagraph B(1), (i) no Person who has
delivered a Transferee Undertaking shall Transfer any Stock, and no Person
shall Transfer any Stock to any Person who has delivered a Transferee
Undertaking, if, in either case, such Transfer would result in a violation
of such Transferee Undertaking, and (ii) no Person who has delivered a
Transferee Undertaking shall take or cause to be taken any other action
that would constitute a Testing Date Action.
(5) Exception. Notwithstanding anything herein to the contrary, the
issuance of shares of Common Stock of the Corporation to Navistar
International Transportation Corp. ("Navistar") or its designees pursuant
to the terms of an Asset Purchase Agreement, dated September 12, 1996 (the
"Asset Purchase Agreement"), between Navistar and RYMAC Mortgage Investment
Corporation shall not be deemed to be a violation of the transfer
restrictions set forth in this Paragraph B.
C. Permitted Transfers.
(1) General. Unless otherwise restricted under Paragraph B of Section
1 or under a Transferee Undertaking or other agreement, Transfers of Stock
may be made without the consent of the Board of Directors.
(2) Transfers by Effective Date Tier Entities. Upon petition by any
Effective Date Tier Entity or individual that owns a direct ownership
interest in the Corporation of five percent or more, the Board of Directors
shall consent to a proposed Transfer of Stock that complies with
Subparagraph B(2) of Section 1 but would otherwise be prohibited pursuant
to Subparagraph B(1) of Section 1 if it determines that (i) after giving
effect to such Transfer, the percentage of Stock owned by all Persons and
Public Groups with a Prohibited Ownership percentage will not have
increased by more than 47 percentage points over the lowest percentage of
Stock owned by such Persons and Public Groups at any time during the
three-year period preceding the proposed date of such Transfer (such
determination to be made in accordance with the provisions of Treasury
Regulations Section 1.382-2T(c)) and (ii) the proposed transferee shall
have delivered a Transferee Undertaking.
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(3) Transfers by Permitted Transferees. Upon petition by any Permitted
Transferee, the Board of Directors shall consent to a proposed Transfer of
Stock or Testing Date Action that would otherwise be prohibited pursuant to
Subparagraph B(1) or B(4) of Section 1 or pursuant to any Transferee
Undertaking if it determines that (i) after such proposed Transfer or
Testing Date Action there would not be an Ownership Change and (ii) in the
case of any such proposed Transfer that, if effected, would otherwise be
prohibited under Subparagraph B(1) of Section 1, such Transfer would
otherwise be permitted under Subparagraph C(2) if such Transfer were
proposed to be made by an Effective Date Tier Entity.
(4) Certain Additional Transfers to Permitted Transferees. Upon
petition by any Permitted Transferee, the Board of Directors shall consent
to a proposed Transfer of additional Stock to such Permitted Transferee
from a Person constituting an Effective Date Tier Entity or another
Permitted Transferee if it determines that such proposed Transfer would
otherwise be permitted under Subparagraph C(2) or C(3) of Section I, as the
case may be.
(5) Transfers by Other Permitted Holders. Upon petition by any Other
Permitted Holder, the Board of Directors shall consent to a proposed
Transfer of Stock or Testing Date Action that would otherwise be prohibited
pursuant to Subparagraph B(1), B(3) or B(4) of Section 1 or pursuant to any
Transferee Undertaking if it determines that (i) after such proposed
Transfer or Testing Date Action there would not be an Ownership Change and
(ii) in the case of any such proposed Transfer that, if effected, would
otherwise be prohibited under Subparagraph (B)(1) of Section 1, such
Transfer would not cause a 47 Percentage Point Increase and the proposed
transferee shall have delivered a Transferee Undertaking.
D. Waivers. Notwithstanding anything herein to the contrary, the Board of
Directors may waive any of the restrictions contained in Paragraph B of Section
1 of this Article VIII: (a) in the case of any issuance of Stock by the
Corporation which would otherwise be prohibited under Subparagraph B(1) of
Section 1, if the transferee agrees to be bound to the restrictions applicable
to Permitted Transferees; (b) in the event of a tender or exchange offer within
the meaning of the Securities Exchange Act of 1934, as amended, to acquire Stock
constituting more than fifty percent in value of the outstanding Common Stock of
the Corporation, so long as such waiver shall apply to all Transfers pursuant to
such tender or exchange offer; (c) in connection with any Transfers of Stock in
connection with underwritten offerings of such Stock; (d) in connection with any
investment in or acquisition of a business or any business combination involving
the Corporation or any subsidiary of the Corporation; and (e) in any other
instance in which the Board of Directors reasonably and in good faith determines
that a waiver would be in the best interests of the Corporation.
SECTION 2. Attempted Transfer in Violation of Transfer Restrictions. Unless
the consent or waiver of the Board of Directors is obtained as provided in
Paragraph C or D of Section 1, and except as provided in Paragraph C of Section
2 below, any attempted Transfer of shares of Stock of the Corporation in excess
of the shares that could be Transferred to the transferee without restriction
under Paragraph B of Section 1 is not effective to transfer ownership of such
excess shares (the "Prohibited Shares") to the purported acquiror thereof (the
"Purported Acquiror"), and the Purported Acquiror shall not be entitled to any
rights as a shareholder of the Corporation with respect to the Prohibited
Shares, including, without limitation, the right to vote or to receive dividends
with respect thereto. Nothing contained in this Article VIII shall preclude the
settlement of any transaction involving Stock entered into through the
facilities of any national securities exchange on which the shares of Stock of
the Corporation are listed. The application of the provisions and remedies
described in the first sentence of this Section 2 and in Paragraphs A, B and C
of Section 2 below shall be deemed not to so preclude any such settlement.
Paragraphs A, B and C below shall apply only in the case of violations of the
restrictions contained in Subparagraph B(1) of Section 1.
A. Transfer of Certificates; Sale of Stock. Upon demand by the Corporation,
the Purported Acquiror shall transfer any certificate or other evidence of
purported ownership of the Prohibited Shares within the Purported Acquiror's
possession or control, together with any dividends or other distributions paid
by the Corporation with respect to the Prohibited Shares that were received by
the Purported Acquiror (the "Prohibited Distributions"), to an agent to be
designated by the Corporation (the "Agent"). If the Purported Acquiror has sold
the Prohibited Shares to an unrelated party in an arms-length transaction after
purportedly acquiring them, the Purported Acquiror shall be deemed to have sold
the Prohibited Shares for the Agent, and
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in lieu of transferring the Prohibited Shares and Prohibited Distributions to
the Agent shall transfer to the Agent the Prohibited Distributions and the
proceeds of such sale (the "Resale Proceeds") except to the extent that the
Agent grants written permission to the Purported Acquiror to retain a portion of
the Resale Proceeds not exceeding the amount that would have been payable by the
Agent to the Purported Acquiror pursuant to Paragraph B of Section 2 if the
Prohibited Shares had been sold by the Agent rather than by the Purported
Acquiror. Any purported Transfer of the Prohibited Shares by the Purported
Acquiror, other than a transfer described in one of the two preceding sentences
(unless such transfer itself violated the provisions of Article VIII), shall not
be effective to transfer any ownership of the Prohibited Shares.
B. Allocation and Distribution of Proceeds. The Agent shall sell in an
arms-length transaction (through the American Stock Exchange, if possible) any
Prohibited Shares transferred to the Agent by the Purported Acquiror, and the
proceeds of such sale (the "Sales Proceeds"), or the Resale Proceeds, if
applicable, shall be allocated to the Purported Acquiror up to the following
amount: (1) where applicable, the purported purchase price paid or value of
consideration surrendered by the Purported Acquiror for the Prohibited Shares
and (2) where the purported Transfer of the Prohibited Shares to the Purported
Acquiror was by gift, inheritance, or any similar purported transfer, the fair
market value of the Prohibited Shares at the time of such purported Transfer.
Any Resale Proceeds or Sales Proceeds in excess of the amount allocable to the
Purported Acquiror pursuant to the preceding sentence, together with any
Prohibited Distributions (such excess amount and Prohibited Distributions are
collectively the "Subject Amounts"), shall be transferred to an entity
designated by the Corporation that is described in Section 501(c)(3) of the
Internal Revenue Code (the "Designated Charity"). In no event shall any such
Prohibited Shares or Subject Amounts inure to the benefit of the Corporation or
the Agent, but such Subject Amounts may be used to cover expenses incurred by
the Agent in performing its duties.
C. Limitation on Enforceability. Notwithstanding anything herein to the
contrary, with respect to any Transfer of Stock which would cause a Person or
Public Group (the "Prohibited Party") to violate a restriction provided for in
Subparagraph B(1) of Section I only on account of the attribution to the
Prohibited Party of the ownership of Stock by a Person or Public Group which is
not controlling, controlled by or under common control with the Prohibited
Party, which ownership is nevertheless attributed to the Prohibited Party,
Subparagraph B(1) of Section 1 shall not apply in a manner that would invalidate
such Transfer. In such case, the Prohibited Party and any Persons controlling,
controlled by or under common control with the Prohibited Party (collectively,
the "Prohibited Party Group") shall automatically be deemed to have disposed of,
and shall be required to dispose of, sufficient shares of Stock (which shares
shall consist only of shares held legally or beneficially, whether directly or
indirectly, by any member of the Prohibited Party Group, but not shares held
through another Person, other than shares held through a Person acting as agent
or fiduciary for any member of the Prohibited Party Group, and which shares
shall be disposed of in the inverse order in which they were acquired by members
of the Prohibited Party Group) to cause the Prohibited Party, following such
disposition, not to be in violation of Subparagraph B(1) of Section 1; provided
that in the event no member of the Prohibited Party Group (i) is an Effective
Date Tier Entity, Permitted Transferee or Other Permitted Holder and (ii) had
any actual knowledge that such Transfer was prohibited under Subparagraph B(1)
of Section 1, such disposition shall only be effected to the extent necessary in
order to prevent an Ownership Change. Such disposition shall be deemed to occur
simultaneously with the Transfer giving rise to the application of this
provision, and such number of shares which are deemed to be disposed of shall be
considered Prohibited Shares and shall be disposed of through the Agent as
provided in Paragraph B of Section 2, except that the maximum amount payable to
the Prohibited Party in connection with such sale shall be the fair market value
of the prohibited Shares at the time of the Prohibited Transfer.
D. Other Remedies. In the event that the Board of Directors determines that
a Person proposes to take any action in violation of Paragraph B of Section 1,
or in the event that the Board of Directors determines after the fact that an
action has been taken in violation of Paragraph B of Section 1, the Board of
Directors, subject to the second and third sentences of the introductory
paragraph of Section 2, may take such action as it deems advisable to prevent or
to refuse to give effect to any Transfer or other action which would result, or
has resulted, in such violation, including, but not limited to, refusing to give
effect to such Transfer or other action on the books of the Corporation or
instituting proceedings to enjoin such Transfer or other action. If any Person
shall knowingly violate Paragraph B of Section 1, then that Person and all other
Persons controlling,
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controlled by or under common control with such Person shall be jointly and
severally liable for, and shall pay to the Corporation, such amount as will,
after taking account of all taxes imposed with respect to the receipt or accrual
of such amount and all costs incurred by the Corporation as a result of such
loss, put the Corporation in the same financial position as it would have been
in had such violation not occurred.
SECTION 3. Prompt Enforcement Against Purported Acquiror. Within 30
business days of learning of a purported Transfer of Prohibited Shares to a
Purported Acquiror or a Transfer of Stock to a Prohibited Party, the Corporation
through its Secretary or any Assistant Secretary shall demand that the Purported
Acquiror or Prohibited Party surrender to the Agent the certificates
representing the Prohibited Shares, or any Resale Proceeds, and any Prohibited
Distributions, and if such surrender is not made by the Purported Acquiror or
Prohibited Party within 30 business days from the date of such demand, the
Corporation shall institute legal proceedings to compel such surrender;
provided, however, that nothing in this Section 3 shall preclude the Corporation
in its discretion from immediately bringing legal proceedings without a prior
demand, and also provided that failure of the Corporation to act within the time
periods set out in this Section 3 shall not constitute a waiver of any right of
the Corporation to compel any transfer required by Section 2. Upon a
determination by the Board of Directors that there has been or is threatened a
purported Transfer of Prohibited Shares to a Purported Acquiror or a Transfer of
Stock to a Prohibited Party or any other violation of Paragraph B of Section 1,
the Board of Directors may authorize such additional action as it deems
advisable to give effect to the provisions of this Article VIII, including,
without limitation, refusing to give effect on the books of the Corporation to
any such purported Transfer or instituting proceedings to enjoin any such
purported Transfer.
SECTION 4. Obligation to Provide Information. The Corporation may require
as a condition to the registration of the Transfer of any Stock that the
proposed transferee furnish to the Corporation all information reasonably
requested by the Corporation with respect to all the direct or indirect
ownership of Stock by the proposed transferee and by Persons controlling,
controlled by or under common control with the proposed transferee.
SECTION 5. Legends. All certificates evidencing Stock that is subject to
the restrictions on transfer set forth in this Article VIII shall bear a
conspicuous legend referencing such restrictions.
SECTION 6. Further Actions. Subject to the second and third sentences of
the introductory paragraph of Section 2, nothing contained in this Article VIII
shall limit the authority of the Board of Directors to take such other action to
the extent permitted by law as it deems necessary or advisable to protect the
Corporation and the interests of the holders of its securities in preserving the
Tax Benefits. Without limiting the generality of the foregoing, in the event of
a change in law (including applicable regulations) making one or more of the
following actions necessary, in the case of actions described in clauses (B),
(C) and (D) below, or desirable, in the case of actions described in clause (A)
below, the Board of Directors may (A) accelerate the Expiration Date, (B) extend
the Expiration Date, (C) conform any terms or numbers set forth in the transfer
restrictions in Section 1 to make such terms consistent with the Internal
Revenue Code and the Treasury Regulations following any changes therein to the
extent necessary to preserve the Tax Benefits, or (D) conform the definitions of
any terms set forth in this Article VIII to the definitions in effect following
such change in law; provided that the Board of Directors shall determine in
writing that such acceleration, extension, change or modification is reasonably
necessary to preserve the Tax Benefits or that the continuation of these
restrictions is no longer reasonably necessary for the preservation of the Tax
Benefits, which determination shall be based upon an opinion of legal counsel to
the Corporation and which determination shall be filed with the Secretary of the
Corporation and mailed by the Secretary to all stockholders of the Corporation
within ten days after the date of any such determination.
SECTION 7. Severability. If any provision of this Article VIII or the
application of any such provision to any Person or under any circumstance shall
be held invalid, illegal, or unenforceable in any respect by a court of
competent jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision of this Article VIII.
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ARTICLE IX
BOARD OF DIRECTORS
SECTION 1. Powers of Board of Directors. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors of the
Corporation is expressly authorized:
A. To make, alter, amend or repeal the By-Laws. Any By-Law may be
altered, amended or repealed by the holders of the capital stock of the
Corporation entitled to vote thereon at any annual meeting or at any
special meeting called for that purpose.
B. To authorize and cause to be executed mortgages and liens upon the
real and personal property of the Corporation.
C. To exercise, in addition to the powers and authorities hereinbefore
or by law conferred upon it, any such powers and authorities and do all
such acts and things as may be exercised or done by the Corporation,
subject, nevertheless, to the provisions of the laws of the State of
Delaware and of the Certificate of Incorporation and of the By-Laws of the
Corporation.
SECTION 2. Removal of Directors. Subject to the rights of the holders of
any series of Preferred Stock or any other class of capital stock of the
Corporation (other than the Common Stock) then outstanding, any director, or the
entire Board of Directors, may be removed from office at any time, with or
without cause, by the affirmative vote of the holders of record of outstanding
shares representing at least 80% of the Voting Stock, voting together as a
single class.
SECTION 3. Vacancies. Subject to the rights of the holders of any series of
Preferred Stock or any other class of capital stock of the Corporation (other
than the Common Stock) then outstanding, any vacancies in the Board of Directors
for any reason, including by reason of any increase in the number of directors,
shall be filled only by the Board of Directors, acting by the affirmative vote
of a majority of the remaining directors then in office, although less than a
quorum, and any directors so elected shall hold office until their successors
are elected and qualify; provided, however, notwithstanding anything herein to
the contrary, any vacancies on the Board of Directors prior to the first annual
meeting of stockholders of the Corporation after the Closing Date (as defined in
the Asset Purchase Agreement referred to in Section 1(B)(5) of Article VIII
hereof, a copy of which shall be sent to any stockholder, upon request, without
charge) shall be filled as provided in the Asset Purchase Agreement.
SECTION 4. Preferred Stock. Whenever the holders of any one or more series
of Preferred Stock issued by the Corporation shall have the right, voting
separately by class or series, to elect directors at an annual or a special
meeting of holders of capital stock of the Corporation, the nomination,
election, term of office, filling of vacancies and other features of such
directorships shall be governed by this Article IX unless expressly otherwise
provided by law or by the resolution or resolutions providing for the creation
of such series.
ARTICLE X
ACTION BY STOCKHOLDERS
Any action required or permitted to be taken by the holders of the issued
and outstanding capital stock of the Corporation may be effected solely at an
annual or special meeting of stockholders duly called and held in accordance
with law, this Certificate of Incorporation and the By-laws of the Corporation,
and the power of stockholders, or any of them, to consent in writing, without a
meeting, to the taking of any such action is hereby specifically denied.
ARTICLE XI
LIMITATION OF DIRECTORS' LIABILITY
SECTION 1. Limitation of Directors' Liability. A. No director of the
corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except, to the
extent provided by applicable law, for liability (i) for breach of the
director's duty of loyalty to
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the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is hereafter amended to
authorize corporate action further limiting or eliminating the personal
liability of directors, then the liability of each director of the Corporation
shall be limited or eliminated to the full extent permitted by the Delaware
General Corporation Law as so amended from time to time.
B. Neither the amendment nor repeal of this Section 1, nor the adoption of
any provision of the Certificate of Incorporation inconsistent with this Section
1, shall eliminate or reduce the effect of this Section 1, in respect of any
matter occurring, or any cause of action, suit or claim that, but for this
Section 1, would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
ARTICLE XII
The name and mailing address of the sole incorporator is as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
- -------------------------------------- -----------------------
<S> <C>
RYMAC MORTGAGE INVESTMENT CORPORATION Penn Central West II
Suite 311
Pittsburgh, PA 15276
</TABLE>
ARTICLE XIII
RESERVATION OF RIGHT TO AMEND CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend, alter, change or repeal any
provisions contained in this Certificate of Incorporation in the manner now or
hereafter prescribed by law, and all the provisions of this Certificate of
Incorporation and all rights and powers conferred in this Certificate of
Incorporation on stockholders, directors and officers are subject to this
reserved power; provided that (a) the affirmative vote of the holders of record
of at least 66 2/3% of the shares of Voting Stock, voting together as a single
class, shall be required to amend, alter, change, or repeal any provision of, or
to adopt any provision or provisions inconsistent with Article VI or this
subsection (a) of Article XIII of this Certificate of Incorporation; (b) the
affirmative vote of the holders of record of at least 80% of the shares of
Voting Stock, voting together as a single class, shall be required to amend,
alter, change, or repeal any provision of, or adopt any provision or provisions
inconsistent with Section 2 of Article IX or this subsection (b) of Article XIII
of this Certificate of Incorporation; and (c) the affirmative vote of the
holders of record of at least 80% of the shares of Voting Stock present in
person or by proxy at a meeting of stockholders, voting together as a single
class, shall be required to amend, alter, change, or repeal any provision of, or
to adopt any provision or provisions inconsistent with Article XI or this
subsection (c) of Article XIII of this Certificate of Incorporation,
notwithstanding the fact that a lesser percentage may be specified by the
General Corporation Law of Delaware.
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ANNEX VII
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required] for the fiscal year ended December 31, 1995 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
____________ to ____________
COMMISSION FILE NUMBER 1-10001
RYMAC MORTGAGE INVESTMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 25-1577534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. FOURTH STREET, SUITE 43952
813, P.O. BOX 250, (Zip Code)
STEUBENVILLE, OH
(Address of principal executive
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 666-6960
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock, Par Value $.01 American Stock Exchange, Inc.
---------------------------- -----------------------------
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of March 20, 1996, 5,210,600 shares of RYMAC Mortgage Investment
Corporation common stock were outstanding, and the aggregate market value of the
shares held by non-affiliates (based upon the closing price of the common stock
on that date as reported on the American Stock Exchange Composite Tape) was
approximately $7,165,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant's 1996 definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
registrant's fiscal year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VII-1
<PAGE> 206
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS.
RYMAC Mortgage Investment Corporation (the "Company") was incorporated in
the State of Maryland on July 1, 1988. Prior to 1994, the Company was primarily
engaged in making investments in mortgage derivative securities and, to a lesser
extent, mortgage related investments, all of which are secured by single-family
residential mortgage loans. Two wholly-owned, limited purpose finance
subsidiaries of the Company, RYMAC Mortgage Investment I, Inc. ("RMI I") and
RYMAC Mortgage Investment II, Inc. ("RMI II"), hold certain mortgage related
investments. The Company also generates revenues from other sources, such as
interest earnings on certain investments of the Company and sales of certain
investments of the Company.
The Company has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). As
long as the Company qualifies as a REIT, dividends paid to stockholders will be
allowed as a deduction for purposes of determining income subject to federal
corporate income tax. As a result, the Company will not be subject to such tax
on that portion of its net income that is distributed to stockholders. (See
"Federal Income Taxation of the Company and Stockholders")
(B) CURRENT BUSINESS ENVIRONMENT.
Since May 1992, the Company has not purchased any new mortgage derivative
or mortgage related investments. During 1995, the Company purchased one 7% FNMA
guaranteed pass-through certificate backed by 30 year single-family mortgage
loans of which the Company maintains 100% ownership. The current principal
balance is approximately $3.4 million. During the period from the Company's
inception in 1988 through early 1992, mortgage interest rate levels and
prepayment speeds remained within ranges existent from 1970 to early 1992.
Historically, cash received from the Company's investment portfolio represented
interest and dividend earnings and the return of investment principal (basis).
However, from June of 1992 to early 1994, mortgage rates declined to levels
lower than those existent for the prior twenty years, resulting in
extraordinarily rapid and sustained levels of residential mortgage prepayments.
As a direct result, the Company's investments generated sharply reduced interest
and dividend earnings. Further, as the duration of high levels of prepayments
continued, the Company's cash flows from returns of investment principal and
interest and dividend earnings were also impaired and sufficient only to reduce
the Company's borrowings (including margin calls), pay operating expenses and
fund minimal dividend distributions to stockholders during the second half of
1992 and all of 1993, 1994 and 1995. As a result of these earnings difficulties
and a substantially altered mortgage-backed securities market, the Company's
Board of Directors elected in mid-1994 not to pursue its historical business.
Instead, the Company and, since June 1995, its financial advisor have been
investigating alternatives to the business currently conducted by the Company.
Operating and capital losses incurred during 1992 through 1995 have resulted in
tax losses estimated currently at $36 million. Such tax losses can be carried
forward and utilized to offset future taxable income generated from current or
contemplated activities before Company earnings are taxable or, as a REIT,
result in dividend distributions.
Currently, the Company and its financial advisor are in the process of
identifying and soliciting interest from suitable candidates regarding strategic
transactions involving the acquisition of or merger with a profitable growing
concern. The successful conclusion of a business combination or merger is
subject to financial and economic conditions in the marketplace, the negotiation
of mutually acceptable values, the particular requirements of the owners and
management of other entities and the existence of competitive offers from
entities with greater resources than those of the Company. To date, the Company
has not successfully concluded any such discussions.
If the Company is unsuccessful in identifying a business combination or
merger that is likely to produce value building results, it may elect to
alternatively begin to develop an investment portfolio of financial assets. A
decision to pursue such alternative investment activity would be subject to the
Company's financial position as well as general economic and financial market
conditions prevailing at such time. Either a new investment
VII-2
<PAGE> 207
activity or any business combination or merger would seek to make effective use
of the Company's tax loss position. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations")
(C) NARRATIVE DESCRIPTION OF BUSINESS.
1. Management of Operations. The Company's investment policy is controlled
by its Board of Directors (the "Board of Directors"). The By-laws of the Company
provide that, except in the case of a vacancy, a majority of the members of the
Board of Directors and of any committee of the Board of Directors must not be
employed by, or otherwise affiliated with, the Company or its former manager.
2. Operating Policies and Strategies. Unprecedented high levels of mortgage
refinancings resulting in prepayment of the Company's assets for all of 1992 and
1993 and continuing into the early part of 1994, have caused the Company to
incur large operating losses. The extended duration of these prepayments
permanently reduced cash flows and earnings from these same assets and caused
the Company to consider alternative investment policies and strategies,
including the purchase and financing of alternative financial assets and
evaluation of potential business combinations. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Investment Activities
and Future Prospects for the Company")
During the four year period ended December 31, 1995, the Company incurred
tax losses estimated at $36 million. Of this, it is estimated that $31 million
represents operating losses while $5 million represents capital losses related
to sales of assets. Operating tax losses may be carried forward for a period of
up to 15 years from the date of occurrence, while capital tax losses can be
carried forward for five years from occurrence. The Company's tax loss positions
can be utilized to offset future taxable income before the Company's earnings
again become taxable, or, as a REIT, result in required dividend distributions.
Should its future activities be successful, the Company would be in a position
to reinvest cash flows into suitable assets and activities.
Historically, the Company generated revenues primarily from investments in
mortgage derivative securities ("Mortgage Derivative Securities"). The Company's
investments in Mortgage Derivative Securities currently consist of (i) a class
or classes of collateralized mortgage obligations ("CMOs") (as defined below)
that either represents a regular class of bonds or a residual class of bonds or
(ii) interests in a class or classes of mortgage-backed pass-through
certificates that either represent a regular class of certificates or a residual
class of certificates. These securities entitle the Company to receive a portion
of the cash flow from the Mortgage Collateral (as defined below) underlying the
CMOs or mortgage-backed pass-through certificates. For federal income tax
purposes, a majority of the Company's Mortgage Derivative Securities represent
interests in real estate mortgage investment conduits ("REMICs"). A CMO is a
security issued in one or more classes ("CMO Classes") collateralized by a
specific group of mortgage loans or mortgage certificates guaranteed by GNMA,
FNMA or FHLMC (collectively, the "Mortgage Certificates" and together with the
mortgage loans, the "Mortgage Collateral") and evidences the right of the
investors to cash flows from the assets underlying such CMO. The Company had
also generated revenues from Mortgage Related Investments (as defined below) and
had purchased for its portfolio shares of common stock of companies engaged in
businesses similar to the Company's.
In addition, or as an alternative, the Company, with the approval of a
majority of the Unaffiliated Directors, may adopt investment strategies which,
among other things, could involve the acquisition of non-real estate related
assets. Such strategies, if adopted, could result in the Company being unable to
qualify as a REIT under the Code. The failure to qualify as a REIT could have
severe adverse tax consequences for the Company. (See "Federal Income Taxation
of the Company and Stockholders") However, the adverse tax consequences may be
substantially mitigated by the Company's net operating losses.
The Company may elect to purchase or otherwise reacquire, shares of its
Common Stock, par value $.01 per share ("Common Stock"), if, in the opinion of
the Board of Directors, such purchases can be made upon favorable terms that can
be expected to result in an increase in distributions or value to the remaining
stockholders without adversely affecting the ability of the Company to maintain
its qualification as a REIT under the Code. The Company did not purchase any
shares of Common Stock during calendar 1995 nor does it anticipate any purchase
of shares during calendar 1996.
VII-3
<PAGE> 208
The Company previously utilized borrowings to purchase certain of the
investments described above and contemplates the use of borrowings in regard to
any new investment activity or business combination. During 1994, the Company
elected to allow its bank line of credit to expire and repaid in full all
outstanding repurchase agreements with Wall Street dealers. Since November 30,
1994, the Company has had no outstanding borrowings. (See "Capital Resources")
3. Types of Investments. Historically, the Company's portfolio of assets
has included:
(a) Mortgage Related Investments. In its first fifteen months of
operations, the Company's primary source of income was its mortgage related
investments, wherein the Company purchased from issuers of CMOs the right to
receive the cash flow of the CMO after debt service payments on the CMO are made
("Mortgage Related Investments").
(b) Mortgage Derivative Securities. Although Mortgage Related Investments
still constitute a portion of the Company's portfolio, the Company's portfolio
also includes other investments, consisting of Mortgage Derivative Securities
such as IOs, Inverse IOs, PAC and TAC IOs, POs, IOettes, Floating Rate and
Inverse Floating Rate Bonds, Z Bonds, MBSs, and Residual Bonds, as defined
below.
1) An IO is an interest only class. An IO entitles the holder to receive
the interest portion of the cashflow from the underlying mortgage-backed
security. These securities are bearish in nature and thus show improved
performance as prepayment speeds slow and interest rates rise.
2) An Inverse IO is created by dividing a fixed rate bond class into
floating and inverse floating rate components based upon a market interest rate
index, such that, at any time the sum of the interest payments to the two
classes is no greater than the coupon on the fixed rate bond. As the index
rises, more interest is required in the floating rate component and therefore
less is available to the inverse floating rate holder. In a rising interest rate
environment, the lower coupon payments due the Inverse IO holder are to some
degree offset by the IO structure of the security. With rising rates, slower
prepayments will enable the Inverse IO holder to recognize a decreased coupon on
an outstanding balance for a longer period. An Inverse IO does not guarantee the
par face of the bond, unlike an Inverse Floating Rate Bond (see 7 below), and is
usually sold with nominal principal face amount but at a premium.
3) A PAC (Planned Amortization Class) IO is an IO with a fixed coupon
calculated on a nominal principal balance that is protected within a band of
prepayment rates. This prepayment band offers more average life assurance than a
pure IO strip. A TAC (Targeted Amortization Class) IO is similar to a PAC IO
except that the band of prepayment rates is much narrower. This narrower band
makes the average life of a TAC IO more sensitive to prepayment speeds than a
PAC IO.
4) A PO is a principal only class. A PO entitles the holder to receive the
principal portion of the underlying mortgage-backed security. These securities
are sold at a discount to face and benefit when interest rates fall and
prepayment rates rise.
5) An IOette represents an interest only strip from a portion of the
interest component of an underlying mortgage backed security. This security is
bearish in nature as it shows improved performance as prepayments slow (interest
rates rise).
6) A Floating Rate Bond is a CMO bond on which the interest rate paid to
bondholders fluctuates with changes in an interest rate index, such as the
London Interbank Offered Rate ("LIBOR"), and is usually reset monthly.
7) An Inverse Floating Rate Bond contains a coupon that fluctuates
inversely with changes in a floating rate index such as LIBOR. As the index
decreases, the formula used to set the coupon on this bond results in an
increased yield. Typically, this type of Mortgage Derivative Security is
purchased at or near the face amount of the bond. Although the face amount of
principal will always be returned, it may be faster than expected due to an
increase in prepayment speeds usually associated with lower interest rates.
8) A Z, or accrual, bond is a bond class that does not receive payments of
interest until certain other classes of bonds are retired. Until the Z bond
begins receiving interest payments, the amount of interest due is accrued, or
added, to the principal amount of the bond.
VII-4
<PAGE> 209
9) Residual Bonds, in general, entitle the holder to receive all or a
portion of the residual cash flow from an underlying CMO after payment of
principal and interest on all other bond classes and other expenses related to
administration of the CMO.
(c) Mortgage-Backed Securities. An MBS, or Mortgage-Backed Security, is a
security backed by an undivided interest in a pool of mortgage loans. The cash
flow from the mortgage loans is used to pay principal of, and interest on, the
securities. The most commonly recognized MBSs are issued through the following
three governmental entities: GNMA; FNMA; and FHLMC.
4. Investment Portfolio. During the year ended December 31, 1995, in order
to continue to qualify for an exemption under the Investment Company Act of 1940
(See "Investment Restrictions"), the Company made a sizeable investment in one
7% FNMA guaranteed 30 year single-family mortgage pool. (See "Current Business
Environment" above, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations")
The information presented below and on the following pages, with respect to
each of the Mortgage Derivative Securities, Mortgage Related Investments and
Mortgage-Backed Securities held by the Company at December 31, 1995, was
provided to the Company either by the issuer of the related CMO or obtained from
the Bloomberg Financial System ("Bloomberg"). The Company did not participate in
the issuance of such CMOs and is relying on the respective CMO Issuers and
Bloomberg regarding the accuracy of the information provided. The Company
believes, however, that such information is accurate. In reading the information
presented below and on the following pages, only information regarding CMO
classes whose structure and balance affect the performance of the Company's
investment in the related Mortgage Derivative Security, Mortgage Related
Investment or Mortgage-Backed Security is shown. For investments where no
information is shown for other CMO classes, the performance of the Company's
investment relates solely to prepayment speeds on the underlying Mortgage
Collateral.
COLLATERALIZED MORTGAGE OBLIGATIONS
UNDERLYING MORTGAGE RELATED INVESTMENTS
HELD ON DECEMBER 31, 1995
<TABLE>
<CAPTION>
ISSUED DATE/
INITIAL PRINCIPAL FIRST COMPANY'S
PRINCIPAL AMOUNT AS OF OPTIONAL PERCENTAGE
NAME OF ISSUER CMO AMOUNT DEC. 31, 1995 INTEREST STATED REDEMPTION OWNERSHIP
AND SERIES CLASS (IN THOUSANDS) (IN THOUSANDS) RATE MATURITY DATE INTEREST
---------- ----- -------------- -------------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
RYMAC IV
Series 7 7-Z(1) $ 1,500 $ 2,741 9.400% 08/01/16 07/29/86 100%
Later of
08/01/01
or date
Class 7-C
fully paid
Series 10 10-Z(1) 4,000 5,493 9.450 10/01/16 09/30/86 100%
Later of
10/01/01
or date
Class 10-C
fully paid
Series 19 19-B 4,550 1,880 8.250 05/01/17 04/23/87 100%
05/01/97
</TABLE>
(notes to table appears on page 7)
VII-5
<PAGE> 210
COLLATERALIZED MORTGAGE OBLIGATIONS
UNDERLYING MORTGAGE DERIVATIVE SECURITIES
HELD ON DECEMBER 31, 1995
<TABLE>
<CAPTION>
ISSUED DATE/
INITIAL PRINCIPAL FIRST COMPANY'S
PRINCIPAL AMOUNT AS OF OPTIONAL PERCENTAGE
NAME OF ISSUER CMO AMOUNT DEC. 31, 1995 INTEREST STATED REDEMPTION OWNERSHIP
AND SERIES CLASS (IN THOUSANDS) (IN THOUSANDS) RATE MATURITY DATE INTEREST
---------- ----- -------------- -------------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
FNMA
REMIC 7-Z(1) $ 20,000 $ 35,821 9.250% 04/25/18 04/29/88 15% of
Trust 1988-7 7-R 700 77 (5) 04/25/18 No Class 7-R
optional
redemption
permitted
FNMA
REMIC 11-A(2) 56,000 16,703 8.550 05/25/18 05/25/88 22% of
Trust 1988-11 11-B(2) 6,700 1,998 (3) 05/25/18 No Class 11-R
optional
11-C 88,200 3,233 (3) 05/25/18 redemption
permitted
11-D 49,100 1,800 (4) 05/25/18
11-R 20 5 (5) 05/25/18
FHLMC
Series 1248 H 186 36 (3) 03/15/22 03/30/92 10.8%
Date
amount of
certificates
is less
than 1% of
original
amount
FNMA
REMIC Trust SA 1,360 261 (3) 12/25/21 12/30/91 12.87% of
1991-163 No Class SA
optional
redemption
permitted
FHLMC
Series 2 2-Z(1) 19,260 26,725 9.300 03/15/19 03/30/88 100% of
2-R 100 2 2,668.240(5) 03/15/19 No Class 2-R
optional
redemption
permitted
FHLMC
Series 21 21-Z(1) $ 84,750 100,668 9.500% 01/15/20 11/30/88 37.5% of
21-R 100 10 (5) 01/15/20 Date Class 21-R
amount of
multi-class
bonds is
less than
1% of
original
amount
Cornerstone
Mortgage
Investment
Group II, Inc.
Series 13 A-1 20,009 4,986 9.250 08/30/18 08/25/88 100% of
Interest None None (6) 08/30/18 Date Interest
Receipts amount of Receipts
certificates
is less
than 10% of
original
amount
Series 14 A-1 15,012 2,734 9.250 09/30/18 09/25/88 100% of
Interest None None (6) 09/30/18 Date Interest
Receipts amount of Receipts
certificates
is less
than 10% of
original
amount
</TABLE>
(Notes to table appear on page 7)
VII-6
<PAGE> 211
COLLATERALIZED MORTGAGE OBLIGATIONS
UNDERLYING MORTGAGE DERIVATIVE SECURITIES
HELD ON DECEMBER 31, 1995
<TABLE>
<CAPTION>
ISSUED DATE/
INITIAL PRINCIPAL FIRST COMPANY'S
PRINCIPAL AMOUNT AS OF OPTIONAL PERCENTAGE
NAME OF ISSUER CMO AMOUNT DEC. 31, 1995 INTEREST STATED REDEMPTION OWNERSHIP
AND SERIES CLASS (IN THOUSANDS) (IN THOUSANDS) RATE MATURITY DATE INTEREST
---------- ----- -------------- -------------- ---- -------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PaineWebber
CMO Trust L-4(2) $114,200 $ 41,042 8.950% 07/01/18 06/30/88 17.8% of
Series L L-5 185 185 (5) 07/01/18 No Class L-5
optional
redemption
permitted
</TABLE>
MORTGAGE-BACKED SECURITY
HELD ON DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT AS OF COMPANY'S
INITIAL DECEMBER 31, PERCENTAGE
NAME OF ISSUER AMOUNT 1995 INTEREST STATED ISSUE OWNERSHIP
AND POOL NUMBER (IN THOUSANDS) (IN THOUSANDS) RATE MATURITY DATE INTEREST
--------------- -------------- -------------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
FNMA
#332585 $ 3,400 $ 3,397 7.000% 11-1-25 12-1-95 100%
</TABLE>
- ---------
(1) A Class of "Compound Interest Bonds" or "Accrual Certificates" on which
interest accrues and is added to the principal amount of such CMO Class but
on which interest and principal is not paid until all CMO Classes having an
earlier stated maturity are fully paid.
(2) A Scheduled Amortization Class on which principal is paid on a preferred
basis with respect to other CMO Classes in a specified amount, to the
extent funds are available.
(3) A CMO Class whose interest rate varies based on a specified relationship to
the 30-day London Interbank Offered Rate for U.S. Dollar deposits
("LIBOR"), the 1 Year Treasury Index or the 3 Month Treasury Index, subject
to a maximum interest rate. The interest rates at December 31, 1995 on
Class 11-B and 11-C of the FNMA REMIC Trust 1988-11 were 6.39% and 6.69%,
respectively, with maximum interest rates payable of 12.75% and 14.0%,
respectively. The interest rate at December 31, 1995 on Class H of FHLMC
Series 1248 was 3,471.53% with a maximum interest rate payable of
9,340.65%. The interest rate at December 31, 1995 on Class SA of the FNMA
REMIC Trust 1991-163 was 427.05% with a maximum interest rate payable of
1,034.80%.
(4) Zero coupon Bond that does not bear interest.
(5) Residual Bonds.
(6) Beneficial ownership of undivided interests in 2.105263% of all future
interest payments to be made on the GNMA certificates underlying the
related CMO.
VII-7
<PAGE> 212
The following table sets forth certain information with respect to the
collateral underlying such CMO(1):
COLLATERAL DESCRIPTIONS
<TABLE>
<CAPTION>
WEIGHTED
TYPE OF REMAINING AVERAGE WEIGHTED AVERAGE
MORTGAGE PRINCIPAL AMOUNT PASS-THROUGH SCHEDULED
ISSUER AND CERTIFICATES OF MORTGAGE RATE OF REMAINING TERM
SERIES OR SECURING CERTIFICATES MORTGAGE TO MATURITY
POOL NUMBER THE CMO (IN THOUSANDS) CERTIFICATES (YEARS: MONTHS)
----------- ------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
RYMAC IV
Series 7................................ FNMA $ 2,774 9.24% 19:01
Series 10............................... FNMA 5,280 9.60 18:09
Series 19............................... FNMA 1,760 8.62 20:02
FNMA
#332585................................. -- 3,397 7.00 29:10
FNMA
REMIC Trust 1988-7...................... FNMA 35,898 9.50 20:06
REMIC Trust 1988-11..................... FNMA 23,739 9.00 20:11
REMIC Trust 1991-163.................... FNMA 104,159 9.00 23:04
FHLMC
Series 2................................ FHLMC 26,727 9.50 17:03
Series 21............................... FHLMC 100,678 9.50 21:01
Series 1248............................. FHLMC 63,497 9.00 21:09
Cornerstone Mortgage Investment Group II, Inc.
Series 13............................... GNMA 4,989 9.50 22:01
Series 14............................... GNMA 2,736 9.50 22:00
PaineWebber
Series L................................ FNMA 41,217 9.00 20:03
----
TOTAL PORTFOLIO WEIGHTED AVERAGE
PASS-THROUGH RATE.......................................................... 9.20
====
</TABLE>
- ---------
(1) Information on those RYMAC IV CMOs which did not have a payment date on
January 1, 1996 is as of the payment date for such CMOs that preceded
January 1, 1996. All other information is as of January 1, 1996.
5. Cash Flow from Investments. The Company's return on its investments has
been substantially affected by a number of factors, including short-term
interest rates to the extent that such rates affect certain of its investments,
and the rates of prepayment of the underlying Mortgage Collateral. The rate at
which principal payments occur on pools of single-family loans is influenced by
a variety of economic, geographic, social and other factors. In general,
however, mortgage loans are likely to be subject to higher prepayment rates if
prevailing interest rates are significantly below the interest rates on the
mortgage loans, as was the case during the time period of early 1992 to early
1994 and again during the second half of 1995. Conversely, in the event that
interest rates are near or above the interest rate on the mortgage loans, the
rate of prepayment would be expected to decrease as had been the case in the
period of mid 1994 to mid 1995. The extended duration of unprecedented high
levels of prepayments during the early 1992 to early 1994 time period caused
permanent impairment to the cash flow levels of a majority of the Company's
assets purchased prior to May of 1992. The extent of the impairment was such
that a return to slower prepayment speeds did not materially improve the cash
flow performance of such assets. Other factors affecting the rate of prepayment
of mortgage loans include changes in mortgagor's housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties, assumability
of mortgage loans, servicing decisions and the cost of refinancing.
The Company's Mortgage Derivative Securities each have different
characteristics; thus the cash flows from any particular mortgage derivative
security will vary based upon the structure of the particular Mortgage
Derivative Security (see 3(b) above), the level of interest rates on mortgage
loans and mortgage prepayment
VII-8
<PAGE> 213
levels. However, the Company's portfolio of Mortgage Derivative Securities has
been materially adversely affected because of such levels.
The Company's cash flow from its Mortgage Related Investments is derived
from three principal sources: (a) any positive difference between the interest
rates of the Mortgage Collateral and the weighted average interest rates of the
related CMO Classes; (b) any amounts available from prepayments on the Mortgage
Collateral that are not necessary for debt service payments on such CMOs; and
(c) any reinvestment income in excess of amounts required to ensure timely
payments of principal and interest on such CMOs. The positive difference between
rates on the Mortgage Collateral and the weighted average rates on the related
CMO Classes was negatively affected by the rapid levels of mortgage prepayments
in the 1992 to early 1994 period. Rapid prepayments result in 1) a reduction of
the positive difference available to the Company and 2) a shortened duration of
such positive difference. Also, lower interest rates result in reduced
reinvestment rates.
Excess cash flow from a particular investment will decline over time and
eventually terminate.
6. Other Potential Investments. The Company's Board of Directors adopted
Investment Guidelines ("Guidelines") to provide general parameters for the
Company's investments and borrowings pursuant to which the Company may make
investments without case by case approval by the Board of Directors. The
Guidelines list certain investments which the Company is permitted to make.
Pursuant to the Guidelines, the Company may purchase Mortgage Collateral which
the Company may hold or pledge to secure a CMO or to back other mortgage related
securities. The Company may also acquire shares of equity securities of other
CMO residual REITs. Additionally, the investment criteria set forth in the
Guidelines, allow the Company, for a fee, to issue commitments to sellers of
Mortgage Collateral. The Company may purchase mortgage loans (i) that are
eligible for securitization and guaranty by GNMA, FNMA or FHLMC or (ii) that are
not eligible for such securitization and guaranty. The Company may also purchase
Mortgage Collateral that could subsequently be used to secure various CMOs
issued by one or more CMO Issuers, and may participate in the issuance of CMOs
by forming, acquiring or entering into arrangements with CMO Issuers. The
Company has not engaged in any of such activities to date and does not expect to
consider such activities. However, due to the performance of the Company's
investment portfolio since 1992 and the altered business environment for
mortgage investments in general, the Company has made only one substantial
investment since May 1992 (See "Investment Portfolio" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations") and
is currently required to seek specific Board of Directors approval for purchases
of any new investment. The Board of Directors has authorized management 1) to
continue evaluation of alternative investment activities and 2) to evaluate
business combination proposals that could effectively utilize the Company's tax
loss position.
7. Capital Resources. The Company had maintained a line of credit with a
commercial bank for $250,000 which expired on April 30, 1994 and, at the
Company's election, was not renewed. The line of credit had been used to fund
day-to-day operating needs and in past periods to also temporarily fund
acquisitions of new investments pending negotiation of repurchase agreements or
awaiting return of invested principal.
The Company had historically supplemented its funds available for
investment through repurchase agreements. The repurchase agreements entered into
by the Company involved the transfer by the Company of certain of its assets to
a financial institution in exchange for cash in an amount that was less than the
fair market value of such assets. At the same time, the Company agreed to
repurchase such assets at a future date at a price equal to the cash paid by
such financial institution plus interest thereon. The extraordinarily high level
of mortgage prepayments in the 1992 to mid 1994 period caused dealers to reduce
substantially the financing value of investments pledged under repurchase
agreements. Under such circumstances, the Company was required to reduce the
amount of outstanding borrowings by cash payments under the repurchase agreement
or the delivery of other unencumbered investments, thus reducing the Company's
ability to purchase new investments. (See "Management's Discussion and
Analysis--Liquidity and Capital Resources")
At December 31, 1995 and March 20, 1996 the Company had no outstanding
borrowings under repurchase agreements. As such, all of the Company's Mortgage
Derivative Securities and its Mortgage-Backed Security are available to secure
future borrowings, although the financing value of such Mortgage Derivative
Securities is substantially limited.
VII-9
<PAGE> 214
The Company's By-laws provide that it may not incur additional indebtedness
if, after giving effect to such indebtedness, its aggregate indebtedness (other
than liabilities incurred in connection with participation in the issuance of
CMOs and any loans between the Company and its corporate subsidiaries), secured
and unsecured, would exceed 300% of the Company's average invested assets, in
each case on a consolidated basis, as calculated at the end of each calendar
quarter in accordance with generally accepted accounting principles, unless such
additional indebtedness is approved by a majority of the Unaffiliated Directors.
The Company is currently operating under a borrowing limitation pursuant to a
policy adopted by its Board of Directors that limits total borrowings to
$25,000,000, an amount substantially in excess of the amount the Company would
be able to borrow under the current operating condition of the Company. At
December 31, 1995 and March 20, 1996, the Company had no indebtedness
outstanding. The Company's contemplated future activities could include
borrowings by the Company which would be secured by a pledge of newly acquired
assets and/or current portfolio assets.
The Company has authorized 50,000,000 shares of Common Stock. The Company's
current financial condition substantially limits its ability to raise additional
equity capital. The successful implementation of alternative investment
strategies and/or the negotiation of a business combination may involve issuance
by the Company of common stock. The Company believes that the issuance of equity
securities in connection with alternative investment activities and/or a
business combination and potentially raising additional equity capital based
upon the success of such investment activity or combination is in the long-term
best interests of the Company.
In addition, the Company's Articles of Incorporation permit the Board of
Directors to authorize and issue from time to time additional classes of stock
without the necessity of further approval by the stockholders and with such
rights and preferences as the Board of Directors of the Company may designate by
resolution. Depending upon the terms set by the Board of Directors, the
authorization and issuance of preferred stock or other new classes of stock
could adversely affect existing stockholders. The effects on stockholders could
include, for example, dilution of existing stockholders, restriction on
dividends on Common Stock, restrictions on dividends for other corporate
purposes and preferences to holders of a new class of stock in the distribution
of assets upon liquidation. Since the filing of the Articles of Incorporation,
the Board of Directors has neither authorized nor issued any additional classes
of stock.
8. Investment Restrictions. Restrictions on investments by the Company in
certain types of assets are imposed by the provisions of the Investment Company
Act of 1940, as amended (the "Investment Company Act"). The Investment Company
Act specifically exempts entities primarily engaged in such activities from the
definition of an investment company (the "Real Estate Exception"). Under
interpretations issued by the staff of the Securities and Exchange Commission,
in order to qualify for the Real Estate Exception, the Company must maintain at
least 55% of its assets in mortgage loans or certain other interests in real
estate, and another 25% of its assets in those or certain other types of real
estate-related interests. The ability of the Company to acquire Mortgage
Derivative Securities may be limited by the Investment Company Act depending,
among other things, upon whether the Company acquires all or only a portion of
the residual interest in a CMO, the nature of the collateral underlying such CMO
and the composition of the balance of the Company's assets at the time of each
such acquisition. Under interpretations of the staff of the Commission,
investments in mortgage-backed or other mortgage related securities (including
mortgage certificates) that are securities considered to be separate from the
underlying mortgage loans are not considered to be investments in mortgage loans
for purposes of the 55% test unless such securities represent all the
certificates issued with respect to the underlying pool of mortgages. The
Company's investment policies prohibit it from making any investments that would
cause the Company to be an investment company within the meaning of the
Investment Company Act. The Company monitors its operations in order to evaluate
the qualification of the Company for the Real Estate Exception.
Uncertainties exist as to the interpretation of the exception from the
definition of an investment company under the Investment Company Act for
companies primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate. The Company believed
that, based upon its historical method of operation, it fell within such
exception. In connection with the review by the Commission of the registration
statement for the Company's initial public offering, the Company had been
advised, based on a preliminary review, that the staff of the Division of
Investment Management of the
VII-10
<PAGE> 215
Commission, while not taking a definitive position, was not in agreement with
the Company's conclusion. If the Company were required to register as an
investment company or to revise materially its contemplated method of operation
to qualify for an exemption, it would be subject to additional limitations and
restrictions on its activities.
In order to continue to qualify for an exemption under the Investment
Company Act of 1940, (see note 2 of the Company's Consolidated Financial
Statements), the Company made a sizeable investment in one 7% FNMA guaranteed 30
year single-family mortgage pool, of which the Company owns 100%, during the
fourth quarter of 1995. Such security is AAA rated and was purchased at a price
that under current market conditions minimizes principal risk to the Company.
If the Company were unable to qualify for the Real Estate Exception or
otherwise engage in a business other than that of an investment company, it will
be required to register as an investment company under the Investment Company
Act. The Company is unable to predict how registration under such Act would
affect its current plans to pursue new investment activities or business
combinations. Registration under the Investment Company Act would also require
the investments held by the Company to be adjusted to market value at the
balance sheet date to the extent not done so already. The other financial
statement reporting and disclosure requirements of the Investment Company Act
may differ in certain respects from those to which the Company is currently
subject.
The Company is prohibited from purchasing real estate contracts of sale.
The Company also may not invest in unimproved real property or mortgage loans on
unimproved real property, nor may it underwrite securities of other issuers. The
foregoing restrictions may not be changed without the approval of a majority of
the Unaffiliated Directors.
The Company may purchase or otherwise reacquire shares of its Common Stock
if, in the opinion of the Board of Directors, the purchases can be made upon
favorable terms that can be expected to result in an increase in distributions
to the remaining stockholders. However, the Company may not make such purchases
if to do so would adversely affect the ability of the Company to maintain its
qualification as a REIT under the Code. (See "Federal Income Taxation of the
Company and Stockholders")
The operating policies and strategies of the Company are governed by the
Board of Directors, which has the power to modify or alter such policies without
the consent of the stockholders.
9. Management Agreement and Fees. The Company's Management Agreement with
its former manager expired on March 31, 1992. The Board of Directors determined
that the Company would operate on a self-managed basis and, consequently, it did
not enter into a new management agreement with its former manager.
On a self-managed basis, the Company is responsible for all expenses,
including resources previously provided by the former manager.
10. Dividend Reinvestment Plan. On December 13, 1988, the Company adopted
an Automatic Dividend Reinvestment Plan (the "Plan"). The Plan is administered
by American Stock Transfer & Trust Company. The Plan provides to the Company's
security holders a method of investing cash dividends paid by the Company in new
shares of the Company's common stock. The Plan also permits participants to make
optional cash investments in additional shares of the Company's common stock.
11. Federal Income Taxation of the Company and Stockholders. THE PROVISIONS
OF THE CODE ARE HIGHLY TECHNICAL AND COMPLEX. THIS SUMMARY IS NOT INTENDED AS A
DETAILED DISCUSSION OF ALL APPLICABLE PROVISIONS OF THE CODE, THE RULES AND
REGULATIONS PROMULGATED THEREUNDER, OR THE ADMINISTRATIVE AND JUDICIAL
INTERPRETATIONS THEREOF. THE COMPANY HAS NOT OBTAINED A RULING FROM THE INTERNAL
REVENUE SERVICE WITH RESPECT TO ANY TAX CONSIDERATIONS RELEVANT TO ITS
ORGANIZATION OR OPERATION, OR TO AN INVESTMENT IN ITS SECURITIES. THIS SUMMARY
IS NOT INTENDED TO SUBSTITUTE FOR PRUDENT TAX PLANNING, AND EACH STOCKHOLDER OF
THE COMPANY IS URGED TO CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THESE AND
OTHER FEDERAL, STATE AND LOCAL
VII-11
<PAGE> 216
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF THE
COMMON STOCK OF THE COMPANY AND ANY CHANGES IN APPLICABLE LAW.
GENERAL
The Company operates in a manner that permits it to qualify as a REIT under
the Code. As a REIT, the Company itself generally will be subject to federal
income tax only on the amount of its taxable income, subject to certain
modifications ("REIT Taxable Income"), that it does not distribute in the
taxable year in which it is earned. In addition, the Company will be subject to
a 4% excise tax to the extent it fails to satisfy certain calendar year
distribution requirements. The Company expects that, with limited exceptions, it
will not be subject to federal income tax at the corporate level or to federal
excise tax.
The Company would be subject to tax (including any applicable minimum tax)
on its taxable income at regular corporate rates without any deduction for
distributions to stockholders if it failed to qualify as a REIT in any taxable
year. Unless entitled to relief under specific statutory provisions, the Company
also would be disqualified from treatment as a REIT for the following four
taxable years. The failure to qualify as a REIT for even one year could result
in the Company incurring substantial indebtedness in order to pay any resulting
taxes, thus reducing the amount of cash available for distribution to
stockholders.
For purposes of the special REIT taxation rules and the REIT qualification
requirements set forth below, the assets, liabilities, income and deductions of
any subsidiary, all of whose stock has been owned by the Company during the
subsidiary's entire existence ("Qualified REIT Subsidiary"), will be treated as
assets, liabilities, income and deductions of the Company.
REIT QUALIFICATION REQUIREMENTS
In order to qualify as a REIT, the Company must satisfy various
requirements with respect to (i) the nature of its assets ("Asset Requirements")
and income ("Income Requirements"), (ii) certain organizational matters
("Organizational Requirements") and (iii) the amount of distributions to
stockholders ("Distribution Requirements").
Under the Asset Requirements, at the close of each quarter during the
taxable year (a) at least 75% of the assets of the Company, by value, must
consist of specified real estate assets, cash or U. S. government securities and
(b) as to its other assets other than securities of a Qualified REIT Subsidiary,
the Company cannot own (1) securities of any one issuer which represent more
than 5% of the total value of the Company's assets or (2) more than 10% of the
outstanding voting securities of any one issuer.
The Income Requirements provide that at least 75% of the Company's gross
income must be derived from specified real estate related sources, including
interest on mortgage obligations, income from REMIC interests, and gains from
the sale of such obligations and interests not held primarily for sale to
customers in the ordinary course of business ("Dealer Property"). Additionally,
at least 95% of the Company's gross income must consist of income derived from
items that qualify for the 75% income test plus other specified types of passive
income, such as interest, dividends and gains from the sale or other disposition
of stock and securities other than Dealer Property.
If the Company fails to satisfy either of the foregoing 75% and 95% Income
Requirements but (a) the Company otherwise satisfies the requirements for
qualification as a REIT, (b) such failure is due to reasonable cause and not
willful neglect and (c) certain other requirements are met, then the Company
will continue to qualify as a REIT but will be subject to a 100% tax on the
greater of the amount by which it fails to satisfy either of such tests reduced
by expenses incurred in earning that amount.
The Income Requirements also require that less than 30% of the Company's
gross income be derived from the sale or other disposition of (a) stock or
securities held for less than one year, (b) certain Dealer Property and (c) most
real property (including mortgage obligations and REMIC interests) held for less
than four years. In addition, the Code also generally imposes a 100% tax on
gains (less associated expenses) derived from sales of Dealer Property (without
an offset for any losses).
VII-12
<PAGE> 217
The Distribution Requirements require that the Company distribute annually
at least 95% of its REIT Taxable Income (and 95% of certain other income related
to foreclosure property), excluding any net capital gain, to its stockholders.
For this purpose, certain dividends paid by the Company after the close of a
taxable year may be considered as having been paid during such taxable year,
although they would be taxed to the stockholders in the year in which they were
actually paid. Such dividends will also be treated as paid during the taxable
year for purposes of determining whether the Company has undistributed REIT
Taxable Income subject to income tax at the corporate level for the taxable
year. For purposes of the 4% excise tax (described above), however, such
dividends would not be treated as having been distributed in the taxable year.
In addition, dividends declared in October, November or December of a calendar
year, payable to stockholders of record as of a date in such a month, and
actually paid during January of the following year will be considered as paid on
December 31 of such calendar year for excise tax purposes as well as for other
purposes under the REIT rules. Such dividends, however, will also be treated as
having been paid on that December 31 for purposes of determining a stockholder's
gross income.
Due to the nature of the Company's income from its assets and its
deductions in respect of its obligations, under certain circumstances, the
Company may generate REIT Taxable Income in excess of its cash flow. For
example, the maturity and pass-through rates of the Mortgage Collateral pledged
to secure the CMO issuances in which the Company holds an investment are not
likely to match the maturity and interest rates of the CMOs secured thereby.
Similarly, the Company may recognize taxable market discount income with respect
to its receipts from the sale, retirement or other disposition of the portion of
the Mortgage Collateral that constitutes market discount bonds (i.e.,
obligations with a stated redemption price at maturity greater than the
Company's tax basis therein), whereas these receipts frequently will be used to
make nondeductible principal payments on CMOs. In addition, certain CMOs may be
issued with original issue discount, the tax treatment of which may result in
taxable income in excess of cash flow. Accordingly, the Company may be required
to distribute a portion of its working capital to its stockholders or borrow
funds to make required distributions in years in which the gross income of the
Company on a tax basis (including "non-cash" income) exceeds its deductible
expenses. In the event that the Company is unable to pay dividends equal to
substantially all of its REIT Taxable Income, it may incur income tax or excise
tax or may not be able to qualify as a REIT.
Dividends paid for a fiscal year in excess of the Company's earnings and
profits, as computed for federal income tax purposes, are reported as a return
of capital to the Company's stockholders. Some of the Company's investments
constitute REMIC residual interests. Certain of these residual interests produce
"excess inclusion" income (see "Excess Inclusion Income" below) during the
fiscal year. The Code requires that excess inclusion income be included in a
taxpayer's income even though the taxpayer has losses that would otherwise
offset such income. As a result, the Company could have taxable income from
excess inclusions in a taxable year even though it has losses from other
investments that would normally be sufficient to offset the amount of such
excess inclusion income. The Company is required to distribute the taxable
income representing excess inclusions to meet its 95% distribution requirement
and to avoid a corporate level tax on such income. When such income is
distributed to a stockholder, the stockholder will have taxable income, rather
than a return of capital, equal to its share of such excess inclusion income
during the fiscal year. For fiscal 1993, the Company reported that all its
distributions paid in 1993, even though it experienced both a net loss and a tax
loss for 1993, represented excess inclusion income. Although the Company made no
distributions in 1994, excess inclusion income which was reported to the Company
for 1994 was declared payable to stockholders in September 1995, prior to the
Company's filing of its 1994 Tax Return. This distribution represented 1995
taxable income to stockholders. For a stockholder, excess inclusion income
cannot be offset by losses, except in the case of certain excess inclusion
income for certain savings and loan associations and their "qualified"
subsidiaries.
The most significant Organizational Requirement is that the stock of the
Company must be widely held. This requires that the stock of the Company be held
by a minimum of 100 persons for at least 335 days in each taxable year and that
no more than 50% in value of the stock be owned, actually or indirectly, by five
or fewer individuals at any time during the second half of each taxable year.
For this purpose, some pension funds and certain other tax-exempt entities are
treated as individuals. To evidence compliance with these requirements, the
Company is required to maintain records that disclose the actual ownership of
its outstanding shares of
VII-13
<PAGE> 218
Common Stock. In fulfilling its obligations to maintain records, the Company
must demand written statements each year from the record holders of designated
percentages of its shares of Common Stock which would, among other things,
disclose the actual owners of such shares.
EXCESS INCLUSION INCOME
All of the cash dividends distributed to the Company's stockholders in 1993
were comprised of "excess inclusion" income. There were no distributions for
1994, but excess inclusion income reported to the Company for 1994 was declared
payable to stockholders in September 1995, prior to the Company's filing of its
1994 Tax Return. Such distribution represents 1995 taxable income to
stockholders. Excess inclusion income is attributable to CMO issuances for which
an election has been made to be treated as a REMIC for federal income tax
purposes. The portion of the Company's dividends determined to be excess
inclusion income is taxable to certain otherwise tax-exempt stockholders as
unrelated business income. In addition, generally, excess inclusion income may
not be offset by any deductions or losses, including net operating losses.
12. Restrictions on Transfer and Redemption of Shares. Two of the
requirements for qualification as a REIT under the Code are that (i) during the
last half of each taxable year not more than 50% of the outstanding shares may
be owned directly or indirectly by five or fewer individuals and (ii) there must
be at least 100 stockholders for at least 335 days in each taxable year. Those
requirements apply for all taxable years after the year in which the REIT elects
REIT status.
In order that the Company may meet these requirements at all times, the
Company's Articles of Incorporation prohibit any person or group of persons from
acquiring or holding, directly or indirectly, ownership of a number of shares of
Common Stock in excess of 9.8% of the outstanding shares. Shares of Common Stock
owned by a person or group of persons in excess of such amounts are referred to
in the Articles of Incorporation and herein as "Excess Shares." The Articles of
Incorporation also provide that in the event any person acquires Excess Shares,
such Excess Shares may be redeemed by the Company, at the discretion of the
Board of Directors.
Under the Company's Articles of Incorporation, any acquisition of shares of
the Company that would result in the disqualification of the Company as a REIT
under the Code is void to the fullest extent permitted by law, and the Board of
Directors is authorized to refuse to recognize a transfer of shares to a person
if, as a result of the transfer, that person would own Excess Shares.
Additional provisions regarding restrictions on transfers and redemptions
of the Company's shares are set forth in the Company's Articles of
Incorporation, which were filed as Exhibit 3.1 to Amendment No. 1 to the
Company's Registration Statement No. 33-22891 on Form S-11.
The Articles of Incorporation also contain provisions intended to minimize
the potential adverse effect on the Company of a Code provision that would
impose a tax on REITs (and other pass-through entities) that hold REMIC
interests if at any time during the taxable year a Disqualified Organization (as
defined below) is a record holder of an interest in such entity. A "Disqualified
Organization" means the United States, any state or political subdivision
thereof, any foreign government, any international organization or
instrumentality of the foregoing, any tax-exempt entity, other than a farmer's
cooperative, not subject to the unrelated business income tax and any rural
electric or telephone cooperative. If a Disqualified Organization were a
stockholder of record of the Company during a year in which the Company held a
REMIC interest, a tax might be imposed on the Company. The amount of tax would
be equal to the product of the highest marginal corporate tax rate and the
amount of REMIC excess inclusions for the taxable year allocable to the interest
in the Company held by the Disqualified Organization.
Accordingly, the Articles of Incorporation provide that any acquisition of
shares of the Company that could or would result in the direct or indirect
imposition of a penalty tax on the Company (including the tax described above)
(a "Prohibited Transfer") will be void ab initio to the fullest extent permitted
by applicable law, and the intended transferee of any shares that are the
subject of a Prohibited Transfer may be deemed never to have had an interest
therein. If the foregoing provision is determined to be void or invalid, the
transferee shall be deemed, at the option of the Company, to have acted as agent
of the Company in acquiring those shares and to hold those shares on behalf of
the Company. In addition, any shares of the Company that
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<PAGE> 219
are the subject of a proposed, attempted or actual Prohibited Transfer may be
redeemed by the Company at the discretion of the Board of Directors. Any such
redemption will be effected as provided in the preceding paragraphs with respect
to Excess Shares. Furthermore, whenever it is deemed by the Board of Directors
to be prudent in order to avoid a Prohibited Transfer, the Board of Directors
may require a holder or proposed transferee of shares to file a statement or
affidavit with the Company, stating that the holder or proposed transferee is
not a Disqualified Organization; and any contract for the sale or other transfer
of shares of the Company will be subject to this provision. Moreover, the Board
of Directors may, in its discretion, refuse to transfer shares on the books of
the Company if (i) a statement or affidavit described in the preceding sentence
has not been received or (ii) the proposed transferee is a Disqualified
Organization.
13. Competition. In purchasing Mortgage Derivative Securities, Mortgage
Collateral, Mortgage-Backed Securities, all of which the Company currently owns,
or other assets, including assets which the Company may utilize in future
alternative investment activities, the Company competes, or will compete, with
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies and other lenders, other REITs, GNMA, FNMA and
FHLMC and other entities, many of which have greater financial resources than
the Company.
Additionally, as the Company and its financial advisor seek to identify
suitable candidates regarding a strategic transaction involving the acquisition
of or merger with a profitable growing concern, it competes with offers from
entities with greater resources than those of the Company, such as financial
buyers, venture capitalists, corporate entities and other investment groups.
As a REIT, the Company's business activities are limited by the provisions
of the Code that require a REIT to meet certain tests to maintain its
qualification as a REIT. Many of the Company's competitors operate through
entities that may have more flexibility than the Company in conducting their
business operations. In regard to its future activities, the Company may forfeit
its REIT status, either voluntarily or involuntarily.
14. Employees. The Company employs two full-time employees and one
part-time employee as of December 31, 1995, and utilizes the services of
consultants, as necessary.
ITEM 2. PROPERTIES.
The Company does not own real estate or physical property. The executive
offices of the Company are located in leased space at 100 North Fourth Street,
Suite 813, P.O. Box 250, Steubenville, Ohio 43952. The lease covering such space
can be terminated at any time with notice to the lessor.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1995, there were no legal proceedings pending or
threatened to which the Company or its subsidiaries were a party or to which any
of their respective property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1995.
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<PAGE> 220
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "RM".
The table below sets forth the high and low sale prices of the Company's
Common Stock for each full quarterly period within the two most recent fiscal
years for which such stock was traded, as reported on the American Stock
Exchange Composite Tape, and certain dividend information with respect to such
shares.
<TABLE>
<CAPTION>
PER SHARE
DIVIDENDS
PAID OR
HIGH LOW DECLARED
---- --- ----------
<S> <C> <C> <C>
First Quarter 1995........................................... 1 5/16 15/1 $ 0.00
Second Quarter 1995.......................................... 1 3/4 1 0.00
Third Quarter 1995........................................... 1 3/4 1 1/16 0.003(1)
Fourth Quarter 1995.......................................... 1 7/16 1 0.00
First Quarter 1994........................................... 1 7/16 1 1/8 $ 0.00
Second Quarter 1994.......................................... 1 1/8 11/1 0.00
Third Quarter 1994........................................... 1 11/1 0.00
Fourth Quarter 1994.......................................... 1 1/4 11/1 0.00
</TABLE>
- ---------
(1) Three tenths of one cent.
In order to qualify as a REIT under the Code, the Company, among other
things, must distribute as dividends to its stockholders an amount at least
equal to (i) 95% of its REIT Taxable Income (determined before the deduction for
dividends paid and excluding any net capital gain and any net income from the
sale or other disposition of property held primarily for sale) plus (ii) 95% of
the excess of its net income from foreclosure property over the tax imposed on
such income by the Code less (iii) any excess noncash income (as determined
under the Code). The actual amount and timing of dividend payments, however, is
at the discretion of the Board of Directors and depends upon the financial
condition of the Company in addition to the requirements of the Code.
The Company's Common Stock was held by 466 stockholders of record on March
20, 1996.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS--1995, 1994, 1993, 1992 AND 1991
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenues(1)........................... $ 898 $ 4,085 $(13,588) $ 21,861 $ 52,182
Expenses.............................. 1,654 3,280 12,036 23,729 44,244
Net Income (loss)(2).................. (756) 805 (25,624) (1,868) 7,938
Net Income (loss) per share........... (0.15) 0.15 (4.92) (0.36) 1.52
Taxable Income (loss)(3)(4)........... (625) (8,425) (10,823) (16,656) 9,190
Taxable Income (loss) per share....... (0.12) (1.62) (2.08) (3.20) 1.76
Weighted Average Shares Outstanding... 5,211 5,211 5,211 5,211 5,211
Dividends Paid per Share.............. 0.003 0.00 0.04 0.90 1.75
</TABLE>
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<PAGE> 221
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Mortgage Related Investments.......... $ 9,814 $12,430 $ 65,248 $142,396 $332,998
Mortgage Derivative Securities........ 1,014 1,990 7,161 40,727 41,720
Mortgage-Backed Securities............ 3,397 0 0 0 0
Total Assets.......................... 16,602 19,892 81,097 197,860 394,026
Funding Notes Payable................. 10,114 12,538 44,892 94,329 230,781
CMOs Payable.......................... 0 0 25,042 54,886 106,585
Notes Payable......................... 0 0 3,814 14,833 12,241
Total Liabilities..................... 10,387 12,905 74,915 166,184 355,455
Total Stockholders' Equity............ 6,215 6,987 6,182 31,676 38,571
Shares of Common Stock Outstanding.... 5,211 5,211 5,211 5,211 5,211
</TABLE>
- ---------
(1) Includes for 1993 cumulative effect of change in accounting principle of
$(1,530).
(2) See note 7 to Audited Consolidated Financial Statements.
(3) Amounts estimated for 1995.
(4) See Management's Discussion and Analysis--Dividend Policy.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INVESTMENT ACTIVITIES AND FUTURE PROSPECTS FOR THE COMPANY
A portion of the Company's current portfolio of investments continues to be
sensitive to changes in interest rates and mortgage prepayments. The lowest
mortgage interest rate levels in 20 years were reached in 1992 and continued to
25 year lows during the fourth quarter of 1993, resulting in unprecedented
mortgage refinancings and vastly accelerated mortgage prepayments. As a result
of the high level and extended duration of these prepayments, earnings and cash
flows from the Company's investments were adversely impacted. For a large
majority of those assets, earnings and cash flows were permanently impaired and
did not recover even as prepayments returned to more historical levels in the
second, third and fourth quarters of 1994. These permanent impairments were the
direct result of the massive level of paydowns on the mortgages collateralizing
such investments. During this time frame, most of the Company's assets
represented the ownership of identified cash flows in diverse CMO structures.
Prepayments of the underlying mortgage collateral, especially of the magnitude
and duration experienced from early 1992 through early 1994, served to
permanently reduce cash flows even when prepayment speeds slowed. As an example,
a specific identified cash flow representing a single class of a CMO
collateralized by $100 million in mortgages produces only 20% of the original
expected cash flows when the underlying mortgage collateral prepays unexpectedly
to a $20 million level. This type of phenomenon was representative of the
marketplace for investments of the type owned by the Company during 1992 to
mid-1994.
In light of its earnings difficulties and the erratic conditions in the
mortgage-backed securities markets, both caused by the 1992 to mid-1994
prepayment environment discussed above, the Company elected in mid-1994 not to
pursue its historical business. With a slow down in prepayment speeds during the
second half of 1994, the Company sold a substantial portion of its investment
portfolio, using the proceeds from such sales to repay all its borrowing
obligations and temporarily invest cash excesses in high quality liquid
investments. The Company then began to explore the prospects for a business
combination or merger with a profitable growing concern and simultaneously began
investigating alternative investment activities outside the Company's historical
business.
In regard to its search for an appropriate business combination or merger,
the Company's Board of Directors established acquisition criteria in an effort
to direct management's efforts and, in June of 1995, engaged a financial advisor
to permit the Company to uncover and analyze a wider array of potential
transactions.
VII-17
<PAGE> 222
Currently, the Company and its financial advisor continue the process of
identifying suitable candidates regarding a strategic transaction involving the
acquisition of or merger with a profitable growing concern. The successful
conclusion of a business combination or merger is subject to financial and
economic conditions in the marketplace, the negotiation of mutually acceptable
values, the particular requirements of the owners and management of other
entities and the existence of competitive offers from entities with greater
resources than those of the Company. To date, the Company has not successfully
concluded any such negotiations.
Any such transaction may involve payment by the Company of a cash purchase
price, the issuance of notes or preferred or common stock or some combination
thereof. In any case, it is anticipated that the consummation of a transaction
would be conditioned upon the receipt of stockholder approval at a special
meeting called for such purpose.
If the Company is unsuccessful in identifying a transaction that is likely
to produce value building results, it may elect to alternatively begin to
develop an investment portfolio of financial assets as a means of increasing
value to stockholders. A decision to pursue such alternative investment activity
would be subject to the Company's financial position as well as general economic
and financial market conditions prevailing at such time.
The Company and its financial advisor continue to believe that the future
potential earnings and value building aspects of utilizing its assets in a
successful business combination outweigh those of rebuilding an investment
portfolio containing lower-risk assets than those previously composing the
Company's investment portfolio.
In order to continue to qualify for an exemption under the Investment
Company Act of 1940 (see note 2 of the Company's Consolidated Financial
Statements), the Company made a sizeable investment in one 7% FNMA guaranteed 30
year single-family mortgage pool, of which the Company maintains 100% ownership,
during the fourth quarter of 1995. Such security is AAA rated and was purchased
at a price that under current market conditions minimizes principal risk to the
Company.
DIVIDEND POLICY
In accordance with the Code, the Company is required to distribute at least
95% of its taxable income to its stockholders each year in order to maintain its
status as a REIT. Dividends paid for a fiscal year in excess of the Company's
taxable income are reported as a return of capital to the Company's
stockholders, except as provided below.
Some of the Company's investments constitute REMIC residual interests.
Certain of these residual interests may produce "excess inclusion" income during
the fiscal year. The Code requires that excess inclusion income be included in a
taxpayer's income even though the taxpayer has current or prior losses that
would otherwise offset such income. As a result, the Company could have taxable
income from excess inclusions in a taxable year even though it has current or
prior losses from other investments that would normally be sufficient to offset
the amount of such excess inclusion income. The Company is required to
distribute the taxable income representing excess inclusions to meet its 95%
distribution requirement and to avoid a corporate level tax on such income. When
such income is distributed to a stockholder, the stockholder will have taxable
income, rather than a return of capital, equal to its share of such excess
inclusion income during the fiscal year. For a stockholder, generally, excess
inclusion income cannot be offset by losses.
For the tax year ended December 31, 1995, the Company paid a dividend of
$0.003 per share on September 29, 1995 to stockholders of record on September
20, 1995. This 1995 dividend was the result of excess inclusion income and is
reportable by stockholders as taxable income for 1995.
RESULTS OF OPERATIONS
1995 TO 1994 COMPARISONS
STATEMENT OF REVENUES AND EXPENSES
Net Income/(loss), as calculated in accordance with generally accepted
accounting principles, and as presented in the accompanying consolidated
financial statements, for the twelve months ended December 31,
VII-18
<PAGE> 223
1995, was $(756,000), or $(0.15) per share, as compared to $805,000, or $0.15
per share, for the twelve months ended December 31, 1994.
Generally accepted accounting principles require the Company to
periodically evaluate its investments based upon current and expected future
mortgage prepayment speeds and interest rates and, effective December 31, 1993,
market discount rates, as well. (See note 2 to the Company's Consolidated
Financial Statements) Downward valuation adjustments, if necessary, are
reflected as a reduction of interest revenues in the Company's Consolidated
Statements of Revenues and Expenses. The results for 1995 reflect downward
valuation adjustments totaling $700,000, or $(0.13) per share, all incurred
during the second quarter of 1995. For 1994, downward adjustments in carrying
value were $285,000, or $(0.05) per share.
The reduction in the Company's Net Income/(loss) from 1994 to 1995 of
$1,561,000 is due to 1) larger writedowns in value of Company investments during
1995 and 2) the existence of gains from the sale of assets in 1994, offset by
reduced operating expenses for 1995. Downward asset valuation adjustments in
1994 were $285,000, while such writedowns in 1995 were $700,000, an increase of
$415,000. In 1994, the Company recorded net gains on the sales of assets of
$1,119,000. In 1995, the Company had no gains related to asset sales. Absent
1994 sales gains, the Company's Net Income would have been $(314,000), or
$(0.06) per share. The Company further reduced operating expenses from $850,000
in 1994 to $590,000 in 1995, a decrease of $260,000.
The assumptions used to value assets at the end of each quarter take into
consideration the current level of interest rates (short and long), actual
mortgage prepayment speeds experienced for each asset through the end of the
quarterly period, market expectations of future prepayment speeds for the
mortgages backing each asset and, effective December 31, 1993, the application
of a market discount rate to future cash flows. If prepayment speeds were to
occur at levels higher than market expectations, market expectations of future
mortgage prepayment speeds increase beyond current anticipated levels, short
term interest rates increase beyond their current levels, or the market discount
rate applied were to be increased, further reductions in the value of the
Company's investments could be necessary.
Interest revenue on Mortgage Related Investments decreased from $2,208,000
for the year ended December 31, 1994 to $1,063,000 for the year ended December
31, 1995, as a result of the reduction in Mortgage Related Investments on the
Company's Balance Sheet between December 31, 1994 and December 31, 1995,
discussed below. Interest revenue on Mortgage Derivative Securities was $612,000
for the year ended December 31, 1994 as compared to $(447,000) for the year
ended December 31, 1995. The decrease in interest revenue on Mortgage Derivative
Securities of $1,059,000 was primarily attributable to a $700,000 writedown of
this asset category for 1995 while such writedowns were only $285,000 for 1994.
Such writedowns are deducted from Mortgage Derivative Securities interest
revenues. There was also a general reduction in interest earnings on that same
asset category from 1994 to 1995 resulting from the amortization of carrying
value during the period in the amount of $276,000.
Interest expense on Funding Notes and CMOs Payable decreased from
$2,430,000 to $1,064,000 for the years ended 1994 and 1995, respectively, as a
result of the offsetting balance sheet decline of Funding Notes and CMOs
Payable, discussed below. Operating expenses (which includes "Interest on Notes
Payable" and "General and Administrative") decreased from $850,000 for 1994 to
$590,000 for the comparable period in 1995. This decrease between periods of
$260,000 was the result of reduced interest expense on Notes Payable of $109,000
as the Company repaid all amounts outstanding under repurchase agreements during
1994 and had no borrowings during 1995. General and Administrative Expenses
declined by $151,000, from $741,000 in 1994 to $590,000 in 1995. General and
Administrative Expenses for 1995 include the amortization of $81,000 of deferred
expenses related to the Company's investigation of alternative investment
activities, specifically tax sale certificates. The balance of these expenses
will be completely amortized by the end of the first quarter of 1996, an
additional $27,000.
BALANCE SHEET
The Company's assets declined during the twelve month period ended December
31, 1995 by $3,290,000, to a total of $16,602,000 at December 31, 1995. This
decrease is attributable to the Company's Mortgage Related Investments declining
during the twelve month period from $12,430,000 to $9,814,000, a decrease of
VII-19
<PAGE> 224
$2,616,000. This reduction is primarily the result of prepayments and regularly
scheduled principal payments on the underlying Mortgage Collateral.
These asset reductions were matched by a corresponding decrease in the
related liability account, Funding Notes Payable, from $12,538,000 to
$10,114,000, or a decrease of $2,424,000, which represented regularly scheduled
and prepaid mortgage payments.
Mortgage Derivative Securities decreased from $1,990,000 at December 31,
1994 to $1,014,000 at December 31, 1995, a decrease of $976,000, reflecting 1)
the amortization and return of the cost basis of the assets held in this
category of approximately $276,000 and 2) the writedown of carrying value of
such securities which represents additional amortization in 1995 totaling
$700,000.
Cash decreased from $4,917,000 to $1,549,000, a decrease of $3,368,000,
primarily due to the purchase of Mortgage-Backed Securities during 1995 of
$3,400,000. At December 31, 1994, the Company's cash was temporarily invested in
liquid short-term U.S. government securities and commercial paper rated in the
highest grade by both Standard & Poor's and Moody's Rating Services. As fully
described in note 2 of the Company's Consolidated Financial Statements, in order
to continue to qualify as an REIT, the Company purchased in 1995 Mortgage-Backed
Securities of a nature that qualify under the Real Estate Exception and allow
the Company to continue to qualify as an REIT.
Mortgage-Backed Securities consists of one 7% FNMA guaranteed 30 year
single-family mortgage pool of which the Company maintains 100% ownership. At
December 31, 1995, the FNMA pool is being carried at the Company's cost but is
subject to periodic downward valuation adjustments based upon market conditions.
At December 31, 1995, the FNMA security had a premium market value.
Funds held by trustee decreased from $172,000 at December 31, 1994 to
$159,000 at December 31, 1995. This category of assets represents the receipt of
monthly mortgage payments awaiting further payment (reduction) of Funding Notes
Payable at a future date. The magnitude of this account is directly affected by
the decrease in Mortgage Related Investments discussed above and the level of
mortgage prepayments.
Receivables on Mortgage Related Investments and Mortgage Derivative
Securities increased from $257,000 at December 31, 1994 to $415,000 at December
31, 1995. Such $158,000 increase is attributable to the level of mortgage
prepayments on the underlying mortgage collateral.
Other assets increased from $126,000 at December 31, 1994 to $254,000 at
December 31, 1995, related to the deferment of expenses regarding the Company's
investigation and analysis of potential business combination or merger
opportunities and alternative investment activities. The Company will continue
to defer expenses related to its continuing efforts to successfully conclude a
business combination. Such deferrals were approximately $89,000 at December 31,
1995.
The Company's Net Loss of $756,000, or $(0.15) per share, for 1995 and its
dividend distribution of $0.003 per share, or $16,000, are reflected as
increases to the Accumulated Deficit which was $(37,822,000) at December 31,
1995, as compared to $(37,050,000) at December 31, 1994, a total increase of
$772,000.
1994 TO 1993 COMPARISONS
STATEMENT OF REVENUES AND EXPENSES
Net Income for the year ended December 31, 1994 was $805,000, or $0.15 per
share, as compared to Net Loss of $(25,624,000), or $(4.92) per share, for the
year ended December 31, 1993. This substantial improvement in the Company's
results from 1993 to 1994 of $26,429,000 was due to 1) drastically larger
writedowns in value of Company investments during 1993, 2) larger gains from the
sale of assets in 1994 and 3) sharply reduced operating expenses for 1994.
Downward asset valuation adjustments in 1993 were $25,569,000, while such
writedowns in 1994 were only $285,000, a decrease of $25,284,000. The large
magnitude of asset valuation writedowns during 1993 reflected unprecedented
actual mortgage prepayment levels and market expectations of a continuation of
high prepayment levels. 1994's minor valuation adjustments reflect the dramatic
slowdown in prepayment speeds and resultant stabilization in values of
securities collateralized by mortgage loans. In 1993, the Company recorded gains
on the sale of Mortgage Related Investments of $838,000 and losses on the sale
of Marketable Equity Securities of $486,000, for a
VII-20
<PAGE> 225
total net gain of $352,000 from asset sales. In 1994, the Company had total net
gains of $1,119,000, of which $461,000 related to the sale of ownership rights
in three Mortgage Related Investments and $658,000 related to the sale of six
Mortgage Derivative Securities. The difference in sales gains represents an
increase of $767,000 in Net Income between periods. The Company also reduced
operating expenses from $1,703,000 in 1993 to $850,000 in 1994, a decrease of
$853,000. These three substantial improvements, when combined with other minor
income reductions on assets between 1993 and 1994, provide for an increase in
the Company's Net Income of $26,429,000.
BALANCE SHEET
The Company's assets declined during the twelve month period ended December
31, 1994 by $61,205,000, to a total of $19,892,000 at December 31, 1994. This
decrease was attributable to the Company's Mortgage Related Investments
declining during the twelve month period from $65,248,000 to $12,430,000, a
decrease of $52,818,000. This reduction is primarily the result of 1) the sales,
during February 1994, of the ownership rights of two RYMAC IV Bond Series, and
during June 1994, of the ownership rights to the Ryland Mortgage Securities
Corporation Mortgage Collateralized Bonds Series 1989-6, in order to take
advantage of market premiums on the underlying mortgage collateral (such sales
reduced Mortgage Related Investments by $40,755,000), 2) substantial prepayments
on collateral underlying the Company's remaining Mortgage Related Investments
and 3) to a much lesser extent, regularly scheduled principal payments on the
underlying mortgage collateral. Such prepayments and scheduled principal
payments further reduced Mortgage Related Investments by approximately
$12,000,000.
These asset reductions were matched by a corresponding decrease in the
related liability accounts, Funding Notes Payable and CMOs Payable, from
$69,934,000 to $12,538,000, or a decrease of $57,396,000. The sale of ownership
rights includes the transfer of CMO and Funding Note obligations to the buyers
while regularly scheduled and prepaid principal on the underlying mortgages
serve to retire outstanding obligations secured by such mortgages. The sale of
ownership rights reduced CMO and Funding Notes by $42,012,000, while regularly
scheduled and prepaid mortgage payments produced approximately $15,400,000 in
reductions.
Mortgage Derivative Securities decreased from $7,161,000 at December 31,
1993 to $1,990,000 at December 31, 1994, a decrease of $5,171,000 reflecting 1)
the amortization and return of the cost basis of the assets held in this
category of approximately $1,335,000, 2) the writedown of carrying value of
these securities which represented additional amortization in 1994 totaling
$285,000 and 3) the sale of six securities in 1994's third and fourth quarters
which removed the cost basis of these six assets totaling $3,551,000 from the
balance sheet.
Funds held by trustee decreased from $1,347,000 at December 31, 1993 to
$172,000 at December 31, 1994. This category of assets represents the receipt of
monthly mortgage payments awaiting further payment (reduction) of Funding Notes
and CMOs Payable at a future date.
Receivables on Mortgage Related Investments and Mortgage Derivative
Securities declined from $5,608,000 at December 31, 1993 to $257,000 at December
31, 1994. Such $5,351,000 decrease is directly attributable to the sizeable
decreases in Mortgage Related Investments and Mortgage Derivative Securities
discussed previously.
Notes Payable, consisting solely of repurchase agreements, decreased from
$3,814,000 at December 31, 1993 to $0 at December 31, 1994 due primarily to the
result of dealer margin calls during 1994 and Kidder Peabody & Company's payment
demand on five repurchase agreements, which occurred immediately prior to Paine
Webber's acquisition of them during 1994. At November 30, 1994, the Company
repaid Kidder Peabody $433,000, reducing its Notes Payable balance to zero.
Net Income for 1994 of $805,000, or $0.15 per share, is reflected as a
decrease to the Accumulated Deficit. Such amount decreased from $(37,855,000) at
December 31, 1993 to $(37,050,000) at December 31, 1994. Taxable Income was a
negative $8,425,000, or $(1.62) per share. Of this amount, $4,811,000 represents
capital tax losses related to asset sales during 1994 and $3,614,000 represents
operating tax losses. Additionally, $16,000 was reported to the Company as
excess inclusion income for 1994 which the Company
VII-21
<PAGE> 226
distributed to stockholders in September 1995. As described above, this
distribution represents 1995 taxable income for stockholders. The Company
declared no dividend distributions for 1994.
EXPENSES AND USE OF BORROWED FUNDS
Operating expenses (Interest on Notes Payable and General and
Administrative) were $850,000 for the year ended December 31, 1994 versus
$590,000 for the year ended December 31, 1995, a decline of $260,000. The
components of this significant decrease in Operating expenses include: 1)
reduced interest costs on Notes Payable, which decreased from $109,000 in 1994
to $0 for 1995, as Notes Payable on the Balance Sheet were paid in full during
the fourth quarter of 1994 and 2) a decrease of General and Administrative
Expenses from $741,000 in 1994 to $590,000 in 1995, a decline of $151,000 as
part of a continuing expense reduction program.
Prior to 1995, the Company had used the proceeds from repurchase agreements
to fund a portion of its portfolio of Mortgage Derivative Securities. Prior to
April 1994, the Company had also maintained a line of credit used to fund
day-to-day operating needs and in past periods to also temporarily fund
acquisitions of new investments pending negotiation of repurchase agreements or
awaiting return of invested principal.
LIQUIDITY AND CAPITAL RESOURCES
Until November 1994, the Company had been a party to various repurchase
agreements, the proceeds of which had been used to acquire Mortgage Derivative
Securities. Such repurchase agreements were secured by substantially all of the
Company's Mortgage Derivative Securities.
The Company had maintained a line of credit with a commercial bank for
$250,000 which expired on April 30, 1994 and, at the Company's election, was not
renewed.
At both December 31, 1995 and December 31, 1994, the total amount borrowed
by the Company was $0. The Company is subject to a limitation on the amount of
total borrowings of $25,000,000 pursuant to a policy adopted by its Board of
Directors in March 1992, although such amount is substantially in excess of the
Company's current available credit sources.
During the third quarter and early fourth quarter of 1994, the Company sold
six Mortgage Derivative Securities. Since all of these Mortgage Derivative
Securities were subject to repurchase agreement financing, their sales required
the repayment in full of associated borrowed amounts. The repayment of these
repurchase agreements totaled $1,901,000 and reduced repurchase agreement
borrowings to $433,000 as of late October 1994. At November 30, 1994, the
Company repaid in full its remaining repurchase agreement obligations and has
had no outstanding Notes Payable since that date. As such, all of the Company's
remaining Mortgage Derivative Securities and Mortgage-Backed Security are
available to secure any future borrowings.
The Company believes that the periodic cashflows from its remaining
investment portfolio and the significant liquidity existent in its highly liquid
cash and Mortgage-Backed Securities positions are sufficient to allow the
Company to pursue the several business alternatives it is currently
investigating.
VII-22
<PAGE> 227
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
RYMAC MORTGAGE INVESTMENT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.................................................... 23
Consolidated Balance Sheets as of December 31, 1995 and 1994...................... 24
Consolidated Statements of Revenues and Expenses for the years ended
December 31, 1995, 1994 and 1993................................................ 25
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993................................................ 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993................................................ 27
Notes to Consolidated Financial Statements........................................ 28
</TABLE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of RYMAC Mortgage Investment
Corporation:
We have audited the consolidated balance sheets of RYMAC Mortgage
Investment Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of revenues and expenses, stockholders'
equity and cash flows for each year in the three year period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RYMAC Mortgage Investment Corporation and subsidiaries as of December 31, 1995
and 1994, and the consolidated results of their operations and their cash flows
for each of the years in the three year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
(Successor to Kenneth Leventhal &
Company)
New York, New York
March 5, 1996
VII-23
<PAGE> 228
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Real estate investments:
Mortgage related investments (note 4)............................. $ 9,814 $ 12,430
Mortgage derivative securities less valuation allowance of $39 for
1995 (notes 2 and 3)............................................. 1,014 1,990
Mortgage-backed securities (note 5).................................. 3,397 --
-------- --------
14,225 14,420
Cash................................................................. 1,549 4,917
Funds held by trustee................................................ 159 172
Receivables on mortgage related investments.......................... 370 212
Receivables on mortgage derivative securities........................ 45 45
Other assets......................................................... 254 126
-------- --------
$ 16,602 $ 19,892
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 6)....................................... $ 10,114 $ 12,538
Accrued interest on funding notes payable............................ 146 179
Other liabilities.................................................... 127 188
-------- --------
10,387 12,905
COMMITMENTS AND CONTINGENCIES (NOTES 2, 3, & 8)
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share 50,000,000 shares authorized,
5,210,600 issued and outstanding at December 31, 1995, and 1994... 52 52
Additional paid-in capital........................................... 43,985 43,985
Accumulated Deficit (note 7)......................................... (37,822) (37,050)
-------- --------
6,215 6,987
-------- --------
$ 16,602 $ 19,892
======== ========
</TABLE>
See notes to consolidated financial statements.
VII-24
<PAGE> 229
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
------ ------ --------
<S> <C> <C> <C>
REVENUES
Interest:
Mortgage related investments (note 4)............. $1,063 $2,208 $ 9,205
Mortgage derivative securities (note 3)........... (447) 612 (23,345)
Provision for investment losses................... (39) -- --
Mortgage-backed securities (note 5)............... 12 -- --
Temporary investments............................. 309 37 160
Gain (loss) on the sale of marketable equity
securities........................................ -- -- (486)
Gain on the sale of mortgage derivative securities... -- 658 --
Gain on the sale of mortgage related investments,
net............................................... -- 461 838
Other................................................ -- 109 40
------ ------ --------
898 4,085 (13,588)
====== ====== ========
EXPENSES
Interest on funding notes payable.................... 1,064 1,723 6,551
Interest on CMOs payable............................. -- 707 3,782
Interest on notes payable............................ -- 109 297
General and Administrative........................... 590 741 1,406
------ ------ --------
1,654 3,280 12,036
------ ------ --------
Net Income (loss) (note 2)........................... $ (756) $ 805 $(25,624)
------ ------ --------
Net Income (loss) per share (note 2)................. $(0.15) $ 0.15 $ (4.92)
------ ------ --------
Weighted average number of common shares
outstanding....................................... 5,211,000 5,211,000 5,211,000
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
VII-25
<PAGE> 230
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
--------------------------------------------------------------------
ADDITIONAL ACCUMULATED TOTAL
NUMBER OF COMMON PAID-IN DEFICIT STOCKHOLDERS'
SHARES STOCK CAPITAL (NOTE 7) EQUITY
--------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992.... 5,210,600 $ 52 $ 43,985 $ (12,361) $ 31,676
--------- ---- -------- --------- --------
1993 Unrealized Loss............ -- -- -- 338(1) 338
1993 Net Loss................... -- -- -- (25,624) (25,624)
1993 Dividends Declared......... -- -- -- (208) (208)
--------- ---- -------- --------- --------
Balance at December 31, 1993.... 5,210,600 52 43,985 (37,855) 6,182
--------- ---- -------- --------- --------
1994 Net Income................. -- -- -- 805 805
1994 Dividends Declared......... -- -- -- -- --
--------- ---- -------- --------- --------
Balance at December 31, 1994.... 5,210,600 52 43,985 (37,050) 6,987
--------- ---- -------- --------- --------
1995 Net Loss................... -- -- -- (756) (756)
1995 Dividends Declared......... -- -- -- (16) (16)
--------- ---- -------- --------- --------
Balance at December 31, 1995.... 5,210,600 $ 52 $ 43,985 $ (37,822) $ 6,215
========= ==== ======== ========= ========
</TABLE>
- ---------
(1) Reversal of prior year unrealized loss as current year realized loss.
See notes to consolidated financial statements.
VII-26
<PAGE> 231
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (loss)..................................... $ (756) $ 805 $(25,624)
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of net premium on mortgage related
investments...................................... -- 840 675
Amortization of premiums on mortgage derivative
securities....................................... 966 1,429 31,142
Interest accrued and added to funding notes
payable.......................................... 153 658 1,782
Decrease in interest receivable on mortgage related
investments...................................... 18 505 701
Decrease (increase) in interest receivable on
mortgage derivative securities................... -- 373 (5)
Decrease in accrued interest on funding notes
payable and CMOs payable......................... (33) (405) (881)
Loss (gain) on the sales of investments............ -- (658) 486
Decrease in accrued expenses payable............... (61) (395) (88)
Other, net......................................... (128) (87) 87
------- -------- --------
Net cash provided by operating activities............. 159 3,065 8,275
------- -------- --------
INVESTING ACTIVITIES:
Purchase of investments............................... (3,400) -- --
Principal payments on mortgage related investments.... 2,440 56,400 79,917
Decrease in funds held by trustee..................... 13 1,175 2,575
Principal payments on funding notes payable........... (2,577) (33,012) (51,219)
Principal payments on CMOs payable.................... -- (25,042) (29,844)
Principal payments on mortgage-backed security........ 3 -- --
Proceeds from sales of investments.................... -- 4,209 184
Principal payments on mortgage derivative
securities......................................... 10 241 2,398
------- -------- --------
Net cash (used in)/provided by investing activities... (3,511) 3,971 4,011
------- -------- --------
FINANCING ACTIVITIES:
Net repayments of notes payable....................... -- (3,814) (11,019)
Dividends paid........................................ (16) -- (208)
------- -------- --------
Net cash used in financing activities................. (16) (3,814) (11,227)
------- -------- --------
Net (decrease)/increase in cash......................... (3,368) 3,222 1,059
Cash at beginning of year............................... 4,917 1,695 636
------- -------- --------
Cash at end of year..................................... $ 1,549 $ 4,917 $ 1,695
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of amount added to funding
notes payable)..................................... $ 944 $ 2,329 $ 9,931
Dividends declared.................................... -- -- 208
</TABLE>
See notes to consolidated financial statements.
VII-27
<PAGE> 232
RYMAC MORTGAGE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 1--THE COMPANY
RYMAC Mortgage Investment Corporation ("RMIC") was incorporated in Maryland
on July 1, 1988. RMIC has two wholly-owned subsidiaries, RYMAC Mortgage
Investment I, Inc. ("RMI") and RYMAC Mortgage Investment II, Inc. ("RMII").
RMIC, RMI and RMII are collectively referred to hereafter as the "Company". At
inception, the Company issued 5,420,000 shares of its common stock. During 1990
and 1991, the Company repurchased 209,400 shares of its common stock in
accordance with a stock repurchase program at costs ranging from $6.75 to $7.63
per share.
The Company and its financial advisor continue the process of identifying
and soliciting interest from suitable candidates regarding strategic
transactions involving the acquisition of or merger with a profitable growing
concern. The successful conclusion of a business combination or merger is
subject to financial and economic conditions in the marketplace, the negotiation
of mutually acceptable values, the particular requirements of the owners and
management of other entities and the existence of competitive offers from
entities with greater resources than those of the Company. To date, the Company
has not successfully concluded any such discussions.
If the Company is unsuccessful in identifying a transaction that is likely
to produce value building results, it may elect to alternatively begin to
develop an investment portfolio of financial assets. A decision to pursue such
alternative investment activity would be subject to the Company's financial
position as well as general economic and financial market conditions prevailing
at such time.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of RMIC and its
wholly-owned subsidiaries RMI and RMII. All intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Mortgage Related Investments
Mortgage Related Investments are carried at their outstanding principal
balance and are designated as available for sale. The net premium on Mortgage
Related Investments was amortized over the estimated lives of the investments
using the interest method. (See note 4). Due to the sale of several of the
Company's Mortgage Related Investments during 1994, the Company determined that
the remaining balance of any premiums was nominal and, as such, decided to
amortize all premiums at December 31, 1994.
Mortgage Derivative Securities
Mortgage Derivative Securities have been recorded at cost and are amortized
over their estimated lives using the interest method. (See note 3)
The Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard No. 115 ("FASB-115"), "Accounting for Certain Investments in
Debt and Equity Securities," effective for fiscal years beginning after December
15, 1993. The Company first applied FASB-115 to its December 31, 1993 financial
statements. FASB-115 requires that impaired investments be carried at fair
market value. Quarterly, the Company projects the expected future cash flows
from its Mortgage Derivative Securities under market based assumptions as to
future mortgage prepayment speeds and interest rate levels. An impairment to
value under
VII-28
<PAGE> 233
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
FASB-115 has occurred if the future cash flows, discounted at a risk free rate
(the yield associated with a U.S. Treasury Security with a maturity
approximating the average life of the future cash flows from the Company's
portfolio of investments), are less than the investment's carrying value.
Mortgage-Backed Securities
Mortgage-Backed Securities have been recorded at the lower of cost or
market and are considered held to maturity. At December 31, 1995, the market
value was $3,425.
Fair Value
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("FASB 107"), requires the Company to disclose
the fair value of financial instruments for which it is practicable to estimate
such value and to disclose the method(s) and assumptions used to estimate such
value(s). Each of Notes 3, 4, 5 and 6 discuss the fair value of the Company's
Mortgage Derivative Securities, Mortgage Related Investments, Mortgage-Backed
Securities and Funding Notes Payable, respectively.
For Mortgage Related Investments, prices for similar mortgage-backed
securities were obtained from Wall Street Dealers active in mortgage-backed
markets. It is important to note, however, that the current market premiums on
such similar mortgage-backed securities are not available to the Company unless
and until the Company is able to call for early redemption the Funding Notes
that are collateralized by such Mortgage Related Investments. The potential for
early redemption (calls) is specific to each underlying collateralized
obligation and the indenture covering such transaction. For the Company's three
remaining Mortgage Related Investments, the timing of early redemptions are at
future dates, the earliest of which is May 1, 1997. As such, no value has been
assigned to potential premiums available at early redemption dates.
In regard to Funding Notes Payable, market price quotations for these
underlying obligations were obtained from a dealer who actively trades such
instruments. Although these instruments currently trade at par or slight
premiums in the present financial environment, the Company's obligation
thereunder is equal to the face principal amounts without any applicable
premiums or discounts.
Investment Restrictions
In addition to qualifying as a Real Estate Investment Trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code"), the Company's
investment activities are restricted by provisions of the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Investment Company Act
specifically exempts entities primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens and interests in real estate from
the definition of an investment company (the "Real Estate Exception"). Under
interpretations issued by the staff of the Securities and Exchange Commission,
in order to qualify for the Real Estate Exception, the Company must maintain at
least 55% of its assets in mortgage loans or certain other interests in real
estate, and another 25% of its assets in those or certain other types of real
estate related interests.
During 1995, the Company purchased additional assets, specifically
mortgage-backed securities. As such, the Company continues to maintain in excess
of 55% of its assets in mortgage loans or certain other interests in real estate
and, therefore, can continue to rely on the Real Estate Exception to qualify as
a REIT under the Code.
If the Company were unable to qualify for the Real Estate Exception or
engage in a business other than that of an investment company, it would be
required to register as an investment company under the Investment Company Act.
The Company is unable to predict how registration under such Act would affect
its current plans to pursue new investment activities or business combinations.
Registration under the Investment Company Act would also require the investments
held by the Company to be adjusted to market value at each
VII-29
<PAGE> 234
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
financial reporting date to the extent not done so already. Other financial
statement reporting and disclosure requirements of the Investment Company Act
may differ in certain respects from those to which the Company is currently
subject.
Federal Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a result,
the Company generally will not be subject to federal income taxation at the
corporate level to the extent it distributes annually at least 95% of its REIT
taxable income, as defined in the Code, to its stockholders and satisfies
certain other requirements. Accordingly, no provision has been made for income
taxes in the accompanying consolidated financial statements.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding during the period.
NOTE 3--MORTGAGE DERIVATIVE SECURITIES
The Company's investments in mortgage derivative securities currently
consist of (i) a class or classes of collateralized mortgage obligations
("CMOs") that either represents a regular class of bonds or a residual class of
bonds or (ii) interests in a class or classes of mortgage-backed pass-through
certificates that either represent a regular class of certificates or a residual
class of certificates. For federal income tax purposes, a majority of the
Company's Mortgage Derivative Securities represent interests in real estate
mortgage investment conduits ("REMICs"). CMOs are mortgage-backed bonds which
bear interest at a specific predetermined rate or at a rate which varies
according to a specified relationship to a specific short term interest rate
index, such as the London interbank offered rate for one-month U.S. dollar
deposits ("LIBOR").
Most residual bonds are structured so as to entitle the holder to receive a
proportionate share of the excess (if any) of payments received from the
collateral pledged to secure such bonds and the other related classes, together
with the reinvestment income thereon, over amounts required to make debt service
payments on such CMOs and to pay related administrative expenses. In connection
with these investments, the Company acquired no other rights relating to the
collateral pledged to secure its Mortgage Derivative Securities. Most residual
certificates are structured so as to entitle the Company to receive a specified
percentage of the distributions generated from the pool of assets comprising the
trust funds of which the certificates evidence an interest.
At December 31, 1995 and 1994, the Company had net investments in Mortgage
Derivative Securities as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO OF MORTGAGE DERIVATIVE SECURITIES 1995 1994
------------------------------------------- ------ ------
<S> <C> <C>
FNMA REMIC Trust 1988-7 ("FNMA 1988-7")................................... $ 41 $ 73
-- Trust 1988-11 ("FNMA 1988-11").................................... 245 410
-- Trust 1991-163 Class SA ("FNMA 1991-163")......................... 294 763
FHLMC Multi-Class Mortgage Participation Certificates (Guaranteed)
-- Series 2 ("FHLMC 2").............................................. 106 164
-- Series 1248 Class H ("FHLMC 1248")................................ 294 528
Cornerstone Mortgage Investment Group II, Inc.
-- Series 13 ("Cornerstone 13")...................................... 22 32
-- Series 14 ("Cornerstone 14")...................................... 12 20
------ ------
$1,014 $1,990
====== ======
</TABLE>
VII-30
<PAGE> 235
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
The Company makes valuation adjustments at quarterly dates based upon
assumptions as to mortgage prepayment speeds, interest rates and discount rates
reflective of then current financial markets.
Under FASB-115, future cash flows are discounted at a rate reflective of
market yields for assets of the type held by the Company. At December 31, 1995,
the Company applied a discount rate of 16% to the cash flows for its portfolio
of Mortgage Derivative Securities and at December 31, 1994, a 12% discount rate
was applied to most assets. At December 31, 1995, all assets in this category
were providing yields in a range of 18%-30%. Yields in excess of 16% were
utilized to fund a valuation reserve account in order to provide for future
downward valuation adjustments. At December 31, 1995, the valuation reserve
account had a balance of $39. At December 31, 1994, the balance of the valuation
reserve account was utilized to reduce the value of certain assets. Total
valuation adjustments for 1994 were $285 as compared with $700 for 1995, all of
which was incurred during the second quarter of 1995.
Additionally, in accordance with FASB-107, the Company is required to
compute the estimated fair value of its Mortgage Derivative Securities by
projecting anticipated future cash flows and discounting those cash flows at
discount rates established in market transactions for securities having similar
characteristics and backed by collateral of similar rate and term.
For the December 31, 1995 estimate of fair market values, the Company used
the same prepayment and interest rate assumptions as for its determination of
carrying values under FASB-115. (See note 2) The PSA speeds vary depending on
the collateral. The prepayment assumption model used by the Company incorporates
a market methodology established by the Public Securities Association ("PSA").
Such model assumes a rate of prepayment each month of the unpaid principal
balance of a pool of mortgage loans. 100% of PSA assumes that 0.2% per annum of
the then outstanding principal balance of a pool of mortgage loans will prepay
in the first month of the life of such mortgage loans and an additional 0.2% per
annum in each month thereafter (for example, 0.4% per annum in the second month,
0.6% in the third month, etc.) until the 30th month. Beginning with the 30th
month and in each month thereafter, 100% PSA assumes a constant prepayment rate
of 6% per annum of the then outstanding principal balance of such mortgage
loans. On a bi-weekly basis, Bloomberg Financial Markets ("Bloomberg") obtains
PSA estimates for a wide range of mortgage coupons and ages from several dealers
in mortgage derivative securities and makes them available to Bloomberg's
subscribers.
The prepayment speeds used by the Company in establishing the estimated
fair value of its securities at December 31, 1995 are:
<TABLE>
<CAPTION>
COLLATERAL/(YEAR OF BLOOMBERG MEDIAN PSA
ISSUE) AS OF DECEMBER 31, 1995
------ -----------------------
<S> <C>
GNMA 9.5% (1986) 298%
FNMA/FHLMC 9.0 (1986) 333
FNMA/FHLMC 9.0 (1991) 331
FNMA/FHLMC 9.5 (1986) 331
</TABLE>
Such PSA assumptions do not purport to be an historical description of
prepayment experience or a prediction of the future rate of prepayments of any
mortgage loan.
All assets were modeled forward using the December 31, 1995 Bloomberg
Median PSA for the life of each asset. LIBOR was assumed at 5.625% for the life
of the assets and various discount rates were applied. The resulting analysis
indicated that the fair value of all of the Company's Mortgage Derivative
Securities was in excess of their carrying value at December 31, 1995.
None of the Company's Mortgage Derivative Securities are pledged as
collateral for any borrowings and thus represent a source of increased liquidity
to the Company.
VII-31
<PAGE> 236
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 4--MORTGAGE RELATED INVESTMENTS
The Company's Mortgage Related Investments consist of ownership interests
in certain classes of mortgage-backed securities issued by Ryan Mortgage
Acceptance Corporation IV (as described below).
On September 23, 1988, the Company purchased from Ryan Mortgage Acceptance
Corporation IV ("RYMAC IV") certain GNMA certificates and FNMA certificates and
other collateral owned by RYMAC IV and pledged to secure RYMAC IV's Mortgage
Collateralized Bonds (the "RYMAC IV Bonds"). (See note 6) These Mortgage Related
Investments and other collateral were purchased subject to the lien of the
Indenture between RYMAC IV and the Trustee (the "RYMAC IV Indenture") pursuant
to which the RYMAC IV Bonds were issued and subject to the rights of the Trustee
and the bondholders thereunder. (See note 6) The purchase agreements grant to
the Company certain additional rights with respect to the RYMAC IV Bonds, such
as the right, if any, to substitute collateral, the right to direct the
reinvestment of collateral proceeds and the right to call the related RYMAC IV
Bonds. At December 31, 1995, the Company's Mortgage Related Investments consist
of RYMAC IV Bonds, Series 7, 10 and 19.
During the first quarter of 1994, the Company sold certain ownership rights
in the RYMAC IV Bonds for a net gain of approximately $595. (See note 6) For the
remaining RYMAC IV Bonds the Company is investigating the possible contractual
assignment of the Company's rights. Additionally, the Company assigned its
ownership rights in the Ryland Mortgage Securities Corporation Mortgage
Collateralized Bonds Series 1989-6 to a third party during the second quarter of
1994 and realized a net loss of approximately $134. No such sales or assignments
occurred during 1995.
At December 31, 1995 and 1994, the Company owned Mortgage Related
Investments with aggregate outstanding principal balances of $9,814 and $12,430,
respectively, which provide for monthly principal and interest payments. The
RYMAC IV collateral bears interest at rates ranging from 7.75% to 10.50% and
have scheduled maturity dates ranging from July 1, 2001 to April 1, 2017.
The Company held the following Mortgage Related Investments as of December
31, 1995:
<TABLE>
<CAPTION>
INTEREST FINAL
RATE MATURITY PRINCIPAL
DESCRIPTION RANGE DATE RANGE AMOUNT
----------- ----- ---------- ------
<S> <C> <C> <C>
82 Pools of FNMA Certificates, 7.75% to 7/01/2001 $ 9,814
24 of which were under $50 10.50% to 4/01/2017
</TABLE>
The following is a summary of total Mortgage Related Investments for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
Balance at beginning of year........................... $12,430 $ 64,408
Sales of collateral or ownership rights................ -- (40,755)
Collections of principal............................... (2,616) (11,223)
------- --------
Balance at end of year................................. $ 9,814 $ 12,430
======= ========
</TABLE>
In accordance with FASB-107, the Company obtained prices from a Wall Street
Dealer for the mortgage-backed securities collateralizing the Company's Mortgage
Related Investments.
Although the FNMA Certificates were trading at premiums to their face
values as of December 31, 1995, as described in note 2, the premiums on these
FNMA Certificates are only available to the Company under limited circumstances
related to early redemption of specific series of bonds.
The Company estimates the fair value of the RYMAC IV Bond Series 7, 10 and
19 to equal the carrying values at December 31, 1995 and 1994.
VII-32
<PAGE> 237
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 5--MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities have been recorded at the lower of cost or
market. The fair value of the Company's Mortgage-Backed Securities were at a
premium to the carrying value at December 31, 1995. However, since such assets
are being held for investment purposes, no unrealized gains have been
recognized.
NOTE 6--FUNDING NOTES PAYABLE
Funding Notes Payable represent limited recourse notes delivered to RYMAC
IV as partial payment for the purchase of Mortgage Related Investments and other
collateral, and have payment terms the same as the related series of RYMAC IV
Bonds. (See note 4) The Funding Notes Payable consisted of three multi-class
series at December 31, 1995 and 1994 having stated maturities ranging from
August 1, 2016 to May 1, 2017 and August 1, 2010 to May 1, 2017, respectively.
The classes of each series of Funding Notes Payable bear interest at fixed
rates. The range of fixed rates at December 31, 1995 and 1994 were 8.25% to
9.45%.
Principal and interest payments on the Mortgage Related Investments are
used to make the monthly or quarterly payments on the funding notes payable. In
addition, prepayments of the underlying mortgage related investments are passed
through as prepayments of the Funding Notes Payable so that the Funding Notes
Payable may be fully paid prior to their stated maturities.
In accordance with FASB-107, the Company obtained prices for its Funding
Notes Payable as of December 31, 1995 and 1994, from a dealer actively trading
in RYMAC IV Bonds and other bonds of this type. Such bonds were trading at par
or slight premiums to their face values as of December 31, 1995 and 1994. Market
premiums (or discounts) on trades of these obligations do not affect the
Company. The Company's obligations for repayment of its Funding Notes Payable
are at par through receipt of principal and interest payments on its Mortgage
Related Investments.
NOTE 7--FEDERAL INCOME TAXES AND DISTRIBUTIONS
As described in note 2, the Company has elected to be treated for federal
income tax purposes as a REIT. As such, the Company is required to distribute
annually, in the form of dividends to its stockholders, at least 95% of its
taxable income. Because of the provisions of the Code applicable to the type of
investments made by the Company, in the early years of the life of certain of
the Company's initial investments (particularly investments made in connection
with the Company's initial public offering, and to a lesser degree during 1989)
taxable income exceeded net income.
During the later years of such ownership, Net Income will exceed REIT
taxable income. The principal reason for such difference is that the Company
reports income from its portfolio of Mortgage Related Investments and Mortgage
Derivative Securities on the interest method for financial reporting purposes;
however, for income tax purposes, the Company reports its proportionate share of
the difference between interest income generated by the collateral and interest
expense on the CMOs. More recent investments made by the Company and investments
currently available in the market are typically structured so that taxable
income and Net Income are similar during each reporting period. Over the life of
a particular investment or security, taxable income and Net Income will be
equal. In reporting periods where taxable income exceeds Net Income,
stockholders' equity will be reduced by the amount of dividends in excess of Net
Income in such period and will be increased by the excess of Net Income over
dividends in future reporting periods.
For 1995, the Company made a distribution of $0.003 per share to its
stockholders on September 29, 1995, with a record date of September 20, 1995.
The dividend represented excess inclusion income. The Company expects to have a
tax loss of approximately $625 for the year. The Company's taxable losses
through 1995 aggregate to approximately $36 million. During 1994, the Company's
investment in certain REMICs produced excess inclusion income of $16. For 1995,
the Company's investments did not generate any excess inclusion income. Under
the Code, a REIT must generally distribute its excess inclusion income to its
stockholders even though it has other losses or deductions exceeding such excess
inclusion income.
VII-33
<PAGE> 238
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
Accordingly, if the Company were to report future excess inclusion income, it
may elect to distribute such excess inclusion income as dividends even though it
has an estimated tax loss carryforward approximating $36 million, including
approximately $5 million in capital loss carryforwards. The tax losses can be
carried forward to offset future income of the Company.
NOTE 8--RELATED PARTY TRANSACTIONS
Pursuant to the Purchase Agreements between the Company and RYMAC IV (see
note 4), $27 has been withheld from amounts released from the lien of the RYMAC
IV Indenture, retained by RYMAC IV and deposited in escrow to be used for
payment of expenses of the CMOs secured by certain of the Mortgage Related
Investments purchased by the Company. In addition, during the year ended
December 31, 1995, the Company incurred $14 of CMO administration fees which
were paid to RYMAC IV under the terms of the Purchase Agreements.
NOTE 9--EMPLOYEE BENEFITS
The Company's Board of Directors has established a Salary
Reduction-Simplified Employee Pension Program ("SAR-SEP") for its full-time
employees. A SAR-SEP is a minimal administration 408-K Plan (similar to a 401-K)
for companies with fewer than 25 employees.
For 1995, the Company contributed 3% of gross compensation and has
established the same minimum contribution for 1996. Company contributions to the
plan may vary and the Company is not required to continue the program. Employee
contributions are based upon established formulas under the Employee Retirement
Income Security Act ("ERISA") rules governing 408-K Plans.
The Unaffiliated Directors adopted an incentive stock option program during
1994 for the Company's two Officers and Affiliated Director. Under the Stock
Option Program, options on 260,000 shares of the Company's Common Stock were
awarded at market prices, exercisable over ten year periods ending May 2005. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants. In addition, a salary
continuance program was provided to the Company's officers, allowing for up to
one year's base salary following the consummation of a business combination.
VII-34
<PAGE> 239
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
1994 OPERATING RESULTS
Revenues(1)................................. $1,951 $ 576 $1,061 $ 497 $4,085
Expenses.................................... 1,596 766 519 399 3,280
Net Income (loss)........................... 355 (190) 542 98 805
Net Income (loss) per share................. $ 0.07 $(0.04) $ 0.11 $ 0.01 $ 0.15
Dividends................................... $ -- $ -- $ -- $ -- $ --
OTHER INFORMATION
10 Year Treasury(2)......................... 6.07% 7.07% 7.32% 7.83% 7.10%
1 Month LIBOR(3)............................ 3.40 4.19 4.73 5.54 4.48
1995 OPERATING RESULTS
Revenues(1)................................. $ 437 $ (281) $ 378 $ 364 $ 898
Expenses.................................... 441 439 412 362 1,654
Net Loss.................................... (4) (720) (34) 2 (756)
Net Loss per share.......................... $ -- $(0.14) $(0.01) $ -- $(0.15)
Dividends................................... -- -- $0.003 $ -- $0.003
OTHER INFORMATION
10 Year Treasury(2)......................... 7.47% 6.60% 6.32% 5.89% 6.58%
1 Month LIBOR(3)............................ 6.06 6.08 5.89 5.86 5.96
</TABLE>
- ---------
(1) Includes downward valuation adjustment to the carrying value of the
Company's assets. (See notes 2, 3 and 4)
(2) Quarterly 10 Year Treasury figures are based upon the daily average while
the yearly figures are based upon the weekly average. (Source: Bloomberg
Financial System)
(3) Quarterly 1-Month LIBOR figures are based upon the daily average while the
yearly figures are based upon the weekly average. (Source: Bloomberg
Financial System)
VII-35
<PAGE> 240
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1996 Annual Meeting of Stockholders to be held on or about May 22, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1996 Annual Meeting of Stockholders to be held on or about May 22, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1996 Annual Meeting of Stockholders to be held on or about May 22, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1996 Annual Meeting of Stockholders to be held on or about May 22, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. The following financial statements are included in Part II, Item 8
of this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Revenues and Expenses
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial statement schedules required:
None
3. The following exhibits are included as part of this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------- ---------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the
Company's Registration Statement No. 33-22891 on Form S-11).
3.1.1 Articles of Amendment to Amended and Restated Articles of
Incorporation of the Company (incorporated by reference to Exhibit
3.1.1 to the Company's Form 10-K for the year ended December 31,
1990).
</TABLE>
VII-36
<PAGE> 241
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------- ---------
<S> <C> <C>
3.2.1 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the Company's
Registration Statement No. 33-22891 on Form S-11).
3.2.2 Amendment to By-laws of the Company (incorporated by reference to
Exhibit 3.2.1 to Amendment No. 2 to the Company's Registration
Statement No. 33-22891 on Form S-11).
10.1 Purchase Agreement dated as of August 30, 1988 among the Company, RMI
I and RYMAC IV with respect to collateral securing RYMAC IV's Series
7 Bonds (incorporated by reference to Exhibit 10.5 to the Company's
Form 10-Q for the quarter ended September 30, 1988).
10.2 Purchase Agreement dated as of August 30, 1988 among the Company, RMI
I and RYMAC IV with respect to collateral securing RYMAC IV's Series
10 Bonds (incorporated by reference to Exhibit 10.6 to the Company's
Form 10-Q for the quarter ended September 30, 1988).
10.3 Purchase Agreement dated as of August 30, 1988 among the Company, RMI
I and RYMAC IV with respect to collateral securing RYMAC IV's Series
19 Bonds (incorporated by reference to Exhibit 10.7 to the Company's
Form 10-Q for the quarter ended September 30, 1988).
10.4 First Amendment to Purchase Agreements dated as of September 23, 1989
among the Company, RMI I and RYMAC IV (incorporated by reference to
Exhibit 10.27 to the Company's Form 10-Q for the quarter ended March
31, 1989).
10.5 Residual Bond Purchase Agreement dated as of September 30, 1988
between NVR Mortgage L.P. and the Company (incorporated by reference
to Exhibit 10.21 to the Company's Form 10-Q for the quarter ended
September 30, 1988).
20 Notice to stockholders regarding Dividend Reinvestment Plan
(incorporated by reference to Exhibit 21 to the Company's Form 10-K
for the year ended December 31, 1988).
27.1 Financial Data Schedule
99.1 Dividend Reinvestment Plan of the Company (incorporated by reference
to Exhibit 28.1 to the Company's Form 10-K for the year ended
December 31, 1988).
99.2 Dividend Reinvestment Service Agreement dated December 13, 1988
between the Company and Maryland National Bank (incorporated by
reference to Exhibit 28.2 to the Company's Form 10-K for the year
ended December 31, 1988).
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
VII-37
<PAGE> 242
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RYMAC MORTGAGE INVESTMENT CORPORATION
By: /s/ RICHARD R. CONTE
---------------------------------
Richard R. Conte
Chief Executive Officer
Date: March 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ RICHARD R. CONTE Chairman of the Board of Directors, March 20, 1996
- ------------------------------------- Chief Executive Officer and
Richard R. Conte Principal Financial Officer
/s/ EDWARD S. BABBITT, JR. Director March 20, 1996
- -------------------------------------
Edward S. Babbitt, Jr.
/s/ JOSEPH P. BERGHOLD Director March 20, 1996
- -------------------------------------
Joseph P. Berghold
/s/ JAMES C. CHAPLIN, IV Director March 20, 1996
- -------------------------------------
James C. Chaplin, IV
/s/ MALCOLM M. PRINE Director March 20, 1996
- -------------------------------------
Malcolm M. Prine
/s/ RONALD L. TEMPLE Director March 20, 1996
- -------------------------------------
Ronald L. Temple
/s/ HAY WALKER, IV Director March 20, 1996
- -------------------------------------
Hay Walker, IV
</TABLE>
VII-38
<PAGE> 243
ANNEX VIII
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
Or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-10001
RYMAC MORTGAGE INVESTMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 25-1577534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
100 NORTH FOURTH STREET, SUITE 43952
813, STEUBENVILLE, OHIO (Zip Code)
(Address of principal executive
offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 666-6960
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Number of shares of common stock, $.01 par value, outstanding as of August
14, 1996: 5,210,600
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VIII-1
<PAGE> 244
RYMAC MORTGAGE INVESTMENT CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 (unaudited) and
December 31, 1995............................................... 3
Consolidated Statements of Revenues and Expenses (unaudited)
for the three and six months ended June 30, 1996 and 1995....... 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended June 30, 1996 and 1995............................. 5
Notes to Consolidated Financial Statements (unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 10
PART II. OTHER INFORMATION........................................................ 14
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES......................................................................... 15
</TABLE>
VIII-2
<PAGE> 245
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate investments:
Mortgage related investments (note 4)........................ $ -- $ 9,814
Mortgage derivative securities less valuation allowance of
$39 for 1995
(notes 2 and 3)............................................ -- 1,014
Mortgage-backed securities less allowance for unrealized loss
of $128 for 1996 (note 5).................................. 3,252 3,397
-------- --------
3,252 14,225
Cash......................................................... 2,747 1,549
Funds held by trustee........................................ -- 159
Receivables on mortgage related investments.................. -- 370
Receivables on mortgage derivative securities................ -- 45
Other assets................................................. 131 254
-------- --------
$ 6,130 $ 16,602
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 5)............................... $ -- $ 10,114
Accrued interest on funding notes payable.................... -- 146
Other liabilities............................................ 117 127
-------- --------
117 10,387
COMMITMENTS AND CONTINGENCIES (NOTES 2, 3 AND 7)
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share 50,000,000 shares
authorized 5,210,600 issued and outstanding at June 30,
1996,
and December 31, 1995...................................... 52 52
Additional paid-in capital................................... 43,985 43,985
Accumulated Deficit (note 8)................................. (37,896) (37,822)
Unrealized loss on mortgage-backed securities................ (128) --
-------- --------
6,013 6,215
-------- --------
$ 6,130 $ 16,602
======== ========
</TABLE>
See notes to consolidated financial statements.
VIII-3
<PAGE> 246
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES
Interest:
Mortgage related investments............. $ 144 $ 277 $ 369 $ 561
Mortgage derivative securities........... 20 (639) 72 (570)
Provision for investment losses.......... 52 3 35 --
Mortgage-backed securities............... 59 -- 119 --
Temporary investments.................... 28 78 51 165
Net loss on the sale of mortgage related
investments.............................. (202) -- (202) --
Net gain on the sale of mortgage derivative
securities............................... 79 -- 155 --
------ ------ ------ ------
180 (281) 599 156
------ ------ ------ ------
EXPENSES
Interest on funding notes payable........... 142 273 368 558
General and Administrative.................. 138 166 305 322
------ ------ ------ ------
280 439 673 880
------ ------ ------ ------
Net Income (loss) (note 8).................. $ (100) $ (720) $ (74) $ (724)
====== ====== ====== ======
Net Income (loss) per share................. $(0.02) $(0.14) $(0.02) $(0.14)
Weighted average number of common shares
outstanding.............................. 5,211,000 5,211,000 5,211,000 5,211,000
</TABLE>
See notes to consolidated financial statements.
VIII-4
<PAGE> 247
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Operating Activities:
Net Loss (note 7)....................................................... $ (74) $ (724)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of premiums on mortgage derivative securities........... 50 817
Interest accrued and added to funding notes payable.................. -- 152
Decrease in interest receivable on mortgage related investments...... 79 6
Decrease in interest receivable on mortgage derivative securities.... 44 4
Decrease in accrued interest on funding notes payable................ (146) (10)
Gains on sales of investments........................................ (155) --
Decrease in accrued expenses payable................................. (10) (58)
Other, net........................................................... 86 14
-------- ------
Net cash provided by operating activities............................... (126) 201
Investing Activities:
Principal payments on mortgage related investments...................... 10,105 771
Decrease/(increase) in funds held by trustee............................ 159 (6)
Principal payments on funding notes payable............................. (10,114) (908)
Principal payments on mortgage-backed security.......................... 17 --
Principal payments on mortgage derivative securities.................... 4 3
Proceeds from sales of investments...................................... 1,153 --
-------- ------
Net cash used in investing activities................................... 1,324 (140)
Financing Activities:
Dividends paid.......................................................... -- --
-------- ------
Net cash used in financing activities................................... -- --
Net increase in cash...................................................... 1,198 61
Cash at beginning of period............................................... 1,549 4,917
-------- ------
Cash at end of period..................................................... $ 2,747 $4,978
======== ======
Supplemental disclosure of cash flow information:
Interest paid (net of amounts added to funding notes payable)........... $ 515 $ 416
Second quarter dividends declared....................................... $ -- $ --
</TABLE>
See notes to consolidated financial statements.
VIII-5
<PAGE> 248
RYMAC MORTGAGE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share data)
NOTE 1--THE COMPANY
RYMAC Mortgage Investment Corporation ("RMIC") was incorporated in Maryland
on July 1, 1988. RMIC has two wholly-owned subsidiaries, RYMAC Mortgage
Investment I, Inc. ("RMI") and RYMAC Mortgage Investment II, Inc. ("RMII").
RMIC, RMI and RMII are collectively referred to hereafter as the "Company". At
inception, the Company issued 5,420,000 shares of its common stock. During 1990
and 1991, the Company repurchased 209,400 shares of its common stock in
accordance with a stock repurchase program at costs ranging from $6.75 to $7.63
per share.
On May 15, 1996, the Company and Navistar International Transportation
Corp. ("Navistar") announced that they had reached a non-binding agreement in
principle dated May 13, 1996 (the "Agreement in Principle") with respect to the
purchase by the Company (the "Acquisition") of Navistar's Columbus Plastics
Operation ("Columbus Plastics"), which manufactures large sheet molding compound
("SMC") components and is located in Columbus, Ohio.
The obligation of either party to proceed with the Acquisition is subject
to the negotiation and execution by the Company and Navistar of a mutually
acceptable definitive purchase agreement. The Agreement in Principle
contemplated that the parties would work diligently to complete and sign such an
agreement by May 31, 1996. Since the parties have not reached agreement by May
31, 1996, either is free to terminate negotiations by the terms of the Agreement
in Principle. The parties are nonetheless continuing to negotiate the terms of a
possible transaction. In the event an agreement is executed, consummation of the
transaction will be subject to approval by the Board of Directors of each of the
Company and Navistar, approval by the Company's stockholders, and such other
terms and conditions as may be set forth in such purchase agreement. If an
agreement is successfully concluded and all conditions set forth therein are
satisfied, it is expected that the Acquisition will be consummated in fall 1996.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of RMIC and its
wholly-owned subsidiaries RMI and RMII. All intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Mortgage-Backed Securities
Mortgage-Backed Securities have been recorded at the lower of cost or
market and are considered held to maturity. At June 30, 1996, the cost exceeded
the market value by $128. An allowance for unrealized losses and a separate
component of stockholders' equity has been recorded.
Investment Restrictions
In addition to qualifying as a Real Estate Investment Trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code"), the Company's
investment activities are currently restricted by provisions of the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Investment
Company Act specifically exempts entities primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens and interests in
real estate from the definition of an investment company (the "Real Estate
Exception"). Under interpretations issued by the staff of the Securities and
Exchange
VIII-6
<PAGE> 249
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commission, in order to qualify for the Real Estate Exception, the Company must
maintain at least 55% of its assets in mortgage loans or certain other interests
in real estate, and another 25% of its assets in those or certain other types of
real estate related interests.
During 1995, the Company purchased additional assets, specifically
mortgage-backed securities. As such, the Company continues to maintain in excess
of 55% of its assets in mortgage loans or certain other interests in real estate
and, therefore, can continue to rely on the Real Estate Exception to avoid
registration as an investment company under the Investment Company Act.
If the Acquisition described in Note 1 above is consummated, the Company
will no longer be required to rely upon the Real Estate Exception in order to
avoid being subject to the provisions of the Investment Company Act.
Federal Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a result,
the Company generally will not be subject to federal income taxation at the
corporate level to the extent it distributes annually at least 95% of its REIT
taxable income, as defined in the Code, to its stockholders and satisfies
certain other requirements. Accordingly, no provision has been made for income
taxes in the accompanying consolidated financial statements.
If the Acquisition described in Note 1 above is consummated, the Company
will no longer qualify as a REIT and will be taxed as a corporation under
subchapter C of Chapter 1 of the Code.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding during the period.
NOTE 3--MORTGAGE DERIVATIVE SECURITIES
Prior to June 30, 1996, the Company had investments in mortgage derivative
securities, which consisted of (i) a class or classes of collateralized mortgage
obligations ("CMOs") that either represented a regular class of bonds or a
residual class of bonds or (ii) interests in a class or classes of
mortgage-backed pass-through certificates that either represented a regular
class of certificates or a residual class of certificates. For federal income
tax purposes, a majority of the Company's Mortgage Derivative Securities
represented interests in real estate mortgage investment conduits ("REMICs").
CMOs are mortgage-backed bonds which bear interest at a specific predetermined
rate or at a rate which varies according to a specified relationship to a
specific short term interest rate index, such as the London interbank offered
rate for one-month U.S. dollar deposits ("LIBOR").
Most residual bonds are structured so as to entitle the holder to receive a
proportionate share of the excess (if any) of payments received from the
collateral pledged to secure such bonds and the other related classes, together
with the reinvestment income thereon, over amounts required to make debt service
payments on such CMOs and to pay related administrative expenses. In connection
with these investments, the Company acquired no other rights relating to the
collateral pledged to secure its Mortgage
Derivative Securities. Most residual certificates are structured so as to
entitle the Company to receive a specified percentage of the distributions
generated from the pool of assets comprising the trust funds of which the
certificates evidence an interest.
The Company sold its remaining Mortgage Derivative Securities during the
second quarter of 1996 for $785 and recorded a net gain of $79 during the
quarter.
VIII-7
<PAGE> 250
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
NOTE 3--MORTGAGE DERIVATIVE SECURITIES (continued)
During the first quarter, the Company sold one Mortgage Derivative Security
for $368 and recorded a net gain of $76. The proceeds from these sales will be
directed toward the new business activities which the Company is currently
investigating.
NOTE 4--MORTGAGE RELATED INVESTMENTS
Prior to June 30, 1996, the Company maintained a portfolio which included
Mortgage Related Investments, consisting of ownership interests in certain
classes of mortgage-backed securities issued by Ryan Mortgage Acceptance
Corporation IV (as described below).
On September 23, 1988, the Company purchased from Ryan Mortgage Acceptance
Corporation IV ("RYMAC IV") certain GNMA certificates and FNMA certificates and
other collateral owned by RYMAC IV and pledged to secure RYMAC IV's Mortgage
Collateralized Bonds (the "RYMAC IV Bonds"). (See note 6) These Mortgage Related
Investments and other collateral were purchased subject to the lien of the
Indenture between RYMAC IV and the Trustee (the "RYMAC IV Indenture") pursuant
to which the RYMAC IV Bonds were issued and subject to the rights of the Trustee
and the bondholders thereunder. The purchase agreements grant to the Company
certain additional rights with respect to the RYMAC IV Bonds, such as the right,
if any, to substitute collateral, the right to direct the reinvestment of
collateral proceeds and the right to call the related RYMAC IV Bonds. At
December 31, 1995, the Company's Mortgage Related Investments consisted of RYMAC
IV Bonds, Series 7, 10 and 19.
During the second quarter of 1996, the Company sold its ownership rights in
the RYMAC IV Series 7, 10 and 19 Bonds for a net loss of $202. (See note 6)
NOTE 5--MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities have been recorded at the lower of cost or
market. The market value of the Company's Mortgage-Backed Securities were at a
discount to the carrying value at June 30, 1996. An allowance for unrealized
losses was established at March 31, 1996. A separate component of stockholders'
equity has been reduced by $128, accordingly.
NOTE 6--FUNDING NOTES PAYABLE
Funding Notes Payable represented limited recourse notes delivered to RYMAC
IV as partial payment for the purchase of Mortgage Related Investments and other
collateral, and had payment terms the same as the related series of RYMAC IV
Bonds. (See note 4)
Principal and interest payments on the Mortgage Related Investments were
used to make the quarterly payments on the funding notes payable. In addition,
prepayments of the underlying mortgage related investments were passed through
as prepayments of the Funding Notes Payable so that the Funding Notes Payable
could be fully paid prior to their stated maturities.
During the second quarter of 1996, the Company sold its ownership interest
in the RYMAC IV Series 7, 10 and 19 Bonds. As a result of the sale of these
ownership interests, the related liability account, Funding Notes Payable, was
reduced to $0. (See note 4)
NOTE 7--FEDERAL INCOME TAXES AND DISTRIBUTIONS
As described in note 2, the Company has elected to be treated for federal
income tax purposes as a REIT. As such, the Company is required to distribute
annually, in the form of dividends to its stockholders, at least 95% of its
taxable income. Because of the provisions of the Code applicable to the type of
investments made by the Company, in the early years of the life of certain of
the Company's initial investments (particularly
VIII-8
<PAGE> 251
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
NOTE 7--FEDERAL INCOME TAXES AND DISTRIBUTIONS (continued)
investments made in connection with the Company's initial public offering, and
to a lesser degree during 1989) taxable income exceeded net income.
During the later years of such ownership, Net Income will exceed REIT
taxable income. The principal reason for such difference is that the Company
reports income from its portfolio of Mortgage Related Investments and Mortgage
Derivative Securities on the interest method for financial reporting purposes;
however, for income tax purposes, the Company reports its proportionate share of
the difference between interest income generated by the collateral and interest
expense on the CMOs. More recent investments made by the Company and investments
currently available in the market are typically structured so that taxable
income and Net Income are similar during each reporting period. Over the life of
a particular investment or security, taxable income and Net Income will be
equal. In reporting periods where taxable income exceeds Net Income,
stockholders' equity will be reduced by the amount of dividends in excess of Net
Income in such period and will be increased by the excess of Net Income over
dividends in future reporting periods.
During the first and second quarter of 1996, no dividend distributions were
made. The Company's taxable losses through 1995 aggregate to approximately $36
million. Under the Code, a REIT must generally distribute its excess inclusion
income to its stockholders even though it has other losses or deductions
exceeding such excess inclusion income. Accordingly, if the Company were to
report future excess inclusion income, it may elect to distribute such excess
inclusion income as dividends even though it has an estimated tax loss
carryforward approximating $36 million, including approximately $5 million in
capital loss carryforwards. The tax losses can be carried forward to offset
future income of the Company.
If the Acquisition described in Note 1 above is consummated, the Company
will no longer qualify as a REIT and will be taxed as a corporation under
subchapter C of Chapter 1 of the Code.
NOTE 8--RELATED PARTY TRANSACTIONS
Pursuant to the Purchase Agreements between the Company and RYMAC IV (see
note 4), $15 has been withheld from amounts released from the lien of the RYMAC
IV Indenture, retained by RYMAC IV and deposited in escrow to be used for
payment of expenses of the CMOs secured by certain of the Mortgage Related
Investments purchased by the Company. In addition, during the quarter ended June
30, 1996, the Company incurred $7 of CMO administration fees which were paid to
RYMAC IV under the terms of the Purchase Agreements.
NOTE 9--EMPLOYEE BENEFITS
The Company's Board of Directors has established a Salary
Reduction-Simplified Employee Pension Program ("SAR-SEP") for its full-time
employees. A SAR-SEP is a minimal administration 408-K Plan (similar to a 401-K)
for companies with fewer than 25 employees.
For 1996, the Company has established a minimum contribution of 3% of gross
compensation. Company contributions to the plan may vary and the Company is not
required to continue the program. Employee contributions are based upon
established formulas under the Employee Retirement Income Security Act ("ERISA")
rules governing 408-K Plans.
The Unaffiliated Directors adopted an incentive stock option program during
1994 for the Company's two Officers and Affiliated Director. Under the Stock
Option Program, options on 260,000 shares of the Company's Common Stock were
awarded at market prices, exercisable over ten year periods ending May 2005. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and, accordingly, recognizes no
compensation expense for the stock option grants. In addition, a salary
continuance program was provided to the Company's officers, allowing for up to
one year's base salary following the consummation of a business combination.
VIII-9
<PAGE> 252
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On May 15, 1996, RYMAC Mortgage Investment Corporation (the "Company") and
Navistar International Transportation Corp. ("Navistar"), the principal
operating subsidiary of Navistar International Corporation, announced that they
had reached a non-binding agreement in principle dated May 13, 1996 (the
"Agreement in Principle") with respect to the purchase by the Company (the
"Acquisition") of Navistar's Columbus Plastics Operation, which manufactures
large sheet molding compound components and is located in Columbus, Ohio. A copy
of the Agreement in Principle was filed with the Securities and Exchange
Commission by the Company on May 22, 1996 as an exhibit to a Current Report on
Form 8-K.
The obligation of either party to proceed with the Acquisition is subject
to the execution by the Company and Navistar of a mutually acceptable definitive
purchase agreement. The Agreement in Principle contemplated that the parties
would work diligently to complete and sign such an agreement by May 31, 1996.
Since the parties have not reached agreement by May 31, 1996, either is free to
terminate negotiations by the terms of the Agreement in Principle. The parties
are nonetheless continuing to negotiate the terms of a possible transaction.
It is currently contemplated that the consideration for the Acquisition
would consist of newly issued common stock of the Company and a promissory note
of the Company, together with certain contingent payments to Navistar should the
Company's earnings exceed certain preestablished levels. It is further
contemplated that Navistar would become the Company's largest stockholder and
have substantial representation on the Company's board of directors. The Company
would further expect to enter into a long-term supply contract with Navistar to
supply fiberglass reinforced plastic parts for Navistar's truck assembly
business.
In the event a definitive agreement is executed, consummation of the
transaction would be subject to approval by the Board of Directors of each of
the Company and Navistar, approval by the Company's stockholders, and such other
terms and conditions as may be set forth in a purchase agreement. If an
agreement is executed and all conditions set forth therein are satisfied, the
Company presently anticipates that the Acquisition would be consummated in fall
1996.
If the Company is unsuccessful in concluding the Acquisition described
above, it may elect to continue to seek a suitable candidate with which to
effect a business combination or, alternatively to begin to develop an
investment portfolio of financial assets as a means of increasing value to
stockholders. A decision to pursue such alternative investment activity would be
subject to the Company's financial position as well as general economic and
financial market conditions prevailing at such time.
The Company and its financial advisor continue to believe that the future
potential earnings and value building aspects of utilizing its assets in a
successful business combination outweigh those of rebuilding an investment
portfolio containing lower-risk assets than those previously composing the
Company's investment portfolio.
In anticipation of an acquisition of Columbus Plastics, the Company sold
the majority of its remaining mortgage assets during the second quarter of 1996.
(See Results of Operations)
DIVIDEND POLICY
In accordance with the Code, the Company is required to distribute at least
95% of its taxable income to its stockholders each year in order to maintain its
status as a REIT. Dividends paid for a fiscal year in excess of the Company's
taxable income are reported as a return of capital to the Company's
stockholders, except as provided below.
Historically, some of the Company's investments constituted REMIC residual
interests. Certain of these residual interests may produce "excess inclusion"
income during the fiscal year. The Code requires that excess inclusion income be
included in a taxpayer's income even though the taxpayer has current or prior
losses that would otherwise offset such income. As a result, the Company could
have taxable income from excess inclusions in a taxable year even though it has
current or prior losses from other investments that would
VIII-10
<PAGE> 253
normally be sufficient to offset the amount of such excess inclusion income. The
Company is required to distribute the taxable income representing excess
inclusions to meet its 95% distribution requirement and to avoid a corporate
level tax on such income. When such income is distributed to a stockholder, the
stockholder will have taxable income, rather than a return of capital, equal to
its share of such excess inclusion income during the fiscal year. For a
stockholder, generally, excess inclusion income cannot be offset by losses.
For the tax year ended December 31, 1995, the Company paid a dividend of
$0.003 per share on September 29, 1995 to stockholders of record on September
20, 1995. This 1995 dividend was the result of excess inclusion income and is
reportable by stockholders as taxable income for 1995. The Company paid no
dividend for the first or second quarters of 1996.
If the Acquisition described in note 1 to the Company's Consolidated
Financial Statements and "Recent Developments" is consummated, the Company will
no longer qualify as a REIT and will be taxed as a corporation under subchapter
C of Chapter 1 of the Code. As a result, the Company will no longer be entitled
to any deduction for dividends paid to stockholders. No assurances can be given
as to the dividends, if any, that may be declared by the Board of Directors of
the Company following such Acquisition.
RESULTS OF OPERATIONS
The Company's Net Loss declined from $724,000 for the six month period
ended June 30, 1995 to a Net Loss of $74,000 for the six month period ended June
30, 1996, a decrease of $650,000. This decline is attributable to the Company's
incurring $700,000 in asset valuation writedowns during the 1995 period while no
writedowns were required for the first six months of 1996, offset in part by the
existence of a net loss from the sale of assets of $47,000 in 1996's period as
compared to no such loss in the 1995 period.
Without the net loss recorded from the sale of assets in 1996's first half,
the Company's loss for such period would have been reduced to $27,000.
STATEMENT OF REVENUES AND EXPENSES
Net Income (loss), as calculated in accordance with GAAP and as presented
in the accompanying consolidated financial statements, was $(74,000), or $(0.02)
per share, for the six months ended June 30, 1996 as compared with $(724,000),
or $(0.14) per share, for the six months ended June 30, 1995, and $(100,000), or
$(0.02) per share, for the three months ended June 30, 1996 as compared to
$(720,000), or $(0.14) per share, for the three months ended June 30, 1995.
Interest revenue on Mortgage Related Investments decreased from $561,000
for the six months ended June 30, 1995 to $369,000 for the six months ended June
30, 1996, as a result of the reduction in Mortgage Related Investments on the
Company's Balance Sheet, which decreased from an average outstanding of
$11,912,000 during 1995's first six months to an average outstanding of
$4,907,000 during the first six months of 1996. Interest revenue on Mortgage
Derivative Securities was $(570,000) for the six months ended June 30, 1995 as
compared to $72,000 for the six months ended June 30, 1996. This $642,000
increase in interest revenue was the result of the valuation writedown of assets
equal to $700,000 in 1995's second quarter as compared with no such writedown in
the first half of 1996. Such writedowns are reflected as a decrease to interest
revenues on Mortgage Derivative Securities during the period incurred.
Income from Temporary investments decreased from $165,000 for the six
months ended June 30, 1995 to $51,000 for the six months ended June 30, 1996 due
to the Company's purchase of one 7% FNMA guaranteed 30-year single family
mortgage pool of which the Company maintains 100% ownership since 1995's fourth
quarter. This Mortgage-Backed Security carried as a separate investment category
produced $119,000 of interest revenues during the 1996 period.
In anticipation of the transaction with Navistar described in note 1 to the
Company's Consolidated Financial Statements and "Recent Developments", the
Company sold during the March-June 1996 time period all of its remaining
Mortgage Related Investments and Mortgage Derivative Securities. Nine Mortgage
Derivative Securities were sold for net cash proceeds of $1,153,000,
representing prices that exceeded the Company's carrying value by $155,000 and
was recognized as a gain during the 1996 period. Also, the Company sold its
ownership interests (including early redemption rights) in its three remaining
Mortgage
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Related Investments (RYMAC IV, Series 7, 10 and 19). The sale transaction
relating to the RYMAC IV assets included the Company's transfer of the future
obligation for payment of quarterly administrative costs to the purchaser. Such
administrative costs approximated $12,500 per annum over the next five and
one-half years. The sale of the Company's ownership rights, including ongoing
administrative costs, in its Mortgage Related Investments resulted in the
Company recording a loss on such transaction of $202,000 during the 1996 period.
The Company also recognized $35,000 in revenues during the 1996 period
reflecting the reversal of a provision for future losses on Mortgage Derivative
Securities that was no longer necessary given the sale of the Company's
remaining assets carried in this category.
Interest expense on Funding Notes Payable decreased from $558,000 to
$368,000 for the six months ended June 30, 1995 and 1996, respectively, as a
result of the substantial offsetting balance sheet decline of Funding Notes
Payable, which decreased from average outstandings of $12,160,000 to $5,057,000
for the six months ended June 30, 1995 and 1996, respectively. General and
Administrative expenses decreased slightly from $322,000 for 1995's first six
months to $305,000 in 1996's first six months as the Company maintained a
minimal staff while continuing its efforts to identify and conclude a business
combination.
BALANCE SHEET
The Company's assets declined by $10,472,000 during the six month period
ended June 30, 1996, dropping from $16,602,000 to a total of $6,130,000 at June
30, 1996. This decrease is attributable to the Company's sale of its remaining
Mortgage Related Investments and Mortgage Derivative Securities during the six
month period ended June 30, 1996 and, to a minor extent, reductions resulting
from principal payments on the mortgage collateral underlying the Company's
Mortgage Related Investments and amortization of the cost basis in its Mortgage
Derivative Securities.
Concurrently, Funds Held by Trustee and Receivables on both Mortgage
Related Investments and Mortgage Derivative Securities decreased from $159,000
and $415,000, respectively at December 31, 1995 to $0 in both categories at June
30, 1996, as both of these assets categories were associated with the sale of
the Company's remaining Mortgage Related and Mortgage Derivative holdings.
The sale of Mortgage Related Investments caused the related liability
account, Funding Notes Payable, to decrease from $10,114,000 to $0, between
December 31, 1995 and June 30, 1996.
The two liability accounts, Accrued Interest on Funding Notes Payable and
Other Liabilities, decreased in total by $156,000, primarily reflecting the sale
of the corresponding liability account, Funding Notes Payable, related to the
sale of Mortgage Related Investments described above.
The Company's Accumulated Deficit increased slightly from $(37,822,000) at
December 31, 1995 to $(37,896,000) at June 30, 1996 due to the Net Loss incurred
for the period of $74,000. Additionally, the Company's net worth was negatively
affected by the GAAP requirement to carry a valuation account, Unrealized Loss
on Mortgage-Backed Securities, for the Company's Mortgage-Backed Securities,
valuing the asset at the lower of cost or market. This Unrealized Loss of
$128,000 reflects the loss that would have been recognized if the Company had
elected to sell its entire Mortgage-Backed Securities holding at June 30, 1996.
EXPENSES AND USE OF BORROWED FUNDS
Operating expenses, "General and Administrative", were $322,000 for the six
months ended June 30, 1995 versus $305,000 for the six months ended June 30,
1996. These low expense levels are reflective of the Company's minimal staffing
and cost reduction efforts while continuing its efforts to conclude a business
combination.
The Company has had no borrowings since November 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
At both December 31, 1995 and June 30, 1996, the total amount borrowed by
the Company was $0. The Company is subject to a limitation on the amount of
total borrowings of $25,000,000 pursuant to a policy
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<PAGE> 255
adopted by its Board of Directors in March 1992, although such amount is
substantially in excess of amounts that could currently be borrowed by the
Company.
All of the Company's remaining Mortgage-Backed Securities are available to
secure future borrowings. The Company estimates that either the approximate
$3,000,000 in borrowing value or $3,300,000 from the current market sale value
of the Company's Mortgage-Backed Securities in conjunction with its cash
reserves of approximately $2,700,000, currently held in high quality short-term
instruments, provide the Company with sufficient liquidity with which to pursue
its proposed business activities. (See "Recent Developments")
If the Acquisition described in note 1 to the Company's Consolidated
Financial Statements and "Recent Developments" above is consummated, additional
liquidity to fund working capital requirements of the Company will be needed.
The Company intends to seek additional working capital funding prior to the
consummation of the Acquisition in order to fund such requirements. No
assurances can be given that the Company will be successful in obtaining such
funding.
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<PAGE> 256
PART II OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included as part of this Form 10-Q.
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K was filed during the second quarter of 1996 on May 22, 1996, reflecting
"Item 5--Other Events" as the Company announced an Agreement in Principle regarding
the potential acquisition of the Columbus Plastics Operation of Navistar
International Transportation Corp.
</TABLE>
VIII-14
<PAGE> 257
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RYMAC MORTGAGE INVESTMENT CORPORATION
By: /s/ RICHARD R. CONTE
-----------------------
Richard R. Conte
Chairman of the Board, Chief
Executive Officer and Principal
Financial Officer
Dated: August 14, 1996
VIII-15
<PAGE> 258
RYMAC MORTGAGE INVESTMENT CORPORATION
This Proxy is solicited on behalf of the Board of Directors of RYMAC
Mortgage Investment Corporation.
The undersigned hereby appoints Richard R. Conte and Malcolm M. Prine,
or any one of them, proxies with full power of substitution to vote at the
Special Meeting of Stockholders of RYMAC Mortgage Investment Corporation
to be held on December 19, 1996, and any adjournments or postponements
thereof, as follows:
1. Proposal to approve (a) the terms and conditions of an Asset Purchase
Agreement between Navistar International Transportation Corp. and RYMAC
Mortgage Investment Corporation (the "Company"), dated as of September 12,
1996, as amended (the "Asset Purchase Agreement"), pursuant to which RYMAC
Mortgage Investment Corporation will acquire the assets, properties and
business, subject to the assumption of certain liabilities, of the
Columbus Plastics Operation of Navistar International Transportation Corp.
and (b) the issuance to Navistar International Transportation Corp. of
4,264,000 shares of common stock of Core Materials Corporation, a Delaware
corporation which is a wholly-owned subsidiary of the Company, which
amount is subject to adjustment pursuant to the provisions of the Asset
Purchase Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal to approve and adopt an Agreement and Plan of Merger between
the Company and Core Materials Corporation, a Delaware corporation and a
wholly-owned subsidiary of the Company, (the "Merger Agreement") pursuant
to which (a) the Company would be merged with and into Core Materials
Corporation, with Core Materials Corporation continuing as the surviving
corporation and (b) each outstanding share of Common Stock of the Company
would be automatically converted into the right to receive one share of
common stock of Core Materials Corporation.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
When properly executed, this Proxy will be voted in the manner
directed above. If no direction is made, it will be voted FOR approval and
adoption of the Asset Purchase Agreement and the Merger Agreement.
Discretionary authority is hereby conferred as to any other matters as
may properly come before the meeting. The undersigned acknowledges receipt
of the Notice of Special Meeting of Stockholders and the Proxy Statement
(with all enclosures and attachments) dated November 8, 1996. The
undersigned ratifies all that the proxies or any of them or their
substitutes may lawfully do or cause to be done by virtue hereof and
revokes all former proxies.
DATED:......................................., 1996
...................................................
Signature
...................................................
Signature if held jointly
Please sign this proxy exactly as your name(s)
appears below. If the stock is registered in the
names of two or more persons, each must sign.
Executors, administrators, trustees, guardians,
attorneys and corporate officers should add their
titles.
IMPORTANT: PLEASE MARK, DATE, SIGN AND RETURN
THIS PROXY IN THE ENVELOPE PROVIDED. NO POSTAGE
IS REQUIRED IF MAILED IN THE UNITED STATES.
