<PAGE>
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- --------------------------------------------------------------------------------
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY
STATEMENT
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:
[X] Preliminary proxy statement
[_] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
KETEMA, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
KETEMA, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of filing fee (Check the appropriate box):
[_] $125 per Exchange Act Rule 0-11(c)(l)(ii), 14a-6(i)(l), or 14a-6(j)(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, $1.00 par value per share
(2) Aggregate number of securities to which transactions applies: 3,538,394
shares of Common Stock/1/
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $15.00
(4) Proposed maximum aggregate value of transaction/2/: $46,837,920.00
[_]Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: ____________
(2) Form, schedule or registration statement no.: ____________
(3) Filing party: ____________
(4) Date filed: ____________
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/1/Includes shares held by the Acquiring Group (as defined in the attached
Proxy Statement).
/2/For purposes of calculating the filing fee only. This amount is based upon
the purchase of 3,122,528 shares of Common Stock of the Registrant at a
price of $15.00 in cash per share. The amount of the filing fee, calculated
in accordance with Exchange Act Rule O-11(c)(1), equals 1/50th of one
percent of the proposed cash payment to the holders of the Common Stock. A
fee of $9,367.59 was paid in connection with the initial filing of the
attached preliminary proxy materials on August 2, 1994.
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<PAGE>
EXPLANATORY NOTE
For purposes of the attached Proxy Statement, it was assumed that, prior to
the record date for the Special Meeting, (i) members of the Acquiring Group (as
defined in the Proxy Statement) shall convert in the aggregate approximately
$6,975,000 principal amount of Debentures (as defined in the Proxy Statement)
into an aggregate of approximately 447,689 Preferred Shares (as defined in the
Proxy Statement), (ii) Hugh H. Williamson, III, President and Chief Executive
Officer of the Company and a member of the Acquiring Group, shall convert
$500,000 principal amount of 8% Convertible Subordinated Debentures due 2003,
which were issued to Mr. Williamson by the Company in a private placement on
June 24, 1992, into approximately 48,192 Common Shares (as defined in the Proxy
Statement), and (iii) none of the remaining Debentures shall be converted into
Preferred Shares or Common Shares.
<PAGE>
PRELIMINARY COPY DATED SEPTEMBER 29, 1994
KETEMA, INC.
SUITE 600
ONE CHERRY CENTER
501 SOUTH CHERRY STREET
DENVER, COLORADO 80222
, 1994
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
(including any adjournment or postponement thereof, the "Special Meeting") of
Ketema, Inc. (the "Company") to be held at , New York, New York on , ,
1994 at , local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of June 21, 1994, among the Company, KTM Holdings Corp.,
a Delaware corporation ("Holdings Corp."), and KTM Acquisition Corp., a
Delaware corporation ("Acquisition Corp.") and a wholly-owned subsidiary of
Holdings Corp., pursuant to which Acquisition Corp. will be merged (the
"Merger") with and into the Company, with the Company continuing as the
surviving corporation. Holdings Corp. and Acquisition Corp. were organized by
certain clients of American Securities BD Co., L.P. (the "American Securities
Group") who, together with Hugh H. Williamson, III, President and Chief
Executive Officer of the Company (collectively, the "Acquiring Group"), are the
proponents of the Merger. The members of the Acquiring Group are the beneficial
owners of an aggregate of approximately 21.66% of the Company's outstanding
voting stock (exclusive of shares held as fiduciaries for persons or entities
who are not proponents of the Merger and shares issuable upon exercise of
employee stock options held by Mr. Williamson).
Pursuant to the terms of the Merger Agreement, all stockholders of the
Company, other than Holdings Corp., Acquisition Corp. and those stockholders
who choose to exercise their dissenters' rights, will be entitled to receive
$15.00 per share in cash in exchange for each share of the Company's common
stock, par value $1.00 per share, together with a right (a "Right") associated
therewith entitling the holder thereof to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock of the Company (each such
share and associated Right being referred to herein as a "Common Share" and
collectively, the "Common Shares"), held by them at the effective time of the
Merger. Members of the Acquiring Group have entered into agreements to vote all
of their Common Shares and shares of the Company's 7% Cumulative Convertible
Voting Preferred Stock (the "Preferred Shares") in favor of the Merger
Agreement and have agreed to contribute or cause to be contributed to
Acquisition Corp. prior to the effective time of the Merger a sufficient number
of their Common Shares and Preferred Shares (valued on the basis of $15.00 per
Common Share and the redemption price of Preferred Shares) which, together with
any cash contributed by the Acquiring Group and cash contributed by third party
investors, will result in Acquisition Corp. having contributed equity of not
less than $15 million.
Following the Merger, all of the capital stock of the Company will be held by
Holdings Corp. and the present holders of the Common Shares (other than
Holdings Corp., Acquisition Corp. or members of the Acquiring Group) will no
longer have any equity interest in the Company. If the Merger is approved and
consummated, each of the Company's public stockholders (other than those who
pursue appraisal rights as described in the accompanying Proxy Statement) will
have the right to receive $15.00 in cash for each Common Share held. Therefore,
following the Merger, the members of the Acquiring Group, together with one or
more third party investors, will become, indirectly through Holdings Corp., in
exchange for the $15 million of contributed equity to Acquisition Corp.
discussed above, the sole owners of all of the capital stock
<PAGE>
of the Company. Thus, they will be the sole beneficiaries of any future
earnings and growth of the Company and will have the ability to benefit from
any divestitures, strategic acquisitions or other corporate opportunities that
may be pursued by the Company in the future.
The Company's Board of Directors appointed a Special Committee, consisting of
the two directors of the Company who are not employees of the Company and who
are not affiliated with the Acquiring Group. The Special Committee has, among
other things, reviewed and considered the proposed Merger. In connection with
its review and consideration of the proposed Merger, the Special Committee
retained Bear, Stearns & Co. Inc. to act as its financial advisor. The
Company's Board of Directors and the Special Committee have unanimously
approved the Merger as being in the best interests of the Company and the
stockholders of the Company who are not affiliated with the Acquiring Group.
Accordingly, the Company's Board of Directors and the Special Committee
recommend that you vote FOR adoption of the Merger Agreement.
Attached is a Notice of Special Meeting of Stockholders and a Proxy Statement
containing a discussion of the Merger. We urge you to read this material
carefully. Your vote is important. Whether or not you plan to attend the
Special Meeting, please complete, sign and date the accompanying proxy card and
return it in the enclosed prepaid envelope as soon as possible. If you attend
the Special Meeting, you may vote in person if you wish, even if you have
previously returned your proxy card. Your prompt cooperation will be greatly
appreciated.
Very truly yours,
HUGH H. WILLIAMSON, III
President and Chief Executive
Officer
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
KETEMA, INC.
SUITE 600
ONE CHERRY CENTER
501 SOUTH CHERRY STREET
DENVER, COLORADO 80222
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1994
To the Stockholders of Ketema, Inc.
A Special Meeting of Stockholders (the "Special Meeting") of Ketema, Inc.
(the "Company") will be held at , New York, New York on , , 1994 at
, local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of June 21, 1994 (the "Merger
Agreement"), among the Company, KTM Holdings Corp. ("Holdings Corp."), a
Delaware corporation, and KTM Acquisition Corp. ("Acquisition Corp."), a
Delaware corporation and a wholly-owned subsidiary of Holdings Corp.,
pursuant to which, among other things, (a) Acquisition Corp. will be merged
(the "Merger") into the Company with the Company being the surviving
corporation (the "Surviving Corporation") and the separate existence of
Acquisition Corp. will cease, (b) each outstanding share of common stock,
par value $1.00 per share, together with a right (a "Right") associated
therewith entitling the holder thereof to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock of the Company (each
such share and associated Right being referred to herein as a "Common
Share" and collectively, the "Common Shares") of the Company (except Common
Shares held by the Company as treasury stock or owned by Holdings Corp.
and/or Acquisition Corp. or by persons who perfect their dissenters' rights
under Delaware law) will be converted into the right to receive $15.00 in
cash, without interest, (c) each outstanding Common Share owned by Holdings
Corp. and/or Acquisition Corp. or held by the Company as treasury stock
will be cancelled without consideration, (d) each outstanding share of 7%
Cumulative Convertible Voting Preferred Stock, par value $1.00 per share
(the "Preferred Shares"), of the Company owned by Holdings Corp. and/or
Acquisition Corp. will be cancelled without consideration, and (e) each
outstanding share of Acquisition Corp. common stock will be converted into
one share of common stock of the Surviving Corporation; and
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
A copy of the Merger Agreement is included as Annex A to the accompanying
Proxy Statement. Only holders of record of Common Shares and Preferred Shares
(collectively, the "Voting Shares") at the close of business on October 14,
1994, the record date for the Special Meeting, will be entitled to notice of
and to vote at the Special Meeting and at any adjournment or postponement
thereof.
If the Merger is consummated, holders of Common Shares who do not vote in
favor of the Merger Agreement and who perfect their statutory appraisal rights
under Section 262 of the Delaware General Corporation Law ("DGCL") will have
the right to seek appraisal of their Common Shares. See "DISSENTERS' RIGHTS" in
the accompanying Proxy Statement for a statement of the rights of such
stockholders and a description of the procedures required to be followed by
stockholders to obtain appraisal of their Common Shares. A copy of Section 262
of the DGCL is attached as Annex B to the accompanying Proxy Statement.
<PAGE>
Stockholders of the Company are cordially invited to attend the Special
Meeting. To assure that your interest will be represented regardless of whether
you plan to attend the Special Meeting in person, please complete, date and
sign the enclosed proxy card and return it promptly in the enclosed, postage
paid return envelope. Your proxy may be revoked in the manner described in the
accompanying Proxy Statement at any time before it has been voted at the
Special Meeting.
YOUR VOTE IS IMPORTANT. PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY
PROMPTLY, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING. PLEASE DO NOT
SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
By order of the Company's Board of
Directors,
Robert L. Welty
Secretary
<PAGE>
KETEMA, INC.
SUITE 600
ONE CHERRY CENTER
501 SOUTH CHERRY STREET
DENVER, COLORADO 80222
----------------
PROXY STATEMENT
----------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1994
----------------
INTRODUCTION
This Proxy Statement is being furnished to the holders of common stock, $1.00
par value per share (together with a right (a "Right") associated therewith
entitling the holder thereof to purchase one one-hundredth of a share of Series
A Junior Participating Preferred Stock of the Company (each such share and
associated Right being referred to herein as a "Common Share" and collectively,
the "Common Shares")), and 7% Cumulative Convertible Voting Preferred Stock,
$1.00 par value per share (the "Preferred Shares" and, together with the Common
Shares, the "Voting Shares"), of Ketema, Inc., a Delaware corporation (the
"Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company for use at a special meeting of the stockholders of
the Company to be held on , , 1994, at , New York, New York at ,
local time, and at any adjournment or postponement thereof (the "Special
Meeting"). This Proxy Statement and the attached Notice of Special Meeting of
Stockholders and the proxy card are first being mailed to stockholders of the
Company on or about , 1994.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of the Company will consider and
vote upon a proposal to approve and adopt an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of June 21, 1994, among the Company, KTM Holdings
Corp. ("Holdings Corp."), a Delaware corporation, and KTM Acquisition Corp.
("Acquisition Corp."), a Delaware corporation and a wholly-owned subsidiary of
Holdings Corp. Holdings Corp. and Acquisition Corp. were recently organized by
certain persons (the "American Securities Group") who are clients of American
Securities BD Co., L.P. ("American Securities") (formerly known as American
Securities Partners, L.P. and the successor to American Securities
Corporation).
The Merger Agreement provides, subject to the approval of stockholders at the
Special Meeting, for the merger (the "Merger") of Acquisition Corp. into the
Company, with the Company being the surviving corporation (the "Surviving
Corporation"). Following the Merger, the Company would be a wholly-owned
subsidiary of Holdings Corp. Pursuant to the Merger, (i) each outstanding
Common Share, other than Common Shares held by the Company as treasury stock,
owned by Holdings Corp. and/or Acquisition Corp. or owned by stockholders who
do not vote in favor of the Merger Agreement and who perfect their appraisal
rights under Section 262 of the General Corporation Law of the State of
Delaware (the "DGCL"), will be converted into the right to receive $15.00 per
share in cash, without interest (the "Merger Consideration"), (ii) each
outstanding Common Share owned by Holdings Corp. and/or Acquisition Corp. or
held by the Company as treasury stock will be cancelled without consideration,
(iii) each outstanding Preferred Share owned by Holdings Corp. and/or
Acquisition Corp. will be cancelled without consideration and (iv) each
outstanding share of Acquisition Corp. common stock, $.01 par value per share,
will be converted into one share of common stock of the Surviving Corporation.
A copy of the Merger Agreement is attached as Annex A to this Proxy Statement.
Holdings Corp. and Acquisition Corp. were organized by the American
Securities Group for the purpose of enabling the American Securities Group and
Hugh H. Williamson, III, President and Chief Executive Officer of the Company
(collectively, the "Acquiring Group"), together with one or more third party
<PAGE>
investors, to acquire pursuant to the Merger Agreement the entire equity
interest in the Company. As a result of the Merger, stockholders of the Company
who are not members of the Acquiring Group will no longer have any equity
interest in the Company. Members of the Acquiring Group, who are the beneficial
owners of an aggregate of approximately 21.66% of the outstanding Voting Shares
(exclusive of Common Shares held as fiduciaries for persons or entities who are
not proponents of the Merger, and Common Shares issuable upon exercise of
employee stock options held by Mr. Williamson), have agreed to contribute or
cause to be contributed to Acquisition Corp. prior to the Effective Time of the
Merger a sufficient number of their Voting Shares (valued on the basis of
$15.00 per Common Share and the redemption price of Preferred Shares) which,
together with any cash contributed by the Acquiring Group and cash contributed
by third party investors, will result in Acquisition Corp. having contributed
equity of not less than $15 million. Under the terms of the Merger Agreement,
all of the Voting Shares so contributed to Acquisition Corp. will be cancelled,
without consideration, upon consummation of the Merger. Members of the
Acquiring Group have entered into agreements to vote all of the Voting Shares
held by them in favor of the Merger Agreement. See "INTRODUCTION--Voting
Rights; Votes Required for Approval" and "SPECIAL FACTORS--Purpose and
Structure of the Merger."
Equity interests in Holdings Corp. will be held directly or indirectly by Mr.
Williamson and indirectly by the members of the American Securities Group
through KTM Partners, L.P., a New York limited partnership ("KTM Partners"),
which was organized by the members of the American Securities Group to hold
their equity interests in Holdings Corp. Equity interests in Holdings Corp.
will also be held directly or indirectly by one or more third party investors.
See "SPECIAL FACTORS--Purpose and Structure of the Merger."
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Board of Directors of the Company has fixed the close of business on
October 14, 1994 (the "Record Date") as the date for the determination of
stockholders entitled to notice of and to vote at the Special Meeting and any
adjournment or postponement thereof. Accordingly, only holders of record of
Voting Shares at the close of business on that date will be entitled to notice
of and to vote at the Special Meeting. At the close of business on the Record
Date, there were [3,538,394] Common Shares (held by stockholders of record)
and [447,689] Preferred Shares outstanding and entitled to vote at the Special
Meeting. All of such Preferred Shares were beneficially owned by certain
members of the Acquiring Group.
Each holder of record of Voting Shares on the Record Date is entitled to cast
one vote per share in person or by proxy at the Special Meeting and any
adjournment or postponement thereof, with the Common Shares and Preferred
Shares voting together as a single class. The presence, in person or by proxy,
at the Special Meeting of the holders of a majority of the total outstanding
Voting Shares entitled to vote is necessary to constitute a quorum at the
Special Meeting. Abstentions and broker non-votes (where a broker or other
record holder submits a proxy but does not have authority to vote a customer's
Voting Shares) will be considered present for purposes of establishing a
quorum.
Under the DGCL, the Merger Agreement must be approved by the holders of at
least a majority of the outstanding Voting Shares. Pursuant to the terms of the
Merger Agreement, members of the Acquiring Group who as of the Record Date were
the beneficial owners in the aggregate of approximately 876,167 Voting Shares
entitled to vote at the Special Meeting (including approximately 12,612
outstanding Common Shares held as fiduciaries for persons or entities who are
not proponents of the Merger), representing approximately 21.98% of the
outstanding Voting Shares, have entered into agreements to vote in favor of the
Merger Agreement. In addition to the members of the American Securities Group,
other clients of American Securities owned beneficially as of the Record Date
approximately 121,388 outstanding Common Shares, constituting approximately
3.05% of the outstanding Voting Shares entitled to vote at the Special Meeting,
and approximately 71,374 Common Shares issuable upon conversion of Debentures.
Holders of Common Shares who do not vote in favor of, or who abstain from
voting on, the Merger Agreement and who comply with the provisions of Section
262 of the DGCL will have the right to receive cash payment for the "fair
value" of their Common Shares. Any stockholder contemplating the exercise of
dissenters' rights should carefully review Section 262 of the DGCL,
particularly the procedural steps required to perfect dissenters' rights, a
description of which is provided under "DISSENTERS' RIGHTS." A
ii
<PAGE>
stockholder who fails to comply with such procedural requirements will lose
such holder's dissenter's rights and will receive the Merger Consideration for
the Common Shares held by such stockholder. See "DISSENTERS' RIGHTS" and Annex
B, "Section 262 of the Delaware General Corporation Law."
PROXIES
All Voting Shares represented by properly executed proxies received prior to
or at the Special Meeting and not revoked will be voted in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
proxies will be voted FOR the proposal to approve and adopt the Merger
Agreement and, in the discretion of the persons named in the proxy, on such
other matters as may properly be presented at the Special Meeting. Abstentions
and broker non-votes will have the effect of a vote against the Merger
Agreement.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated and signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
The cost of solicitation of proxies will be paid by the Company. In addition
to solicitation by mail, directors, officers and regular employees of the
Company may solicit proxies by telephone, telegram or by personal interviews.
Such persons will receive no additional compensation for such services. The
Company will reimburse brokers and certain other persons for their charges and
expenses in forwarding proxy material to the beneficial owners of Voting Shares
held of record by such persons. [In addition, the Company has retained to
assist in soliciting proxies and to provide proxy materials to banks, brokerage
firms, nominees, fiduciaries and other custodians. For such services, the
Company will pay to a fee of approximately $ plus expenses.]
All information appearing in this Proxy Statement concerning the Company has
been supplied by the Company, and all information appearing in this Proxy
Statement concerning Holdings Corp., Acquisition Corp. and the Acquiring Group
has been supplied by Holdings Corp., Acquisition Corp. and the Acquiring Group,
respectively.
The date of this Proxy Statement is , 1994.
AVAILABLE INFORMATION
The Company, Holdings Corp. and Acquisition Corp. have filed with the
Securities and Exchange Commission (the "Commission") a Rule 13e-3 Transaction
Statement (including any amendments thereto, the "Schedule 13E-3") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect
to the Merger. This Proxy Statement does not contain all the information set
forth in the Schedule 13E-3 and the exhibits thereto, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission.
The Schedule 13E-3 and the respective exhibits thereto, as well as such
reports, proxy statements and other information filed by the Company, can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Suite 1300, Seven World Trade Center, New
York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be
obtained at prescribed rates from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Common Shares are traded on the American Stock Exchange (the "AMEX") and
certain of the Company's reports, proxy materials and other information are
available for inspection at the offices of the AMEX, 86 Trinity Place, New
York, New York 10006.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INTRODUCTION.............................................................. i
Proposal to be Considered at the Special Meeting........................ i
Voting Rights; Votes Required for Approval.............................. ii
Proxies................................................................. iii
AVAILABLE INFORMATION..................................................... iii
SUMMARY................................................................... 1
SPECIAL FACTORS........................................................... 8
Background of the Merger................................................ 8
Recommendations of the Special Committee, the Board and the Acquiring
Group; Fairness
of the Merger ......................................................... 19
Opinion of the Special Committee's Financial Advisor.................... 22
Report of Financial Advisor of the American Securities Group............ 27
Certain Projections..................................................... 31
Purpose and Structure of the Merger..................................... 36
Plans for the Company After the Merger.................................. 39
Certain Effects of the Merger........................................... 40
Interests of Certain Persons in the Merger; Certain Relationships....... 40
Certain Federal Income Tax Consequences of the Merger................... 41
Accounting Treatment of the Merger...................................... 42
Risk of Fraudulent Conveyance........................................... 42
Certain Litigation...................................................... 43
Regulatory Approvals.................................................... 44
THE MERGER AGREEMENT...................................................... 45
General................................................................. 45
Effective Time of the Merger............................................ 45
The Surviving Corporation............................................... 45
Consideration to be Received by Stockholders of the Company............. 45
The Company's 8% Convertible Subordinated Debentures Due 2003........... 46
The Company's 7% Cumulative Convertible Voting Preferred Stock.......... 47
Representations and Warranties.......................................... 47
Covenants............................................................... 48
Other Potential Bidders................................................. 49
Conditions to Consummation of the Merger................................ 50
Termination............................................................. 50
Expenses................................................................ 51
Amendments.............................................................. 51
DISSENTERS' RIGHTS........................................................ 51
FINANCING OF THE MERGER................................................... 54
General................................................................. 54
Bank Financing.......................................................... 54
Estimated Fees and Expenses............................................. 57
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
BUSINESS OF THE COMPANY................................................... 58
General................................................................. 58
Process Group........................................................... 58
Aerospace Group......................................................... 59
Industrial Group........................................................ 59
American Innovations, Inc. ............................................. 59
Research and Development................................................ 60
Competition............................................................. 60
Customers............................................................... 60
Backlog................................................................. 60
Raw Materials........................................................... 61
Patents, Licenses and Trademarks........................................ 61
Personnel............................................................... 61
Seasonal Variations of Business......................................... 61
Environmental Matters................................................... 61
Working Capital Practices............................................... 61
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY.................. 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.................................................. 63
Discontinued Operations................................................. 63
Results of Operations................................................... 63
Liquidity and Capital Resources......................................... 68
Capital Expenditures.................................................... 69
Other Matters........................................................... 69
MARKET PRICE FOR THE COMMON SHARES........................................ 69
DIVIDENDS................................................................. 70
CERTAIN INFORMATION CONCERNING ACQUISITION CORP., HOLDINGS
CORP., KTM PARTNERS AND KTM GP CORP. .................................... 71
Acquisition Corp. ...................................................... 71
Holdings Corp. ......................................................... 71
KTM Partners............................................................ 71
KTM GP Corp. ........................................................... 71
General................................................................. 72
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY, HOLDINGS CORP.,
ACQUISITION CORP., KTM GP CORP. AND THE SURVIVING CORPORATION............ 72
Information Concerning Directors and Executive Officers of the Company.. 72
Information Concerning Directors and Executive Officers of Holdings
Corp., Acquisition
Corp. and KTM GP Corp. ................................................ 74
Information Concerning Directors and Executive Officers of the Surviving
Corporation............................................................ 74
SECURITY OWNERSHIP OF THE COMPANY......................................... 75
Security Ownership of Certain Beneficial Owners......................... 75
Security Ownership of Directors and Executive Officers.................. 77
PURCHASES OF VOTING SHARES BY CERTAIN PERSONS............................. 79
TRANSACTION OF OTHER BUSINESS............................................. 80
</TABLE>
<PAGE>
<TABLE>
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<S> <C>
INDEPENDENT AUDITORS....................................................... 80
MISCELLANEOUS.............................................................. 80
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 81
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
ANNEX A:Merger Agreement
ANNEX B:Section 262 of the Delaware General Corporation Law
ANNEX C:Opinion of Bear, Stearns & Co. Inc.
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. The following summary is not intended to be a complete
description of the matters covered in this Proxy Statement and is subject to
and qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement, including the Annexes hereto.
Stockholders are urged to read carefully the entire Proxy Statement, including
the Annexes.
GENERAL
Time, Place and Date of the
Special Meeting..............
The Special Meeting of stockholders of the Com-
pany will be held at , New York, New York
on , , 1994, at , local time.
Record Date...................
Any holders of record of Voting Shares at the
close of business on October 14, 1994 are enti-
tled to notice of and to vote at the Special
Meeting. On that date, there were [3,538,394]
Common Shares and [447,689] Preferred Shares
outstanding, with each such Voting Share enti-
tled to cast one vote, voting together as a
single class, with respect to the Merger at the
Special Meeting. See "INTRODUCTION--General"
and "--Voting Rights; Vote Required for Approv-
al."
Purpose of the Special
Meeting; Quorum; Vote
Required..................... At the Special Meeting, stockholders will con-
sider and vote upon a proposal to approve and
adopt the Merger Agreement, a copy of which is
attached as Annex A to this Proxy Statement.
See "INTRODUCTION--Proposal to be Considered at
the Special Meeting." The presence at the Spe-
cial Meeting, in person or by proxy, of the
holders of a majority of the outstanding Voting
Shares is necessary to constitute a quorum at
the Special Meeting. Under Delaware law, ap-
proval of the Merger Agreement requires the af-
firmative vote of the holders of a majority of
the outstanding Voting Shares. Members of the
Acquiring Group, who as of the Record Date were
the beneficial owners of approximately 21.98%
of the Voting Shares entitled to vote at the
Special Meeting (including shares held as fidu-
ciaries for persons or entities who are not
proponents of the Merger), have agreed to vote
all of the Voting Shares held by them in favor
of the Merger Agreement. See "INTRODUCTION--
Voting Rights; Vote Required for Approval."
Structure of the Merger....... Pursuant to the Merger Agreement, Acquisition
Corp. will merge into the Company, with the
Company being the Surviving Corporation as a
wholly-owned subsidiary of Holdings Corp. Each
outstanding Common Share (except those Common
Shares held by the Company as treasury stock,
or owned by Holdings Corp. and/or Acquisition
Corp. or by stockholders who perfect their dis-
senters' rights under the DGCL) will be con-
verted into the right to receive $15.00 in
cash, without interest. Each outstanding Common
Share and Preferred Share
1
<PAGE>
owned by Holdings Corp. and/or Acquisition
Corp. or held by the Company as treasury stock
will be cancelled without consideration. Each
outstanding share of common stock, par value
$.01 per share, of Acquisition Corp. will be
converted into one share of common stock of the
Surviving Corporation. Holdings Corp. and Ac-
quisition Corp. were organized by the American
Securities Group. Each of the members of the
Acquiring Group have agreed to contribute or
cause to be contributed to Holdings Corp. a
sufficient number of their Voting Shares (val-
ued on the basis of $15.00 per Common Share and
the redemption price of Preferred Shares)
which, together with any cash contributed by
the Acquiring Group and cash contributed by
third party investors, will result in Holdings
Corp. having contributed equity of not less
than $15 million. Holdings Corp., in turn, will
contribute all of such Voting Shares and cash
to Acquisition Corp. prior to the Effective
Time of the Merger. See "SPECIAL FACTORS--Pur-
pose and Structure of the Merger," "--Interests
of Certain Persons in the Merger; Certain Rela-
tionships" and "THE MERGER AGREEMENT."
Plans for the Company After
the Merger..............
Upon consummation of the Merger, the Company
will become highly leveraged and, accordingly,
it is not contemplated that the Company will
seek to make acquisitions of other businesses
pending the substantial reduction of its in-
debtedness unless it obtains additional equity
and/or debt financing for such purpose. The
Company intends, however, to continue to evalu-
ate the possible divestiture of existing busi-
ness units, with the proceeds of any such dis-
positions being used primarily to reduce the
Company's indebtedness. See "SPECIAL FACTORS--
Plans for the Company After the Merger."
Certain Effects of the
Merger....................... As a result of the Merger, the entire equity
interest in the Company will be owned by Hold-
ings Corp. Therefore, following the Merger, the
present holders of the Common Shares (other
than Holdings Corp., Acquisition Corp. or the
members of the Acquiring Group) will no longer
have an equity interest in the Company and will
no longer share in future earnings and growth
of the Company, the risks associated with
achieving such earnings and growth, or the po-
tential to realize greater value for their Com-
mon Shares through divestitures, strategic ac-
quisitions or other corporate opportunities
that may be pursued by the Company in the fu-
ture. Instead, each such holder of Common
Shares will have only the right to receive the
Merger Consideration for each Common Share held
or to seek appraisal rights as described under
the caption "DISSENTERS' RIGHTS." If the Merger
is consummated, Holdings Corp. intends to cause
the Company to terminate the registration of
the Common Shares and the Debentures under the
Exchange Act and its obligation to file re-
ports, proxy statements
2
<PAGE>
and other information with the Commission. See
"SPECIAL FACTORS--Certain Effects of the Merg-
er."
Opinion of Financial Advisor..
Bear, Stearns & Co. Inc. ("Bear Stearns"), an
internationally-recognized investment banking
firm, has rendered its written opinion to the
Special Committee of the Company's Board of Di-
rectors to the effect that the Merger is fair,
from a financial point of view, to holders of
Common Shares who are unaffiliated with the Ac-
quiring Group. In connection with its opinion,
Bear Stearns performed the following analyses:
(1) analysis of historical market prices of the
Common Shares; (2) going-concern analysis based
on comparisons with other publicly-traded mul-
ti-industry companies serving markets similar
to those of the Company; (3) going-concern
analysis based on comparisons with acquisitions
of other publicly-traded multi-industry compa-
nies serving markets similar to those of the
Company; (4) analysis of pro forma capitaliza-
tion of projected fiscal year 1995 earnings be-
fore interest, taxes, depreciation and amorti-
zation ("EBITDA"); (5) liquidation analysis;
and (6) discounted cash flow analysis. The full
text of Bear Stearns' written opinion, dated as
of the date of this Proxy Statement, which sets
forth the assumptions made, procedures fol-
lowed, matters considered and limits of its re-
view, is attached hereto as Annex C. HOLDERS OF
COMMON SHARES ARE URGED TO READ SUCH OPINION IN
ITS ENTIRETY. For additional information relat-
ing to the opinion of Bear Stearns, see "SPE-
CIAL FACTORS--Opinion of the Special Commit-
tee's Financial Advisor."
Determination of Special
Committee; Recommendation of
Company's Board of
Directors....................
A special committee of the Board of Directors,
consisting of the two directors of the Company
who are not employed by or affiliated with ei-
ther the Company (except in their capacity as
directors), any of its subsidiaries, KTM Part-
ners, Holdings Corp. or Acquisition Corp., who
are not members of the Acquiring Group and who
do not hold and will not acquire any equity in-
terest in KTM Partners, Holdings Corp. or Ac-
quisition Corp. (the "Special Committee"), has
unanimously determined, based in part upon the
opinion of Bear Stearns, that the Merger and
the Merger Consideration are fair from a finan-
cial point of view to, and in the best inter-
ests of, the stockholders of the Company who
are not affiliated with the Acquiring Group.
After considering the recommendation of the
Special Committee, the Board of Directors has
unanimously approved the Merger Agreement and
recommends that stockholders vote FOR the pro-
posal to approve and adopt the Merger Agree-
ment. The Board of Directors' recommendation is
based upon the following factors, among others:
(i) the analyses, conclusions and recommenda-
tions of the Special Committee; (ii) the opin-
ion of Bear Stearns; (iii) the fact that the
Merger Consid
3
<PAGE>
eration was the result of arm's-length negotia-
tions between the Special Committee and members
of the Acquiring Group and their respective le-
gal and financial advisors; and (iv) the report
of the financial advisor to the American Secu-
rities Group. See "SPECIAL FACTORS--Background
of the Merger" and "--Recommendations of the
Special Committee, the Board and the Acquiring
Group; Fairness of the Merger."
Interests of Certain Persons
in the Merger; Conflicts of
Interest.....................
Members of the Acquiring Group beneficially own
an aggregate of approximately 21.66% of the
outstanding Voting Shares (exclusive of shares
held as fiduciaries for persons or entities who
are not proponents of the Merger and shares is-
suable upon exercise of stock options held by
Mr. Williamson) and may be deemed to control
the Company. Alexander G. Anagnos, Charles D.
Klein, Elizabeth R. Varet and Hugh H.
Williamson, III, all members of the Acquiring
Group, serve on the Company's Board of Direc-
tors and Mr. Williamson is also the Company's
President and Chief Executive Officer. Because
the DGCL requires a merger agreement to be ap-
proved by a majority of a Delaware corpora-
tion's board of directors, such directors, who
constitute four of the six member Board of Di-
rectors of the Company, participated in the
vote of the Board of Directors concerning the
Merger and the Merger Agreement.
An agreement between Holdings Corp. and Mr.
Williamson provides, among other things, that
(i) Mr. Williamson is to receive options to ac-
quire equity securities of Holdings Corp. in
substitution for his existing options to ac-
quire Common Shares and also shares of re-
stricted stock of Holdings Corp. having a value
of $600,000 in lieu of certain supplemental re-
tirement benefits, (ii) three other executive
officers of the Company are to receive options
to acquire an aggregate of 3.9% of the common
stock of Holdings Corp., (iii) the Company's
officers (other than Mr. Williamson) and gen-
eral managers are to be offered the right to
invest in up to an aggregate of 5% of the eq-
uity securities of Holdings Corp. at the same
purchase price as other stockholders and (iv)
American Securities Capital Partners, L.P.
("Capital Partners"), an affiliate of American
Securities, is to receive certain fees upon
consummation of the Merger and for future in-
vestment banking and consulting services.
Holdings Corp. has agreed that all rights to
indemnification arising at or prior to the Ef-
fective Time in favor of the directors or offi-
cers of the Company (including the members of
the Special Committee) as provided in the
Company's certificate of incorporation or by-
laws, as in effect on the date of the Merger
Agreement, or in contractual indemnification
agreements, will, for a period of six years af-
ter the Effective Time, with respect to matters
occurring prior to the Effective Time, survive
the Merger and continue in full force and ef-
fect.
4
<PAGE>
See "SPECIAL FACTORS--Interests of Certain Per-
sons in the Merger; Certain Relationships" and
"THE MERGER AGREEMENT--Covenants."
Federal Income Tax The receipt of cash for Common Shares pursuant
Consequences................. to the Merger will be a taxable transaction for
federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"),
and also may be a taxable transaction under ap-
plicable state, local, foreign and other tax
laws. See "SPECIAL FACTORS--Certain Federal In-
come Tax Consequences."
THE MERGER AGREEMENT
Effective Time of the Merger.. The Merger will become effective upon the fil-
ing of a Certificate of Merger with the Secre-
tary of State of the State of Delaware or at
such later time as is specified in such Certif-
icate of Merger (the "Effective Time"). The
filing will occur after all conditions to the
Merger contained in the Merger Agreement have
been satisfied or waived. The Company, Holdings
Corp. and Acquisition Corp. anticipate that the
Merger will be consummated as promptly as prac-
ticable following the Special Meeting. See "THE
MERGER AGREEMENT--General" and "--Effective
Time of the Merger."
Conditions to Consummation of
the Merger...................
The respective obligations of the Company, on
the one hand, and Holdings Corp. and Acquisi-
tion Corp., on the other hand, to consummate
the Merger are subject to the satisfaction or
waiver at or prior to the Effective Time of the
following conditions, among others: (a) ap-
proval and adoption of the Merger Agreement and
the Merger by the holders of a majority of the
outstanding Voting Shares at the Special Meet-
ing; (b) the absence of any statute, rule, in-
junction or similar order prohibiting or re-
stricting the consummation of the Merger; (c)
the receipt of all other required authoriza-
tions, consents and approvals of governmental
authorities; (d) the compliance by all parties
with their obligations under the Merger Agree-
ment; and (e) the material truth and correct-
ness of all representations and warranties of
the parties to the Merger Agreement. The obli-
gation of Holdings Corp. and Acquisition Corp.
to consummate the Merger is further subject to
the satisfaction or waiver of, among other con-
ditions, the condition that Acquisition Corp.
receive financing pursuant to a bank financing
commitment in an amount which, together with
the Company's cash and marketable securities,
is sufficient to pay the Merger Consideration,
to effect the refinancing of the $45 million
principal amount of the Company's outstanding
Senior Notes due October 31, 2003 (the "Senior
Notes") and to pay related fees and expenses.
See "THE MERGER AGREEMENT--Conditions to Con-
summation of the Merger."
5
<PAGE>
Termination of the Merger The Merger Agreement may be terminated and the
Agreement.................... Merger may be abandoned at any time prior to
the Effective Time (notwithstanding approval of
the Merger Agreement by the stockholders of the
Company): (a) by mutual written consent of the
Company and Holdings Corp.; (b) by either the
Company or Holdings Corp. if the Merger has not
been consummated by December 31, 1994; (c) by
either the Company or Holdings Corp., if there
has been any law or regulation that makes con-
summation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, or-
der or decree enjoining Holdings Corp. or the
Company from consummating the Merger is entered
and becomes final and nonappealable; (d) by ei-
ther the Company or Holdings Corp. if the
Merger Agreement and the Merger fail to receive
the requisite vote for approval and adoption by
the stockholders of the Company at the Special
Meeting; (e) by Holdings Corp. or the Company
(such determination to be made on behalf of the
Company by the Special Committee in its sole
discretion), if (i) the Board of Directors of
the Company or the Special Committee withdraws,
modifies or changes its recommendation of the
Merger Agreement or the Merger in a manner ad-
verse to Holdings Corp. or Acquisition Corp. or
resolves to do any of the foregoing or the
Board of Directors of the Company or the Spe-
cial Committee recommends to the stockholders
of the Company any Competing Transaction, as
defined herein under "THE MERGER AGREEMENT--
Other Potential Bidders," or resolves to do so,
or (ii) any person acquires beneficial owner-
ship of 50% or more of the Voting Shares or any
"group" (as such term is defined under Section
13(d) of the Exchange Act and the rules and
regulations thereunder and not including the
Acquiring Group) is formed which beneficially
owns 50% or more of the Voting Shares. See "THE
MERGER AGREEMENT--Termination."
Expenses...................... The Company has agreed to reimburse Holdings
Corp. for certain out-of-pocket expenses in-
curred in connection with the Merger, up to a
maximum of $1.5 million, if the Merger is not
consummated under certain circumstances. See
"THE MERGER AGREEMENT--Expenses."
Amendments to the Merger The Merger Agreement may not be amended prior
Agreement.................... to the Effective Time except by action of the
Company, Holdings Corp. and Acquisition Corp.
set forth in a written instrument signed on be-
half of each of the parties; provided that any
such amendment by the Company must be approved
by the Board of Directors of the Company, act-
ing on the recommendation of the Special Com-
mittee. After approval of the Merger Agreement
by the stockholders of the Company at the Spe-
cial Meeting and without the further approval
of such stockholders, no amendment to the
Merger Agreement may be made which will change
6
<PAGE>
(i) the Merger Consideration or (ii) any other
terms and conditions of the Merger Agreement if
any of such changes would adversely affect the
stockholders of the Company. See "THE MERGER
AGREEMENT--Amendments."
Dissenters' Rights............
Holders of Common Shares who do not vote in fa-
vor of, or who abstain from voting on, the
Merger Agreement and who comply with the provi-
sions of Section 262 of the DGCL will have the
right to receive cash payment for the "fair
value" of their Common Shares. Any stockholder
contemplating the exercise of dissenters'
rights should carefully review Section 262
ofthe DGCL, particularly the procedural steps
required to perfect dissenters' rights. See
"DISSENTERS' RIGHTS" andAnnex B, "Section 262
of the Delaware General Corporation Law."
Source of Funds; Financing of
the Merger...................
The total amount of funds required to pay the
Merger Consideration to holders of all out-
standing Common Shares on a fully diluted basis
(including Common Shares beneficially owned by
members of the Acquiring Group), to refinance
the Company's Senior Notes and to pay related
Company fees and expenses in connection with
the Merger is expected to be approximately $130
million. These funds will be provided (i) out
of the Company's cash balances and cash equiva-
lents, including marketable securities, (ii)
from bank financing to be obtained pursuant to
a commitment received from The Chase Manhattan
Bank, N.A. ("Chase") to provide up to $50 mil-
lion in financing (a portion of which will be
used for the Company's working capital needs)
and (iii) through equity contributions of not
less than $15 million. See "FINANCING OF THE
MERGER."
Holdings Corp. and Acquisition Corp. have rep-
resented in the Merger Agreement that the eq-
uity to be provided to Acquisition Corp. will
be not less than $15 million, consisting of any
cash that may be contributed by members of the
Acquiring Group, cash contributed by one or
more third party investors and Voting Shares
(valued on the basis of $15.00 per Common Share
and the redemption price of Preferred Shares)
contributed by members of the Acquiring Group.
See "SPECIAL FACTORS--Purpose and Structure of
the Merger" and "FINANCING OF THE MERGER."
7
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER
The members of the American Securities Group are clients of American
Securities and are the beneficial owners of an aggregate of approximately 21.3%
of the outstanding Voting Shares. The members of the American Securities Group
acquired their initial ownership of Common Shares of the Company on November
30, 1988 when the Company became publicly owned by means of the pro rata
distribution by Ametek, Inc. ("Ametek"), the former parent of the Company, of
all of the Company's outstanding Common Shares to the stockholders of Ametek.
Concurrently with such distribution, the Company commenced a rights offering
which resulted in the issuance of $17,500,000 principal amount of the Company's
8% Convertible Subordinated Debentures due 2003 (the "Debentures"). Certain
members of the American Securities Group acquired Debentures through the
exercise of rights and pursuant to a standby purchase agreement with the
Company. In addition, certain members of the American Securities Group acquired
additional Common Shares and Debentures from time to time in open market
transactions. On , 1994, the members of the American Securities Group
converted the Debentures beneficially owned by them (exclusive of those held as
fiduciaries for persons or entities who are not proponents of the Merger) into
447,689 Preferred Shares, each of which is convertible into one Common Share
and is entitled to one vote per share, voting together with the Common Shares
as a single class, on the Merger. The members of the American Securities Group
are primarily members of the family of William Rosenwald, trusts for the
benefit of such persons, certain senior executives of American Securities, its
affiliate American Securities, L.P. and other affiliated entities and members
of their families and philanthropic foundations established by such persons.
Members of the American Securities Group include three of the Company's six-
member Board of Directors.
In May 1993, representatives of the American Securities Group met with Hugh
H. Williamson, III, the President and Chief Executive Officer of the Company,
and discussed the low market price for the Common Shares. Mr. Williamson
expressed his reservations as to the Company's ability to successfully
implement its then current strategic plan and, in particular, its ability to
make appropriate acquisitions of other businesses to utilize its substantial
excess cash. Mr. Williamson suggested to the American Securities Group that he
review the strategic options available to the Company and its stockholders,
including possible merger or business combination transactions. The
representatives of the American Securities Group informed Mr. Williamson that
they also would be reviewing their options regarding the American Securities
Group's investment in the Company. Thereafter, the American Securities Group
began to review what actions, if any, it should take in order to enhance
shareholder value. In August 1993, representatives of the American Securities
Group discussed with several potential institutional lenders the feasibility of
obtaining financing for a merger transaction of the type now proposed. During
August and September 1993, representatives of the American Securities Group
also had general discussions with Mr. Williamson regarding such a transaction.
In September 1993, Mr. Williamson advised representatives of the American
Securities Group that he was interested in proceeding with such a transaction.
At the regular meeting of the Board of Directors of the Company held on
September 28, 1993, Mr. Williamson advised the Board of his interest in
proposing, as a strategic alternative for the Company, a business combination
transaction in which all outstanding publicly owned Common Shares would be
acquired for cash. Mr. Williamson stated that he would proceed with such a
transaction only if the American Securities Group would join with him in
proposing the transaction. At Mr. Williamson's request, the Board established a
Special Committee consisting of Messrs. William J. Catacosinos and Alan R.
Gruber, the two members of the Board of Directors who are not employed by the
Company and who are not affiliated with the American Securities Group, to
consider the request of Mr. Williamson that the Board approve Mr. Williamson
and the American Securities Group or certain members thereof becoming an
"interested stockholder" within the meaning of Section 203 of the DGCL
("Section 203") and a similar provision in the Company's Certificate of
Incorporation. Mr. Williamson made this request so that he and the American
Securities Group could explore such a possible business combination transaction
without such transaction becoming subject to the restrictions
8
<PAGE>
that might otherwise be applicable under Section 203 or the Certificate of
Incorporation. At a special meeting of the Board of Directors held on October
19, 1993, the Board of Directors, based on the recommendation of the Special
Committee made after consultation with independent legal counsel selected by
the Special Committee, approved Mr. Williamson and the American Securities
Group or certain members thereof becoming an "interested stockholder" solely as
a result of any agreement, arrangement or understanding which may be reached by
them with respect to a proposal for a business combination between the Company
and an entity formed by them, provided that a written proposal for such a
business combination was submitted to the Board of Directors prior to six
months from the date of the meeting or such longer period as the Board, acting
upon the recommendation of the Special Committee, may approve.
In Amendment No. 12 to its Schedule 13D Statement, which was filed with the
Commission on October 21, 1993, the members of the American Securities Group
stated that they were considering various options with regard to their
investment in the Company, including initiating or responding to proposals
regarding (i) a merger or other business combination transaction pursuant to
which the members of the American Securities Group or certain of them, together
with current members of senior management or certain of them, would acquire the
equity interest in the Company not held by them, (ii) the sale of certain of
the Company's business units, (iii) the sale of the Company as a whole or (iv)
the sale of all or a portion of the American Securities Group's investment in
the Company. The Amendment also stated that Mr. Williamson had suggested that
the American Securities Group consider a merger or business combination of the
type referred to in clause (i) of the preceding sentence and had discussed the
concept generally with certain members of the American Securities Group. The
Amendment further stated that while the members of the American Securities
Group intended to explore such a transaction with Mr. Williamson, they had no
agreement, arrangement or understanding with him with respect thereto at that
time.
Thereafter, on November 1, 1993 the American Securities Group retained The
Bridgeford Group ("Bridgeford") as its financial advisor in connection with its
investment in the Company. During November 1993, representatives of the
American Securities Group, together with Mr. Williamson, began to explore the
availability of debt financing from various institutional lenders for a merger
transaction in which the members of the Acquiring Group, together with certain
members of the Company's senior management, would acquire the equity interest
in the Company not owned by them. In connection with such a merger, the members
of the Acquiring Group would contribute as equity all or a portion of the
Common Shares and Debentures (or Preferred Shares issuable upon conversion
thereof) owned by them and arrange for borrowings which, together with the cash
and marketable securities of the Company, would be used to pay the cash merger
consideration for the Common Shares not already owned by members of the
Acquiring Group, to refinance the Company's outstanding $45 million of Senior
Notes held by institutional investors and to pay related transaction expenses
and provide for ongoing working capital needs. In early December 1993, the
American Securities Group received preliminary proposals from two institutional
lenders specializing in asset-based transactions to explore financing, with the
due diligence expenses of such institutional lenders being borne by the
American Securities Group. In accordance with these proposals, third parties
selected by the lending institutions were engaged to prepare appraisals of the
Company's machinery and equipment assets and real property assets and to
perform an environmental compliance analysis. The Special Committee was advised
of the retention of Bridgeford and these discussions and arrangements with
potential lenders and it was suggested that the Special Committee retain an
investment banking firm to act as financial advisor to the Special Committee in
connection with any proposal which may be made by the American Securities Group
for such a transaction.
The members of the Special Committee met with representatives of two
investment banking firms and, based on those meetings, selected Bear Stearns as
their financial advisor, and retained Bear Stearns in such capacity pursuant to
an engagement letter, dated December 13, 1993. Bear Stearns was instructed by
the Special Committee to conduct a due diligence review of the Company so that
it would be prepared to analyze any proposal which might be made by the
American Securities Group. At that time, it was contemplated
9
<PAGE>
that the American Securities Group might secure an acceptable financing
commitment and be in a position to make a proposal by late January 1994.
During March 1994, representatives of Bear Stearns visited certain of the
Company's facilities and held discussions with certain members of the Company's
senior and operating managements to discuss the Company's operations,
historical financial statements and prospects.
Despite the extensive efforts of the American Securities Group to obtain a
financing commitment, during the first quarter of 1994 the American Securities
Group had received only one financing commitment from an asset-based
institutional lender. Such commitment was insufficient in amount to finance an
all cash merger proposal at a price which the American Securities Group and
Bridgeford believed would be fair to the public stockholders of the Company.
Thereafter, the American Securities Group renewed its efforts to obtain an
acceptable financing commitment by approaching both additional institutional
lenders and certain of the institutions it had previously solicited. At the
regular meeting of the Board of Directors held on April 5, 1994, at the request
of the American Securities Group and based upon the recommendation of the
members of the Special Committee, the Board extended from April 19, 1994 until
May 26, 1994 (the date of the next regularly scheduled meeting of the Board)
the period during which the American Securities Group and Mr. Williamson would
be afforded the opportunity to provide a written proposal for a business
combination without becoming subject to the restrictions on such a transaction
which would otherwise be applicable to an "interested stockholder" under
Section 203 and the Company's Certificate of Incorporation. At such meeting,
the Board also adopted the Company's Key Employee Severance Plan pursuant to
which the executive officers (including Mr. Williamson) and general managers of
the Company would become entitled to receive severance benefits in an amount
equal to 12 months salary continuation, annual bonus and certain health and
welfare benefits, if their employment is terminated by the Company (other than
for "cause") or by the employee for "good reason" (as defined) during the
period of 24 months following a "change of control" (as defined) of the
Company. For purposes of such Plan, a "change in control" is defined as the
acquisition of 30% or more of the outstanding Common Shares by any person
(other than the Company or any employee benefit plan or affiliate of the
Company) and a change in the members of the Board of Directors, within any 24-
month period, such that the individuals who at the beginning of such period
constituted the Board cease to constitute a majority thereof. During the first
quarter of 1994, representatives of the American Securities Group also
continued to engage in negotiations with Mr. Williamson regarding his equity
participation in Holdings Corp. and the other terms and conditions of his
relationship and that of other members of the Company's management with such
entity and the Company following the consummation of the merger transaction.
Thereafter, the American Securities Group continued its efforts to obtain
acceptable financing and on April 27, 1994 obtained an oral commitment from
Chase. On April 28, 1994, Holdings Corp. delivered the following letter to the
Board of Directors of the Company proposing a merger transaction under which
the Acquiring Group would acquire all outstanding Common Shares not already
owned by the Acquiring Group at a price of $13.125 per Common Share (the
"Initial Proposal").
10
<PAGE>
"April 28, 1994
Board of Directors
Ketema, Inc.
One Cherry Center
501 Cherry Street
Denver, Colorado 80222
Attention: Special Committee
Dear Sirs:
As you know, certain persons and entities affiliated with American Securities
Corporation (the "Amseco Group") have been considering various options with
regard to their investment in Ketema, Inc. (the "Company"). After careful
deliberation, the Amseco Group hereby proposes to acquire all of the
outstanding Common Stock of the Company not already owned by members of the
group (the "Acquisition") at a price of $13.125 per share, payable in cash (the
"Merger Consideration"). The Amseco Group beneficially owns approximately 21.2%
of the outstanding Common Stock of the Company (including shares issuable upon
conversion of debentures held by them).
The Acquisition would be effected through a merger of a wholly-owned
subsidiary of KTM Holdings Corp. ("Buyer") into the Company (the "Merger").
Buyer is a newly-formed Delaware company created to effect the Acquisition.
Upon consummation of the Merger, the Company would become a wholly-owned
subsidiary of Buyer. The Company's currently outstanding 8% Convertible
Subordinated Debentures due 2003 which are not converted into Common Stock or
Convertible Preferred Stock prior to the Merger would remain outstanding and,
in accordance with their terms, would thereafter be convertible solely into the
right to receive the cash Merger Consideration.
Buyer has obtained an oral commitment from a bank to provide financing for
purposes of the Acquisition. We anticipate that such financing, together with
the Company's cash balances and marketable securities, will be sufficient to
refinance the Company's existing institutional indebtedness, fund the Merger
Consideration, pay transaction expenses and provide for ongoing working capital
needs.
Our proposal is subject only to (i) the negotiation and execution of a
definitive merger agreement containing terms and conditions customary in
transactions of this kind (including customary representations, warranties,
covenants and conditions) (the "Merger Agreement"), (ii) approval by the
holders of a majority of the outstanding shares of the Company's Common Stock,
(iii) Buyer reaching satisfactory agreements with the institutional investors
holding the Company's outstanding $45 million principal amount of 11.12% Senior
Notes due October 31, 2003 regarding the early retirement of such Notes, (iv)
the receipt of any necessary governmental approvals, (v) Buyer reaching
satisfactory arrangements with Hugh H. Williamson, III, Chief Executive Officer
of the Company, regarding continuation of his current operating duties and the
exchange of the convertible debentures and options presently held by him for an
equity participation in Buyer and (vi) the funding of the working capital and
term loans pursuant to the financing commitment. Our proposal is necessarily
based on current market conditions and our assessment of the Company's
businesses and assets as they exist today. We will have no obligation to the
Company or its shareholders with respect to this proposal unless and until the
Merger Agreement is executed. After such execution, the only obligations will
be those set forth in the Merger Agreement.
We are prepared to submit a draft Merger Agreement and to begin negotiating
the Merger Agreement with the Special Committee of the Board and its counsel
and financial advisors.
We believe, based in part on the advice of our financial advisors, that the
Merger Consideration is fair to the public shareholders of the Company. The
Merger Consideration represents premiums of 20% and 22% over the average
closing prices for the Company's Common Stock for the 10 trading day and 60
trading day
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periods, respectively, prior to October 21, 1993 when the Amseco Group filed an
amendment to its Schedule 13D to disclose its consideration of, among other
things, a merger of the type now proposed. The Merger Consideration also
represents a multiple of 39 times net income per share of $.34 for the
Company's fiscal year ended February 28, 1994.
We request that the Company's Board of Directors consider the proposal as
soon as possible. Our financial advisors, The Bridgeford Group, and our legal
advisors, Stroock & Stroock & Lavan, are available to meet with the Special
Committee and its counsel and financial advisors to discuss and answer any
questions regarding our proposal. We look forward to a response at your
earliest convenience.
Very truly yours,
KTM Holdings Corp.
/s/ Michael G. Fisch
By: _________________________
Upon its receipt of the Initial Proposal, on April 28, 1994, the Company
issued the following press release:
"FOR IMMEDIATE RELEASE
DENVER, CO--April 28, 1994--Ketema, Inc. (Amex-KTM) announced today that
its Board of Directors has received a merger proposal from a group of
stockholders who are affiliated with American Securities Corporation. Under
the merger proposal, such stockholders would acquire all of the Common
Stock of Ketema not already owned by them at a price of $13.125 per share
in cash through a merger of a newly-formed corporation owned by them into
Ketema.
Ketema said that it understands that members of the American Securities
group, which includes three Directors of Ketema, beneficially own
approximately 21.2% of Ketema's outstanding Common Stock, including shares
issuable upon conversion of debentures held by them. Ketema further said
that its Board of Directors had appointed a Special Committee of Directors
to consider any proposal which might be made.
The American Securities group disclosed on October 21, 1993 in a Schedule
13D filing with the Securities and Exchange Commission that the group was
considering various options with regard to its investment in the Company,
including a merger of the type now proposed.
Under the terms of the proposal, Ketema's 8% Convertible Subordinated
Debentures due 2003 which are not converted into Common Stock prior to the
merger would remain outstanding and, in accordance with their terms, would
thereafter be convertible solely into the right to receive the cash merger
consideration. Such Debentures are presently convertible into Ketema Common
Stock at a conversion price of $15.58 per share.
Ketema said that the proposed merger would be subject to, among other
things, (i) the execution of a definitive merger agreement, (ii) approval
by holders of a majority of Ketema's outstanding shares, (iii) the American
Securities group reaching satisfactory agreements with the institutional
investors holding Ketema's $45 million principal amount of outstanding
senior notes regarding the early retirement of such notes, (iv) the receipt
of all necessary consents and governmental approvals, (v) the group
reaching a satisfactory agreement with the chief executive officer of
Ketema regarding his continuation as CEO following the merger and (vi)
funding pursuant to an oral financing commitment. Ketema said the group has
advised that it has obtained an oral commitment from a bank to provide
financing and that the group anticipates that such financing, together with
Ketema's cash balances and marketable securities, will be sufficient to
refinance Ketema's existing institutional indebtedness, fund the merger,
pay transaction expenses and provide for ongoing working capital needs.
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Ketema said that there can be no assurance at this time as to whether or
not any transaction will occur or as to the timing or terms of any
transaction."
On April 28, 1994, the American Securities Group filed with the Commission
Amendment No. 13 to its Schedule 13D to disclose the Initial Proposal, the
terms of the oral financing commitment of Chase, and the identity of those
members of the American Securities Group who are the proponents of the merger
transaction. The Amendment stated, among other things, that the current members
of the American Securities Group beneficially owned an aggregate of
approximately 21.2% of the outstanding Common Shares after giving effect to the
conversion of Debentures owned by them and that certain other clients of
American Securities, including certain persons who were reporting persons in
Amendment No. 12 to the Schedule 13D filed on October 21, 1993 and who
beneficially owned an aggregate of approximately 5.5% of the outstanding Common
Shares after giving effect to the conversion of Debentures owned by them, were
not proponents of the proposed merger transaction and that the Common Shares
owned by such persons would, upon consummation of the proposed merger, be
converted into the right to receive the same cash payment per Share as all
other stockholders of the Company.
Subsequent to April 28, 1994, seven class action lawsuits were commenced in
the Delaware Court of Chancery relating to the Initial Proposal. See "SPECIAL
FACTORS--Certain Litigation."
On May 2, 1994, Bridgeford furnished representatives of Bear Stearns with a
written analysis of the Company and of the Initial Proposal (the "Bridgeford
Report") which had been prepared by Bridgeford. Among the financial data
included in the Bridgeford Report were (i) Five Year Projections, Fiscal Years
1995-1999 prepared by the Company's management and furnished to the Company's
Board of Directors in February 1994 (the "Five Year Management Projections");
(ii) the Company's Business Plan for its fiscal year ending February 28, 1995
which had been completed on March 30, 1994 (the "Fiscal 1995 Management
Budget"); and (iii) the financial model prepared by American Securities in
April 1994 and provided by it to prospective financing sources, including Chase
(the "American Securities Projections"). See "SPECIAL FACTORS--Report of
Financial Advisor of the American Securities Group" and "--Certain
Projections."
On May 5, 1994, the American Securities Group filed with the Commission
Amendment No. 14 to its Schedule 13D to report, among other things, the receipt
and acceptance of a written financing commitment from Chase relating to the
proposed merger transaction and the inclusion of Mr. Williamson as a member of
the Acquiring Group by reason of his joining with the other members thereof as
a proponent of the Initial Proposal. The Amendment also reported the terms of
an agreement, dated May 5, 1994, between Holdings Corp. and Mr. Williamson
regarding (i) his continuation as Chief Executive Officer of the Company
following consummation of the proposed merger, (ii) his equity participation in
Holdings Corp., including the grant to him of restricted stock and options to
purchase shares of Holdings Corp., (iii) the treatment of outstanding stock
options and stock appreciation rights held by employees of the Company other
than Mr. Williamson and the grant of options to purchase shares of Holdings
Corp. to certain executive officers other than Mr. Williamson, (iv) the
officers (other than Mr. Williamson) and general managers of the Company being
offered the right to invest in equity securities of Holdings Corp. representing
a maximum of up to 5% of its outstanding shares, in the aggregate, at the same
purchase price paid by the other stockholders of Holdings Corp., (v) the
composition of the Board of Directors of Holdings Corp., (vi) certain fees
payable to an affiliate of American Securities and (vii) certain compensation
matters with respect to management of the Company following consummation of the
proposed merger. See "SPECIAL FACTORS--Interests of Certain Persons in the
Merger."
Following the receipt of the Initial Proposal and the Bridgeford Report, the
Special Committee met in person with representatives of Bear Stearns and of
Skadden, Arps, Slate, Meagher & Flom, independent legal counsel to the Special
Committee, on more than four occasions and held numerous telephonic conferences
(both as a group and individually) throughout the period until the date of the
Merger Agreement.
On May 5, 1994, Mr. Gruber, having previously consulted with Dr. Catacosinos,
met with Bear Stearns and counsel in order to establish the framework for the
Committee's review of the Initial Proposal. At that
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meeting, the terms of the Initial Proposal were reviewed and Bear Stearns
discussed the scope of its prior due diligence activities and the status of its
information concerning the Company.
On May 18, 1994, the Special Committee met to review the Initial Proposal as
well as to receive Bear Stearns' preliminary views of the Initial Proposal. The
Special Committee reviewed the terms of the Initial Proposal, including the
terms and likelihood of the receipt of its financing and the arrangements
reached between the American Securities Group and Mr. Williamson. The Special
Committee also reviewed the Company's recent financial performance as well as
its recent restructuring activities and discussed the issues associated with
whether the Company would be able to capitalize on the steps it had taken over
the past two years. The Special Committee discussed the composition of the
Company's business and the difficulties associated with analyzing the value of
each of its component units. Bear Stearns reviewed with the Special Committee
its methods of evaluation of the proposed transaction as well as, among other
things, a detailed review and analysis of the Five Year Management Projections.
Bear Stearns did not present a detailed analysis of the Initial Proposal at
this meeting but indicated its preliminary view, based primarily on its prior
review of the fiscal 1995 forecasts made by the managements of the Company's
individual business units (the "1995 Divisional Forecasts"), that it could not
conclude that the Initial Proposal was fair from a financial point of view to
the Company's stockholders other than the Acquiring Group. Bear Stearns advised
the Special Committee that it needed further information in order to understand
the difference between the 1995 Divisional Forecasts, the Five Year Management
Projections and the American Securities Projections.
Following such meeting, the Special Committee advised representatives of the
American Securities Group that, based on the preliminary analysis of Bear
Stearns, the Special Committee had preliminarily concluded that it could not
favorably recommend the Initial Proposal, but that Bear Stearns needed to
perform additional analyses and review the Bridgeford Report with Bridgeford
and management of the Company. The Special Committee further advised
representatives of the Acquiring Group that the Special Committee would not be
in a position to render its report on the Initial Proposal until after the
regular meeting of the Board of Directors scheduled to be held on May 26, 1994.
On May 20, 1994, representatives of Bear Stearns met with representatives of
Bridgeford to review the Bridgeford Report. At this meeting, the
representatives of Bear Stearns questioned the Five Year Management Projections
which reflected no growth in revenues after fiscal 1995 and no growth in EBITDA
after fiscal 1996 and noted that such Projections and the American Securities
Projections differed significantly, in terms of sales and operating margins,
from the 1995 Divisional Forecasts made by the managements of the Company's
individual business units in connection with the preparation of the Fiscal 1995
Management Budget. The Bridgeford representatives explained that the Five Year
Management Projections had been prepared before the Fiscal 1995 Management
Budget had been completed and assumed a zero level of inflation over the five-
year period solely for purposes of the projections. The Bridgeford
representatives also explained that forecasts made by the managements of the
Company's individual business units in prior years had consistently proved to
have been significantly overly optimistic and that, therefore, the Company's
current senior management had made an overall downward adjustment to such
forecasts for the current fiscal year as well as the prior fiscal year when
incorporating them into the consolidated budgets prepared by senior management.
At this meeting, Bear Stearns suggested that the Company's management be asked
to develop an additional set of financial projections based on more optimistic
operating assumptions, including inflation assumptions. The Bridgeford
representatives agreed to work with the Company's senior management to develop
such updated projections and furnish them to Bear Stearns as soon as possible.
At the regular meeting of the Board of Directors held on May 26, 1994, the
Special Committee did not report on its consideration of the Initial Proposal.
At the suggestion of legal counsel for the Special Committee, the Board of
Directors unanimously adopted resolutions to clarify the duties and
responsibilities and the authority of the Special Committee. The Special
Committee was authorized to take all plenary action it deemed necessary or
appropriate to review, evaluate and reach a determination with respect to the
Initial Proposal, including negotiations with respect to the terms of the
Initial Proposal, and any other proposals to
14
<PAGE>
acquire the Company or all or substantial portions of its business or assets
which may be received by the Company or the Special Committee, whether by
active solicitation of such other proposals, public dissemination of
information concerning the Initial Proposal or any such other proposals or
otherwise (including furnishing of information concerning the Company to third
parties in connection with any such other proposals), and negotiations with
respect to the terms thereof. The Board also ratified the retention by the
Special Committee of Skadden, Arps, Slate, Meagher & Flom as legal counsel to
assist the Special Committee in its review and evaluation of the Initial
Proposal and to assist the Special Committee and the Company in connection with
all other legal matters relating to the Initial Proposal and any other
proposals, and the retention by the Special Committee of Bear Stearns as
financial advisor to the Special Committee to assist it and the Board of
Directors in their review and evaluation of the Initial Proposal and any other
proposals and to render a written opinion as to the fairness of the terms of
the Initial Proposal or any other proposals to the Company's stockholders from
a financial point of view. The Board of Directors also authorized and directed
the officers of the Company to fully cooperate with the Special Committee and
its advisors, including supplying all information requested by the Special
Committee or its advisors, and directed the officers of the Company and members
of the Board and each of their advisors to refer to the Special Committee any
other proposals received by them.
On June 2, 1994, Bridgeford delivered to the Special Committee and Bear
Stearns the updated five-year projections (the "Optimistic Growth Case
Projections") which senior management of the Company had developed with the
assistance of representatives of Bridgeford. See "SPECIAL FACTORS--Report of
Financial Advisor of the American Securities Group" and "--Certain
Projections."
On June 9, 1994, the Special Committee met with its financial and legal
advisors. The Special Committee again reviewed the terms of the Initial
Proposal and received Bear Stearns' report regarding their analysis of the
Initial Proposal as well as their review of the Optimistic Growth Case
Projections. Bear Stearns advised the Special Committee that in its view the
per share price contained in the Initial Proposal was inadequate. Based in part
on such advice, the Special Committee determined that the Initial Proposal was
inadequate from a financial point of view and that it would not recommend such
offer to the Company's stockholders. The Special Committee discussed the
possibility that the Acquiring Group might withdraw the Initial Proposal in
light of such determination, as well as the circumstances surrounding another
expression of interest in the Company it had received from a third party.
Following such meeting of the Special Committee, the Special Committee
advised representatives of the Acquiring Group that Bear Stearns could not
conclude that the Initial Proposal at $13.125 per Common Share was fair from a
financial point of view to the Company's stockholders. Members of the Acquiring
Group initially advised the Special Committee that they would consider their
options, including possibly withdrawing the Initial Proposal, in light of such
action, but subsequently advised that they planned to work at refining their
analyses over the next several days until the next Board meeting, at which time
they would decide whether they were prepared to submit a revised proposal.
Thereafter, a special meeting of the Board of Directors was called for June 13,
1994 for the purpose of receiving the report of Bear Stearns and the
recommendation of the Special Committee with regard to the Initial Proposal.
At the special meeting of the Board of Directors held by telephone conference
on June 13, 1994, representatives of Bear Stearns reported that based upon
their review of financial and other information to date, they had advised the
members of the Special Committee that in their opinion the Initial Proposal of
$13.125 per Common Share was inadequate. The members of the Special Committee
advised the meeting that, after considering the Bear Stearns report and
discussing their own views regarding the Company, the Special Committee had
concluded the Initial Proposal was inadequate. The Special Committee also
reported that a third party had expressed a preliminary interest in acquiring
the Company at a price higher than $13.125. A representative of the Acquiring
Group advised the meeting that the Acquiring Group might be prepared to
increase its proposal to a per share amount closer to $14.00 per share than
$13.00 per share if the Special Committee were to indicate that it would be
inclined to favorably consider such a proposal. The representative of the
Acquiring Group suggested that Bear Stearns expedite any further analysis which
it
15
<PAGE>
believed it needed to perform in order to evaluate such a possible increase in
the Acquiring Group's proposal and advise the Acquiring Group later in the week
as to whether Bear Stearns could recommend such an increased proposal, if made,
to the Special Committee. The special meeting of the Board then adjourned to
permit the Special Committee to meet separately with its financial and legal
advisors. Thereafter, the meeting of the Board reconvened and the members of
the Special Committee advised that they and the Special Committee's advisors
were prepared to discuss an increased merger proposal with the Acquiring Group
and its advisors, as well as exploring the other expression of interest it had
received from a third party or any additional expressions of interest which it
may thereafter receive. The Board of Directors directed management to issue
promptly a press release regarding the Special Committee's determination that
the Initial Proposal was inadequate.
On June 13, 1994, following the conclusion of the special meeting of the
Board of Directors, the Company issued the following press release:
"FOR IMMEDIATE RELEASE
KETEMA'S SPECIAL COMMITTEE MAKES INITIAL DETERMINATION
Denver, CO, June 13, 1994--Ketema, Inc. (Amex-KTM) announced today that
its Special Committee of Directors formed to review and evaluate the
proposal received from the Amseco Group to acquire the shares of the
Company's common stock not owned by them at $13.125 per share in cash has
determined that the offer is inadequate from a financial point of view and
that it would not recommend that stockholders approve the offer. The Amseco
Group, which owns approximately 23% of the Company's outstanding stock,
including shares issuable upon conversion of debentures held by the Group,
consists of clients of American Securities Partners, L.P. and Hugh H.
Williamson, III, the President and Chief Executive Officer of Ketema. Four
members of the Amseco Group are directors of the Company. The Special
Committee based its determination in part on the opinion of Bear, Stearns &
Co. Inc., its financial advisor. The Special Committee has advised
representatives of the Amseco Group of its determination and is continuing
to discuss the proposal with the Amseco Group and its advisors, as well as
exploring other expressions of interest which have been or may be received
from third parties.
Ketema, Inc., is a diversified, multi-product manufacturer that develops,
designs, manufactures, and markets, domestically and internationally, a
wide group of products for industrial and commercial markets."
Later in the day on June 13, 1994, representatives of the Acquiring Group and
Bridgeford met with representatives of Bear Stearns. At such meeting, the
historical and projected performance of the Company on a consolidated basis and
certain of the larger individual business units were discussed. The
participants at the meeting also discussed the differences between the
Optimistic Growth Case Projections and the American Securities Projections. It
was explained that the American Securities Projections reflected greater EBITDA
by reason of the assumed elimination of $500,000 of annual estimated general
and administrative expenses which the Company would not incur as a privately-
owned, as opposed to publicly-owned, corporation following the Merger,
including the additional legal and accounting fees incurred in connection with
the preparation of reports required to be filed with the Commission, the legal,
accounting, printing and mailing costs of proxy materials and annual and other
reports to stockholders, the cost of holding annual meetings of stockholders,
higher state franchise taxes, certain insurance premiums and transfer agent and
similar fees and expenses, and the assumption that the Company would not
experience a cyclical downturn over the period of the projections. The overly
optimistic nature of the forecasts historically made by the managements of the
Company's individual business units, including the 1995 Divisional Forecasts
and the adjustments thereto made by the Company's senior management, were
explained by the representative of the Acquiring Group. In addition, the
different views of the valuation of the Company by the Acquiring Group and the
Bear Stearns representatives were discussed.
16
<PAGE>
During the evening of June 13, 1994, legal counsel for the Acquiring Group
submitted to legal counsel for the Special Committee a draft of a proposed
merger agreement, copies of which were also furnished to Company and wished to
receive confidential information concerning the Company. Between June 14 and
June 17, legal counsel for the Special Committee discussed the draft merger
agreement in detail with the members of the Special Committee and the
respective legal advisors negotiated the provisions of the draft merger
agreement. During this period, successive revised drafts of such agreement were
prepared and furnished to the Special Committee and its legal and financial
advisors. In addition, counsel for the Special Committee received (and later
advised the Special Committee of) an inquiry from an additional third party
expressing a possible interest in acquiring the Company.
On June 14, 1994 counsel for the Special Committee forwarded to counsel for
the Company a form of confidentiality agreement the Special Committee intended
to enter into on behalf of the Company with any third party who expressed
interest in acquiring the Company.
On June 16, 1994, Alan R. Gruber, on behalf of the Special Committee, advised
by telephone a representative of the Acquiring Group that after consideration
with its financial advisor, the Special Committee believed that an increased
offer by the Acquiring Group to the $14.00 per Common Share range as suggested
at the June 13th meeting would, if made, be inadequate. Mr. Gruber did not
indicate what price the Special Committee would determine to be adequate.
Thereafter, on June 17, 1994, representatives of Bridgeford met with
representatives of Bear Stearns to discuss Bear Stearns' views that a price of
$14.00 per Common Share would not be adequate. Following such meeting, the
Bridgeford representatives advised representatives of the Acquiring Group that
Bridgeford believed Bear Stearns would be able to opine that a price of between
$14.50 and $15.00 per Common Share would be in the range of fairness.
On June 20, 1994, representatives of the Acquiring Group and its financial
and legal advisors met at the offices of Skadden, Arps, Slate, Meagher & Flom
with Alan R. Gruber and the financial and legal advisors of the Special
Committee. William J. Catacosinos participated in the meeting from time to time
by telephone. At such meeting, the representatives of the Acquiring Group said
it was prepared to increase its offer to $15.00 in cash per share (the "Revised
Proposal"), subject to Holdings Corp. receiving an amendment to the Chase
financing commitment. The making of the Revised Proposal was also conditioned
on reaching agreement on certain provisions of the proposed merger agreement
which remained unresolved, including the circumstances under which Holdings
Corp. would be entitled to reimbursement from the Company of Holdings Corp.'s
out-of-pocket expenses in the event the merger was not consummated and the
maximum dollar amount of such expense reimbursement obligation of the Company.
Following such meeting, the Special Committee and its advisors met by
conference telephone. Bear Stearns expressed its preliminary view that the
price of $15.00 in cash per Common Share, if proposed, would be fair from a
financial point of view to the Company's stockholders not affiliated with the
Acquiring Group. Counsel for the Special Committee discussed the terms of the
proposed merger agreement, both resolved and unresolved. The Special Committee
discussed the importance of the merger agreement containing specific provisions
which would allow it to negotiate with third parties who had, or might
thereafter, express an interest in acquiring the Company and to terminate the
merger agreement in such circumstances. Counsel also reviewed the fact that
there were no other "lock up" type arrangements in the draft merger agreement.
The Special Committee discussed the merger agreement, including the expense
reimbursement request presented by the Acquiring Group and the circumstances
under which it felt such reimbursement would be appropriate.
Thereafter, legal counsel for the Special Committee advised the Acquiring
Group and its advisors that Bear Stearns had indicated to the Special Committee
that Bear Stearns was prepared to advise the Special Committee that the price
of $15.00 in cash per Common Share to be received by the Company's stockholders
(other than the Acquiring Group) pursuant to the Revised Proposal, if made,
would be fair from a financial point of view to the Company's stockholders not
affiliated with the Acquiring Group. Counsel for the Special Committee also
advised that the Special Committee had scheduled a further meeting for the
following day, June 21, 1994, in anticipation of receiving the Revised Proposal
and to consider such Revised Proposal and the unresolved terms of the proposed
merger agreement.
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<PAGE>
On June 21, 1994, the Special Committee met by conference telephone with its
financial and legal advisors to review the status of the Revised Proposal and
the negotiations regarding certain terms of the merger agreement. Bear Stearns
confirmed the preliminary view as to the adequacy of the Revised Proposal that
it had expressed on the prior day. The Special Committee discussed the status
of the Revised Proposal, including the likelihood that the conditions
(including receipt of the required financing) to the Revised Proposal would be
satisfied. Counsel reviewed with the Special Committee the status of
negotiations concerning the proposed merger agreement, including the expense
reimbursement provisions. Discussion then turned to the authority of the
Special Committee under the proposed merger agreement to respond to other
offers and expressions of interest by third parties. The members of the Special
Committee were read the relevant provisions of the proposed merger agreement
which set forth this authority. The Special Committee further noted that since
the filing by the American Securities Group of Amendment No. 12 to its Schedule
13D in October 1993, information with respect to a possible transaction by the
Acquiring Group was publicly available and that no lock-ups or other
disincentives were put in the way of interested third parties beyond
reimbursement to Holdings Corp. of certain of its expenses. Subject to limiting
further the scope of the expense reimbursement provisions, the Special
Committee determined, based in part on the advice of Bear Stearns, that the
Revised Proposal was fair and in the best interests of the Company's
stockholders other than the Acquiring Group and that it would recommend that
the Board of Directors approve and adopt the Merger Agreement.
Thereafter, a special meeting of the Board of Directors was held by
conference telephone late in the day on June 21, 1994 (Mr. Gruber joined the
call toward the end of the meeting). At such meeting, the representatives of
the Acquiring Group confirmed that Holdings Corp. had received and accepted an
amendment to the Chase financing commitment that satisfied the condition to the
Acquiring Group making the Revised Proposal. A representative of Bear Stearns
then reviewed with the Board of Directors such firm's analysis of the Revised
Proposal, including the methodologies which such firm had employed in its
analysis. He advised that Bear Stearns, subject to approval of its valuation
committee, had concluded that the Revised Proposal at a price of $15.00 in cash
per Common Share was fair from a financial point of view to the Company's
stockholders other than the Acquiring Group. Dr. Catacosinos then advised the
Meeting that the remaining provisions of the proposed merger agreement had been
resolved to the satisfaction of the Special Committee and that the Special
Committee had unanimously determined, based in part on the advice of Bear
Stearns, that the Revised Proposal was fair and in the best interests of the
Company's stockholders other than the Acquiring Group, and that it recommended
to the full Board of Directors the $15.00 per Common Share price to be paid in
connection with the Merger and the other terms of the Merger Agreement. The
full Board of Directors then unanimously approved the Revised Proposal and the
Merger Agreement. See "SPECIAL FACTORS--Recommendations of the Special
Committee, the Board, and the Acquiring Group; Fairness of the Merger."
The Company issued the following press release early on June 22, 1994:
"FOR IMMEDIATE RELEASE
KETEMA'S BOARD APPROVES REVISED MERGER PROPOSAL
Denver, CO, June 21, 1994--Ketema, Inc. (Amex-KTM) announced today that
its Board of Directors, based in part upon the recommendation of a Special
Committee of independent Directors, has unanimously approved a revised
merger proposal from the American Securities Group under which the members
of such Group would acquire all of the Common Stock of Ketema not already
owned by them at a price of $15.00 per share in cash through the merger of
a newly-formed corporation owned by them into Ketema. The American
Securities Group, which owns approximately 23% of the Company's outstanding
stock, including shares issuable upon conversion of Debentures held by the
Group, consists of clients of American Securities Partners, L.P., and Hugh
H. Williamson, III, the President and Chief Executive officer of Ketema.
Four members of the American Securities Group are Directors of the Company.
18
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The Special Committee based its recommendation in part upon the advice of
Bear, Stearns & Co. Inc., its financial advisor, that the transaction is
fair from a financial point of view to the Company's stockholders (other
than the American Securities Group). As previously reported, the American
Securities Group had submitted a proposal in April, 1994 for a similar
transaction at a price of $13.125 per share in cash. On June 13, 1994, the
Company announced that the Special Committee had determined that such prior
offer was inadequate from a financial point of view and that it would not
recommend that stockholders approve the offer.
Under the terms of the definitive Merger Agreement executed today, the
Special Committee has the authority to continue to explore other
expressions of interest which have been or may be received from third
parties. The Company, acting through the Special Committee, would have the
right to terminate the Merger Agreement if the Board of Directors or the
Special Committee recommends a competing transaction or withdraws its
recommendation of the proposal of the American Securities Group.
Ketema said that under the terms of the Merger Agreement, the merger is
subject to, among other things, (i) approval by holders of a majority of
Ketema's outstanding shares at a Special Meeting of Stockholders to be
called for the purpose of considering the merger, (ii) funding pursuant to
a bank financing commitment, which financing commitment would require,
among other things, the American Securities Group reaching satisfactory
agreements with the institutional investors holding Ketema's $45,000,000
principal amount of outstanding Senior Notes regarding the early retirement
of such Notes, and (iii) the receipt of all necessary consents and
governmental approvals.
Upon consummation of the merger, Ketema's 8% Convertible Subordinated
Debentures due 2003 which are not converted into Common Stock prior to the
merger would remain outstanding and, in accordance with their terms, would
thereafter be convertible solely into the right to receive the cash merger
consideration. Such Debentures are presently convertible into Ketema Common
Stock at a conversion price of $15.58 per share. However, it is the present
intention of the American Securities Group to cause Ketema to redeem the
Debentures at their redemption price, plus accrued interest, following
consummation of the merger subject to availability of financing.
Ketema, Inc. is a diversified, multi-product manufacturer that develops,
designs, manufactures, and markets, domestically and internationally, a
wide group of products for industrial and commercial markets."
On June 27, 1994, the party that had initially expressed an interest in
acquiring the Company advised the Special Committee in writing that it was no
longer interested in pursuing its interest in the Company.
On the date of this Proxy Statement, Bear Stearns delivered a written
opinion, dated the date hereof, a copy of which is attached as Annex C hereto,
as to the fairness of the consideration from a financial point of view to be
paid to the Company's public stockholders pursuant to the Merger. See "SPECIAL
FACTORS--Recommendations of the Special Committee, the Board and the Acquiring
Group; Fairness of the Merger."
RECOMMENDATIONS OF THE SPECIAL COMMITTEE, THE BOARD AND THE ACQUIRING GROUP;
FAIRNESS OF THE MERGER
The Special Committee. At a meeting of the Special Committee of the Board of
Directors on June 21, 1994, the Special Committee unanimously concluded that
the Merger and the Merger Consideration are fair from a financial point of view
to, and in the best interests of, the stockholders of the Company (other than
to members of the Acquiring Group) and recommended to the Board of Directors
that it approve the Merger Agreement based upon the following factors:
(i) The opinion of the Special Committee's financial advisor to the
effect that the Merger is fair, from a financial point of view, to the
stockholders of the Company (other than to members of the Acquiring Group);
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(ii) The existing assets, financial condition and operations of the
Company, including its relatively small size and market capitalization and
its numerous small and diverse business units;
(iii) The trading history of the Common Shares with particular emphasis
on the relationship between the price to be paid pursuant to the Merger and
the trading history of the Common Shares, including the fact that the
consideration to be received pursuant to the Merger represents a premium of
approximately 34.8% over the closing sales price on the AMEX on October 20,
1993, the last trading day before the filing of Amendment No. 12 to the
Schedule 13D by members of the American Securities Group (see "SPECIAL
FACTORS--Background of the Merger") and a premium of approximately 11.0%
over the closing sales price on the AMEX on June 21, 1994, the last trading
date preceding the press release by the Company announcing the receipt and
acceptance of the Acquiring Group's Revised Proposal of $15.00 per Common
Share (see "MARKET PRICE FOR THE COMMON SHARES");
(iv) The fact that the terms of the Merger Agreement and the price to be
paid were determined through arms' length negotiations between
representatives of the Acquiring Group, on the one hand, and the Special
Committee, on the other hand; and that as a result of these negotiations,
the price to be paid was increased by the Acquiring Group on two occasions;
(v) The terms and conditions of the Revised Proposal and the Special
Committee's judgment as to the likelihood of the transaction being
consummated;
(vi) The fact that the Special Committee had negotiated in the Merger
Agreement the ability to respond to and negotiate with third parties who
had previously or might thereafter express an interest in acquiring the
Company and, if appropriate, to terminate the Merger Agreement in light of
such expressions of interest as well as the right to include such
information in the public announcement concerning approval of the Merger
Agreement; and
(vii) The risks that the Company would not be able to realize potentially
greater values from various restructuring alternatives.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger and the Merger Consideration, the Special Committee
did not find it practicable to assign relative weights to the factors
considered in reaching its decision, and therefore, the Special Committee did
not quantify or otherwise attach relative weights to the specific factors
considered by the Special Committee.
As described more fully under "--Background of the Merger" above, the
Acquiring Group made the Initial Proposal of $13.125 per Common Share on April
28, 1994. On June 13, 1994, the Special Committee determined that the Initial
Proposal was inadequate. A representative of the Acquiring Group then suggested
that the Acquiring Group might increase their offer to the $14.00 per Common
Share range. In response to that suggestion, on June 16, 1994, the Special
Committee indicated to the Acquiring Group that such an increased offer by the
Acquiring Group, if made, would be inadequate. On June 20, 1994, the Acquiring
Group increased its offer to the Revised Proposal of $15.00 per Common Share.
On June 21, 1994, the Special Committee determined that the Revised Proposal
was adequate and recommended the Revised Proposal to the full Board of
Directors. The full Board of Directors then unanimously approved the Revised
Proposal and the Merger Agreement.
As noted above, the Special Committee considered as an important element of
its analysis, among the other factors described above, the analysis of its
financial advisor as to the fairness of the Merger from a financial point of
view. The Special Committee relied for its analysis upon the fairness opinion
rendered by Bear Stearns after its review of the Optimistic Growth Case
Projections, the Five Year Management Projections and the American Securities
Projections, and the Special Committee expressly adopted the conclusion and
analysis of Bear Stearns as its own (see "SPECIAL FACTORS--Opinion of the
Special Committee's Financial Advisor"). In its presentation to the Special
Committee, Bear Stearns discussed
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the financial analysis it had conducted (described under "SPECIAL FACTORS--
Opinion of the Special Committee's Financial Advisor") and indicated that such
analysis supported its conclusion that the Merger is fair, from a financial
point of view, to the holders of Common Shares unaffiliated with the Acquiring
Group. The Special Committee and its financial advisor evaluated the fairness
of the Merger Consideration following receipt of the Revised Proposal from
members of the Acquiring Group and neither the Special Committee nor its
financial advisor established a range of fair values for the Company as a
whole. The Special Committee determined that the factors discussed above
indicated that the Merger Consideration of $15.00 per Common Share was a
reasonable price and there could be no assurance that the Company's public
stockholders would be able to realize any greater value per Common Share in an
alternative transaction. Accordingly, the Special Committee believed that the
factors discussed above were supportive of its determination that the Merger is
fair to the stockholders of the Company unaffiliated with the Acquiring Group.
In addition, in considering alternatives of strategic acquisitions or
management initiatives, the Special Committee noted that the Company's
President had recently decided against strategic acquisitions or divestitures.
The Special Committee felt that it was unlikely that the Company would embark
upon any strategic acquisition program, and that such a task would be difficult
given the diverse nature of the Company's various business units. It was felt
that the alternative involving divestitures also could not be considered a
timely alternative given the number and diverse nature of the Company's various
business units. It was also noted by the Special Committee that the Company's
defense manufacturing business was suffering from downward market conditions
likely to be ongoing.
The Special Committee recognized that the interests of members of the
Acquiring Group in the Merger are not the same as the interests of the other
holders of Common Shares in the Merger. The Special Committee also recognized
that adoption of the Merger Agreement does not require the affirmative vote of
a majority of the Common Shares held by stockholders of the Company who are
unaffiliated with the Acquiring Group. See "SPECIAL FACTORS--Interests of
Certain Persons in the Merger; Certain Relationships," "--Opinion of the
Special Committee's Financial Advisor," "--Certain Projections" and "MARKET
PRICE FOR THE COMMON SHARES."
The Board. The Board of Directors of the Company has concluded that the
Merger, including the Merger Consideration and the negotiation and structure of
the Merger, is fair to the stockholders of the Company (other than the members
of the Acquiring Group) and recommends that stockholders vote in favor of the
Merger based upon the following factors: (i) the conclusions and
recommendations of the Special Committee; (ii) the opinion of the Special
Committee's financial advisor to the effect that the $15.00 per Common Share to
be received in the Merger is fair from a financial point of view to the
stockholders of the Company (other than the members of the Acquiring Group),
which opinion of Bear Stearns the Board of Directors has adopted as its own, as
well as the conclusion and analysis of Bear Stearns; (iii) the factors referred
to above as having been taken into account by the Special Committee, which the
Board of Directors adopts as its own, including the existing assets, financial
condition and operations of the Company, the trading history of the Common
Shares, the fact that the Special Committee had negotiated in the Merger
Agreement the ability to respond to and negotiate with third parties and the
risks that the Company would not be able to realize potentially greater values
from various restructuring alternatives; (iv) the fact that the Merger
Consideration was the result of arm's-length negotiations between the Special
Committee and members of the Acquiring Group and their respective legal and
financial advisors; and (v) the report of Bridgeford detailing certain analyses
relating to the value of the Common Shares which American Securities had
considered in developing the Initial Proposal. In view of the wide variety of
factors considered in connection with its evaluation of the Merger and the
Merger Consideration, the Board of Directors did not find it practicable to
assign relative weights to the factors considered in reaching its decision,
and, therefore, the Board of Directors did not quantify or otherwise attach
relative weights to the specific factors considered by the Board.
The Board of Directors has considered as an important element of its
assessment the fairness opinion of the Special Committee's financial advisor.
In its analyses, the Board of Directors recognized that adoption of
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the Merger Agreement does not require the affirmative vote of a majority of the
Common Shares held by stockholders of the Company other than members of the
Acquiring Group. The Board recognized that the interests of the members of the
Acquiring Group in the Merger are not the same as the interests of the other
holders of Common Shares in the Merger. Because Delaware law requires a merger
agreement to be approved by a majority of the members of a Delaware
corporation's board of directors, members of the Acquiring Group who serve on
the Board of Directors, Alexander G. Anagnos, Charles D. Klein, Elizabeth R.
Varet and Hugh H. Williamson, III, participated in the Board's vote to approve
the Merger Agreement and recommend it to the Company's stockholders. See
"SPECIAL FACTORS--Interests of Certain Persons in the Merger; Certain
Relationships," "--Opinion of the Special Committee's Financial Advisor," and
"--Certain Projections."
The Acquiring Group. The Acquiring Group has concluded that the Merger,
including the Merger Consideration and the negotiation and structure of the
Merger, is fair to the stockholders of the Company (other than the members of
the Acquiring Group) based upon the following factors: (i) the conclusions and
recommendations of the Special Committee and the Company's Board of Directors;
(ii) information provided to and discussed with members of the Acquiring Group
in connection with the valuation analyses performed by Bridgeford; (iii) the
fact that the Merger Consideration and the other terms and conditions of the
Merger Agreement were the result of arm's-length good faith negotiations
between the Special Committee and its advisors and the representatives of the
Acquiring Group and its advisors; (iv) the fact that Bear Stearns issued a
fairness opinion to the Special Committee to the effect that the Merger is fair
from a financial point of view to the Company's public stockholders; (v) the
fact that prior to the execution of the Merger Agreement there had been, and
during the substantial period of time which would elapse between the
announcement of the execution of the Merger Agreement and the consummation of
the Merger following the Special Meeting of Stockholders to be held to vote
upon the Merger there would be, more than sufficient time and opportunity for
other persons to propose alternative transactions to the Merger and that the
terms of the Merger Agreement authorize the Company to furnish information to
and negotiate with third parties in response to unsolicited requests by such
parties concerning any merger, sale of assets, sale of shares of capital stock
or similar transaction involving the Company or any subsidiary or division
thereof if the Special Committee deems such action is appropriate in light of
its fiduciary obligations to the Company's stockholders after consultation with
legal counsel; and (vi) the other factors referred to above as having been
taken into account by the Special Committee and the Company's Board of
Directors, which the members of the Acquiring Group adopt as their own (see
"SPECIAL FACTORS--Background of the Merger" and "--Opinion of the Special
Committee's Financial Advisor"). The Acquiring Group took note of the fact that
as of May 31, 1994, the Company's book value per Common Share outstanding,
determined in accordance with generally accepted accounting principles, was
$16.14 and the Company's book value per Common Share outstanding (adjusted for
LIFO inventories of $9.7 million, net of combined federal and state income
taxes at 40% or $3.9 million) was $17.80. Although these book value amounts
were greater than the Merger Consideration of $15.00 per Common Share, the
Acquiring Group believes that book value of common stock is not a reliable
estimate of value as it is the result of the recording and amortization of
historical receipts and costs and not a reflection of current values.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger and the Merger Consideration, the members of the
Acquiring Group did not find it practicable to assign relative weights to the
factors considered in reaching their decision, and, therefore, the members of
the Acquiring Group did not quantify or otherwise attach relative weights to
the specific factors considered by the Special Committee and the Company's
Board of Directors. The members of the Acquiring Group recognized that their
interests in the Merger are not the same as the interests of the other holders
of Common Shares in the Merger. See "SPECIAL FACTORS--Interests of Certain
Persons in the Merger; Certain Relationships."
OPINION OF THE SPECIAL COMMITTEE'S FINANCIAL ADVISOR
The Special Committee of the Board of Directors of the Company retained Bear
Stearns on December 13, 1993 to act as its financial advisor and to render an
opinion to the Special Committee and the Board of Directors as to the fairness
of the Merger, from a financial point of view, to the holders of Common Shares
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unaffiliated with the Acquiring Group. On June 21, 1994, Bear Stearns rendered
its financial advice to the Special Committee and the Board of Directors that
with an increase of the consideration to $15.00 per Common Share, payable in
cash, the Merger was fair, from a financial point of view, to the holders of
Common Shares unaffiliated with the Acquiring Group. Bear Stearns issued its
formal opinion which has been updated to the date of this Proxy Statement.
The full text of Bear Stearns' opinion, which sets forth certain assumptions
made, certain procedures followed and certain matters considered by Bear
Stearns, is attached as Annex C to this Proxy Statement. As set forth therein,
Bear Stearns relied upon the accuracy and completeness of the financial and
other information provided to it by the Company and further relied upon the
assurances of management that it is unaware of any facts that would make the
information provided to Bear Stearns incomplete or misleading. In arriving at
its opinion, Bear Stearns did not perform any independent appraisal of the
assets of the Company. No limitations were imposed by the Special Committee or
the Board of Directors of the Company with respect to the investigation made,
or the procedures followed, by Bear Stearns in rendering its opinion, and the
Company's management cooperated fully with Bear Stearns in connection
therewith. Bear Stearns' opinion was based on market, economic and other
conditions as they existed and could be evaluated at the date of the opinion.
Bear Stearns did not recommend the amount of consideration to be paid in the
Merger, which was determined through arm's-length negotiations between the
Acquiring Group and the Special Committee. The discussion of the opinion in
this Proxy Statement is qualified in its entirety by reference to the full text
of such written opinion of Bear Stearns. STOCKHOLDERS ARE ENCOURAGED TO READ
BEAR STEARNS' OPINION IN ITS ENTIRETY.
In conducting its analysis and arriving at its opinion, Bear Stearns, among
other things: (i) reviewed this Proxy Statement; (ii) reviewed the Company's
Annual Reports to Stockholders and Annual Reports on Form 10-K for the fiscal
years ended February 28, 1993 and 1994 and its Quarterly Report on Form 10-Q
for the period ended May 31, 1994; (iii) reviewed certain operating and
financial information, including projections, provided to it by management
relating to the Company's business and prospects; (iv) met with certain members
of the Company's senior and operating managements to discuss its operations,
historical financial statements and future prospects; (v) visited the Company's
facilities in Bensalem, Pennsylvania, Denver, Colorado, El Cajon, California,
Grand Prairie, Texas, and Odenton, Maryland; (vi) reviewed the historical stock
prices and trading volume of the Common Shares; (vii) reviewed publicly
available financial data and stock market performance data of public companies
which it deemed generally comparable to the Company; (viii) reviewed the terms
of recent acquisitions of companies which it deemed generally comparable to the
Company; and (ix) conducted such other studies, analyses, inquiries and
investigations as it deemed appropriate.
In connection with its opinion, Bear Stearns performed the following
analyses: (1) analysis of historical market prices of the Common Shares; (2)
going-concern analysis based on comparisons with other multi-industry,
publicly-traded companies serving similar markets; (3) going-concern analysis
based on comparisons with acquisitions of other multi-industry, publicly-traded
companies serving similar markets; (4) pro forma capitalization of projected
fiscal year 1995 EBITDA; (5) liquidation analysis; and (6) discounted cash flow
analysis.
Market Price Analysis. Bear Stearns reviewed the historical market price and
volume relating to the Common Shares and noted the following: (i) during the
twelve months ended June 21, 1994, the Common Shares traded between $9.875 and
$15.75; (ii) the closing price on October 21, 1993, the day of the filing of
Amendment No. 12 to the Schedule 13D by the members of the American Securities
Group (see "SPECIAL FACTORS--Background of the Merger"), was $11.00 per Common
Share; (iii) on October 22, 1993, the price per Common Share rose to $15.75 and
closed at $15.125, the highest Common Share price since 1990; (iv) on April 26,
1994, the last trading day prior to public disclosure of the Initial Proposal,
the closing price was $13.00 per Common Share; and (v) on June 14, 1994, one
day after the announcement of the Special Committee's rejection of the Initial
Proposal, the closing price of the Common Shares was $13.375 per
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Common Share. Bear Stearns believed that this analysis supported the conclusion
that the Merger is fair, from a financial point of view, to the holders of
Common Shares unaffiliated with the Acquiring Group.
Going-Concern Analysis--Comparison with Selected Publicly Traded Companies.
Bear Stearns reviewed and compared the financial and market performance of the
Company to the financial and market performance of Vishay Intertechnology,
Inc., Ametek, Inc., Varlen Corporation, Core Industries Inc. Pacific Scientific
Company and SL Industries Inc. (the "Comparable Companies" and, collectively
with the Company, the "Comparable Group"), six publicly traded multi-industry
corporations that Bear Stearns believed were comparable in certain respects to
the Company. Although the Comparable Companies were considered similar to the
Company in some respects, none of the Comparable Companies possessed the same
make-up, combination of businesses or other characteristics identical to those
of the Company. For each member of the Comparable Group, Bear Stearns examined
certain publicly available financial data, including net sales, EBITDA,
earnings before interest and taxes ("EBIT"), net income, earnings per share,
profit margins and compounded annual growth rates. Bear Stearns examined
balance sheet items of each company, earnings forecasts (if available) and the
relative trading performance of the various companies' common stock. In
addition, with respect to each member of the Comparable Group, Bear Stearns
calculated the ratios of (i) the market price per share of common stock (using
the Merger Consideration of $15.00 per Common Share in the case of the Company)
to latest twelve months ("LTM") earnings per share, projected 1994 earnings per
share (which projections were available for each member of the Comparable Group
except SL Industries Inc.) and projected 1995 earnings per share (which
projections were available for each member of the Comparable Group except SL
Industries Inc. and Core Industries Inc.) and (ii) the market capitalization
(defined as the total market value of a company's common stock outstanding,
plus its debt at par, minus its cash and cash equivalents) to LTM net sales,
LTM EBITDA and LTM EBIT. The Company (i) was the next to smallest company in
terms of net sales; (ii) had the lowest or next to lowest profit margins; and
(iii) had the lowest four-year sales growth and a negative growth rate in EBIT,
which was worse than four of the Comparable Companies. The ratios of the Merger
Consideration to the Company's LTM earnings per share, projected 1994 earnings
per share and projected 1995 earnings per share were all higher than for all of
the Comparable Companies for which data was available. The ratios of market
capitalization to LTM net sales, LTM EBITDA and LTM EBIT for the Company were,
respectively, lower than all the Comparable Companies, lower than all the
Comparable Companies but one, and above the harmonic mean of the Comparable
Companies.
More specifically, this analysis indicated, among other things, that (i) LTM
net sales ranged from $73.3 million to $854.8 million for the Comparable
Companies, as compared to $124.6 million for the Company; (ii) LTM EBIT margin
ranged from 4.2% to 8.8% for the Comparable Companies, as compared to 3.0% for
the Company and a mean of 6.7% for the Comparable Companies; (iii) LTM EBITDA
margin ranged from 6.8% to 14.2% for the Comparable Companies, as compared to
7.9% for the Company and a mean of 10.9% for the Comparable Companies; (iv)
four year sales compounded annual growth rate ranged from -6.3% to 19.8% for
the Comparable Companies, as compared to -9.6% for the Company and a mean of
4.3% for the Comparable Companies; (v) four year EBIT compounded annual growth
rate ranged from -17.9% to 16.2% for the Comparable Companies, as compared to -
6.5% for the Company and a mean of 0.3% for the Comparable Companies; (vi)
market price as a multiple of LTM earnings per share ranged from 9.5x to 24.2x
for the Comparable Companies, as compared to 373.1x for the Company and a
harmonic mean of 15.2x for the Comparable Companies; (vii) market price per
share as a multiple of projected 1994 earnings per share ranged from 9.8x to
17.0x for the Comparable Companies, as compared to 31.6x for the Company and a
harmonic mean of 12.8x for the Comparable Companies; (viii) market price per
share as a multiple of projected 1995 earnings per share ranged from 9.0x to
14.1x for the Comparable Companies, as compared to 62.1x for the Company (22.9x
for the Company on a pro forma basis assuming the repayment of the $45 million
principal amount of the Senior Notes and associated reduced interest expense)
and a harmonic mean of 11.8x for the Comparable Companies; (ix) market
capitalization as a multiple of LTM sales ranged from 0.5x to 1.2x for the
Comparable Companies, as compared to 0.4x for the Company and a harmonic mean
of 0.7x for the Comparable Companies; (x) market capitalization as a multiple
of LTM EBIT ranged from 6.8x
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to 16.5x for the Comparable Companies, as compared to 14.3x for the Company and
a harmonic mean of 10.8x for the Comparable Companies; and (xi) market
capitalization as a multiple of LTM EBITDA ranged from 4.5x to 9.2x for the
Comparable Companies, as compared to 5.3x for the Company and a harmonic mean
of 6.9x for the Comparable Companies. In evaluating an acquisition proposal
from a financial point of view based on a comparison of the subject company
with comparable companies, Bear Stearns' normal practice is to compare (i) the
subject company's financial performance vis a vis the financial performance of
the comparable companies with (ii) the subject company's market price and
market capitalization multiples (based on the proposed acquisition price) vis a
vis the market price and market capitalization multiples of the comparable
companies. Bear Stearns believed that this analysis supported the conclusion
that the Merger is fair, from a financial point of view, to the holders of
Common Shares unaffiliated with the Acquiring Group.
Going-Concern Analysis--Comparison with Selected Acquisitions. Bear Stearns
reviewed the consideration paid or proposed to be paid in connection with the
publicly-disclosed acquisitions of Fischer & Porter Company, Mark Controls
Corp., Autotrol Corporation, Rexnord Corporation, Eldec Corp. and Sun Electric
Corporation (collectively, the "Acquired Companies"), six publicly traded
multi-industry corporations that Bear Stearns believed were comparable in
certain respects to the Company. Although the Acquired Companies were
considered similar to the Company in some respects, none of Acquired Companies
possessed the same make-up, combination of businesses or other characteristics
identical to those of the Company. For each company, Bear Stearns examined
certain publicly available financial data, including net sales, EBIT, EBITDA,
net income and earnings per share. Bear Stearns calculated the ratio of the
acquisition price of each company's stock (using the Merger Consideration of
$15.00 per Common Share in the case of the Company) in relation to LTM earnings
and the ratio of the market capitalization of each company to its LTM net
sales, LTM EBIT and LTM EBITDA. The Company had the highest multiple of LTM
earnings, the lowest multiple of LTM sales and EBITDA, and the next to lowest
multiple of EBIT.
More specifically, this analysis indicated, among other things, that (i) the
aggregate acquisition price for stock of the Acquired Companies ranged from
$44.3 million to $414.7 million, as compared to $52.4 million for Company; (ii)
the market capitalization of the Acquired Companies ranged from $41.5 million
to $813.8 million, as compared to $52.6 million for the Company; (iii) market
capitalization as a multiple of LTM sales ranged from 0.6x to 1.5x for the
Acquired Companies, as compared to 0.4x for the Company; (iv) market
capitalization as a multiple of LTM EBIT ranged from 11.8x to 33.4x for the
Acquired Companies (with such multiple not being calculated for two of the
Acquired Companies due to negative LTM EBIT), as compared to 14.3x for the
Company; (v) market capitalization as a multiple of LTM EBITDA ranged from 8.5x
to 18.3x for the Acquired Companies, as compared to 5.3x for the Company; and
(vi) acquisition price as a multiple of LTM earnings ranged from 24.3x to 67.7x
for the Acquired Companies (with such multiple not being calculated for two of
the Acquired Companies due to negative LTM earnings), as compared to 373.1x for
the Company. In evaluating an acquisition proposal from a financial point of
view based on a comparison of the subject acquisition with other acquisitions,
Bear Stearns' normal practice is to compare the subject company's market price
and market capitalization multiples with the market price and market
capitalization multiples of the other acquired companies, in each case based on
the acquisition price paid or proposed to be paid. Bear Stearns believed that
this analysis was neutral relative to the conclusion that the Merger is fair,
from a financial point of view, to the holders of Common Shares unaffiliated
with the Acquiring Group.
Pro Forma Capitalization of Projected Fiscal Year 1995 EBITDA. In this
analysis, Bear Stearns estimated the going-concern value of the Common Shares
by multiplying the Company's projected fiscal year 1995 EBITDA by multiples
ranging from 4.0x to 5.5x and adjusting such products to reflect the Company's
financial assets and liabilities. Such adjustments were (i) additions totaling
$75.6 million to reflect the Company's cash and cash equivalents, the estimated
market value of certain discontinued operations, the estimated market value of
the Company's investment in Pine Street Partners, L.P., a risk arbitrage
partnership, the tax benefit associated with the Company's net operating losses
and the assumed proceeds from the exercise of the Company's outstanding stock
options; (ii) deductions totalling $52.4 million to reflect
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the assumed payment of the principal amount of, accrued interest on, and
prepayment penalty associated with, the Senior Notes (which will be refinanced
in connection with the Merger); and (iii) in estimates using the 4.0x and 4.5x
multiples only, deductions totalling $14.7 million to reflect the redemption of
the Debentures (in the remaining estimates the Debentures were assumed to be
converted). The imputed value per Common Share ranged from $13.39 to $17.24.
Bear Stearns believed that the 4.0x to 5.5x EBITDA multiple range was
appropriate in light of a variety of factors, including the Company's current
and expected performance and the market for companies similar to the Company
and its subsidiaries. Bear Stearns believed that this analysis supported the
conclusion that the Merger is fair, from a financial point of view, to the
holders of Common Shares unaffiliated with the Acquiring Group.
Liquidation Analysis. The Company's book value per Common Share outstanding
based on generally accepted accounting principles was $16.32 as of February 28,
1994. Although this book value is greater than the Merger Consideration of
$15.00 per Common Share, book value of common stock is not normally considered
a reliable estimate of value as it is the result of the recording and
amortization of historical receipts and costs and not a reflection of current
values. Bear Stearns estimated the net asset value of the Company assuming the
liquidation of all the Company's assets and liabilities at their current
estimated realizable values. Bear Stearns' analysis was based in part on
certain estimates of fair market values provided to Bear Stearns by the Company
as well as appraised values for certain machinery and real estate also supplied
by the Company. In this analysis receivables were discounted by 20%,
inventories were discounted by 50% and no value was ascribed to intangible
assets. Bear Stearns concluded that a liquidation of the Company would result
in a net asset value of approximately $6.71 before consideration of the risk,
time and expense of liquidation. Bear Stearns believed that this liquidation
analysis supported the conclusion that the Merger is fair, from a financial
point of view, to the holders of Common Shares unaffiliated with the Acquiring
Group.
Discounted Cash Flow Analysis. Bear Stearns prepared a discounted cash flow
analysis based upon the American Securities Projections, which were adjusted so
that the analysis (i) used minimum cash balances of $4.0 million not
incorporated in the American Securities Projections; (ii) assumed that the
Company would continue as a public reporting entity; (iii) ignored the Merger
financing reflected in the American Securities Projections but assumed
prepayment of the Senior Notes; and (iv) assumed both a larger amount and a
faster use of the Company's NOLs for tax purposes. Bear Stearns used the
American Securities Projections as opposed to the Company's projections because
(i) the American Securities Projections were believed to be credible in that
they were used to secure financing for the proposed Merger and (ii) the
American Securities Projections were more optimistic than the Company's
projections. Bear Stearns used minimum cash balances of $4.0 million because
Bear Stearns was informed by the Company that this was the minimum cash
required to be on hand to meet the Company's day-to-day needs. The net effect
of this cash balance assumption was to slightly reduce the net present value
per share. Bear Stearns ignored the Merger financing but assumed prepayment of
the Senior Notes because Bear Stearns wished to estimate the net present value
per share before consideration of the effects of the Merger but giving
consideration to the proposed prepayment of the Senior Notes which would
increase the net present value per share. Bear Stearns assumed both a larger
amount and faster use of the Company's NOL's for tax purposes which would also
increase the net present value per share. Based on terminal value multiples of
4.0x to 5.5x projected fiscal year 1999 EBITDA and discount rates of 13.0% to
17.0%, the imputed value of the Common Shares was between $13.22 and $17.40 per
Common Share. Bear Stearns believed that the 4.0x to 5.5x EBITDA multiple range
was appropriate in light of a variety of factors, including the Company's
current and expected performance and the market for companies similar to the
Company and its subsidiaries. Bear Stearns believed that the 13% to 17%
discount rate was appropriate based upon a variety of factors including
estimates of the Company's cost of equity capital based upon the capital asset
pricing model and its publicly reported beta. Bear Stearns believed that this
discounted cash flow analysis supported the conclusion that the Merger is fair,
from a financial point of view, to the holders of Common Shares unaffiliated
with the Acquiring Group.
Bear Stearns also prepared a discounted cash flow analysis based upon the
preceding model with two additional adjustments: both revenues and capital
expenditures were increased using a 5% annual growth
26
<PAGE>
rate as opposed to the 3% annual growth rate used in the American Securities
Projections. The purpose of this analysis was to test the sensitivity of the
estimated discounted cash flow values to the possibility that the Company might
grow faster than projected in the American Securities Projections. The imputed
value per Common Share was between $13.80 and $18.35. Bear Stearns believed
that this analysis further supported the conclusion that the Merger is fair,
from a financial point of view, to the holders of Common Shares unaffiliated
with the Acquiring Group.
A copy of Bear Stearns' written presentation to the Special Committee has
been filed as an Exhibit to the Schedule 13E-3. Copies will be made available
for inspection and copying at the principal executive offices of the Company
during regular business hours by any interested stockholder of the Company, or
the representative of such stockholder who has been designated in writing as
such by such stockholder. The summary set forth above of the analyses prepared
by Bear Stearns does not purport to be a complete description of Bear Stearns'
analyses. Bear Stearns believes that its analyses must be considered as a whole
and that selecting portions of the factors considered and analyses performed by
it, without considering all factors and analyses, could create an incomplete
view of the processes underlying its analyses and fairness opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In its analyses, Bear
Stearns made numerous assumptions which Bear Stearns and the Special Committee
considered reasonable with respect to the Company's industry, general business
and economic conditions and other matters, many of which are beyond the
Company's control. Any estimates contained therein are not necessarily
indicative of actual value, which may be significantly more or less favorable
than as set forth therein. Estimates of value for companies do not purport to
be appraisals or necessarily reflect the prices at which companies may actually
be sold. Because such estimates are inherently subject to uncertainty, Bear
Stearns assumes no responsibility for their accuracy.
Bear Stearns is an internationally recognized investment banking firm which
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions. The Special Committee chose Bear
Stearns as its financial advisor based upon Bear Stearns' qualifications,
expertise and reputation. For its services as financial advisor to the Special
Committee, the Company has paid Bear Stearns a fee of $350,000. The Company has
also agreed to indemnify Bear Stearns against certain liabilities and to
reimburse Bear Stearns for its reasonable out-of-pocket expenses (including the
reasonable fees and expenses of its counsel). In the ordinary course of its
business, Bear Stearns may actively trade in securities of the Company for its
own account and for the account of its customers and, accordingly, may at any
time hold a long or short position in such securities.
REPORT OF FINANCIAL ADVISOR OF THE AMERICAN SECURITIES GROUP
American Securities has neither requested nor received any opinion from
Bridgeford, or any other outside party, as to the fairness of the Merger
Consideration to the Company's public stockholders. However, since it was
retained by American Securities pursuant to a letter agreement dated November
1, 1993, Bridgeford undertook and reported the results of certain analyses
relating to the value of the Common Shares to assist American Securities in
connection with its deliberations as to what action, if any, it should take
with respect to its interest in the Company. In preparing such analyses,
Bridgeford, among other things: (i) reviewed the Company's Annual Reports to
Stockholders and Annual Reports on Form 10-K for the fiscal years ended
February 28, 1993 and 1994 and its Quarterly Report on Form 10-Q for the period
ended November 30, 1993; (ii) reviewed certain operating and financial
information including projections and monthly reports to the Company's Board of
Directors provided to it by senior corporate management relating to the
Company's business and prospects; (iii) met with certain members of the
Company's senior corporate management to discuss its operations, competitive
position, historical financial performance and future prospects; (iv) reviewed
the historical stock prices and trading volume of the Common Shares and
comparative historical prices of various stock market indices; (v) reviewed
publicly available financial data and stock market performance data for public
companies which it deemed generally comparable to the Company; (vi) reviewed
the terms of recent acquisitions of companies which it deemed generally
comparable to the Company; and (vii) conducted such other studies, analyses,
inquiries and investigations as it deemed
27
<PAGE>
appropriate. Bridgeford relied on the accuracy of information provided by
American Securities and senior corporate management of the Company. Bridgeford
did not independently verify such information. Following the Initial Proposal,
American Securities requested that Bridgeford provide to the Special Committee,
Bear Stearns and Skadden, Arps, Slate, Meagher & Flom, a report detailing
certain analyses relating to the value of the Common Shares which American
Securities had considered in developing the Initial Proposal. Bridgeford
delivered this report (the "Bridgeford Report") on May 2, 1994. The Bridgeport
Report included the following analyses: (1) Historical Stock Trading and
Financial Statement Analysis; (2) Comparable Company Analysis based on
comparisons with other diversified, multi-industry, publicly-traded companies
believed to have characteristics similar to that of the Company; (3) Comparable
Transaction Analysis based on comparisons with acquisitions of other
diversified, multi-industry companies believed to have characteristics similar
to those of the Company; (4) Discounted Cash Flow Analysis; and (5) Leveraged
Buyout Analysis. Bridgeford is of the view that these methodologies are
generally among the most relevant for valuing a Company and its securities. The
following is a brief summary of the Bridgeford Report.
Historical Stock Trading and Financial Statement Analyses. Bridgeford
reviewed and analyzed historical trading prices and volumes for the Common
Shares as well as selected historical balance sheet and income statement
information for the Company. The Initial Proposal represented a 20% premium
over the unaffected market price of Common Shares prior to the filing of the
13D Amendment by the American Securities Group on October 21, 1993, and placed
a higher value on the Common Shares than at any time since mid-1990, excluding
the period from October 21, 1993 to the date of the Initial Proposal. (The
Revised Proposal represents a 37% premium over the unaffected market price of
the Common Shares). Such analysis also indicated that the Common Shares had
significantly under-performed relevant industrial indices, including the NASDAQ
Composite, Standard & Poor's Industrial and Standard & Poor's Manufacturing
(Diversified Industrials). Bridgeford's analysis also noted that the Company's
financial performance since it had been publicly owned had generally been
inconsistent and weak on an absolute basis and relative to a group of publicly-
traded companies that Bridgeford deemed to have businesses similar to those of
the Company. Bridgeford further noted that the Company underperformed its
fiscal year 1994 Budget. Bridgeford was of the view that the premium
represented by the Initial Proposal was significant versus benchmarks deemed
relevant by Bridgeford in light of the Company's relatively weak historical
stock market and financial performance.
Comparable Company Analysis. Bridgeford conducted an analysis of selected
companies with diverse businesses believed to have characteristics similar to
those of the Company. These companies included Arx, Inc., Curtiss-Wright
Corporation, Esterline Technologies Corporation, Heico Corporation, Hi-Shear
Industries Inc., Moog Inc., TransTechnology Corporation and Wyman-Gordon
Company (the "Selected Companies"). Bridgeford analyzed certain multiples
derived from the historical stock price, earnings and other information for the
Selected Companies. Such analyses indicated that, with respect to the Selected
Companies, the mean and median (excluding values deemed extreme by Bridgeford)
aggregate total market capitalization (market value of equity plus total debt,
preferred stock and minority interests, less cash and cash equivalents) for the
Selected Companies as a multiple of their LTM operating income, operating cash
flow (operating income plus depreciation and amortization), free cash flow
(operating cash flow less capital expenditures) and net book capital (book
value of common equity plus total debt, preferred stock and minority interests,
less cash and cash equivalents) ranged from 8.6x to 9.2x, 5.4x to 6.1x, 7.4x to
8.3x and 0.9x to 1.0x, respectively. Bridgeford also analyzed equity market
capitalization multiples based on earnings per share and book values, but
deemed these less relevant than aggregate market capitalization multiples.
Aggregate market capitalization multiples were then applied to the Company's
adjusted estimated actual fiscal year 1994 results. Adjustments were determined
by Bridgeford through analysis of the Company's interim monthly reports to the
Board of Directors and through discussions with management, and were undertaken
to reflect what Bridgeford viewed as being the Company's recurring earnings
from operations. Earnings deductions included the elimination of profits in the
Aerospace & Electronics division that were deemed to have been more closely
associated with prior years' activities, the elimination of favorable LIFO
effects and various insurance-related adjustments. Earnings add-backs included
the elimination of certain
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<PAGE>
losses in the American Innovations division, the elimination of losses
attributable to Aldan Machining and the elimination of non-recurring
consultants fees. Bridgeford determined that normalized estimated operating
income in fiscal year 1994 was $5.0 million, compared to $5.6 million
ultimately reported by the Company in its audited fiscal year 1994 Consolidated
Statements of Operations. Adjusted operating cash flow and free cash flow were
determined to be $11.3 million and $6.7 million, respectively. Bridgeford's
Comparable Company Analysis indicated an implied value range for the Company's
Common Shares on a fully-diluted basis of $11.87 to $17.67 per Common Share
based on the application of mean and median aggregate market capitalization
multiples for the Selected Companies to the Company's adjusted estimated fiscal
year 1994 financial results. Bridgeford noted that the Initial Proposal was at
a price within this implied value range.
Comparable Transaction Analysis. Bridgeford also conducted analyses of
transactions involving companies with diverse businesses believed to have
characteristics similar to those of the Company (the "Selected Transactions").
As with the Comparable Company Analysis, Bridgeford analyzed certain multiples
derived from the purchase price, target company earnings and other information
pertaining to the Selected Transactions. Such analyses indicated that, with
respect to the Selected Transactions, the mean and median (excluding values
deemed extreme by Bridgeford) aggregate consideration paid as a multiple of the
transaction targets' LTM operating income, operating cash flow, free cash flow
and net book capital ranged from 6.2x to 6.3x, 4.7x to 4.9x, 4.6x to 4.8x, and
0.9x flat, respectively. Bridgeford's Comparable Transaction Analysis indicated
an implied value range for the Company's Common Shares on a fully-diluted basis
of $8.46 to $14.85 per Common Share based on the application of mean and median
aggregate consideration multiples for the Selected Transactions to the
Company's adjusted estimated fiscal year 1994 financial results. Bridgeford
noted that the Initial Proposal was at a price toward the upper end of this
implied value range.
Discounted Cash Flow Analysis. Bridgeford conducted a discounted cash flow
("DCF") analysis on the Five Year Management Projections for the purpose of
estimating the Company's stand-alone asset value. The DCF was conducted by
discounting two components: (1) the projected future unleveraged after-tax cash
flows of the Company over a period from fiscal year 1995 to fiscal year 1999,
and (2) the terminal asset value of the Company at the end of fiscal year 1999
based on a multiple of 1999 projected EBIT. Bridgeford discounted these
components using a range of discount rates between 15.0% and 20.0%, which were
deemed an appropriate reflection of the Company's weighted average cost of
capital based on a review of the Company's asset beta, the historical market
risk premium for small capitalization equities, and current and prospective
long-term interest rates on U.S. government securities. The terminal asset
value was calculated by multiplying 1999 projected EBIT by multiples of 9.0x to
10.0x, which were determined in part by a review of the Selected Companies. To
the sum of the two discounted components described herein, Bridgeford added the
book value of cash and marketable securities and the Company's investment in
Pine Street Partners L.P., a risk arbitrage partnership, and subtracted the
book values of debt and accrued interest on the Company's unaudited February
28, 1994 balance sheet. After accounting for the exercise of options and the
conversion of convertible subordinated debt where appropriate, this methodology
produced an estimated fully diluted equity value per Common Share ranging from
$10.25 to $12.68. Bridgeford noted that the Initial Proposal was at a price
which was in excess of the Company's stand-alone value as determined by the DCF
analysis.
Leveraged Buyout Analysis. Bridgeford undertook an analysis of the
prospective equity returns to a financial investor in a leveraged acquisition
of the Company assuming a per share purchase price for the Company of $13.125,
an initial equity investment of $15 million, and the realization the Five Year
Management Projections with the following adjustments: annual income
attributable to Pine Street Partners, L.P. was deducted to reflect the fact
that the liquidation of Pine Street would be required to fund the merger
consideration, cost savings related to the operation of the Company as a
private entity were added, and an adjustment was made to cash flows from
changes in working capital to reflect the pre-funding of workers compensation
claims which was being contemplated by the Acquiring Group. Terminal asset
values were based on multiples of fiscal year 1999 EBIT of 7.0x to 8.0x which
were determined in part by a review of the Selected Companies and Selected
Transactions. Bridgeford's analysis indicated that a five-year pre-tax return
to common equity investors before equity concessions to financing sources and
management was expected to
29
<PAGE>
be in the range of 15% to 19%. In Bridgeford's view, the Initial Proposal was
at a price which it considered to be at the upper end of possible leveraged
buyout valuations for the Company, as in Bridgeford's experience common equity
investors typically seek acquisitions in which the minimum projected five-year
pre-tax return is in the range of 25% to 30%.
Optimistic Growth Case Projections. During the week of May 23, Bridgeford had
a series of discussions with Company management concerning the ramifications of
a more optimistic set of operating assumptions than those reflected in the Five
Year Management Projections on the Company's prospective financial performance.
These discussions led to the development of the Optimistic Growth Case
Projections. The major differences between the assumptions in the Optimistic
Growth Case Projections versus the Five Year Management Projections included
the following: (a) improved revenue growth for the three core business groups
in fiscal years 1996, 1997 and 1999 primarily as the result of incorporating
inflation assumptions; (b) improvement in the operating margins for the
Company's Process Group and Industrial Group in fiscal years 1996, 1997 and
1999; (c) corporate expense growth with inflation in all years; (d) capital
expenditures projected to equal depreciation in all years; and (e) the
inclusion of an estimated $7 million prepayment premium related to the
prospective early retirement of the Company's $45 million principal amount of
Senior Notes, as it was determined that this might be likely to occur if the
Company continued to operate on a stand-alone basis.
Bridgeford performed a discounted cash flow analysis on the Optimistic Growth
Case Projections using the same discount rate range as employed in the
Bridgeford Report. With a view towards achieving greater consistency with the
valuation methodology being employed by Bear Stearns, Bridgeford calculated its
terminal asset value as a multiple of 1999 EBITDA. Bridgeford employed an
EBITDA multiple range of 4.0x to 5.5x, based in part on a review of the
Selected Companies and Selected Transactions. After accounting for net
financial assets and liabilities and the exercise of options and conversion of
convertible subordinated debt where appropriate, this analysis produced an
estimated fully diluted equity value per Common Share ranging from $8.59 to
$12.67 per share. Bridgeford provided the Optimistic Growth Case Projections
and associated DCF analysis to the Special Committee, Bear Stearns and Skadden,
Arps, Slate, Meagher & Flom and its advisors on June 2, 1994.
The summary set forth above does not purport to be a complete description of
the analyses conducted by Bridgeford. Bridgeford believes that its analyses and
the summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or considering the
above summary, without considering all factors and analyses, could create an
incomplete view of the process underlying all analyses. In performing its
analyses, Bridgeford made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the Company's control, and therefore, are inherently
imprecise. The analyses performed by Bridgeford are not necessarily indicative
of actual values or actual future results, and results may be significantly
more or less favorable than suggested by such analyses.
Both Bear Stearns and Bridgeford utilized discounted cash flow valuation as
well as comparable company and transaction valuation methodologies in their
analyses of the Company and the Merger. The publicly-traded companies and
acquisition transactions selected by Bear Stearns and Bridgeford in their
comparable company and transaction analyses, respectively, differed based on
differing views of business and financial comparability to the Company.
Bridgeford did not perform a liquidation analysis as it was of the view that
the net asset value from such an analysis would be difficult to quantify with
any degree of confidence due to the uncertainty involved in the potential
timing and realized proceeds from the sale of the Company's eleven businesses.
Bridgeford did not perform an analysis comparable to Bear Stearns' "Pro Forma
Capitalization of Fiscal Year 1995 EBITDA" as this is an analysis which
Bridgeford typically does not perform in its valuation of securities.
Copies of the Bridgeford Report (which includes the Five Year Management
Projections, the Fiscal 1995 Management Budget and the American Securities
Projections) and the Optimistic Growth Case Projections
30
<PAGE>
have been filed with the Commission as Exhibits to the Schedule 13E-3. Copies
will be made available for inspection and copying at the principal executive
office of the Company during regular business hours by any interested
stockholder of the Company or his representative who has been so designated in
writing. A copy may also be inspected and copied, and obtained by mail, in the
manner specified under "AVAILABLE INFORMATION," except that copies are not
available at the regional offices of the Commission.
American Securities retained Bridgeford based upon Bridgeford's reputation,
experience and expertise. Bridgeford is a nationally recognized mergers &
acquisitions and financial advisory firm. Bridgeford, as part of its advisory
business, engages on a regular basis in the valuation of businesses and
securities in connection with mergers and acquisitions, private placements and
valuations for corporate and other purposes. Other than in connection with
advising American Securities with respect to the Merger and providing to an
affiliate of American Securities a fairness opinion in an unrelated assignment
for which it received compensation customary for such type of assignment,
Bridgeford has not provided any services to, or received any fees from, the
Company or American Securities during the past two years.
Pursuant to a letter agreement dated November 1, 1993 between American
Securities and Bridgeford, American Securities retained Bridgeford to act as
exclusive financial advisor to American Securities in connection with a
possible acquisition of, or business combination with, the Company. American
Securities has paid Bridgeford an advisory fee of $25,000 and, based upon
whether an acquisition is consummated, has agreed to pay Bridgeford a
transaction fee. If an acquisition (including the Merger), a share repurchase,
a special dividend or other distribution is concluded and (i) Bridgeford is
required to render a fairness opinion, Bridgeford will be entitled to receive a
transaction fee of $100,000 or (ii) Bridgeford is not required to render a
fairness opinion, Bridgeford will be entitled to receive a transaction fee in
an amount as shall be mutually agreed upon by American Securities and
Bridgeford.
American Securities has agreed to reimburse Bridgeford for its out-of-pocket
expenses, including the fees of its legal counsel. American Securities also has
agreed to indemnify Bridgeford and its affiliates, their respective directors,
officers, agents and employees and each person, if any, controlling Bridgeford
or any of its affiliates against certain liabilities, including liabilities
under federal securities laws.
CERTAIN PROJECTIONS
Set forth below are the Optimistic Growth Case Projections and the American
Securities Projections. The Optimistic Growth Case Projections were developed
by the senior management of the Company with the assistance of representatives
of Bridgeford and were provided to the Special Committee and Bear Stearns on
May 31, 1994. As discussed above, the Optimistic Growth Case Projections were
prepared at the suggestion of Bear Stearns based on a more optimistic set of
operating assumptions (i.e., a "best case" scenario) than those underlying the
Five Year Management Projections which had previously been prepared by senior
management of the Company in February 1994 and were included in the Bridgeford
Report. Bear Stearns requested the preparation of the Optimistic Growth Case
Projections because the Five Year Management Projections did not make allowance
for inflation and were otherwise based on assumptions which Bear Stearns
believed were conservative. The Optimistic Growth Case Projections are included
herein because they represent management's most optimistic view of the
Company's future performance and they were considered (along with the American
Securities Projections) by Bear Stearns in conducting its analysis and arriving
at its opinion that the Merger is fair, from a financial point of view, to the
stockholders of the Company who are unaffiliated with the Acquiring Group. The
American Securities Projections were developed by American Securities in April
1994 and were furnished to prospective financing sources for the Merger,
including Chase, and were also included in the Bridgeford Report. In preparing
the American Securities Projections, representatives of American Securities
utilized information contained in both the Five Year Management Projections and
the Fiscal 1995 Management Budget which had been completed by the Company's
senior management on March 30, 1994, with adjustments deemed appropriate by
American Securities to reflect an assumed rate of inflation and the elimination
of certain public company expenses and
31
<PAGE>
various other assumptions described below. See "SPECIAL FACTORS--Background of
the Merger" and "--Report of Financial Advisor of the American Securities
Group."
The Company as a matter of course does not prepare projected financial
information as to future revenues or earnings that is publicly disclosed.
Accordingly, neither the Optimistic Growth Case Projections nor the American
Securities Projections were prepared with a view toward compliance with
published guidelines of the Commission or the American Institute of Certified
Public Accountants regarding forward-looking information or generally accepted
accounting principles. These projections are being provided herein solely
because such projections were included in the information submitted to and
reviewed by the Special Committee of the Board of Directors and Bear Stearns.
Both the Optimistic Growth Case Projections and the American Securities
Projections of necessity make a variety of assumptions described below, all of
which are difficult to predict and many of which are beyond the control of the
Company and may not have been, or may no longer be, accurate. The Optimistic
Growth Case Projections reflect the continued operation of the Company as a
publicly-owned corporation, but were prepared on an unleveraged basis and,
accordingly, do not reflect expense or income attributable to the Company's
financial liabilities or assets, such as debt, and cash, marketable securities
and an investment in Pine Street Partners, L.P., respectively. The American
Securities Projections were prepared on a leveraged pro forma basis giving
effect to a merger of the type herein contemplated and, therefore, reflect
expense and income attributable to financial liabilities and assets,
respectively. Additionally, the Optimistic Growth Case Projections and the
American Securities Projections were prepared in May 1994 and April 1994,
respectively, and have not been revised to reflect, among other things, the
increase in the Merger Consideration to $15.00 per Common Share and the effect
thereof on various income statement and balance sheet items, actual financial
results of the Company to date, revised prospects for the Company's businesses,
changes in general business and economic conditions or any other transactions
or events that have occurred or that may occur and that were not anticipated at
the time such projections were prepared. Accordingly, the projections included
herein are not necessarily indicative of current values or future performance,
which may be significantly more favorable or less favorable than as set forth
therein in the projections. There can be no assurance that the results of
operations reflected in any of the projections will be realized or that actual
results will not be significantly better or lower than those projected. The
Company's independent accountants have not examined, reviewed or compiled any
of the projections in this Proxy Statement or expressed any conclusion or
provided any other form of assurance with respect to such projections and,
accordingly, assume no responsibility for such projections. Because of these
inherent uncertainties, none of the Company, American Securities, the Special
Committee, the Acquiring Group, Holdings Corp., Acquisition Corp., Bear
Stearns, Bridgeford or any other person assumes any responsibility for the
accuracy of such projections and the inclusion of the projections in this Proxy
Statement should not be regarded as an indication that the Company, American
Securities, the Special Committee, the Acquiring Group, Holdings Corp.,
Acquisition Corp., Bear Stearns or Bridgeford consider such information to be
accurate or reliable.
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<PAGE>
Optimistic Growth Case Projections
KETEMA, INC.
OPTIMISTIC GROWTH CASE PROJECTIONS
SUMMARY INCOME STATEMENTS FROM CONTINUING OPERATIONS
FISCAL 1994 ADJUSTED AND PROJECTED FISCAL YEARS 1995-1999
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDING LAST DAY OF FEBRUARY
----------------------------------------------
1994
(ADJUSTED)* 1995 1996 1997 1998 1999
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Sales........................ $127.1 $138.2 $143.3 $148.3 $142.5 $145.7
Operating Cash Flow (EBITDA)..... $ 11.5 $ 11.3 $ 12.2 $ 12.9 $ 11.6 $ 12.0
Depreciation..................... 4.8 5.3 5.3 5.3 5.3 5.3
Amortization..................... 1.2 1.2 1.1 1.1 1.0 1.1
------ ------ ------ ------ ------ ------
Operating Profit (EBIT).......... $ 5.5 $ 4.8 $ 5.8 $ 6.5 $ 5.3 $ 5.6
Taxes............................ 2.2 1.9 2.3 2.5 2.1 2.2
------ ------ ------ ------ ------ ------
Net Income....................... $ 3.3 $ 2.9 $ 3.5 $ 4.0 $ 3.2 $ 3.4
====== ====== ====== ====== ====== ======
</TABLE>
*The 1994 historical data have been adjusted (i) to exclude the effect of
discontinued operations and (ii) to reflect the results of operations on an
unleveraged basis as described in assumption (a) below.
Significant Assumptions. The following assumptions apply to the foregoing
Optimistic Growth Case Projections of the Company's sales and net income:
(a) The projections assume the continued operation of the Company as a
publicly-owned corporation, but were prepared on an unleveraged basis and,
accordingly, do not reflect expense or income attributable to the Company's
financial liabilities or assets, such as debt and cash, marketable
securities and the investment in Pine Street Partners, L.P.
(b) The projection for fiscal 1995 reflects the Fiscal 1995 Management
Budget which forms the base year for the projections for fiscal 1996
through 1999 which assume the continuation of the Company as a public
company.
(c) The Company's four business segments (the Process Group, the
Aerospace Group, the Industrial Group and American Innovations) were
projected separately with the following assumptions, which management
regards as reasonable based upon the Company's historical operating
results:
(i) Process Group: Given the demonstrated cyclical nature of the
businesses in this Group, the projections assume 5% revenue growth in
fiscal 1996 and 1997, followed by a 6% revenue decrease to reflect a
cyclical downturn in fiscal 1998 and a 3% revenue increase to reflect a
cyclical rebound in fiscal 1999. Operating margins are assumed to
increase by 0.2% to 11.1% in fiscal 1996 and to 11.3% in fiscal 1997;
to decrease by 0.4% to 10.9% in fiscal 1998; and to rebound by 0.2% to
11.1% in fiscal 1999.
(ii) Aerospace Group: Given the generally depressed conditions in the
aerospace industry, revenues are projected to decrease by 1% in fiscal
1996 followed by no revenue growth in fiscal 1997 through fiscal 1999.
Operating margins are assumed to remain flat at 5.4% in all years.
(iii) Industrial Group: Given the demonstrated cyclical nature of
the businesses in this Group, the projections assume 5% revenue growth
in each of fiscal 1996 and 1997; a revenue decrease of 6% in fiscal
1998 to reflect a cyclical downturn; and a revenue increase of 3% in
fiscal 1999 to reflect a cyclical rebound. Operating margins are
assumed to increase by 0.2% to 9.1% in fiscal 1996 and to 9.3% in
fiscal 1997; to decrease by 0.4% to 8.9% in fiscal 1998; and to rebound
by 0.2% to 9.1% in fiscal 1999.
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<PAGE>
(iv) American Innovations. This segment, which to date has been a
development stage enterprise, is projected to realize revenue growth of
74% in fiscal 1996 and 10% per year thereafter. Operating margins are
assumed to nearly break even in fiscal 1996 and to increase from 5% to
8% during fiscal 1997 through fiscal 1999.
(d) Corporate expenses of $6.6 million are assumed in the Fiscal 1995
Management Budget. Of this amount, general and administrative expenses
($5.9 million) and divisional adjustments ($.4 million) are assumed to
increase at 3% per annum to reflect inflation with the balance of corporate
expenses remaining flat throughout the period covered by the projections.
(e) The projections reflect tax provisions at an assumed rate of 40%.
(f) The projections assume that capital expenditures will equal capital
depreciation in all years and represent minimum expenditures necessary to
maintain current equipment and competitive position.
(g) The projections reflect no acquisitions or divestitures.
(h) The projections reflect the elimination of $216,000 per year of
amortization of debt issuance costs beginning in fiscal 1995 due to the
assumed retirement of the Company's outstanding $45 million principal
amount of Senior Notes.
American Securities Projections
In reviewing the American Securities projections, reference should be made to
the second and third paragraphs under "--Certain Projections" above. The
amounts in the following table have been rounded, creating discrepancies in
some cases between the individual items and the corresponding totals.
34
<PAGE>
KETEMA, INC.
AMERICAN SECURITIES PROJECTIONS
STATEMENTS OF INCOME FROM CONTINUING OPERATIONS
FISCAL 1994 ADJUSTED AND PROJECTED FISCAL YEARS 1995-2001
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDING LAST DAY OF FEBRUARY
------------------------------------------------------------------
1994
(ADJUSTED)* 1995 1996 1997 1998 1999 2000 2001
----------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $127.1 $133.5 $137.5 $141.7 $145.9 $150.3 $154.8 $159.4
Cost of Sales......... 94.5 98.8 101.8 104.8 108.0 111.2 114.5 118.0
------ ------ ------ ------ ------ ------ ------ ------
Gross Profit............ 32.6 34.7 35.8 36.8 37.9 39.1 40.2 41.5
Operating Expenses:
S, G & A Expense...... 14.4 17.4 17.9 18.4 19.0 19.5 20.1 20.7
HQ General & Admin.... 6.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4
Workers Comp. Adj..... -- (1.3) (1.0) (0.8) (0.5) (0.3) (0.3) (0.3)
------ ------ ------ ------ ------ ------ ------ ------
Total Expenses...... 20.4 21.5 22.3 23.1 23.9 24.7 25.3 25.9
------ ------ ------ ------ ------ ------ ------ ------
EBITDA.................. 12.2 13.2 13.5 13.8 14.1 14.4 15.0 15.6
Depreciation.......... 4.8 5.1 6.1 6.7 7.4 8.1 3.7 3.4
Amortization.......... 1.4 0.7 0.7 0.7 0.7 0.7 0.1 0.1
------ ------ ------ ------ ------ ------ ------ ------
EBIT.................... 6.0 7.5 6.7 6.4 6.0 5.6 11.2 12.1
Interest Expense...... 6.5 2.8 2.5 2.0 1.4 0.9 0.2 0.0
Interest Income....... 2.6 0.0 0.0 0.0 0.0 0.0 0.0 0.1
------ ------ ------ ------ ------ ------ ------ ------
Pretax Income........... 2.1 4.7 4.3 4.4 4.5 4.8 11.0 12.3
Benefit of NOL........ -- (0.8) (0.8) (0.8) (0.8) (0.8) (0.8) (0.8)
Taxes................. 0.6 1.9 1.3 1.4 1.6 1.9 4.6 5.0
------ ------ ------ ------ ------ ------ ------ ------
Net Income.............. $ 1.5 $ 3.6 $ 3.7 $ 3.7 $ 3.7 $ 3.6 $ 7.1 $ 8.0
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
* The fiscal 1994 historical data have been adjusted to exclude the effect of
discontinued operations.
Significant Assumptions. The following assumptions apply to the foregoing
seven year American Securities Projections of the Company's sales and net
income:
(a) The projections were prepared on a leveraged pro forma basis giving
effect to a merger transaction of the type proposed in this Proxy Statement
and, therefore, reflect expense and income attributable to financial
liabilities and assets, respectively. The projections assume Merger
Consideration at a price of $13.00 per Common Share and the incurrence of
only $37.4 million of funded acquisition indebtedness at assumed interest
rates of 7.25% to 7.5% per annum.
(b) The projections assume annual sales growth of 5% in fiscal 1995 and
3% in each year thereafter. Gross profit margins of 26% are assumed for
each year.
(c) The projections assume the elimination of $500,000 per year of HQ
general and administrative expenses related to estimated public company
filing, proxy and other shareholder expenses and insurance premiums which
the Company would not incur, or would incur in lesser amounts, as a
privately-owned company.
(d) The projections reflect the elimination of workers' compensation
expenses for which $5 million is assumed to be pre-funded upon consummation
of the Merger.
(e) The projections reflect utilization of the Company's net operating
loss carry-forwards at the rate of approximately $800,000 per year.
(f) The projections reflect no acquisitions or divestitures.
35
<PAGE>
PURPOSE AND STRUCTURE OF THE MERGER
The members of the Acquiring Group have proposed the Merger because the
Company has not been successful in achieving its strategy of attaining growth
through a combination of expansion of its existing business units and
appropriate acquisitions, and their belief that the Company is more suitable to
private rather than public ownership for a variety of reasons. Among the
reasons for such belief are the Company's relatively small size and market
capitalization, its numerous small and diverse business units and the
relatively mature markets that most of its products serve. The Acquiring Group
believes these factors have inhibited any significant interest in the Company's
securities by the investment community since the Company first became publicly
owned in 1988. The Acquiring Group is not aware of any securities analysts who,
prior to the public announcement of the Initial Offer, have issued research
reports on the Company or who otherwise follow the Company on a regular basis.
In addition, the Company has encountered difficulty in pursuing its strategy of
seeking suitable acquisition opportunities at attractive prices for which it
had borrowed approximately $62.5 million at the time of its initial public
offering, including $45 million of long-term non-callable institutional
indebtedness. As a consequence, the Company has suffered and continues to
suffer a negative spread between interest expense on its long-term debt and
income on its excess cash and marketable securities. Moreover, operation of the
Company as a privately held, as opposed to a publicly held, concern would
permit the Company's management to effect strategic decisions that are in the
Company's long-term interest without regard to their temporary effects on
earnings and the market value of a publicly traded stock or the interests of
public stockholders.
Various alternatives to the Merger were considered by members of the American
Securities Group with regard to their investment in the Company, including (i)
divestiture of certain of the Company's business units, (ii) the sale of the
Company as a whole to a third party, or (iii) the continuation of the Company
as a public company and its original strategy of pursuing growth through its
existing businesses and strategic acquisitions. Each of these alternatives was
rejected by the American Securities Group. Divestiture of certain of the
Company's business units while remaining a public company was rejected as an
alternative because of the management effort, time and expense which would be
involved in disposing of a large number of relatively small and diverse
businesses and the uncertainties as to the ultimate impact of such a program on
stockholder values. The members of the American Securities Group believe that a
sale of the Company as a whole to a third party would be unlikely to maximize
stockholder value because of their belief that the Company is not likely to be
viewed as an attractive acquisition candidate due to, among other things, its
numerous small and diverse business units and the relatively mature markets
that most of its products serve, and its historical and projected financial
performance. The alternative of continuing as a public company was also
rejected because the American Securities Group believes that the problems the
Company is currently encountering as a public company, as described in the
preceding paragraph, would likely continue for the foreseeable future and,
therefore, have a negative effect on the market value of the Common Shares.
The Merger has been structured so as to enable members of the Acquiring
Group, together with one or more third party investors, to acquire the entire
equity interest in the Company not already owned by members of the Acquiring
Group while maximizing stockholder value for the Company's public stockholders.
The Merger will terminate the equity interest in the Company of the Company's
stockholders other than members of the Acquiring Group. Accordingly, the
Company's public stockholders will neither share in future earnings and growth
of the Company nor the risks associated with achieving such earnings and growth
following the Merger. The Merger will enable the Company's public stockholders
to receive a cash payment of $15.00 per Common Share held or to seek appraisal
rights as described under "DISSENTERS' RIGHTS" pursuant to a transaction which
has been determined by the Board of Directors, as discussed above, to be fair
to such stockholders. The Merger Consideration was the result of arms' length
negotiations between representatives of the Acquiring Group and the Special
Committee and their respective advisors following a proposal by the Acquiring
Group. See "SPECIAL FACTORS--Opinion of the Special Committee's Financial
Advisor," and "--Report of Financial Advisor of the American Securities Group."
Following the Merger, the members of the Acquiring Group, together with one or
more third party investors, will be the
36
<PAGE>
sole beneficiaries of any future earnings and growth of the Company and will
have the ability to enter into and benefit from any divestitures, strategic
acquisitions or other corporate opportunities that may be pursued by the
Company in the future.
In view of the increase in the Merger Consideration from the Initial Proposal
of $13.125 per Common Share to the Revised Proposal of $15.00 per Common Share,
the Merger Agreement contemplates that the Acquiring Group may seek additional
equity financing for Holdings Corp. from third party investors, including
wealthy individuals and/or families, financial institutions, public and private
pension funds, corporations and other sophisticated and substantial investors.
In this connection, following execution of the Merger Agreement, Capital
Partners, acting on behalf of the American Securities Group, began and is
continuing to solicit potential third party investors to make cash investments
in Holdings Corp. indirectly as limited partners in KTM Partners (or in other
limited partnerships which may be created for the purpose of making an equity
investment in Holdings Corp.). To the extent that such cash investments are
made by such third parties, the members of the American Securities Group may
contribute less than all of the approximately 863,555 Voting Shares
beneficially owned by them (exclusive of approximately 12,612 outstanding
Common Shares and approximately 21,885 Common Shares issuable upon conversion
of Debentures held as fiduciaries for persons or entities who are not
proponents of the Merger) and such Voting Shares as may be retained by them
would, in the case of Common Shares, be converted in the Merger into the right
to receive the cash Merger Consideration and, in the case of Preferred Shares,
either remain outstanding following the Merger or, subject to the availability
of financing, be redeemed by the Surviving Corporation at their redemption
price following the Merger. See "THE MERGER AGREEMENT--The Company's 7%
Cumulative Convertible Voting Preferred Stock."
In connection with Capital Partners' efforts to obtain additional equity
financing, on August 19, 1994 Capital Partners, Holdings Corp. and KTM Partners
GP Corp. (the general partner of KTM Partners) entered into a letter agreement
with Danaher Corporation, a New York Stock Exchange listed company ("Danaher"),
pursuant to which Danaher exercised an option granted to it by Capital Partners
on June 28, 1994 and committed to purchase (or to cause one of its affiliates
to purchase) for $5 million in cash a limited partnership interest in KTM
Partners, representing not less than 33 1/3% of the total partnership interests
in KTM Partners and indirectly representing approximately 33 1/3% of the total
equity in Holdings Corp. Such investment by Danaher (or its affiliate) will be
made on a pari passu per unit value basis with the other limited partners who
are members of the American Securities Group based on the amount of cash and/or
securities of the Company to be contributed to KTM Partners by them, with such
securities being valued at the Merger Consideration of $15.00 per share
provided for in the Merger Agreement or the redemption price thereof in case of
the Preferred Shares. The letter agreement provides that if the Merger is
consummated, Danaher (or its affiliate) will have the right to designate two
directors of Holdings Corp. and the right to approve certain corporate
activities and transactions of Holdings Corp. and the Company. In the event
that, following the Merger, the Company or Holdings Corp. proposes to offer
shares of common stock or other equity securities (with certain exceptions) at
a time when Danaher (or its affiliate) holds at least a 25% limited partnership
interest in KTM Partners, Danaher (or its affiliate) would have the right to
purchase the number of shares of common stock or other equity securities of the
Company or Holdings Corp. on the same terms as the other offerees in order to
preserve its proportionate interest in the Company or Holdings Corp. Danaher is
a party to a confidentiality/standstill agreement with Capital Partners entered
into on June 28, 1994, pursuant to which agreement Danaher received certain
information for due diligence purposes prior to making its determination to
invest in KTM Partners. The foregoing summary of the agreements with Danaher is
qualified in its entirety by reference to copies thereof filed as Exhibits to
Amendments No. 16, 17 and 18 to the Schedule 13D filed on June 28, 1994 and
August 22, 1994 by the Acquiring Group and to the Schedule 13E-3 and
incorporated herein in their entirety by reference.
Prior to the Merger, Capital Partners may arrange for third party investors
in addition to Danaher to acquire limited partnership interests in KTM Partners
(or in other limited partnerships which may be created for the purpose of
making an equity investment in Holdings Corp.).
37
<PAGE>
Following the Merger, the interest of the Acquiring Group (and the third
party investors) in the Company's net book value and net income (loss) will
increase to 100%. The members of the Acquiring Group and those members of the
Company's senior management in addition to Hugh W. Williamson, III who invest
in shares of Holdings Corp. and the other third party investors, as the only
stockholders of the Company (indirectly through their interests in KTM Partners
and any other partnerships which may be formed for the purposes of investing in
Holdings Corp. and directly in Holdings Corp.), will thereafter benefit from
any increases in the value of the Company and also bear the risk of any
decreases in the value of the Company's assets or operations. See "SPECIAL
FACTORS--Plans for the Company After the Merger."
Pursuant to the Merger Agreement, upon consummation of the Merger,
Acquisition Corp. will merge into the Company, with the Company being the
Surviving Corporation. Each outstanding Common Share (except those Common
Shares held by the Company as treasury shares, by Holdings Corp. or Acquisition
Corp. or by stockholders who perfect their dissenters' rights under the DGCL)
will be converted into the right to receive $15.00 in cash, without interest.
Each outstanding Voting Share held by Holdings Corp. or Acquisition Corp. or by
the Company as treasury shares will be cancelled without consideration. Each
outstanding share of Acquisition Corp. common stock (all of which are owned by
Holdings Corp.) will be converted into one share of common stock of the
Surviving Corporation.
As of the Record Date, the only Preferred Shares outstanding were the
approximately 447,689 Preferred Shares beneficially owned by certain members of
the Acquiring Group. Until , 1994, the holders of Debentures have the right
to convert their Debentures into Preferred Shares at the Debenture conversion
price of $15.58 per share. If any Debentures are so converted into Preferred
Shares, such Preferred Shares outstanding at the Effective Time (other than
those held by Holdings Corp. or Acquisition Corp. which, as noted above, will
be cancelled without consideration) will remain outstanding and will not be
converted in the Merger and, in accordance with their terms, will thereafter be
convertible solely into the right to receive the Merger Consideration of $15.00
per share in cash. It is the present intention of the Acquiring Group to cause
the Surviving Corporation to redeem any Preferred Shares which remain
outstanding after the Merger at their redemption price plus accrued dividends,
subject to the availability of financing. See "THE MERGER AGREEMENT--The
Company's 7% Cumulative Convertible Voting Preferred Stock."
Members of the Acquiring Group beneficially own approximately 863,555 Voting
Shares (representing approximately 21.66% of the Voting Shares outstanding)
(exclusive of the approximately 12,612 outstanding Common Shares and
approximately 21,885 Common Shares issuable upon conversion of Debentures held
as fiduciaries for persons or entities who are not proponents of the Merger and
Common Shares issuable upon exercise of employee stock options held by Mr.
Williamson). Such ownership consists of approximately 415,866 currently
outstanding Common Shares (representing approximately 10.43% of the currently
outstanding Voting Shares) and approximately 447,689 currently outstanding
Preferred Shares (representing approximately 11.23% of the currently
outstanding Voting Shares). Members of the Acquiring Group have agreed to
contribute or cause to be contributed such number of such currently outstanding
Voting Shares to Acquisition Corp., which together with any cash contributed by
the Acquiring Group and cash contributed by Danaher (or an affiliate thereof)
and any other third-party investors, will result in Acquisition Corp. having
contributed equity of not less than $15 million prior to the Effective Time of
the Merger.
Under the DGCL, approval and adoption of the Merger Agreement requires the
affirmative vote of the holders of a majority of the outstanding Voting Shares.
In accordance with the terms of the Merger Agreement, the members of the
Acquiring Group who beneficially owned on the Record Date for the Special
Meeting an aggregate of approximately 21.98% of the Voting Shares entitled to
vote at the Special Meeting (including approximately 12,612 outstanding Common
Shares held as fiduciaries for non-proponents of the Merger) have entered into
voting agreements to vote all of such Voting Shares in favor of the Merger
Agreement.
The Merger Agreement does not require the approval of a majority of the
public stockholders of the Company. See "INTRODUCTION--Voting Rights; Vote
Required for Approval."
38
<PAGE>
Members of the Acquiring Group discussed with their financial and legal
advisors two alternative methods for a transaction in which the Acquiring Group
could acquire the publicly held Common Shares in the Company: (i) a cash merger
and (ii) a cash tender offer followed by a cash merger. The Acquiring Group
sought to acquire the outstanding Common Shares not already owned by members of
the Acquiring Group in the simplest possible transaction and determined that
the Merger offered the most efficient and effective means of documenting and
executing the transaction. This determination was based upon the timing,
procedures and financing required to complete the transaction.
After the receipt of the Initial Proposal but before the execution of the
Merger Agreement, the Special Committee received inquiries from representatives
of two parties, each of whom expressed an interest in acquiring the Company.
One party indicated that that entity was interested in acquiring the Company at
a per share price higher than that contained in the Initial Proposal. Both
parties had access to public information concerning the Company and were
provided forms of confidentiality agreements to enter into if they were
interested in receiving proprietary information concerning the Company. Both
parties were contacted by the Special Committee or its counsel after the Merger
Agreement was entered into to advise them of the ability of the Special
Committee to negotiate a possible acquisition of the Company with third parties
other than the Acquiring Group and, if appropriate, to terminate the Merger
Agreement. Neither party entered into a confidentiality agreement with the
Company and on June 27, 1994 one party advised the Special Committee in writing
of its decision not to pursue its interest in the Company.
Holders of Common Shares have the right to demand appraisal of, and obtain
payment for, the "fair value" of their shares by following the procedures
prescribed in Section 262 of the DGCL, a copy of which is attached as Annex B
to this Proxy Statement, and is summarized under "DISSENTERS' RIGHTS" in this
Proxy Statement. Failure to take any of the steps required under Section 262 on
a timely basis could result in the loss of appraisal rights.
PLANS FOR THE COMPANY AFTER THE MERGER
Pursuant to the terms of the Merger Agreement, the Directors of Acquisition
Corp. at the Effective Time of the Merger shall be the Directors of the
Surviving Corporation and the officers of the Company at the Effective Time
shall be the officers of the Surviving Corporation after the Merger. See
"DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY, HOLDINGS CORP., ACQUISITION
CORP., KTM GP CORP. AND THE SURVIVING CORPORATION--Information Concerning
Directors and Executive Officers of the Surviving Corporation." The Merger
Agreement also provides that the Certificate of Incorporation and By-Laws of
the Company shall remain as the Certificate of Incorporation and By-Laws of the
Surviving Corporation.
The Company's strategy since becoming a public corporation in 1988 has
included the making of appropriate acquisitions to utilize the Company's
available cash, while at the same time continually evaluating existing business
units with a view towards making appropriate divestitures. Upon consummation of
the Merger, the Company will use its available cash to finance, in part, the
payment of the Merger Consideration, the refinancing of the Company's existing
Senior Notes and fees and expenses relating to the Merger and will become
highly leveraged. Accordingly, it is not contemplated that the Company will
make acquisitions pending the substantial reduction of its indebtedness unless
it obtains additional equity and/or debt financing for such purpose. The
Company will, however, continue to evaluate the possible divestiture of
existing business units, with the proceeds of any such dispositions being used
primarily to reduce the Company's indebtedness. At the present time, the
Company has no agreements, arrangements or understandings and is not currently
engaged in any negotiations regarding the possible sale of any of its
individual business units.
Except as otherwise described in this Proxy Statement, the Acquiring Group
has formulated no plans or proposals regarding activities or transactions which
are to occur after the Merger that would relate to or would result in an
extraordinary transaction such as a merger, reorganization or liquidation
involving the Company or any of its subsidiaries or divisions, a sale or
transfer of a material amount of assets of the
39
<PAGE>
Company or any of its subsidiaries or divisions, a change in any material term
of the employment contract of any executive officer, or any other material
change in the Company's corporate structure or business. The Acquiring Group
reserves the right, however, to take such actions relating to the Company
following the Merger as it deems appropriate and in its best interests,
including activities and transactions of the nature discussed in this
paragraph.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, each Common Share, other than shares held by
the Company as treasury stock, shares owned by Holdings Corp. and/or
Acquisition Corp., and shares as to which appraisal rights have been perfected
in accordance with Delaware law ("Dissenting Shares"), will be converted into
the right to receive the Merger Consideration. As a result, the present holders
of the Common Shares (other than Holdings Corp. and Acquisition Corp. and the
members of the Acquiring Group) will cease to have any ownership interest in
the Company or rights as stockholders and will cease to participate in the
Company's future earnings and growth, if any. Similarly, such stockholders will
not face the risk of any decline in the value of the Company after the Merger.
See "SPECIAL FACTORS--Purpose and Structure of the Merger" which describes
certain other effects of the Merger. The Merger will be a taxable transaction
to the holders of the Common Shares (other than Holdings Corp. and Acquisition
Corp.) for federal income tax purposes and may be taxable for state, local,
foreign and other tax purposes. See "SPECIAL FACTORS--Certain Federal Income
Tax Consequences of the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CERTAIN RELATIONSHIPS
Holdings Corp. and Acquisition Corp. were organized by the American
Securities Group for the purpose of enabling the Acquiring Group (which
includes Hugh H. Williamson, III, President and Chief Executive Officer of the
Company), who are the beneficial owners of an aggregate of approximately 21.66%
of the outstanding Voting Shares, together with Danaher (or an affiliate
thereof) and any other third-party investors, to acquire, pursuant to the
Merger Agreement, the entire equity interest in the Company. As a result of the
Merger, the current stockholders of the Company other than members of the
Acquiring Group will no longer have any equity interest in the Company. See
"SPECIAL FACTORS--Certain Effects of the Merger." The American Securities Group
includes, among others, William Rosenwald, his children (including Elizabeth R.
Varet, a Director of the Company) and their spouses, his grandchildren, certain
irrevocable trusts established for the benefit of William Rosenwald's
descendants, certain senior executives of American Securities and its
affiliates, the spouses and children of such senior executives, certain
charitable foundations controlled by members of the Rosenwald family and/or
senior executives of American Securities and Lewis G. Cole, a member of the law
firm of Stroock & Stroock & Lavan. Charles D. Klein, David P. Steinmann,
Alexander G. Anagnos and Michael G. Fisch are all senior executives of American
Securities and members of the Acquiring Group. Ms. Varet, Mr. Klein, Mr. Anagnos
and Mr. Williamson currently serve on the Board of Directors of the Company. Mr.
Klein, Mr. Steinmann and Mr. Fisch currently serve on the Boards of Directors of
Holdings Corp. and Acquisition Corp.
In addition to the members of the American Securities Group, other clients of
American Securities beneficially own approximately 121,388 outstanding Common
Shares, constituting approximately 3.05% of the outstanding Voting Shares, and
approximately 71,374 Common Shares issuable upon conversion of Debentures which
are convertible at the current conversion price of $15.58 per Common Share. All
of the outstanding Common Shares owned by such clients of American Securities
will, upon consummation of the Merger, be converted into the right to receive
the Merger Consideration.
Pursuant to an agreement, dated May 5, 1994, between Holdings Corp. and Mr.
Williamson (the "Williamson Agreement"), it is contemplated that Mr. Williamson
will continue as Chief Executive Officer of the Company following the Merger.
The Williamson Agreement also provides for, among other things, the following:
(i) the grant by Holdings Corp. to Mr. Williamson of non-qualified stock
options to acquire equity securities of Holdings Corp. in substitution for the
outstanding stock options and stock appreciation
40
<PAGE>
rights of the Company currently held by him, with the exercise price of such
new options to be such that the aggregate spread between the value of the
shares of Holdings Corp. covered by the new options and the aggregate exercise
price of such new options will equal the aggregate spread between the Merger
Consideration ($15.00 per share) that would be payable with respect to the
shares subject to Mr. Williamson's existing Company options and stock
appreciation rights and the aggregate exercise prices of Mr. Williamson's
existing Company options and stock appreciation rights; (ii) the receipt by Mr.
Williamson of a restricted stock award of Holdings Corp.'s equity securities
having a value of $600,000, in lieu of certain supplemental retirement
benefits, with such shares becoming vested at the rate of 30% of the shares on
the first anniversary of the date of their issuance and an additional 10% of
the shares on each annual anniversary date thereafter; (iii) the grant by
Holdings Corp. of non-qualified stock options to purchase shares of Common
Stock of Holdings Corp. to Robert L. Tomz, Vice President and Chief Financial
Officer of the Company, Tom A. Sims, Vice President--Human Resources of the
Company, and William E. Leisey, Controller of the Company, representing 1.8%,
1.2% and .9%, respectively, of the outstanding Common Stock of Holdings Corp.
on a fully-diluted basis; (iv) officers (other than Mr. Williamson) and general
managers of the Company being offered the right to invest in equity securities
of Holdings Corp. representing a maximum of up to 5% of the outstanding shares
of Holdings Corp., in the aggregate, at the same per share purchase price paid
by the other stockholders of Holdings Corp.; (v) the payment of annual
Directors' fees of $20,000 to each of the four members of the Board of
Directors of the Surviving Corporation, who are expected to be Mr. Klein, Mr.
Fisch, Ms. Varet and Mr. Williamson; and (vi) the payment of an annual fee of
$250,000 to Capital Partners, for investment banking and consulting services to
be rendered to the Company and, upon closing of the Merger, a fee in an amount
equal to approximately 1% of the consolidated capitalization (funded debt and
equity) of Holdings Corp. The Williamson Agreement also provides for the
maintenance of the current salary levels of management of the Company and for
annual merit increases commensurate with individual performance at the
discretion of the Board of Directors and contemplates the adoption of a cash
incentive bonus plan for management. The foregoing summary of the Williamson
Agreement is qualified in its entirety by reference to the Williamson
Agreement, a copy of which has been filed as an Exhibit to Amendment No. 14 to
the Schedule 13D filed on May 5, 1994 by the Acquiring Group and to the
Schedule 13-E.
In the Merger Agreement, Holdings Corp. has agreed that all rights to
indemnification arising at or prior to the Effective Time in favor of the
directors or officers of the Company (including the members of the Special
Committee) as provided in the Company's certificate of incorporation or bylaws,
as in effect on the date of the Merger Agreement, will, for a period of six
years after the Effective Time, with respect to matters occurring prior to the
Effective Time, survive the Merger and continue in full force and effect. See
"THE MERGER AGREEMENT--Covenants."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of cash for Common Shares pursuant to the Merger will be a
taxable transaction for federal income tax purposes under the Code, and also
may be a taxable transaction under applicable state, local, foreign and other
tax laws.
In general, a stockholder will recognize gain or loss equal to the difference
between the tax basis for the Common Shares held by such stockholder and the
amount of cash received in exchange therefor. Such gain or loss will be capital
gain or loss if the Common Shares are capital assets in the hands of the
stockholder and will be long-term capital gain or loss if the holding period
for the Common Shares is more than one year. Long-term capital gains recognized
in 1994 by stockholders who are individuals are taxable at a maximum rate of
28% (as compared with a maximum rate of 39.6% on ordinary income). Corporations
generally are subject to tax at a maximum rate of 35% on both capital gains and
ordinary income. The distinction between capital gain and ordinary income may
be relevant for certain other purposes, including the taxpayer's ability to
utilize capital loss carryovers to offset any gain recognized.
The foregoing discussion may not be applicable to stockholders who acquired
their Common Shares pursuant to the exercise of options or other compensation
arrangements or who are not citizens or residents of the United States or who
are otherwise subject to special tax treatment under the Code.
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THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED ON EXISTING TAX
LAW AS OF THE DATE OF THIS PROXY STATEMENT, WHICH MAY DIFFER ON THE DATE OF THE
CONSUMMATION OF THE MERGER OR AT THE EFFECTIVE TIME. EACH STOCKHOLDER IS URGED
TO CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO SUCH STOCKHOLDER OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a "purchase" as that term is used under
generally accepted accounting principles for accounting and financial reporting
purposes.
RISK OF FRAUDULENT CONVEYANCE
If a court in a lawsuit by an unpaid creditor or representative of creditors
of the Company, such as a trustee in bankruptcy or the Surviving Corporation,
as debtor in possession, were to find that, at the Effective Time or at the
time the Surviving Corporation distributed the Merger Consideration to the
holders of Common Shares, the Surviving Corporation: (a) made such payment with
fraudulent intent; or (b) received less than a reasonably equivalent value or
consideration in exchange for the Merger Consideration and (i) was insolvent,
(ii) was rendered insolvent by reason of such transactions or distributions,
(iii) was engaged in a business, transaction or distribution for which the
assets remaining with the Surviving Corporation constituted unreasonably small
capital or (iv) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they matured, such court could (w) find
that the Merger, the Merger Consideration and the financing thereof constituted
fraudulent transfers or conveyances; (x) void the Merger and require that the
Surviving Corporation return the assets of the Company to a fund for the
benefit of the Company's creditors (including, under certain circumstances,
bank lenders and other holders of debt of the Surviving Corporation); (y) void
the distribution of the Merger Consideration to holders of Common Shares and
require that such holders return the same (or equivalent amounts) to the
Surviving Corporation or a fund for the benefit of its creditors (including,
under certain circumstances, bank lenders and other holders of debt of the
Surviving Corporation); and (z) void or modify the rights and obligations
relating to the financing of the Merger.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, however,
the Surviving Corporation would be considered insolvent if the sum of the
Surviving Corporation's debts is greater than all of the Surviving
Corporation's property at a fair valuation, or if the present fair salable
value of the Surviving Corporation's assets is less than the amount that will
be required to pay its probable liability on its existing debts as they become
absolute and matured. No assurance can be given as to what method a court would
use in order to determine whether the Surviving Corporation was "insolvent" at
the Effective Time or that, regardless of the method of valuation, a court
would not determine that the Surviving Corporation was insolvent at the
Effective Time. The avoidance of the distribution of the Merger Consideration
to holders of the Common Shares as described above could result in such holders
being required to return all or a portion of the Merger Consideration, thereby
losing some or the entire value of their equity investment in the Company.
Management of the Company believes that the payments to be made in connection
with the Merger will be made for proper purposes and in good faith, and that,
based on present forecasts and other financial information, the Company is, and
the Surviving Corporation will be, solvent, and that the Surviving Corporation
will have sufficient capital for carrying on its businesses after the Merger
and will be able to pay its debts as they mature. See "FINANCING OF THE MERGER"
and "SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY."
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CERTAIN LITIGATION
Between the time of the Company's public announcement on April 28, 1994 of
its receipt of the Initial Proposal and the meeting of the Special Committee on
May 18, 1994 to review the Initial Proposal, seven class action lawsuits were
commenced in the Delaware Court of Chancery, New Castle County ("the Chancery
Court") relating to the Initial Proposal. The complaints name as defendants,
among others, all or certain of the directors of the Company (collectively, the
"Individual Defendants") and, in some instances, the Company itself. These
lawsuits are as follows: Phyllis Freiman v. Hugh H. Williamson, III, et al,
C.A. No. 13485; Adolph Raab v. Alexander G. Anagnos, et al, C.A. No. 13489;
Moshe Greenfield v. Hugh H. Williamson, III, et al, C.A. No. 13491; Robert L.
Dunn v. Hugh H. Williamson, III, et al, C.A. No. 13494; William Klein II P.C.
v. Ketema, Inc., et al, C.A. No. 13504; Olga Fried v. Hugh H. Williamson, III,
et al, C.A. No. 13490; Croyden Associates v. Ketema, Inc., et al, C.A. No.
13487 (collectively "the Actions").
All of the complaints alleged, among other things, that the Initial Proposal,
if accepted, would be inadequate and unfair to the stockholders of the Company
who are not affiliated with the Acquiring Group and would constitute a breach
of fiduciary duties by the defendant directors.
The principal relief sought by the complaints was a declaration that, if the
merger transaction contemplated by the Initial Proposal were consummated, it
would constitute a breach of fiduciary duty and the granting of a preliminary
injunction to bar an acquisition at the price offered in the Initial Proposal.
The complaints further sought to rescind the merger upon the terms of the
Initial Proposal if implemented prior to entry of an injunction, to recover
damages in an unspecified amount, reimbursement of costs, including attorneys'
and experts' fees, and other equitable relief.
Although defendants have not been required to answer the complaints in the
Actions, if required to answer those complaints, defendants would deny the
allegations of wrongdoing and would assert various defenses, including that the
claims relating to the Initial Proposal have been rendered moot by the Revised
Proposal which the financial adviser to the Special Committee has found to be
fair to the stockholders who are not affiliated with the Acquiring Group.
Plaintiffs' counsel reviewed various documents relating to the Company and
plaintiffs' counsel were furnished by the defendants and reviewed certain
documents prepared by Bear Stearns for the Special Committee in connection with
its evaluation of the Initial Proposal.
Without admitting any wrongdoing in any of the Actions, in order to avoid the
burden and expense of further litigation, the Company, the Acquiring Group,
Holdings Corp. and the Individual Defendants have reached an agreement in
principle with the plaintiffs which contemplates settlement of the Actions.
The Company, the Acquiring Group, Holdings Corp., the Individual Defendants
and the plaintiffs have entered into a memorandum of understanding (the
"Memorandum of Understanding"), pursuant to which the parties would, subject to
certain facts being confirmed through discovery which is currently being
conducted, enter into a settlement agreement which would be subject to approval
by the Chancery Court. The Memorandum of Understanding contemplates that the
settlement would provide: (a) that the defendants acknowledge that the pendency
and prosecution of the Actions was one of the factors contributing to the
improvement in the terms from the Initial Proposal to the Revised Proposal and
provided a substantial benefit to the stockholders of the Company not
affiliated with the Acquiring Group (i.e., the class plaintiffs seek to
represent); (b) that the Company will disseminate to its stockholders a proxy
statement making complete and accurate disclosures regarding the valuation
analysis performed by Bear Stearns on behalf of the Special Committee, the
Actions and the Memorandum of Understanding, and that, prior to its submission
to the Commission, lead counsel for plaintiffs will be provided with a draft of
the proxy statement to review and comment upon as to its completeness and
accuracy; and (c) for a release of all claims, rights or causes of action that
have been or could have been asserted by plaintiffs or any member of the class
plaintiffs seek to represent in the Actions against any of the defendants, the
Acquiring Group, or any of their affiliates,
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directors, officers, employees or agents arising out of the facts set forth in
the complaints in those Actions or in the proxy statement or any disclosure
documents pertaining to matters set forth in the complaints in those Actions.
The Company, the Acquiring Group, Holdings Corp., the Individual Defendants
and the plaintiffs have agreed that the settlement outlined above is fair, in
the best interest of the Company's stockholders and confers a substantial
benefit on the Company and its stockholders who are not members of the
Acquiring Group. The Memorandum of Understanding contemplates that, in
connection with the benefit conferred, plaintiffs' counsel will apply to the
Chancery Court for an award of attorneys' fees and litigation expenses in the
amount of $345,000 and Holdings Corp. has agreed to pay the fees and expenses
which may be awarded by the Chancery Court up to that amount.
REGULATORY APPROVALS
No federal or state regulatory approvals are required to be obtained, nor any
regulatory requirements complied with, in connection with consummation of the
Merger by any party to the Merger Agreement, except for the requirements of the
DGCL in connection with stockholder approvals and consummation of the Merger,
and the requirements of federal securities law.
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THE MERGER AGREEMENT
GENERAL
The Merger Agreement provides for the merger of Acquisition Corp. into the
Company. The Company will be the Surviving Corporation of the Merger, and, as a
result of the Merger, Holdings Corp. will own all of the Surviving
Corporation's common stock. Holdings Corp., in turn, will be controlled
directly or indirectly by members of the Acquiring Group and one or more third
party investors. In the Merger, the stockholders of the Company, other than
Holdings Corp., Acquisition Corp. and stockholders who exercise their
dissenters' rights under Delaware law, will receive the Merger Consideration
described below. See "SPECIAL FACTORS--Purpose and Structure of the Merger."
EFFECTIVE TIME OF THE MERGER
The Effective Time of the Merger will occur upon the filing of a Certificate
of Merger with the Secretary of State of the State of Delaware as required by
the DGCL or at such later time as is specified in such Certificate of Merger.
It is anticipated that such Certificate of Merger will be filed as promptly as
practicable after approval and adoption of the Merger Agreement by the
stockholders of the Company at the Special Meeting. Such filing will be made,
however, only upon satisfaction or waiver of all conditions to the Merger
contained in the Merger Agreement. The following discussion of the Merger
Agreement is qualified in its entirety by reference to the complete text of the
Merger Agreement, which is included in this Proxy Statement as Annex A and is
incorporated herein by reference.
THE SURVIVING CORPORATION
The Merger Agreement provides that, at the Effective Time, the persons
identified herein under "DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY,
HOLDINGS CORP., ACQUISITION CORP., KTM GP CORP. AND THE SURVIVING CORPORATION--
Information Concerning Directors and Executive Officers of the Surviving
Corporation" will become officers and directors of the Surviving Corporation
and the Surviving Corporation will adopt as its certificate of incorporation
and bylaws the certificate of incorporation and bylaws of the Company.
CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS OF THE COMPANY
As a result of the Merger, each outstanding Common Share (except shares held
by the Company as treasury stock, shares owned by Holdings Corp. and/or
Acquisition Corp. and shares owned by stockholders who perfect their
dissenters' rights under the DGCL) will be converted into the right to receive
the Merger Consideration of $15.00 in cash, without interest. Each Common Share
owned by Holdings Corp. and/or Acquisition Corp. or held by the Company as
treasury stock will be canceled without consideration. Each Preferred Share
owned by Holdings Corp. and/or Acquisition Corp. will also be canceled without
consideration.
Each of the outstanding shares of common stock, par value $.01 per share, of
Acquisition Corp. will automatically be converted into one share of common
stock, par value $1.00 per share, of the Surviving Corporation.
As described above, upon consummation of the Merger, subject to the
provisions described below, each Common Share outstanding at the Effective Time
(except shares held by the Company as treasury stock, shares owned by Holdings
Corp. and/or Acquisition Corp. and shares owned by stockholders who perfect
their dissenters' rights under the DGCL) will be converted into the right to
receive the Merger Consideration. If the Merger is consummated, instructions
with regard to the surrender of certificates formerly representing Common
Shares, together with the letter of transmittal to be used for that purpose,
will be mailed to stockholders as soon as practicable after the Effective Time.
The Exchange Agent (as defined in the Merger Agreement), as soon as practicable
following receipt from a stockholder of a duly executed letter of
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transmittal, together with certificates formerly representing Common Shares and
any other items required by the letter of transmittal, shall pay to such
stockholder the Merger Consideration. If payment is to be made to a person
other than the person in whose name the certificate surrendered is registered,
it will be a condition of payment that the certificate so surrendered be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment pay to the Exchange Agent any transfer or other taxes
required by reason of such payment or establish to the satisfaction of the
Exchange Agent that such taxes have been paid or are not applicable.
Stockholders should NOT submit any stock certificates for Common Shares at
the present time.
If the Merger is consummated, after the Effective Time a holder of a
certificate formerly representing Common Shares shall cease to have any rights
as a stockholder of the Company, and such holder's sole right will be to
receive the Merger Consideration to which such holder is entitled.
In no event will holders of Common Shares be entitled to receive any interest
on the Merger Consideration to be distributed to them in connection with the
Merger.
Any funds remaining with the Exchange Agent one year following the Effective
Time shall be delivered to the Surviving Corporation within one week after the
end of such one year period, without further action or request, and any holder
who has not exchanged Common Shares for the Merger Consideration prior to that
time shall thereafter look only to the Surviving Corporation for payment of the
Merger Consideration in respect of such holder's Common Shares. Notwithstanding
the foregoing, neither Holdings Corp. nor the Surviving Corporation shall be
liable to any holder of Common Shares for any amount paid to a public official
pursuant to applicable abandoned property laws. Any amounts remaining unclaimed
by holders of Common Shares two years after the Effective Time (or such earlier
date immediately prior to such time as such amounts would otherwise escheat to
or become property of any governmental entity) shall, to the extent permitted
by applicable law, become the property of the Surviving Corporation free and
clear of any claims or interest of any person previously entitled thereto.
No transfer of shares outstanding immediately prior to the Effective Time
will be made on the stock transfer books of the Surviving Corporation after the
Effective Time. Certificates formerly representing Common Shares presented to
the Surviving Corporation after the Effective Time will be canceled in exchange
for the Merger Consideration.
THE COMPANY'S 8% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
Holders of the Debentures who convert their Debentures into Common Shares
prior to the Effective Time shall have the rights of a holder of Common Shares
to receive the Merger Consideration per Common Share following the Effective
Time. Pursuant to the terms of the indenture governing the Company's
Debentures, any Debentures not converted into Common Shares prior to the
Effective Time will remain outstanding after the Merger as obligations of the
Surviving Corporation. Holders of Debentures who convert their Debentures into
Common Shares after the Effective Time shall be entitled to receive the Merger
Consideration multiplied by the number of Common Shares into which such
holders' Debentures were convertible immediately prior to the Effective Time.
Until , 1994, the holders of Debentures have the right to convert
their Debentures into Preferred Shares at the Debenture conversion price of
$15.58 per share. If any Debentures are so converted into Preferred Shares,
such Preferred Shares outstanding at the Effective Time (other than those held
by Holdings Corp. or Acquisition Corp. which, as noted above, will be cancelled
without consideration) will remain outstanding and will not be converted in the
Merger and, in accordance with their terms, will thereafter be convertible
solely into the right to receive the Merger Consideration of $15.00 per share
in cash. See "--The Company's 7% Cumulative Convertible Voting Preferred
Stock."
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It is the present intention of the Acquiring Group to cause the Surviving
Corporation to redeem all Debentures which remain outstanding after the Merger
at their redemption price, plus accrued interest, following the Effective Time,
subject to availability of financing. The Debentures are redeemable until
November 15, 1994 and thereafter until November 15, 1995 at redemption prices
of 103% and 102%, respectively, of the principal amount thereof, plus accrued
interest to the redemption date.
THE COMPANY'S 7% CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK
Holders of Preferred Shares (other than Holdings Corp. or Acquisition Corp.)
who convert their Preferred Shares into Common Shares prior to the Effective
Time shall have the rights of a holder of Common Shares to receive the Merger
Consideration per Common Share following the Effective Time. Any Preferred
Shares not converted into Common Shares prior to the Effective Time (other than
Preferred Shares owned by Holdings Corp. or Acquisition Corp.) will remain
outstanding after the Merger as equity securities of the Surviving Corporation.
Holders of Preferred Shares who convert their Preferred Shares into Common
Shares after the Effective Time shall be entitled to receive the Merger
Consideration multiplied by the number of Common Shares into which such
holders' Preferred Shares were convertible immediately prior to the Effective
Time.
It is the present intention of the Acquiring Group to cause the Surviving
Corporation to redeem any Preferred Shares which remain outstanding after the
Merger at their redemption price, plus accrued dividends, following the
Effective Time, subject to availability of financing. The Preferred Shares are
redeemable until November 15, 1994 and thereafter until November 15, 1995 at a
redemption price per share of 103% and 102%, respectively, of the liquidation
value thereof ($15.58 per share), plus accrued dividends to the redemption
date.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
Company, Holdings Corp. and Acquisition Corp. relating to, among other things,
the following matters (which representations and warranties are subject, in
certain cases, to specified exceptions and, generally, apply only to facts and
circumstances existing as of the date of the Merger Agreement): (a) due
incorporation, corporate existence, good standing and power of, and similar
corporate matters with respect to, each of the Company, Holdings Corp. and
Acquisition Corp.; (b) corporate power and authority to enter into, and the
valid and binding execution and delivery of, the Merger Agreement by each such
party; (c) the absence of any governmental authorization, consent, or approval
required to consummate the Merger, except as disclosed; (d) the Merger
Agreement and the Merger not resulting in contraventions or conflicts with
respect to the certificate of incorporation or bylaws and violations of laws,
regulations, judgments, injunctions, orders or decrees relating to the Company
and its subsidiaries, Holdings Corp. and Acquisition Corp.; (e) the accuracy of
information supplied by the Company and Holdings Corp. included in this Proxy
Statement and the Schedule 13E-3; and (f) the absence of any investment
banking, brokerage, finder's or other similar fee or commission due in
connection with the Merger (except for fees payable to Bear Stearns, Capital
Partners and Bridgeford, as described under "SPECIAL FACTORS").
In the Merger Agreement, the Company has made certain additional
representations and warranties to Holdings Corp. and Acquisition Corp. relating
to the following matters (which representations and warranties are subject, in
certain cases, to specified exceptions and, generally, apply only to facts and
circumstances existing as of the date of the Merger Agreement): (a) the capital
structure of the Company and its subsidiaries; (b) the delivery to Holdings
Corp. of certain documents filed by the Company with the Commission and the
accuracy of the information contained in such documents; (c) the fair
presentation of financial statements supplied by the Company to Holdings Corp.;
(d) the proper filing by the Company with the Commission of all required
documents and the accuracy of the information contained in such documents; and
(e) the absence of any undisclosed litigation which may delay the Merger or any
related transactions.
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In the Merger Agreement, Holdings Corp. and Acquisition Corp. have made
certain additional representations and warranties to the Company relating to
the following matters (which representations and warranties are subject, in
certain cases, to specified exceptions and, generally, apply only to facts and
circumstances existing as of the date of the Merger Agreement): (a) the
obligations and prior activities of Acquisition Corp.; (b) that Holdings Corp.
has received and furnished to the Company the commitment letter from Chase with
respect to the financing of the Merger and that Holdings Corp. will, at the
Effective Time, have available funds (including the Company's cash balances and
cash equivalents and equity financing to be provided by the Acquiring Group
and/or other investors, if any) sufficient to provide all of the requisite
Merger Consideration, to effect all refinancing required in connection with the
transactions contemplated by the Merger Agreement and to pay all related fees
and expenses; (c) that the equity financing to be provided by the Acquiring
Group and/or other investors, if any, will not be less than $15 million
consisting of cash and/or Common Shares valued on the basis of the Merger
Consideration or Debentures or Preferred Shares issued upon conversion thereof;
(d) that the Acquiring Group, Holdings Corp. and/or Acquisition Corp. in the
aggregate own beneficially not less than a specified number of Common Shares;
and (e) that the Surviving Corporation will be solvent and have adequate
capitalization after consummation of the Merger. The Surviving Corporation will
be determined to be solvent if, on the date of determination, the fair
valuation of its property will be greater than the total amount of liabilities
of the Surviving Corporation as of such date and that the present fair saleable
value of the Surviving Corporation's assets will be, on the date of
determination, greater than the amount that will be required to pay the
Surviving Corporation's probable liability on its existing debts as they become
absolute and matured.
COVENANTS
The Company has agreed in the Merger Agreement that until consummation of the
Merger the Company and its subsidiaries will conduct their businesses in the
ordinary course consistent with past practice and (except for acts necessary to
the Merger) will use their best efforts to preserve their business organization
and relationships with third parties and to keep available the services of
their present officers and employees. Without limiting the generality of the
foregoing, the Company has agreed that, without the consent of Holdings Corp.,
the Company will not, and, in the case of clauses (b), (c), (d) and (g), will
not permit any of its subsidiaries to: (a) adopt or propose any change in its
certificate of incorporation or bylaws; (b) acquire, whether by purchase of
equity securities, merger or consolidation, any other person or acquire a
material amount of assets of any other person; (c) sell, lease, license or
otherwise dispose of any material assets or property except (i) pursuant to
existing contracts or commitments and (ii) in the ordinary course consistent
with past practice; (d) agree or commit to do any of the foregoing; (e)
authorize for issuance, issue, sell, deliver or agree or commit to issue, sell
or deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock of any
class or any other securities or equity equivalents (including, without
limitation, any stock options or stock appreciation rights), except upon
conversion of any of the Company's convertible securities and except as
required by outstanding options or stock appreciation rights under the
Company's 1988 Stock Incentive Plan as in effect as of the date of the Merger
Agreement, or amend any of the terms of any such securities, options or rights
outstanding as of the date of the Merger Agreement, except as specifically
contemplated by the Merger Agreement; (f) split, combine or reclassify shares
of its capital stock, declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of its capital stock, or redeem or otherwise acquire any of its
securities or any securities of its subsidiaries; and (g) except as may be
required by law, enter into, adopt or amend or terminate any bonus, profit
sharing, compensation, severance, termination, stock option, stock appreciation
right, restricted stock, performance unit, stock equivalent, stock purchase
agreement, pension, retirement, deferred compensation, employment, severance or
other employee benefit agreement, trust, plan, fund or other arrangement for
the benefit or welfare of any director, officer or employee in any manner, or
(except for normal increases in the ordinary course of business consistent with
past practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense to the Company, or as required under existing
agreements) increase in any manner the compensation or fringe benefits of any
director, officer or employee or pay any benefit not required by any plan and
arrangement as
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in effect as of the date hereof (including, without limitation, the granting of
stock appreciation rights or performance units).
The Company has agreed to give Holdings Corp. and its authorized
representatives full access to the offices, properties, books and records of
the Company and its subsidiaries and will furnish to Holdings Corp. and its
authorized representatives such financial and operating data and other
information as Holdings Corp. and its authorized representatives may reasonably
request and will instruct the Company's employees, counsel, financial advisors
and auditors to cooperate with Holdings Corp. in its investigation of the
business of the Company and its subsidiaries.
Each of Holdings Corp., Acquisition Corp. and the Company have agreed to use
its best efforts to take, or cause to be taken, all actions and to do, or cause
to be done, all things necessary, proper or advisable to consummate and make
effective the transactions contemplated by the Merger Agreement.
Holdings Corp. and the Company have agreed to cooperate (a) in determining
whether any action by or in respect of, or filing with, any governmental body,
agency or official, or authority is required, or any actions, consents,
approvals or waivers are required to be obtained from parties to any material
contracts, in connection with the Merger and the transactions contemplated by
the Merger Agreement and (b) in seeking any such actions, consents, approvals
or waivers or making any such filings, furnishing information required in
connection therewith or with this Proxy Statement or the Schedule 13E-3 and
seeking timely to obtain any such actions, consents, approvals or waivers.
Holdings Corp. has agreed to use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to satisfy the requirements
of the Senior Facilities (as defined herein under "FINANCING OF THE MERGER") or
any alternative arrangements which are conditions to closing the transactions
constituting the Senior Facilities.
Holdings Corp. and the Company have agreed to consult with each other before
issuing any press release or otherwise making any public statements with
respect to the Merger Agreement, the Merger and the transactions contemplated
thereby.
Holdings Corp. has agreed that for six years after the Effective Time,
Holdings Corp. will or will cause the Surviving Corporation to indemnify and
hold harmless the present and former officers and directors of the Company in
respect of acts or omissions occurring prior to the Effective Time to the
extent provided under the Company's certificate of incorporation and bylaws in
effect on the date of the Merger Agreement. Holdings Corp. has further agreed
that for such six years after the Effective Time, Holdings Corp. will or will
cause the Surviving Corporation to use its best efforts to provide officers'
and directors' liability insurance in respect of acts or omissions occurring
prior to the Effective Time covering each such person currently covered by the
Company's officers' and directors' liability insurance policy on terms with
respect to coverage and amount no less favorable than those of such policy in
effect on the date of the Merger Agreement, provided that if such coverage is
not obtainable at a cost less than or equal to two times the amount per annum
the Company paid in its last full fiscal year, Holdings Corp. will or will
cause the Surviving Corporation to purchase such lesser amount of coverage, on
terms as similar in coverage as practicable to such coverage in effect on the
date of the Merger Agreement, as may be obtained having a cost not to exceed
two times the amount per annum the Company paid in its last full fiscal year,
which amount has been disclosed to Holdings Corp.
OTHER POTENTIAL BIDDERS
The Merger Agreement provides that the Company is required, directly or
indirectly, to furnish information and access, in each case in response to
unsolicited requests therefor, received prior to or after the date of the
Merger Agreement, to any corporation, partnership, person or other entity or
group pursuant to
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appropriate confidentiality agreements, and may participate in discussions and
negotiate with any such entity or group concerning any merger, sale of assets,
sale of shares of capital stock or similar transaction involving the Company or
any subsidiary or division of the Company (any such transaction being referred
to herein as a "Competing Transaction"), if the Special Committee determines
after consultation with counsel that such action is appropriate in light of its
fiduciary obligations to the Company's stockholders. In addition, the Company
is required to direct its officers and other appropriate personnel to cooperate
with and be reasonably available to consult with any such entity or group.
Except as set forth above, the Company has agreed that it will not solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than Holdings Corp. or its affiliates or associates) concerning any
merger, sale of assets, sale of shares of capital stock or similar transaction
involving the Company or any subsidiary or division of the Company.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of the Company, on the one hand, and Holdings
Corp. and Acquisition Corp., on the other hand, to consummate the Merger are
subject to the satisfaction or waiver, at or prior to the Effective Time, of
the following conditions, among others: (a) approval and adoption of the Merger
Agreement and the Merger by the holders of a majority of the outstanding Voting
Shares at the Special Meeting; (b) the absence of any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) enacted, issued, promulgated, enforced or
entered prohibiting or restricting the consummation of the Merger; (c) the
receipt of all other required authorizations, consents and approvals of
governmental authorities; (d) the performance of and compliance with, in all
material respects, all agreements and obligations contained in the Merger
Agreement and required to be performed or complied with at or prior to the
Effective Time by the respective parties to the Merger Agreement; (e) the
material truth and correctness of all representations and warranties of the
parties to the Merger Agreement; and (f) the furnishing of officers'
certificates as to the matters covered in clauses (d) and (e) above.
The obligation of Holdings Corp. and Acquisition Corp. to consummate the
Merger is further subject to the satisfaction or waiver of the following
conditions, among others: (a) Holdings Corp. having obtained or being satisfied
that it will obtain all material third-party consents and approvals necessary,
proper and advisable to consummate the Merger or to enable the Surviving
Corporation to continue to carry on the business of the Company and its
subsidiaries as presently conducted; and (b) the receipt by Holdings Corp. on
behalf of Acquisition Corp. of financing, which, together with the Company's
cash balances and cash equivalents, including marketable securities, is
sufficient to consummate the Merger, to effect the necessary refinancing of the
Senior Notes and to pay related fees and expenses.
The obligation of the Company to consummate the Merger is further subject to
the satisfaction or waiver of the following conditions, among others: (a) the
receipt by the Company of all documents it has reasonably requested relating to
the existence of Holdings Corp. and Acquisition Corp. and the authority of
Holdings Corp. and Acquisition Corp. to enter into the Merger Agreement; and
(b) the receipt by the Board of Directors of the Company of a certificate
signed by the principal financial officer of the Company attesting to the
solvency of the Surviving Corporation immediately after the Effective Time, or,
alternatively, if Chase requires an opinion of an independent appraiser to such
effect, receipt by the Board of Directors of such opinion.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, notwithstanding approval of the Merger Agreement
by the stockholders of the Company: (a) by mutual written consent of the
Company and Holdings Corp.; (b) by either the Company or Holdings Corp. if the
Merger has not been consummated by December 31, 1994; (c) by either the Company
or Holdings Corp., if there shall be any law or regulation that makes
consummation of the Merger illegal or otherwise prohibited
50
<PAGE>
or if any judgment, injunction, order or decree enjoining Holdings Corp. or the
Company from consummating the Merger is entered and becomes final and
nonappealable; (d) by either the Company or Holdings Corp. if the Merger
Agreement and the Merger fail to receive the requisite vote for approval and
adoption by the stockholders of the Company at the Special Meeting; (e) by
Holdings Corp. or the Company (acting through the Special Committee), if (i)
the Board of Directors of the Company or the Special Committee withdraws,
modifies or changes its recommendation of the Merger Agreement or the Merger in
a manner adverse to Holdings Corp. or Acquisition Corp. or resolves to do any
of the foregoing or the Board of Directors of the Company recommends to the
stockholders of the Company any Competing Transaction or resolves to do so, or
(ii) any person acquires beneficial ownership, or the right to acquire
beneficial ownership, of 50% or more of the Voting Shares, or any "group" (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder and not including the Acquiring Group) is formed which
beneficially owns, or has the right to acquire beneficial ownership of, 50% or
more of the Voting Shares.
EXPENSES
Except as otherwise specifically provided, the Merger Agreement provides
that, whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such cost or expense.
Pursuant to the terms of the Merger Agreement, Holdings Corp. is entitled to
reimbursement for up to $1.5 million of out-of-pocket expenses incurred in
connection with or arising out of the Merger in the event that (i) the Merger
Agreement is terminated (a) by the Company or Holdings Corp. if the vote
required in favor of the Merger Agreement and the Merger is not received, (b)
by the Company if the Company or the Special Committee recommends to the
stockholders of the Company any Competing Transaction or (c) by the Company or
Holdings Corp. if any person shall have acquired beneficial ownership of 50% or
more of the Voting Shares or any "group" (as such term is defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder and not
including the Acquiring Group) shall have been formed which beneficially owns
50% or more of the Voting Shares or (ii) the Merger is not consummated and the
Company is in breach in any material respect of its covenants, representations,
warranties or agreements contained in the Merger Agreement, and in any of such
events set forth in clause (i) or (ii) Holdings Corp. and Acquisition Corp. are
not in breach in any material respect of their respective covenants,
representations, warranties or agreements contained in the Merger Agreement.
AMENDMENTS
The Merger Agreement may not be amended prior to the Effective Time except by
action of the Company, Holdings Corp. and Acquisition Corp. set forth in a
written instrument signed on behalf of each of the parties; provided that any
such amendment by the Company must be approved by the Board of Directors of the
Company, acting on the recommendation of the Special Committee. After approval
of the Merger Agreement by the stockholders of the Company at the Special
Meeting and without the further approval of such stockholders, no amendment to
the Merger Agreement may be made which will change (i) the Merger Consideration
or (ii) any of the other terms and conditions of the Merger Agreement if such
change would adversely affect the stockholders of the Company.
DISSENTERS' RIGHTS
Holders of record of Common Shares who comply with the applicable procedures
summarized herein will be entitled to appraisal rights under Section 262 of the
DGCL. A person having a beneficial interest in Common Shares held of record in
the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect appraisal rights.
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THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING TO
APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL
TEXT OF SECTION 262 WHICH IS REPRINTED IN ITS ENTIRETY AS ANNEX B TO THIS PROXY
STATEMENT. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER"
ARE TO THE RECORD HOLDER OF COMMON SHARES AS TO WHICH APPRAISAL RIGHTS ARE
ASSERTED. VOTING AGAINST, ABSTAINING FROM VOTING OR FAILING TO VOTE ON APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT WILL NOT CONSTITUTE A DEMAND FOR APPRAISAL
WITHIN THE MEANING OF SECTION 262 OF THE DGCL.
Under the DGCL, holders of Common Shares who follow the procedures set forth
in Section 262 will be entitled to have their Common Shares appraised by the
Chancery Court and to receive payment in cash of the "fair value" of such
Common Shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, as determined by such court.
Under Section 262, where a proposed merger is to be submitted for approval at
a meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, must notify each of its stockholders who was a stockholder on the
record date for such meeting with respect to shares for which appraisal rights
are available, that appraisal rights are so available, and must include in such
notice a copy of Section 262.
This Proxy Statement constitutes such notice to the holders of Common Shares
and the applicable statutory provisions of the DGCL are attached to this Proxy
Statement as Annex B. Any stockholder who wishes to exercise such appraisal
rights or who wishes to preserve his right to do so should review the following
discussion and Annex B carefully because failure to timely and properly comply
with the procedures specified will result in the loss of appraisal rights under
the DGCL.
A holder of Common Shares wishing to exercise such holder's appraisal rights
(i) must not vote in favor of adoption of the Merger Agreement and (ii) must
deliver to the Company prior to the vote on the Merger Agreement at the Special
Meeting to be held on , 1994, a written demand for appraisal of such
holder's Common Shares. A holder of Common Shares wishing to exercise such
holder's appraisal rights must be the record holder of such Common Shares on
the date the written demand for appraisal is made and must continue to hold
such Common Shares of record until the Effective Time of the Merger.
Accordingly, a holder of Common Shares who is the record holder of Common
Shares on the date the written demand for appraisal is made, but who thereafter
transfers such Common Shares prior to the Effective Time of the Merger, will
lose any right to appraisal in respect of such Common Shares.
Only a holder of record of Common Shares is entitled to assert appraisal
rights for the Common Shares registered in that holder's name. A demand for
appraisal should be executed by or on behalf of the holder of record, fully and
correctly, as such holder's name appears on such holder's stock certificates.
If the Common Shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of the demand should be made in that
capacity, and if the Common Shares are owned of record by more than one person
as in a joint tenancy or tenancy in common, the demand should be executed by or
on behalf of all joint owners. An authorized agent, including an agent for two
or more joint owners, may execute a demand for appraisal on behalf of a holder
of record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, the agent is agent
for such owner or owners. A record holder such as a broker who holds Common
Shares as nominee for several beneficial owners may exercise appraisal rights
with respect to the Common Shares held for one or more beneficial owners while
not exercising such rights with respect to the Common Shares held for other
beneficial owners; in such case, the written demand should set forth the number
of Common Shares as to which appraisal is sought and where no number of Common
Shares is expressly mentioned the demand will be presumed to cover all Common
Shares held in the name of the record owner. Stockholders who hold their Common
Shares in brokerage accounts or other nominee forms and who wish to exercise
appraisal rights are urged to consult with their brokers to determine the
appropriate procedures for the making of a demand for appraisal by such a
nominee.
All written demands for appraisal should be sent or delivered to the Company
at Suite 600, One Cherry Center, 501 South Cherry Street, Denver, Colorado
80222, Attention: Corporate Secretary.
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The Surviving Corporation shall within 10 days after the Effective Time of
the Merger notify each stockholder who has complied with the statutory
requirements summarized above that the Merger has become effective. Within 120
days after the Effective Time of the Merger, but not thereafter, the Company or
any stockholder who has complied with the statutory requirements summarized
above may file a petition in the Chancery Court demanding a determination of
the fair value of the Common Shares. The Company is under no obligation to and
has no present intention to file a petition with respect to the appraisal of
the fair value of the Common Shares. Accordingly, it is the obligation of the
stockholders to initiate all necessary action to perfect their appraisal rights
within the time prescribed in Section 262.
Within 120 days after the Effective Time of the Merger, any stockholder who
has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Company a statement setting
forth the aggregate number of Common Shares not voted in favor of adoption of
the Merger Agreement and with respect to which demands for appraisal have been
received and the aggregate number of holders of such Common Shares. Such
statements must be mailed within 10 days after a written request therefor has
been received by the Company.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Chancery Court will determine the stockholders entitled to
appraisal rights and will appraise the "fair value" of their Common Shares,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Stockholders considering
seeking appraisal should be aware that the fair value of their Common Shares as
determined under Section 262 could be more than, the same as or less than the
consideration they would receive pursuant to the Merger Agreement if they did
not seek approval of their Common Shares and that investment banking opinions
as to fairness from a financial point of view are not necessarily opinions as
to fair value under Section 262. The Delaware Supreme Court has stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings.
The Chancery Court will determine the amount of interest, if any, to be paid
upon the amounts to be received by persons whose Common Shares have been
appraised. The costs of the action may be determined by the Chancery Court and
taxed upon the parties as the Chancery Court deems equitable. The Chancery
Court may also order that all or a portion of the expenses incurred by any
stockholder in connection with an appraisal, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all of the
Common Shares entitled to appraisal.
Any holder of Common Shares who has duly demanded an appraisal in compliance
with Section 262 will not, after the Effective Time of the Merger, be entitled
to vote the Common Shares subject to such demand for any purpose or be entitled
to the payment of dividends or other distributions on those Common Shares
(except dividends or other distributions payable to holders of record of Common
Shares as of a record date prior to the Effective Time of the Merger).
If any stockholder who properly demands appraisal of such stockholder's
Common Shares under Section 262 fails to perfect, or effectively withdraws or
loses, such stockholder's right to appraisal as provided in the DGCL, the
Common Shares of such stockholder will be converted into the right to receive
the consideration receivable with respect to such Common Shares in accordance
with the Merger Agreement. A stockholder will fail to perfect, or effectively
lose or withdraw, his right to appraisal if, among other things, no petition
for appraisal is filed within 120 days after the Effective Time of the Merger,
or if the stockholder delivers to the Company a written withdrawal of his
demand for appraisal and acceptance of the Merger. Any such attempt to withdraw
an appraisal demand more than 60 days after the Effective Time of the Merger
will require the written approval of the Company.
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Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights (in which
event a stockholder will be entitled to receive the Merger Consideration with
respect to such Common Shares in accordance with the Merger Agreement).
Delaware courts have decided that the statutory appraisal remedy, depending
on factual circumstances, may or may not be a dissenter's exclusive remedy.
Several decisions by the Delaware courts have held that a controlling
stockholder of a company involved in a merger has a fiduciary duty to the other
stockholders which requires that the merger be "entirely fair" to such other
stockholders. In determining whether a merger is fair to minority stockholders,
the Delaware courts have considered, among other things, the type and amount of
consideration to be received by stockholders and whether there was fair dealing
among the parties. The Delaware Supreme Court stated in Weinberger v. UOP,
Inc., 457 A.2d 701, 714 (1983), that although the remedy ordinarily available
in a merger that is found not to be "fair" to minority stockholders is the
right to appraisal described above, such appraisal remedy may not be adequate
"in certain cases, particularly where fraud, misrepresentation, self-dealing,
deliberate waste of corporate assets, or gross and palpable overreaching are
involved," and that in such cases the Chancery Court would be free to fashion
any form of appropriate relief.
FINANCING OF THE MERGER
GENERAL
Based on the Merger Consideration of $15.00 per Common Share, payable in cash
without interest, the total amount of funds required to pay the Merger
Consideration following the Effective Time to the holders of all outstanding
Common Shares on a fully diluted basis (including Common Shares beneficially
owned by members of the Acquiring Group), to effect the refinancing of the
Company's Senior Notes and to pay related fees and expenses in connection with
the Merger is estimated to be approximately $130 million. Such amount will be
reduced by not less than $15 million, the aggregate value of the Voting Shares
and/or cash which the Acquiring Group contributes or causes to be contributed
to Acquisition Corp. and cash to be contributed by Danaher (or an affiliate
thereof) and any other third party investors.
The remainder of the Merger Consideration will be provided out of the
Company's cash balances and cash equivalents, including marketable securities,
as well as from the bank financing described below. On , 1994, the
earliest date on which the Merger may occur, the Company is expected to have
approximately $70 million in cash and cash equivalents, all of which is
expected to be used to pay a portion of the Merger Consideration and related
expenses.
BANK FINANCING
General. Pursuant to a commitment letter dated May 5, 1994, as amended on
June 21, 1994 (the "Commitment Letter"), and subject to certain conditions,
Chase committed to make available to Acquisition Corp. and, after consummation
of the Merger, to the Surviving Corporation senior acquisition financing in an
aggregate amount of up to $50 million (the "Senior Facilities"), subject to
certain conditions described below. The Commitment Letter is filed as an
exhibit to the Schedule 13E-3 and is available for inspection and copying by
any holder of Voting Shares or representative of such holder who has been so
designated in writing, at the principal executive offices of Acquisition Corp.
The parties expect that Chase may syndicate a portion of the Senior Facilities
to other banks and/or financial institutions (the "Lenders"). The following
constitutes only a summary of the principal terms and conditions of the
Commitment Letter and is qualified in its entirety by reference to the actual
terms of the Commitment Letter. The definitive credit agreement (the "Credit
Agreement") has not yet been fully negotiated and may contain more or less
restrictive provisions than are contained in the Commitment Letter.
The Commitment Letter provides that Chase and the other Lenders will commit
to provide up to $25 million pursuant to a term loan facility (the "Term Loan
Facility") and, in addition, will provide up to $25
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million pursuant to a revolving credit facility (the "Revolving Credit
Facility") to provide part of the financing for the Merger, refinance the
Company's Senior Notes, pay related fees, commissions and expenses, and finance
ongoing working capital requirements of the Surviving Corporation.
Term Loan Facility. The Term Loan Facility is a single draw facility in the
aggregate principal amount of up to $25 million. The loan to be made pursuant
to the Term Loan Facility (the "Term Loan") will be incurred by the Company at
the Effective Time to provide financing for the Merger. The Term Loan Facility
may be either a Single Term Loan Facility or a Two Tranche Term Loan Facility
consisting of "Term Loan A" and "Term Loan B." The final maturity of the Term
Loan Facility will be (i) in the case of a Single Term Loan Facility, seven
years from the Effective Time or (ii) in the case of a Two Tranche Term Loan
Facility, for Term Loan A, five years from the Effective Time, and for Term
Loan B, seven years from the Effective Time. The Term Loan is to be repaid in
accordance with an amortization schedule to be mutually agreed upon.
Revolving Credit Facility. The Revolving Credit Facility provides for
revolving credit loans (the "Revolving Loans") from time to time of up to $25
million (with a $5 million limit for letters of credit). Drawings may be made
at any time from the Effective Time until the final maturity of the Revolving
Credit Facility, except that the Term Loan Facility must be fully utilized
before any drawings may be made under the Revolving Credit Facility. The final
maturity of the Revolving Credit Facility will be five years from the Effective
Time with the Revolving Loans to be repaid in full at such time.
Fees. Holdings Corp. and American Securities have jointly and severally
agreed to pay a commitment fee of 3/8 of 1% per annum (calculated on a 360 day
basis) of the unused amounts of the total commitments under the Senior
Facilities for the period commencing June 20, 1994 until the date on which the
Credit Agreement is signed. Thereafter, Acquisition Corp. and the Surviving
Corporation will be required to pay a commitment fee equal to 1/2 of 1% per
annum (calculated on a 360 day basis) with respect to the unused amounts of the
commitments under the Senior Facilities in effect from time to time, payable
quarterly in arrears for the account of the Lenders. The Lenders and Chase
shall also receive a syndication fee and agency fee as have been separately
agreed upon.
Holdings Corp. and American Securities have also agreed to pay a termination
fee of $200,000 if the Acquiring Group abandons or terminates its efforts to
consummate the Merger or the Merger is consummated with the proceeds of
financing other than the Senior Facilities; provided that such fee shall only
be payable to the extent that at least $200,000 of expense reimbursement is
available to Holdings Corp. from the Company pursuant to the Merger Agreement.
See "THE MERGER AGREEMENT--Expenses."
Interest. Amounts outstanding under the Term Loan Facility and the Revolving
Credit Facility will bear interest at a rate equal to, at the Company's option,
(i) the Base Rate plus the Applicable Margin (each as defined herein) ("Base
Rate Loans") or (ii) the London interbank offered rate (as adjusted) for one,
two (in each case subject to availability), three or six month U.S. dollar
deposits (as selected by the Company) plus the Applicable Margin ("LIBOR
Loans"). "Applicable Margin" shall mean a percentage per annum as shown in the
following table:
<TABLE>
<CAPTION>
BASE RATE LOANS LIBOR LOANS
--------------- -----------
<S> <C> <C>
Term Loan Facility
(a) Single................................... 1.75% 3.00%
(b) Two Tranche
1. Term Loan A............................. 1.50% 2.75%
2. Term Loan B............................. 2.00% 3.25%
Revolving Credit Facility.................... 1.50% 2.75%
</TABLE>
55
<PAGE>
"Base Rate" shall mean the higher of (i) 1/2 of 1% in excess of the rate on
overnight Federal Funds transactions, as published by the Federal Reserve Bank
of New York and (ii) the rate announced by Chase as its prime commercial
lending rate.
In addition, fees of 2.50% per annum in the case of standby letters of credit
and 1.50% per annum in the case of commercial letters of credit will be payable
for the account of the Lenders, plus a 1/4% fronting fee per annum for the
account of Chase on the aggregate amount available for drawing under all
letters of credit and calculated on the basis of a 360 day year, plus customary
administrative fees.
Security. The Term Loan and the Revolving Loans and the Company's obligations
under any interest rate protection agreements entered into with any Lender will
be secured by (i) perfected first priority pledges of the capital stock of the
Company and its subsidiaries and (ii) security interests in and liens upon
substantially all other assets (including, but not limited to, all accounts
receivable, inventory, general intangibles and real property) owned by the
Company and its subsidiaries.
Conditions. The obligations of the Lenders to provide the initial advances
under the Credit Agreement will be subject to the satisfaction of certain
conditions. These conditions will include, among other things: (i) receipt by
the Lenders of certain opinions, certificates, documents, appraisals,
governmental and regulatory approvals, financial statements and other
information, (ii) receipt by Acquisition Corp., prior to borrowings under the
Senior Facilities, of at least $15 million consisting of Voting Shares,
Debentures and/or cash, (iii) receipt of a solvency certificate of an
appropriate officer of the Company or a solvency opinion of an independent
appraiser, in either case concluding that, after giving effect to the Merger
and the consummation of the related financings, neither Holdings Corp.,
Acquisition Corp., nor the Surviving Company and its subsidiaries is insolvent
nor will any such entity be rendered insolvent thereby, (iv) satisfaction by
Chase that the aggregate amount of the funds available to Acquisition Corp. in
the form of equity contributions and under the Senior Facilities shall be
sufficient to consummate the Merger and to pay all fees and expenses payable in
connection with the Merger and the repayment of the Senior Notes, (v) all
conditions to Acquisition Corp.'s obligations under the Merger Agreement shall
have been met or waived, (vi) the absence of any litigation, pending or
threatened (a) with respect to the Senior Facilities or (b) which, in Chase's
reasonable determination, could have a material adverse effect on the business,
property, assets, nature of assets, liabilities, condition (financial or
otherwise), operations or results of operation of the Company after giving
effect to the Merger, and (vii) nothing having occurred which could have a
material adverse change in the condition (financial or otherwise), business,
operations, results of operations, assets, nature of assets or liabilities of
the Company and its subsidiaries.
Covenants. The Credit Agreement will contain certain restrictive covenants
which, among other things and with certain exceptions, will limit the Company
and its subsidiaries with respect to certain activities and require the Company
to satisfy certain financial covenants.
Events of Default. The Credit Agreement will contain events of default
appropriate in the context of the proposed transactions including, without
limitation, a default in the event of a change of ownership of the Company.
Expenses and Indemnification. All expenses of Chase in the negotiation and
closing of the Commitment Letter, the Credit Agreement and the Senior
Facilities are to be paid by Holdings Corp. and American Securities. Holdings
Corp. and American Securities have agreed to indemnify Chase and the Lenders
against any and all costs and liabilities relating to the Commitment Letter and
the Senior Facilities.
Guarantees. Borrowings under the Senior Facilities and obligations under any
interest rate protection agreements with any Lender are required to be
guaranteed, jointly and severally, by Holdings Corp. and all subsidiaries of
the Company.
The foregoing description of the terms of the Commitment Letter is qualified
in its entirety by the text of such Commitment Letter which has been filed as
Exhibit (a)(1) to the Schedule 13E-3 and is incorporated
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<PAGE>
herein by reference. Copies are available for inspection and may be obtained by
mail as described above under "AVAILABLE INFORMATION."
ESTIMATED FEES AND EXPENSES
Estimated fees and expenses incurred or to be incurred by the Company,
Holdings Corp., Acquisition Corp. and the Acquiring Group in connection with
the Merger are approximately as follows:
<TABLE>
<S> <C>
Payment of Merger Consideration........................................ $
Advisory fees(1).......................................................
Bank financing commitment fees.........................................
Legal fees and expenses(2)(3)..........................................
Accounting fees and expenses...........................................
Commission filing fees.................................................
Printing and mailing expenses..........................................
Exchange Agent fees and expenses.......................................
Appraisal and environmental analysis fees..............................
Early retirement of Senior Notes and associated prepayment penalties...
Proxy solicitation fees and expenses...................................
Miscellaneous expenses.................................................
---
Total.................................................................. $
===
</TABLE>
- --------
(1) Includes the fees and estimated expenses of Bear Stearns, Bridgeford and
American Securities and its affiliates. See "SPECIAL FACTORS."
(2) Includes the estimated fees and expenses of counsel for the Special
Committee and counsel for the Acquiring Group.
(3) Includes an estimated $ that may be payable to plaintiffs' counsel
in the Actions. See "SPECIAL FACTORS--Certain Litigation."
See "THE MERGER AGREEMENT--Expenses" for a description of certain provisions
for the reimbursement by the Company of certain out-of-pocket expenses incurred
by Holdings Corp.
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BUSINESS OF THE COMPANY
GENERAL
The Company is a diversified multi-product manufacturer which develops,
designs, manufactures and markets a wide group of products for industrial and
commercial markets.
The Company was incorporated in May 1988 in connection with a corporate
restructuring of Ametek, in which certain businesses and related assets and
liabilities of Ametek were transferred to the Company. On November 30, 1988,
the Company became a separate, publicly held corporation by means of the pro
rata distribution (the "Distribution") by Ametek of all the outstanding Common
Shares to holders of record of Ametek's common stock on the close of business
on that date. Concurrent with the Distribution, the Company commenced a rights
offering which resulted in the issuance of $17.5 million aggregate principal
amount of the Debentures for aggregate gross proceeds of $17.5 million. The
Debentures are convertible into either Common Shares or, under certain
circumstances, Preferred Shares, which in turn are convertible into Common
Shares.
The Company consists of eleven operating units. These operating units and
their major products are divided into four business segments: Process Group,
Aerospace Group, Industrial Group and American Innovations, Inc. The Process
Group designs and manufactures highly engineered components and equipment for
the chemical process, petroleum, agriculture, power and related industries. The
Aerospace Group engineers and produces parts and components for aircraft and
rocket engines, missiles, satellites and other aerospace applications. The
units in the Industrial Group generally manufacture products that involve
fairly standard manufacturing processes and industrial applications. American
Innovations, Inc. designs and produces systems for an emerging market, namely
the remotely monitored meter reading segment of the utility industry.
Additional information concerning the business of the Company is included in
the Company's Annual Report on Form 10-K for the year ended February 28, 1994,
which is incorporated herein by reference, and its other public filings. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
The Company's principal executive offices are located at Suite 600, One
Cherry Center, 501 South Cherry Street, Denver, Colorado 80222 and its
telephone number is (303) 331-0940.
PROCESS GROUP
The Heat Transfer division manufactures Whitlock (R) shell and tube heat
exchangers and Acme (R) chiller barrels designed to maintain temperature or
remove or recover heat in many industrial processes. Standard heat exchangers
are supplied for computer, electronic and other industrial applications, while
custom-engineered heat exchangers are supplied to the refrigeration, power and
process industries. The division utilizes manufacturer's representatives as
well as its own personnel to market its products.
The McCrometer division produces propeller and V-Cone (TM) differential
pressure flow meters, some with electronic batching and remote recording
systems, used primarily for agricultural applications and, to a lesser extent,
for industrial and municipal applications, both in the U.S. and in certain
foreign markets. Flow meters measure and regulate the usage of water or other
fluids. The division's marketing efforts are conducted primarily through
manufacturer's representatives and dealers in the agricultural markets.
The Process Equipment division engineers and manufactures equipment to
separate solids from liquids in numerous applications and provides maintenance,
overhaul and field services for equipment manufactured by the Company and other
manufacturers. It produces Tolhurst (R) and Mark III (R) centrifuges, Filtroba
helical filters and helical filter dryers, Niagara filters and filtration
fabrics for pharmaceutical and other process industries. Also produced are
large metal fabrications made to customer specifications for use as bellows and
expansion joints. Process Equipment's products are sold primarily through
manufacturers' representatives.
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The Schutte and Koerting division manufactures flow measurement and control
devices, including the following: variable area meters and turbine meters for
the aerospace, general aviation and automotive industries; steam jet apparatus
and fume scrubbers for the chemical process, petrochemical and pulp and paper
markets; and valves for the power generation industry. Certain high accuracy
flow meters are used principally as instruments for calibration. Schutte and
Koerting's products are sold primarily through manufacturer's representatives.
AEROSPACE GROUP
The Company's A&E division (formally the Aerospace & Electronics division)
produces titanium, stainless steel and other high-temperature alloy precision
weldments and brazements for a large variety of jet and gas turbine aircraft
engines. It also supplies components and assemblies for the rocket engine of
the Space Shuttle and the fuselage of missiles. In addition, A&E designs and
manufactures microelectronic fuel control systems for aerospace and missile
projects. Many of the A&E products have military applications and are built to
customer specifications. Jet engine components produced by A&E represented
approximately 25% in fiscal 1994, 18% in fiscal 1993 and 23% in fiscal 1992, of
the Company's net sales. Most of A&E's sales are made under subcontracts for
the U.S. government and sales are made primarily by divisional personnel.
Aldan Industrial Machining, Inc. ("Aldan"), a wholly-owned subsidiary which
was acquired in the fourth quarter of fiscal 1993, designs and manufactures
special-use bearings, including slot-loaded, swaged, fractured and lined
bearings, rod ends and fittings. While Aldan focuses primarily on the aerospace
industry, it also develops and manufactures high-precision machined components
for other industries. Sales are made by Aldan personnel.
Programmed Composites, Inc., a wholly-owned subsidiary, fabricates advanced
composite structures primarily for commercial satellite programs. Sales are
made by Programmed Composites' personnel.
INDUSTRIAL GROUP
The Los Angeles Die Casting division produces custom die-cast zinc and
aluminum components for the automotive and recreational vehicle after-market,
computer, commercial and residential lighting products, appliance manufacturers
and industrial applications. These components are produced to customer design
and are sold by divisional personnel and manufacturer's representatives.
The Rodan division manufactures thermistors and thermistor assemblies, which
are solid-state devices that produce precise changes in electrical resistance
as temperature increases or decreases. Rodan's Surge-Gard (TM), a current-
limiting device, is used in computers, power supplies, motors and filament
circuits. Rodan also manufactures positive temperature coefficient thermistors
which function as temperature sensors to protect motors and electric circuits
from over-current conditions. Sales are made by divisional personnel and by
manufacturer's representatives.
The Special Filaments division produces thermoplastic monofilaments extruded
from nylon, polyester and olefin resins and combinations of these materials.
These products are sold primarily as monofilament fibers for industrial textile
applications and bristles for paint, household, industrial, hair and cosmetic
brushes. Sales are made by divisional personnel and a distributor.
AMERICAN INNOVATIONS, INC.
American Innovations, Inc., an 80% owned subsidiary which was acquired in the
third quarter of fiscal 1993, designs and manufactures microprocessor driven
remotely monitored meter reading systems primarily for the utility industry.
Sales are made by American Innovations' personnel and manufacturer's
representatives.
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<PAGE>
RESEARCH AND DEVELOPMENT
Research activities are geared toward new product development as well as
improvement of existing products or manufacturing processes. The Company spent
$0.7 million in fiscal 1994, $3.6 million in fiscal 1993, and $0.7 million in
fiscal 1992, on research and development programs. Research and development
expenditures in fiscal 1993 included research and development in process in
connection with the acquisition of American Innovations, Inc., a development
stage enterprise acquired in the third quarter of fiscal 1993.
COMPETITION
The Company's products are marketed on a worldwide basis. Generally, most
markets in which the Company operates are highly competitive and, while
generally stable in terms of demand, are subject to general economic
conditions. Many of the Company's businesses have an established customer base
with a known product identity. The principal elements of competition for the
products manufactured in each of the Company's business segments are price,
product features, distribution, product quality and service. The Company
believes that, as a whole, it competes effectively with respect to all of the
foregoing.
At the Special Filaments division, the Company's competition in certain
extruded filaments is from some of its larger raw material suppliers and
customers who are also end-product manufacturers.
In all other operations the Company faces intense competition from
competitors having either greater or lesser financial and technological
resources. The Company does not believe that it is a major factor in any market
it serves.
CUSTOMERS
The Company, as either a prime contractor or a subcontractor, sells certain
of its products and services to various agencies of the United States
government. Approximately $26.8 million or 21% of the Company's fiscal year
1994 sales were ultimately to the U.S. Government as prime contract and
subcontract sales. Sales to General Electric Co. ("G.E.") in fiscal 1994 were
approximately $35.1 million or 28% of net sales, of which $18.6 million were
included above as subcontracts to the U.S. Government. Substantially all of
these sales were made by units in the Aerospace segment. In November 1993, the
Company received verbal notification from G.E. of its intention to transfer,
over a several year period, certain of its business to other suppliers because
the Company would not honor G.E.'s demand for additional substantial price
concessions. While this continues to be a concern for the Company, no
significant transfers have yet been made and the Company has received new
orders from G.E. since the notification. Except for various U.S. Government
agencies treated as a single customer and G.E., the Company as a whole is not
dependent on any single customer or a few customers such that their loss would
have a material adverse effect on its operations.
BACKLOG
The Company's backlog of unfilled orders at February 28, 1994 and 1993 by
business segment was as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Process Group............................................. $13,500 $11,400
Aerospace Group........................................... 42,700 50,700
Industrial Group.......................................... 5,000 4,300
American Innovations, Inc................................. 1,400 600
------- -------
Total................................................... $62,600 $67,000
======= =======
</TABLE>
Backlog is not considered significant to the operations of the Industrial and
Process Groups because substantially all orders are filled on a current order
and shipment basis. Of the total February 28, 1994 backlog, the Company
believes that all but approximately $21.0 million, primarily in the Aerospace
Group, will be filled by February 28, 1995.
60
<PAGE>
RAW MATERIALS
The Company's businesses obtain raw materials and supplies from a variety of
sources, generally from more than one supplier. However, in the Industrial
segment, certain commodities are available only from a limited number of
suppliers. The Company believes that its sources and supply of raw materials
are adequate for its needs.
PATENTS, LICENSES AND TRADEMARKS
The Company owns numerous unexpired U.S. trademarks, U.S. patent and
trademark applications, U.S. design patents, and foreign patents, trademarks
and applications therefor, including counterparts of its more important U.S.
patents and trademarks, in the major free-trade industrial countries of the
world. The Company is a licensor or licensee under patent agreements of various
types and its products are marketed under various registered U.S. and foreign
trademarks and trade names. However, the Company does not consider any one
patent or trademark or any group thereof essential to its business as a whole,
or to any of its business segments. The annual royalties received or paid under
license agreements are not significant.
PERSONNEL
At February 28, 1994, the Company employed approximately 1,080 employees, 54%
of whom were non-salaried employees. Four of the Company's units rely on union
employees who comprise 32% of all non-salaried employees. Management believes
that the Company's relations with its employees are satisfactory.
SEASONAL VARIATIONS OF BUSINESS
The Company believes that its business as a whole and the business segments
in which it operates are not subject to significant seasonal variations.
ENVIRONMENTAL MATTERS
The Company is subject to an expanding and evolving set of environmental laws
and regulations. Compliance with these laws and regulations may require higher
capital expenditures and expenses in the future. For instance, as reported in
fiscal 1993, the Company had identified certain historic materials handling
practices at its Bensalem, Pennsylvania manufacturing plant which may require
future expenditures. The Company retained an environmental engineering firm to
evaluate these conditions and develop any necessary cleanup plans. No formal
remediation report has been completed at this time.
The Company has notified the appropriate state regulatory agency regarding
this investigation process. No enforcement agency process has been initiated.
The former site owner, Ametek, has also been notified. While it is difficult to
quantify the potential financial impact of this matter, based on engineering
estimates derived from currently available information, the Company reserved
$1.0 million in fiscal 1993 to account for ongoing investigation costs and any
cleanup work that would ultimately be required. During fiscal 1994, the Company
charged investigative and engineering costs of $0.2 million to this reserve and
based on available information, the Company believes that its current reserve
is sufficient to account for any further investigation and cleanup costs that
may become necessary at the site.
Otherwise, while it is difficult to quantify the potential impact of the
evolving set of environmental laws and regulations generally pertinent to the
Company's operations, the Company believes that, other than the incident
discussed above, they will have no material effect on the Company's financial
position or future results of operations.
WORKING CAPITAL PRACTICES
The Company does not have extraordinary working capital requirements in any
of its business segments. Customers generally are billed at normal trade terms
with no extended payment provisions. Under certain U.S. government contracts,
shipments may be made before the contracts are finalized and invoicing is
allowed. Inventories are controlled and maintained at levels responsive to
normal delivery requirements of customers. However, under certain long-term
contracts and programs, as to which the Company receives progress payments,
inventories may be carried for longer periods.
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
The following table sets forth selected historical financial information for
the Company and its subsidiaries for the three months ended May 31, 1993 and
1994 and for each of the five years in the period ended February 28, 1994. The
following financial information should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" and the Consolidated Financial Statements and related Notes
included elsewhere in this Proxy Statement. The interim unaudited information
for the Company and its subsidiaries for the three months ended May 31, 1993
and 1994 reflect, in the opinion of management of the Company, all
adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the information provided for such interim periods. The
results of operations of such interim periods are not necessarily indicative
of results which may be expected for any other interim period or for the year
as a whole.
KETEMA, INC. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MAY 31 (A), AS OF AND FOR THE FISCAL YEARS ENDED FEBRUARY 28 OR 29(A),
------------------ ---------------------------------------------------------------
1994 1993 1994 1993 1992 1991 1990
-------- -------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 30,956 $ 33,477 $ 127,109 $ 122,159 $ 133,132 $ 142,665 $ 136,848
Restructuring charge
(b).................... -- -- -- -- (7,385) -- --
Operating income (loss). 131 1,020 5,550 (2,373) (4,149) 2,510 (2,139)
Settlement charge (c)... -- -- -- -- -- (5,841) --
Income (loss) before
income taxes, minority
interest, discontinued
operations and
cumulative effect of
changes in accounting
principles............. (832) 123 2,095 (4,915) (4,343) (2,930) (1,553)
Income (loss) from con-
tinuing operations..... (566) (93) 1,541 (3,447) (3,194) (2,884) 1,015
Income (loss) from dis-
continued operations
(d).................... -- (250) (305) (342) (21) 2,016 3,851
Cumulative effect of
changes in accounting
principles............. -- -- -- -- 208 -- --
Net income (loss)....... (566) (343) 1,236 (3,789) (3,007) (868) 4,866
Income (loss) per share
(e):
Continuing operations.. $ (0.16) $ (0.03) $ 0.42 $ (0.93) $ (0.81) $ (0.70) $ 0.23
Net income (loss)...... $ (0.16) $ (0.09) $ 0.34 $ (1.02) $ (0.77) $ (0.21) $ 1.10
Average common shares
outstanding........... 3,490 3,683 3,630 3,718 3,927 4,111 4,417
Total assets............ $146,856 $150,789 $ 148,973 $ 158,409 $ 156,952 $ 160,622 $ 165,997
Net working capital..... $ 69,005 $ 75,291 $ 67,208 $ 75,543 $ 91,309 $ 90,016 $ 90,754
Ratio of current assets
to current liabilities. 3.17 3.66 3.01 3.12 4.35 4.22 4.16
Long-term debt.......... $ 55,692 $ 60,197 $ 55,692 $ 60,198 $ 62,044 $ 62,858 $ 62,924
Equity.................. $ 56,315 $ 57,502 $ 56,981 $ 57,826 $ 64,269 $ 67,382 $ 72,214
Ratio of earnings to
fixed charges (f)...... 0.48 1.08 1.32 0.30
Book value per share.... $ 16.14 $ 16.32
</TABLE>
- --------
(a) Financial data for prior years have been restated to reflect the Aluminum
Extrusion Division as a discontinued operation. The division was sold
effective August 31, 1993.
(b) Restructuring charge consisted primarily of the write-down of intangible
and other assets related to the woven fabric composite material business,
expenses related to the consolidation of various facilities and relocation
costs.
(c) Costs associated with settling claims assumed when spun off by Ametek.
(d) Income (loss) associated with discontinued operations of Aluminum
Extrusion Division.
(e) Fully diluted earnings per share, which assumes the conversion of the
Debentures into additional Common Shares, is not presented since it is
antidilutive.
(f) For purposes of computing the ratio of earnings to fixed charges, earnings
coverage represents the sum of income from continuing operations before
income taxes plus fixed charges. Fixed charges represent interest paid or
accrued on indebtedness of the Company.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DISCONTINUED OPERATIONS
On September 1, 1993 the Company completed the sale of the business and
substantially all the assets of its Aluminum Extrusion Division, effective as
of the close of business August 31, 1993. The Company's consolidated financial
statements present the results of the Aluminum Extrusion Division as a
discontinued operation and reported amounts for the previous years have been
restated consistent with this presentation. The Division was previously
included in the Industrial Group for business segment reporting. See the Notes
to the Consolidated Financial Statements for further information on the
Aluminum Extrusion Division. The comments in the Results of Operations and
Review of Financial Condition sections, which follow, pertain to the Company's
continuing operations.
RESULTS OF OPERATIONS
FIRST QUARTER OF FISCAL 1995 COMPARED TO THE FIRST QUARTER OF FISCAL 1994
Sales for the first quarter of fiscal 1995 were $31.0 million compared to
$33.5 million in the first quarter of fiscal 1994, a decrease of $2.5 million
or 7.5%. Operating income for the first quarter of fiscal 1995 was $0.1 million
which was $0.9 million less than the first quarter of fiscal 1994. The changes
in sales and operating income for the first quarter of fiscal 1995 compared to
the same period of fiscal 1994 by business group are shown in the following
table:
COMPARATIVE SALES AND OPERATING INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED MAY 31
---------------------------------------------------
SALES OPERATING INCOME
------------------------ --------------------------
FISCAL FISCAL INCREASE FISCAL FISCAL INCREASE
GROUP 1995 1994 (DECREASE) 1995 1994 (DECREASE)
- ----- ------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Process....................... $14.8 $14.0 $ 0.8 $ 1.2 $ 1.7 $(0.5)
Aerospace..................... 9.5 12.7 (3.2) -- 0.7 (0.7)
Industrial.................... 6.4 6.8 (0.4) 0.8 0.8 --
American Innovations, Inc..... 0.3 -- 0.3 (0.2) (0.4) 0.2
Corporate Expenses............ NA NA NA (1.7) (1.8) 0.1
----- ----- ----- ----- ----- -----
Totals...................... $31.0 $33.5 $(2.5) $ 0.1 $ 1.0 $(0.9)
===== ===== ===== ===== ===== =====
</TABLE>
Sales of the Process Group increased $0.8 million or 5.7% to $14.8 million
compared to the prior year. Increases in shipments of heat exchangers and
miscellaneous process equipment of $0.6 million each were partially offset by a
decrease in shipments of flow measurement devices of $0.4 million. Operating
profit for the Process Group was $1.2 million or a decrease of $0.5 million
compared to the first quarter of fiscal 1994. The increased shipments and
somewhat higher margins of heat exchangers favorably impacted operating profits
by $0.2 million. This gain, however, was more than offset by decreased
operating profits of $0.3 million resulting from reduced shipments and
increased material and marketing costs related to flow measurement devices and
an operating profit reduction of $0.4 million related to miscellaneous process
equipment, despite an increase in sales, caused by increased marketing costs
and reduced margins related to the introduction of new products in the
filtration market.
The Aerospace Group recorded sales of $9.5 million in the first quarter of
1995 a decrease of $3.2 million or 25.2% compared to 1994. This decrease was
caused mainly by ongoing delays and extensions of aerospace customer
requirements related to defense industry cutbacks and softness in the
commercial airline business which are expected to continue for some time in the
future. In November 1993, the Company received verbal
63
<PAGE>
notification from G.E. that it intended to transfer, over a several year
period, certain of its business to other suppliers because the Company would
not honor G.E.'s demand for additional substantial price reductions. G.E.
accounted for approximately 28% and 21% of the Company's net sales for fiscal
1994 and the first quarter 1995, respectively. While this situation continues
to be a concern for the Company, no significant transfers have yet been made
and the Company has received new orders from G.E. since the notification. The
operating profit of this group decreased $0.7 million compared to 1994. The
decrease in sales volume was the major cause of the operating profit decrease.
However, $0.2 million of the decrease resulted from a lesser amount of profits
related to LIFO inventory liquidation than in the prior year.
The Industrial Group recorded sales of $6.4 million in the first quarter of
fiscal 1995, a decrease of $0.4 million or 5.9%. Shipments of extruded
monofilaments decreased $0.9 million due primarily to the loss of a large
specialty monofilament customer in the fourth quarter of fiscal 1994. Recently,
however, the Company was notified verbally by this customer that it would
resume business with the Company beginning in July 1994 as the customer finds
the Company's product to be of highest quality. It is not certain at this time
what the customer's requirements will be in fiscal 1995. Sales of thermistors
and die castings increased $0.1 million and $0.5 million, respectively. Despite
the overall reduction in sales, the operating income of the Industrial Group
did not change over the prior year. Increased shipments of thermistors and die
castings resulted in increases in operating income of $0.1 million and $0.2
million, respectively, offsetting the decreased operating income that was
caused by the reduced sales of extruded monofilaments.
American Innovations, Inc., which had no sales last year, reported sales of
$0.3 million in the first quarter of fiscal 1995. Our efforts to penetrate this
market continue to be frustrated by the lengthy buying cycle in the utility
industry. Operating losses, consisting primarily of marketing and engineering
costs, were $0.2 million in 1995 compared to $0.4 million in the first quarter
of fiscal 1994.
Corporate expenses were $1.7 million or $0.1 million less than the first
quarter of fiscal 1994 despite the recognition in the current period of $0.4
million in fees in connection with the Merger. Reductions in expenses resulted
principally from reductions in staff, the discontinuance of the Supplemental
Senior Executive Death Benefit Program, and decreased legal and consulting
fees.
Other expense, net of other income, increased $0.1 million compared to 1994
chiefly as a result of fewer gains on sales of unused capital equipment in the
first quarter of fiscal 1995. The Company continues to experience a negative
interest spread on its nonprepayable (until October 1996) debt position
compared to the low interest earned on its almost equal cash and marketable
securities position.
Included in the 1994 tax provision was a valuation allowance for certain
deferred tax assets related to 1994 losses that were, at that time, expected to
be nonrecoverable; such valuation allowance was not required for 1995.
Losses from continuing operations in the first quarter of fiscal 1995 were
$0.6 million or 16 cents per share, compared to a loss from continuing
operations of $0.1 million or 3 cents per share in the same period of the prior
year.
Net loss for the Company was $0.6 million or 16 cents per share for the first
quarter of this year compared to a net loss of $0.3 million or 9 cents per
share in the first quarter of fiscal 1994.
64
<PAGE>
FISCAL 1994 COMPARED TO FISCAL 1993
Sales for fiscal 1994 were $127.1 million compared to $122.2 million in
fiscal 1993, an increase of $4.9 million or 4.0%. Operating income for 1994 was
$5.5 million compared to a $2.4 million loss in 1993. The changes in sales and
operating income by business group are shown in the following table:
COMPARATIVE SALES AND OPERATING INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SALES OPERATING INCOME
------------------------ --------------------------
FISCAL FISCAL INCREASE FISCAL FISCAL INCREASE
GROUP 1994 1993 (DECREASE) 1994 1993 (DECREASE)
- ----- ------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Process....................... $ 55.5 $ 50.9 $ 4.6 $ 4.6 $ 3.8 $0.8
Aerospace..................... 46.1 46.1 -- 5.8 1.3 4.5
Industrial.................... 25.0 25.2 (0.2) 2.8 2.5 0.3
American Innovations, Inc..... 0.5 -- 0.5 (1.6) (2.4) 0.8
Corporate Expenses............ NA NA NA (6.1) (7.6) 1.5
------ ------ ----- ----- ----- ----
Totals...................... $127.1 $122.2 $ 4.9 $ 5.5 $(2.4) $7.9
====== ====== ===== ===== ===== ====
</TABLE>
Sales of the Process Group increased $4.6 million or 9.0% to $55.5 million
compared to the prior year. Increases in shipments of flow measurement devices
of $3.5 million and miscellaneous process equipment of $3.0 million were
partially offset by a decrease in shipments of heat exchangers of $1.9 million.
The increase in shipments of flow measurement devices was due primarily to the
acquisition of XO Technologies in the fourth quarter of last year. Most of the
increase in sales of miscellaneous process equipment resulted from increased
shipments of centrifuges, including several exported to China. The decline in
shipments of heat exchangers was primarily due to poor economic conditions.
Operating profit for the Process Group was $4.6 million, which was $0.8 million
greater than fiscal 1993. The reduced shipments and lower margins of heat
exchangers negatively impacted operating profits by $1.4 million; this negative
impact was more than offset by increased operating profits of $0.8 million and
$1.4 million resulting from the higher level of sales of flow measurement
devices and miscellaneous process equipment, respectively.
The Aerospace Group recorded sales of $46.1 million in both fiscal 1994 and
fiscal 1993. Sales of the group were reduced by $1.6 million as a result of the
sale of several composite materials businesses in fiscal 1993, and by $2.3
million, due mostly to lower shipments of electro-mechanical devices. However,
these decreases were offset by an increase of $3.2 million in sales by Aldan
Industrial Machining, Inc., purchased in the fourth quarter of fiscal 1993 and
by a $0.7 million increase in sales of fabricated composite structures for
commercial space satellites. Delays and extensions of aerospace customer
requirements related to defense industry cutbacks and softness in the
commercial airlines business, which have had an adverse effect on sales and
profits of aerospace components in the past, are expected to continue for some
time in the future. Also, see the discussion herein under "BUSINESS OF THE
COMPANY--Customers," concerning the possible loss of business from a major
customer of the Aerospace Group. Operating profit of this group was $5.8
million, an improvement of $4.5 million compared to the prior year. The
liquidation of LIFO inventory layers, carried at lower costs prevailing in
prior years compared with the current cost of inventory, contributed $0.8
million to this improvement. The balance is principally attributable to
improved productivity and cost control measures related to the manufacture of
aerospace components at the A&E Division and increased sales of composite
structures by Programmed Composites, Inc.
The Industrial Group recorded sales of $25.0 million in fiscal 1994, a
decrease of $0.2 million or less than 1.0%. Shipments of extruded monofilaments
and thermistors increased $1.0 million and $0.1 million, respectively; however,
these increases were more than offset by reduced sales of die castings. The
increase in extruded monofilament sales resulted from new products introduced
for the household and industrial brush market, and increased demand for paint
brush bristle. (The loss in the fourth quarter of fiscal 1994 of a large
65
<PAGE>
specialty monofilament customer, with annual sales of approximately $2.8
million, is expected to have a substantial adverse impact on sales and profits
of this group in fiscal 1995.) Despite the reduction in sales, the operating
profit of the Industrial Group increased by $0.3 million over the prior year.
Increased shipments of extruded monofilaments resulted in an increase in
operating profit of $0.3 million; and increased volume, cost control measures
and new production techniques used in the manufacture of thermistors increased
operating profit by $0.5 million. On the other hand, reduced sales of die
castings caused a reduction in operating profit of $0.6 million.
American Innovations, Inc., which was acquired late in the third quarter of
fiscal 1993 and had no sales last year, reported sales of $0.5 million in
fiscal 1994. Operating losses, consisting primarily of marketing and
engineering costs, were $1.6 million in fiscal 1994 compared to $2.4 million in
fiscal 1993 which included a charge to research and development expense of $1.8
million for the value of research and development projects in process at the
time of acquisition.
Corporate expenses were $6.1 million or $1.5 million less than fiscal 1993.
Compensation and benefits were reduced $1.0 million due principally to
reductions in staff, the discontinuance of the Supplemental Senior Executive
Death Benefit Program and decreased pension costs. The balance of the decrease
resulted principally from reduced workers' compensation insurance costs.
Other expense, net of other income, increased $0.9 million compared to fiscal
1993 primarily as a result of reduced investment income due chiefly to lower
interest rates and, to a lesser extent, a smaller investment pool.
The effective tax rate for fiscal 1994 was 26%. This reduced rate reflects a
refund of federal income taxes related to the settlement of claims assumed
during the spin off from Ametek.
Income from continuing operations was $1.5 million or 42 cents per share,
compared to a net loss of $3.4 million or 93 cents per share in the prior year.
Net income for the Company was $1.2 million or 34 cents per share this year,
an improvement of $5.0 million over the prior year loss of $3.8 million or a
loss of $1.02 per share.
Of the $7.9 million increase in operating income between fiscal years 1993
and 1994 discussed above, $5.1 million occurred in the fourth quarter of fiscal
1994. On almost identical fourth quarter sales ($29.8 million in fiscal 1994
compared to $29.7 million in fiscal 1993), operating income increased from a
$3.0 million loss in fiscal 1993 to a $2.1 million profit in fiscal 1994. This
increase was the result of many factors, some of which were noted in the full
year discussion above. The more significant factors for the fourth quarter are
further detailed below.
In the fourth quarter of fiscal 1993, $1.0 million of environmental costs
were recognized at one of the Process Group plants, while no similar expenses
were incurred in fiscal 1994. This matter is more fully discussed under
"BUSINESS OF THE COMPANY--Environmental Matters".
The Aerospace Group had $1.8 million of improved profitability in the fourth
quarter of fiscal 1994 from several areas. Research and development costs of
approximately $0.3 million, related to a new composite structure fabrication
program, were expensed in the fourth quarter of fiscal 1993 since the Company
did not have a contractual commitment for recovery at that time. The amount was
recognized as revenue in the fourth quarter of fiscal 1994 when the contract
was finalized resulting in a positive change of $0.6 million between the two
quarterly periods. In addition, major improvements in productivity and cost
control were experienced in fiscal 1994 at the Company's A&E Division due to
restructuring projects which were begun in fiscal 1993.
66
<PAGE>
In the fourth quarter of fiscal 1993, $0.6 million of additional insurance
reserves (primarily workers' compensation) were required due to a highly
unfavorable historical loss experience. However, as a consequence of safety and
claims settlement programs instituted at all Company operations by both general
management and a newly hired risk manager, a significant favorable adjustment
of $0.4 million of such reserves was recorded in the fourth quarter of fiscal
1994, resulting in a $1.0 million positive change between the two quarterly
periods.
Certain corporate expenses were reduced by $1.1 million in fiscal 1994 from
the consolidation of the corporate offices in Denver, Colorado and the
resulting down-sizing of staff and from the elimination in the fourth quarter
of fiscal 1994 of a supplemental executive retirement plan.
FISCAL 1993 COMPARED TO FISCAL 1992
Sales for fiscal 1993 were $122.2 million compared to $133.1 million in
fiscal 1992, a decrease of $10.9 million or 8.2%. The operating loss for fiscal
1993 was $2.4 million or $1.8 million less than the prior year which included a
restructuring charge of $7.4 million. The changes in sales and operating income
by business group are shown in the following table:
COMPARATIVE SALES AND OPERATING INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SALES OPERATING INCOME
------------------------ --------------------------
FISCAL FISCAL INCREASE FISCAL FISCAL INCREASE
GROUP 1993 1992 (DECREASE) 1993 1992 (DECREASE)
- ----- ------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Process....................... $ 50.9 $ 54.2 $ (3.3) $ 3.8 $ 6.4 $(2.6)
Aerospace..................... 46.1 54.1 (8.0) 1.3 (4.2) 5.5
Industrial.................... 25.2 24.8 0.4 2.5 1.3 1.2
American Innovations, Inc..... -- -- -- (2.4) -- (2.4)
Corporate Expenses............ NA NA NA (7.6) (7.7) 0.1
------ ------ ------ ----- ----- -----
Totals...................... $122.2 $133.1 $(10.9) $(2.4) $(4.2) $ 1.8
====== ====== ====== ===== ===== =====
</TABLE>
The Process Group's sales were $50.9 million in fiscal 1993, a decrease of
$3.3 million or 6.1% compared to fiscal 1992. Decreases in shipments of heat
exchangers and process equipment of $2.7 million and $0.9 million,
respectively, were partially offset by increased sales of flow measurement
devices of $0.3 million. The major reason for the decline in shipments of heat
exchangers was reduced demand for mainframe computers. Operating profit for the
Process Group was $3.8 million in fiscal 1993 versus $6.4 million in fiscal
1992, a decrease of $2.6 million. The reduced shipments of heat exchangers
resulted in a reduction of operating profits of $0.7 million. Reduced shipments
of process equipment as well as increased environmental costs decreased
operating profits by $1.4 million.
The Aerospace Group reported sales of $46.1 million for fiscal 1993, a
decrease of $8.0 million or 14.8% compared to fiscal 1992. The sale of the
Textile Products and Composite Material divisions in the third quarter of
fiscal 1993 contributed $2.6 million to this decrease. Reduced shipments of
aerospace components of $7.1 million and electro-mechanical devices of $1.6
million also had a negative impact on sales. These reductions were partially
offset by a $2.8 million increase in space shuttle component shipments and a
$0.5 million increase in sales of fabricated composite structures. Delays and
extensions of aerospace customer requirements related to defense industry
cutbacks and the soft commercial airline business, which had an adverse effect
on sales and profits of aerospace components, are expected to continue for some
time in the future. The operating profit of this group was $1.3 million, a
decrease of $0.8 million compared to fiscal 1992, before the restructuring
charge of $6.3 million. This decrease is primarily attributable to the changes
in sales previously discussed and increased research and development
expenditures in connection with a new composite structure fabrication program,
partially offset by reduced losses of $0.7 million related to the composite
materials businesses sold in fiscal 1993.
67
<PAGE>
The Industrial Group recorded sales of $25.2 million in fiscal 1993, compared
to $24.8 million for fiscal 1992. This increase of $0.4 million or 1.6% was due
to increased shipments of extruded monofilaments as a result of new products
introduced for the household and industrial brush market and increased demand
for paint brush bristle and specialty monofilaments. The operating profit of
the Industrial Group was $2.5 million in fiscal 1993, an increase of $1.2
million over the prior year. Increased shipments of extruded monofilaments used
in cosmetic brushes resulted in an increase in operating profit of $0.4
million. Reduced cost of sales of die castings and thermistors as a result of
cost control measures and new production techniques increased operating profit
by $0.3 million and $0.5 million, respectively.
American Innovations, Inc., acquired in the third quarter of fiscal 1993, had
no sales in that year. Operating losses of $2.4 million in fiscal 1993
consisted of a $1.8 million charge to research and development expense for the
value of research and development projects in process at the time of
acquisition plus continuing marketing and engineering costs.
Corporate expenses of $7.6 million in fiscal 1993 were $0.9 million greater
than fiscal 1992 after excluding a $1.0 million restructuring charge included
in that year. This increase was due to increases in corporate general and
administrative expenses.
Other expense, net of other income, increased $2.3 million compared to fiscal
1992 primarily due to reduced investment income resulting principally from
lower interest rates.
The fiscal 1993 tax provision includes a valuation allowance of $0.8 million
for certain deferred tax assets related to current year losses that were not
expected to be recoverable.
Loss from continuing operations was $3.4 million or 93 cents per share in
fiscal 1993, compared to a loss of $3.2 million or 81 cents per share in the
prior year.
Net loss for the Company was $3.8 million or $1.02 per share in fiscal 1993,
compared to the net loss for fiscal 1992 of $3.0 million or 77 cents per share.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at February 28, 1994 amounted to $67.2 million compared to
$75.5 million at February 28, 1993. This decrease of $8.3 million was caused
largely by the reclassification of $4.5 million of long-term debt to current,
the repayment of $1.4 million of loans on officers life insurance and the
decrease in assets of discontinued operations of $6.8 million due to the sale
of the Aluminum Division. Working capital at May 31, 1994 amounted to $69.0
million, compared to $67.2 million at February 28, 1994. This increase of $1.8
million was caused, for the most part, by the receipt of $1.5 million of cash
surrender value payments on officers' life insurance related to the
discontinuance and settlement of the Supplemental Senior Executive Death
Benefit Program in fiscal 1994. Included in current assets are cash and cash
equivalents and marketable securities of $60.0 million at May 31, 1994, $60.7
million at February 28, 1994 and $64.7 million at February 28, 1993. Also
included in current assets at May 31, 1994 are net deferred income tax assets
of $3.4 million, the recognition of which is justified by the Company's ability
to generate future taxable income through tax planning strategies for
inventories which are presently valued on a LIFO basis.
The covenants of the $45.0 million of Senior Notes, with a current interest
rate of 11.17%, prohibit prepayment until October 31, 1996, though scheduled
annual repayments of $4.5 million will commence October 31, 1994. An amendment
to the Senior Note Agreement, however, will allow the Company to purchase an
aggregate amount of $7.5 million of Debentures and/or Common Shares subsequent
to February 28, 1994 if the Company can maintain a debt to capitalization ratio
of less than 50%. The ratio as of February 28, 1994 was 51.2%.
68
<PAGE>
The Company's ability to pay dividends is also restricted by the terms of its
financing arrangements and the Company currently is not permitted to pay cash
dividends to stockholders. In the future, the Company's Board of Directors will
consider the advisability of paying cash or other dividends, when permitted,
based on the Company's earnings, financial condition, anticipated cash needs
and such other factors as are deemed relevant at the time.
The Company's overall financial condition remained strong at May 31, 1994,
and its liquidity and capital resources were adequate for its operating needs.
CAPITAL EXPENDITURES
In fiscal 1994, 1993 and 1992, the Company invested a total of $15.0 million
in capital improvements. Such expenditures were directed primarily toward
improved production efficiency and expanded capacity. Capital expenditures in
fiscal 1994 totaled $4.9 million, reflecting investment in automated and other
manufacturing equipment. Capital expenditures and other cash requirements are
being funded by internally generated and existing funds, and no significant
additional borrowings have been incurred. Capital expenditures in 1995 are
expected to be financed by existing cash balances and cash generated by
operating activities.
OTHER MATTERS
Inflation has had no significant effect on the Company's overall operations
or financial condition in the last few years due to the relatively low rate of
inflation in the United States. In addition, the LIFO method of accounting for
inventories (where the cost of the products sold approximates current cost) is
used and, therefore, the effect of inflation is substantially reflected in
operating costs. In general, the Company believes that programs are in place to
monitor the effect of inflation and take the necessary steps to minimize its
effect on operations.
MARKET PRICE FOR THE COMMON SHARES
The Company's Common Shares are listed and traded on the AMEX. The following
table sets forth the high and low quoted sales price for the Common Shares on
the AMEX for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING LAST DAY IN FEBRUARY HIGH LOW
--------------------------------------- ------- -------
<S> <C> <C>
1993:
First Quarter............................................. $11 7/8 $ 9 1/2
Second Quarter............................................ $11 7/8 $10 7/8
Third Quarter............................................. $11 5/8 $11
Fourth Quarter............................................ $12 1/2 $10 5/8
1994:
First Quarter............................................. $12 1/2 $11
Second Quarter............................................ $11 7/8 $ 9 7/8
Third Quarter............................................. $15 3/4 $10 3/4
Fourth Quarter............................................ $14 1/2 $12 1/2
1995:
First Quarter............................................. $13 3/4 $11 7/8
Second Quarter............................................ $15 $13 1/8
Third Quarter (through September 27, 1994)................ $14 1/8 $13 5/8
</TABLE>
69
<PAGE>
On October 20, 1993, the last trading day before the American Securities
Group publicly indicated it was reviewing its options with respect to its
interests in the Company, the high and low quoted sales price for the Common
Shares on the AMEX were $11 1/8 and $11, respectively.
On April 26, 1994, the last trading day before the public announcement by the
Company that it had received the Initial Proposal from the Acquiring Group, the
high and low quoted sales price for the Common Shares on the AMEX were $13 and
$12 3/4, respectively.
On June 21, 1994, the last trading day preceding the issuance of the press
release by the Company announcing the receipt of the Revised Proposal, the high
and low quoted sales price for the Common Shares on the AMEX was $13 1/2.
On , 1994, the most recent practicable date before the printing of this
Proxy Statement, the high and low quoted sales price for the Common Shares on
the AMEX were $ and $ , respectively, and Common Shares were issued
and outstanding among registered stockholders.
HOLDERS OF COMMON SHARES ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR
THE COMMON SHARES.
DIVIDENDS
The Company has not paid cash dividends to date. As of February 28, 1994,
payments of dividends were restricted until such time as the Company earns
additional net income of $6.0 million.
Under the terms of the Note Purchase Agreement with respect to the Senior
Notes, the Company is restricted in its ability to pay any dividend or make any
distribution on its capital stock or to its stockholders (other than dividends
or distributions payable in its Common Shares or rights, warrants, options or
similar securities with respect to the purchase of its Common Shares). Such
payments or distributions are prohibited (i) if a Default or an Event of
Default, as defined in the Note Purchase Agreement, has occurred and is
continuing, or (ii) if, in the aggregate, proposed dividends, repurchases of
Common Shares, or certain investments are in excess of $5.0 million plus 75% of
cumulative net income (or minus 100% of net losses) subsequent to December 1,
1988, plus any proceeds from the issuance of Common Shares or resulting from
the conversion of indebtedness or Preferred Shares into Common Shares. During
fiscal 1991, the Company received a waiver from its lenders excluding $3.0
million of certain costs reimbursed to Ametek from the above calculation.
During fiscal 1992, the Note Purchase Agreement was amended to permit
additional repurchases of up to $15.0 million of the Company's Debentures and
Common Shares, provided that the Company is entitled to incur additional
unsecured Funded Debt, as defined in the Note Purchase Agreement. In
conjunction with such amendment, the interest rate on the Senior Notes was
increased. As noted above, the Senior Notes will be prepaid in full upon
consummation of the Merger. Additional restrictions on the Company's ability to
pay dividends will be imposed if at any time the Debentures are in default or
any dividends are not declared and paid on the Preferred Stock.
If the Merger is approved, it is contemplated that the Surviving
Corporation's cash flow will be used primarily to make debt service payments
under the Senior Facilities and to meet other corporate obligations. Future
dividends on the Company's capital stock will be determined in light of the
earnings and financial requirements of the Surviving Corporation and will be
subject to restrictions contained in the Credit Agreement and other debt
instruments of the Surviving Corporation.
70
<PAGE>
CERTAIN INFORMATION CONCERNING ACQUISITION CORP.,
HOLDINGS CORP., KTM PARTNERS AND KTM GP CORP.
ACQUISITION CORP.
Acquisition Corp. is a Delaware corporation organized for the purpose of
effectuating the Merger. As of the date of this Proxy Statement, the authorized
capital stock of Acquisition Corp. consists of 1,000 shares of common stock,
$.01 par value per share ("Acquisition Corp. Shares"). Holdings Corp. owns all
of the issued and outstanding Acquisition Corp. Shares. As of the date of this
Proxy Statement, the directors and officers of Acquisition Corp. are as set
forth under "DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY, HOLDINGS CORP.,
ACQUISITION CORP., KTM GP CORP. AND THE SURVIVING CORPORATION--Information
Concerning Directors and Executive Officers of Holdings Corp., Acquisition
Corp. and KTM GP Corp." The directors and sole stockholder of Acquisition Corp.
have approved the Merger Agreement. Until the consummation of the Merger, it is
not anticipated that Acquisition Corp. will have any significant assets or
liabilities (other than those arising under the Merger Agreement or in
connection with the Merger and the transactions contemplated thereby) or engage
in any activities other than those incident to its formation and
capitalization, the Merger and the financing thereof.
HOLDINGS CORP.
Holdings Corp. is a Delaware corporation organized for the purpose of
effectuating the Merger. As of the date of this Proxy Statement, the authorized
capital stock of Holdings Corp. consists of 1,000 shares of common stock, $.01
par value per share ("Holdings Corp. Shares"). [Currently, KTM Partners owns
all of the issued and outstanding Holdings Corp. Shares]. As of the date of
this Proxy Statement, the directors and officers of Holdings Corp. are the same
as for Acquisition Corp. The directors and sole stockholder of Holdings Corp.
have approved the Merger Agreement. Until the consummation of the Merger, it is
not anticipated that Holdings Corp. will have any significant assets or
liabilities (other than those arising under the Merger Agreement or in
connection with the Merger and the transactions contemplated thereby) or engage
in any activities other than those incident to its formation and
capitalization, the Merger and the financing thereof.
KTM PARTNERS
KTM Partners is a New York limited partnership formed for the purpose of
effectuating the Merger. The sole general partner of KTM Partners is KTM
Partners GP Corp., a New York corporation ("KTM GP Corp."), which holds a 1%
ownership interest in KTM Partners. Currently, the limited partners of KTM
Partners are the members of the American Securities Group, who hold the
remaining 99% ownership interest in KTM Partners. Danaher has agreed to
purchase (or to cause one of its affiliates to purchase) for cash, upon
consummation of the Merger, a $5 million limited partnership interest in KTM
Partners (which interest will constitute not less than 33 1/3% of the total
partnership interests in KTM Partners and approximately 33 1/3% of the total
equity in Holdings Corp.). Capital Partners may arrange for other third party
investors to purchase limited partnership interests in KTM Partners (or in
other limited partnerships which may be created for the purpose of making an
equity investment in Holdings Corp.).
KTM GP CORP.
KTM GP Corp. is a New York corporation organized for the purpose of
effectuating the Merger. As of the date of this Proxy Statement, the authorized
capital stock of KTM GP Corp. consists of 1,000 shares of common stock, $.01
par value per share ("KTM GP Corp. Shares"). Currently, Elizabeth R. Varet owns
53%, Charles D. Klein owns 39% and Michael G. Fisch owns 8% of the issued and
outstanding KTM GP Corp. Shares. As of the date of this Proxy Statement, the
directors and officers of KTM GP Corp. are as set forth under "DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY, HOLDINGS CORP., ACQUISITION CORP., KTM GP
CORP. AND THE SURVIVING CORPORATION--Information
71
<PAGE>
Concerning Directors and Executive Officers of Holdings Corp., Acquisition
Corp. and KTM GP Corp." Until the consummation of the Merger, it is not
anticipated that KTM GP Corp. will have any significant assets or liabilities
(other than those arising under the limited partnership agreement of KTM
Partners) or engage in any activities other than those incident to its
formation and capitalization, the Merger and the financing thereof.
GENERAL
The business address of Acquisition Corp., Holdings Corp., KTM Partners and
KTM GP Corp. is 122 East 42nd Street, Suite 2400, New York, New York 10022.
DIRECTORS AND EXECUTIVE OFFICERS
OF THE COMPANY, HOLDINGS CORP., ACQUISITION CORP.,
KTM GP CORP. AND THE SURVIVING CORPORATION
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is the name of each director and executive officer of the
Company and the present principal occupation or employment of each such person,
the material occupations, positions, officers or employments and the name,
principal business and address of any corporation or other organization in
which such occupation, position, office or employment of each such person was
held during the past five years. Unless otherwise indicated, the address of
each director and executive officer is that of the Company at Suite 600, One
Cherry Drive, 501 South Cherry Street, Denver, Colorado 80222. Unless otherwise
indicated, each person listed below is a citizen of the United States.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR POSITIONS, AND ADDRESSES
NAME THEREOF, DURING THE PAST FIVE YEARS (1); CITIZENSHIP
- ---- ----------------------------------------------------
<S> <C>
Alexander G. Anagnos.... Director of the Company since June 22, 1988; Financial
advisor to Mr. William Rosenwald and his family; Executive
Director of American Securities, L.P. and a Director of an
affiliated and predecessor entity (122 East 42nd Street,
Suite 2400, New York, New York 10022); Trustee of Eastover
Corporation, a real estate investment trust, since April
1990.
William J. Catacosinos.. Director of the Company since June 22, 1988; Chairman of the
Board, Chief Executive Officer and President of Long Island
Lighting Company (175 East Old Country Road, Hicksville, New
York 11801); Director of Utilities Mutual Insurance Co. and
U.S. Life Corporation.
Alan R. Gruber.......... Director of the Company since June 25, 1992; Chairman of the
Board and Chief Executive Officer of Orion Capital
Corporation ("Orion"), a property and casualty insurance
holding company (30 Rockefeller Plaza, New York, New York
10112); Chairman of Guaranty National Corporation, an
insurance affiliate of Orion; Trustee of five trusts which
manage the Neuberger & Berman family of equity mutual funds;
Director of Trenwick Group, Inc., a property and casualty
reinsurance underwriter.
Charles D. Klein........ Director of the Company since June 22, 1988; Financial
advisor to Mr. William Rosenwald and his family; Managing
Director of American Securities, L.P. and executive officer
of affiliated and predecessor entities (122 East 42nd
Street, Suite 2400, New York, New York 10022); Director of
Ametek.
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR POSITIONS, AND ADDRESSES
NAME THEREOF, DURING THE PAST FIVE YEARS (1); CITIZENSHIP
---- ----------------------------------------------------
<S> <C>
William E. Leisey....... Controller of the Company since September 1990; Director of
Accounting of the Company from December 1988 to September
1990.
Tom A. Sims............. Vice President-Human Resources of the Company since August
1992; Director of Human Resources of Energy Service Company,
Inc., (1445 Ross Avenue, Dallas, Texas 75202) from June 1990
to July 1992; Vice President of Administration of the
Reading & Bates Corporation, (3500 Mid-Continent Tower,
Tulsa, Oklahoma 74102) for more than two years prior
thereto.
Robert L. Tomz.......... Vice President and Chief Financial Officer of the Company
since March 1993; Vice President of the Company from
December 1992 to March 1993; business consultant (13907
Bluff Lane, San Antonio, Texas 78216) from July 1991 to
November 1992; an Executive Vice President of James Barko
and Associates (9311 San Pedro, Suite 1450, San Antonio,
Texas 78216) from March 1990 to June 1991; President and
Chief Executive Officer of RemodelAmerica Corporation (10410
Gulfdale, San Antonio, Texas 78216) from December 1988 to
February 1990.
Elizabeth R. Varet...... Director of the Company since June 22, 1988; Chairperson and
Managing Director of American Securities, L.P. and a
Director of affiliated and predecessor entities (122 East
42nd Street, Suite 2400, New York, New York 10022); Director
of Ametek.
Robert L. Welty......... Secretary of the Company since September 1993; Legal counsel
of the Company since August 1990; in private practice (765
Belfry Drive, Blue Bell, Pennsylvania 19422) for two years
prior to joining the Company.
Hugh H. Williamson, III. Director, President and Chief Executive Officer of the
Company since April 21, 1992; President, Chief Executive
Officer and Chief Operating Officer of Williamson &
Associates, (2519 E. 21st Street, Tulsa, Oklahoma 74114) a
consulting firm, for more than three years prior thereto.
</TABLE>
- --------
(1) Except as otherwise indicated, such persons have held their present
occupations for a period in excess of five years.
73
<PAGE>
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS CORP.,
ACQUISITION CORP. AND KTM GP CORP.
Set forth below is the name of each director and executive officer of
Holdings Corp., Acquisition Corp. and KTM GP Corp. and, unless disclosed
elsewhere under "DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY, HOLDINGS
CORP., ACQUISITION CORP., KTM GP CORP. AND THE SURVIVING CORPORATION," the
present principal occupation or employment of each such person, the material
occupations, positions, officers or employments and the name, principal
business and address of any corporation or other organization in which such
occupation, position, office or employment of each such person was held during
the past five years. Unless otherwise indicated, the address of each director
and executive officer of Holdings Corp., Acquisition Corp. and KTM GP Corp. is
that of American Securities at 122 East 42nd Street, Suite 2400, New York, New
York 10022. Unless otherwise indicated, each person listed below is a citizen
of the United States.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR POSITIONS, AND ADDRESSES
NAME THEREOF, DURING THE PAST FIVE YEARS (1); CITIZENSHIP
---- ----------------------------------------------------
<S> <C>
Michael G. Fisch........ Director, Vice President, Treasurer and Assistant Secretary
of Holdings Corp. and Acquisition Corp. since December 1993
and April 1994, respectively; Director, Executive Vice
President, Treasurer and Secretary of KTM GP Corp. since
June 1994; Financial advisor to Mr. William Rosenwald and
his family since April 1993; Managing Director of American
Securities, L.P. and executive officer of affiliated and
predecessor entities (122 East 42nd Street, Suite 2400, New
York, New York 10022) since April 1993; from 1991 to 1993, a
Managing Director of First Atlantic Capital, Ltd., New York
City; prior to 1990, a Principal of Adler & Shaykin, New
York City.
Charles D. Klein........ Director and President of Holdings Corp. and Acquisition
Corp. since December 1993 and April 1994, respectively;
Director, President and Chief Executive Officer of KTM GP
Corp. since June 1994. See
"--Information Concerning Directors and Executive Officers
of the Company."
David P. Steinmann...... Director, Vice President, Secretary and Assistant Treasurer
of Holdings Corp. and Acquisition Corp. since December 1993
and April 1994, respectively; Chief Administrative Officer
of the organization responsible for the management of the
investment and philanthropic activities of the William
Rosenwald family; Managing Director of American Securities,
L.P. and executive officer of affiliated and predecessor
entities (122 East 42nd Street, Suite 2400, New York, New
York 10022); Director of Ametek.
Elizabeth R. Varet...... Chairman of the Board of Directors of KTM GP Corp. since
June 1994. See "--Information Concerning Directors and
Executive Officers of the Company."
</TABLE>
- --------
(1) Except as otherwise indicated, such persons have held their present
occupations for a period in excess of five years.
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING
CORPORATION
The directors of the Surviving Corporation are expected to be Michael G.
Fisch, Charles D. Klein, Elizabeth R. Varet and Hugh H. Williamson, III. See
"--Information Concerning Directors and Executive Officers of the Company" and
"--Information Concerning Directors and Executive Officers of Holdings Corp.,
Acquisition Corp. and KTM GP Corp."
The executive officers of the Company as identified above under "--
Information Concerning Directors and Executive Officers of the Company" will
continue to serve as executive officers of the Surviving Corporation.
74
<PAGE>
SECURITY OWNERSHIP OF THE COMPANY
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of , 1994, information regarding the
beneficial ownership of each person or group who owned of record or who, to the
best knowledge of the Company, owned beneficially more than five percent of the
outstanding Voting Shares.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
VOTING SHARES OUTSTANDING
NAME AND ADDRESS BENEFICIALLY VOTING
OF BENEFICIAL OWNER OWNED SHARES(1)
------------------- ------------- -------------
<S> <C> <C>
Acquiring Group
c/o American Securities BD Co., L.P.
122 East 42nd Street
Suite 2400
New York, New York 10168.......................... 926,942(2) 22.96%
Tweedy, Browne Company L.P.
TBK Partners, L.P.
Vanderbilt Partners, L.P.
52 Vanderbilt Avenue
New York, New York 10017.......................... 455,477(3) 12.87%
Gabelli Funds, Inc.
GAMCO Investors, Inc.
Gabelli & Company, Inc. Profit Sharing Plan
Gabelli Performance Partnership
Gabelli Associates Fund
Gabelli Associates Limited
Gabelli & Company, Inc.
One Corporate Center
Rye, New York 10580............................... 335,669(4) 8.88%
Lehman Brothers, Inc.
Lehman Brothers Holdings, Inc.
2 World Trade Center, 15th Floor
New York, New York 10048.......................... 178,600(5) 5.05%
</TABLE>
- --------
(1) Percentage of Outstanding Voting Shares was calculated based on the ratio
of beneficial ownership to the sum of (a) the outstanding Common Shares,
(b) Common Shares issuable upon conversion of Debentures held by the
applicable beneficial owner, (c) Common Shares issuable upon conversion of
Preferred Shares (each of which is convertible into one Common Share) held
by the applicable beneficial owner and (d) in the case of the Acquiring
Group, Common Shares issuable upon the exercise of currently exercisable
stock options held by Hugh H. Williamson, III.
(2) Consists of 428,478 outstanding Common Shares, 447,689 outstanding
Preferred Shares, 21,885 Common Shares issuable upon conversion of
Debentures and 28,890 Common Shares issuable upon the exercise of currently
exercisable stock options held by Mr. Williamson. Included in the Common
Shares beneficially owned by certain members of the Acquiring Group are
12,612 outstanding Common Shares and 21,885 Common Shares issuable upon
conversion of Debentures held in their capacities as trustees of certain
trusts, executor of an estate or officers and/or directors of charitable
foundations which are not proponents of the Merger; such 12,612 outstanding
Common Shares will be converted into the right to receive the Merger
Consideration in connection with the Merger. The total Voting Shares owned
beneficially by the Acquiring Group does not include an aggregate of
approximately 192,762 Common Shares (5.16%) (including 71,374 Common Shares
issuable upon conversion of Debentures), which are
75
<PAGE>
beneficially owned by other clients of American Securities. The total
beneficial ownership shown in the above table for the Acquiring Group
eliminates the duplication of beneficial ownership of Common Shares where
certain members of the Acquiring Group share voting and dispositive power
over the same Common Shares by virtue of their positions as co-trustees of
certain trusts or officers and/or directors of certain corporations and/or
charitable foundations. Of the members of the American Securities Group,
Elizabeth R. Varet has beneficial ownership with respect to Common Shares as
provided below under "--Security Ownership of Directors and Executive
Officers"; Nina K. Rosenwald, Ms. Varet's sister, has beneficial ownership
with respect to 402,660 Common Shares (10.75%), as to 56,702 Common Shares
(including 32,242 Preferred Shares) of which she has sole voting and
dispositive power and as to 345,958 Common Shares (including 174,561
Preferred Shares and 128 Common Shares issuable upon conversion of
Debentures) of which she has shared voting and dispositive power as a
director and/or officer of one or more corporations and/or foundation and as
a co-trustee of certain trusts; Alice R. Sigelman, Ms. Varet's sister, has
beneficial ownership with respect to 412,840 Common Shares (11.02%), as to
34,357 Common Shares (including 24,197 Preferred Shares) of which she has
sole voting and dispositive power and as to 378,483 Common Shares (including
182,478 Preferred Shares and 128 Common Shares issuable upon conversion of
Debentures) of which she has shared voting and dispositive power as a
director and/or officer of one or more corporations and/or foundation and as
a co-trustee of certain trusts; and Lewis G. Cole, a member of Stroock &
Stroock & Lavan, has beneficial ownership with respect to 310,357 Common
Shares (8.45%), as to 1,200 Common Shares of which he has sole voting and
dispositive power and as to 309,157 Common Shares (including 127,918
Preferred Shares and 5,455 Common Shares issuable upon conversion of
Debentures) of which he has shared voting and dispositive power as a co-
trustee of certain trusts.
(3) Based upon an amendment to a Schedule 13D filed with the Commission on July
6, 1994, (i) Tweedy, Browne Company L.P. reported beneficial ownership of
an aggregate of 447,377 Common Shares (12.64%), of which it reported sole
voting power as to 383,531 Common Shares and shared dispositive power as to
447,377 Common Shares; (ii) TBK Partners, L.P. reported sole voting and
dispositive power with respect to 4,600 Common Shares (0.13%); and (iii)
Vanderbilt Partners, L.P. reported sole voting and dispositive power with
respect to 3,500 Common Shares (0.10%).
(4) Based upon an amendment to a Schedule 13D filed with the Commission on
September 22, 1994, (i) Gabelli Funds, Inc. reported sole voting,
dispositive power and beneficial ownership of 149,310 Common Shares
(3.26%), of which 119,310 Common Shares are issuable upon conversion of
Debentures; (ii) GAMCO Investors, Inc. reported sole voting, dispositive
power and beneficial ownership of 89,576 Common Shares (2.47%), of which
84,076 Common Shares are issuable upon conversion of Debentures; (iii)
Gabelli & Company, Inc. Profit Sharing Plan reported sole voting,
dispositive power and beneficial ownership of 28,560 Common Shares (0.80%),
of which 28,560 Common Shares are issuable upon conversion of Debentures;
(iv) Gabelli Performance Partnership reported sole voting, dispositive
power and beneficial ownership of 1,900 Common Shares (0.05%); (v) Gabelli
Associates Fund reported sole voting, dispositive power and beneficial
ownership of 56,323 Common Shares (1.59%), of which 8,023 Common Shares are
issuable upon conversion of Debentures; (vi) Gabelli Associates Limited
reported sole voting, dispositive power and beneficial ownership of 7,000
Common Shares (0.19%); and (vii) Gabelli & Company, Inc. reported sole
voting, dispositive power and beneficial ownership of 3,000 Common Shares
(0.08%).
(5) In a Schedule 13G filed with the Commission on February 10, 1994, Lehman
Brothers, Inc. and Lehman Brothers Holdings, Inc. and certain related
entities reported sole voting and dispositive power and beneficial
ownership of 178,600 Common Shares.
76
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth as of , 1994, information regarding the
beneficial ownership of Common Shares by each Director of the Company, the
Company's Chief Executive Officer and its other most highly compensated
executive officers whose salary and bonus for fiscal year 1994 exceeded
$100,000 and by all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
COMMON SHARES OUTSTANDING
BENEFICIALLY COMMON
NAME OF BENEFICIAL OWNER OWNED(1) SHARES(2)
------------------------ ------------- -------------
<S> <C> <C>
Alexander G. Anagnos.............................. 55,477(3) 1.55%
William J. Catacosinos............................ 11,704(4) 0.33%
Alan R. Gruber.................................... 14,000(5) 0.40%
Charles D. Klein.................................. 74,022(6) 2.07%
William E. Leisey................................. 3,994(7) 0.11%
Thomas A. Sims.................................... 1,650(8) 0.05%
Robert L. Tomz.................................... 5,957(9) 0.17%
Elizabeth R. Varet................................ 518,379(10) 13.67%
Hugh H. Williamson, III........................... 84,526(11) 2.36%
All executive officers and directors as a group,
consisting of ten persons, including the individ-
uals named above................................. 770,459(12) 19.91%
</TABLE>
- --------
(1) Pursuant to Rule 13d-3 under the Exchange Act, beneficial ownership of a
security consists of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including
the power to dispose or direct the disposition) with respect to a security
through any contract, arrangement, understanding, relationship or
otherwise. Unless otherwise indicated, beneficial ownership disclosed
consists of sole voting and dispositive power.
(2) Percentage of Outstanding Common Shares was calculated based on the ratio
of beneficial ownership to the sum of (a) the outstanding Common Shares,
(b) Common Shares issuable upon conversion of Debentures held by the
applicable beneficial owner, (c) Common Shares issuable upon conversion of
Preferred Shares (each of which is convertible into one Common Share) held
by the applicable beneficial owner and (d) Common Shares issuable upon the
exercise of currently exercisable stock options held by the applicable
beneficial owner.
(3) Includes 19,201 Common Shares (including 7,702 Preferred Shares)
beneficially owned by Mr. Anagnos' wife and son. Mr. Anagnos disclaims
beneficial ownership of such 19,201 Common Shares. Mr. Anagnos has sole
voting and dispositive power with respect to 9,593 Common Shares
(including 8,793 Preferred Shares). Mr. Anagnos has shared voting and
dispositive power with respect to 26,682 Common Shares (including 2,631
Preferred Shares and 15,339 Common Shares issuable upon conversion of
Debentures) as a director and/or officer of a foundation, as a co-trustee
of several trusts and as executor of an estate. Mr. Anagnos is a director
of an investment manager for certain entities holding an aggregate of
94,400 Common Shares (including a Company employee benefit plan trust
which holds among its assets an aggregate of 56,000 Common Shares); none
of such 94,400 Common Shares have been included in the above table.
(4) Includes 1,604 Common Shares issuable upon conversion of Debentures.
(5) Includes 3,333 Common Shares held pursuant to restricted stock awards
under the Company's 1988 Stock Incentive Plan (the "1988 Plan").
(6) Includes 3,425 Common Shares (including 1,925 Preferred Shares)
beneficially owned by Mr. Klein's wife. Mr. Klein disclaims beneficial
ownership of such 3,425 Common Shares. Mr. Klein has sole voting and
dispositive power with respect to 57,126 Common Shares (including 32,926
Preferred Shares). Mr. Klein has shared voting and dispositive power with
respect to 13,471 Common Shares (including 4,493 Preferred Shares and
6,418 Common Shares issuable upon conversion of Debentures) as a director
and/or officer of a foundation and as a co-trustee of several trusts.
77
<PAGE>
(7) Includes 384 Common Shares issuable upon conversion of Debentures and
3,250 Common Shares issuable upon the exercise of currently exercisable
stock options.
(8) Issuable upon the exercise of currently exercisable stock options.
(9) Includes 1,604 Common Shares issuable upon conversion of Debentures
beneficially owned by Mr. Tomz, 2,750 Common Shares issuable upon the
exercise of currently exercisable stock options and 1,603 Common Shares
issuable upon conversion of Debentures beneficially owned by his son and a
trust for the benefit of another son. Mr. Tomz disclaims beneficial
ownership of such 1,603 Common Shares.
(10) Includes 15,482 Common Shares (including 15,082 Preferred Shares)
beneficially owned by Ms. Varet's husband. Ms. Varet disclaims beneficial
ownership of such 15,482 Common Shares. Ms. Varet has sole voting and
dispositive power with respect to 91,890 Common Shares (including 55,990
Preferred Shares) and shared voting and dispositive power with respect to
411,006 Common Shares (including 182,606 Preferred Shares) as a director
and/or officer of one or more foundations and as co-trustee of certain
trusts.
(11) Includes 7,444 Preferred Shares and 28,890 Common Shares issuable upon the
exercise of currently exercisable stock options.
(12) Includes (a) 3,333 Common Shares held pursuant to restricted stock awards
under the 1988 Plan; (b) 263,956 Preferred Shares; (c) 26,952 Common
Shares issuable upon conversion of Debentures; and (d) 37,290 Common
Shares issuable upon exercise of currently exercisable stock options held
by all executive officers and directors as a group.
78
<PAGE>
PURCHASES OF VOTING SHARES BY CERTAIN PERSONS
The following table sets forth certain information concerning purchases of
Voting Shares since March 1, 1992 by the Company, by members of the Acquiring
Group, and by directors and executive officers of the Company.
<TABLE>
<CAPTION>
WHERE AND HOW
NO. OF PRICE PER TRANSACTION
NAME DATE SHARES SHARE EFFECTED
---- -------- ------- --------- ------------------
<S> <C> <C> <C> <C>
Steve Anagnos.................. 3/04/92 1,180 $10.55 AMEX
Charles D. Klein............... 3/04/92 12,400 $10.55 AMEX
Jane P. Klein as custodian for
Andrew Klein.................. 3/04/92 500 $10.55 AMEX
Jane P. Klein as custodian for
Elizabeth P. Klein............ 3/04/92 500 $10.55 AMEX
Jane P. Klein.................. 3/04/92 500 $10.55 AMEX
David P. Steinmann............. 3/04/92 9,380 $10.55 AMEX
Catherine Steinmann............ 3/04/92 480 $10.55 AMEX
David P. Steinmann Defined Ben-
efit Plan--
Keogh U/A dated 12/28/84...... 3/04/92 500 $10.55 AMEX
Gabriel Steinmann.............. 3/04/92 476 $10.55 AMEX
Jennifer Steinmann............. 3/04/92 476 $10.55 AMEX
Joshua Steinmann............... 3/04/92 476 $10.55 AMEX
J.J.G. Enterprises, Inc. ...... 3/04/92 2,000 $10.55 AMEX
Trust U/A dated 9/28/51........ 3/04/92 9,870 $10.55 AMEX
Trust U/A dated 8/13/65........ 3/04/92 40,000 $10.55 AMEX
Trust U/A dated 8/30/41........ 3/04/92 15,000 $10.55 AMEX
Lewis G. Cole.................. 3/04/92 1,000 $10.55 AMEX
Neil B. Goldstein.............. 3/04/92 5,000 $10.55 AMEX
William Rosenwald Family Fund,
Inc. ......................... 3/04/92 40,000 $10.55 AMEX
Company........................ 4/17/92 197,600 $12.75 (1) Exercise of option
Alan R. Gruber................. 5/11/92 400 $11.00 AMEX
Alan R. Gruber................. 5/12/92 1,400 $11.125 AMEX
Alan R. Gruber................. 5/13/92 400 $11.125 AMEX
Alan R. Gruber................. 5/18/92 1,800 $11.75 AMEX
Company........................ 7/15/92 37,000 $11.51 Private repurchase
Trust U/A dated 8/13/65........ 12/17/92 3,422 $10.82 AMEX
Company........................ 9/01/93 190,900 $11.00 (2)
</TABLE>
- --------
(1) Includes cost of option of $2.75 per Common Share and exercise price of
option of $10.00 per Common Share.
(2) Received by the Company as part of the consideration for the sale of its
Aluminum Extrusion Division.
The above table excludes Common Shares beneficially owned by members of the
Acquiring Group as fiduciaries for persons or entities who are not proponents
of the Merger. In addition to the purchases shown in the above table, from
March 1992 through July 1994, various members of the Acquiring Group effected
certain intra-group transfers for which no consideration was paid including
distributions by certain trusts to the beneficiaries thereof and certain gifts.
This table does not cover any transactions in the Debentures.
On , 1994, certain members of the Acquiring Group converted in the
aggregate approximately $6,975,000 principal amount of Debentures into an
aggregate of approximately 447,689 Preferred Shares.
On , 1994, Hugh H. Williamson, III converted $500,000 principal amount
of 8% Convertible Subordinated Debentures due 2003, which were issued to Mr.
Williamson by the Company in a private placement on June 24, 1992, into
approximately 48,192 Common Shares.
79
<PAGE>
TRANSACTION OF OTHER BUSINESS
The Board of Directors knows of no other matters which may be presented at
the Special Meeting, but if other matters do properly come before the meeting,
it is intended that the persons named in the proxy will vote, pursuant to their
discretionary authority, according to their best judgment in the interest of
the Company.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of February 28, 1993
and February 28, 1994, and for each of the years in the three-year period ended
February 28, 1994, included herein have been audited by Ernst & Young,
independent auditors, as indicated in their report with respect thereto.
MISCELLANEOUS
If the Merger is not consummated for any reason, proposals of stockholders
intended to be presented at the 1995 Annual Meeting of Stockholders must be
received by the Company at its principal executive offices not later than
, 199 , for inclusion in the Company's Proxy Statement and form of proxy
relating to that meeting. Stockholders should mail any proposals by certified
mail--return receipt requested.
80
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No. 1-
10028) pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement:
1. The Company's Annual Report on Form 10-K for the year ended February 28,
1994;
2. The Company's Current Report on Form 8-K dated June 29, 1994; and
3. The Company's Quarterly Report on Form 10-Q for the quarter ended May
31, 1994.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of this Proxy
Statement and prior to the date of the Special Meeting shall be deemed to be
incorporated by reference into this Proxy Statement and to be a part hereof
from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein (or in any other subsequently filed document that is
or is deemed to be incorporated by reference herein) modifies or supersedes
such previous statement. Any statement so modified or superseded shall not be
deemed to constitute a part hereof except as so modified or superseded. All
information appearing in this Proxy Statement is qualified in its entirety by
the information and financial statements (including the notes thereto)
appearing in the documents incorporated by reference.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE TO SUCH DOCUMENTS) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED, ON
WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO THE COMPANY, FROM
KETEMA, INC., SUITE 600, ONE CHERRY CENTER, 501 SOUTH CHERRY STREET, DENVER,
COLORADO 80222, ATTENTION: CORPORATE SECRETARY, TELEPHONE (303) 331-0940. IN
ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING,
REQUESTS MUST BE RECEIVED BY , 1994.
BY ORDER OF THE BOARD OF DIRECTORS
Robert L. Welty
Secretary
Denver, Colorado
, 1994
PLEASE COMPLETE AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
81
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Unaudited Financial Statements:
Consolidated Statement of Operations--Three Months Ended May 31, 1994
and 1993............................................................. F-2
Condensed Consolidated Balance Sheet--May 31, 1994 and February 28,
1994................................................................. F-3
Condensed Consolidated Statement of Cash Flows--Three Months Ended May
31, 1994 and 1993.................................................... F-4
Notes to Consolidated Financial Statements............................ F-5
Audited Financial Statements:
Report of Independent Auditors........................................ F-8
Consolidated Statements of Operations--Years Ended February 28, 1994,
February 28, 1993 and February 29, 1992.............................. F-9
Consolidated Balance Sheets--February 28, 1994 and 1993............... F-10
Consolidated Statements of Cash Flows--Years Ended February 28, 1994,
February 28, 1993 and February 29, 1992.............................. F-11
Consolidated Statements of Stockholders' Equity--Years Ended February
28, 1994, February 28, 1993 and February 29, 1992.................... F-12
Notes to Consolidated Financial Statements............................ F-13
</TABLE>
F-1
<PAGE>
KETEMA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 31,
----------------
1994 1993(A)
------- -------
<S> <C> <C>
Net sales.................................................... $30,956 $33,477
------- -------
Expenses:
Cost of sales, excluding depreciation...................... 23,708 26,106
Selling, general and administrative........................ 5,828 5,179
Depreciation............................................... 1,289 1,172
------- -------
30,825 32,457
------- -------
Operating Income............................................. 131 1,020
Other income (expense):
Interest income............................................ 666 620
Interest expense........................................... (1,622) (1,623)
Other, net................................................. (7) 106
------- -------
(963) (897)
------- -------
Income (loss) from continuing operations before income taxes. (832) 123
Benefit from (provision for) income taxes.................... 266 (216)
------- -------
Income (loss) from continuing operations..................... (566) (93)
Discontinued operations, net of income taxes................. -- (250)
------- -------
Net income (loss)............................................ $ (566) $ (343)
======= =======
Income (loss) per share(b)
Continuing operations...................................... $ (0.16) $ (0.03)
Discontinued operations.................................... -- $ (0.06)
------- -------
Net income (loss).......................................... $ (0.16) $ (0.09)
======= =======
Average common shares outstanding............................ 3,490 3,683
======= =======
</TABLE>
- --------
(a) Restated to reflect the disposition of Aluminum Extrusion Division (Note
5).
(b) The fully diluted earnings per share are not shown since they are
antidilutive.
See accompanying notes.
F-2
<PAGE>
KETEMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1994 1994
ASSETS --------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 921 $ 961
Marketable securities................................. 59,127 59,719
Receivables........................................... 20,973 20,445
Inventories........................................... 12,456 11,322
Deferred income taxes................................. 3,394 2,835
Net assets of discontinued operations................. 676 992
Prepaid expenses and other current assets............. 3,226 4,311
--------- --------
Total current assets................................ 100,773 100,585
--------- --------
Property, plant and equipment, at cost.................. 73,536 73,097
Less accumulated depreciation......................... (48,733) (47,789)
--------- --------
Net property, plant and equipment................... 24,803 25,308
Intangibles, net of amortization........................ 13,137 13,396
Deferred income taxes................................... -- 173
Other assets............................................ 8,143 9,511
--------- --------
$ 146,856 $148,973
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 7,095 $ 7,200
Accrued employee compensation and benefits............ 5,314 5,671
Other accrued liabilities............................. 14,854 15,692
Income taxes payable.................................. -- 309
Current maturities of long-term debt.................. 4,505 4,505
--------- --------
Total current liabilities........................... 31,768 33,377
--------- --------
Long-term debt.......................................... 55,692 55,692
Deferred income taxes................................... 112 --
Other long-term liabilities............................. 2,969 2,923
Stockholders' equity.................................... 56,315 56,981
--------- --------
$ 146,856 $148,973
========= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
KETEMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
---------------------
1994 1993(A)
--------- ----------
<S> <C> <C>
Cash flow from operating activities:..................... $ (566) $ (93)
Income (loss) from continuing operations
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization........................ 1,649 1,535
Deferred income taxes and credits.................... (274) 161
Changes in working capital........................... (2,186) (9,492)
Investing activities included in income (loss) from
continuing operations............................... (407) 107
Redemption of cash surrender values on officers' life
insurance........................................... 1,574 --
Other................................................ (259) 117
--------- ---------
Net cash provided by (used in) continuing opera-
tions............................................. (469) (7,665)
Loss from discontinued operations...................... -- (250)
Change in net operating assets of discontinued opera-
tions and other adjustments........................... 316 (354)
--------- ---------
Net cash provided by (used in) operating activi-
ties.............................................. (153) (8,269)
--------- ---------
Cash flow from investing activities:
Capital expenditures--continued operations........... (855) (1,541)
Capital expenditures--discontinued operations........ -- (173)
Sale (purchase) of marketable securities............. 985 4,476
Proceeds from sale of other assets................... 85 102
Other................................................ (102) (16)
--------- ---------
Net cash provided by (used in) investing activi-
ties:............................................. 113 2,848
--------- ---------
Cash flow from financing activities:
Principal repayments of long-term debt............... -- (15)
--------- ---------
Increase (decrease) in cash and cash equivalents......... (40) (5,436)
Cash and cash equivalents, beginning of period........... 961 6,303
--------- ---------
Cash and cash equivalents, end of period................. $ 921 $ 867
========= =========
</TABLE>
- --------
(a)Restated to reflect the disposition of Aluminum Extrusion Division (Note 5)
See accompanying notes.
F-4
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements are unaudited, but the
Company believes that they include all adjustments necessary for fair
presentation of the consolidated financial position of the Company at May 31,
1994, the consolidated results of operations for the three-month periods ended
May 31, 1994 and 1993 and the consolidated cash flows for the three-month
periods ended May 31, 1994 and 1993.
Quarterly results of operations are not necessarily indicative of results for
the full year. The consolidated financial statements, which are unaudited and
contain condensed disclosures, should be read in conjunction with the
consolidated financial statements and related notes in the Company's latest
audited financial statements.
NOTE 2 -- EARNINGS PER SHARE
Primary earnings per share is determined by dividing income (loss) by the
weighted average number of common shares outstanding during the period, after
adjusting for common stock equivalents arising from stock incentives, if
dilutive.
Earnings per share assuming full dilution is not presented since there is no
dilutive effect on earnings per share amounts assuming the conversion of the
Company's outstanding debentures into additional shares of common stock and the
exercise of outstanding stock incentives.
NOTE 3 -- INCOME TAXES
The differences between the Company's federal income tax rate of 34% and the
Company's effective tax rate attributable to continuing operations were as
follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
THREE
MONTHS
ENDED MAY
31,
-----------
1994 1993
---- -----
<S> <C> <C>
Statutory federal tax benefit (provision)...................... $283 $ (42)
State income taxes, net of federal income tax benefit.......... 37 (33)
Valuation allowance for deferred tax assets.................... -- (141)
Other.......................................................... (54) --
---- -----
Benefit from (provision for) incomes taxes................... $266 $(216)
==== =====
</TABLE>
Components of the Company's deferred tax assets and liabilities as of May 31,
1994 and February 28, 1994 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
MAY 31, FEBRUARY 28,
1994 1994
------- ------------
<S> <C> <C>
Total deferred tax assets.............................. $ 7,747 $ 7,899
Valuation allowance for deferred tax assets............ (2,189) (2,189)
------- -------
5,558 5,710
Total deferred tax liabilities......................... (2,276) (2,702)
------- -------
Net deferred tax assets.............................. $ 3,282 $ 3,008
======= =======
</TABLE>
In addition, income tax refund claims receivable of $1,694,000 included in
prepaids and other current assets at February 28, 1994 were collected in March,
1994.
F-5
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 4 -- INVENTORIES
Inventories are principally accounted for using the last-in, first-out (LIFO)
cost method. If the first-in, first-out (FIFO) method of accounting for
inventories had been used by the Company, inventories would have been higher
than that reported at May 31, 1994 and February 28, 1994 by $9,714,000. During
the three-month periods ended May 31, 1994 and 1993, certain inventories were
reduced resulting in the liquidation of LIFO inventory layers carried at lower
costs prevailing in prior years as compared with the cost of purchases in the
current periods, the effect of which decreased cost of goods sold by
approximately $85,000 and $207,000 for the three-month periods ended May 31,
1994 and 1993, respectively.
The estimated components of inventory stated at lower of LIFO cost or market
are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
MAY 31, FEBRUARY 28,
1994 1994
------- ------------
<S> <C> <C>
Raw materials........................................... $ 1,803 $ 1,831
Work in Process......................................... 4,953 4,335
Finished goods.......................................... 5,700 5,156
------- -------
$12,456 $11,322
======= =======
</TABLE>
Progress payments (principally related to long-term contracts and programs)
of $945 at May 31, 1994 ($661 at February 28, 1994) have been netted against
inventories.
NOTE 5 -- DISCONTINUED OPERATIONS
Effective August 31, 1993, the Company sold its Aluminum Extrusion Division
for $10,978,000 which consisted of cash and short term notes of $8,878,000 (all
notes were fully collected by December 30, 1993) and a non-cash item of 190,900
shares of Ketema, Inc. common stock which had a market value of $2,100,000. In
addition, the Company is entitled to a contractually defined percentage of
profits, if any, for the period from September 1, 1993 through December 31,
1996, from the combined aluminum extrusion operations consisting of the
divested operation and two of the purchaser's operations. No gain or loss on
the sale was recognized since the sales price, net of estimated divestiture
expenditures, approximated the division's book value. The remaining assets of
the Aluminum Extrusion Division at May 31, 1994 and February 28, 1994 of
$676,000 and $992,000, respectively, consist primarily of accounts receivable
and some fixed assets to be disposed of separately. The net assets and
operating results of the Aluminum Extrusion Division have been classified as
discontinued operations for all periods presented in the consolidated financial
statements. Operating results from discontinued operations for the three months
ended May 31, 1993 consisted of sales of $8,930,000 and an operating loss
before tax of $417,000.
NOTE 6 -- MARKETABLE SECURITIES
During the first quarter of fiscal 1995, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" effective for fiscal years beginning
after December 15, 1993.
F-6
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
At May 31, 1994, the carrying value of marketable securities was $59,127,000,
as follows:
<TABLE>
<CAPTION>
CARRYING
VALUE
-----------
<S> <C>
Held to Maturity, due in one year or less (fair market
value of $54,564,000)..................................... $54,588,000
Available for Sale, due in 3 to 20 years, carried at fair
value
(amortized cost of $4,203,000)............................ 4,042,000
Interest receivable........................................ 497,000
-----------
Total carrying value..................................... $59,127,000
===========
</TABLE>
The write-down of the "Available for Sale" securities was charged to equity
since such valuation was considered temporary in accordance with FAS No. 115.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Ketema, Inc.
We have audited the accompanying consolidated balance sheets of Ketema, Inc.
as of February 28, 1994 and February 28, 1993, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended February 28, 1994. 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 Ketema, Inc. at February 28, 1994 and February 28, 1993 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended February 28, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes and individual deferred
compensation contracts during the year ended February 29, 1992.
/s/ Ernst & Young
Denver, Colorado
April 15, 1994,
except for Note 14, as to which the date is
May 11, 1994
F-8
<PAGE>
KETEMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1994 1993* 1992*
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................... $127,109 $122,159 $133,132
-------- -------- --------
Expenses:
Cost of sales, excluding depreciation. 95,716 100,294 106,359
Selling, general and administrative... 21,080 19,996 19,303
Depreciation.......................... 4,763 4,242 4,234
Restructuring charge.................. -- -- 7,385
-------- -------- --------
121,559 124,532 137,281
-------- -------- --------
Operating income (loss)................. 5,550 (2,373) (4,149)
Other income (expense):
Interest income....................... 2,651 3,969 6,405
Interest expense...................... (6,515) (6,402) (6,424)
Other, net............................ 409 (109) (175)
-------- -------- --------
(3,455) (2,542) (194)
-------- -------- --------
Income (loss) before income taxes,
minority interest, discontinued
operations and cumulative effect of
changes in accounting principles....... 2,095 (4,915) (4,343)
Benefit from (provision for) income
taxes.................................. (554) 1,018 1,149
Minority interest in loss of subsidiary. -- 450 --
-------- -------- --------
Income (loss) from continuing
operations............................. 1,541 (3,447) (3,194)
Discontinued operations, net of income
taxes.................................. (305) (342) (21)
-------- -------- --------
Income (loss) before cumulative effect
of changes in accounting principles.... 1,236 (3,789) (3,215)
Cumulative effect of changes in
accounting principles.................. -- -- 208
-------- -------- --------
Net income (loss)....................... $ 1,236 $ (3,789) $ (3,007)
======== ======== ========
Income (loss) per share:
Continuing operations................. $ 0.42 $ (0.93) $ (0.81)
Discontinued operations............... (0.08) (0.09) (0.01)
Cumulative effect of changes in
accounting principles................ -- -- 0.05
-------- -------- --------
Net income (loss)..................... $ 0.34 $ (1.02) $ (0.77)
======== ======== ========
Average common shares outstanding....... 3,630 3,718 3,927
======== ======== ========
</TABLE>
- --------
*Restated to reflect disposition of Aluminum Extrusion Division (Note 2).
See accompanying notes.
F-9
<PAGE>
KETEMA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
ASSETS 1994 1993*
- ------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 961 $ 6,303
Marketable securities.............................. 59,719 58,405
Receivables........................................ 20,445 19,089
Notes receivable from employees.................... -- 408
Inventories........................................ 11,322 10,952
Deferred income taxes.............................. 2,835 3,949
Net assets of discontinued operations.............. 992 7,822
Prepaid expenses and other current assets.......... 4,311 4,271
-------- --------
Total current assets ............................ 100,585 111,199
-------- --------
Property, plant and equipment, at cost:
Land............................................... 2,573 2,573
Buildings.......................................... 15,536 14,858
Machinery and equipment............................ 54,988 53,116
-------- --------
73,097 70,547
Less accumulated depreciation...................... (47,789) (44,812)
-------- --------
Net property, plant and equipment................ 25,308 25,735
Intangibles, net of amortization..................... 13,396 14,490
Deferred income taxes................................ 173 --
Other assets......................................... 9,511 6,985
-------- --------
$148,973 $158,409
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable................................... $ 7,200 $ 8,268
Escrow funds payable............................... -- 5,120
Accrued employee compensation and benefits......... 5,671 5,710
Other accrued liabilities.......................... 15,692 16,468
Income taxes payable............................... 309 --
Current maturities of long-term debt............... 4,505 90
-------- --------
Total current liabilities........................ 33,377 35,656
-------- --------
Long-term debt....................................... 55,692 60,198
Deferred income taxes................................ -- 664
Other long-term liabilities.......................... 2,923 4,065
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 1,500
shares; none issued
Common stock, $1.00 par value, authorized 13,500
shares; issued 4,532 for 1994 and 1993............ 4,532 4,532
Capital in excess of par value..................... 74,096 74,096
Deficit............................................ (8,858) (10,094)
Net unrealized losses.............................. (523) (468)
Cost of shares held in treasury:
1994--1,042 shares; 1993--851 shares.............. (12,221) (10,121)
Unearned compensation.............................. (45) (119)
-------- --------
Total stockholders' equity....................... 56,981 57,826
-------- --------
$148,973 $158,409
======== ========
</TABLE>
- --------
*Restated to reflect disposition of Aluminum Extrusion Division (Note 2).
See accompanying notes.
F-10
<PAGE>
KETEMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1994 1993* 1992*
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income (loss) from continuing
operations........................... $ 1,541 $ (3,447) $(3,194)
Adjustments to reconcile income (loss)
from continuing operations to net
cash provided by (used in) operating
activities:
Depreciation and amortization....... 6,227 4,873 5,274
Write-off of intangibles............ -- -- 5,204
Research and development projects in
process............................ -- 1,766 --
Deferred income taxes and credits... 305 134 (2,138)
Minority interest in loss of
subsidiary......................... -- (450) --
Changes in working capital
Receivables....................... (949) (686) 3,251
Inventories....................... (370) 2,200 (1,098)
Prepaid expenses and other current
assets........................... (40) (1,648) (270)
Escrow fund, payable.............. (5,120) 5,120 --
Payables and accruals............. (4,938) 106 (700)
Investing activities included in
income (loss) from continuing
operations......................... 399 284 (138)
Prepaid interest to escrow account.. -- (1,120) --
Termination of deferred compensation
arrangements....................... (1,744) -- --
Other............................... (634) (488) 360
------- -------- -------
Net cash provided by (used in)
continuing operations.......... (5,323) 6,644 6,551
Loss from discontinued operations..... (305) (342) (21)
Change in net operating assets of
discontinued operations and other
adjustments.......................... (479) (901) 2,293
------- -------- -------
Net cash provided by (used in)
operating activities........... (6,107) 5,401 8,823
------- -------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures--continued
operations........................... (4,546) (3,617) (4,272)
Capital expenditures--discontinued
operations........................... (349) (431) (1,745)
Purchased companies................... -- (12,057) --
Sale (purchase) of marketable
securities........................... (1,902) 17,676 (2,396)
Proceeds from sale of Aluminum
Extrusion Division................... 8,878 -- --
Proceeds from sale of other assets.... 243 928 208
Proceeds from note receivable......... -- -- 1,819
Other................................. (97) (269) (732)
------- -------- -------
Net cash provided by (used in)
investing activities........... 2,227 2,230 (7,118)
------- -------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term
debt................................. -- 500 --
Purchase of treasury stock............ -- (2,291) (747)
Principal repayments of long-term
debt................................. (91) (2,312) (812)
Principal repayment of loans on
officers life insurance.............. (1,371) -- --
------- -------- -------
Net cash used in financing
activities..................... (1,462) (4,103) (1,559)
------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (5,342) 3,528 146
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR................................... 6,303 2,775 2,629
------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR.. $ 961 $ 6,303 $ 2,775
======= ======== =======
</TABLE>
- --------
Supplemental cash flow disclosures--excluded from the consolidated statement of
cash flows for the year ended February 28, 1994 was the effect of certain non-
cash investing activities related to the sale of the Aluminum Division as
disclosed in Note 2.
*Restated to reflect disposition of Aluminum Extrusion Division (Note 2).
See accompanying notes.
F-11
<PAGE>
KETEMA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL NET
COMMON IN EXCESS UNREALIZED
STOCK $1 OF GAINS TREASURY UNEARNED
PAR VALUE PAR VALUE (DEFICIT) (LOSSES) STOCK COMPENSATION TOTAL
--------- --------- --------- ---------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 28,
1991................... $4,535 $74,140 $(3,298) $(431) $ (7,083) $(481) $67,382
Net loss................ -- -- (3,007) -- -- -- (3,007)
Employee stock
incentives............. -- -- -- -- -- 353 353
Purchase of treasury
stock.................. -- -- -- -- (747) -- (747)
Change in pension
liability in excess of
unrecognized prior
service cost, net of
deferred taxes......... -- -- -- 288 -- -- 288
------ ------- ------- ----- -------- ----- -------
BALANCE, FEBRUARY 29,
1992................... 4,535 74,140 (6,305) (143) (7,830) (128) 64,269
Net loss................ -- -- (3,789) -- -- -- (3,789)
Employee stock
incentives............. (3) (44) -- -- 111 9 73
Purchase of treasury
stock.................. -- -- -- -- (2,402) -- (2,402)
Change in pension
liability in excess of
unrecognized prior
service cost, net of
deferred taxes......... -- -- -- (325) -- -- (325)
------ ------- ------- ----- -------- ----- -------
BALANCE, FEBRUARY 28,
1993................... 4,532 74,096 (10,094) (468) (10,121) (119) 57,826
Net income.............. -- -- 1,236 -- -- -- 1,236
Employee stock
incentives............. -- -- -- -- -- 74 74
Treasury stock received
in connection with sale
of the Aluminum
Extrusion Division..... -- -- -- -- (2,100) -- (2,100)
Change in pension
liability in excess of
unrecognized prior
service cost, net of
deferred taxes......... -- -- -- (55) -- -- (55)
------ ------- ------- ----- -------- ----- -------
BALANCE, FEBRUARY 28,
1994................... $4,532 $74,096 $(8,858) $(523) $(12,221) $ (45) $56,981
====== ======= ======= ===== ======== ===== =======
</TABLE>
See accompanying notes.
F-12
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
subsidiaries, after elimination of all significant intercompany transactions in
consolidation.
RESTATEMENT AND RECLASSIFICATION OF PRIOR YEARS
The results for fiscal years 1993 and 1992 have been restated to reflect the
Aluminum Extrusion Division, which was sold effective August 31, 1993, as a
discontinued operation. In addition, certain reclassifications have been
reflected in the accompanying fiscal 1993 and 1992 consolidated financial
statements to conform to the fiscal 1994 presentation.
SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents.
All highly liquid investments with maturities of three months or less when
purchased are considered cash equivalents. The recorded value of cash and
cash equivalents approximates market.
Marketable Securities.
Marketable securities, primarily U.S. Government securities, are carried at
amortized cost plus accrued interest, which approximates market. During May
1993, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). FAS 115 is effective for fiscal years
beginning after December 15, 1993 and will be implemented by the Company
effective in fiscal 1995. Management does not believe the implementation of
FAS 115 will have a significant effect on the Company.
Inventory Valuation.
Inventories are stated at the lower of cost or market, cost being
determined principally by the last-in, first-out (LIFO) method, and market on
the basis of the lower of replacement cost or estimated net proceeds from
sales.
Property, Plant and Equipment.
Expenditures for additions to plant facilities, or which extend the useful
life of the properties, are capitalized. Maintenance and repairs are charged
to operations as incurred. Depreciation of plant and equipment is determined
principally on a straight-line basis over the estimated useful lives of the
assets.
Intangible Assets.
Intangible assets are amortized on a straight-line basis over 3 to 40
years.
Research and Development.
Research and development costs are charged to operations as incurred. Such
costs during the past three years were approximately: 1994--$700; 1993--
$3,600 and 1992--$700. The costs in 1993 included a significant amount of
research and development costs in process which related to the acquisition of
American Innovations, Inc. during the third quarter of fiscal year 1993.
F-13
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Taxes.
Deferred income taxes have been determined by applying current tax rates to
temporary differences between the amount of assets and liabilities determined
for income tax and financial reporting purposes and to applicable income tax
credit carryforwards.
Earnings Per Share.
Primary earnings per share is determined by dividing income (loss) by the
weighted average number of common shares outstanding during the year, after
adjusting for common stock equivalents arising from stock incentives, if
dilutive.
Earnings per share assuming full dilution is not presented since there is
no dilutive effect on earnings per share amounts assuming the conversion of
the Company's outstanding debentures into additional shares of common stock
and the exercise of outstanding stock incentives.
Cumulative Effect of Accounting Changes in Fiscal 1992.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in the fourth quarter of the fiscal year ended
February 29, 1992. The Statement provides for the recognition of deferred tax
assets given the likelihood of certain future events. The Company had
previously used Statement of Financial Accounting Standards No. 96,
"Accounting for Income Taxes," which contained much more restrictive criteria
for the recognition of deferred tax assets. In accordance with generally
accepted accounting principles, the cumulative effect of the change on prior
years was recorded in the first quarter of fiscal 1992. The cumulative effect
of this accounting change was to record a benefit of $1,115 or $0.28 per
share as of March 1, 1991.
The Company also changed the method of accounting for existing individual
deferred compensation contracts in accordance with an amendment to APB
Opinion No. 12, Omnibus Opinion in the fourth quarter of the fiscal year
ended February 29, 1992. In prior years, expense was recognized over a period
through the date the Company commenced payment of its obligation under the
deferred compensation contract. The amendment reduces the recognition period
to the period over which the employee becomes entitled to the deferred
compensation. In accordance with generally accepted accounting principles,
the cumulative effect of the change on prior years was recorded in the first
quarter of fiscal 1992. The total cumulative effect of this accounting change
was to record a charge of $907 or $0.23 per share, net of a tax benefit of
$605.
NOTE 2--ACQUISITIONS AND DISPOSALS
Effective August 31, 1993, the Company sold its Aluminum Extrusion Division
for $10,978 which consisted of cash and short term notes of $8,878 (all notes
were fully collected by December 30, 1993) and a non-cash item of 190,900
shares of Ketema, Inc. common stock which had a market value of $2,100. In
addition, the Company is entitled to a contractually defined percentage of the
profits, if any, for the period from September 1, 1993 through December 31,
1996, from the combined aluminum extrusion operations consisting of the
divested operation and two of the purchaser's operations. No gain or loss on
the sale was recognized since the sales price, net of estimated divestiture
expenditures, approximated the division's book value. The remaining assets of
the Aluminum Extrusion Division at February 28, 1994 of $992 consist primarily
of accounts receivable and some fixed assets to be disposed of separately. The
net assets of the Aluminum Extrusion Division at February 28, 1993 were $7,822
consisting primarily of receivables, inventory
F-14
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
and property, plant and equipment of $11,112 less payables and accruals of
$3,290. The net assets and operating results of the Aluminum Extrusion Division
have been classified as discontinued operations for all periods presented in
the consolidated financial statements. Operating results for the three years
ended February 28, 1994, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net sales..................................... $17,412 $33,091 $34,554
Operating loss, before tax.................... (508) (570) (35)
Operating loss, after tax..................... $ (305) $ (342) $ (21)
======= ======= =======
</TABLE>
On January 29, 1993, the Company purchased certain assets and assumed certain
liabilities of XO Technologies, Inc., a producer of turbine meter products, for
approximately $3,500. On December 17, 1992 a wholly-owned subsidiary of the
Company purchased certain assets and assumed certain liabilities of Aldan
Industrial Machining, Inc., a producer of high-precision machined components,
at a cost of approximately $4,600 in cash and $4,000 (plus an additional $1,120
in interest thereon) funded into an escrow account subsequent to February 28,
1993 (the "Escrow Account"). These acquisitions were accounted for as
purchases, and accordingly, the assets and liabilities acquired have been
recorded at their estimated fair value (assets acquired of approximately
$14,000, including intangible assets of approximately $8,500 being amortized
over periods ranging from 3 to 20 years, and liabilities assumed of
appoximately $1,900) and the results of operations were included from the date
of acquisition.
During the third quarter of fiscal 1993, the Company entered into an
arrangement whereby it contributed cash of approximately $1,800 to a newly
established entity, American Innovations, Inc., in exchange for 80% of the
common stock of the entity. A development stage enterprise (the "Predecessor
Company") contributed tangible assets of approximately $100, liabilities of
approximately $1,400, and intangible assets (comprised of research and
development projects in process) of approximately $1,750 in exchange for 20% of
the common stock of the newly established entity. The Company has consolidated
the results of the newly formed entity since the formation date. The value of
research and development projects in process was included in research and
development expense for the period. The minority shareholders are entitled to a
dividend preference for fiscal years 1994, 1995 and 1996 equal to 80% of
earnings before interest and taxes of American Innovations, Inc. which will be
paid 90 days following the close of the fiscal year. In the case of a loss
before interest and taxes, a dividend will be paid only to the extent of
cumulative earnings. Should such dividend be distributed, they will be
accounted for as a purchase price adjustment. No dividend was earned for fiscal
1994 since American Innovations had a contractually defined operating loss.
On September 18, 1992, the Company sold the Composite Materials division, a
composite materials engineering and design business, to former division
management. On September 30, 1992, the Company completed the sale of the
Textile Products division, a woven fabric composite material business. Sales
and operating results of these businesses through the date of sale, which are
included in the fiscal 1993 results, were not significant. No gain or loss was
recorded in fiscal 1993 as a result of these disposals due to the restructuring
charge booked in fiscal 1992 (see Note 3).
NOTE 3--RESTRUCTURING CHARGE
The fourth quarter of fiscal 1992 financial results included a special pretax
charge of approximately $7,400 for the write-down of various intangible and
other assets related to the woven fabric composite material business, expenses
related to the consolidation of facilities and relocation costs.
F-15
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--INVENTORIES
Inventories are principally accounted for using the last-in, first-out (LIFO)
cost method. If the first-in, first-out (FIFO) method of accounting for
inventories had been used by the Company, inventories would have been higher
than that reported at February 28, 1994 and 1993, by $9,714 and $10,968
respectively. During fiscal years 1994, 1993 and 1992, certain inventories were
reduced resulting in the liquidation of LIFO inventory layers carried at lower
costs prevailing in prior years as compared with the cost of 1994, 1993 and
1992 purchases, the effect of which decreased costs of goods sold by
approximately $1,564, $890 and $588 in fiscal years 1994, 1993 and 1992,
respectively.
Revenues are recorded and costs are relieved from inventory relating to long-
term fixed price contracts and programs primarily on a unit-of-delivery basis.
Revenues and costs related to cost reimbursement contracts are recognized and
relieved as the work progresses. Progress payments (principally related to
long-term contracts and programs) of $661 at February 28, 1994 ($694 at
February 28, 1993) have been netted against inventories.
The components of inventory at February 28, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Raw Materials............................................. $ 1,831 $ 1,424
Work in process........................................... 4,335 5,170
Finished goods............................................ 5,156 4,358
------- -------
$11,322 $10,952
======= =======
</TABLE>
NOTE 5--LONG-TERM DEBT
Long-term debt at February 28, 1994 and 1993 consisted of:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Notes payable due October 31, 1994 to 2003............. $45,000 $45,000
8% convertible subordinated debentures due 2003........ 14,692 14,692
8% private placement convertible subordinated
debentures due 2003................................... 500 500
Other.................................................. 5 96
------- -------
60,197 60,288
Less current maturities................................ (4,505) (90)
------- -------
Net long-term debt..................................... $55,692 $60,198
======= =======
</TABLE>
In February 1989, the Company issued $17,500 of convertible subordinated
debentures (the "Debentures") bearing an interest rate of 8% and maturing on
November 15, 2003, with mandatory annual prepayments equal to 20% of principal
beginning in fiscal year 2000 reduced by any repurchases or conversions to
date. The Debentures are convertible at a conversion price of $15.58 per share
into common stock at any time or into preferred stock under certain conditions,
and are subordinated in right of payment to all existing and future senior
indebtedness of the Company.
During fiscal 1993, the Company issued, through a private placement to Hugh
H. Williamson, III, President and Chief Executive Officer of the Company, a
$500 convertible subordinated debenture due 2003, with mandatory annual
prepayments equal to 20% of principal beginning in fiscal year 2000 reduced by
any
F-16
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
repurchases or conversions to date, bearing an interest rate of 8% and maturing
on November 15, 2003. This debenture issued to Mr. Williamson is convertible at
a conversion price of $10.375 per share into common stock at any time and
participates pari passu with the Debentures described above.
Through a private placement in December 1988, the Company issued $45,000 in
notes bearing interest at an annual rate of 10.97%. Scheduled annual repayments
of $4,500 commence on October 31, 1994. The convenants of the notes prohibit
prepayment until October 31, 1996. The prepayment penalty declines from 4.701%
on October 31, 1996 to zero on October 31, 2002. In addition, the agreement
contains restrictions relating to working capital, dividends and capital stock
purchases. Under the Company's debt agreements at February 28, 1994,
consolidated current assets were $50,519 in excess of the required minimum and
payments of dividends were restricted until the Company earns additional net
income of $6,015.
During the third quarter of fiscal 1992, the Company's note agreement was
amended to permit, under certain circumstances, repurchases of up to $15,000 of
the Company's common stock and 8% convertible subordinated debentures due 2003,
not subject to certain otherwise applicable restrictions. In conjunction with
the amendment, the interest rate on the notes payable increased to 11.07% and
will increase to a maximum of 11.22% based on the level of permitted
repurchases (11.17% and 11.12% at February 28, 1994 and 1993, respectively). In
fiscal years 1992 and 1993, the Company repurchased $2,798 of the 8%
convertible subordinated debentures. As of February 28, 1994, the Company is
allowed to purchase an aggregate of $7,497 of Debentures and/or common stock if
the Company can maintain a debt to capitalization ratio of less than 50%. (The
debt to capitalization ratio as of February 28, 1994 is 51.2%.)
Cash payments of interest were approximately $6,300, $6,400, and $6,500 in
1994, 1993 and 1992, respectively.
The fair value of long-term debt approximated the recorded value at February
28, 1994. The fair values have been determined through information obtained
from market sources and management estimates.
NOTE 6--STOCKHOLDERS' EQUITY
During fiscal 1993, the Company exercised an option, acquired in April 1991
at a price of $2.75 per share, to purchase 198 shares of common stock at an
exercise price of $10.00 per share and purchased 37 shares of its common stock
in a privately negotiated transaction at a cost of $426.
In October 1991, the Company adopted a Shareholder Rights Plan. Under the
Shareholder Rights Plan's Rights Agreement, the Board of Directors declared a
dividend of one Right for each share of Company common stock owned. The
Shareholder Rights Plan provides, under certain conditions involving
acquisition of the Company's common stock, that holders of Rights, except for
the acquiring entity, would be entitled: (a) to purchase shares of preferred
stock at a specified exercise price, or (b) to purchase shares of common stock
of the Company, or the acquiring company, having a value of twice the Rights
exercise price. The rights under the Shareholder Rights Plan expire in 2001.
The Company has a stock incentive plan (the "Plan") whereby key employees and
directors may be granted stock options, stock appreciation rights and
restricted stock awards. These stock incentives entitle them to purchase common
stock and in certain cases receive cash under the Plan. The outstanding options
are exercisable at a price not less than market value on the date of grant,
with the exception of 104 stock options granted to Hugh H. Williamson, III in
fiscal 1993 at 85% of market value on the date of grant.
F-17
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Information on stock options for fiscal 1994 is as follows:
<TABLE>
<CAPTION>
PRICE RANGE SHARES
------------ ------
<S> <C> <C>
Outstanding at beginning of year..................... $ 8.82-14.94 321
Granted.............................................. $11.13-11.13 19
Exercised............................................ $ -- --
Cancelled............................................ $11.13-13.56 27
Outstanding at end of year (expire from 1996 through
2002)............................................... $ 8.82-14.94 313
Exercisable at end of year........................... $10.38-14.94 108
</TABLE>
Outstanding options are exercisable in installments over five to nine years
and expire seven to ten years from the date of grant.
Under the Plan, the Company also has 142 outstanding conjunctive stock
appreciation rights exercisable for cash and/or shares of common stock when the
related option is exercised. Subject to certain limitations, each right relates
to the excess of market value of the Company's stock over the exercise price of
the related option, for which a charge to income is made, which is not
significant in amount.
Also under the Plan, there are 7 outstanding shares of restricted stock which
become nonforfeitable over fiscal 1995 and 1996. The shares were purchased for
$1.00 per share and are subject to forfeiture under certain circumstances.
Unearned compensation, representing the excess of the fair market value of the
shares at the date of issuance over the purchase price of the award, is
amortized to expense over the period of restriction.
At February 28, 1994 and 1993, 461 shares of the Company's common stock were
reserved for issuance pursuant to the exercise of stock options and restricted
stock awards, or stock appreciation rights granted or to be granted
independently of any stock options. A maximum of 229 shares of the Company's
common stock at February 28, 1994 and 1993, respectively were reserved for
issuance pursuant to the exercise of conjunctive stock appreciation rights
granted or to be granted in connection with stock options.
NOTE 7--LEASES
During fiscal years 1994, 1993 and 1992 rental expense under operating leases
was charged to operations in the amount of $1,450, $1,555 and $1,722,
respectively.
Minimum aggregate rental commitments under noncancellable operating leases
(including those of discontinued operations retained by the Company) in effect
at February 28, 1994 are as follows (principally comprised of real property and
office space):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995............................................................... $1,256
1996............................................................... 1,015
1997............................................................... 877
1998............................................................... 619
1999............................................................... 530
Thereafter......................................................... 3,183
------
$7,480
======
</TABLE>
F-18
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--INCOME TAXES
At February 28, 1994, the Company has net operating loss carryforwards of
approximately $4,700 for federal income tax purposes which expire in the year
2008. The Company also has AMT credit carryforwards of approximately $400 which
may be utilized to reduce federal income taxes due in the future.
Components of the Company's deferred tax liabilities and assets as of
February 28, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Total deferred tax assets............................... $ 7,899 $ 7,643
Valuation allowance for deferred tax assets --.......... (2,189) (805)
------- -------
5,710 6,838
Total deferred tax liabilities.......................... (2,702) (3,553)
------- -------
Net deferred tax assets................................. $ 3,008 $ 3,285
======= =======
</TABLE>
The increase in the valuation allowance during fiscal 1994 of $1,384 was
primarily attributable to: (a) $646 arising from the deductibility of a $1,900
claim paid in 1991 as to which no benefit was taken by the Company in 1994 (see
Note 11); and (b) $813 which applied to deferred tax assets at February 28,
1993 which were grossed up against the related valuation allowance provided
through that date.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amount used for income tax purposes and the tax effect of income tax
credit carryforwards. Principal items comprising net deferred income tax assets
as of February 28, 1994 and 1993 are:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Tax over book depreciation............................. $(1,951) $(3,231)
Reserves and accruals.................................. 5,021 4,580
Restructuring charge................................... 81 297
AMT credit carryforward................................ 422 --
Net operating loss carryforward........................ 1,610 2,405
Other--net............................................. 14 39
------- -------
5,197 4,090
Valuation allowance.................................... (2,189) (805)
------- -------
Net deferred tax assets............................ $ 3,008 $ 3,285
======= =======
</TABLE>
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
1994 1993 1992
---- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ 12 $(1,380) $ 813
State........................................... 34 -- 162
Amortization of prior years investment tax
credits.......................................... -- (267) (131)
Deferred.......................................... 305 401 (2,007)
---- ------- -------
351 (1,246) (1,163)
Add back: benefit from discontinued operations.... 203 228 14
---- ------- -------
Provision for (benefit from) income taxes,
continuing operations.......................... 554 (1,018) (1,149)
Deferred (benefit) from cumulative effect of
changes in accounting principles................. -- -- (1,720)
---- ------- -------
$554 $(1,018) $(2,869)
==== ======= =======
</TABLE>
F-19
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The differences between the federal income tax rate of 34% and the Company's
effective tax rate were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ------- -------
<S> <C> <C> <C>
Statutory federal tax provision (benefit)
continuing operations............................ $713 $(1,671) $(1,477)
State income taxes, net of federal income tax
benefit.......................................... 124 87 185
Investment tax credits............................ -- (267) (131)
Tax deduction related to fiscal 1991 settlement
cost
(Note 11)........................................ (646) -- --
Valuation allowance............................... 571 805 --
Non-deductible items.............................. 153 57 218
AMT refund........................................ (314) -- --
Other............................................. (47) (29) 56
---- ------- -------
Provision for (benefit from) income taxes,
continuing operations........................ $554 $(1,018) $(1,149)
==== ======= =======
</TABLE>
During 1994 and 1993 net income tax refunds of $106 and $522, respectively,
were received. Income taxes of $1,442 were paid during 1992. Refundable income
taxes in the amounts of $1,694 and $1,462 for fiscal 1994 and 1993,
respectively, are included within prepaids and other current assets in the
accompanying balance sheet.
NOTE 9--RETIREMENT AND PENSION PLANS
The Company maintains noncontributory defined benefit retirement and pension
plans for eligible salaried and hourly rated employees. The defined benefit
plans provide benefits based primarily on the participant's years of service
and/or compensation. These benefits are being funded through a trust
established in conjunction with these plans. A defined benefit retirement plan
for the Company's directors is unfunded.
The Company's funding policy with respect to its qualified plans is to
contribute amounts determined annually on an actuarial basis that provides for
current and future benefits in accordance with funding requirements of federal
law and regulations. Assets of funded benefit plans are invested in a variety
of equity and debt instruments and in commingled funds.
Net pension expense for the Company's defined benefit retirement and pension
plans includes the following components:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Service cost benefits earned during the period... $1,017 $1,421 $1,384
Interest cost on projected benefit obligation.... 1,271 1,190 1,031
Actual return on plan assets..................... (3,193) (369) (1,840)
Net amortization and deferrals................... 2,087 (636) 1,215
------ ------ ------
Net pension expense.............................. 1,182 1,606 1,790
Pension expense of discontinued operations....... 52 107 149
------ ------ ------
Net pension expense of continuing operations..... $1,130 $1,499 $1,641
====== ====== ======
</TABLE>
F-20
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company also incurred an additional $267 in 1994 for costs associated
with the curtailment and settlement of plans associated with discontinued
operations. Such costs have been reflected as a charge to the reserve for
discontinued operations (see Note 10).
Net pension expense reflects an expected long-term rate of return on plan
assets of 9% for 1994, 1993 and 1992. The actual return has been adjusted to
defer gains or losses which differ from the expected return. The present value
of projected benefit obligations was determined using an assumed discount rate
of 7.25% for 1994, 8.5% for 1993 and 9.0% for 1992. The assumed rate of
compensation increase, where applicable, used in determining the present value
of projected benefit obligations was 5.25% for 1994 and 6% for 1993 and 1992.
The following table sets forth the funded status of the plans:
<TABLE>
<CAPTION>
FEBRUARY 28, 1994 FEBRUARY 28, 1993
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation. $ 8,613 $ 6,690 $6,277 $ 6,378
======= ======= ====== =======
Accumulated benefit
obligation............... $ 9,212 $ 7,000 $6,785 $ 6,505
======= ======= ====== =======
Projected benefit
obligation............... $11,382 $ 7,000 $8,995 $ 6,650
======= ======= ====== =======
Plan assets at fair value... $11,545 $ 5,135 $8,763 $ 5,009
======= ======= ====== =======
Plan assets in excess of
(less than) projected
benefit obligation......... $ 163 $(1,865) $ (232) $(1,641)
Unrecognized prior service
cost....................... 608 709 745 600
Unrecognized net loss
(gain)..................... (24) 781 178 863
Unrecognized net transition
(asset) obligation, net of
amortization............... (712) 310 (763) 301
------- ------- ------ -------
Prepaid (accrued) pension
expense.................... $ 35 $ (65) $ (72) $ 123
======= ======= ====== =======
</TABLE>
For pension plans with accumulated benefits in excess of assets, a minimum
liability was recognized for the sum of the excess of the accumulated benefit
obligation over the fair value of the plan assets plus the amount of prepaid
pension expense or minus the amount of accrued pension expense (such reduction
limited to the underfunding position of individual plans). The minimum
liability was $1,812 and $1,660 at February 28, 1994 and 1993, respectively. In
1994, the minimum liability was offset by a charge to stockholders' equity of
$523, net of deferred tax benefits of $269, and an intangible asset of $1,020.
In 1993, the minimum liability was offset by a charge to stockholders' equity
of $468, net of deferred tax benefits of $241, and an intangible asset of $951.
The Company sponsors a defined contribution plan for eligible employees. The
cost recognized in fiscal years 1994, 1993 and 1992 for the defined
contribution plan, based on compensation of covered employees, was $246, $278
and $255, respectively.
The Company provides limited health care benefits for certain early retirees
of one of its divisions. Prior to fiscal year 1994, the Company accounted for
the costs of these benefits on an accrual basis over the working lives of
employees expected to receive benefits. Effective March 1, 1994, the Company
adopted the provisions
F-21
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
of Statement of Financial Accounting Standards No. 106 ("FAS 106") "Employers'
Accounting for Postretirement Benefits Other than Pensions". At February 28,
1994 and 1993, respectively, the Company had accruals of $507 and $619 for
these postretirement medical benefits which are included in other long-term
liabilities in the accompanying balance sheet. The impact on the Company's
operations of adopting FAS 106 in 1994 was not significant.
Prior to fiscal 1994, the Company had deferred compensation arrangements with
certain officers, directors, and key employees pursuant to a Supplemental
Executive Benefit Plan and a Directors' Benefit Plan. As of February 28, 1993,
the Company had accrued $2,287 with respect to these agreements of which $350
was charged to expense in fiscal 1993. During fiscal 1994, the Board of
Directors authorized the settlement of the obligation associated with these
plans for participants with a "vested" benefit (currently retired or eligible
for early retirement under the Ketema, Inc. Employees' Retirement Plan). These
participants were offered a discounted lump sum cash settlement in lieu of
future benefits from the Plan. Payments were made under this arrangement in the
amount of $1,744. Non-vested agreements were terminated at no cost to the
Company. At February 28, 1994, the Company has an accrual of $531 with respect
to those participants who did not elect to accept the lump sum cash settlement.
During fiscal 1994, $49 was charged to expense with respect to these Plans.
As part of the compensation package for Mr. Williamson which was recommended
by the Compensation Committee and approved by the Board of Directors, a
retirement benefit was approved which permits Mr. Williamson to retire at age
60 and receive an annual amount equal to 50% of the three-year average of his
then-current salary and bonus. The difference between such amount and the
amount received by Mr. Williamson under the retirement plan would be paid by
the Company. Automatic vesting would occur upon a change in control of the
Company prior to Mr. Williamson's reaching age 60. At February 28, 1994, $201
was accrued with respect to this agreement.
F-22
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--INTANGIBLES, OTHER ASSETS AND OTHER ACCRUED LIABILITIES
Intangibles, other assets and other accrued liabilities consist of the
following at February 28, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Intangible Assets
-----------------
Patents.............................................. $ 2,312 $ 2,312
Other acquired intangibles........................... 8,832 8,584
Excess of cost over net assets acquired.............. 3,016 2,965
Financing and organization costs..................... 3,492 3,492
Pension.............................................. 1,020 951
Less accumulated amortization........................ (5,276) (3,814)
------- -------
$13,396 $14,490
======= =======
Other Assets
------------
Investment in limited partnership (approximates
market value)....................................... $ 5,228 $ 4,586
Cash surrender value of officers life insurance, net
of related loans in 1993............................ 2,172 643
Prepaid pension expense.............................. 862 862
Unbilled receivable, long term portion............... 693 --
Prepaid interest, long term portion.................. 556 784
Other................................................ -- 110
------- -------
$ 9,511 $ 6,985
======= =======
Other Accrued Liabilities
-------------------------
Accrued insurance.................................... $ 4,871 $ 5,210
Accrued interest..................................... 2,032 2,074
Contract loss reserve................................ 3,390 3,393
Restructuring/relocation reserves.................... 643 2,036
Environmental reserve................................ 832 1,000
Reserve for discontinued operations.................. 1,644 --
Other................................................ 2,280 2,755
------- -------
$15,692 $16,468
======= =======
</TABLE>
NOTE 11--CONTINGENT ASSETS AND LIABILITIES
The Company was incorporated in May 1988 in connection with a corporate
restructuring of AMETEK, Inc. ("Ametek"), in which certain businesses and
related assets and liabilities of Ametek were transferred to the Company. On
November 30, 1988, the Company became a separate, publicly held corporation by
means of the pro rata distribution (the "Distribution") by Ametek of all the
outstanding shares of the Company's Common Stock, $1.00 par value ("Common
Stock"), to holders of record of Ametek's common stock as of the close of
business on that date.
In connection with the Distribution, the Company and Ametek agreed that
contingent liabilities which arise out of the transferred assets or the conduct
of the Company's operations, or which are not incurred in
F-23
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the ordinary course of business, shall be obligations of the Company only to
the extent of the first $5,000 and one-half of the next $10,000. The Company
and Ametek agreed to indemnify each other against claims or damages arising
from liabilities for which each has agreed to be responsible. However, to the
extent liabilities are covered by insurance of Ametek, only one-half of the
first $200 in any individual case shall be the responsibility of the Company.
In accordance with the above agreement, the Company reimbursed Ametek $5,210 in
1991 for a settlement with the U.S. Government, for an event which occurred
prior to the distribution. The income tax benefit of the settlement was to be
recognized for financial statement purposes upon final determination by the
Internal Revenue Service as to the deductibility of such costs.
During fiscal 1994, the Company and Ametek reached an agreement with the
Internal Revenue Service which allowed the Company and Ametek to each deduct
for federal income tax purposes $1,900 in relation to the reimbursement to
Ametek mentioned above.
The Company has reflected its $1,900 additional deduction in the 1994 income
tax balances. AMT refunds which resulted from amended prior year returns have
been included in earnings in the fourth quarter of 1994. A valuation allowance
has been provided to offset the deferred tax asset which results from the
availability of an additional operating loss carryforward (see Note 8).
When Ametek files its amended federal and state income tax returns for
calendar year 1991 for its $1,900 deduction, the proceeds plus interest, net of
certain contractual costs and legal fees, will be due to the Company. Due to
the uncertainty of the amount and the timing of payment, such amount will not
be reflected in the Company's books until the net payment becomes certain.
NOTE 12--LETTERS OF CREDIT
The Company has entered into irrevocable standby letter of credit agreements
with financial institutions primarily to back the Company's self-insurance
program. At February 28, 1994, the Company was contingently liable on
outstanding letters of credit aggregating $9,709. The Company paid fees in the
amount of $83 on the outstanding letters of credit during fiscal 1994.
NOTE 13--LEGAL PROCEEDINGS
On August 25, 1993, the Company, Hugh H. Williamson, III--the Company's
President and Chief Executive Officer, and John McCloskey--formerly the
Company's Vice President--Manufacturing, were sued in the District Court, 160th
Judicial District, Dallas, Texas, by Raymond J. Moore, the former General
Manager of the Company's Heat Transfer Division, located in Grand Prairie,
Texas. The case has been removed to the United States District Court for the
Northern District of Texas, Dallas Division. Mr. Moore seeks damages for the
alleged intentional infliction of severe emotional distress suffered by him as
the result of an unsatisfactory performance review, negligent employment and
retention, defamation and violations of the Age Discrimination in Employment
Act, the Family Medical Leave Act and the Americans with Disabilities Act. Mr.
Moore principally seeks, from the defendants, jointly and severally: lost wages
in the amount of $20; full pay and benefits through 1997 in the amount of $150
per year as front pay; exemplary and punitive damages in the amount of
$100,000; damages for mental anguish and emotional distress in the amount of
$20,000; and $20,000 for the age, disability, family leave and defamation
claims. The Company believes the case is without merit. Discovery is ongoing.
The Company and the individual defendants intend to contest the matter
vigorously and believe they have meritorious defenses. Trial is currently
scheduled for the two week period following November 21, 1994.
See Note 14 for additional litigation matters.
F-24
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14--SUBSEQUENT EVENTS
In an amendment to a Schedule 13D Statement, dated October 19, 1993, filed
with the Securities and Exchange Commission, a group of stockholders of the
Company, consisting of clients of American Securities Partners, L.P. ("American
Securities Partners"), including three directors of the Company (the "American
Securities Group"), stated that they were considering various options with
regard to their investment in the Company including initiating or responding to
proposals regarding a merger or other business combination. The Amendment also
stated that the American Securities Group had discussed generally and intended
to explore with Hugh H. Williamson, III, the President and Chief Executive
Officer of the Company, a possible merger or business combination transaction.
On April 28, 1994, KTM Holdings Corp., a corporation organized on behalf of the
American Securities Group ("KTM"), delivered a proposal to the Company's Board
of Directors proposing the acquisition of all outstanding shares of Common
Stock not already owned by the members of the American Securities Group at a
price of $13.125 per share payable in cash through a merger of a wholly-owned
subsidiary of KTM into the Company which would be the surviving corporation and
become a wholly-owned subsidiary of KTM (the "Merger Proposal"). The Merger
Proposal provides that the proposed merger, if approved by the Board of
Directors based on a favorable recommendation of a special committee of the
Board consisting of two directors who are not members of the American
Securities Group or employees of the Company (the "Special Committee"), would
be subject to a number of conditions, including (i) the negotiation and
execution of a definitive merger agreement, (ii) approval by the holders of a
majority of the outstanding shares of Common Stock, (iii) KTM reaching
satisfactory agreements with (a) the institutional investors holding the
Company's outstanding Senior Notes regarding the early retirement of such Notes
and (b) Mr. Williamson, regarding, among other things, his continuation as
Chief Executive Officer of the Company and his exchange of the convertible
debentures and options held by him for an equity participation in KTM if the
proposed merger is consummated, and (iv) the funding of working capital and
term loans to finance the transaction under a bank commitment letter.
Subsequently, KTM reached an understanding with Mr. Williamson. The American
Securities Group and Mr. Williamson beneficially own in the aggregate
approximately 22.87% of the outstanding shares of Common Stock (after giving
effect to the conversion of all convertible debentures held by them and the
exercise of all presently exercisable stock options held by Mr. Williamson).
Thereafter, the Special Committee, with the assistance of its financial and
legal advisors, began to consider the Merger Proposal in light of, among other
things, the operating and financial performance of the Company. There can be no
assurances that the merger contemplated by the Merger Proposal, or any other
business combination involving the Company, will be approved by the Special
Committee or the Board of Directors, or if approved, will be consummated.
The Company is obligated to pay the fees and expenses of the Special
Committee's financial and legal advisors. The financial advisor was retained at
a fee of $350 plus expenses, of which $100 was incurred in fiscal 1994. The
amount of legal expenses is not currently determinable.
Subsequent to the Company's public announcement on April 28, 1994, of its
receipt of the Merger Proposal the Company was served with, or advised of the
filing of, seven class action lawsuits in the Delaware Court of Chancery, New
Castle County relating to the Merger Proposal. The complaints name as
defendants, inter alia, all or certain directors of the Company and, in some
instances, the Company itself. All of the complaints allege that the proposal
by certain of the defendant directors who are members of the American
Securities Group to acquire the remaining interest of the Company at the offer
price of $13.125 in cash, if accepted, would be inadequate and unfair to the
minority stockholders of the Company and would constitute a breach of fiduciary
duties by the defendant directors. Certain of the complaints include further
allegations, among them, that the offer "effectively put(s) a cap on the market
price for Ketema stock" and therefore is
F-25
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
manipulative, and that there is allegedly non-public information in the
possession of the defendants with respect to the Company's prospects which
should be disclosed to stockholders to enable them to determine whether to
exercise appraisal rights in any proposed merger. The principal relief sought
by the complaints is a declaration that, if the acquisition were consummated at
the offered price, it would constitute a breach of fiduciary duty and the
granting of a preliminary injunction to bar an acquisition at the offered
price. The complaints further seek to rescind the merger if implemented prior
to entry of an injunction, to recover damages in an unspecified amount,
reimbursement of costs, including attorneys' and experts' fees, and other
equitable relief.
NOTE 15--BUSINESS SEGMENT INFORMATION
The Company classifies its operations into four business segments: Process
Group, Aerospace Group, Industrial Group and American Innovations, Inc. The
principal products and services offered by each segment are as follows:
Process Group
-------------
Heat transfer equipment, propeller and differential pressure flow meters,
centrifuges and separation equipment and flow measurement and control devices.
Aerospace Group
---------------
Jet engine and airplane parts and composite material structures.
Industrial Group
----------------
Synthetic monofilaments, custom die-cast components and thermistors.
American Innovations, Inc.
--------------------------
Remotely monitored meter reading systems, primarily for the utility industry.
F-26
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's operations by industry segments are as follows:
<TABLE>
<CAPTION>
1994 1993* 1992*
-------- -------- --------
<S> <C> <C> <C>
Net sales (1&2)
Process Group............................... $ 55,503 $ 50,896 $ 54,237
Aerospace Group............................. 46,081 46,048 54,068
Industrial Group............................ 25,023 25,215 24,827
American Innovations, Inc................... 502 -- --
-------- -------- --------
Total..................................... $127,109 $122,159 $133,132
======== ======== ========
Operating profit (3)
Process Group............................... $ 4,595 $ 3,769 $ 6,399
Aerospace Group............................. 5,793 1,357 (4,192)
Industrial Group............................ 2,787 2,537 1,309
American Innovations, Inc................... (1,633) (2,438) --
-------- -------- --------
Segment operating profit (4).............. 11,542 5,225 3,516
Corporate and other expenses................ (5,583) (7,707) (7,840)
Interest income (expense), net.............. (3,864) (2,433) (19)
-------- -------- --------
Income (loss) before income taxes,
minority interest, discontinued
operations and cumulative effect of
changes in accounting principles......... $ 2,095 $ (4,915) $ (4,343)
======== ======== ========
Identifiable assets
Process Group............................... $ 26,019 $ 24,531 $ 20,357
Aerospace Group............................. 32,184 33,173 26,129
Industrial Group............................ 9,663 9,142 11,003
American Innovations, Inc................... 925 265 --
-------- -------- --------
Total segments............................ 68,791 67,111 57,489
Discontinued operations..................... 992 7,822 6,490
Corporate assets............................ 79,190 83,476 92,973
-------- -------- --------
Total..................................... $148,973 $158,409 $156,952
======== ======== ========
Additions to property, plant and equipment
Process Group............................... $ 1,355 $ 833 $ 1,379
Aerospace Group............................. 2,005 2,075 2,179
Industrial Group............................ 1,101 497 704
American Innovations, Inc................... 14 34 --
-------- -------- --------
Total segment............................. 4,475 3,439 4,262
Discontinued operations..................... 349 431 1,745
Corporate................................... 71 178 10
-------- -------- --------
Total..................................... $ 4,895 $ 4,048 $ 6,017
======== ======== ========
Depreciation and amortization
Process Group............................... $ 1,813 $ 1,253 $ 1,315
Aerospace Group............................. 3,222 2,445 2,757
Industrial Group............................ 819 827 867
American Innovations, Inc................... 19 6 --
-------- -------- --------
Total segments............................ 5,873 4,531 4,939
Corporate................................... 354 342 335
-------- -------- --------
Total..................................... $ 6,227 $ 4,873 $ 5,274
======== ======== ========
</TABLE>
- ----------------
*Restated to reflect disposition of Aluminum Extrusion Division (Note 2),
formerly a component of the Industrial Group.
F-27
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) After elimination of inter-segment sales, not significant in amount.
(2) Sales to the U.S. Government (principally by the Aerospace Group) were 21%
in 1994, 23% in 1993 and 29% in 1992 of the Company's net sales. Sales to
General Electric Company (principally by the Aerospace Group) were 28% in
1994, 21% in 1993 and 22% in 1992 of the Company's total net sales and are
partially included in sales to the U.S. Government.
(3) The 1992 results reflect a one-time, pretax charge of $7,385 for
restructuring costs and the write-down of certain assets. Of the total
charge $6,300 was allocated to the Aerospace Group, $85 was allocated to
the Industrial Group and $1,000 was allocated to corporate and other
expenses.
(4) Represents sales less all direct costs and expenses and certain
administrative expenses applicable to each segment.
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly sales and earnings for fiscal years 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
1994 QUARTER QUARTER QUARTER QUARTER YEAR
---- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... $33,477 $31,913 $31,902 $29,817 $127,109
Operating income.............. $ 1,020 $ 1,327 $ 1,107 $ 2,096 $ 5,550
Income (loss) from continuing
operations................... $ (93) $ 37 $ 519 $ 1,078 $ 1,541
Net income (loss)............. $ (343) $ (18) $ 519 $ 1,078 $ 1,236
Primary earnings (loss) per
share:
Continuing operations....... $ (0.03) $ 0.01 $ 0.15 $ 0.30 $ 0.42
Net income (loss)........... $ (0.09) $ 0.00 $ 0.15 $ 0.30 $ 0.34
Fully diluted earnings (loss)
per share:
Continuing operations....... $ (0.03) $ 0.01 $ 0.15 $ 0.28 $ 0.42
Net income (loss)........... $ (0.09) $ 0.00 $ 0.15 $ 0.28 $ 0.34
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
1993* QUARTER QUARTER QUARTER QUARTER YEAR
----- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... $31,798 $33,228 $27,457 $29,676 $122,159
Operating income (loss)....... $ 647 $ 1,429 $(1,457) $(2,992) $ (2,373)
Income (loss) from continuing
operations................... $ 237 $ 554 $(1,762) $(2,476) $ (3,447)
Net income (loss)............. $ 265 $ 501 $(1,853) $(2,702) $ (3,789)
Primary earnings (loss) per
share:
Continuing operations....... $ 0.06 $ 0.15 $ (0.47) $ (0.67) $ (.93)
Net income (loss)........... $ 0.07 $ 0.14 $ (0.50) $ (0.73) $ (1.02)
Fully diluted earnings (loss)
per share:
Continuing operations....... $ 0.06 $ 0.15 $ (0.47) $ (0.67) $ (.93)
Net income (loss)........... $ 0.07 $ 0.14 $ (0.50) $ (0.73) $ (1.02)
</TABLE>
- ----------------
*Restated to reflect disposition of Aluminum Extrusion Division (Note 2).
F-28
<PAGE>
ANNEX A
[CONFORMED COPY]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF
JUNE 21, 1994
AMONG
KETEMA, INC.,
KTM HOLDINGS CORP.
AND
KTM ACQUISITION CORP.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
THE MERGER
<C> <C> <S> <C>
SECTION 1.01 Company Action............................................. A-2
1.02 The Merger................................................. A-2
1.03 Conversion of Shares....................................... A-2
1.04 Surrender and Payment...................................... A-3
1.05 Dissenting Shares.......................................... A-3
1.06 Stock Options.............................................. A-4
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.01 Certificate of Incorporation............................... A-4
2.02 Bylaws..................................................... A-5
2.03 Directors and Officers..................................... A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
SECTION 3.01 Corporate Existence and Power.............................. A-5
3.02 Corporate Authorization.................................... A-5
3.03 Governmental Authorization................................. A-5
3.04 Non-Contravention.......................................... A-5
3.05 Capitalization............................................. A-5
3.06 Subsidiaries............................................... A-6
3.07 SEC Filings................................................ A-6
3.08 Financial Statements....................................... A-6
3.09 Disclosure Documents....................................... A-7
3.10 Litigation................................................. A-7
3.11 Finders' and Bankers' Fees................................. A-7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF BUYER
SECTION 4.01 Corporate Existence and Power.............................. A-7
4.02 Corporate Authorization.................................... A-8
4.03 Governmental Authorization................................. A-8
4.04 Non-Contravention.......................................... A-8
4.05 Disclosure Documents....................................... A-8
4.06 Finders' and Bankers' Fees................................. A-8
4.07 Financing.................................................. A-8
4.08 Ownership of Shares........................................ A-9
4.09 Solvency; Adequate Capitalization.......................... A-9
</TABLE>
- --------
* The Table of Contents is not a part of this Agreement.
A-(i)
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
ARTICLE V
COVENANTS OF THE COMPANY
<C> <C> <S> <C>
SECTION 5.01 Conduct of the Company.................................... A-9
5.02 Stockholder Meeting; Proxy Material....................... A-10
5.03 Access to Information..................................... A-10
5.04 Other Potential Bidders................................... A-10
5.05 Notices of Certain Events................................. A-11
ARTICLE VI
COVENANTS OF BUYER
SECTION 6.01 Confidentiality........................................... A-11
6.02 Voting of Shares.......................................... A-11
6.03 Director and Officer Liability............................ A-11
ARTICLE VII
COVENANTS OF BUYER
AND THE COMPANY
SECTION 7.01 Best Efforts.............................................. A-12
7.02 Certain Filings........................................... A-12
7.03 Public Announcements...................................... A-12
7.04 Further Assurances........................................ A-12
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01 Conditions to the Obligations of Each Party............... A-12
Additional Conditions to the Obligations of Buyer and
8.02 Merger Subsidiary......................................... A-13
8.03 Conditions to the Obligations of the Company.............. A-13
ARTICLE IX
TERMINATION
SECTION 9.01 Termination............................................... A-14
9.02 Effect of Termination..................................... A-14
ARTICLE X
MISCELLANEOUS
SECTION 10.01 Notices................................................... A-14
10.02 Survival of Representations and Warranties................ A-15
10.03 Amendments; No Waivers.................................... A-15
10.04 Fees and Expenses......................................... A-15
10.05 Successors and Assigns.................................... A-16
10.06 Governing Law............................................. A-16
10.07 Counterparts; Effectiveness............................... A-16
Actions of the Company Approved or Taken by the Acquiring
10.08 Group..................................................... A-16
</TABLE>
A-(ii)
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of June 21, 1994 among Ketema, Inc., a
Delaware corporation (the "Company"), KTM Holdings Corp., a Delaware
corporation ("Buyer"), and KTM Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Buyer ("Merger Subsidiary").
WHEREAS:
A. The Company is a corporation duly incorporated and validly existing under
the corporate laws of the State of Delaware with it principal executive offices
located at Suite 600, One Cherry Center, 501 South Cherry Street, Denver,
Colorado 80222.
B. The authorized capital stock of the Company consists of (i) 13,500,000
shares of common stock, $1 par value, (the "Company Common Stock"), of which
3,490,202 shares are issued and outstanding as of the date hereof, and (ii)
1,500,000 shares of Preferred Stock, $1 par value, none of which shares are
issued and outstanding as of the date hereof.
C. Buyer is a corporation duly incorporated and validly existing under the
corporate laws of the State of Delaware with its principal address located c/o
American Securities Partners, L.P. at 122 East 42nd Street, New York, New York
10168.
D. Immediately prior to the Effective Time (as defined in Section 1.02(b)
below), Buyer and/or Merger Subsidiary will own or be deemed to own
beneficially not less than 894,000 shares of Company Common Stock, which shares
are currently beneficially owned by certain clients of American Securities
Partners, L.P. and by Hugh H. Williamson, III, the President and Chief
Executive Officer of the Company (collectively, the "Acquiring Group"), and
include shares of Company Common Stock issuable upon conversion of certain
convertible subordinated debentures of the Company (or upon conversion of the
convertible preferred stock which is issuable under certain circumstances upon
conversion of such debentures) owned by members of the Acquiring Group.
E. The Board of Directors of the Company, based in part on the recommendation
of a Special Committee of the Board of Directors initially appointed on
September 28, 1993 and comprised entirely of Directors who are neither members
of management nor affiliated with American Securities Partners, L.P. or the
Acquiring Group (the "Special Committee"), (i) unanimously approved the members
of the Acquiring Group becoming an "interested stockholder" within the meaning
of Section 203 of the Delaware General Corporation Law and the Company's
Certificate of Incorporation for purposes of proposing a "business combination"
(as defined in said Section 203 and the Company's Certificate of Incorporation)
between the Company and an entity formed by the Acquiring Group for the purpose
of engaging in such a business combination, and (ii) has unanimously determined
that the Merger is fair and in the best interests of the stockholders of the
Company (other than the Acquiring Group) and has unanimously resolved to
approve and adopt this Agreement and the transactions contemplated hereby and,
subject to the terms and conditions set forth herein, to recommend the approval
and adoption of this Agreement and the Merger by the stockholders of the
Company.
F. The Board of Directors of the Company, based in part on the recommendation
of the Special Committee, and the Boards of Directors of Buyer and Merger
Subsidiary each have approved the merger of Merger Subsidiary with and into the
Company (the "Merger") in accordance with the General Corporation Law of the
State of Delaware and the terms and conditions provided below, pursuant to
which each Share (as defined in Section 1.03 hereof) (other than Shares held by
the Company as treasury stock, Shares owned by Buyer, Merger Subsidiary or any
other subsidiary of Buyer immediately prior to the Effective Time and Shares as
to which appraisal rights have been perfected) shall be converted into the
right to receive the Merger Consideration (as defined in Section 1.03(a)
below).
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
representations, warranties and agreements herein contained, the parties hereto
agree as follows:
A-1
<PAGE>
ARTICLE I
THE MERGER
SECTION 1.01. Company Action. The Company hereby consents to the Merger (as
defined in Section 1.02) and represents that its Board of Directors, at a
meeting duly called and held and acting, in part, on the unanimous
recommendation of the Special Committee, has (i) unanimously determined that
this Agreement and the transactions contemplated hereby, including the Merger,
are fair to and in the best interest of the Company's stockholders (other than
the Acquiring Group), (ii) unanimously approved and adopted this Agreement and
the transactions contemplated hereby, including the Merger, and (iii)
unanimously resolved to recommend approval and adoption of this Agreement and
the Merger by the Company's stockholders, provided, that such recommendation
may be withdrawn, modified or amended by the Board of Directors of the Company
if the Board deems such withdrawal, modification or amendment appropriate in
light of its fiduciary obligations to the Company's stockholders after
consultation with counsel.
SECTION 1.02. The Merger. (a) At the Effective Time, Merger Subsidiary shall
be merged with and into the Company in accordance with the General Corporation
Law of the State of Delaware (the "Delaware Law"), whereupon the separate
existence of Merger Subsidiary shall cease, and the Company shall be the
surviving corporation (the "Surviving Corporation").
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger, the Company and Merger
Subsidiary will file a certificate of merger substantially in the form of
Exhibit A hereto with the Secretary of State of the State of Delaware and make
all other filings or recordings required by Delaware Law in connection with the
Merger. The Merger shall become effective at such time as such certificate of
merger is duly filed with the Secretary of State of the State of Delaware or at
such later time as is specified in such certificate of merger (the "Effective
Time").
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of the Company and Merger
Subsidiary, all as provided under Delaware Law.
SECTION 1.03. Conversion of Shares. At the Effective Time:
(a) each share of Company Common Stock, together with the right (a
"Right") associated therewith entitling the holder thereof to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock
of the Company (each such share and associated Right being referred to
herein as a "Share" and collectively, the "Shares") outstanding immediately
prior to the Effective Time shall, except as otherwise provided in Section
1.03(b) or as provided in Section 1.05 with respect to Shares as to which
appraisal rights have been perfected, be converted into the right to
receive $15.00 in cash, without interest (the "Merger Consideration");
(b) each Share held by the Company as treasury stock or owned by Buyer,
Merger Subsidiary or any other subsidiary of Buyer immediately prior to the
Effective Time shall be cancelled, and no payment shall be made with
respect thereto;
(c) each outstanding share of 7% Cumulative Convertible Voting Preferred
Stock, $1 par value, of the Company (each, a "Convertible Preferred Share"
and collectively, the "Convertible Preferred Shares"), if any, owned by
Buyer, Merger Subsidiary or any other subsidiary of Buyer immediately prior
to the Effective Time shall be cancelled, and no payment shall be made with
respect thereto;
(d) each outstanding Convertible Preferred Share, if any, not owned by
Buyer, Merger Subsidiary or any other subsidiary of Buyer immediately prior
to the Effective Time, shall remain outstanding in accordance with its
terms and shall not be converted in the Merger; and
(e) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become
one share of common stock of the Surviving
A-2
<PAGE>
Corporation with the same rights, powers and privileges as the shares so
converted and shall constitute the only outstanding shares of capital stock
of the Surviving Corporation.
SECTION 1.04. Surrender and Payment. (a) At or prior to the Effective Time,
the Company shall appoint American Stock Transfer & Trust Company as agent (the
"Exchange Agent") for the purpose of exchanging certificates representing
Shares for the Merger Consideration. At the Effective Time, the Surviving
Corporation will make available to the Exchange Agent the Merger Consideration
to be paid in respect of all outstanding Shares entitled thereto as to which
appraisal rights have not been exercised. At or prior to the Effective Time,
the Company or Surviving Corporation will send, or will cause the Exchange
Agent to send, to each holder of Shares at the Effective Time a letter of
transmittal for use in such exchange (which shall specify that the delivery
shall be effected, and risk of loss and title shall pass, only upon proper
delivery of the certificates representing Shares to the Exchange Agent).
(b) Each holder of Shares that have been converted into a right to receive
the Merger Consideration, upon surrender to the Exchange Agent of a certificate
or certificates representing such Shares, together with a properly completed
letter of transmittal covering such Shares, will be entitled to receive the
Merger Consideration payable in respect of such Shares. Until so surrendered,
each such certificate shall, after the Effective Time, represent for all
purposes, only the right to receive such Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a Person
other than the registered holder of the Shares represented by the certificate
or certificates surrendered in exchange therefor, it shall be a condition to
such payment that the certificate or certificates so surrendered shall be
properly endorsed or otherwise be in proper form for transfer and that the
Person requesting such payment shall pay to the Exchange Agent any transfer or
other taxes required as a result of such payment to a Person other than the
registered holder of such Shares or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable. For purposes of
this Agreement, "Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality thereof.
(d) After the Effective Time, there shall be no further registration of
transfers of Shares. If, after the Effective Time, certificates representing
Shares are presented to the Surviving Corporation, they shall be cancelled and
exchanged for the Merger Consideration provided for, and in accordance with the
procedures set forth, in this Article I.
(e) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 1.04(a) that remains unclaimed by the holders of
Shares one year after the Effective Time shall be returned within one week
after the end of such one year period, without further action or request, to
the Surviving Corporation, and any such holder who has not exchanged his Shares
for the Merger Consideration in accordance with this Section prior to that time
shall thereafter look only to the Surviving Corporation for payment of the
Merger Consideration in respect of his Shares. Notwithstanding the foregoing,
neither Buyer nor the Surviving Corporation shall be liable to any holder of
Shares for any amount paid to a public official pursuant to applicable
abandoned property laws. Any amounts remaining unclaimed by holders of Shares
two years after the Effective Time (or such earlier date immediately prior to
such time as such amounts would otherwise escheat to or become property of any
governmental entity) shall, to the extent permitted by applicable law, become
the property of the Surviving Corporation free and clear of any claims or
interest of any Person previously entitled thereto; provided, however, that
nothing herein shall limit the obligations of the Surviving Corporation under
Section 1.04(b).
SECTION 1.05. Dissenting Shares. Notwithstanding Section 1.03, Shares
outstanding immediately prior to the Effective Time and held by a holder who
has not voted in favor of the Merger or consented thereto in writing and who
has demanded appraisal for such Shares in accordance with Delaware Law shall
not be converted into a right to receive the Merger Consideration, unless such
holder fails to perfect or withdraws or otherwise loses his right to appraisal.
If after the Effective Time such holder fails to perfect or
A-3
<PAGE>
withdraws or loses his right to appraisal, such Shares shall be treated as if
they had been converted as of the Effective Time into a right to receive the
Merger Consideration. The Company shall give Buyer prompt notice of any demands
received by the Company for appraisal of Shares, and Buyer shall have the right
to participate in all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of Buyer,
make any payment with respect to, or settle or offer to settle, any such
demands.
SECTION 1.06. Stock Options. (a) Except as otherwise provided in paragraph
(b) of this Section 1.06 and except for outstanding options to purchase Shares
and conjunctive stock appreciation rights granted to Hugh H. Williamson, III,
the Company shall take all steps reasonably necessary such that, at the
Effective Time, the holder of each outstanding option to purchase Shares
granted under the Company's 1988 Stock Incentive Plan, whether or not then
vested or exercisable, shall be paid by the Surviving Corporation for each such
option an amount in cash determined by multiplying (i) the excess, if any, of
the Merger Consideration over the applicable exercise price of the option (the
"Spread") by (ii) the number of Shares such holder could have purchased had
such holder exercised such option in full immediately prior to the Effective
Time (whether or not such option is actually vested or exercisable at such
time) and each such option shall thereafter be cancelled. Any conjunctive stock
appreciation rights related to any such option shall also be cancelled and, in
accordance with the terms thereof and of the Company's Stock Incentive Plan,
each holder thereof shall be entitled to receive from the Surviving Corporation
an amount in cash equal to 66 2/3% of the product obtained by multiplying (i)
the Spread by (ii) the number of Shares to which such stock appreciation rights
relate.
(b) Notwithstanding the provisions of paragraph (a) above, Buyer may, at its
option but subject to its receipt of the requisite consent of the individual
holder thereof, including Hugh H. Williamson, III, issue in exchange for the
cancellation of all options held by such holder outstanding at the Effective
Time and any conjunctive stock appreciation rights related thereto, a deeply
discounted non-qualified option to purchase shares of common stock of Buyer (a
"Substitute Option"). The number of shares of Buyer's common stock subject to
such Substitute Option shall be such number of shares as shall have a fair
market value immediately after the Effective Time equal to the sum of the
Aggregate Value (as hereinafter defined) and the aggregate exercise price under
the Substitute Option. The Aggregate Value shall mean the sum of (A) the amount
determined by multiplying (i) the Spread with respect to all options held by
such individual holder by (ii) the number of Shares such individual holder
could have purchased had he exercised such options in full immediately prior to
the Effective Time (whether or not such options are actually vested or
exercisable at such time) plus (B) 66 2/3% of the product obtained by
multiplying (i) the Spread with respect to all options held by such individual
holder which have conjunctive stock appreciation rights related thereto by (ii)
the number of Shares to which such stock appreciation rights relate. The term
of each Substitute Option shall be ten years. Each Substitute Option shall
become vested and exercisable on the seventh anniversary of the date of grant;
provided, however, that the Substitute Option shall have accelerated vesting
and exercisability provisions if certain pre-determined earnings and/or debt
reduction goals are met, in which case the Substitute Option shall become
vested and exercisable with respect to up to 20% of the shares of Buyer's
common stock subject thereto on or after each of the first, second, third,
fourth and fifth anniversaries of the date of grant. The Substitute Options
shall contain such other terms and conditions as shall be set forth in the non-
qualified stock option agreement executed by Buyer and the individual holder of
an option consenting to receive such Substitute Option pursuant to this Section
1.06(b).
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.01. Certificate of Incorporation. The certificate of incorporation
of the Company in effect at the Effective Time shall be the certificate of
incorporation of the Surviving Corporation until amended in accordance with
applicable law.
A-4
<PAGE>
SECTION 2.02. Bylaws. The bylaws of the Company in effect at the Effective
Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 2.03. Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the directors of Merger Subsidiary at the Effective Time
shall be the directors of the Surviving Corporation, and (ii) the officers of
the Company at the Effective Time shall be the officers of the Surviving
Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Buyer that:
SECTION 3.01. Corporate Existence and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, and has all corporate powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, consents
and approvals where the failure to so obtain would not, individually or in the
aggregate, have a Material Adverse Effect. The Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except for those jurisdictions
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect. The Company has heretofore delivered
to Buyer true and complete copies of the Company's certificate of incorporation
and bylaws as currently in effect. For purposes of this Agreement, "Material
Adverse Effect" means with respect to any matter that such matter would be
expected to materially and adversely affect the business, condition (financial
or otherwise) or results of operations of the Company and its consolidated
Subsidiaries considered as a whole.
SECTION 3.02. Corporate Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation by the
Company of the transactions contemplated hereby are within the Company's
corporate powers and, except for any required approval by the Company's
stockholders in connection with the consummation of the Merger, have been duly
authorized by all necessary corporate action. This Agreement constitutes a
valid and binding agreement of the Company.
SECTION 3.03. Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the Merger
by the Company require no action by or in respect of, or filing with, any
governmental body, agency, official or authority other than (i) the filing of a
certificate of merger in accordance with Delaware Law; and (ii) compliance with
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder (the "Exchange Act").
SECTION 3.04. Non-Contravention. The execution, delivery and performance by
the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby do not and will not (i) contravene or conflict
with the certificate of incorporation or bylaws of the Company, or (ii)
assuming compliance with the matters referred to in Section 3.03, contravene or
conflict with or constitute a violation of any provision of any law,
regulation, judgment, injunction, order or decree binding upon or applicable to
the Company or any Subsidiary.
SECTION 3.05. Capitalization. The authorized capital stock of the Company
consists of 13,500,000 authorized shares of Company Common Stock and 1,500,000
authorized shares of Preferred Stock, $1 par value ("Preferred Shares"). As of
May 31, 1994, (a) 3,490,202 shares of Company Common Stock were issued and
outstanding, (b) 1,041,619 shares of Company Common Stock were held in the
treasury of the Company,
A-5
<PAGE>
(c) 943,003 shares of Company Common Stock were reserved for future issuance
upon conversion of the Company's 8% Convertible Subordinated Debentures due
2003 (the "Public Debentures") of which $14,692,000 in aggregate principal
amount were outstanding, (d) 48,192 shares of Company Common Stock were
reserved for future issuance upon conversion of the Company's 8% Convertible
Subordinated Debentures due 2003 (the "Private Debentures") of which $500,000
principal amount were outstanding and held by Hugh H. Williamson, III and (e)
461,479 shares of Company Common Stock were reserved for future issuance
pursuant to outstanding employee stock options granted pursuant to the
Company's Stock Incentive Plan. As of May 31, 1994, (a) no Preferred Shares
were issued and outstanding, (b) no Preferred Shares were held in the treasury
of the Company, (c) 943,003 Convertible Preferred Shares were reserved for
future issuance upon conversion, under certain circumstances, of the Public
Debentures and (d) one one-hundredth of a share of Series A Junior
Participating Preferred Stock is reserved for future issuance upon exercise,
under certain circumstances, of each Right issued under the Company's
Shareholder Rights Plan, dated October 15, 1991, between the Company and
American Stock Transfer & Trust Company, as Rights Agent. All outstanding
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable. Except as set forth in this
Section and except for changes since May 31, 1994, resulting from the exercise
of employee stock options outstanding on such date, there are outstanding (i)
no shares of capital stock or other voting securities of the Company, (ii) no
securities of the Company convertible into or exchangeable for shares of
capital stock or voting securities of the Company, and (iii) no options or
other rights to acquire from the Company, and no obligation of the Company to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company (the items
in clauses (i), (ii) and (iii) being referred to collectively as the "Company
Securities"). There are no outstanding obligations of the Company or any
Subsidiary to repurchase, redeem or otherwise acquire any Company Securities.
SECTION 3.06. Subsidiaries. All of the outstanding capital stock of, or other
ownership interests in, each Subsidiary, is owned by the Company, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other ownership interests). There are no
outstanding (i) securities of the Company or any Subsidiary convertible into or
exchangeable for shares of capital stock or other voting securities or
ownership interests in any Subsidiary, and (ii) options or other rights to
acquire from the Company or any Subsidiary, and no other obligation of the
Company or any Subsidiary to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or
exchangeable for any capital stock, voting securities or ownership interests
in, any Subsidiary (the items in clauses (i) and (ii) being referred to
collectively as the "Subsidiary Securities"). There are no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem or otherwise
acquire any outstanding Subsidiary Securities. For purposes of this Agreement,
"Subsidiary" means any corporation or other entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are directly
or indirectly owned by the Company.
SECTION 3.07. SEC Filings. (a) The Company has delivered to Buyer (i) the
annual report on Form 10-K for its fiscal year ended February 28, 1994 (the
"Company 10-K"), (ii) its proxy or information statements relating to meetings
of, or actions taken without a meeting by, the stockholders of the Company held
since June 24, 1993 and (iii) all of its other reports, statements, schedules
and registration statements filed with the Securities and Exchange Commission
(the "SEC") since February 28, 1994.
(b) As of its filing date, each such report or statement filed pursuant to
the Exchange Act did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
SECTION 3.08. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in the Company 10-K fairly present, in conformity with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated in the notes thereto), the consolidated financial position
of the Company and its consolidated
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subsidiaries as of the dates thereof and their consolidated statements of
operations and of cash flows for the periods then ended (subject to normal
year-end adjustments in the case of any unaudited interim financial
statements). For purposes of this Agreement, "Balance Sheet" means the
consolidated balance sheets of the Company as of February 28, 1994 set forth in
the Company 10-K and "Balance Sheet Date" means February 28, 1994.
SECTION 3.09. Disclosure Documents. (a) Each document required to be filed by
the Company with the SEC in connection with the transactions contemplated by
this Agreement (the "Company Disclosure Documents"), including, without
limitation, the proxy statement of the Company (the "Company Proxy Statement")
to be filed with the SEC in connection with the Merger, and any amendments or
supplements thereto will, when filed, comply as to form in all material
respects with the applicable requirements of the Exchange Act.
(b) At the time the Company Proxy Statement or any amendment or supplement
thereto is first mailed to stockholders of the Company, at the time such
stockholders vote on adoption of this Agreement and at the Effective Time, the
Company Proxy Statement, as supplemented or amended, if applicable, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. At the time of
the filing of any Company Disclosure Document other than the Company Proxy
Statement and at the time of any distribution thereof, such Company Disclosure
Document will not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties contained in this Section 3.09(b) will not
apply to statements or omissions included in any Company Disclosure Documents
(including, without limitation, the Company Proxy Statement) based upon
information furnished to the Company in writing by Buyer specifically for use
therein.
SECTION 3.10. Litigation. Except as set forth in the Company 10-K or most
recent quarterly report on Form 10-Q, there is no action, suit, investigation
or proceeding pending against, or to the knowledge of the Company threatened
against or affecting, the Company or any of its officers or Directors which in
any manner challenges or seeks to prevent, enjoin, alter or materially delay
the Merger or any of the other transactions contemplated hereby.
SECTION 3.11. Finders' and Bankers' Fees. Except for Bear, Stearns & Co. Inc.
("Bear Stearns"), a copy of whose engagement agreement has been provided to
Buyer, there is no investment banker, broker, finder or other intermediary
which has been retained by or is authorized to act on behalf of the Company,
the Special Committee or any Subsidiary who might be entitled to any fee or
commission from Buyer or any of its affiliates upon consummation of the
transactions contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF BUYER
Buyer represents and warrants to the Company that:
SECTION 4.01. Corporate Existence and Power. Each of Buyer and Merger
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to consummate the transactions contemplated by
this Agreement. Since the date of its incorporation, Merger Subsidiary has not
engaged in any material activities other than in connection with or as
contemplated by this Agreement or in connection with arranging any financing
required to consummate the transactions contemplated hereby.
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SECTION 4.02. Corporate Authorization. The execution, delivery and
performance by Buyer and Merger Subsidiary of this Agreement and the
consummation by Buyer and Merger Subsidiary of the transactions contemplated
hereby are within the corporate powers of Buyer and Merger Subsidiary and have
been duly authorized by all necessary corporate action. This Agreement
constitutes a valid and binding agreement of Buyer and Merger Subsidiary.
SECTION 4.03. Governmental Authorization. (a) The execution, delivery and
performance by Buyer and Merger Subsidiary of this Agreement and the
consummation by Buyer and Merger Subsidiary of the transactions contemplated by
this Agreement require no action by or in respect of, or filing with, any
governmental body, agency, official or authority other than (i) the filing of a
certificate of merger in accordance with Delaware Law and (ii) compliance with
any applicable requirements of the Exchange Act.
(b) With respect to the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
(i) Buyer is controlled by KTM Partners, L.P., a New York limited partnership
(the "Partnership"); (ii) formation of Buyer requires no Premerger Notification
and Report Forms to be filed; (iii) neither the Partnership, Buyer nor Merger
Subsidiary will have any assets other than capital consisting of cash and
equity securities of the Company that will be utilized in connection with the
Merger; and (iv) the Partnership, Buyer and Merger Subsidiary will not have
regularly prepared balance sheets prior to the consummation of the Merger.
SECTION 4.04. Non-Contravention. The execution, delivery and performance by
Buyer and Merger Subsidiary of this Agreement and the consummation by Buyer and
Merger Subsidiary of the transactions contemplated hereby do not and will not
(i) contravene or conflict with the certificate of incorporation or bylaws of
Buyer or Merger Subsidiary, or (ii) assuming compliance with the matters
referred to in Section 4.03, contravene or conflict with any material provision
of law, regulation, judgment, order or decree binding upon Buyer or Merger
Subsidiary.
SECTION 4.05. Disclosure Documents. The information with respect to Buyer and
its affiliates that Buyer furnishes to the Company in writing specifically for
use in any Company Disclosure Document will not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading (i) in the case of the Company Proxy Statement at the
time the Company Proxy Statement or any amendment or supplement thereto is
first mailed to stockholders of the Company, at the time the stockholders vote
on adoption of this Agreement and at the Effective Time, and (ii) in the case
of any Company Disclosure Document other than the Company Proxy Statement, at
the time of the filing thereof and at the time of any distribution thereof.
SECTION 4.06. Finders' and Bankers' Fees. Except for American Securities
Corporation and its successor, American Securities Partners, L.P., which have
acted on behalf of the Acquiring Group, and for The Bridgeford Group, which has
been engaged as a financial adviser to Buyer and its affiliates, there is no
investment banker, broker, finder or other intermediary who might be entitled
to any fee or commission from the Company or any of its affiliates upon
consummation of the transactions contemplated by this Agreement.
SECTION 4.07. Financing. Buyer has received and furnished copies to the
Company of a commitment letter addressed to Buyer (the "Commitment Letter")
from The Chase Manhattan Bank, N.A. (the "Lender") dated May 5, 1994, as
amended on June 21, 1994, pursuant to which the Lender has committed, subject
to the terms and conditions thereof, to enter into a credit agreement with
Merger Subsidiary to provide financing for the transactions contemplated herein
(the "Financing"). The aggregate proceeds of the Financing committed by the
Lender in the Commitment Letter, together with the then available cash and
marketable securities of the Company and equity financing to be provided by the
Acquiring Group and/or other investors, is in an amount which Buyer believes is
sufficient to provide all of the requisite Merger Consideration, to effect all
refinancing required in connection with the transactions contemplated herein
and to pay all related fees and expenses. The equity to be provided by the
Acquiring Group and/or other investors to Buyer shall, in any event, be not
less than $15,000,000 consisting of cash contributed by the Acquiring
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Group or by third party investors (which may be substantial individuals and/or
families, financial institutions, public and private pension funds,
corporations and other sophisticated and substantial investors) and/or Shares
valued on the basis of the Merger Consideration (or Public Debentures,
Convertible Preferred Shares issued upon conversion thereof or Private
Debentures) contributed to Buyer or Merger Subsidiary.
SECTION 4.08. Ownership of Shares. On the record date applicable to the
meeting of stockholders of the Company to be held in connection with the
Merger, the members of the Acquiring Group, Buyer and/or Merger Subsidiary in
the aggregate will own beneficially not less than 894,000 Shares, including
Shares issuable upon conversion of the Public Debentures (or any Convertible
Preferred Shares) and the Private Debentures beneficially owned by them.
SECTION 4.09. Solvency; Adequate Capitalization. After giving effect to the
Merger, the Surviving Corporation will be solvent. For purposes of this
Agreement, the term "solvent" shall mean, with respect to the Surviving
Corporation, that the fair valuation of its property will be, on the date of
determination, greater than the total amount of liabilities of the Surviving
Corporation as of such date and that the present fair saleable value of the
Surviving Corporation's assets will be, on the date of determination, greater
than the amount that will be required to pay the Surviving Corporation's
probable liability on its existing debts as they become absolute and matured.
After giving effect to the Merger, the Surviving Corporation will not have
unreasonably small capital with which to conduct its business.
ARTICLE V
COVENANTS OF THE COMPANY
The Company agrees that:
SECTION 5.01. Conduct of the Company. From the date hereof until the
Effective Time, the Company and the Subsidiaries shall conduct their business
in the ordinary course consistent with past practice and (except for acts
necessary to the Merger) shall use their best efforts to preserve intact their
business organizations and relationships with third parties and to keep
available the services of their present officers and employees. Without
limiting the generality of the foregoing, from the date hereof until the
Effective Time, without the consent of Buyer:
(a) the Company will not adopt or propose any change in its certificate
of incorporation or bylaws;
(b) the Company will not, and will not permit any Subsidiary to, acquire,
whether by purchase of equity securities, merger or consolidation, any
other Person or acquire a material amount of assets of any other Person;
(c) the Company will not, and will not permit any Subsidiary to, sell,
lease, license or otherwise dispose of any material assets or property
except (i) pursuant to existing contracts or commitments and (ii) in the
ordinary course consistent with past practice;
(d) except as otherwise contemplated herein, the Company will not, and
will not permit any Subsidiary to, agree or commit to do any of the
foregoing;
(e) the Company will not authorize for issuance, issue, sell, deliver or
agree or commit to issue, sell or deliver (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise) any stock of any class or any other securities or
equity equivalents (including, without limitation, any stock options or
stock appreciation rights), except upon conversion of the Public Debentures
(or any Convertible Preferred Shares) or the Private Debentures and except
as required by outstanding options or stock appreciation rights under the
Company's Stock Incentive Plan as in effect as of the date hereof, or amend
any of the terms of any such securities, options or rights outstanding as
of the date hereof, except as specifically contemplated by this Agreement;
(f) the Company will not split, combine or reclassify shares of its
capital stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof)
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in respect of its capital stock, or redeem or otherwise acquire any of its
securities or any securities of its subsidiaries; and
(g) the Company will not, and will not permit any Subsidiary to, except
as may be required by law, enter into, adopt or amend or terminate any
bonus, profit sharing, compensation, severance, termination, stock option,
stock appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement,
trust, plan, fund or other arrangement for the benefit or welfare of any
director, officer of employee in any manner, or (except for normal
increases in the ordinary course of business consistent with past practice
that, in the aggregate, do not result in a material increase in benefits or
compensation expense to the Company, or as required under existing
agreements) increase in any manner the compensation or fringe benefits of
any director, officer or employee or pay any benefit not required by any
plan and arrangement as in effect as of the date hereof (including, without
limitation, the granting of stock appreciation rights or performance
units).
SECTION 5.02. Stockholder Meeting; Proxy Material. The Company shall cause a
meeting of its stockholders (the "Company Stockholder Meeting") to be duly
called and held as soon as reasonably practicable for the purpose of voting on
the approval and adoption of this Agreement and the Merger. The Directors of
the Company, acting in part on the unanimous recommendation of the Special
Committee, shall, subject to their fiduciary duties after consultation with
counsel, recommend approval and adoption of this Agreement and the Merger by
the Company's stockholders. In connection with such meeting, but subject to the
terms hereof, including Section 10.08(b), the Company (i) will promptly prepare
and file with the SEC, will use its best efforts to have cleared by the SEC and
will thereafter mail to its stockholders as promptly as practicable the Company
Proxy Statement, all other proxy materials for such meeting and the Rule 13E-3
Transaction Statement required pursuant to Section 13(e) of the Exchange Act
(the "Schedule 13E-3"), (ii) will use its best efforts to obtain the necessary
approvals by its stockholders of this Agreement and the transactions
contemplated hereby and (iii) will otherwise comply with all legal requirements
applicable to such meeting.
SECTION 5.03. Access to Information. From the date hereof until the Effective
Time, the Company will give Buyer, its counsel, financial advisors, auditors
and other authorized representatives full access to the offices, properties,
books and records of the Company and the Subsidiaries, will furnish to Buyer,
its counsel, financial advisors, auditors and other authorized representatives
such financial and operating data and other information as such Persons may
reasonably request and will instruct the Company's employees, counsel,
financial advisors and auditors to cooperate with Buyer in its investigation of
the business of the Company and the Subsidiaries; provided that no
investigation pursuant to this Section shall affect any representation or
warranty given by the Company to Buyer hereunder.
SECTION 5.04. Other Potential Bidders. The Company shall, directly or
indirectly, furnish information and access, in each case in response to
unsolicited requests therefor, received prior to or after the date of this
Agreement, to the same extent permitted by Section 5.03 hereof, to any
corporation, partnership, person or other entity or group pursuant to
appropriate confidentiality agreements, and may participate in discussions and
negotiate with any such entity or group concerning any merger, sale of assets,
sale of shares of capital stock or similar transaction involving the Company or
any Subsidiary or division of the Company (any such transaction being referred
to herein as a "Competing Transaction"), if the Special Committee determines
that such action is appropriate in light of its fiduciary obligations to the
Company's stockholders after consultation with counsel. In addition, the
Company shall direct its officers and other appropriate personnel to cooperate
with and be reasonably available to consult with any such entity or group.
Except as set forth above, the Company shall not solicit, participate in or
initiate discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than Buyer or
its affiliates or associates) concerning any merger, sale of assets, sale of
shares of capital stock or similar transaction involving the Company or any
Subsidiary or division of the Company.
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SECTION 5.05. Notices of Certain Events. The Company shall promptly notify
Buyer of:
(i) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement; and
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement.
ARTICLE VI
COVENANTS OF BUYER
Buyer agrees that:
SECTION 6.01. Confidentiality. Prior to the Effective Time and after any
termination of this Agreement Buyer will hold, and will instruct its officers,
directors, employees, accountants, counsel, consultants, advisors and agents to
hold, in confidence, unless compelled to disclose by judicial or administrative
process or by other requirements of law, all confidential documents and
information concerning the Company and the Subsidiaries furnished to Buyer in
connection with the transactions contemplated by this Agreement, except to the
extent that such information can be shown to have been (i) previously known on
a nonconfidential basis by Buyer, (ii) in the public domain other than as a
result of a disclosure by Buyer or (iii) later lawfully acquired by Buyer from
sources other than the Company; provided that Buyer may disclose such
information to its officers, directors, employees, accountants, counsel,
consultants, advisors and agents in connection with the transactions
contemplated by this Agreement and to its potential sources of financing (both
debt and equity) in connection with obtaining the financing for the
transactions contemplated by this Agreement so long as such Persons are
informed by Buyer of the confidential nature of such information and are
directed by Buyer to treat such information confidentially. If this Agreement
is terminated, Buyer will, and will use its best efforts to cause its officers,
directors, employees, accountants, counsel, consultants, advisors and agents
to, destroy or deliver to the Company, upon request, all documents and other
materials, and all copies thereof, obtained by or on behalf of Buyer from the
Company in connection with this Agreement that are subject to such
confidentiality undertaking.
SECTION 6.02. Voting of Shares. Prior to the record date applicable to the
Company Stockholder Meeting to be held in connection with the Merger, each of
the members of the Acquiring Group shall execute an agreement with the Company,
substantially in the form of Exhibit B attached hereto, to vote or cause to be
voted all of the Shares and Convertible Preferred Shares, if any, then
outstanding and beneficially owned by such member of the Acquiring Group in
favor of the approval and adoption of this Agreement and the Merger.
SECTION 6.03. Director and Officer Liability. For six years after the
Effective Time, Buyer will or will cause the Surviving Corporation to indemnify
and hold harmless the present and former officers and directors of the Company
in respect of acts or omissions occurring prior to the Effective Time to the
extent provided under the Company's certificate of incorporation and bylaws in
effect on the date hereof; provided that such indemnification shall be subject
to any limitation imposed from time to time under applicable law. For such six
years after the Effective Time, Buyer will or will cause the Surviving
Corporation to use its best efforts to provide officers' and directors'
liability insurance in respect of acts or omissions occurring prior to the
Effective Time covering each such Person currently covered by the Company's
officers' and directors' liability insurance policy on terms with respect to
coverage and amount no less favorable than those of such policy in effect on
the date hereof, provided that if such coverage is not obtainable at a cost
less than or equal to two times the amount per annum the Company paid in its
last full fiscal year, Buyer shall or shall cause the Surviving Corporation to
purchase such lesser amount of coverage, on terms as similar in coverage as
practicable to such coverage in effect on the date hereof, as may be obtained
having a cost not to exceed two times the amount per annum the Company paid in
its last full fiscal year, which amount has been disclosed to Buyer.
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ARTICLE VII
COVENANTS OF BUYER
AND THE COMPANY
The parties hereto agree that:
SECTION 7.01. Best Efforts. Subject to the terms and conditions of this
Agreement, each party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement. Buyer also will use its best efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to satisfy
all requirements of the Financing agreements or any alternative arrangements
which are conditions to closing the transactions constituting the Financing.
SECTION 7.02. Certain Filings. The Company and Buyer shall cooperate with one
another (a) in connection with the preparation of the Company Disclosure
Documents and (b) in determining whether any action by or in respect of, or
filing with, any governmental body, agency or official, or authority is
required, or any actions, consents, approvals or waivers are required to be
obtained from parties to any material contracts, in connection with the
consummation of the transactions contemplated by this Agreement and (c) in
seeking any such actions, consents, approvals or waivers or making any such
filings, furnishing information required in connection therewith or with the
Company Disclosure Documents and seeking timely to obtain any such actions,
consents, approvals or waivers.
SECTION 7.03. Public Announcements. Buyer and the Company will consult with
each other before issuing any press release or making any public statement with
respect to this Agreement and the transactions contemplated hereby and, except
as may be required by applicable law or any listing agreement with any national
securities exchange, will not issue any such press release or make any such
public statement prior to such consultation.
SECTION 7.04. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things they may deem desirable to vest, perfect or confirm of
record or otherwise in the Surviving Corporation any and all right, title and
interest in, to and under any of the rights, properties or assets of the
Company acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party. The obligations of
the Company, Buyer and Merger Subsidiary to consummate the Merger are subject
to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived, in whole or in part, by each of
the parties intended to benefit therefrom, to the extent permitted by
applicable law:
(i) this Agreement and the Merger shall have been approved and adopted by
the requisite vote of the stockholders of the Company in accordance with
Delaware Law;
(ii) no court, arbitrator or governmental body, agency, official or
authority shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect and
which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger;
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(iii) all actions by or in respect of or filings with any governmental
body, agency, official, or authority required to permit the consummation of
the Merger shall have been obtained; and
(iv) at the time of mailing of the Company Proxy Statement, Bear Stearns
shall have reaffirmed in writing the fairness opinion previously prepared
and delivered by it to the Special Committee and, at or prior to the time
of the Company Stockholder Meeting and the Effective Time, Bear Stearns
shall not have withdrawn such opinion.
SECTION 8.02. Additional Conditions to the Obligations of Buyer and Merger
Subsidiary. The obligations of Buyer and Merger Subsidiary to consummate the
Merger are also subject to the satisfaction at or prior to the Effective Time
of the following further conditions, any or all of which may be waived, in
whole or in part, by each of the parties intended to benefit therefrom, to the
extent permitted by applicable law:
(i) the Company shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of the Company contained
in this Agreement and in any certificate or other writing delivered by the
Company pursuant hereto shall be true and correct in all respects, except
where the breach or inaccuracy thereof would not, individually or in the
aggregate, have a Material Adverse Effect, at and as of the Effective Time
as if made at and as of such time, except that those representations and
warranties which address matters only as of a particular date shall remain
true and correct as of such date, and Buyer shall have received a
certificate signed by the principal financial officer of the Company to the
foregoing effect;
(ii) Buyer shall have received or be satisfied that it will receive all
consents and approvals contemplated by Section 3.03 or otherwise necessary
in connection with the consummation of the Merger; and
(iii) Buyer shall have obtained on behalf of Merger Subsidiary the
Financing pursuant to the Commitment Letter in an amount which, together
with then available cash and marketable securities of the Company,
exclusive of the Company's investment in Pine Street Partners, L.P., is
sufficient to enable the Surviving Corporation to pay as of the Effective
Time the aggregate amount of the Merger Consideration payable hereunder to
holders of Shares, to effect all necessary refinancing, and to pay all
related fees and expenses as contemplated by the Commitment Letter.
SECTION 8.03. Conditions to the Obligations of the Company. The obligations
of the Company to consummate the Merger are also subject to the satisfaction at
or prior to the Effective Time of the following further conditions, any or all
of which may be waived, in whole or in part, by the Company to the extent
permitted by applicable law:
(i) Buyer and Merger Subsidiary shall have performed in all material
respects all of their respective obligations hereunder required to be
performed by them at or prior to the Effective Time, the representations
and warranties of Buyer and Merger Subsidiary contained in this Agreement
shall be true and correct in all material respects at and as of the
Effective Time as if made at and as of such time, except that those
representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date, and the
Company shall have received a certificate signed by the President or any
Vice President of each of Buyer and Merger Subsidiary to the foregoing
effect;
(ii) the Company shall have received all documents it may reasonably
request relating to the existence of Buyer or Merger Subsidiary and the
authority of Buyer or Merger Subsidiary to enter into this Agreement, all
in form and substance satisfactory to the Company; and
(iii) the Board shall have received a certificate signed by the principal
financial officer of the Company to the effect that after the consummation
of the Merger, the Surviving Corporation will be solvent as defined above
in Section 4.09; provided, however, that if the Lender providing the
Financing shall require an opinion of an independent appraiser to such
effect, a copy of such opinion addressed to the Board shall be received in
lieu of the certificate of the principal financial officer.
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ARTICLE IX
TERMINATION
SECTION 9.01. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement by the stockholders of the Company):
(i) by mutual written consent of the Company and Buyer;
(ii) by either the Company or Buyer, if the Merger has not been
consummated by December 31, 1994;
(iii) by either the Company or Buyer, if there shall be any law or
regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining Buyer
or the Company from consummating the Merger is entered and such judgment,
injunction, order or decree shall become final and nonappealable;
(iv) by either the Company or Buyer if this Agreement and the Merger
shall fail to receive the requisite vote for approval and adoption by the
stockholders of the Company at the Company Stockholder Meeting called for
such purpose;
(v) by Buyer or the Company (such determination to be made on behalf of
the Company by the Special Committee in its sole discretion), if (a) the
Board of Directors of the Company or the Special Committee withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to Buyer or Merger Subsidiary or shall have resolved to do
any of the foregoing or the Board of Directors of the Company or the
Special Committee shall have recommended to the stockholders of the Company
any Competing Transaction or resolved to do so, or (b) any Person shall
have acquired beneficial ownership or any "group" (as such term is defined
under Section 13(d) of the Exchange Act and the rules and regulations
thereunder and not including the Acquiring Group) shall have been formed
which beneficially owns 50% or more of the Shares.
SECTION 9.02. Effect of Termination. If this Agreement is terminated pursuant
to Section 9.01, this Agreement shall become void and of no effect with no
liability on the part of any party hereto, except that the agreements contained
in Sections 6.01, 10.04 and 10.08 shall survive the termination hereof;
provided, however, that, except as specifically provided herein, nothing herein
shall relieve any party hereto of liability for any breach of this Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including telecopy or similar writing) and
shall be given,
if to Buyer or Merger Subsidiary, to:
KTM Holdings Corp.
c/o American Securities Partners, L.P.
122 East 42nd Street
New York, New York 10168
Telecopy: (212) 697-5524
Attention: Michael G. Fisch
with a copy to:
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004-2696
Telecopy: (212) 806-6006
Attention: David L. Finkelman, Esq.
A-14
<PAGE>
if to the Company, to:
Ketema, Inc.
501 South Cherry Street
Suite 600
Denver, Colorado 80222
Telecopy: (303) 331-9430
Attention: Special Committee of the Board of Directors
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Telecopy: (212) 735-2001
Attention: Eileen Nugent Simon, Esq.
or such other address or telecopy number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective when delivered at the address
specified in this Section.
SECTION 10.02. Survival of Representations and Warranties. The
representations and warranties contained herein and in any certificate or other
writing delivered pursuant hereto shall not survive the Effective Time or the
termination of this Agreement.
SECTION 10.03. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived prior to the Effective Time if, and only if, such
amendment or waiver is in writing and signed, in the case of an amendment, by
the Company, Buyer and Merger Subsidiary or in the case of a waiver, by the
party against whom the waiver is to be effective; provided that any such
amendment and any such waiver by the Company shall have been approved by the
Board of Directors of the Company, acting on the recommendation of the Special
Committee; and provided, further, that after the adoption of this Agreement by
the stockholders of the Company, no such amendment or waiver shall, without the
further approval of such stockholders, alter or change (i) the amount or kind
of consideration to be received in exchange for any shares of capital stock of
the Company or (ii) any of the terms or conditions of this Agreement if such
alteration or change would adversely affect the holders of any shares of
capital stock of the Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 10.04. Fees and Expenses. (a) Except as otherwise provided in this
Section, all Expenses (as defined below) incurred in connection with this
Agreement shall be paid by the party incurring such cost or expense.
(b) If (i) this Agreement is terminated (a) by the Company or Buyer pursuant
to Section 9.01(iv), (b) by the Company pursuant to Section 9.01(v) if the
Company or the Special Committee shall have recommended to the stockholders of
the Company any Competing Transaction or (c) by the Company or Buyer pursuant
to Section 9.01(v)(b) or (ii) the Merger is not consummated and the Company is
in breach in any material respect of its covenants, representations, warranties
or agreements contained herein, and in any of such events set forth in clause
(i) or (ii) Buyer and Merger Subsidiary are not in breach in any material
respect of their respective covenants, representations, warranties or
agreements contained herein, the Company shall, promptly after a request by
Buyer therefor, pay, or in the discretion of Buyer, reimburse Buyer for, all
Expenses, not to exceed $1,500,000, incurred by or on behalf of Buyer.
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<PAGE>
"Expenses", as used in this Section, shall include all reasonable out-of-
pocket expenses (including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants (which shall
not include fees and expenses of officers or Directors of Buyer and/or
affiliates thereof) and commitment fees and other financing fees and expenses)
incurred by Buyer, Merger Subsidiary or the Company or on behalf of any such
party in connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement, the Financing, the
preparation, printing, filing and mailing of the Company Proxy Statement and
Schedule 13E-3, the solicitation of the stockholder approvals and all other
matters related to the consummation of the transactions contemplated herein.
SECTION 10.05. Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto except that Buyer may transfer
or assign, in whole or from time to time in part, to one or more of its
affiliates, its rights under this Agreement, but any such transfer or
assignment will not relieve Buyer of its obligations under this Agreement or
prejudice the rights of stockholders to receive the Merger Consideration for
Shares properly surrendered in accordance with Section 1.04. This Agreement
shall not be construed so as to confer any right or benefit upon any person
other than the parties to this Agreement, and their respective successors and
assigns.
SECTION 10.06. Governing Law. This Agreement shall be construed in accordance
with and governed by the law of the State of Delaware.
SECTION 10.07. Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have
received counterparts hereof signed by all of the other parties hereto.
SECTION 10.08. Actions of the Company Approved or Taken by the Acquiring
Group. (a) The parties hereto hereby agree that any action or inaction of the
Company approved or taken or omitted to be taken by the Acquiring Group or any
member thereof (including Hugh H. Williamson, III) that is not concurred in by
the Special Committee and that might otherwise be a breach of this Agreement
shall not be a breach of this Agreement and that Buyer and Merger Subsidiary
waive any and all claims and causes of action arising out of or otherwise
related to any such action or inaction.
(b) Buyer and Merger Subsidiary waive any and all claims and causes of action
(i) against the Company or the Special Committee or its members (collectively,
the "Section 10.08(b) Parties") arising out of or otherwise related to any of
the Section 10.08(b) Parties' actions pursuant to Section 5.04 hereof
(including, without limitation, that any such action would constitute a breach
of Sections 5.02 or 7.01 hereof) and (ii) against any of the Section 10.08(b)
Parties and/or any third parties for tortious or intentional interference with
contract or with prospective economic advantage by virtue of any of the Section
10.08(b) Parties' or such third parties' actions hereunder (including, without
limitation, actions taken pursuant to Section 5.04 hereof) or the termination
of this Agreement by the Company in accordance with the terms hereof.
A-16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
Ketema, Inc.
/s/ Hugh H. Williamson, III
By __________________________________
Title: President and Chief
Executive Officer
KTM Holdings Corp.
/s/ Michael G. Fisch
By __________________________________
Title: Vice President
KTM Acquisition Corp.
/s/ Michael G. Fisch
By __________________________________
Title: Vice President
A-17
<PAGE>
EXHIBIT A
TO AGREEMENT AND
PLAN OF MERGER
FORM OF CERTIFICATE OF MERGER
----------------
CERTIFICATE OF MERGER
OF
KTM ACQUISITION CORP.
INTO
KETEMA, INC.
----------------
PURSUANT TO SECTION 251 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
----------------
KETEMA, INC., a Delaware corporation, hereby certifies as follows:
FIRST: The names of the constituent corporations are "KTM ACQUISITION
CORP." and "KETEMA, INC.". Each constituent corporation is incorporated
under the laws of the State of Delaware.
SECOND: An Agreement and Plan of Merger dated as of June 21, 1994 has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with Section 251(c) of the General
Corporation Law of the State of Delaware.
THIRD: The name of the surviving corporation (the "Surviving
Corporation") is Ketema, Inc.
FOURTH: The Certificate of Incorporation of Ketema, Inc. as in effect at
the date of the merger shall be the Certificate of Incorporation of the
Surviving Corporation.
FIFTH: An executed copy of the Agreement and Plan of Merger is on file at
the principal place of business of the Surviving Corporation, 501 South
Cherry Street, Suite 600, Denver, Colorado 80222, and a copy of the
Agreement will be furnished by the Surviving Corporation, on request and
without cost, to any stockholder of either of the constituent corporations.
IN WITNESS WHEREOF, Ketema, Inc. has caused this Certificate of Merger to be
executed in its corporate name by its President and attested by its Secretary
this day of , 1994.
Ketema, Inc.
By __________________________________
Hugh H. Williamson, III
President
Attest:
By __________________________________
Secretary
A-18
<PAGE>
EXHIBIT B
TO AGREEMENT AND
PLAN OF MERGER
, 1994
Ketema, Inc. 501 South Cherry Street Suite 600 Denver, Colorado 80222
Dear Sirs:
The undersigned is or may become a beneficial owner of shares of common
stock, $1.00 par value per share ("Common Stock"), or voting preferred stock,
$1.00 par value per share ("Preferred Stock"), of Ketema, Inc., a Delaware
corporation (the "Company"). The undersigned has been advised that the Company
has entered into an Agreement and Plan of Merger dated as of June 21, 1994 with
KTM Holdings Corp., a Delaware corporation ("Holdings"), and KTM Acquisition
Corp., a Delaware corporation ("Acquisition Corp."), pursuant to which
Acquisition Corp. would be merged into the Company and the Company would
thereby become a wholly-owned subsidiary of Holdings. Such Agreement and Plan
of Merger, as it may hereafter be amended in accordance with its terms, is
referred to herein as the "Merger Agreement."
The undersigned hereby agrees that in any vote of the Company's stockholders
with respect to the Merger Agreement and the transactions thereby contemplated
(whether at a meeting or otherwise), the undersigned will vote, or cause to be
voted, all shares of Common Stock and Preferred Stock, if any, then outstanding
and beneficially owned by the undersigned in favor of the approval and adoption
of the Merger Agreement and the transactions thereby contemplated.
This letter shall in no way be construed to preclude the undersigned from (i)
converting any convertible securities of the Company beneficially owned by the
undersigned into, or exercising any option or right to acquire, shares of
Common Stock or Preferred Stock or (ii) otherwise acquiring shares of Common
Stock or Preferred Stock after the date hereof. Any such shares of Common Stock
or Preferred Stock so acquired shall become subject to the terms of this
letter.
The undersigned acknowledges that in the event of any breach by the
undersigned of the obligations set forth in this letter, the Company will not
have an adequate remedy at law or in damages. Accordingly, in the event of any
such breach, the undersigned consents to the issuance of an injunction or award
of specific performance or the enforcement of other equitable remedies against
the undersigned in any action to compel performance of the terms hereof.
The provisions of this letter shall terminate, and the undersigned shall
cease to be bound hereby, concurrently with any termination of the Merger
Agreement in accordance with its terms.
In the event that the undersigned is a director of the Company, it is
understood that the provisions of this letter relate solely to the undersigned
as a stockholder of the Company and shall not in any way be construed to
require the undersigned to take or refrain from taking any action in the
undersigned's capacity as a director of the Company.
Please indicate your acceptance of this letter by signing below.
Very truly yours,
Accepted and Agreed:
Ketema, Inc.
By: ______________________________________
Name:
Title:
A-19
<PAGE>
ANNEX B
SECTION 262
OF THE DELAWARE GENERAL CORPORATION LAW
262. APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S) 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251, 252, 254, 257, 258 or 263 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock which, at the
record date fixed to determine the stockholders entitled to receive notice
of and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 stockholders; and
further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger
did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of (S) 251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258 and 263 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation;
b. Shares of stock of any other corporation which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
stockholders;
c. Cash in lieu of fractional shares of the corporation described in
the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock and cash in lieu of
fractional shares described in the foregoing subparagraphs a., b. and
c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the aspects
of the corporation. If the certificate of incorporation
B-1
<PAGE>
contains such a provision, the procedures of this section, including those set
forth in subsection (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The
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<PAGE>
Register in Chancery, if so ordered by the Court, shall give notice of the time
and place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders shown on
the list at the addresses therein stated. Such notice shall also be given by 1
or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington, Delaware
or such publication as the Court deems advisable. The forms of the notices by
mail and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholder entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall
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<PAGE>
be dismissed as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
B-4
<PAGE>
ANNEX C
FORM OF OPINION
OF BEAR, STEARNS & CO, INC.
, 1994
Special Committee
of the Board of Directors
Ketema, Inc.
One Cherry Center
Suite 600
501 South Cherry Street
Denver, Colorado 80222
Dear Sirs:
We understand that Ketema, Inc. ("Ketema") has entered into an Agreement and
Plan of Merger (the "Merger Agreement"), dated as of June 21, 1994, with KTM
Holdings Corp. ("Holdings") and KTM Acquisition Corp. ("Acquisition") pursuant
to which Acquisition will be merged with and into Ketema and all of Ketema's
common stock not already owned by Holdings or Acquisition will receive $15.00
per share payable in cash (the "Transaction"). We understand that as of the
record date for the Special Meeting of the Stockholders to consider and vote
upon the Merger Agreement certain clients of American Securities BD Co., L.P.
and Hugh H. Williamson, III, Ketema's President and Chief Executive Officer
(collectively, the "Acquiring Group"), Holdings and Acquisition, collectively
owned or may have been deemed to beneficially own not less than 894,000 common
shares of Ketema. You have supplied us with a copy of the proxy statement,
which includes the Merger Agreement, describing the Transaction in
substantially the form to be sent to Ketema's common stockholders (the "Proxy
Statement").
You have asked us to render our opinion as to whether the Transaction is
fair, from a financial point of view, to Ketema's common stockholders
unaffiliated with the Acquiring Group.
In the course of our analyses for rendering this opinion, we have:
1. reviewed the Proxy Statement;
2. reviewed Ketema's Annual Reports to Stockholders and Annual Reports on
Form 10-K for the fiscal years ended February 28, 1993 and 1994 and its
Quarterly Reports on Form 10-Q for the periods ended May 31, 1994, [and
August 31, 1994];
3. reviewed certain operating and financial information including
projections, provided to us by management relating to Ketema's business and
prospects;
4. met with certain members of Ketema's senior and operating managements
to discuss its operations, historical financial statements and future
prospects;
5. visited Ketema's facilities in Bensalem, Pennsylvania, Denver,
Colorado, El Cajon, California, Grand Prairie, Texas and Odenton, Maryland;
6. reviewed the historical stock prices and trading volume of the common
shares of Ketema;
7. reviewed publicly available financial data and stock market
performance data of public companies which we deemed generally comparable
to Ketema;
8. reviewed the terms of recent acquisitions of companies which we deemed
generally comparable to Ketema; and
9. conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
<PAGE>
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us by management and we have further relied upon
the assurances of management that they are unaware of any facts that would make
the information provided to us incomplete or misleading. In arriving at our
opinion, we have not performed any independent appraisal of the assets of
Ketema.
On the basis of the foregoing, it is our opinion that the Transaction is
fair, from a financial point of view, to Ketema's common stockholders
unaffiliated with the Acquiring Group.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: _________________________________
Managing Director
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