<PAGE> 1
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
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
RINGER CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Not Applicable [COMPANY NAME]
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $.01
(2) Aggregate number of securities to which transaction applies: 5,500,000
shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined): Average of High and Low Prices
for 9/29/97 (Nasdaq NMS) -- $1.75
(4) Proposed maximum aggregate value of transaction: $9,625,000
(5) Total fee paid: $1,925.00
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
RINGER CORPORATION
9555 JAMES AVENUE SOUTH
SUITE 200
BLOOMINGTON, MINNESOTA 55431-2543
October 31, 1997
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Ringer Corporation (the "Company") to be held at the offices of the Company,
9555 James Avenue South, Suite 200, Bloomington, Minnesota, on December 8, 1997
at 4:00 p.m. local time (the "Special Meeting"). A Notice of the Special
Meeting, a Proxy Statement and a proxy card are enclosed. All holders of the
Company's outstanding shares of Common Stock (the "Common Stock") as of October
21, 1997 are entitled to notice of and to vote at the Special Meeting.
At the Special Meeting, you will be asked to consider and to vote upon a
proposal to approve and adopt an Agreement and Plan of Merger dated October 3,
1997 (the "Merger Agreement"), by and among the Company, a wholly-owned
subsidiary of the Company (the "Merger Subsidiary") and Southern Resources, Inc.
("SRI"), pursuant to which the Merger Subsidiary will be merged with and into
SRI (the "Merger") and SRI will become a wholly owned subsidiary of the Company.
In the Merger, each outstanding share of common stock of SRI will be converted
into the right to receive 11,000 shares of Common Stock. A total of 5,500,000
shares of the Company's Common Stock will be issued in connection with the
Merger. Approval of the Merger requires the affirmative vote of the holders of a
majority of all outstanding shares of the Common Stock. Details of the proposed
Merger and other important information are set forth in the accompanying Proxy
Statement, which you are urged to read carefully.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AND RECOMMENDS THAT YOU
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
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 postage
prepaid envelope. If you attend the Special Meeting, you may revoke such proxy
and vote in person if you wish, even if you have previously returned your proxy
card.
Thank you for your interest and participation.
Sincerely,
Stanley Goldberg
Chairman, President and
Chief Executive Officer
<PAGE> 3
RINGER CORPORATION
9555 JAMES AVENUE SOUTH
SUITE 200
BLOOMINGTON, MINNESOTA 55431-2543
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 8, 1997
-------------------------
To Shareholders of Ringer Corporation:
A special meeting of the shareholders of Ringer Corporation, a Minnesota
corporation (the "Company"), will be held at the offices of the Company, 9555
James Avenue South, Suite 200, Bloomington, Minnesota, on December 8, 1997 at
4:00 p.m. local time (the "Special Meeting"), to consider and act upon the
following matters:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated October 3, 1997 (the "Merger
Agreement"), among the Company, a wholly owned subsidiary of the Company
(the "Merger Subsidiary") and Southern Resources, Inc., a Georgia
corporation ("SRI"). Pursuant to the Merger Agreement, among other things,
(i) the Merger Subsidiary will be merged with and into SRI (the "Merger")
and SRI will become a wholly owned subsidiary of the Company and (ii) each
outstanding share of common stock of SRI will be converted into the right
to receive 11,000 shares of the Company's Common Stock. A total of
5,500,000 shares of the Company's Common Stock will be issued in connection
with the Merger. A copy of the Merger Agreement is attached as Exhibit A to
the accompanying Proxy Statement.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Only holders of record of the Common Stock at the close of business on
October 21, 1997 are entitled to notice of and to vote at the Special Meeting.
Your attention is directed to the Proxy Statement and Exhibit A attached
thereto for more complete information regarding the Merger Agreement and the
Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
By Order of the Board of Directors,
Mark G. Eisenschenk
Secretary
Bloomington, Minnesota
October 31, 1997
SHAREHOLDERS UNABLE TO ATTEND THIS MEETING ARE URGED TO SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 4
RINGER CORPORATION
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 8, 1997
This Proxy Statement is being furnished to the shareholders of Ringer
Corporation, a Minnesota corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company of proxies to be voted at
a special meeting of shareholders of the Company to be held at the offices of
the Company, 9555 James Avenue South, Suite 200, Bloomington, Minnesota on
December 8, 1997, at 4:00 p.m. local time, and any adjournments or postponements
thereof (the "Special Meeting"). At the Special Meeting, the shareholders of the
Company will consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated October 3, 1997 (the "Merger Agreement"), by and among
the Company, a wholly owned subsidiary of the Company (the "Merger Subsidiary")
and Southern Resources, Inc., a Georgia corporation ("SRI"). Pursuant to the
Merger Agreement, among other things, (i) the Merger Subsidiary will be merged
with and into SRI (the "Merger") and SRI will become a wholly owned subsidiary
of the Company and (ii) each outstanding share of common stock of SRI will be
converted into the right to receive 11,000 shares of the Company's Common Stock
(the "Common Stock"). A total of 5,500,000 shares of the Company's Common Stock
will be issued in connection with the Merger. The Merger Agreement is attached
hereto as Exhibit A. Shareholders of the Company do not have dissenters' rights
with respect to the Merger.
Approval of the Merger requires the affirmative vote of the holders of a
majority of all outstanding shares of the Common Stock. Only holders of record
of the Common Stock at the close of business on October 21, 1997 are entitled to
notice of and to vote at the Special Meeting. This Proxy Statement is first
being mailed to shareholders on or about October 31, 1997.
<PAGE> 5
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
</TABLE>
SUMMARY..................................................... 1
Date, Time and Place of Special Meeting................... 1
Record Date; Shareholders Entitled to Vote; Quorum........ 1
Purpose of the Meeting.................................... 1
The Merger................................................ 1
Termination of Merger Agreement........................... 1
Effective Time of the Merger.............................. 1
Recommendation of the Company's Board of Directors........ 2
Federal Income Tax Consequences........................... 2
Accounting Treatment of the Merger........................ 2
Regulatory Approvals...................................... 2
The Company............................................... 2
SRI....................................................... 2
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING
INFORMATION............................................... 3
COMPARATIVE UNAUDITED PER SHARE DATA........................ 3
SELECTED HISTORICAL FINANCIAL DATA.......................... 5
PRO FORMA SELECTED FINANCIAL DATA........................... 7
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 8
THE SPECIAL MEETING......................................... 12
General................................................... 12
Proposal to be Considered at the Special Meeting.......... 12
Record Date; Shareholder Approval......................... 12
Proxies................................................... 12
THE MERGER.................................................. 13
Background of the Merger.................................. 13
Purposes and Structure of the Merger...................... 13
Recommendation of the Company's Board of Directors........ 14
Federal Income Tax Consequences........................... 14
Regulatory Approvals...................................... 14
Legal Proceedings......................................... 14
THE MERGER AGREEMENT........................................ 14
General................................................... 14
Effective Time............................................ 15
Consideration To Be Received by SRI Shareholders; Holdback
Amount................................................. 15
Operations of SRI Prior to the Merger..................... 16
Conditions to Consummation of the Merger.................. 16
Termination............................................... 16
Accounting Treatment...................................... 17
BUSINESS OF THE COMPANY..................................... 17
MARKET PRICE AND DIVIDEND DATA.............................. 21
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS.................................................... 22
COMPANY MANAGEMENT DISCUSSION AND ANALYSIS.................. 23
BUSINESS OF SRI............................................. 32
SRI MANAGEMENT DISCUSSION AND ANALYSIS...................... 35
INDEPENDENT AUDITORS........................................ 41
SHAREHOLDER PROPOSALS....................................... 41
i
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 41
INDEX TO FINANCIAL STATEMENTS............................... F-1
EXHIBIT A -- Agreement and Plan of Merger
</TABLE>
ii
<PAGE> 8
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. The following summary is not intended to be complete and
is qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement and in Exhibit A attached hereto. Shareholders
are urged to review the entire Proxy Statement carefully.
DATE, TIME AND PLACE OF SPECIAL MEETING
A Special Meeting of Shareholders of Ringer Corporation will be held on
December 8, 1997 at 4:00 p.m. local time at the offices of the Company, 9555
James Avenue South, Suite 200, Bloomington, Minnesota.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; QUORUM
Only holders of record of shares of the Common Stock at the close of
business on October 21, 1997 (the "Record Date") are entitled to notice of and
to vote at the Special Meeting. On that date, there were 12,181,270 shares of
Common Stock outstanding, held of record by approximately 248 shareholders. See
"THE SPECIAL MEETING -- Record Date; Shareholder Approval." The presence, in
person or by proxy, at the Special Meeting of the holders of a majority of the
outstanding shares of the Common Stock is necessary to constitute a quorum at
the Special Meeting.
PURPOSE OF THE MEETING
At the Special Meeting, shareholders will consider and vote upon a proposal
to approve and adopt the Merger Agreement, a copy of which is attached as
Exhibit A to this Proxy Statement. See "THE SPECIAL MEETING -- Proposal To Be
Considered at the Special Meeting." The Merger Agreement provides for the merger
of the Merger Subsidiary with and into SRI, with SRI becoming a wholly owned
subsidiary of the Company. See "THE MERGER AGREEMENT -- General."
THE MERGER
Pursuant to the Merger Agreement, the Merger Subsidiary will merge with and
into SRI, with SRI being the surviving corporation. Each outstanding share of
SRI common stock will be converted into the right to receive 11,000 shares of
the Common Stock. A total of 5,500,000 shares of the Common Stock will be issued
in connection with the Merger.
Approval of the Merger requires the affirmative vote of the holders of a
majority of all outstanding shares of the Common Stock. See "THE SPECIAL MEETING
- -- Record Date; Shareholder Approval." Each shareholder of SRI has approved the
Merger and elected to waive, and not to exercise, his or her dissenters' rights
with respect to the Merger.
The Merger is subject to various closing conditions, including the absence
of any event that would have a material adverse effect on the assets,
properties, liabilities, obligations, financial condition, results of operations
or business of SRI. See "THE MERGER AGREEMENT -- Conditions to Consummation of
the Merger."
TERMINATION OF MERGER AGREEMENT
The Merger Agreement may, under specified circumstances, be terminated and
the Merger abandoned at any time prior to the filing of a Certificate of Merger
with the Georgia Secretary of State, notwithstanding approval of the Merger
Agreement by the shareholders of the Company. See "THE MERGER AGREEMENT --
Termination."
EFFECTIVE TIME OF THE MERGER
Unless otherwise agreed by the parties to the Merger Agreement or otherwise
provided by law, the Merger will become effective upon the acceptance for
recording of the Certificate of Merger by the Georgia Secretary of State (the
"Effective Time"). Subject to approval of the Merger at the Special Meeting and
the
1
<PAGE> 9
satisfaction or waiver of the terms and conditions in the Merger Agreement, the
Effective Time is expected to occur as soon as practicable after the Special
Meeting. See "THE MERGER AGREEMENT -- Effective Time."
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Board of Directors of the Company believes that the Merger is in the
best interests of the Company's shareholders. The Board of Directors has
approved the Merger Agreement and recommends that shareholders vote in favor of
the proposal to approve and adopt the Merger Agreement. See "THE MERGER --
Recommendation of the Company's Board of Directors."
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, it is anticipated that the Merger will
qualify as a tax-free reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended. See "THE MERGER -- Certain
Federal Income Tax Consequences."
ACCOUNTING TREATMENT OF THE MERGER
For financial reporting purposes, it is anticipated the Merger will be
accounted for as a "pooling of interests" under generally accepted accounting
principles.
REGULATORY APPROVALS
The Company and SRI believe no regulatory approvals are or will be
necessary to consummate the Merger.
THE COMPANY
The Company is a developer, manufacturer and marketer of a variety of
nationally-branded lawn, garden and turf products primarily for the retail
consumer and specialty commercial and professional markets. The Company's
product lines include environmentally-sensitive, patented, proprietary
pesticides and fertilizers sold under the Safer(R) and Ringer(R) brand names, as
well as a full line of traditional pesticides sold under the Dexol(R) and
various private label brands. Sales for the fiscal year ended September 30, 1997
were approximately $19 million. See "BUSINESS OF THE COMPANY".
The principal executive office of the Company is located at 9555 James
Avenue South, Suite 200, Bloomington, Minnesota 55431, and the Company's
telephone number is (612) 703-3300.
SRI
SRI is a privately held Fort Valley, Georgia-based holding company. It owns
100% of the stock of SureCo., Inc. ("SureCo"), its operating subsidiary, and
Peach County Property, Inc. ("PCP"), a real estate subsidiary, both of which are
also located in Georgia. SureCo manufactures and markets pesticides, which it
sells under a variety of proprietary and private label brand names to commercial
and consumer markets throughout North America. SureCo's commercial pesticides
are sold principally under the All Pro(R) brand to distributors of specialty
agricultural products and to distributors of professional applicator products
and represented approximately $10 million in sales in the fiscal year ended
September 30, 1997. Consumer products are sold into the consumer retail market
principally under SureCo's Rigo/Black Leaf(R) brand as well as under various
private label store-brands and represented sales in fiscal 1997 of approximately
$9 million. SureCo also manufactures pesticidal products under contract
packaging arrangements for other pesticide marketers, which generated
approximately $6 million in fiscal 1997 sales. See "BUSINESS OF SRI".
The principal executive office of SRI is located at 310 Highway 341 South,
Fort Valley, Georgia 31030, and SRI's telephone number is (912) 825-3351.
2
<PAGE> 10
CAUTIONARY STATEMENT CONCERNING
FORWARD LOOKING INFORMATION
This Proxy Statement (including information included or incorporated by
reference herein) contains forward-looking statements that involve risks and
uncertainties including (a) statements relating to cost savings that are
expected to result from the Merger (see "THE MERGER -- Purposes and Structure of
the Merger"); (b) statements relating to the magnitude of revenues resulting
from the Merger; (c) statements relating to technology potential resulting from
the Merger; and (d) statements preceded by, followed by, or that include the
words "believes," "expects," "anticipates" or similar expressions. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) expected cost savings from the Merger cannot be fully realized or realized
within the expected time frame; (2) revenues following the Merger are lower than
expected; and (3) costs or difficulties related to the commercialization of the
Company's patented technologies are greater than expected.
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth selected unaudited per share data for the
Company on a historical and pro forma combined basis, giving effect to the
Merger using the "pooling-of-interests" method of accounting. The pro forma
comparative unaudited per share data assumes the Merger had been consummated at
the beginning of the periods presented. For a description of the effect of
pooling-of-interests accounting on the historical financial statements of the
Company, see "THE MERGER AGREEMENT -- Accounting Treatment." The information set
forth below is based on and derived from the consolidated historical financial
statements of the Company and SRI and the unaudited pro forma condensed combined
financial information, including the respective notes thereto, appearing
elsewhere in this Proxy Statement. This information should be read in
conjunction with such historical financial statements and pro forma financial
information and the related notes thereto. See "INDEX TO FINANCIAL STATEMENTS,"
and "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
The per share data set forth herein is presented for comparative purposes
only and is not necessarily indicative of the future combined financial
position, the results of the future operations or the actual results or combined
financial position of the Company that would have been achieved had the Merger
been consummated as of the dates or for the periods indicated.
While no assurance can be given, the Company expects that it will achieve
substantial benefits from the Merger including operating cost savings and
revenue enhancements. However, the pro forma comparative unaudited per share
data does not reflect any direct costs, potential savings or revenue
enhancements which
3
<PAGE> 11
are expected to result from the consolidation of operations of the Company and
SRI and, therefore, do not purport to be indicative of the results of future
operations of the Company.
<TABLE>
<CAPTION>
RINGER COMMON STOCK SRI COMMON STOCK
---------------------------- ------------------------------
PRO FORMA PRO FORMA
HISTORICAL COMBINED(1)(2) HISTORICAL(3) EQUIVALENT(4)
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
BOOK VALUE:
June 30, 1997.............................. $1.04 $ .71 $833.43 $.08
NET INCOME (LOSS):
Nine Months Ended:
June 30, 1997........................... $ .02 $(.01) $592.88 $.05
Year Ended:
September 30, 1996...................... $(.05) $(.08) $527.68 $.05
September 30, 1995...................... (.20) (.14) 205.78 .02
</TABLE>
Notes to Comparative Unaudited Per Share Data:
(1) The pro forma combined book value per share of Ringer Common Stock is based
upon the pro forma total common equity for Company and SRI, divided by the
total pro forma shares of the combined company following the completion of
the Merger. Total pro forma shares are equal to the outstanding shares of
Company Common Stock prior to the Merger plus 5,500,000 of additional shares
to be issued in connection with the Merger.
(2) The pro forma combined loss per share has been computed based on the average
number of outstanding shares of Company Common Stock during the periods
indicated plus an additional 5,500,000 shares to be issued in connection
with the Merger.
(3) Historical per share amounts for SRI are based on actual outstanding shares
(500 shares of common stock) for all periods presented.
(4) Pro forma equivalent earnings per share for SRI are based upon historical
financial amounts divided by 5,500,000 shares of Company Common Stock
assumed outstanding, which is the total number of shares to be issued in
connection with the Merger.
4
<PAGE> 12
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical consolidated
information for the Company and SRI. The selected historical data of the Company
for the years ended September 30, 1996 and 1995 was derived from the audited
consolidated historical financial statements of the Company, and the selected
historical data of SRI for the years ended September 30, 1996 and 1995 was
derived from the audited historical financial statements of SRI. The selected
historical financial data for the nine months ended June 30, 1997 and 1996 was
derived from the unaudited historical financial statements of the Company and
SRI, respectively. This information should be read in conjunction with the
consolidated historical financial statements of the Company and the historical
financial statements of SRI, the pro forma selected financial data, and the
unaudited pro forma condensed combined financial information, including the
respective notes thereto, appearing elsewhere in this Proxy Statement. See
"INDEX TO FINANCIAL STATEMENTS", "PRO FORMA SELECTED FINANCIAL DATA" and
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION".
SELECTED HISTORICAL FINANCIAL DATA
RINGER CORPORATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Condensed Statement of Operations:
Net sales........................................ $15,678 $13,254 $14,673 $14,193
Gross margin..................................... 7,460 6,437 7,025 7,204
Operating expenses............................... 7,236 5,923 7,371 9,503
------- ------- ------- -------
Income (loss) from operations.................... 224 514 (346) (2,299)
Other income (expense)........................... (34) 45 (222) 126
------- ------- ------- -------
Net income (loss)................................ $ 190 $ 559 $ (568) $(2,173)
======= ======= ======= =======
Income (loss) per share.......................... $ .02 $ .05 $ (.05) $ (.20)
======= ======= ======= =======
Outstanding shares............................... 11,344 10,925 10,922 10,898
======= ======= ======= =======
Period End Condensed Balance Sheet:
Cash and cash equivalents........................ $ 1,614 $ 3,289
Accounts receivable.............................. 4,354 992
Inventory........................................ 3,530 1,520
Total current assets............................. 9,743 5,934
Total assets..................................... 17,051 11,470
Current liabilities.............................. 3,828 1,531
Long-term debt................................... 1,451 0
Shareholders' equity............................. 11,771 9,939
</TABLE>
5
<PAGE> 13
SELECTED HISTORICAL FINANCIAL DATA
SOUTHERN RESOURCES, INC.
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
---------------------- --------------------------------
JUNE 27, JUNE 28, SEPTEMBER 27, SEPTEMBER 29,
1997 1996 1996 1995
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Condensed Statement of Operations:
Net sales..................................... $19,647 $15,691 $20,792 $18,444
Gross margin.................................. 4,072 2,751 3,694 2,328
Operating expenses............................ 3,021 1,637 2,613 1,666
------- ------- ------- -------
Income from operations........................ 1,051 1,114 1,081 662
Other income (expense)........................ (678) (433) (679) (510)
------- ------- ------- -------
Income before taxes........................... 373 681 402 152
Provision for taxes........................... 77 234 138 36
------- ------- ------- -------
Income before extraordinary item.............. 296 447 264 116
Extraordinary item............................ -- -- -- (13)
------- ------- ------- -------
Net income.................................... $ 296 $ 447 $ 264 $ 103
======= ======= ======= =======
Period End Condensed Balance Sheet:
Cash and cash equivalents..................... $ 8 $ 120
Accounts receivable........................... 5,601 3,328
Inventory..................................... 5,743 5,060
Total current assets.......................... 11,877 9,021
Total assets.................................. 14,419 11,817
Current liabilities........................... 12,519 5,390
Long-term debt................................ 1,435 6,141
Shareholders' equity.......................... 417 120
</TABLE>
6
<PAGE> 14
PRO FORMA SELECTED FINANCIAL DATA
REFLECTING THE MERGER OF THE COMPANY AND SRI
The following table presents selected unaudited combined financial data for
the Company and SRI prepared on a pro forma basis. The pro forma statement of
operations items have been prepared assuming the Merger occurred at the
beginning of the periods presented. The pro forma statement of operations items
and related per share amounts do not include anticipated revenue enhancements,
operating costs savings or the after-tax impact of Merger-related costs expected
as a result of the Merger.
The pro forma balance sheet items give effect to the Merger as if it
occurred at the beginning of the period presented and includes pro forma
adjustments. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION".
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
NINE MONTHS ENDED ---------------------
JUNE 30, 1997 1996 1995
----------------- ---- ----
<S> <C> <C> <C>
Condensed Statement of Operations:
Net sales............................................ $38,230 $53,400 $44,597
Gross margin......................................... 12,475 15,202 12,941
Operating expenses................................... 11,807 14,925 13,905
------- ------- -------
Income (loss) from operations........................ 668 277 (964)
Other expense........................................ (762) (1,512) (1,197)
------- ------- -------
Loss before taxes.................................... (94) (1,235) (2,161)
Provision for taxes.................................. 77 148 36
------- ------- -------
Loss before extraordinary item....................... (171) (1,383) (2,197)
Extraordinary item................................... -- -- (13)
------- ------- -------
Net loss............................................. $ (171) $(1,383) $(2,197)
======= ======= =======
Net loss per share................................... $ (.01) $ (.08) $ (.14)
======= ======= =======
Weighted average shares outstanding.................. 16,844 16,422 16,270
======= ======= =======
Period End Condensed Balance Sheet:
Cash and cash equivalents............................ $ 1,622
Accounts receivable.................................. 9,838
Inventory............................................ 9,273
Total current assets................................. 21,258
Total assets......................................... 31,108
Current liabilities.................................. 16,230
Long-term debt....................................... 2,917
Shareholders' equity................................. 11,991
</TABLE>
7
<PAGE> 15
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information and
accompanying notes reflect the application of the pooling-of-interests method of
accounting. Under this method of accounting, the recorded assets, liabilities,
shareholders' equity, income and expenses of the Company and SRI are combined
and recorded at their historical amounts.
The unaudited pro forma condensed combined financial information also
reflects the acquisition by the Company of substantially all of the assets of
Dexol Industries, Inc. (Dexol), a manufacturer and marketer of consumer
pesticides. The acquisition, completed in March 1997, was accounted for as a
purchase. (See "BUSINESS OF THE COMPANY -- Dexol Acquisition.") The operating
results of Dexol are included in the Company's historical amounts beginning
March 1, 1997. The pro forma information for fiscal 1996 below includes the
operations of Dexol prior to March 1, 1997 as if the acquisition had occurred on
October 1, 1995.
In addition, the unaudited pro forma condensed combined financial
information also reflect the acquisition by SRI of the Rigo/Black Leaf consumer
pesticide division of Wilbur-Ellis Company. The acquisition, completed in April
1996, was accounted for as a purchase. (See "BUSINESS OF SRI -- Rigo
Acquisition.") The operations of Rigo/Black Leaf are included in SRI's
historical amounts beginning May 1, 1996. The pro forma information for fiscal
1996 and 1995 below includes the operations of Rigo/Black Leaf prior to May 1,
1996 as if the acquisition had occurred on October 1, 1995.
The following unaudited pro forma condensed combined balance sheet as of
June 30, 1997 and the unaudited pro forma condensed combined statements of
operations for the nine months ended June 30, 1997 and for each of the years in
the two year period ended September 30, 1996 combine the historical amounts of
the Company and SRI after giving effect to certain adjustments described in the
notes to the unaudited pro forma condensed combined financial information. The
unaudited pro forma condensed combined financial information presents the
combined results of operations of the Company and SRI as if the Merger had been
effective at the beginning of each period.
The unaudited pro forma condensed combined financial information should be
read in conjunction with the historical financial statements of the Company and
SRI, including the respective notes thereto, appearing elsewhere in this Proxy
Statement. The unaudited pro forma condensed combined financial information
presented is not necessarily indicative of the combined financial position or
results of the future operations of the combined entity or the actual results
that would have been achieved had the Merger been consummated prior to the
periods indicated.
8
<PAGE> 16
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF JUNE 30, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RINGER SRI PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Cash........................................... $ 1,614 $ 8 $ 1,622
Accounts receivable............................ 4,354 5,601 $(117)(h) 9,838
Inventory...................................... 3,530 5,743 9,273
Other current assets........................... 245 525 (245)(f) 525
-------- ------- ----- --------
Current assets............................... 9,743 11,877 (362) 21,258
Property, net.................................. 415 1,979 2,394
Intangible assets, net, and other assets....... 6,893 563 7,456
-------- ------- ----- --------
Total assets................................. $ 17,051 $14,419 $(362) $ 31,108
======== ======= ===== ========
Borrowings under line of credit................ $ 5,763 $ 5,763
Accounts payable............................... $ 2,284 4,708 $(117)(h) 6,875
Accrued expenses............................... 1,525 392 1,917
Due to shareholders, current................... 206 206
Current maturities of long-term debt........... 19 1,450 1,469
-------- ------- ----- --------
Current liabilities.......................... 3,828 12,519 (117) 16,230
-------- ------- ----- --------
Long-term debt & other borrowings.............. 1,452 843 2,295
Notes payable to shareholders.................. 592 592
Deferred taxes................................. 48 (48)(i) 0
Common stock................................... 122 1 54 (g) 177
Additional paid-in capital..................... 33,683 (54)(g) 33,629
Cumulative translation adjustment.............. (157) (157)
(245)(f)
Retained deficit............................... (21,877) 416 48 (i) (21,658)
-------- ------- ----- --------
Total shareholders' equity................... 11,771 417 (197) 11,991
-------- ------- ----- --------
Total liabilities and shareholders' equity..... $ 17,051 $14,419 $(362) $ 31,108
======== ======= ===== ========
</TABLE>
9
<PAGE> 17
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO
RINGER DEXOL PRO FORMA RINGER SRI PRO FORMA FORMA
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $15,678 $2,973 $ $18,651 $19,647 $ (67)(e) $38,230
Cost of sales............... 8,218 2,030 10,248 15,575 (67)(e) 25,755
------- ------ ---- ------- ------- ------ -------
Gross margin................ 7,460 943 8,403 4,072 0 12,475
Selling, general and (42)(a)
administrative expenses... 7,236 1,486 30 (c) 8,710 3,021 76 (f) 11,807
------- ------ ---- ------- ------- ------ -------
Operating income (loss)..... 224 (543) 12 (307) 1,051 (76) 668
Interest income (expense),
net....................... (75) (78) 28 (b) (125) (679) (804)
Other income (expense)...... 41 41 1 42
------- ------ ---- ------- ------- ------ -------
Total other income
(expense)................. (34) (78) 28 (84) (678) 0 (762)
------- ------ ---- ------- ------- ------ -------
Income (loss) before
taxes..................... 190 (621) 40 (391) 373 (76) (94)
Provision for taxes......... -- -- -- 77 77
------- ------ ---- ------- ------- ------ -------
Net income (loss)........... $ 190 $ (621) $ 40 $ (391) $ 296 $ (76) $ (171)
======= ====== ==== ======= ======= ====== =======
Net income (loss) per
share..................... $ .02 $ (.01)
======= =======
Weighted average shares
outstanding............... 11,344 5,500 (g) 16,844
======= ====== =======
</TABLE>
PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RIGO/
RINGER DEXOL PRO FORMA RINGER SRI BLACK LEAF PRO FORMA SRI
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED
---------- ---------- ----------- -------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $14,672 $12,719 $ $27,392 $20,792 $7,417 $ $28,209
Cost of sales............ 7,647 10,191 17,839 17,098 5,462 22,560
------- ------- ----- ------- ------- ------ ----- -------
Gross margin............. 7,025 2,528 0 9,553 3,694 1,955 0 5,649
Selling, general and (100)(a)
administrative
expenses............. 7,371 3,283 71 (c) 10,625 2,613 1,610 (55)(j) 4,168
------- ------- ----- ------- ------- ------ ----- -------
Operating income
(loss)................. (346) (755) 29 (1,072) 1,081 345 55 1,481
Interest income
(expense), net......... 6 (323) 65 (b) (253) (689) (329) (96)(k) (1,114)
Equity in unconsolidated
subsidiary............. 37 (37)(d) 0 0
Other income (expense)... (228) 73 (155) 10 12 (12)(l) 10
------- ------- ----- ------- ------- ------ ----- -------
Total other income
(expense).............. (222) (213) 28 (408) (679) (317) (108) (1,104)
------- ------- ----- ------- ------- ------ ----- -------
Income (loss) before
taxes.................. (568) (968) 57 (1,480) 402 28 (53) 377
Provision for taxes...... -- -- 0 138 10 148
------- ------- ----- ------- ------- ------ ----- -------
Net income (loss)........ $ (568) $ (968) $ 57 $(1,480) $ 264 $ 18 $ (53) $ 229
======= ======= ===== ======= ======= ====== ===== =======
Net (loss) per share..... $ (.05)
=======
Weighted average shares
outstanding............ 10,922
=======
<CAPTION>
COMBINED PRO
PRO FORMA FORMA
ADJUSTMENTS COMBINED
----------- --------
<S> <C> <C>
Net sales................ $(2,201)(e) $53,400
Cost of sales............ (2,201)(e) 38,198
------- -------
Gross margin............. 0 15,202
Selling, general and
administrative
expenses............. 132(f) 14,925
------- -------
Operating income
(loss)................. (132) 277
Interest income
(expense), net......... (1,367)
Equity in unconsolidated
subsidiary............. 0
Other income (expense)... (145)
------- -------
Total other income
(expense).............. 0 (1,512)
------- -------
Income (loss) before
taxes.................. (132) (1,235)
Provision for taxes...... 148
------- -------
Net income (loss)........ $ (132) $(1,383)
======= =======
Net (loss) per share..... $ (.08)
=======
Weighted average shares
outstanding............ 5,500(g) 16,422
======= =======
</TABLE>
10
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED
RINGER SRI RIGO PRO FORMA SRI PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED ADJUSTMENTS COMBINED
---------- ---------- ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $14,194 $18,444 $11,959 $ $30,403 $ $44,597
Cost of sales............... 6,990 16,116 8,550 24,666 31,656
------- ------- ------- ----- ------- ------ -------
Gross margin................ 7,204 2,328 3,409 0 5,737 0 12,941
Selling, general and
administrative expenses... 9,503 1,666 2,824 (94)(j) 4,396 6(f) 13,905
------- ------- ------- ----- ------- ------ -------
Operating income (loss)..... (2,299) 662 585 94 1,341 (6) (964)
Interest income (expense),
net....................... 16 (518) (591) (176)(k) (1,285) (1,269)
Other income (expense)...... 110 8 (42) (4)(l) (38) 72
------- ------- ------- ----- ------- ------ -------
Total other income
(expense)................. 126 (510) (633) (180) (1,323) 0 (1,197)
------- ------- ------- ----- ------- ------ -------
Income (loss) before taxes
and extraordinary item.... (2,173) 152 (48) (86) 18 (6) (2,161)
Provision for taxes......... 36 36 36
------- ------- ------- ----- ------- ------ -------
Income (loss) before
extraordinary item........ (2,173) 116 (48) (86) (18) (6) (2,197)
Extraordinary item.......... (13) (13) (13)
------- ------- ------- ----- ------- ------ -------
Net income (loss)........... $(2,173) $ 103 $ (48) $ (86) $ (31) $ (6) $(2,210)
======= ======= ======= ===== ======= ====== =======
Net income (loss) per
share..................... $ (.20) $ (.14)
======= =======
Weighted average shares
outstanding............... 10,898 5,500(g) 16,270
======= ====== =======
</TABLE>
Notes to Condensed Pro Forma Financial Statements:
(a) Elimination of expenses associated with a portion of the business not
acquired by Ringer.
(b) Reduction in interest expense on notes to Dexol shareholders not assumed by
Ringer.
(c) Amortization over 20 years of the excess of purchase price over the net
assets acquired for the five month period of October 1, 1996 through
February 28, 1997 and the twelve month period ended September 30, 1996.
(d) Elimination in unconsolidated subsidiary not acquired by Ringer.
(e) Elimination of sales to Dexol from SRI for the nine month period ended June
30, 1997 and fiscal year ended September 30, 1996. Sales to Dexol by SRI are
not eliminated for the fiscal year ended September 30, 1995 as Dexol is not
included in Ringer historical results for that period.
(f) Elimination of SRI prepaid product registration costs (adjustment for
difference in accounting policies).
(g) Issuance of Ringer stock and retirement of SRI stock at Merger.
(h) Elimination of trade accounts between Dexol and SRI at June 30, 1997.
(i) Elimination of SRI deferred tax liability. Before consideration of the
valuation allowance, the combined company would have a net deferred asset.
The adjustment represents an adjustment to the valuation allowance.
(j) Elimination of Wilbur-Ellis Company administrative intercompany charges from
Rigo which are incremental to the costs of operating the business under
SRI's ownership.
(k) Increase interest expense to reflect higher average interest rates on
working capital borrowings by SRI.
(l) Elimination of miscellaneous other income (i.e., rental income on property
not acquired by SRI) which will not be continued by SRI.
11
<PAGE> 19
THE SPECIAL MEETING
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of the Company for a Special Meeting of
Shareholders to be held on December 8, 1997 at 4:00 p.m. local time at the
offices of the Company, 9555 James Avenue South, Suite 200, Bloomington,
Minnesota, and at any adjournments thereof. Shares represented by properly
executed proxies received by the Company will be voted at the Special Meeting or
any adjournment thereof in accordance with the terms of such proxies, unless
such proxies are revoked. See "-- Proxies" below.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Company will consider and
vote upon a proposal to approve and adopt the Merger Agreement. Pursuant to the
Merger Agreement, the Merger Subsidiary will merge with and into SRI, and SRI
will become a wholly-owned subsidiary of the Company. At the Effective Time,
each outstanding share of the SRI common stock will be converted into the right
to receive 11,000 shares of Common Stock of the Company. A copy of the Merger
Agreement is attached as Exhibit A to this Proxy Statement.
It is not anticipated that any other matters will be brought before the
Special Meeting. However, if other matters should come before the Special
Meeting, it is intended that the holders of proxies solicited hereby will vote
thereon in their discretion, unless such authority is withheld.
RECORD DATE; SHAREHOLDER APPROVAL
Only holders of record of the Common Stock at the close of business on
October 21, 1997 are entitled to notice of and to vote at the Special Meeting.
On that date, there were 12,181,270 shares of Common Stock outstanding, which
were held of record by 248 shareholders. Each share of Common Stock entitles its
holder to one vote concerning all matters properly coming before the Special
Meeting. A majority of the shares of the Common Stock entitled to vote,
represented in person or by proxy, will constitute a quorum. Abstentions and
broker non-votes (i.e. shares held by brokers in street name, voting on certain
matters due to discretionary authority or instructions from the beneficial owner
but not voting on other matters due to lack of authority to vote on such matters
without instructions from the beneficial owner) are counted for the purpose of
establishing a quorum and will have the same effect as a vote against the
approval of the Merger. The Merger must be approved by the holders of at least a
majority of all outstanding shares of the Common Stock.
PROXIES
Any Company shareholder entitled to vote at the Special Meeting may vote
either in person or by duly authorized proxy. All shares of the Common Stock
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.
A shareholder 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.
Expenses in connection with the solicitation of proxies will be paid by the
Company. Upon request, the Company will reimburse brokers, dealers and banks, or
their nominees, for reasonable expenses incurred in forwarding copies of the
proxy material to the beneficial owners of the Common Stock which such persons
hold of record. Solicitation of proxies will be made principally by mail and by
the Company's agent for such purposes. Proxies may also be solicited in person,
or by telephone or telegraph, by officers and regular employees of the Company.
12
<PAGE> 20
THE MERGER
BACKGROUND OF THE MERGER
The Company has publicly communicated its plan to grow its business through
merger and acquisition activities. Over the past few years, the Company has
reviewed approximately fifty potential merger or acquisition opportunities,
seeking to identify and close only those transactions that represent a good
strategic and financial "fit" for the Company.
In May 1997, shortly after having completed the acquisition of
substantially all the assets of Dexol Industries, Inc. ("Dexol"), the Company
discussed with SRI the possibility of entering into a merger or acquisition
transaction. Following further discussions in July 1997 and on-site visits to
SRI, the Company discussed with SRI a preliminary proposal for a business
combination. After SRI's consideration of the Company's preliminary proposal,
SRI presented a counterproposal to the Company. The Company then held a Board of
Directors meeting in August 1997 to discuss the merits of a potential
transaction with SRI, and the Board of Directors authorized management to
continue to further evaluate the transaction.
The Company subsequently performed a preliminary due diligence review at
SRI and conducted negotiations with respect to the structure of the transaction
as well as the form and amount of consideration. The Company held a second Board
of Directors meeting in September 1997 specifically to review and discuss the
proposed transaction. At the meeting, the Board of Directors of the Company
authorized management to enter into a letter of intent with SRI on terms
substantially consistent with those presented at such meeting.
The Company subsequently met with SRI and negotiated the final transaction
terms and executed a formal letter of intent to enter into a merger agreement
with SRI. Following the performance of due diligence, the finalization of the
definitive Merger Agreement and the approval of the Merger Agreement by boards
of directors of each Ringer and SRI and the shareholders of SRI, the Merger
Agreement was executed on October 3, 1997.
PURPOSES AND STRUCTURE OF THE MERGER
The principal purposes of the Merger from the Company's perspective are (i)
to provide the Company with much needed critical mass, (ii) to provide the
Company with an appropriate vehicle to commercialize its patented "hybrid"
pesticide technologies and (iii) to expand the Company's business base into the
commercial pesticide marketplace.
The Merger will double the Company's revenue base. It is anticipated that
the resulting increase in critical mass will enable the Company to achieve
significant expense savings by allowing the Company to more efficiently leverage
its administrative overhead, its sales and distribution system costs and its
manufacturing investment. It is further expected that the Merger will position
the Company as a credible, capable competitor in the marketplace and result in
the Company's moving toward becoming the third largest marketer of consumer lawn
and garden pesticides in the United States.
From a technology perspective, the Company believes the Merger will provide
the opportunity to more effectively develop, manufacture and market its
patented, hybrid fatty acid/traditional pesticide technologies. The Company's
patents on these technologies show that a variety of traditional pesticides can
be reformulated to incorporate naturally occurring fatty acids (the primary
active ingredient in the Company's Safer(R) branded product line), the results
of which are "hybrid" pesticides that have a lower adverse impact on the
environment than traditional pesticides and/or produce improved pesticidal
performance. The Company believes "hybrid" pesticides will provide the Company
with a variety of unique marketing advantages which will be protected from a
competitive perspective by its patents. The Company believes its patented
technologies have relevant commercial applications. As evidence of this, in 1997
the Company introduced its Safer(R) Weed-Away(R) brand selective weed killer, a
hybrid herbicide combination technology, and was satisfied with the product's
first year market reception.
13
<PAGE> 21
From a business diversification perspective, the Merger provides the
Company with entry into the contract packaging manufacturing business, specialty
agricultural products business and commercial pest control business, each a
sizeable market in which the Company has previously not participated.
Among other things, the Merger also provides the Company a greater
opportunity to utilize its net operating loss tax carry forwards of
approximately $23 million which should be available, with certain limitations,
to offset future otherwise taxable earnings.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
On October 1, 1997, the Company's Board of Directors, by unanimous vote at
a special board meeting held on that date, determined that the transactions
contemplated by the Merger Agreement appear to be in the best interests of the
Company and its shareholders and resolved to enter into the Merger Agreement and
to recommend that the Company's shareholders approve the Merger Agreement.
In arriving at its recommendation and determination, the Board reviewed the
financial profiles of SRI and the Company, the terms and conditions of the
Merger Agreement, the relevant indemnities and the post-Merger operating plan.
It also considered the advice and assistance of its outside financial and legal
advisors and management's advice regarding business reasons that favored
approval of the Merger.
If the Merger is not approved by the Company's shareholders and the Merger
does not occur, the Company will continue its current operations.
FEDERAL INCOME TAX CONSEQUENCES
It is anticipated the Merger will qualify as a tax-free reorganization
under provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended.
REGULATORY APPROVALS
The Company and SRI believe no regulatory approvals are or will be
necessary to consummate the Merger.
LEGAL PROCEEDINGS
Owners of property in the vicinity of SRI's Fort Valley, Georgia offices
have initiated civil actions against, among others, SRI, SureCo and PCP,
alleging bodily injury and property damage arising out of chemical formulation
activities conducted on or about the site prior to PCP's purchase of the
property from Canadyne-Georgia Corporation (formerly Woolfolk Chemical Works,
Inc.). SRI believes the actions are without merit as they relate to SRI, since
the environmental claims relate to circumstances caused by the prior owner of
the property. Accordingly, SRI is vigorously defending the suit. See "BUSINESS
OF SRI -- Legal Proceedings".
Furthermore, all of the shareholders of SRI, in a separate 1993 agreement
between the SRI shareholders and SRI, have agreed to indemnify SRI and, in
connection with the execution of the Merger Agreement, to also indemnify the
Company, for any losses, liabilities, deficiencies, damages, expenses or costs
(including reasonable legal expenses), resulting from litigation relating to
environmental matters (see "BUSINESS OF SRI -- Legal Proceedings") on and near
the real property on which SRI's manufacturing site is located or resulting from
any action brought by any state or federal environmental regulatory authority
relating to the property or any other property alleged to be affected in
connection with environmental matters relating to the property. The indemnity
provided by the shareholders of SRI is not limited in dollar amount and the
Company will permit the indemnity to terminate only when litigation has
terminated and cleanup of the property has been approved by the EPA.
14
<PAGE> 22
THE MERGER AGREEMENT
The information under this caption is qualified in its entirety by
reference to the full text of the Merger Agreement, a copy of which is attached
as Exhibit A to this Proxy Statement.
GENERAL
The Company and SRI entered into the Merger Agreement effective October 3,
1997. If the shareholders of the Company approve the Merger Agreement, the
Merger Subsidiary will be merged with and into SRI, and SRI will become a wholly
owned subsidiary of the Company. At the Effective Time, each outstanding share
of common stock of SRI will be converted into the right to receive 11,000 shares
of the Common Stock as described below. See "-- Consideration to be Received by
SRI Shareholders; Holdback Amounts."
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of the Company's
shareholders and all other conditions to consummation of the Merger are
satisfied, the Merger will be consummated and become effective upon the
acceptance for record of the Certificate of Merger by the Georgia Secretary of
State on a date as soon as practicable after conditions to the Merger are
satisfied (or waived to the extent permitted), or such other date as may be
agreed on by the parties. It is currently contemplated that the Effective Time
will occur on or about December 8, 1997. There can be no assurance that all
conditions to the Merger will be satisfied. See "-- Conditions to Consummation
of the Merger."
CONSIDERATION TO BE RECEIVED BY SRI SHAREHOLDERS; HOLDBACK AMOUNTS
In connection with the Merger, each share of SRI common stock outstanding
immediately prior to the Effective Time will be converted into the right to
receive 11,000 shares of the Common Stock. A total of 5,500,000 shares of the
Common Stock will be issued in connection with the Merger. The shares of Common
Stock to be issued are sometimes referred to herein as the "Merger
Consideration".
Twenty percent (20%) of the Merger Consideration will be held in escrow as
security for potential claims (10% for general claims relating to
representations and warranties of SRI and 10% for specific environmental
contamination-related contingencies). The 10% of the Merger Consideration
relating to general representations and warranties (the "General Holdback
Amount") will be held in escrow by First Trust National Association. The Company
will have a right to offset, until the date that the external auditors' report
on the annual consolidated financial statements of the Company and SRI are first
issued (the "Offset Period"), any Losses (defined below) against the General
Holdback Amount. "Losses" are any losses, liabilities, deficiencies, damages,
expenses or costs (including reasonable legal expenses), whether or not actually
incurred or paid during the Offset Period, resulting from any misrepresentation
in any of the representations and warranties of SRI contained in the Merger
Agreement or any breach of, violation of, or failure to perform by SRI any
agreement or covenant of SRI contained in the Merger Agreement or any claim or
threatened claim arising out of actions or inactions of SRI with respect to
SRI's business prior to the Effective Time. A further 10% of the Merger
Consideration relating to specific environmental-related contingencies (the
"Environmental Holdback Amount") will also be held in escrow by First Trust
National Association. The Company will have a right to offset, until all
litigation and governmental actions relating to environmental contamination of
the property on and near which SRI's manufacturing site in Fort Valley, Georgia,
is located have been terminated and cleanup of the property has been approved by
the Environmental Protection Agency ("EPA"), (the "Environmental Offset
Period"), any losses, liabilities, deficiencies, damages, expenses or costs
(including reasonable legal expenses), whether or not actually incurred or paid
during the Environmental Offset Period resulting from certain specific
environmental matters affecting the business and/or property of SRI, SureCo and
PCP.
15
<PAGE> 23
OPERATIONS OF SRI PRIOR TO THE MERGER
SRI has agreed that, prior to the Effective Time, the business of SRI will
be conducted in accordance with certain restrictions set forth in the Merger
Agreement. Among other things, SRI has agreed that it will operate only in the
ordinary course of business.
CONDITIONS TO CONSUMMATION OF THE MERGER
The Merger will occur only if the Merger Agreement is approved and adopted
by the requisite vote of the holders of the Common Stock. Consummation of the
Merger also is subject to the satisfaction of certain other conditions specified
in the Merger Agreement, unless such conditions are waived (to the extent such
waiver is permitted by law). The failure of any such condition to be satisfied,
if not waived, would prevent consummation of the Merger.
The obligations of the Company to consummate the Merger are subject to
satisfaction of the following conditions, among others: (i) SRI shall have
obtained, or caused to be obtained, each consent and approval necessary in order
that the transaction contemplated in the Merger Agreement will not constitute a
breach or violation of, or result in a right of termination or acceleration of,
or creation of any encumbrance on any of SRI's or any subsidiary's assets,
pursuant to the provisions of, any agreement, arrangement or undertaking of or
affecting SRI or any subsidiary or any license, franchise or permit of or
affecting SRI or any subsidiary; (ii) the Company shall have completed its due
diligence investigation of the business and financial condition of SRI and its
subsidiaries and shall not have discovered any fact or circumstance not
previously disclosed to it by SRI regarding the business, assets, property,
condition (financial or otherwise), results of operations or prospects of SRI
materially adverse to SRI or any subsidiary or to the value of shares of SRI
common stock; (iii) there shall have been no damage, destruction or loss of or
to any property or properties owned or used by SRI or its subsidiaries which
would have a Material Adverse Effect (as defined in the Merger Agreement); (iv)
each of the representations and warranties of SRI contained in the Merger
Agreement shall have been true and correct as of the date of execution of the
Merger Agreement and as of the Effective Time (except for any inaccuracies which
in the aggregate would not be expected to have a Material Adverse Effect on SRI
and its subsidiaries taken as a whole); (v) SRI shall have complied in all
material respects with all covenants and agreements required under the terms of
the Merger Agreement to be performed by it; (vi) no injunction, restraining
order or other order of any federal or state court which prevents the Merger
shall be in effect; (vii) no statute, rule or regulation shall have been enacted
by any state or governmental agency that would prevent consummation of the
Merger; (viii) between October 3, 1997 and the Effective Time no Material
Adverse Effect shall have occurred with respect to SRI other than any
developments that generally affect the industry in which SRI operates; (ix) the
Company shall have received from its principal lender such approvals, waivers
and consents as may be necessary to permit the consummation of the Merger
without causing the Company to violate or be in default under any agreements
with such lender; (x) the Company shall have received from Deloitte & Touche
LLP, independent auditors for the Company, letters dated shortly prior to the
date of the mailing of the Proxy Statement and the Effective Date, stating its
opinion that the Merger will qualify for pooling-of-interests accounting
treatment and (xi) the Merger shall have been approved by the shareholders of
the Company.
The obligations of SRI to consummate the Merger are subject to satisfaction
of the following conditions, among others: (i) each of the representations and
warranties of the Company contained in the Merger Agreement shall have been true
and correct as of the date of execution of the Merger Agreement and as of the
Effective Time; (ii) the Company shall have complied in all material respects
with all covenants and agreements required under the terms of the Merger
Agreement to be performed by it; (iv) no injunction, restraining order or other
order of any federal or state court which prevents the Merger shall be in
effect; and (v) no statute, rule or regulation shall have been enacted by any
state or governmental agency that would prevent consummation of the Merger.
16
<PAGE> 24
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the filing of Certificate of Merger with the Georgia Secretary of State
whether before or after action by the Company's shareholders and without further
approval by the Company's shareholders under any of the following circumstances:
(i) by mutual written consent of the Company and SRI; (ii) by the Company or SRI
if there has been a material misrepresentation, a material breach of warranty or
of covenant on the part of the other in the representations, warranties and
covenants set forth in the Merger Agreement; (iii) by the Company or SRI if the
conditions of such party's obligation to consummate the Merger have not been
satisfied or waived; (iv) by the Company if the Company shareholders do not
approve the Merger; and (v) by the Company if there has been a material adverse
change in the business or financial results of SRI.
ACCOUNTING TREATMENT
It is expected that the Merger will be accounted for as a
"pooling-of-interests" under generally accepted accounting principles. Under
this method of accounting, the recorded assets, liabilities, shareholders'
equity, income and expenses of the Company and SRI are combined and recorded at
their historical amounts. The unaudited pro forma financial information included
in this Proxy Statement reflects the Merger using the pooling-of-interests
method of accounting. See "COMPARATIVE UNAUDITED PER SHARE DATA", "SELECTED
HISTORICAL FINANCIAL DATA" and "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION".
BUSINESS OF THE COMPANY
GENERAL
The Company develops, manufactures and markets a wide variety of
nationally-branded lawn, garden and turf products primarily for the retail
consumer and specialty commercial and professional markets. Its product lines
include environmentally-sensitive, patented, proprietary pesticides and
fertilizers sold under the Safer(R) and Ringer(R)brand names, as well as a full
line of traditional pesticides sold under the Dexol(R) and various private label
brands.
The Company's environmentally-sensitive pesticides primarily use botanical
technologies to control insects, weeds and fungal diseases without harming
beneficial insect populations or leaving harmful residues on turf and garden
plants. Its environmentally-sensitive fertilizers use proprietary
microbially-based delivery systems that control release of nutrients for
extended uniform plant feeding.
The Company's traditional pesticides principally utilize synthetic
technologies commonly available to pesticide formulators. The majority of these
traditional pesticides are manufactured by the Company for distribution
primarily into the retail consumer marketplace.
The Company is headquartered in Minneapolis, Minnesota. It maintains
manufacturing and warehousing facilities in Torrance, CA to support the Dexol(R)
and private label product lines (see -- "Dexol Acquisition" below). It leases
and operates a distribution warehouse in Eagan, Minnesota to support the
Ringer(R) and Safer(R) branded product lines and it leases office and warehouse
space in Toronto, Ontario to support the operations of its Canadian subsidiary.
DEXOL ACQUISITION
In March 1997, the Company completed the acquisition of substantially all
of the assets of Dexol, a California-based manufacturer and marketer of home and
garden pesticides sold under the Dexol(R) and various private label brand names.
Payment of the purchase price of approximately $3,013,000 was effected by: (i)
the issuance of 1,059,340 restricted shares of the Common Stock, valued at
$1,397,000, (ii) the issuance of a promissory note to Dexol in the principal
amount of $1,477,000 and (iii) payment of transaction costs of $139,000. In
addition, former Dexol shareholders are entitled to a performance-based earnout
of up to $455,000 payable in the Common Stock if certain contingencies are
achieved.
17
<PAGE> 25
BANK LINE OF CREDIT
In May 1997, the Company secured a three-year $25 million credit facility
from GE Capital Services. The credit facility is intended to be used to finance
the Company's seasonal working capital needs and to provide financing for future
acquisitions. The $25,000,000 credit facility replaced a $5,000,000 bank line of
credit from a previous lender. The Merger Agreement provides that approval by GE
Capital Services of the Merger is a condition to closing of the Merger.
SALES AND MARKETING
The Company's products are marketed primarily through retail distribution
channels. Retail channels consist principally of specialty lawn and garden
stores, hardware cooperatives, home centers and mass merchants. In addition, but
to a significantly lesser extent, the Company markets products through
commercial channels which include specialty distributors who sell products to
golf course turf management professionals. In fiscal 1997, approximately 87% of
the Company's U.S. sales were to retail markets and 3% were to U.S. commercial
markets. Approximately 10% of the Company's fiscal 1997 sales came from
international activities, which are managed by its Canadian subsidiary, Safer,
Ltd., based in Toronto, Ontario.
DISTRIBUTION AND TRANSPORTATION
To distribute its products nationally, the Company relies primarily on
common carrier transportation, leased warehouse facilities and public warehouse
services.
COMPANY PRODUCT AREAS AND TECHNOLOGIES
The Company's environmentally-sensitive pest control technologies are based
primarily on fatty acid compounds, naturally occurring plant extracts,
microorganisms and mechanical traps. The Company holds numerous patents for
fatty acid-based pest control products and for products using fatty acid as
synergists in combination with both natural and synthetic pesticides. These
products are marketed under the Safer(R) brand.
Its granular fertilizer technologies are based on the use of naturally
occurring soil microbes in combination with plant nutrients and high energy
carbohydrate sources which results in a superior, controlled-release fertilizer
system. These fertilizers are marketed under the Ringer(R) and Safer(R) brands.
The Company's traditional, synthetic pesticides utilize technologies
commonly available to pesticide formulators. They are manufactured principally
by the Company at its Torrance, California manufacturing facility and marketed
in the retail consumer marketplace as value brands utilizing the Company's
Dexol(R) brand name as well as several private label brands.
The Company performs product performance testing utilizing outside contract
research and development facilities as well as its own laboratory in
Minneapolis.
PRODUCT DEVELOPMENT
The Company's product development efforts to create new products and
enhance existing products are conducted both internally and externally. Most of
the Company's external product development, research and testing is contracted
to outside facilities including private laboratories, universities and
government researchers unaffiliated with the Company.
MANUFACTURING
The Company's products are manufactured at both its Torrance, California
manufacturing facility and by outside subcontract manufacturers. Substantially
all of its traditional synthetic pesticides are self-manufactured while all
environmentally-sensitive pest control products and fertilizers are manufactured
by subcontract manufacturers located in Missouri and Minnesota. Products for
Canadian and overseas markets are manufactured by subcontractors in Canada,
Europe and the United States.
18
<PAGE> 26
GOVERNMENT REGULATION AND PRODUCT REGISTRATION
Government regulation in the United States and other countries is a
significant factor in the research, development, production and marketing of
pesticides and, to a lesser extent, fertilizers. To develop and sell a pesticide
product, federal and state product registration must be obtained for each pest
and plant for which the product is used. In the United States, pesticides are
regulated by the EPA under the Federal Insecticide, Fungicide and Rodenticide
Act, as amended ("FIFRA"), which requires extensive efficacy, toxicology and
environmental testing to substantiate product performance and safety prior to
registration. In addition, many states have additional registration requirements
that go beyond FIFRA.
Under FIFRA, field efficacy testing may be conducted on a small scale in
certain instances. To conduct large-scale field tests, a company must obtain an
experimental use permit, which generally requires satisfactory completion of
certain toxicology and environmental studies. Initial EPA registration for a new
pesticide may therefore be a lengthy and expensive process.
To regulate the development and use of biological pest controls, including
those based on naturally occurring microorganisms, the EPA established special
guidelines for their registration which are set forth in Subdivision M of the
EPA's Pesticide Assessment Guidelines. Biological pest controls currently are
subject to a three-tier toxicology testing procedure and a four-tier
environmental testing procedure. A biological pest control product that
satisfactorily completes both the toxicology and environmental Tier I tests is
not required to go through the tests specified in subsequent tiers. Should
questions arise during any tier of testing, additional tests may be required.
The cost of registering biological pest control products is generally
substantially lower than that for chemical pesticides. Most of the Company's
environmentally-sensitive pesticides have only required Tier I testing. Based on
current EPA regulations, management believes that product registrations can be
obtained at a reasonable cost to the Company.
The fertilizer products produced and marketed by the Company are currently
regulated by individual state departments of agriculture. Requirements for
obtaining registrations to sell fertilizers vary from state to state. Every
fertilizer product must be registered and licensed in each state where it is
sold, and a registration or license fee to maintain this registration must be
paid on an annual basis.
The Company's products will also be subject to regulation by agencies of
foreign countries in which the products are tested, sold or used. The Company's
activities may be subject to regulation under various other federal and
international laws, regulations and guidelines, and state and local regulatory
requirements, including approvals prior to shipping the products into a country,
state or locality for either experimental or commercial purposes. The Company
currently maintains product registrations in eleven foreign countries and has
registrations pending in three additional foreign countries. The Company cannot
predict the effect of future legislation and regulation on the Company's
operations.
There can be no assurance that any testing approvals or registrations will
be granted on a timely basis, if at all, or that the Company's resources will be
adequate to meet the costs of regulatory compliance. Any or all of those
approvals may be the subject of disputes that could postpone or prevent
research, development, production and/or marketing of the Company's products.
Some states have laws imposing liability on certain parties for the release
of pesticides and/or fertilizers into the environment in a manner or in
concentrations not permitted by law. Such liability could include, among other
things, responsibility for cleaning up the damage resulting from such a release.
In addition, the Comprehensive Environment Response, Compensation and Liability
Act, commonly known as the federal Superfund law, imposes liability on certain
parties for the release into the environment of hazardous substances, which
might include fertilizers and pesticides under certain circumstances. The
federal Superfund law has been interpreted to impose liability on a producer of
pesticides for cleaning up environmental damage resulting from the release of
its products into the environment during their manufacture. The Company has not
been subject to any claims for responsibility relating to impermissible releases
of pesticides under such federal or state statutes. However, there can be no
assurance that the Company will not be subject to claims under such statutes at
some time in the future.
19
<PAGE> 27
COMPETITION
The Company faces significant competition from numerous manufacturers and
marketers participating in the pesticide and fertilizer industries, several of
which significantly dominate their respective markets and many of which have
substantially greater financial, technical, marketing and other resources than
the Company. The principal competitive factors in the Company's markets are
efficacy, ease of application, price, health and environmental compatibility and
name recognition. The Company's environmentally-sensitive products generally
cost more than those of their conventional chemical counterparts, and therefore
the Company is generally not able to compete on pricing alone.
The consumer pesticide and fertilizer industries are dominated by large
competitors such as The Solaris Group (Ortho), United Industries, Inc.
(Spectracide) and Scotts Miracle Gro. Additional competitors include Lebanon
Chemical Company, Bonide, Inc., Dragon Corporation, Schultz, Consep Corporation
and a variety of other national and regional competitors.
PATENTS AND PROPRIETARY TECHNOLOGIES
The Company seeks to protect its product technologies through a variety of
means including patents, trade secrets, proprietary know-how, technical
innovation and customer education.
The Company owns over 30 patents, which expire at various times during the
years 2006 through 2014, including twenty United States patents. It also
licenses two patents. The Company acknowledges that there can be no assurances
that its owned or licensed patents will provide sufficient protection for its
products or be of commercial benefit for the Company.
EMPLOYEES
The Company has 66 employees, all of whom are full-time and located in the
United States and Canada. None of the employees are covered by collective
bargaining arrangements and the Company has experienced no work stoppages. The
Company believes that its employee relations are good and it does not currently
anticipate difficulties in attracting sufficient numbers of qualified employees.
DESCRIPTION OF PROPERTY
The Company leases approximately 6,000 square feet of corporate office
space located in Bloomington, Minnesota. In addition, the Company leases
approximately 26,000 square feet of warehouse and office space in Eagan,
Minnesota. The Company also leases approximately 50,000 square feet of office,
manufacturing and warehouse space in Torrance, California. The Minnesota
corporate office lease and its warehouse lease expire in September 1999 and
December 2001, respectively. The Torrance facilities lease arrangements are
month-to-month with a minimum notice to cancel period of six months. Safer, Ltd.
leases approximately 13,600 square feet of office and warehouse space in a
suburb of Toronto. That lease expires in fiscal 2000. The Company anticipates
that it will be able to renew such leases or enter into new leases on
substantially similar terms.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
20
<PAGE> 28
MARKET PRICE AND DIVIDEND DATA
The Common Stock is traded on the Nasdaq National Market under the symbol
"RING." The following table sets forth the high and low trading prices per share
of the Common Stock on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter............................... $ 2 1/8 $ 1 3/8
Second Quarter.............................. 2 1/2 1 1/2
Third Quarter............................... 2 3/8 1 3/8
Fourth Quarter.............................. 1 21/32 1 1/4
1996
First Quarter............................... $ 2 1/8 $ 1 3/8
Second Quarter.............................. 2 1 5/8
Third Quarter............................... 2 3/4 1 3/8
Fourth Quarter.............................. 2 3/8 1 3/8
1997
First Quarter............................... $ 2 1/8 $ 1 1/4
Second Quarter.............................. 1 11/16 1 1/32
Third Quarter............................... 1 3/4 1
</TABLE>
On October 6, 1997, the last full day of trading prior to the announcement
by the Company that it had entered into an agreement with SRI relating to the
Merger, such reported high and low trading prices per share of the Common Stock
were $2 1/16 and $1 15/16, respectively. On October 24, 1997, the last full day
of trading prior to the printing of this Proxy Statement, the reported high and
low trading prices per share of the Common Stock were $1 7/8 and $1 3/4,
respectively.
The Company has never paid a cash dividend on its Common Stock and does not
anticipate paying any such dividend in the foreseeable future. The Company's
financing source, GE Capital Services, restricts payment of dividends by the
Company.
21
<PAGE> 29
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
STOCK OWNERSHIP
The following table sets forth, as of September 30, 1997, certain
information with respect to beneficial ownership of the Company's Common Stock
by (i) each person or entity known by the Company to own beneficially more than
5% of the Company's Common Stock; (ii) each director of the Company; (iii) each
executive officer of the Company who earned salary and bonus in excess of
$100,000 during the fiscal year ended September 30, 1996; and (iv) all executive
officers and directors as a group. For purposes of this table, beneficial
ownership of securities is defined in accordance with the rules of the United
States Securities and Exchange Commission and means generally the power to vote
or dispose of securities, regardless of any economic interest therein. For the
purpose of determining "Percent of Outstanding Shares," (i) the number of shares
of Common Stock outstanding at September 30, 1997 was and (ii) stock options
exercisable within 60 days from September 30, 1997 are assumed to be exercised
by the individual or entity with respect to whom the percentage is calculated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- -------------------- ----------------
<S> <C> <C>
Dexol Industries, Inc................................... 1,059,340 8.7%
1450 W. 228th Street
Torrance, CA 90501
Parsnip River Company................................... 905,388 7.4%
4422 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Gordon F. Stofer and.................................... 679,561 5.6%
Cherry Tree Ventures III (2)
1400 Northland Plaza
3800 West 80th Street
Minneapolis, MN 55431
Alphi Investment Management Co.......................... 667,100 5.5%
155 Pfingsten Road, Suite 360
Deerfield, IL 60015
Stanley Goldberg(1)..................................... 317,705 2.6%
Robert W. Fischer(1).................................... 112,001 *
Patrick J. McGinnity, Ph.D.(1).......................... 61,651 *
Michael R. Goblet(1).................................... 52,212 *
Frederick F. Yanni, Jr.(1).............................. 38,500 *
Donald E. Lovness(1).................................... 35,550 *
John F. Hetterick(1).................................... 35,000 *
Franklin Pass, M.D.(1).................................. 25,000 *
Officers and directors as a group (11 persons)(1)....... 1,475,894 11.7%
</TABLE>
- -------------------------
* Less than 1%.
(1) Includes for Stanley Goldberg, options to purchase 143,690 shares of Common
Stock which are exercisable within 60 days; for Robert W. Fischer, options
to purchase 25,000 shares of Common Stock which are exercisable within 60
days; for Donald E. Lovness, options to purchase 25,000 shares of Common
Stock which are exercisable within 60 days; for Franklin Pass, M.D., options
to purchase 25,000 shares of Common Stock which are exercisable within 60
days; for Frederick F. Yanni, Jr., options to purchase 35,000 shares of
Common Stock which are exercisable within 60 days; for John F. Hetterick,
options to purchase 35,000 shares of Common Stock which are exercisable
within 60 days; for Michael R. Goblet, options to purchase 44,082 shares of
Common Stock which are exercisable in 60 days; for Patrick J. McGinnity,
Ph.D., options to purchase 61,651 shares of Common Stock which are
exercisable within 60 days; and for all officers and directors as a group,
options to purchase 482,057 shares of Common Stock which are exercisable
within 60 days.
(2) Includes 648,163 shares held by Cherry Tree Ventures III, of which Mr.
Stofer, a director of the Company, is a general partner. Mr. Stofer
disclaims beneficial ownership of shares held by Cherry Tree Ventures III.
Also includes options to purchase 20,000 shares of Common Stock which are
exercisable within 60 days.
22
<PAGE> 30
COMPANY MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial amounts discussed below in this management discussion and
analysis and presented in the summary financial data included therein have been
extracted from the Company's unaudited condensed consolidated financial
statements for the nine months ended June 30, 1997 and 1996 included elsewhere
in this Proxy Statement and the Company's audited consolidated financial
statements for fiscal years ended September 30, 1996, 1995 and 1994 also
included elsewhere in this Proxy Statement.
SUMMARY FINANCIAL DATA
RINGER CORPORATION
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
1997 1996
---- ----
<S> <C> <C>
Condensed Statement of Operations Information:
Net sales................................................. $15,677,890 $13,254,257
Gross profit.............................................. 7,459,910 6,436,792
Operating expenses:
Distribution.............................................. 1,701,937 1,317,184
Sales and marketing....................................... 3,231,743 2,705,452
General and administration................................ 1,200,759 1,008,840
Research and development.................................. 772,168 589,279
Amortization of intangibles............................... 328,962 301,752
----------- -----------
Total operating expenses............................... 7,235,569 5,922,507
----------- -----------
Income before other income.................................. 224,341 514,285
Other income (expense), net................................. (34,119) 45,038
----------- -----------
Income before income taxes.................................. 190,222 559,323
Income taxes................................................ -- --
----------- -----------
Net income.................................................. $ 190,222 $ 559,323
=========== ===========
Condensed Balance Sheet Information:
Current Assets:
Cash and cash equivalents................................. $ 1,614,248
Accounts receivable....................................... 4,353,565
Inventories............................................... 3,530,162
Prepaid assets............................................ 245,391
-----------
Total current assets................................... 9,743,366
Property and equipment (net)................................ 415,396
Intangible assets (net)..................................... 6,892,376
-----------
Total assets........................................... $17,051,138
===========
Current liabilities......................................... $ 3,828,482
Long-Term Debt.............................................. 1,451,400
Shareholders' equity........................................ 11,771,256
-----------
Total liabilities and shareholders' equity............. $17,051,138
===========
</TABLE>
23
<PAGE> 31
ACQUISITION OF DEXOL
In March 1997, the Company completed the acquisition of substantially all
of the assets of Dexol Industries, Inc., ("Dexol") a California based
manufacturer and marketer of home and garden pesticides sold under the Dexol(R)
and various private label brand names, for an aggregate purchase price of
approximately $3,012,790 (the "Dexol acquisition"). The purchase price was
comprised of the issuance of 1,059,340 shares of the Company's restricted common
stock valued at $1,397,005, the issuance of a promissory note to Dexol
Industries, Inc. with a principal amount of $1,477,000 bearing simple interest
at an annual rate of prime plus 3/4% and estimated transaction costs of
$138,785, plus a performance based earnout of up to $455,000 worth of Ringer
Corporation restricted common stock if certain contingencies are achieved.
The Dexol acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair market values at
the date of acquisition. The excess of purchase price over estimated fair market
value of net assets acquired ("goodwill") of approximately $1,685,000 is being
amortized on a straight-line basis over twenty years. Since the acquisition, the
Company has operated the acquired business as its Dexol division and has
marketed Dexol(R) branded products. Dexol division operations are included in
the Company's consolidated statements of operations from the effective date of
the acquisition of March 1, 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
Net Sales. Net sales for the nine months ended June 30, 1997 increased
18.3% to $15,677,890 compared to $13,254,257 for the same period ended June 30,
1996. The increase is due primarily to the Dexol acquisition (see Acquisition of
Dexol above.) The sales increase resulting from the Dexol acquisition was
partially offset by lost sales resulting from the bankruptcy of Ernst Home
Centers, lower foreign sales in Canada and Europe and decreased fertilizer sales
resulting from discontinuance of the Company's Supreme Lawn(R) fertilizer line,
offset in part by increased sales through new distribution channels, such as
Lowe's Companies.
Gross Margins. Gross margins for the nine months ended June 30, 1997
decreased to 47.6% compared to 48.6% for the same period ended June 30, 1996.
The decrease in gross margin as a percent of sales is due primarily to lower
margins on Dexol products offset in part by lower charges for inventory
obsolescence during the nine months of fiscal 1997 compared to the same period
of fiscal 1996.
Operating Expenses. Operating expenses for the nine months ended June 30,
1997 increased $1,313,062 or 22.2% to $7,235,569 from $5,922,507 for the same
period ended June 30, 1996. The components of operating expenses are discussed
below.
Distribution expenses for the nine months ended June 30, 1997 increased
$384,753 or 29.2% in absolute dollars to $1,701,937 compared to $1,317,184 for
the same period in fiscal 1996 and increased as a percentage of sales to 10.9%
in fiscal 1997 from 9.9% for the same period in fiscal 1996. The increase in
distribution expenses was primarily due to higher freight caused by increased
sales resulting from the newly-acquired Dexol business and to the addition of
the Dexol warehouse and distribution organization.
Sales and marketing expense for the nine months ended June 30, 1997
increased $526,291 or 19.5% in absolute dollars to $3,231,743 compared to
$2,705,452 for the same period in fiscal 1996. The increases for these periods
were due primarily to the addition of the Dexol sales and marketing
organizations and to expenses associated with Dexol's fiscal 1997 sales and
marketing programs.
General and administrative expenses for the nine months ended June 30, 1997
increased $191,919 or 19.0% to $1,200,759 compared to $1,008,840 for the same
period in fiscal 1996. The increase in general and administrative expenses was
primarily due to the addition of the Dexol administrative and accounting
organizations.
Research and development expenses increased $182,889 or 31.0% to $772,168
for the nine month period ended June 30, 1997 from $589,279 for the same period
in fiscal 1996. The increase for these periods was
24
<PAGE> 32
primarily due to the addition of the Dexol regulatory compliance organization
and increased spending on certain product development programs.
Other Income (Expense), Net. For the nine months ended June 30, 1997, the
Company incurred net other expense of $34,119 compared to a net other income of
$45,038 for the same period in fiscal 1996. The change in net other income
(expense) for these periods was largely the result of increased interest expense
in fiscal 1997 due to the issuance of a promissory note in connection with the
Dexol acquisition (see Acquisition of Dexol above).
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and cash needs are highly seasonal. During the
first quarter of each year, the Company solicits early orders and plans
production, typically building its inventory of products through January of each
year for shipment during the spring selling season. Most of the shipments for
the peak retail season, and therefore most of the billings that result in
revenue recognition and in receivables, occur in February through May of each
year. Accordingly, the Company typically consumes significant cash in operating
activities during the first and second quarters of each year as it finances
increases in inventory, primarily during the first quarter, and increases in
receivables, primarily during the second and early third quarters.
Consistent with such seasonal fluctuations, cash decreased by $1,674,533
during the nine months ended June 30, 1997. The decrease in cash reflects the
following: cash of $1,692,208 consumed primarily to finance the seasonal buildup
of receivables and to pay accruals and accounts payable, cash of $102,564
consumed to purchase equipment and intangible assets, $124,073 in cash received
in connection with the acquisition of the assets of Dexol for the issuance of
the Company's common stock and a promissory note; and payments on long term debt
relating to the Dexol promissory note of $6,400.
The Company relies on bank financing to fund seasonal increases in
receivables and inventory. On May 2, 1997, the Company secured a new three-year
$25,000,000 credit facility with GE Capital Services, replacing a previous
lender's $5,000,000 line of credit. The new facility is intended to finance the
Company's seasonal working capital needs and to provide financing for future
acquisitions. There were no outstanding borrowings as of June 30, 1997.
The Company believes that cash on hand and the new credit facility will
provide adequate financing to meet the Company's cash needs through at least the
next full year.
The Company believes that inflation has not had a significant impact on the
results of its operations.
NEW ACCOUNTING STANDARDS
In February 1997, SFAS No. 128, "Earnings per Share" was issued which is
required to be adopted for the quarter ending December 31, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options,
stock warrants and convertible securities will be excluded. The calculation of
diluted earnings per share will remain similar to the current method. The impact
of SFAS No. 128 on the calculation of primary and fully diluted earnings per
share is not expected to be material.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued which is required to be adopted for the
fiscal year beginning October 1, 1998. At that time, the Company will be
required to disclose certain financial and descriptive information about its
operating segments as redefined by SFAS No. 131. The Company has not yet
completed its analysis of which operating segments it will be required to report
on.
25
<PAGE> 33
SUMMARY FINANCIAL DATA
RINGER CORPORATION
FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Condensed Statement of Operations Information:
Net sales................................................... $14,672,784 $14,193,898
Gross profit................................................ 7,025,491 7,203,723
Operating expenses:
Distribution and warehousing.............................. 1,555,897 1,886,770
Sales and marketing....................................... 3,332,333 4,810,648
General and administrative................................ 1,331,266 1,445,110
Research and development.................................. 748,932 981,495
Amortization of intangibles............................... 402,778 379,358
----------- -----------
7,371,206 9,503,381
----------- -----------
Loss before other income (expense)..................... (345,715) (2,299,658)
Other income (expense), net................................. (222,404) 126,554
----------- -----------
Net loss.................................................... $ (568,119) $(2,173,104)
=========== ===========
Balance sheet information:
Current assets:
Cash and cash equivalents................................. $ 3,288,781
Trade accounts and notes receivable....................... 992,198
Inventories............................................... 1,519,692
Prepaid expenses.......................................... 133,746
-----------
Total current assets................................... 5,934,417
Property and equipment, net................................. 238,297
Intangible assets, net...................................... 5,297,329
-----------
$11,470,043
===========
Current liabilities......................................... 1,531,145
Shareholders' Equity........................................ 9,938,898
-----------
$11,470,043
===========
</TABLE>
26
<PAGE> 34
ACQUISITION ACTIVITIES
On May 30, 1996, the Company entered into a letter of intent to acquire all
outstanding stock of The Chas. H. Lilly Company ("Lilly"), a regional provider
of lawn and garden fertilizers, pesticides and packet seeds headquartered in
Portland, Oregon. On December 12, 1996, the Company announced that it elected to
discontinue efforts to acquire Lilly. Accordingly, the costs associated with
this acquisition attempt, which amounted to $312,771, have been charged to
expense in the accompanying fiscal 1996 Consolidated Statement of Operations.
Management believes that additional product offerings are essential to the
future growth and profitability of the Company. The Company is actively seeking
additional new product opportunities through a number of internal and external
means including the possibility of licensing arrangements with other companies
and further acquisitions. It should be noted, however, that the successful
culmination of these efforts or the profitable introduction of new products
cannot be assured.
SEASONAL FACTORS AFFECTING OPERATIONS
The Company's business is very seasonal which causes operations to vary
dramatically from quarter to quarter. This can be significantly influenced by
variations in the Company's early season marketing programs and by retail
inventory carryover from year to year. Activities during the first quarter of
each fiscal year are focused heavily toward order solicitation, production
planning and inventory building and shipments to distributors under early order
programs. Inventory balances increase substantially during this period. Normal
seasonal buildup of raw material inventory begins in August and September. Heavy
finished goods production usually begins in October and continues into the
second quarter. Typically, the Company experiences the highest inventory
balances near the end of January and its lowest balances near the end of June.
Sales during the first quarter largely occur in December under early order
marketing programs offered to distributors. These programs normally offer
extended seasonal payment terms common to the industry. Operating costs during
the first quarter, especially sales and marketing expenses, are often higher as
a percentage of sales than in other quarters. This is due to seasonal sales
patterns and increased marketing and promotional expenditures which are incurred
in preparation for the spring retail selling season. As a result of normal
seasonal sales and expenditures patterns during this period, the Company
anticipates that it will frequently incur an operating loss during the first
quarter of each fiscal year. The Company's early season marketing programs which
encouraged distributors to take delivery of inventory in December by offering
substantially higher early season sales discounts can have a significant effect
on the timing quarterly sales.
The second and third fiscal quarters are historically the Company's peak
selling season which usually accounts for over 70% of yearly sales. Most of
these sales occur during February through April. Second quarter sales largely
consist of shipments of spring season early orders as mass merchandisers place
initial stocking orders. Billings for these early order shipments during this
period are normally given extended payment terms common to the industry. This
contributes to a rapid increase in trade receivables during the second quarter
which is substantially reduced during the third quarter when extended-term
billings come due. The majority of third quarter sales are the result of spring
and early summer restocking orders.
Fourth quarter sales are primarily attributed to orders of pesticides sold
into the southern markets and to orders of fall fertilizer and composting
products sold under fall promotional programs. Fall promotion programs generally
include extended payment terms common to the industry, though amounts involved
are much smaller than those experienced earlier in the year. The fourth quarter
also reflects certain marketing expenses incurred in preparation for the
upcoming fiscal year's spring selling season. Also, during this period, analysis
of current year peak season performance is completed and any changes in product,
sales and marketing strategies are implemented. Due to this yearly pattern,
fourth quarter operations may be charged from time to time with material
expenses associated with the implementation of these changes. As a result of
these issues, fourth quarter operations may also show a loss, the existence and
size of which will vary depending on the nature and timing of sales and expenses
discussed above.
27
<PAGE> 35
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995.
Net Sales. Net sales for the fiscal year ended September 30, 1996 increased
by $478,886, or 3.4%, to $14,672,784 from $14,193,898 for the previous fiscal
year ended September 30, 1995. The sales increase for fiscal 1996 was primarily
due to increased sales of Safer(R) brand pesticide products which were partially
offset by lower sales of fertilizer products. Increased pesticide sales was
partially due to increased retail distribution and to new product sales.
Decreased fertilizer sales were largely due to lower second year sales of
Ringer(R) Supreme Lawn Fertilizers(TM). The Company decided to discontinue
Supreme Lawn Fertilizers(TM) for the fiscal 1997 season and to introduce a new
fertilizer under the Safer(R) brand name in an effort to compete more
effectively in the broader consumer lawn fertilizer market.
Gross Margin. Gross margins as a percent of sales decreased to 47.9% in
fiscal 1996 compared to 50.8% in fiscal 1995. The decline in gross margin as a
percent of sales was caused primarily by a continuing change in product mix to a
higher proportion of newer products and new promotional combination packs which
carry lower average gross margins.
The Company is dependent on certain raw material ingredients which are
traded in agricultural and industrial commodity markets, such as feather, bone
and blood meal. Price fluctuations for such commodities are common to the market
and can adversely affect prices paid for these ingredients and, consequently,
the Company's gross margins. Aggregate price changes on such items did not
materially affect gross margins in fiscal 1996.
Operating Expenses. Distribution and warehousing expenses decreased
$330,873, or 17.5%, to $1,555,897 in fiscal 1996 compared to $1,886,770 in
fiscal 1995 and decreased as a percentage of sales in fiscal 1996 to 10.6%
compared to 13.3% in fiscal 1995. The decrease as a percentage of sales in
fiscal 1996 compared to fiscal 1995 was primarily due to lower freight and
outside distribution costs resulting from consolidation of distribution
processes and reduced freight rates. Sales and marketing expenses decreased
$1,478,315, or 30.7%, to $3,332,333 in fiscal 1996 compared to $4,810,648 in
fiscal 1995 and decreased as a percentage of sales to 22.7% in fiscal 1996 from
33.9% in fiscal 1995. The decrease in sales expenses was due largely to lower
compensation, benefits and travel expenses due to staffing reductions, offset in
part by increased commissions incurred from expanded utilization of manufacturer
representative organizations and to lower advertising expenses. In addition,
sales and marketing expenses were favorably impacted by the reversal in fiscal
1996 of approximately $198,000 in estimated co-operative advertising expenses,
which were accrued in fiscal 1995, resulting from a change in estimate based on
actual utilization of co-op advertising allowances. General and administrative
expenses decreased $113,844, or 7.9%, to $1,331,266 in fiscal 1996 compared to
$1,445,110 in fiscal 1995 and decreased as a percentage of sales to 9.1% in
fiscal 1996 from 10.2% in fiscal 1995. The decrease was due largely to reduced
facility rental costs resulting from the sublease of approximately half of the
Company's former office facility. Research and development expenses decreased
$232,563, or 23.7% to $748,932 in fiscal 1996 from $981,495 in fiscal 1995. The
decrease was largely due to lower product registration costs resulting from
discontinued registrations on certain products no longer being sold.
Amortization of intangible assets increased to $402,778 in fiscal 1996 compared
to $379,358 in fiscal 1995. The increase was due primarily to multi-year foreign
product registrations obtained in fiscal 1996 which are being amortized over the
life of the registrations.
Other income and expense. Other income and expense includes a fourth
quarter charge of $312,771 for expenses associated with an election not to
proceed with a previously announced acquisition. (See "Acquisition Activities"
above.) Interest income decreased $9,164, or 11.0%, to $73,866 in fiscal 1996
compared to $83,030 in fiscal 1995. The decrease in interest income was largely
due to declining interest rates on investments. Interest expense increased to
$68,250 in fiscal 1996 from $66,690 in fiscal 1995. The increase in interest
expense was due primarily to increased average borrowings in fiscal 1996
compared to fiscal 1995. Net royalty income decreased to $87,136 in fiscal 1996
from $106,352 in fiscal 1995. The decrease in net royalty income was primarily
caused by additional royalty expenses incurred by the Company in fiscal 1996 in
connection with licensed technology used in the Company's water soluble
fertilizer line. There was no license
28
<PAGE> 36
fee income in fiscal 1996 and fiscal 1995 compared to one-time license fee
income of $1,500,000 recognized in fiscal 1994.
INCOME TAXES
Income tax benefits of net deferred tax assets have been offset by
valuation allowances for the years ended September 30, 1996 and 1995 because it
is more likely than not that the tax benefits could not be carried back or
realized in future periods.
At September 30, 1996, the Company has approximately $23.2 million in
combined U.S. net operating loss carryforwards for federal income tax purposes.
These loss carryforwards expire between 1997 and 2011. Of the total,
approximately $3.6 million are U.S. net operating loss carryforwards of Safer,
Inc., the Company's wholly owned subsidiary. The use of the unexpired net
operating loss carryforwards of Ringer which were generated prior to September
1990, totaling approximately $10.9 million, are restricted to $2,025,000 in any
one year under Internal Revenue Code Section 382 because of a significant
ownership change resulting from the Company's initial public offering. The use
of net operating loss carryforwards of Ringer generated after the ownership
change are not restricted. The use of the net operating losses of Safer, Inc.
are limited to approximately $700,000 in any one year under Internal Revenue
Code Section 382 because of a significant ownership change resulting from the
Company's acquisition of Safer, Inc. in January 1991. At September 30, 1996, the
Company has approximately $986,000 of net operating loss carryforwards in Canada
which expire between 1997 and 1999.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1994
Net Sales. Net sales declined by $432,656, or 3.0%, to $14,193,898 in
fiscal 1995 compared to $14,626,554 in fiscal 1994. This overall decrease is the
combined result of decreases in fertilizer and composting product sales which
were partially offset by an increase in pesticide product sales. The increase in
pesticide product sales was due primarily to increased sales of new or recently
introduced products including Safer(R) Superfast(R) Brand Weed and Grass Killer
and the Company's new aerosol pesticide product line. The decrease in fertilizer
and composting product sales was partly caused by higher retail inventory
carryover from the prior year.
Gross Margin. Gross margins as a percent of sales decreased to 50.8% in
fiscal 1995 compared to 52.6% in fiscal 1994. The decline in gross margin as a
percent of sales was caused primarily by a change in product mix to a higher
proportion of newer products and new promotional combination packs which carry a
lower average gross margin and to increased raw material and packaging costs
which the Company could not pass on to customers due to competitive pressures.
Operating Expenses. In fiscal 1995, principally in the fourth quarter, the
Company took a number of cost control measures including personnel reductions
and other operating expense reductions.
Distribution and warehousing expenses declined slightly to $1,886,770 in
fiscal 1995 compared to $1,890,117 in fiscal 1994, but increased as a percentage
of sales in fiscal 1995 to 13.3% compared to 12.9% in fiscal 1994. The increase
as a percentage of sales in fiscal 1995 compared to fiscal 1994 was due
primarily to a reduction in the average shipment size, which carries higher
freight rates per pound shipped, and to the spread of fixed warehousing expenses
over a lower sales base. Sales and marketing expenses increased $192,436 to
$4,810,648 in fiscal 1995 compared to $4,618,212 in fiscal 1994 and increased as
a percentage of sales to 33.9% compared to 31.6% for the same prior year
periods. The increase in sales expenses was due largely to increased
expenditures for package design services and merchandising materials. General
and administrative expenses decreased 7% to $1,445,110 in fiscal 1995 compared
to $1,558,998 in fiscal 1994. The decrease was due primarily to lower
compensation expenses resulting from staff reductions and lower depreciation
expense resulting from a substantial increase in the amount of fully depreciated
equipment and furnishings. Research and development expenses decreased 19% to
$981,495 in fiscal 1995 compared to $1,212,263 in fiscal 1994. The decrease was
primarily due to lower compensation expenses resulting from staff reductions and
to reduced administrative overhead. Amortization of intangible assets increased
to $379,358 in fiscal 1995 compared to
29
<PAGE> 37
$367,926 in fiscal 1994. The increase was due to the amortization of goodwill
recorded as a result of the acquisition of the Oxygen Plus(R) product line in
December 1994.
Other income and expense. Interest income decreased $12,008, or 13%, to
$83,030 in fiscal 1995 compared to $95,038 in fiscal 1993. The decrease in
interest income resulted from lower average excess cash balances available for
investment in fiscal 1995. Interest expense increased $32,057 to $66,690 in
fiscal 1995 compared to $34,633 in fiscal 1994. The increase in interest expense
was caused by higher average borrowings on the Company's seasonal line of credit
and on higher average interest rates on borrowings. Net royalty income decreased
to $106,352 in fiscal 1995 from $147,788 in fiscal 1994. The decrease in net
royalty income was primarily caused by the addition of royalty expenses in
fiscal 1995 which was paid by the Company in connection with the license of
technology used in the Company's newly acquired water soluble fertilizer line.
There was no license fee income in fiscal 1995 compared to one-time license fee
income of $1,500,000 recognized in fiscal 1994.
QUARTERLY PERFORMANCE
The following table sets forth a summary of quarterly results for the past
two fiscal years in order to show the highly seasonal pattern of the Company's
business and quarterly fluctuations in sales and earnings or losses. This
information is derived from unaudited financial statements which contain all
adjustments, consisting of normal recurring accruals, which the Company believes
are necessary for a fair presentation.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
THREE MONTHS ENDED THREE MONTHS ENDED
---------------------------------------- ----------------------------------------
DEC 31 MAR 31 JUNE 30 SEPT 30 DEC 31 MAR 31 JUNE 30 SEPT 30
------ ------ ------- ------- ------ ------ ------- -------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 3,636 $ 5,613 $4,005 $1,419 $ 3,180 $ 5,584 $3,915 $ 1,515
Gross profit.......................... 1,850 2,878 1,709 588 1,724 2,925 1,933 622
Operating expenses.................... 1,921 2,383 1,619 1,448 2,225 2,910 2,487 1,882
Income (loss) before other income
(expense)........................... (71) 495 90 (860) (501) 15 (554) (1,260)
Other income (expense)................ 19 12 14 (267) 83 16 (11) 39
Net income (loss)..................... $ (52) $ 507 $ 104 $(1,127) $ (418) $ 31 $ (565) (1,221)
Income (loss) per share............... $ (.00) $ .05 $ .01 $ (.10) $ (.04) $ .00 $ (.05) $ (.11)
Average common and common equivalent
shares outstanding.................. 10,922 10,923 10,931 10,922 10,827 10,928 10,922 10,922
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company's cash and working capital needs have been
provided through public and private equity offerings as well as seasonal bank
lines of credit.
Each year the Company experiences an early season build up of accounts
receivable which it normally funds with cash on hand and a revolving bank line
of credit. Accounts receivable increase dramatically during the second and third
quarter of each year which is the Company's peak selling season. Most of the
Company's sales occur during this period and frequently are made with seasonal
extended payment terms offered to customers under early season order programs
common to the industry. Usually accounts receivable are highest, and bank line
borrowings the greatest, around the middle to end of the third quarter of each
fiscal year. In 1996, the Company's maximum borrowings were $3,405,417 from its
bank line of credit compared to maximum borrowings of $3,123,902 in fiscal 1995.
There were no line of credit borrowings outstanding at September 30, 1996.
Normal seasonal build-up of raw material inventory begins in the fourth
quarter of each year in preparation for production required to meet demand
during the peak shipping season in February through April. Inventory purchases
have been funded with cash from operations.
In fiscal 1996, cash and cash equivalents increased $532,404 to $3,288,781
at September 30, 1996. The increase resulted primarily from cash provided by
operating activities of $699,044, partially offset by cash used in investing
activities of $158,506. The $699,044 provided by operating activities was
primarily the result of
30
<PAGE> 38
decreased inventory and receivables of $502,224 and $205,861, respectively, and
increased accrued expenses of $249,746, which was partially offset by cash used
to fund the net operating loss of $568,119, less net non-cash expenses of
$511,896, and a reduction in accounts payable of $194,464. Cash used in
investing activities was primarily used to purchase property and equipment of
$60,861 and to invest in patent and trademark applications and other intangible
assets of $118,674, partially offset by proceeds from the sale of fixed assets
of $20,849.
In fiscal 1995, cash and cash equivalents decreased $2,091,246 to
$2,756,377 at September 30, 1995. The decline resulted primarily from cash used
in operating activities of $1,640,482, cash used in investing activities of
$440,526 and cash used in financing activities of $2,063. The $1,640,482 used in
operating activities was used primarily to fund the net loss of $2,173,104 and
increases in inventory of $748,040, which was partially offset by decreases in
accounts receivable and prepaid expenses of $313,494 and $90,174, respectively,
and increases in accounts payable of $331,887. Cash used in investing activities
was primarily used to acquire substantially all the assets of Plant Research
Laboratories (see Item 1. Business, "Plant Research Laboratories"), to purchase
property and equipment of $101,536 and to invest in patent and trademark
applications and other intangible assets of $106,288. Cash used in financing
activities resulted from final payments on capital lease obligations of $3,667
partially offset by cash of $1,604 received from the exercise of employee
incentive stock options.
On May 2, 1997, the Company secured a three-year $25 million credit
facility from GE Capital Services. The credit facility is intended to be used to
finance the Company's seasonal working capital needs (of approximately $3 to $5
million) and to provide financing for future acquisitions. The $25,000,000
credit facility replaced a $5,000,000 bank line of credit from a previous
lender. There are no commitments for capital expenditures in fiscal 1997. The
Company's bank line of credit agreement limits the Company to capital asset
purchases of not more than $300,000 per year during the term of the credit
agreement.
The Company's line of credit contains certain provisions which require the
Company to maintain certain minimum financial ratios based on net worth. In
addition, there are prohibitions on payment of dividends and restrictions on the
amount of fixed assets that may be purchased during a loan year.
EFFECTS OF INFLATION
The Company believes that, during the periods discussed above, inflation
has not had a material impact on the Company's business.
31
<PAGE> 39
BUSINESS OF SRI
GENERAL
SRI is a privately held Fort Valley, Georgia-based corporation which,
through its wholly owned subsidiary, SureCo, manufactures and markets
traditional liquid and granular pesticides. Its products are sold under a
variety of proprietary and private label brand names to commercial and consumer
markets throughout North America. Commercial pesticides are sold principally
under the All Pro(R) brand to specialty agricultural, turf and ornamental and
professional pest control distributors. Consumer products are sold into the
consumer retail market principally under the Rigo/Black Leaf(R) brand as well as
under various private label store-brands. SureCo also manufactures pesticidal
products under contract packaging arrangements for other pesticide marketers.
RIGO ACQUISITION
In April 1996, SRI acquired substantially all of the assets of the
Rigo/Black Leaf consumer pesticide division of Wilbur-Ellis Company. The
purchase price of approximately $4,177,000 consisted of the payment of
$2,000,000 in cash and the issuance of a $2,177,000 promissory note to
Wilbur-Ellis Company. The remaining unpaid balance on the promissory note, which
is scheduled to be $1,000,000 in April 30, 1998, is expected to be fully paid at
that time.
BANK LINE OF CREDIT
SRI finances working capital needs of its business with an $8 million line
of credit from Fremont Financial Corporation. The credit facility is scheduled
to mature in April 1998 but renews automatically for another year thereafter
unless canceled earlier by either party with proper notice.
SALES AND MARKETING
SRI's products are marketed primarily through commercial and retail
distribution channels using both a direct sales force as well as manufacturer's
representatives. Commercial products are sold primarily to distributors of
specialty agricultural and professional applicator products and represented
approximately 40% of fiscal 1997 sales. Retail sales, representing approximately
36% of 1997 sales, are distributed principally to hardware cooperatives, home
centers, mass merchants and specialty lawn and garden stores. In addition to
manufacturing pesticides for its commercial and consumer products, SRI
manufactures pesticides on a contract basis for other pesticide marketers which
represented approximately 24% of sales. Total sales in fiscal 1997 were
approximately $25 million.
DISTRIBUTION AND TRANSPORTATION
SRI relies primarily on common carrier transportation, leased warehouse
facilities and public warehouse services to distribute its products nationally.
COMPANY PRODUCT AREAS AND TECHNOLOGIES
Products produced by SRI include liquids as well as dry granular and
dust-based pesticides. SRI's traditional pesticides utilize technologies
commonly available to pesticide formulators, such as Dursban(R) brand
chlorpyrifos, Sevin(R) brand carbaryl, diazinon and malathion insect killers,
plus a variety of weed and/or grass killers, fungicides and rodenticides.
MANUFACTURING
SRI's products are substantially all manufactured at its 100,000 square
foot manufacturing/warehousing facility located in Fort Valley, Georgia, which
has capacity to store over one million pounds of bulk storage and in excess of
100,000 gallons of liquid tank storage.
32
<PAGE> 40
GOVERNMENT REGULATION AND PRODUCT REGISTRATION
Government regulation in the United States and other countries is a
significant factor in the research, development, production and marketing of
pesticides and, to a lesser extent, fertilizers. To develop and sell a pesticide
product, federal and state product registration must be obtained for each pest
and plant for which the product is used. In the United States, pesticides are
regulated by the EPA under the Federal Insecticide, Fungicide and Rodenticide
Act, as amended ("FIFRA"), which requires extensive efficacy, toxicology and
environmental testing to substantiate product performance and safety prior to
registration. In addition, many states have additional registration requirements
that go beyond FIFRA.
Under FIFRA, field efficacy testing may be conducted on a small scale in
certain instances. To conduct large-scale field tests, a company must obtain an
experimental use permit, which generally requires satisfactory completion of
certain toxicology and environmental studies. Initial EPA registration for a new
pesticide may therefore be a lengthy and expensive process.
SRI's activities are subject to regulation under various other federal and
international laws, regulations and guidelines, and state and local regulatory
requirements, including approvals prior to shipping the products into a country,
state of locality for either experimental or commercial purposes. SRI currently
maintains product registrations in all 50 states. Pesticides are highly
regulated and SRI cannot predict the effect of future legislation and regulation
on its operations.
Some states have laws imposing liability on certain parties for the release
of pesticides into the environment in a manner or in concentrations not
permitted by law. Such liability could include, among other things,
responsibility for cleaning up the damage resulting from such a release. In
addition, the Comprehensive Environment Response, Compensation and Liability
Act, commonly known as the federal Superfund law, imposes liability on certain
parties for the release into the environment of hazardous substances, which
might include fertilizers and pesticides under certain circumstances. The
federal Superfund law has been interpreted to impose liability on a producer of
pesticides for cleaning up environmental damage resulting from the release of
its products into the environment during their manufacture.
COMPETITION
SRI faces significant competition from numerous manufacturers and marketers
in the pesticide industry, several of which significantly dominate their
respective markets and many of which have substantially greater financial,
technical, marketing and other resources than SRI. The principal competitive
factors in SRI's markets are name recognition, price, efficacy, ease of
application and health and environmental compatibility.
The consumer pesticide industry is dominated by large competitors such as
The Solaris Group (Ortho) and United Industries, Inc. (Spectracide). Additional
competitors include Ringer Corporation (Dexol), Bonide, Inc., Dragon Corporation
and a variety of other national and regional competitors. The commercial
pesticide industry also has significant competitive pressure, including
competitors basic in technology such as Dow Elanco, Agrevo and Novartis as well
as formulators such as Prentiss Drug and Chemical and Microflo. In addition,
companies basic in manufacturing such as HPI Products, Inc., The Andersons and
Aerofil Industries compete with SRI for toll and contract packaging
manufacturing.
PATENTS AND PROPRIETARY TECHNOLOGIES
SRI does not own patents or proprietary technologies. Accordingly, SRI
seeks to protect its product positioning through its trademarks, its formal and
informal customer relationships and its product registrations. SRI has product
registrations in all 50 states and maintains over 450 registrations. SRI
acknowledges that there can be no assurances that its product positioning will
provide sufficient competitive protection for its products and services.
EMPLOYEES
SRI has approximately 75 full time employees. During seasonal production
peaks SRI will normally employ an additional 25 to 50 people. None of the
employees are covered by collective bargaining
33
<PAGE> 41
arrangements and SRI has experienced no work stoppages. SRI believes that its
employee relations are good and it does not currently anticipate difficulties in
attracting sufficient numbers of qualified employees.
DESCRIPTION OF PROPERTY
SRI owns a 100,000 square foot manufacturing, warehousing and office
facility in Fort Valley, Georgia, which is located in central Georgia
approximately 100 miles south of Atlanta. Access to major transportation
systems, including interstate highways and railways, is excellent.
The real property on which the Fort Valley facility is located has been
listed on the National Priorities List by the EPA. When the site was acquired in
1984, the predecessor owner acknowledged that the site had been impaired by
environmental contaminants. The predecessor owner agreed to remediate the site
and indemnify SRI from third party claims. Since the site acquisition, the
predecessor owner has performed a significant amount of environmental
remediation and has submitted a plan to the EPA for the remaining phases of
cleanup. (See "THE MERGER AGREEMENT -- Consideration To Be Received by SRI
Shareholders; Holdback Amounts.")
LEGAL PROCEEDINGS
SRI is a party to a governmental action and to six legal proceedings in
Superior Court of Fulton County, Georgia, brought by or on behalf of property
owners in the area of SRI's Fort Valley, Georgia, manufacturing site, relating
to contamination discovered on or near the site. Management of SRI believes that
the contamination arose prior to the purchase of the plant site by SRI from an
unaffiliated predecessor owner. The former owner has been cooperating with
governmental authorities and has initiated remedial activities on the site. SRI
management believes that the governmental and legal actions relating to the
property should not result in loss to SRI. (See "Description of Property" above
and "THE MERGER AGREEMENT -- Consideration To Be Received by SRI Shareholders;
Holdback Amounts.")
There is a pending products liability claim against SureCo, which SRI
management believes will not have a material adverse effect on the business of
SureCo.
34
<PAGE> 42
SRI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial amounts discussed below in the management discussion and analysis
and presented in the selected consolidated financial data tables therein have
been extracted from SRI's unaudited condensed consolidated financial statements
for the nine months ended June 27, 1997 and June 28, 1996 included elsewhere in
this Proxy Statement and from SRI's audited consolidated financial statements
for fiscal years ended September 27, 1996 and September 29, 1995 also included
elsewhere in this Proxy Statement.
SUMMARY FINANCIAL DATA
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED JUNE 27, 1997 AND JUNE 28, 1996
($000'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------
JUNE 27, JUNE 28,
1997 1996
-------- --------
<S> <C> <C>
Condensed Statements of Operations Information:
Net sales................................................... $19,647 $15,691
Gross profit................................................ 4,072 2,750
Selling, general and administrative expenses................ 3,021 1,636
------- -------
Income from operations.................................... 1,051 1,114
Other expense, net.......................................... (678) (433)
------- -------
Income before taxes....................................... 373 681
Provision for income taxes.................................. 77 234
------- -------
Net income.................................................. $ 296 $ 447
======= =======
Balance sheet data:
Current assets:
Cash...................................................... $ 8
Trade accounts and notes receivable....................... 5,601
Inventories............................................... 5,743
Prepaid expenses and other current assets................. 525
-------
Total current assets................................... 11,877
Property and equipment, net................................. 1,979
Other assets, net........................................... 563
-------
$14,419
=======
Current liabilities......................................... 12,519
Long-term debt.............................................. 1,436
Deferred income taxes....................................... 48
Shareholders' Equity........................................ 416
-------
$14,419
=======
</TABLE>
35
<PAGE> 43
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 27, 1997 AND JUNE 28, 1996
Net Sales. Net sales for the nine months ended June 27, 1997 increased by
$3,956,000, or 25%, to $19,647,000 from $15,691,000 for the same period ended
June 28, 1996. The increase was due primarily to additional sales provided as a
result of the Rigo/Black Leaf acquisition in April 1996.
Gross Margin. Gross margins as a percent of sales increased to 21% for the
nine months ended June 30, 1997 compared to 17% for the same period ended June
28, 1996. The increase in gross margin as a percent of sales was the result of
the addition of the Rigo/Black Leaf product lines in April 1996 which contribute
higher average margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,385,000, or 85%, to $3,021,000 for the nine
months ended June 27, 1997 compared to $1,636,000 for the same period ended June
28, 1996. The increase was primarily due to compensation and overhead expenses
associated with the addition of the sales and administrative employees hired in
connection with the acquisition of the Rigo/Black Leaf business.
Other expense. Other expense, consisting almost entirely of interest
expense, increased $245,000 to $678,000 for the nine months ended June 27, 1997
compared to $433,000 for the same period ended June 28, 1996. The increase was
due to additional interest expense associated with the debt incurred to
partially finance the Rigo/Black Leaf acquisition.
LIQUIDITY AND CAPITAL RESOURCES
SRI's operating and cash needs are highly seasonal. Inventories and
receivables increase dramatically during the second and early third quarters.
Most of SRI's cash flow from collection of receivables occurs during the third
quarters of each year. SRI relies on a revolving line of credit to fund its cash
and working capital needs during the seasonal business fluctuations.
During 1996 SRI secured a $7,000,000 working capital facility with a
commercial finance corporation which replaced SRI's previous $2,500,000 line
discussed in the liquidity and capital resources section of Management's
Discussion and Analysis for the years ended September 27, 1996 and September 29,
1995 and provided funding in the amount of $2,000,000 used to acquire Rigo/Black
Leaf assets. Advances under the lines are limited to 80% of eligible trade
accounts receivable and 60% of eligible inventories, with advances related to
inventories limited to $2,600,000. Borrowings under the line bear interest at
the commercial financial corporation's reference rate plus 2.25% (an effective
interest rate of 10.5% at June 27, 1997), and are secured by accounts
receivable, inventories, and certain intangible assets including product
registrations and trademarks and are guaranteed by the shareholders of SRI. The
line of credit is scheduled to mature in April 1998 but renews automatically for
another year thereafter unless canceled earlier by either party with proper
notice. Since the line of credit agreement is renewable until April 1999,
outstanding borrowings under the lines of $5,763,000 are classified as a
non-current liability at June 27, 1997.
The line of credit includes covenants which limit management compensation
increases, loans to shareholders or employees and annual capital expenditures.
SRI was in compliance with the covenants for the nine months ended June 27,
1997.
For the nine months ended June 27, 1997, cash increased slightly to $8,000
at June 27, 1997 from $3,000 at June 28, 1996. The change in cash reflects cash
used in operating activities of $1,259,000, cash used in investing activities of
$153,000 and cash provided by financing activities of $1,299,000. The $1,259,000
in cash used in operating activities was primarily used to fund seasonal
increases in accounts receivable and inventory. The $153,000 used in investing
activities was used for the purchase of property and equipment and the purchase
of intangible assets. The $1,299,000 cash provided from financing activities was
the result of borrowings of $1,846,000 against SRI's revolving line of credit
and increases in borrowings from a shareholder,
36
<PAGE> 44
offset in part by payments of $906,000 on the SRI's long-term debt associated
with the Rigo/Black Leaf acquisition.
EFFECTS OF INFLATION
SRI believes that, during the periods discussed above, inflation has not
had a material impact on the SRI's business.
37
<PAGE> 45
SUMMARY FINANCIAL DATA
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
FISCAL YEARS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------
SEPTEMBER 27, SEPTEMBER 29,
1996 1995
------------- -------------
<S> <C> <C>
Condensed Statements of Operations Information:
Net sales................................................... $20,791,647 $18,444,474
Gross profit................................................ 3,693,916 2,328,427
Selling, general and administrative expenses................ 2,612,536 1,666,023
----------- -----------
Income from operations.................................... 1,081,380 662,404
Other expense, net.......................................... (679,628) (510,898)
----------- -----------
Income before taxes and extraordinary item................ 401,752 151,506
Provision for income taxes.................................. 137,911 35,618
----------- -----------
Income before extraordinary item.......................... 263,841 115,888
Extraordinary item.......................................... -- (13,000)
----------- -----------
Net income.................................................. $ 263,841 $ 102,888
=========== ===========
Balance sheet information:
Current assets:
Cash and cash equivalents................................. $ 119,820
Trade accounts and notes receivable....................... 3,327,662
Inventories............................................... 5,059,878
Prepaid expenses and other current assets................. 513,257
-----------
Total current assets................................... 9,020,617
Property and equipment, net................................. 2,117,203
Other assets, net........................................... 679,551
-----------
$11,817,371
===========
Current liabilities......................................... $ 5,390,050
Long-term debt.............................................. 6,141,295
Deferred income taxes....................................... 165,748
Stockholders' Equity........................................ 120,278
-----------
$11,817,371
===========
</TABLE>
38
<PAGE> 46
ACQUISITION ACTIVITIES
In April 1996, SRI acquired the inventories, certain equipment and product
registrations of the Rigo/Black Leaf consumer lawn and garden pesticide division
of Wilbur-Ellis Company for a total purchase price of $4,177,072. The purchase
price was allocated as follows: $3,827,013 to inventory, $119,092 to equipment
and $230,967 to prepaid product registration costs, based upon book values
(which approximated fair market values) at the acquisition date. The total
purchase price for the assets consisted of a cash payment of $2,000,000 and
SRI's note payable to the seller for $2,177,072. Included in the assets
purchased were inventories (products, labels and packaging) used in connection
with the seller's seed treatment products. The seller must repurchase, at SRI's
cost, all such unused inventories at the earlier of the satisfaction of SRI's
note payable to the seller, which is due April 30, 1998, or April 1999. The
acquisition expanded SRI's business into the retail consumer lawn and garden
pesticide markets in order to complement its traditional commercial pesticide
business and its contract packaging manufacturing business, as well as to better
utilize SRI's manufacturing capacity.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
Net Sales. Net sales for the fiscal year ended September 27, 1996 increased
by $2,347,143, or 12.7%, to $20,791,647 from $18,444,474 for the previous fiscal
year ended September 29, 1995. The increase was due primarily to additional
sales provided as a result of the Rigo/Black Leaf acquisition in April 1996.
Gross Margin. Gross margins as a percent of sales increased to 17.8% in
fiscal 1996 compared to 12.6% in fiscal 1995. The increase in gross margin as a
percent of sales was the result of the addition of the Rigo/Black Leaf product
lines in fiscal 1996 which contribute higher average margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $946,513, or 56.8%, to $2,612,536 for the
fiscal year ended September 27, 1996 compared to $1,666,023 for the fiscal year
ended September 29, 1995. The increase was primarily due to compensation and
overhead expenses associated with the addition of the sales and administrative
employees hired in connection with the acquisition of the Rigo/Black Leaf
business.
Other income and expense. Other income and expense, consisting almost
entirely of interest expense, increased $168,730 to $679,628 for the fiscal year
ended September 27, 1996 compared to $510,898 for the fiscal year ended
September 29, 1995. The increase was due to additional interest expense
associated with the debt incurred to partially finance the Rigo/Black Leaf
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
SRI's business is very seasonal with most of the sales activity occurring
in the second and third quarters. Inventory and receivables increase
dramatically during this period with cash collections on receivable coming
during the third quarter. SRI relies on a revolving line of credit to fund its
cash and seasonal working capital needs. Seasonal increases in inventory and
receivables are primarily funded through the line of credit.
During 1995 SRI had a lines of credit with a commercial financial
corporation totaling $2,500,000. Advances under the lines were limited to 85% of
eligible trade accounts receivable and 40% of eligible inventories, with
advances related to inventories limited to $500,000. Interest on borrowings
under the line was at prime plus 2.25%, and the borrowings were secured by
accounts receivable and inventories and guaranteed by the shareholders of SRI.
Outstanding borrowings under the line were $2,324,859 at September 29, 1995.
Subsequent to September 29, 1995, the line of credit was extended until October
2, 1996. Accordingly, outstanding borrowings under the line of credit are
classified as a non-current liability in the accompanying consolidated balance
sheet at September 29, 1995.
During 1996 SRI arranged a new $7,000,000 working capital facility with
another commercial finance corporation which replaced its $2,500,000 line
discussed above and provided funding in the amount of $2,000,000 used to acquire
Rigo/Black Leaf assets. Advances under the lines are limited to 80% of eligible
39
<PAGE> 47
trade accounts receivable and 60% of eligible inventories, with advances related
to inventories limited to $2,600,000. Borrowings under the line bear interest at
the commercial financial corporation's reference rate plus 2.25% (an effective
interest rate of 10.5% at September 27, 1996), and are secured by accounts
receivable, inventories, and certain intangible assets including product
registrations and trademarks and are guaranteed by the shareholders of SRI.
Since the line of credit agreement is not subject to review until May 1998,
outstanding borrowings under the line of $3,917,464 are classified as a
non-current liability at September 27, 1996.
The line of credit includes covenants which limit management compensation
increases, loans to shareholders or employees and annual capital expenditures
and has restrictions on the payment of dividends. SRI was in compliance with the
covenants for the year ended September 27, 1996. In fiscal 1996, cash increased
$80,512 to $119,820 at September 27, 1996. The increase resulted primarily from
cash provided by financing activities of $3,172,928 which was largely offset by
cash used in operating activities of $2,521,828 and cash used in investing
activities of $570,588. The $3,172,928 cash provided from financing activities
was the result of proceeds of $2,177,072 from the issuance of long-term debt
associated with the Rigo/Black Leaf acquisition, net borrowings of $1,592,605
against SRI's revolving line of credit and proceeds of $56,854 from a note
payable to a stockholder, which was offset in part by payments on the long-term
acquisition debt of $653,603. The $2,521,828 in cash used in operating
activities was primarily the result of an increases in inventory of $2,995,294.
The $570,588 used in investing activities was the result of $230,549 in
purchases of property and equipment and $340,039 in purchases of other assets.
In fiscal 1995, cash decreased $99,011 to $39,038 at September 29, 1995.
The decline resulted primarily from cash used in operating activities of
$1,018,699 and cash used in investing activities of $112,967, offset in part by
cash provided by financing activities of $1,032,655. The $1,018,699 used in
operating activities was used primarily to fund increases in accounts receivable
of $1,970,225. Cash used in investing activities of $112,967 was primarily used
to acquire property and equipment. Cash provided by financing activities of
$1,032,655 resulted primarily from borrowings on SRI's line of credit.
EFFECTS OF INFLATION
SRI believes that, during the periods discussed above, inflation has not
had a material impact on SRI's business.
40
<PAGE> 48
INDEPENDENT AUDITORS
The consolidated financial statements of the Company at September 30, 1996
and 1995 and for each of the three years in the period ended September 30, 1996,
included in this Proxy Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of SRI as of September 27, 1996, 1995 and
September 29, 1995 and for each of the two years in the period ended September
27, 1996 included in this Proxy Statement have been audited by Smith & Howard,
P.C., independent auditors, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as experts in auditing and accounting.
SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company intended to be presented at the
next annual meeting of shareholders would have to have been received by the
Company for inclusion in the Company's proxy statement and form of proxy
relating to the meeting no later than September 20, 1997.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission the "(Commission." Such reports, proxy statements and other
information can be inspected and copies made at the public reference facilities
of the Commission at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549 and
the Commission's regional offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Section of Commission at its Washington, D.C. address at
prescribed rates. The Commission also maintains a Web site address,
http://www.sec.gov. The Company's Common Stock is listed and traded on the
Nasdaq National Market, and such reports, proxy statements and other information
may be inspected at the offices of Nasdaq Operations, 1735 K Street, NW,
Washington, D.C. 20006.
41
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RINGER CORPORATION
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-2
Consolidated Balance Sheets as of September 30, 1996
and 1995.............................................. F-3
Consolidated Statements of Operations for the Years
Ended September 30, 1996, 1995 and 1994............... F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended September 30, 1996, 1995
and 1994.............................................. F-5
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996, 1995 and 1994............... F-6
Notes to Consolidated Financial Statements............. F-7
UNAUDITED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as of
June 30, 1997......................................... F-15
Unaudited Condensed Consolidated Statements of
Operations for the Nine Months Ended June 30, 1997 and
1996.................................................. F-16
Unaudited Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended June 30, 1997 and
1996.................................................. F-17
Notes to Unaudited Condensed Consolidated Financial
Statements............................................ F-18
SOUTHERN RESOURCES, INC.
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-22
Consolidated Balance Sheets as of September 27, 1996
and September 29, 1995................................ F-23
Consolidated Statement of Income and Retained Earnings
for the Years Ended September 27, 1996 and September
29, 1995.............................................. F-24
Consolidated Statement of Cash Flows for the Years
Ended September 27, 1996 and September 29, 1995....... F-25
Notes to Financial Statements.......................... F-26
UNAUDITED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of
June 27, 1997......................................... F-33
Unaudited Condensed Consolidated Statements of
Operations for the Nine Months Ended June 27, 1997 and
June 28, 1996......................................... F-34
Unaudited Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended June 27, 1997 and June
28, 1996.............................................. F-35
Notes to Unaudited Condensed Consolidated Financial
Statements............................................ F-36
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
RINGER CORPORATION
BLOOMINGTON, MINNESOTA
We have audited the accompanying consolidated balance sheets of Ringer
Corporation and subsidiary as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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
Ringer Corporation and subsidiary as of September 30, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 3, 1996 (December 12, 1996 as to Note 13)
F-2
<PAGE> 51
RINGER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,288,781 $ 2,756,377
Trade accounts and notes receivable, less allowance for
doubtful accounts of $126,000 and $208,000,
respectively........................................... 992,198 1,200,352
Inventories (Note 2)...................................... 1,519,692 2,026,981
Prepaid expenses.......................................... 133,746 132,607
------------ ------------
Total current assets................................. 5,934,417 6,116,317
Property and Equipment, net (Note 3)........................ 238,297 299,374
Intangible Assets, at cost, less accumulated amortization of
$2,264,349 and $1,762,019, respectively (Note 1).......... 5,297,329 5,582,957
------------ ------------
$ 11,470,043 $ 11,998,648
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 651,546 $ 847,733
Accrued expenses:
Co-op advertising...................................... 319,691 302,925
Other accrued expenses................................. 559,908 327,684
------------ ------------
Total current liabilities............................ 1,531,145 1,478,342
Commitments and Contingencies (Note 5)
Stockholders' Equity (Note 6):
Preferred stock, undesignated, par value $.01 per share,
authorized 5,000,000 shares, no shares issued and
outstanding Common stock, par value $.01 per share,
authorized 25,000,000 shares, issued and outstanding
10,921,930 shares...................................... 109,219 109,219
Additional paid-in capital................................ 32,036,675 32,036,675
Accumulated deficit....................................... (22,067,276) (21,499,157)
Cumulative translation adjustment......................... (139,720) (126,431)
------------ ------------
9,938,898 10,520,306
------------ ------------
$ 11,470,043 $ 11,998,648
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 52
RINGER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales............................................. $14,672,784 $14,193,898 $14,626,554
Cost of Goods Sold.................................... 7,647,293 6,990,175 6,933,995
----------- ----------- -----------
Gross Profit........................................ 7,025,491 7,203,723 7,692,559
Operating Expenses:
Distribution and warehousing........................ 1,555,897 1,886,770 1,890,117
Sales and marketing................................. 3,332,333 4,810,648 4,618,212
General and administrative.......................... 1,331,266 1,445,110 1,558,998
Research and development............................ 748,932 981,495 1,212,263
Amortization of intangibles......................... 402,778 379,358 367,926
----------- ----------- -----------
7,371,206 9,503,381 9,647,516
----------- ----------- -----------
Loss before other income (expense)............... (345,715) (2,299,658) (1,954,957)
Other Income (Expense):
Interest income..................................... 73,866 83,030 95,038
Interest expense.................................... (68,250) (66,690) (34,633)
Royalties, net (Note 5)............................. 87,136 106,352 147,788
License fee income (Note 10)........................ 1,500,000
Other income (expense), net......................... (2,385) 3,862 4,299
Abandoned acquisition expenses (Note 13)............ (312,771)
----------- ----------- -----------
(222,404) 126,554 1,712,492
----------- ----------- -----------
Net Loss.............................................. $ (568,119) $(2,173,104) $ (242,465)
=========== =========== ===========
Net Loss Per Weighted Average Common Share............ $ (.05) $ (.20) $ (.02)
=========== =========== ===========
Weighted Average Common Shares Outstanding............ 10,921,930 10,897,704 10,769,957
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 53
RINGER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL CUMULATIVE
NUMBER PAID-IN ACCUMULATED TRANSLATION
OF SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
--------- ------ ---------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1993..................... 10,716,112.. $107,161 $31,693,650 $(19,083,588) $(122,517) $12,594,706
Issuance of common stock
upon exercise of stock
options............... 64,901 649 130,330 130,979
Issuance of common stock
as non-cash
compensation to
officer (Note 11)..... 5,000 50 11,825 11,875
Foreign currency
translation
adjustments........... (9,102) (9,102)
Net loss................. (242,465) (242,465)
---------- -------- ----------- ------------ --------- -----------
Balance at September 30,
1994..................... 10,786,013 107,860 31,835,805 (19,326,053) (131,619) 12,485,993
Issuance of common stock
in connection with the
purchase of Oxygen
Plus.................. 125,000 1,250 186,250 187,500
Issuance of common stock
upon exercise of stock
options............... 917 9 1,595 1,604
Issuance of common stock
as non-cash
compensation to
officer (Note 11)..... 10,000 100 13,025 13,125
Foreign currency
translation
adjustments........... 5,188 5,188
Net loss................. (2,173,104) (2,173,104)
---------- -------- ----------- ------------ --------- -----------
Balance at September 30,
1995..................... 10,921,930 109,219 32,036,675 (21,499,157) (126,431) 10,520,306
Foreign currency
translation
adjustments.............. (13,289) (13,289)
Net loss................. (568,119) (568,119)
---------- -------- ----------- ------------ --------- -----------
Balance at September 30,
1996..................... 10,921,930.. $109,219 $32,036,675 $(22,067,276) $(139,720) $ 9,938,898
========== ======== =========== ============ ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 54
RINGER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 11)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................ $ (568,119) $(2,173,104) $ (242,465)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 514,940 519,928 652,813
Write-off of intangible assets................... 1,312 42,564 15,216
Stock issued as compensation for services........ 13,125 11,875
Income from investment in joint venture.......... (4,356) (9,198)
Gain on sale of property and equipment........... (11,449) (5,786) (7,150)
(Increase) decrease in assets:
Trade accounts receivable...................... 205,861 313,494 (174,867)
Inventories.................................... 502,224 (748,040) 490,123
Prepaid expenses............................... 3,349 90,174 114,945
Increase (decrease) in liabilities:
Accounts payable............................... (194,464) 331,887 (336,325)
Accrued expenses............................... 249,746 (24,724) (928,067)
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................ 699,044 (1,640,482) (413,100)
Cash Flows from Investing Activities:
Purchase of property and equipment.................. (60,681) (101,536) (102,302)
Purchase of intangible assets....................... (118,674) (106,288) (198,388)
Proceeds from sale of property and equipment........ 20,849 24,958 8,590
Net cash paid relating to acquisition of Oxygen
Plus............................................. (257,660)
----------- ----------- -----------
Net cash used in investing activities....... (158,506) (440,526) (292,100)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock.............. 1,604 130,979
Principal payments on capital lease obligations..... (3,667) (13,016)
----------- ----------- -----------
Net cash (used in) provided by financing
activities................................ 0 (2,063) 117,963
Effect of exchange rate changes on cash............... (8,134) (8,175) 13,335
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents...... 532,404 (2,091,246) (573,902)
Cash and Cash Equivalents:
Beginning of Year................................... 2,756,377 4,847,623 5,421,525
----------- ----------- -----------
End of Year......................................... $ 3,288,781 $ 2,756,377 $ 4,847,623
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 55
RINGER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- The Company develops and markets a broad line of
environmentally-oriented turf, lawn and garden treatments to consumer and
specialty professional markets. The Company's product lines include
microbially-driven fertilizers and biological and botanical pest controls which
are offered as products of choice over traditional chemical fertilizers and
pesticides. The Company also offers a line of composting products.
Principles of consolidation -- The consolidated financial statements
include the accounts of Ringer Corporation and Safer, Inc., its wholly owned
subsidiary. All material intercompany accounts and transactions have been
eliminated.
Revenue recognition -- The Company recognizes revenue on the date of
shipment for sales other than "bill and hold" sales. Revenue on infrequent "bill
and hold" sales is recognized at the time that title and risk of ownership
passes to purchaser.
Translation of foreign financial statements -- The Company's foreign
operations are translated from functional foreign currency to U.S. dollars.
Assets and liabilities are translated at year end rates of exchange and the
statements of operations are translated at the average rates of exchange for the
applicable reporting years. Gains and losses resulting from translating foreign
currency financial statements are not included in operations but are accumulated
as a separate component of stockholders' equity.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and equipment -- Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets of three to ten years.
Acquisition of the assets of Plant Research Laboratories -- On December 1,
1994, the Company issued 125,000 shares of its common stock with a fair market
value of $187,500 at December 1, 1994 and paid cash of $257,660 to acquire
substantially all of the assets of Plant Research Laboratories ("PRL"), a
California based developer and marketer of water soluble fertilizers for the
indoor houseplant and outdoor lawn and garden markets. The acquisition was
accounted for using the purchase method using a combination of cash and the
issuance of common stock. The products, marketed under the Oxygen Plus(R) brand
name, have been previously sold by PRL primarily in the western United States.
The historical annual sales of Oxygen Plus were less than one million dollars.
The pro forma impact on net loss and net loss per share is immaterial.
Intangible assets and evaluation of potential impairment -- Intangible
assets consist primarily of goodwill which represents the purchase price and
related acquisition costs in excess of the fair value of identifiable assets
acquired. Other intangible assets include patents and trademarks. Intangible
assets are amortized on a straight-line basis over estimated lives of five to
twenty years. The Company regularly evaluates its intangible assets for
potential permanent impairment. Such evaluations take into consideration
anticipated future operating results and cash flows on an undiscounted basis.
Anticipated future operating results and cash flows are estimated based on
current product sales trends, expected sales from related products in
development, general market trends and other market and business circumstances.
If an impairment loss exists, the amount of the loss would be based on the
difference between the carrying value of the assets and the discounted future
cash flows expected to be generated from the asset.
Concentration of credit risks -- The percentage of consolidated net sales
in fiscal 1996 to U.S. retail and commercial markets totaled 79.3% and 4.4%,
respectively. The percentage of consolidated net sales in fiscal 1995 to U.S.
retail and commercial markets totaled 81.0% and 5.1%, respectively. The
remaining percentage of consolidated net sales in fiscal 1996 and 1995 of 16.3%
and 13.9%, respectively, represent foreign sales, primarily in Canada. In fiscal
1996 and 1995, sales to one U.S. retail customer accounted for 15.3% and 14.5%,
respectively, of consolidated net sales while sales during the same periods to
one distributor that resells to retailers accounted for 14.8% and 12.4%,
respectively, of consolidated net sales.
F-7
<PAGE> 56
Cash and cash equivalents -- Cash and cash equivalents include cash on hand
and in banks and money market funds with maturities of three months or less when
acquired.
Fair value of financial instruments -- The Financial Accounting Standards
Board has issued two Financial Accounting Standards ("FAS") related to
disclosures about the fair value of financial instruments. FAS 107 and 119 are
effective for the fiscal year ended September 30, 1996. The estimated fair
values of financial instruments approximate their carrying amounts in the
consolidated balance sheets.
Income taxes -- The Company accounts for income taxes as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The Statement requires recognition of deferred assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statements and the tax basis of assets and liabilities using enacted tax rates
in effect for the years in which the differences are expected to reverse.
Loss per share -- Loss per common share is computed using the weighted
average number of shares outstanding during each period. Common stock
equivalents, consisting of options and warrants, have been excluded from the
computation because their effect is antidilutive.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Change in estimates -- Fiscal 1996 includes the reversal of approximately
$198,000 in estimated co-op advertising expenses, which were accrued in fiscal
1995, resulting from a change in estimate based on actual utilization of co-op
advertising allowances. Fiscal 1994 includes a reversal of approximately
$195,000 in estimated co-op advertising expenses which were accrued in fiscal
1993 and a reversal of approximately $100,000 in estimated legal and contingency
expenses accrued in prior years.
2. INVENTORIES
Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials......................................... $ 726,099 $1,172,967
Finished goods........................................ 793,593 854,014
---------- ----------
$1,519,692 $2,026,981
========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Office furniture and equipment...................... $ 791,464 $ 1,042,375
Machinery and equipment............................. 786,442 903,667
Leasehold improvements.............................. 8,091 89,223
Transportation equipment............................ 6,400 24,560
----------- -----------
1,592,397 2,059,825
Less accumulated depreciation....................... (1,354,100) (1,760,451)
----------- -----------
$ 238,297 $ 299,374
=========== ===========
</TABLE>
F-8
<PAGE> 57
4. LINE OF CREDIT
The Company has a revolving bank line of credit agreement that expires
October 31, 1997. Under the agreement, as amended, available borrowings under
this line are secured by substantially all of the assets of the Company and its
subsidiary and are limited to the lesser of $5,000,000 or a borrowing base of
70% of eligible receivables, as defined in the credit agreement. Interest is at
prime plus 1 3/4% (10.0% at September 30, 1996). The Company is required to pay
a commitment fee of 1/2% on any unused portion of the line in addition to credit
management fees of $3,000 per month over the term of the agreement. Management
believes that this line of credit will meet the Company's seasonal working
capital requirements for fiscal 1997. There are no outstanding borrowings under
the line of credit as of September 30, 1996.
The Company's line of credit contains certain provisions which require the
Company to maintain certain minimum financial ratios based on net worth. In
addition, there are prohibitions on payment of dividends and restrictions on the
amount of fixed assets that may be purchased during a loan year.
5. COMMITMENTS AND CONTINGENCIES
Leases -- The Company leases office and warehouse space and various
vehicles and equipment under noncancelable operating leases. In addition to
minimum lease payments, these leases require the Company to pay its
proportionate share of real estate taxes, special assessments and maintenance
costs. The lease on the Company's corporate offices expires in September 1999.
The lease on the Company's warehouse facility expires in December 2001. The
Company is also required to carry liability insurance on the premises.
Costs incurred under operating leases are recorded as rent expense and
totaled $220,176, $290,343 and $313,381 for the years ended September 30, 1996,
1995 and 1994, respectively.
The future minimum lease payments due under operating at September 30, 1996
leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending September 30:
1997...................................................... $151,024
1998...................................................... 160,536
1999...................................................... 159,206
2000...................................................... 116,359
2001...................................................... 116,240
Thereafter.................................................. 29,060
--------
Total minimum obligation.................................... $732,425
========
</TABLE>
Royalty agreements -- The Company has paid royalties for the use of
technologies licensed under two agreements entered into in connection with the
acquisition of a water soluble fertilizer product line on December 1, 1994. The
licenses calls for royalty payments of from 2% to 5% of the net selling price of
applicable water soluble fertilizers. Payments under the agreements terminate in
1999 and 2011. Royalty expense incurred under these agreements totaled $18,197
and $23,786 for the years ended September 30, 1996 and 1995, respectively.
Royalty income of $105,333, $130,138 and $147,788 for the fiscal years
ended September 30, 1996, 1995 and 1994, respectively, was generated by the
Company through licensing pesticide technologies to certain foreign and
commercial pesticide distributors for a royalty fee.
CONTINGENCIES
The Company has a Contingency Retention Plan which provides for payment to
certain key employees of the Company, including all of the officers, of a lump
sum termination benefit plus continuation of life insurance, health insurance
and dental benefits for a period of time in the event the employment of such
employees is terminated within two years after a "change of control," as
defined. The amount of the lump sum
F-9
<PAGE> 58
termination benefit varies from the equivalent of three months to two years of
salary and bonus at the time of termination. The period during which health and
welfare benefits continue after termination varies from three months to two
years, but is terminated if the employee obtains other employment with similar
benefits. The Contingency Retention Plan continues in effect unless terminated,
prior to a change in control, by a resolution approved by at least two-thirds of
the Board of Directors.
6. SHAREHOLDERS' EQUITY
Preferred stock -- The Board of Directors of the Company is authorized to
issue preferred stock or other senior equity securities in one or more series,
and with certain limitations, to determine preferences as to dividends,
liquidation, conversion and redemption.
Stock warrants -- As of September 30, 1996, a total of 1,000 shares of
common stock were reserved for currently exercisable outstanding warrants
described below.
<TABLE>
<CAPTION>
EXPIRATION WARRANT SHARES EXERCISE PRICE
---------- -------------- --------------
<S> <C> <C>
September 20, 1998................................. 1,000 $2.00
</TABLE>
1986 Employee Incentive Stock Option Plan -- The 1986 Employee Incentive
Stock Option Plan terminated according to its terms on September 17, 1996. After
this date no further stock options may be granted under the Plan although
previously granted options remain outstanding and exercisable under the terms of
each option. At termination of the Plan, the Company had reserved a total of
833,068 shares of common stock for issuance upon the exercise of outstanding
options previously granted under the Plan.
Under the terms of the 1986 Employee Incentive Stock Option plan, options
to purchase shares of the Company's common stock were granted at a price not
less than 100% of the fair market value of the stock at the date of grant.
Options have a vesting period of from three to five years and expire ten years
from the date of grant. Options become fully vested upon the occurrence of a
change in control, as defined. Activity under the plan is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE PRICE
OPTION SHARES PER SHARE
------------- --------------
<S> <C> <C>
Balance, September 30, 1993 (at $1.88 to $2.70 per share)... 445,855 $2.28
Granted................................................... 139,650 2.34
Canceled.................................................. (32,160) 2.41
Exercised................................................. (64,901) 2.02
--------
Balance, September 30, 1994 (at $1.75 to $3.25 per share)... 488,444 2.32
Granted................................................... 512,050 1.98
Canceled.................................................. (132,247) 2.34
Exercised................................................. (917) 1.75
--------
Balance, September 30, 1995 (at $1.75 to $2.70 per share)... 867,330 2.13
Granted................................................... 28,500 1.58
Canceled.................................................. (62,762) 1.98
--------
Balance, September 30, 1996 (at $1.50 to $2.70 per share)... 833,068 $2.11
========
Exercisable, September 30, 1996............................. 465,875 $2.20
========
</TABLE>
Stock Option Plan for Non-Employee Directors -- The Company has reserved
200,000 shares of the Company's common stock for issuance upon the exercise of
stock options granted under the Stock Option Plan for Non-Employee Directors.
Under provisions of the Plan, non-employee directors are granted, upon
election or appointment as a director of the Company, options for the purchase
of 10,000 shares of the Company's common stock. In addition, non-employee
directors receive, on the first day of each fiscal year while the director
remains in office, options to purchase 5,000 shares of the Company's common
stock. The exercise price of options granted
F-10
<PAGE> 59
under the Plan is 100% of the fair market value of the Company's common stock on
the date of grant. Options are immediately exercisable in full and may be
exercised within five years of the date of grant. Activity under the plan is as
follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
OPTION PRICE
SHARES PER SHARE
------ ---------
<S> <C> <C>
Balance, September 30, 1993.............................. 20,000 $1.81
Granted.................................................. 35,000 2.13
-------
Balance, September 30, 1994.............................. 55,000 2.01
Granted.................................................. 30,000 2.13
-------
Balance, September 30, 1995.............................. 85,000 2.05
Granted.................................................. 30,000 2.13
-------
Balance, September 30, 1996.............................. 115,000 $2.07
=======
</TABLE>
Recent Accounting Pronouncement -- The Financial Accounting Standards Board
has issued Statement of Financial Accounting Standards ("SFAS") No. 123, "
Accounting for Stock-Based Compensation." This Statement requires adoption of
the disclosure provisions no later than fiscal years beginning after December
15, 1995. The new standard defines a fair value method of accounting for stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to the
financial statements the pro forma net income and net income per common and
common equivalent share as if the Company had applied the new method of
accounting.
The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of adoption. The
Company has not yet determined if it will elect to change to the fair value
method, nor has it determined the effect the new standard will have on net
income and income per common and common equivalent share, should it elect to
make such a change. Adoption of the new standard, if elected, will have no
effect on cash flow.
7. PROFIT SHARING PLAN
The Company has a defined contribution plan which conforms to IRS
provisions for 401(k) plans. Employees are eligible to participate in the plan
providing they have attained the age of twenty-one and have completed thirty
days of service. Participants may contribute up to 10% of their earnings. The
Company can also make matching contributions, as determined by the Board of
Directors. The Company may also make discretionary profit sharing contributions
to the Plan as determined by the Board of Directors. The Company made employer
401(k) matching contributions of $37,607, none and $41,927 for the years ended
September 30, 1996, 1995 and 1994, respectively. There were no employer
discretionary profit sharing contributions for the years ended September 30,
1996, 1995 and 1994.
8. INCOME TAXES
The Company accounts for income taxes as required by Statement of Financial
Standards No. 109, "Accounting for Income Taxes". The Statement requires
recognition of deferred assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statements and the tax
basis of assets and liabilities using enacted tax rates in effect for the years
in which the differences are expected to reverse. Net deferred tax assets have
been offset by valuation allowances
F-11
<PAGE> 60
for the years ended September 30, 1996, 1995 and 1994 because it is more likely
than not that the tax benefits could not be carried back or realized in future
years.
Net deferred tax assets at September 30 are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
Prepaid expenses.......................................... $ (9,000) $ (16,000)
Accrued expenses.......................................... 185,000 128,000
Reserves for doubtful accounts............................ 50,000 82,000
Inventory valuation reserves.............................. 55,000 124,000
Expenses capitalized to inventory for tax purposes........ 274,000 329,000
Sales returns and allowance reserves...................... 69,000 69,000
Less valuation allowance.................................. (624,000) (716,000)
----------- -----------
$ -0- $ -0-
=========== ===========
Noncurrent:
Excess of tax over book depreciation...................... $ (11,000) $ (26,000)
Packaging design costs.................................... 152,000
U.S. net operating loss carryforwards..................... 8,398,000 8,623,000
Foreign net operating loss carryforwards.................. 394,000 298,000
U.S. and foreign tax credit carryforwards................. 704,000 706,000
Less valuation allowances................................. (9,637,000) (9,601,000)
----------- -----------
$ -0- $ -0-
=========== ===========
</TABLE>
At September 30, 1996, the Company has approximately $23,200,000 in
combined U.S. net operating loss carryforwards for federal income tax purposes.
These loss carryforwards expire between 1997 and 2011. Of the total,
approximately $3,600,000 are U.S. net operating loss carryforwards of Safer,
Inc., the Company's wholly owned subsidiary.
The use of the unexpired net operating loss carryforwards of Ringer which
were generated prior to September 30, 1990, totaling approximately $10,900,000
as of September 30, 1996, are limited to $2,025,000 in any one year under
Internal Revenue Code Section 382 because of a significant ownership change
resulting from the Company's initial public offering. The use of net operating
loss carryforwards of Ringer generated after the ownership change are not
limited.
The use of the net operating losses of Safer, Inc. are limited to
approximately $700,000 in any one year under Internal Revenue Code Section 382
because of a significant ownership change resulting from the Company's
acquisition of Safer, Inc. in January 1991.
At September 30, 1996, the Company has approximately $986,000 net operating
loss carryforwards in Canada which expire between 1997 and 2002.
10. LICENSE FEE INCOME
During the fiscal year ended September 30, 1994, the Company recognized
$1,500,000 in one-time license fee income as a result of entering into a license
agreement with a major chemical company. The Company does not expect to receive
any further payments as a result of entering into this license agreement.
F-12
<PAGE> 61
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid and received cash for the following items:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest paid................................... $68,106 $66,690 $34,633
Interest received............................... 69,908 82,064 92,582
</TABLE>
Investing and financing transactions not affecting cash during the years
ended September 30, 1996, 1995 and 1994 are described below:
- In 1995, the Company issued 125,000 shares of its common stock as a
portion of the total consideration paid for the acquisition of
substantially all of the assets of Plant Research Laboratories. In
connection with this issuance of common stock, the Company recorded
$187,500 to common stock and additional paid-in capital, which
represented the fair market value of the common stock on the date of
issuance. Additional acquisition costs included $257,660 in cash
consideration and direct acquisition expenses.
- In 1995, the Company issued 10,000 shares of restricted common stock to
an officer in lieu of cash compensation and recorded a $13,125 increase
to compensation expense and to common stock and additional paid-in
capital which was the fair market value of the restricted stock on the
date of issuance.
- In 1994, the Company issued 5,000 shares of restricted common stock to an
officer in lieu of cash compensation and recorded an $11,875 increase to
compensation expense and to common stock and additional paid-in capital
which was the fair market value of the restricted stock on the date of
issuance.
12. FOREIGN OPERATIONS
International sales activity, consisting of sales outside the United
States, primarily in Canada, accounted for approximately 16%, 14% and 11% of
total sales for the years ended September 30, 1996, 1995 and 1994, respectively.
A reconciliation of fiscal 1996, 1995 and 1994 domestic and foreign activity for
net sales, net income (loss) and identifiable assets is as follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN TOTAL
-------- ------- -----
<S> <C> <C> <C>
FISCAL 1996:
Net Sales............................................ $12,274,927 $2,397,857 $14,672,784
Net Income (Loss).................................... (743,106) 174,987 (568,119)
Identifiable Assets.................................. $10,488,502 $ 981,541 $11,470,043
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC FOREIGN TOTAL
-------- ------- -----
<S> <C> <C> <C>
FISCAL 1995:
Net Sales............................................ $12,223,014 $1,970,884 $14,193,898
Net Income (Loss).................................... (2,231,595) 58,491 (2,173,104)
Identifiable Assets.................................. $10,621,910 $1,376,738 $11,998,648
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC FOREIGN TOTAL
-------- ------- -----
<S> <C> <C> <C>
FISCAL 1994:
Net Sales............................................ $12,955,530 $1,671,024 $14,626,554
Net Income (Loss).................................... (292,779) 50,314 (242,465)
Identifiable Assets.................................. $12,594,523 $1,044,267 $13,638,790
</TABLE>
F-13
<PAGE> 62
13. SUBSEQUENT EVENT
On May 30, 1996, the Company entered into a letter of intent to acquire all
outstanding stock of The Chas. H. Lilly Company ("Lilly"), a Portland based
developer and marketer of lawn and garden fertilizers, pesticides and packet
seeds. On December 12, 1996, the Company announced that it elected to
discontinue efforts to acquire Lilly. Accordingly, the costs associated with
this acquisition attempt, which amounted to $312,771, have been charged to
expense in the accompanying fiscal 1996 Consolidated Statement of Operations and
is included in other expense.
F-14
<PAGE> 63
RINGER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,614,248
Accounts receivable....................................... 4,353,565
Inventories............................................... 3,530,162
Prepaid assets............................................ 245,391
------------
Total current assets................................... 9,743,366
Property and equipment (net)................................ 415,396
Intangible assets (net)..................................... 6,892,376
------------
Total assets........................................... $ 17,051,138
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,284,118
Accrued expenses.......................................... 1,525,164
Current portion of long-term debt......................... 19,200
------------
Total current liabilities.............................. 3,828,482
Long-Term Debt.............................................. 1,451,400
Shareholders' Equity:
Common Stock, par value $.01 per share, authorized
25,000,000 shares, issued and outstanding 12,181,270
and 10,921,930 shares, respectively.................... 121,813
Additional paid-in capital................................ 33,683,587
Accumulated deficit....................................... (21,877,054)
Cumulative translation adjustment......................... (157,090)
------------
Total shareholders' equity............................. 11,771,256
------------
Total liabilities and shareholders' equity............. $ 17,051,138
============
</TABLE>
See notes to condensed consolidated financial statements.
F-15
<PAGE> 64
RINGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Net Sales................................................... $15,677,890 $13,254,257
Cost of Sales............................................... 8,217,980 6,817,465
----------- -----------
Gross Profit.............................................. 7,459,910 6,436,792
Operating Expenses:
Distribution.............................................. 1,701,937 1,317,184
Sales & Marketing......................................... 3,231,743 2,705,452
General & Administration.................................. 1,200,759 1,008,840
Research & Development.................................... 772,168 589,279
Amortization of Intangibles............................... 328,962 301,752
----------- -----------
7,235,569 5,922,507
----------- -----------
Income Before Other Income............................. 224,341 514,285
Other Income (Expense), Net................................. (34,119) 45,038
----------- -----------
Income Before Income Taxes.................................. 190,222 559,323
Income Taxes................................................ -- --
----------- -----------
Net Income.................................................. $ 190,222 $ 559,323
=========== ===========
Net income per common and common equivalent share........... $ .02 $ .05
=========== ===========
Weighted average common and common equivalent shares
outstanding............................................... 11,343,695 10,925,191
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-16
<PAGE> 65
RINGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 190,222 $ 559,323
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 454,214 386,646
Loss on disposal of intangible assets.................. 76,085 17,331
(Gain) loss on disposal of assets...................... 1,529 (15,148)
(Increase) decrease in assets:
Trade accounts and notes receivable.................... (1,528,376) (1,701,088)
Inventories............................................ 264,797 236,187
Prepaid expenses....................................... (211,902) 2,366
Increase (decrease) in liabilities:
Accounts payable....................................... (1,140,269) 31,668
Accrued expenses....................................... 201,492 228,855
----------- -----------
Net cash used in operating activities................ (1,692,208) (253,860)
Cash Flows from Investing Activities:
Purchase of property and equipment........................ (76,348) (40,095)
Proceeds from sales of equipment.......................... 7,389 24,548
Purchase of intangible assets............................. (33,605) (99,074)
----------- -----------
Net cash used in investing activities................ (102,564) (114,621)
Cash Flows from Financing Activities:
Cash received in Dexol acquisition........................ 124,073
Principal payments on long-term debt...................... (6,400)
----------- -----------
Net cash received from financing activities............... 117,673 0
Effect of exchange rate changes on cash..................... 2,566 (6,534)
----------- -----------
Decrease in cash and cash equivalents................ (1,674,533) (375,015)
Cash and Cash Equivalents:
Beginning of Period....................................... 3,288,781 2,756,377
----------- -----------
End of Period............................................. $ 1,614,248 $ 2,381,362
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE> 66
RINGER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. They should be read in conjunction with the
annual financial statements included elsewhere in this Proxy Statement for the
year ended September 30, 1996. In the opinion of management, the interim
financial statements include all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the results for the
interim periods presented. Operating results through the third quarter of fiscal
1997 are not necessarily indicative of the operating results for the year ending
September 30, 1997.
Net income per share is calculated using the weighted average common and
common equivalent shares outstanding. Common equivalents consist of stock
options and warrants.
NOTE 2. ACQUISITION
In March 1997, the Company completed the acquisition of substantially all
of the assets of Dexol Industries, Inc., a California based manufacturer and
marketer of home and garden pesticides sold under the Dexol(R) and various
private label brand names, for an aggregate purchase price of $3,012,790, plus a
contingent performance based earnout valued at up to $455,000, payable in shares
of the Company's restricted common stock (the "Dexol acquisition"). The purchase
price was comprised of the issuance of 1,059,340 shares of the Company's
restricted common stock valued at $1,397,005, the issuance of a promissory note
to Dexol Industries, Inc. with a principal amount of $1,477,000 bearing simple
interest at an annual rate of prime plus 3/4% and estimated transaction costs
of $138,785.
The Dexol acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair market values at
the date of acquisition. The excess of purchase price over estimated fair market
value of net assets acquired ("goodwill") of approximately $1,685,000 is being
amortized on a straight-line basis over twenty years. Since the acquisition, the
Company has operated the acquired business as its Dexol division and has
continued marketing Dexol products. Dexol division operations are included in
the Company's consolidated statements of operations from the effective date of
the acquisition of March 1, 1997.
The following table sets forth unaudited proforma sales, loss before taxes,
loss and loss per share for the Company as if the Ringer Corporation and Dexol
businesses had been combined at the beginning of the periods shown. This pro
forma financial information is provided for illustrative purposes only. It is
not necessarily indicative of actual operating results that would have occurred
had the acquisition been in effect for the periods presented and is not
necessarily indicative of results which may be obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Net Sales......................................... $18,650,584 $25,175,851
Loss before taxes................................. (424,978) (17,845)
Loss.............................................. (424,978) (17,845)
Loss per share.................................... $ (.04) $ (.00)
</TABLE>
NOTE 3.
Sales of the Company's products are generally greater in the second and
third fiscal quarters due to seasonal factors.
F-18
<PAGE> 67
NOTE 4.
All comparative data reflect application of consistent accounting
principles and contain no prior period adjustments.
NOTE 5. INVENTORIES
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
-------- -------------
<S> <C> <C>
Raw Materials......................................... $2,161,841 $ 726,099
Finished Goods........................................ 1,368,321 793,593
---------- ----------
$3,530,162 $1,519,692
========== ==========
</TABLE>
NOTE 6. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
Installment promissory note........................... $1,470,600
Less current portion.................................. 19,200
----------
$1,451,400
==========
</TABLE>
NOTE 7. BANK LINE OF CREDIT
On May 2, 1997, the Company secured a three-year $25 million credit
facility from GE Capital Services. The credit facility is intended to be used to
finance the Company's seasonal working capital needs (of approximately $3 to $5
million) and to provide financing for future acquisitions. The $25,000,000
credit facility replaced a $5,000,000 bank line of credit from a previous
lender. The Company's agreement with GE Capital Services, prohibits the payment
of dividends by the Company.
NOTE 8. SHAREHOLDERS' EQUITY
1996 INCENTIVE AND STOCK OPTION PLAN
The Company adopted its new 1996 Incentive and Stock Option Plan in
November 1996 which was later approved by shareholders at the Company's annual
shareholders meeting in February 1997. The plan is administered by the Stock
Option Committee of the Board of Directors. The Company has reserved 500,000
shares of its common stock for issuance upon the exercise of stock options
granted under the Plan. As of June 30, 1997, there were outstanding options
under the 1996 Incentive and Stock Option Plan to purchase up to 45,500 shares
of the Company's common stock.
Under provisions of the Plan, stock options are granted with an exercise
price at least equal to 100% of the fair market value of the stock on the date
of grant. Options have a vesting period of from three to five years and expire
ten years from the date of grant. Options become fully vested upon the
occurrence of a change in control, as defined.
STOCK OPTION REPRICING
To motivate and retain qualified employees, in April 1997, the Board of
Directors approved the repricing of all outstanding stock options to a new
exercise price of $1.3125 per share, the fair market value of the Company's
common stock on the date of repricing. The Board of Directors previously
approved stock option repricings in 1992 and 1994. Prior to this April 1997
action, exercise prices on outstanding stock options ranged from $1.50 to 2.70
per share.
F-19
<PAGE> 68
SALE OF COMMON STOCK TO OFFICERS
In exchange for full-recourse promissory notes and the cancellation of
certain incentive stock options, in April 1997 the Company sold, subject to
shareholder approval, 200,000 shares of its unregistered, restricted common
stock to two executive officers at a price of $1.3125 per share. The promissory
notes are secured by the stock purchased. Under certain circumstances, the
Company will provide bonuses to the two executives sufficient to pay the annual
debt service requirements of the promissory notes, which have terms of three and
five years. Accordingly, the Company has recognized compensation expense
relative to matter in the amount of $6,563 in the Company's accompanying
Condensed Consolidated Statements of Operations.
NOTE 9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) for interest during the period for:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Interest paid.......................................... $116,882 $ 66,535
Interest received...................................... (48,557) (26,776)
</TABLE>
Investing and financing transactions not affecting cash during the nine
month period ended June 30, 1997 are described as follows: The Company issued
1,059,340 shares of its restricted common stock, valued at $1,397,005, and
issued a long-term promissory note with the principal amount of $1,477,000 in
connection with the acquisition of substantially all of the assets of Dexol
Industries. Assets acquired included $124,073 in cash.
NOTE 10. CONTINGENCIES
The Company has a Contingency Retention Plan which provides for the payment
of a lump sum termination benefit plus continuation of life insurance, health
insurance and dental benefits for a period of time in the event the employment
of such employees is terminated within one year after a "change of control," as
defined, to certain key employees of the Company, including all of the officers.
The amount of the lump sum termination benefit varies from the equivalent of
three months to two years of salary and bonus at the time of termination. The
period during which health and welfare benefits continue after termination
varies from three months to two years, but is terminated if the employee obtains
other employment with similar benefits. The Retention Plan continues in effect
unless terminated, prior to a change in control, by a resolution approved by at
least two-thirds of the Board of Directors.
NOTE 11. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This Statement requires adoption of the disclosure provisions no
later than fiscal years beginning after December 15, 1995. The new standard
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company has determined
the implementation of SFAS No. 123 has not been material to the financial
statements of the Company.
In February 1997, SFAS No. 128, "Earnings per Share" was issued which is
required to be adopted for the quarter ending December 31, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options,
stock warrants and convertible securities will be excluded. The calculation of
diluted earnings per share will remain similar to the current method. The impact
of SFAS No. 128 on the calculation primary and fully diluted earnings per share
is not expected to be material.
F-20
<PAGE> 69
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued which is required to be adopted for the
fiscal year beginning October 1, 1998. At that time, the Company will be
required to disclose certain financial and descriptive information about its
operating segments as redefined by SFAS No. 131. The Company has not yet
completed its analysis of which operating segments it will be required to report
on.
NOTE 12. PROPOSED MERGER
On September 16, 1997, the Company entered into a letter of intent to
acquire all outstanding shares of stock of Southern Resources Inc., a Fort
Valley, Georgia-based manufacturer and marketer of pesticides, for 5,500,000
shares of the Company's common stock. On October 3, 1997 the Company entered
into an Agreement and Plan of Merger with Southern Resources, Inc. and expects
to close the transaction on or about December 8, 1997.
F-21
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Southern
Resources, Inc. and Subsidiaries as of September 27, 1996 and September 29,
1995, and the related consolidated statements of income and retained earnings
and cash flows for the years then ended. 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 preparation.
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 financial position of Southern
Resources, Inc. and Subsidiaries at September 27, 1996 and September 29, 1995,
and the results of operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 6, the Company is a party to a governmental action and
lawsuits related to contamination discovered on and near the Company's plant
site. Management believes that the contamination arose prior to the purchase of
the plant site by the Company from an unaffiliated predecessor corporate owner.
The former owner of the plant site has cooperated with governmental authorities
and initiated remedial activities. Management believes that the governmental and
legal actions should not result in loss to the Company. Accordingly, no
provision for losses related to these actions have been made in the accompanying
consolidated financial statements.
SMITH & HOWARD, P.C.
Atlanta, Georgia
September 29, 1997
F-22
<PAGE> 71
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 119,820 $ 39,308
Accounts receivable -- trade, less allowance for doubtful
accounts of $12,265 and $32,817 in 1996 and 1995,
respectively (Notes 4 and 5)........................... 3,327,662 3,279,234
Inventories (Notes 2, 3,4 and 5).......................... 5,059,878 2,064,584
Prepaid expenses.......................................... 295,324 54,014
Accounts receivable -- secured (Note 3)................... -- 92,984
Deferred income taxes (Note 7)............................ 118,184 184,645
Prepaid income taxes...................................... -- 4,911
Other..................................................... 99,749 120,367
----------- ----------
Total current assets................................. 9,020,617 5,840,047
Property and equipment, at cost (Notes 3 and 5)
Land...................................................... 43,879 43,879
Buildings and improvements................................ 482,428 482,428
Machinery and equipment................................... 2,833,509 2,534,333
----------- ----------
3,359,816 3,060,640
Less accumulated depreciation............................. (1,242,613) (958,913)
----------- ----------
2,117,203 2,101,727
Other Assets (Note 3)
Trademarks, less accumulated amortization of $30,000 and
$20,000 in 1996 and 1995, respectively................. 120,000 130,000
Product registrations, less accumulated amortization of
$60,000 and $40,000 in 1996 and 1995, respectively..... 240,000 260,000
Deferred loan fees, less accumulated amortization of
$75,605 in 1996........................................ 237,566 --
Other..................................................... 81,985 51,414
----------- ----------
679,551 441,414
----------- ----------
$11,817,371 $8,383,188
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 3,269,190 $3,531,087
Accrued expenses and other current liabilities (Note 6)... 546,969 477,910
Current portion of long-term debt (Note 5)................ 1,208,084 289,180
Due to stockholders (Note 8).............................. 356,268 356,268
Income taxes payable...................................... 9,539 --
----------- ----------
5,390,050 4,654,445
Borrowings under lines of credit (Note 4)................... 3,917,464 2,324,859
Long-term debt, net of current portion (Note 5)............. 1,991,459 1,318,442
Note and accrued interest payable -- stockholder (Note 8) 232,372 122,334
Deferred Income Taxes (Note 7).............................. 165,748 106,671
Contingencies (Note 6)
Stockholders' Equity
Common stock -- par value $1, authorized 100,000 shares,
issued and outstanding 500 shares...................... 500 500
Additional paid-in capital................................ 500 500
Retained earnings (accumulated deficit)................... 119,278 (144,563)
----------- ----------
120,278 (143,563)
----------- ----------
$11,817,371 $8,383,188
=========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-23
<PAGE> 72
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sales....................................................... $20,791,647 $18,444,474
Cost of Sales............................................... 17,097,731 16,116,047
----------- -----------
Gross Profit................................................ 3,693,916 2,328,427
Selling, General and Administrative Expenses................ 2,612,536 1,666,023
----------- -----------
Income from Operations...................................... 1,081,380 662,404
Other Income (Expense)
Interest expense.......................................... (688,607) (518,543)
Loss on disposal of equipment............................. (1,543) --
Other..................................................... 10,522 7,645
----------- -----------
(679,628) (510,898)
----------- -----------
Income before Income Taxes and Extraordinary Item........... 401,752 151,506
Provision for Income Taxes (Note 7)
Current................................................... 12,373 2,752
Deferred.................................................. 125,538 32,866
----------- -----------
137,911 35,618
Income before Extraordinary Item............................ 263,841 115,888
Extraordinary Item, Net of Deferred Income Tax Credit of
$4,000.................................................... -- (13,000)
----------- -----------
Net Income.................................................. 263,841 102,888
Accumulated Deficit at Beginning of Year.................... (144,563) (247,451)
----------- -----------
Retained Earnings (Accumulated Deficit) at End of Year...... $ 119,278 $ (144,563)
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-24
<PAGE> 73
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Cash received from customers.............................. $ 20,663,058 $ 16,474,249
Cash paid to suppliers and employees...................... (18,735,049) (17,001,706)
Income taxes (paid) refunded.............................. 2,077 (13,116)
Interest paid............................................. (635,423) (485,771)
Other income.............................................. 10,522 7,645
------------ ------------
Net cash provided by (required by) operating
activities........................................... 1,305,185 (1,018,699)
============ ============
Cash Flows from Investing Activities:
Cash paid in acquisition of Rigo/Black Leaf............... (2,335,000)
Acquisitions of property and equipment.................... (111,457) (139,719)
(Increase)/decrease in other assets....................... (109,072) 1,924
Repayments of account receivable - secured................ -- 24,828
------------ ------------
Net cash required by investing activities.............. (2,555,529) (112,967)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt.................. 66,943
Principal payments on long-term debt...................... (318,603) (172,088)
Borrowings under lines of credit, net..................... 1,592,605 1,154,800
Increase(Decrease) in note payable - stockholder.......... 56,854 (17,000)
------------ ------------
Net cash provided by financing activities.............. 1,330,856 1,032,655
------------ ------------
Net increase(decrease) in cash.............................. 80,512 (99,011)
Cash at beginning of year................................... 39,308 138,319
------------ ------------
Cash at end of year......................................... $ 119,820 $ 39,308
============ ============
Reconciliation of Net Income to Net Cash Required by
Operating Activities:
Net Income.................................................. $ 263,841 $ 102,888
Adjustments to Reconcile Net Income to Net Cash Required by
Operating Activities:
Bad debts expense...................................... 80,161 45,945
Depreciation and amortization.......................... 413,884 339,836
Interest expense accrued as long-term debt............. 53,184 32,772
Loss on disposal of equipment.......................... 1,543 --
Provision for deferred income taxes.................... 125,538 32,866
Extraordinary item, net of deferred income tax credit
of $4,000............................................ -- 13,000
Increase in accounts receivable........................ (128,589) (1,970,225)
Increase (decrease) in inventories..................... 831,719 (174,780)
Increase in prepaid expenses and other current
assets............................................... (157,708) (90,169)
(Increase) decrease in prepaid income taxes............ 4,911 (141)
Increase (decrease)in accounts payable................. (261,897) 578,056
Increase in accrued liabilities........................ 69,059 81,866
Increase(decrease) in income taxes payable............. 9,539 (10,613)
------------ ------------
Total Adjustments........................................... 1,041,344 (1,121,587)
------------ ------------
Net cash provided by (required by) operating activities..... $ 1,305,185 $ (1,018,699)
============ ============
</TABLE>
Supplementary Schedule of Non-Cash Investing and Financing Activities:
In April 1996, SRI issued long-term debt of $2,177,072 bearing interest at
8% as partial payment for the acquisition of the Rigo/Black Leaf consumer
pesticide division of Wilbur Ellis Company. The long-term debt calls for
monthly principal payments of $67,000 plus accrued interest.
During the year ended September 27, 1996, the Company financed the
acquisition of equipment through a capital lease in the amount of $68,452.
The accompanying notes are an integral part of this financial statement.
F-25
<PAGE> 74
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND BUSINESS OPERATIONS
The accompanying consolidated financial statements include the accounts of
Southern Resources, Inc. and its wholly-owned subsidiaries SureCo, Inc. and
Peach County Property, Inc., collectively referred to herein as the Company. All
material inter-company transactions and balances have been eliminated in
consolidation.
The Company is engaged in the manufacture and marketing of specialty
pesticide products to consumer and commercial users and provides packing
services for companies marketing their own brands of consumer and commercial
pesticides. The Company's principal markets are throughout North America and the
Caribbean.
During the year ended September 27, 1996, 13%, 11% and 10% of the Company's
sales were to three separate customers. During the year ended September 29,
1995, 23% and 15% of the Company's sales were to two separate customers.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest September 30. The
accompanying consolidated financial statements include results of operations for
fifty-two weeks in each of the years ended September 27, 1996 and September 29,
1995.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
When the assets are retired or otherwise disposed of, the costs less accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income.
Depreciation and amortization are provided over the estimated useful lives
using the straight-line method for financial reporting purposes and primarily
accelerated methods for income tax reporting purposes.
NOTE 2 -- INVENTORIES
Inventories consisted of the following at September 27, 1996 and September
29, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials......................................... $2,506,802 $1,560,941
Finished goods........................................ 2,553,076 503,643
---------- ----------
$5,059,878 $2,064,584
========== ==========
</TABLE>
NOTE 3 -- ACQUIRED ASSETS
In April 1996, the Company acquired the inventories, certain equipment and
product registrations of the Rigo/Black Leaf division of Wilbur-Ellis Company
(Rigo/Black Leaf) for a total purchase price of $4,177,072. The purchase price
was allocated to the inventories ($3,827,013), equipment ($119,092), and prepaid
product registration cost ($230,967) based upon book values, which estimated
their fair values, at the acquisition date. The total purchase price for the
aforementioned assets was satisfied with a cash payment of
F-26
<PAGE> 75
$2,000,000 and the Company's note payable to the seller for $2,177,072 (see Note
5). Included in the assets purchased were inventories (products, labels, and
packaging) used in connection with the seller's seed treatment products. The
seller must repurchase, at the Company's cost, all such unused inventories at
the earlier of the satisfaction of the Company's note payable to the seller or
April 1999.
The acquisition was accounted for as a purchase business combination.
Rigo/Black Leaf operations are included in the Company's consolidated statement
of income from the effective date of the acquisition of April 28, 1996. The
following table sets forth unaudited pro forma sales, income before taxes and
net income (loss) for the Company as if the Company and Rigo/Black Leaf had been
combined at the beginning of the periods shown. This pro forma financial
information is provided for illustrative purposes only. It is not necessarily
indicative of results which may be obtained in the future (000's).
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL YEAR ENDED
--------------------------------
SEPTEMBER 27, SEPTEMBER 29,
1996 1995
------------- -------------
<S> <C> <C>
Net sales........................................... $28,209 $30,403
Income before taxes................................. 377 18
Income (loss)....................................... 229 (18)
</TABLE>
In connection with the Rigo/Black Leaf acquisition, four shareholders of
the Company owning all of the outstanding shares of the Company collectively
agreed to sell 20% of their shares of Company stock to an employee who was
previously employed by Rigo/Black Leaf's prior owner which, if purchased by the
employee, would result in his owning 20% of the Company's outstanding common
stock. As a condition precedent to purchase such stock, the employee would be
required to enter into certain agreements under which the employee would be
subject to cross guarantees and indemnities to which the other shareholders are
obligated. The purchase price for such stock is initially $700,000 as of April
1996 and increases thereafter by a factor of 6% per annum compounded monthly for
each month of time passing until the purchase date, which cannot be later than
the date at which there has been a change of control or April 1998 whichever is
later. For accounting purposes, the share purchase is a variable option which is
being accounted for over the period of the agreement. Management believes the
prescribed purchase price of the stock represented its estimated fair market
value as of April 1996 and September 1996.
In December 1992 the Company acquired for $300,000 some 350 product
registrations approved by the United States Environmental Protection Agency from
a company (SMCP) which was in the same line of business as the Company. In March
1994 SMCP closed its manufacturing facility, and the volume of activity between
SMCP and the Company increased significantly. In April 1993 stockholders of the
Company's Parent sold a 50% interest in the Parent to the stockholders of SMCP
for an amount approximating net book value. In August 1993 the Company entered
into an arrangement wherein, in return for guaranteeing certain of SMCP's
secured indebtedness, the Company obtained a security interest in all of SMCP's
assets and rights to utilize and an option to purchase certain equipment and
trade marks of SMCP. Effective October 1, 1993, the Company elected to exercise
its option to purchase the aforementioned assets for $1,250,000. The purchase
price was allocated to equipment ($1,100,000) and trademarks ($150,000) based
upon independent appraisals. The total purchase price for the product
registrations, equipment and trademarks of $1,550,000 was satisfied by the
Company assuming $1,000,000 of SMCP's indebtedness (See Note 5) and offsetting
$550,000
F-27
<PAGE> 76
of the Company's receivable from SMCP as shown below. At September 29, 1995, the
Company had an account receivable from SMCP, which is secured by SMCP's
receivables and inventories, as follows:
<TABLE>
<S> <C>
Product sales to SMCP....................................... $1,296,648
Advances to or payments on behalf of SMCP................... 321,824
Materials purchased from SMCP............................... (694,002)
Assets acquired from SMCP................................... (550,000)
----------
Balance at October 1, 1993................................ 374,470
Advances to SMCP............................................ 355,758
Payments on behalf of SMCP.................................. (400,000)
Materials purchased from SMCP............................... (32,416)
Writedown of receivable to net realizable value of
collateral................................................ (163,000)
----------
Balance at September 30, 1994............................. 134,812
Materials purchased from SMCP............................... (24,828)
Writedown of receivable to net realizable value of
collateral................................................ (17,000)
----------
Balance at September 29, 1995............................. $ 92,984
==========
</TABLE>
NOTE 4 -- LINES OF CREDIT
During 1995 the Company had available lines of credit with a commercial
financial corporation totaling $2,500,000. Advances under the lines were limited
to 85% of eligible trade accounts receivable and 40% of eligible inventories,
with advances related to inventories limited to $500,000. Interest on borrowings
under the lines was at prime plus 2.25%, and the borrowings were secured by
accounts receivable and inventories and guaranteed by the stockholders of the
Company. Outstanding borrowings under the lines were $2,324,859 at September 29,
1995. Subsequent to September 29, 1995, the lines of credit were extended until
October 2, 1996. Accordingly, outstanding borrowings under the lines of credit
are classified as a noncurrent liability in the accompanying consolidated
balance sheet at September 29, 1995.
During 1996 the Company arranged a new $7,000,000 working capital facility
with another commercial finance corporation which replaced its $2,500,000 line
discussed above and provided funding in the amount of $2,000,000 used to acquire
assets (see Note 3). Advances under the lines are limited to 80% of eligible
trade accounts receivable and 60% of eligible inventories, with advances related
to inventories limited to $2,600,000. Borrowings under the lines bear interest
at the commercial financial corporation's reference rate plus 2.25% (an
effective interest rate of 10.5% at September 27, 1996), are secured by accounts
receivable, inventories, and certain intangible assets including product
registrations and trademarks and are guaranteed by the stockholders of the
Company. Since the line of credit agreement is not subject to review until April
1998, outstanding borrowings under the lines of $3,917,464 are classified as a
noncurrent liability at September 27, 1996.
The lines of credit include covenants which limit management compensation
increases, loans to stockholders or employees and annual capital expenditures
and restricts the payment of dividends. The Company was in compliance with the
covenants for the year ended September 27, 1996.
F-28
<PAGE> 77
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following as of September 27, 1996 and
September 29, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Term loan in the amount of $2,177,072 issued in connection
with acquired assets (See Note 3); secured by inventories
and accounts receivable; monthly principal installments of
$67,000 plus interest at 8% due through March 1998 with all
remaining unpaid principal ($703,072) and accrued interest
due April 1998. This note is subject to a subordination
agreement in favor of the Company's working capital lender
which provides, among other things, that service of this
indebtedness can occur only after the Company is current on
the payment of all of its other obligations for borrowed
monies. $1,909,072 $ --
Term loan in the amount of $1,000,000 assumed in connection
with acquired assets of a Company in October 1993. Terms
modified during 1996 to provide that the loan be secured by
certain production equipment; monthly principal installments
of $8,333 plus accrued interest from January 1997 through
December 1997, monthly principal installments of $16,667
plus accrued interest from January 1998 through December
1999. Interest on the term loan is at a rate of 10%. 500,000 600,000
Term loan with bank secured by machinery and equipment;
principal and interest payments, $12,503 at September 27,
1996, due monthly through December 1998. Interest on the
term loan is at a rate of prime plus 1.5% adjusted quarterly
for changes in the prime rate. 302,020 405,343
Term loan with bank secured by machinery and equipment;
principal and interest payments, $1,723 at September 27,
1996, due monthly through October 2002. Interest on the term
loan is at a rate of prime plus 2% adjusted quarterly for
changes in the prime rate. 92,368 100,407
Term loan with bank secured by machinery and equipment;
principal and interest payments, $3,061 at September 27,
1996, due monthly through July 1999. Interest on the term
loan is at a rate of prime plus 2% adjusted quarterly for
changes in the prime rate. 87,690 110,153
Term loan with bank secured by real property; principal and
interest payments, $3,071 at September 27, 1996, due monthly
through February 2000. Interest on the loan is at a rate of
10.5% 102,938 197,455
Term loan with financial institution secured by equipment;
principal and interest payments, $1,269 at September 27,
1996, due monthly through February 2000. Interest on the
loan is at a rate of 11.6%. 41,964 51,242
Capital lease; principal and interest (at 12.52%) payments
totaling $1,541 due monthly through November 2000. 59,250 --
Capital lease; principal and interest (at 10.4%) payments
totaling $2,998 due monthly through September 1998. 64,812 92,483
Capital lease; principal and interest (at 17.29%) payments
totaling $851 due monthly through April 2000. 27,139 32,185
Unsecured term loan with bank; principal and interest
payments, $649 at September 27, 1996, due monthly through
June 1998. Interest on the term loan is at a rate of prime
plus 2.5% adjusted for changes in the prime rate. 12,290 18,354
---------- ----------
$3,199,543 $1,607,622
========== ==========
</TABLE>
F-29
<PAGE> 78
The above is categorized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Senior Long-Term Debt................................. $1,290,471 $1,607,622
Subordinated Long-Term Debt........................... 1,909,072 --
---------- ----------
3,199,543 1,607,622
Less: Current Portion................................. 1,208,084 289,180
---------- ----------
$1,991,459 $1,318,442
</TABLE>
Aggregate maturities of long-term debt by fiscal year are as follows:
<TABLE>
<S> <C>
1997........................................................ $1,208,084
1998........................................................ 1,499,795
1999........................................................ 348,892
2000........................................................ 105,156
2001........................................................ 17,672
Thereafter.................................................. 19,944
----------
$3,199,543
==========
</TABLE>
The Company is subject to restrictions on the payment of dividends and to
financial covenants under a term loan agreement with a bank. Such covenants
relate primarily to current ratio, net worth, working capital and the ratio of
net worth to total liabilities. The Company was not in compliance with one of
the covenants at September 27, 1996; however, the bank has waived such
noncompliance until after the fiscal 1997 year end.
NOTE 6 -- CONTINGENCIES
In August 1990 the United States Environmental Protection Agency (EPA)
added to its National Priorities List a site which is constituted in part by the
land on which the Company's Fort Valley, Georgia facility is located. In July
1993 the EPA advised the Company that it may be responsible for certain
contamination discovered both on and off this site. The Company denied
responsibility and advised the EPA that the Company did not cause the
contamination and that it had indemnities from the former owner who has since
cooperated with the EPA in completing the investigative activities and
initiating the remedial activities required by the EPA.
In August 1993 the Company and its affiliates were named co-defendants in a
lawsuit filed by neighbors of the site seeking unspecified monetary and
injunctive relief alleging property damage arising out of chemical formulation
activities at the Fort Valley, Georgia facility. Since the alleged property
damage arose prior to the facility being owned by the Company or its affiliates,
management of the Company denies any liability to the plaintiffs and contends
that any damage suffered by the plaintiffs arose out of action of the prior
owners of the facility.
The Company believes that the above actions are without merit and is
vigorously defending its position. Accordingly, no provision for losses related
to the above actions has been made in the accompanying financial statements.
NOTE 7 -- INCOME TAXES
Deferred income taxes are provided with respect to certain items which are
recognized in one period for financial reporting purposes and another period for
income tax purposes. Such temporary differences relate primarily to depreciation
of property and equipment, trademarks and product registration costs, allowance
for doubtful accounts, inventory reserves and carrying costs and certain expense
accruals.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-30
<PAGE> 79
Significant components of the Company's net deferred income tax (asset)
liability as of September 27, 1996 and September 29, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Income Tax Liability:
Tax over book depreciation........................... $ 336,651 $ 291,163
Trademarks and product registration costs............ 27,093 27,147
Net operating loss carryforwards..................... (134,035) (160,051)
Alternative minimum tax credit carryforwards......... (63,961) (51,588)
--------- ---------
$ 165,748 $ 106,671
========= =========
Deferred Income Tax Asset:
Allowance for doubtful accounts...................... $ 3,046 $ 8,139
Inventory reserves................................... 12,400 10,354
Inventory carrying costs............................. 35,135 28,054
Expense accruals..................................... 67,603 138,098
--------- ---------
118,184 184,645
--------- ---------
Net Deferred Income Tax (Asset) Liability.............. $ 47,564 $ (77,974)
========= =========
</TABLE>
Significant components of the provision for income taxes, net of deferred
income tax credit of $4,000 which has been offset against the extraordinary item
in the accompanying consolidated statement of income for the year ended
September 29, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current
Federal................................................. $ 10,826 $ 2,408
State................................................... 1,547 344
-------- -------
$ 12,373 $ 2,752
======== =======
Deferred
Federal................................................. $ 92,990 $21,337
State................................................... 32,548 7,529
-------- -------
$125,538 $28,866
======== =======
</TABLE>
The components of the net provision for deferred income taxes are as
follows for the years ended September 27, 1996 and September 29, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Tax over book depreciation............................... $ 45,488 $ 39,013
Trademarks and product registration costs................ (54) 3,323
Benefits of operating loss carryforwards................. 26,016 (28,122)
Allowance for doubtful accounts.......................... 5,093 (3,505)
Inventory reserves....................................... (2,046) 5,146
Inventory carrying costs................................. (7,081) 3,384
Expense Accruals......................................... 70,495 12,189
Alternative minimum tax credit carryforwards............. (12,373) (2,562)
-------- --------
$125,538 $ 28,866
======== ========
</TABLE>
NOTE 8 -- RELATED PARTY TRANSACTIONS
Due to stockholders in the amount of $356,268 represents cumulative
management fees due two of the Company's stockholders at September 30, 1994.
Such amounts are noninterest bearing and due on demand
F-31
<PAGE> 80
but have no specified payment dates. Subsequent to September 27, 1996 payments
totaling $185,376 were made to reduce the obligations.
The note and accrued interest payable -- stockholders is due on demand and
includes interest at the same rate as the Company incurs under its lines of
Credit (See Note 4). Since the noteholder's intent is not too demand payment
within twelve months, the amounts are included as noncurrent liabilities in the
accompany consolidated balance sheet as of September 27, 1996 and September 29,
1995.
NOTE 9 -- SUBSEQUENT EVENT
Subsequent to September 27, 1996, the Company entered into a letter of
intent to exchange all of the outstanding shares of the Company's common stock
for those of a publicly-traded corporation. The proposed transaction, which is
subject to review by the U.S. Securities and Exchange Commission and approval by
the stockholders of the publicly-traded corporation, is expected to close in
mid-December 1997.
F-32
<PAGE> 81
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 27,
1997
--------
<S> <C>
ASSETS
Current Assets:
Cash........................................................ $ 7,549
Accounts receivable....................................... 5,601,337
Inventories............................................... 5,742,772
Prepaid assets............................................ 388,476
Other current assets...................................... 136,384
-----------
Total current assets................................. 11,876,518
Property and equipment:
Land...................................................... 43,879
Buildings and improvements................................ 482,428
Machinery and equipment................................... 2,953,425
-----------
3,479,732
Less accumulated depreciation............................. (1,500,936)
-----------
1,978,796
Other long-term assets...................................... 563,361
-----------
Total assets......................................... $14,418,675
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit........................... $ 5,763,489
Accounts payable.......................................... 4,708,198
Accrued expenses.......................................... 342,768
Current portion of long-term debt......................... 1,450,000
Due to shareholders....................................... 205,892
Income taxes payable...................................... 48,909
-----------
Total current liabilities............................ 12,519,256
Long-term debt, net of current portion...................... 843,166
Note payable to shareholders................................ 591,972
Deferred income taxes....................................... 47,564
Shareholders' Equity:
Common stock.............................................. 500
Additional paid-in capital................................ 500
Retained earnings......................................... 415,717
-----------
Total shareholders' equity........................... 416,717
-----------
Total liabilities and shareholders' equity.................. $14,418,675
===========
</TABLE>
See notes to condensed consolidated financial statements.
F-33
<PAGE> 82
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
JUNE 27, JUNE 28,
1997 1996
-------- --------
<S> <C> <C>
Net sales................................................... $19,646,717 $15,691,100
Cost of sales............................................... 15,574,684 12,940,432
----------- -----------
Gross profit.............................................. 4,072,033 2,750,668
Selling general and administrative expenses................. 3,021,494 1,636,347
----------- -----------
Income before other income.................................. 1,050,539 1,114,321
Other expense, net.......................................... (677,708) (433,423)
----------- -----------
Income before income taxes.................................. 372,831 680,898
Provision for income taxes.................................. 76,392 233,760
----------- -----------
Net income.................................................. $ 296,439 $ 447,138
=========== ===========
Net Income per Common....................................... $ 592.88 $ 894.28
=========== ===========
Weighted Average Common Shares Outstanding.................. 500 500
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-34
<PAGE> 83
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JUNE 27, JUNE 28,
1997 1996
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.................................................. $ 296,439 $ 447,138
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................. 333,358 242,979
Bad debt provision........................................ 22,700 16,242
Interest expense accrued as long-term debt................ 51,258 41,894
Provision for deferred income taxes....................... 125,538
(Increase) decrease in assets:
Trade accounts and notes receivable.................. (2,273,675) (2,549,307)
Inventories.......................................... (682,894) 1,426,984
Prepaid expenses and other current assets............ (129,787) 3,119
Prepaid income taxes................................. (4,911)
Increase (decrease) in liabilities:
Accounts payable..................................... 1,439,007 (220,598)
Accrued expenses..................................... (204,201) (125,380)
Due to stockholders.................................. (150,376)
Income taxes payable................................. 39,370 105,387
----------- -----------
Net cash used in operating activities............. (1,258,801) (490,915)
----------- -----------
Cash Flows from Investing Activities:
Cash paid in acquisition of Rigo/Black Leaf............... (2,134,000)
Purchase of property and equipment........................ (119,916) (187,342)
Acquisition of intangible assets.......................... (32,802) (52,843)
----------- -----------
Net cash used in investing activities............. (152,718) (2,374,185)
----------- -----------
Cash Flows from Financing Activities:
Principal payments on long-term debt...................... (906,377) (260,710)
Borrowings under line of credit, net...................... 1,846,025 3,014,130
Loan advances from stockholders........................... 359,600 75,200
----------- -----------
Net cash provided by financing activities......... 1,299,248 2,828,620
----------- -----------
Net decrease in cash.............................. (112,271) (36,480)
Cash and Cash Equivalents:
Beginning of Period....................................... 119,820 39,308
----------- -----------
End of Period............................................. $ 7,549 $ 2,828
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-35
<PAGE> 84
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 27, 1997 AND JUNE 28, 1996
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They should be read in conjunction with the annual
financial statements included herein for the year ended September 27, 1996. In
the opinion of management, the interim financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for the interim periods presented. Operating results
through the third quarter of fiscal 1997 are not necessarily indicative of the
operating results for the year ending September 26, 1997.
NOTE 2. ACQUISITION
In April 1996, the Company acquired the inventories, certain equipment and
product registrations of the Rigo/Black Leaf consumer lawn and garden pesticide
division of Wilbur-Ellis Company for a total purchase price of $4,177,072. The
purchase price was allocated as follows: $3,827,013 to inventory, $119,092 to
equipment and $230,967 to prepaid product registration costs, based upon
estimated fair values at the acquisition date. The total purchase price for the
assets consisted of a cash payment of $2,000,000 and the Company's note payable
to the seller for $2,177,072. Included in the assets purchased were inventories
(products, labels, and packaging) used in connection with the seller's seed
treatment products. The seller must repurchase, at the Company's cost, all such
unused inventories at the earlier of the satisfaction of the Company's note
payable to the seller, which is due April 30, 1998, or April 1999.
The following table sets forth unaudited proforma sales, net income before
taxes, net income and earnings per share for the Company as if SRI and
Rigo/Black Leaf had been combined at the beginning of the periods shown. This
pro forma financial information is provided for illustrative purposes only. It
is not necessarily indicative of results which may be obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
JUNE 27, JUNE 29,
1997 1996
-------- --------
<S> <C> <C>
Net sales......................................... $19,667,000 $23,108,000
Net income before taxes........................... 373,000 656,000
Net income........................................ 296,000 394,000
Earnings per share................................ $ 592.88 $ 788.00
</TABLE>
NOTE 3. SEASONALITY
Sales of the Company's products are generally greater in the second and
third fiscal quarters due to seasonal factors.
NOTE 4. COMPARATIVE DATA
All comparative data reflect application of consistent accounting
principles and contain no prior period adjustments.
F-36
<PAGE> 85
NOTE 5. INVENTORIES
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 27,
1997
--------
<S> <C>
Raw Materials............................................... $3,215,929
Finished Goods.............................................. 2,526,843
----------
$5,742,772
==========
</TABLE>
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following as of June 27, 1997:
<TABLE>
<CAPTION>
JUNE 27,
1997
--------
<S> <C>
Term loan in the amount of $2,177,072 issued in connection
with acquired assets (See Note 3); secured by inventories
and accounts receivable; monthly principal installments of
$67,000 plus interest at 8% due through March 1998 with all
remaining unpaid principal ($703,072) and accrued interest
due April 1998. This note is subject to a subordination
agreement in favor of the Company's working capital lender
which provides, among other things, that service of this
indebtedness can occur only after the Company is current on
the payment of all of its other obligations for borrowed
monies. $ 1,239,072
</TABLE>
Term loan in the amount of $1,000,000 assumed in connection
with acquired assets of a Company in October 1993. Terms
modified during 1996 to provide that the loan be secured by
certain production equipment; monthly principal installments
of $8,333 plus accrued interest from January 1997 through
December 1997, monthly principal installments of $16,667
plus accrued interest from January 1998 through December
1999. 441,667
Term loan with bank secured by machinery and equipment;
principal and interest payments of $12,503, due monthly
through December 1998. Interest on the term loan is at a
rate of prime plus 1.5% adjusted quarterly for changes in
the prime rate. 217,067
Term loan with bank secured by machinery and equipment;
principal and interest payments of $1,723, due monthly
through October 2002. Interest on the term loan is at a rate
of prime plus 2% adjusted quarterly for changes in the prime
rate. 85,646
Term loan with bank secured by machinery and equipment;
principal and interest payments of $3,061, due monthly
through July 1999. Interest on the term loan is at a rate of
prime plus 2% adjusted quarterly for changes in the prime
rate. 69,115
Term loan with bank secured by real property; principal and
interest payments of $3,071, due monthly through February
2000. Interest on the loan is at a rate of 10.5%. 82,958
Term loan with financial institution secured by equipment;
principal and interest payments of $1,269, due monthly
through February 2000. Interest on the loan is at a rate of
11.6%. 34,808
Capital lease; principal and interest (at 12.52%) payments
totaling $1,541 due monthly through November 2000. 50,705
Capital lease; principal and interest (at 10.4%) payments
totaling $2,998 due monthly through September 1998. 42,098
Capital lease; principal and interest (at 17.29%) payments
totaling $851 due monthly through April 2000. 22,750
F-37
<PAGE> 86
Unsecured term loan with bank; principal and interest payments of $649, due
monthly through June 1998. Interest on the term loan is at a rate of prime plus
2.5% adjusted for changes in the prime rate.
<TABLE>
<CAPTION>
JUNE 27,
1997
--------
<S> <C>
7,280
-----------
2,293,166
Less current portion (1,450,000)
-----------
Long-term debt $ 843,166
===========
</TABLE>
NOTE 7. BANK LINE OF CREDIT
During 1996 the Company arranged a new $7,000,000 working capital facility
with another commercial finance corporation which replaced its $2,500,000 line
discussed above and provided funding in the amount of $2,000,000 used to acquire
assets (see Note 3). Advances under the lines are limited to 80% of eligible
trade accounts receivable and 60% of eligible inventories, with advances related
to inventories limited to $2,600,000. Borrowings under the lines bear interest
at the commercial financial corporation's reference rate plus 2.25% (an
effective interest rate of 10.5% at June 27, 1997), are secured by accounts
receivable, inventories, and certain intangible assets including product
registrations and trademarks and are guaranteed by the stockholders of the
Company. The line of credit is scheduled to terminate in April 1998, but will
automatically renew for an additional year if not terminated in writing by
either party with 60 days written notice prior to that date. Since the line of
credit is cancellable within one year, outstanding borrowings under the line of
$5,763,000 are classified as a current liability at June 27, 1997.
The lines of credit include covenants which limit management compensation
increases, loans to stockholders or employees and annual capital expenditures.
The Company was in compliance with the covenants for the nine months ended June
27, 1997.
NOTE 8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION.
Cash paid (received) for interest and income taxes during the period for:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
JUNE 27, JUNE 29,
1997 1996
-------- --------
<S> <C> <C>
Interest paid........................................ $(627,513) $(398,853)
Interest received.................................... -- --
Income tax refunds................................... 37,022 2,077
Income tax payments.................................. -- --
</TABLE>
Investing and financing transactions not affecting cash during the nine
month periods ended June 27, 1997 and June 29, 1996 are described as follows:
In April 1996, SRI issued long-term debt of $2,177,072 bearing interest at
8% as partial payment for the acquisition of the Rigo/Black Leaf consumer
pesticide division of Wilbur Ellis Company. The long-term debt calls for monthly
principal payments of $67,000 plus accrued interest.
During the nine months ended June 29, 1996, SRI financed the acquisition of
equipment through a capital lease in the amount of $68,452.
NOTE 9. LEGAL PROCEEDINGS
Owners of property in the vicinity of SRI's Fort Valley, Georgia offices
have initiated civil actions against, among others, SRI, SureCo and PCP,
alleging bodily injury and property damage arising out of chemical formulation
activities conducted on or about the site prior to PCP's purchase of the
property from Canadyne-Georgia Corporation (formerly Woolfolk Chemical Works,
Inc.). SRI believes the actions are without merit as they relate to SRI, since
the environmental claims relate to circumstances caused by the prior owner of
the property. Accordingly, SRI is vigorously defending the suit.
F-38
<PAGE> 87
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT"), dated as of October
3, 1997, is made and entered into by and among Ringer Corporation, a Minnesota
corporation ("RINGER"), SRI Acquisition Corp., a Georgia corporation and wholly
owned subsidiary of Ringer ("MERGER SUBSIDIARY"), and Southern Resources, Inc.,
a Georgia corporation ("SRI"). Merger Subsidiary and SRI are hereinafter
sometimes collectively referred to as the "CONSTITUENT CORPORATIONS."
WHEREAS, the respective Boards of Directors of Ringer, Merger Subsidiary
and SRI have determined that it is advisable and in the best interests of the
respective corporations and their shareholders that Merger Subsidiary be merged
with and into SRI in accordance with the Georgia Business Corporation Code (the
"GEORGIA CODE") and the terms of this Agreement, pursuant to which SRI will be
the surviving corporation as a wholly owned subsidiary of Ringer (the "MERGER");
WHEREAS, it is intended that for federal income tax purposes the Merger
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE"), and that the Merger will
be accounted for as a "pooling of interests" under generally accepted accounting
principles; and
WHEREAS, Ringer, Merger Subsidiary and SRI desire to make certain
representations, warranties, covenants, indemnities and agreements in connection
with, and establish various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants, indemnities and agreements set forth in this Agreement,
and other good and valuable consideration, the adequacy and receipt of which is
hereby acknowledged, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.01 THE MERGER. At the Effective Time (as defined in Section 1.03 hereof),
and subject to the terms and conditions of this Agreement and the Certificate of
Merger (as defined in Section 1.03 hereof), the Merger Subsidiary shall be
merged with and into SRI, the separate existence of the Merger Subsidiary shall
cease, and SRI shall continue as the surviving corporation under the corporate
name of "Southern Resources, Inc." In its capacity as the corporation surviving
the Merger, SRI is hereinafter sometimes referred to as the "SURVIVING
CORPORATION."
1.02 EFFECT OF MERGER. The effect of the Merger shall be as set forth in
Article 11 of the Georgia Code, and the Surviving Corporation shall succeed to
and possess all the properties, rights, privileges, immunities, powers,
franchises and purposes, and be subject to all the duties, liabilities, debts,
obligations, restrictions and disabilities, of the Constituent Corporations, all
without further act or deed.
1.03 EFFECTIVE TIME. The consummation of the Merger shall be effected as
promptly as practicable, but in no event more than three business days, after
the satisfaction or waiver of the conditions set forth in Article VIII of this
Agreement, and the parties hereto will cause a certificate of merger with
respect to the Merger (the "CERTIFICATE OF MERGER") to be executed, delivered
and filed with the Secretary of State of the State of Georgia in accordance with
the Georgia Code and will make all other filings or recordings required by
Georgia law in connection with the Merger and the transactions contemplated by
this Agreement. The Merger shall become effective at the time and date of the
filing of the Certificate of Merger with the Secretary of State of the State of
Georgia. The time at which the Merger shall become effective is referred to
herein as the "EFFECTIVE TIME." The day during which the Effective Time shall
occur is referred to herein as the "EFFECTIVE DATE."
A-1
<PAGE> 88
1.04 DIRECTORS AND OFFICERS. From and after the Effective Time, the
directors of the Surviving Corporation shall be the persons who were the
directors of Merger Subsidiary immediately prior to the Effective Time. From and
after the Effective Time, the officers of the Surviving Corporation shall be the
persons who were the officers of the Merger Subsidiary immediately prior to the
Effective Time. Such directors and officers of the Surviving Corporation shall
hold office for the term specified in, and subject to the provisions contained
in, the articles of incorporation and bylaws of the Surviving Corporation and
applicable law. If, at or after the Effective Time, a vacancy shall exist on the
board of directors or in any of the offices of the Surviving Corporation, such
vacancy shall be filled in the manner provided in the articles of incorporation
and bylaws of the Surviving Corporation.
1.05 ARTICLES OF INCORPORATION; BYLAWS. At and after the Effective Time and
until further amended in accordance with applicable law, the articles of
incorporation and bylaws of Merger Subsidiary as in effect immediately prior to
the Effective Time shall be the articles of incorporation and bylaws of the
Surviving Corporation.
1.06 TAKING OF NECESSARY ACTION; FURTHER ACTION. Ringer, Merger Subsidiary
and SRI, respectively, shall each use its reasonable best efforts to take all
such action as may be necessary or appropriate to effectuate the Merger under
the Georgia Code at the time specified in Section 1.03. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all properties, rights, privileges, immunities,
powers and franchises of either of the Constituent Corporations, the officers of
the Surviving Corporation are fully authorized in the name of each Constituent
Corporation or otherwise to take, and shall take, all such lawful and necessary
action.
1.07 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") will take place at the offices of Dorsey & Whitney,
220 South Sixth Street, Minneapolis, Minnesota, 55402 on a date to be specified
by the parties, which shall be no later than the third business day after
satisfaction or waiver of the conditions set forth in Article VIII hereof, and
will be effective as of the Effective Time. At the Closing, the parties shall
deliver to each other the documents required to be delivered pursuant to Article
VIII hereof.
ARTICLE II
MERGER CONSIDERATION/EFFECT ON CAPITAL STOCK
2.01 EFFECT ON CAPITAL STOCK.
(a) Conversion of SRI Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of Ringer, Merger Subsidiary, SRI,
the Surviving Corporation or the holder of any of the following shares of SRI
capital stock:
(i) Each share of Common Stock, par value $1.00 per share, of SRI
("SRI COMMON STOCK"), issued and outstanding immediately prior to the
Effective Time shall be converted into and become a right to receive 11,000
shares of Common Stock, par value $.01 per share, of Ringer ("RINGER COMMON
STOCK"); and
(ii) Each share of SRI's capital stock issued and outstanding
immediately prior to the Effective Time and owned by Ringer, Merger
Subsidiary or SRI ("CANCELED SHARES") shall be canceled and extinguished
without any conversion thereof and no payment shall be made with respect
thereto.
The shares of Ringer Common Stock referred to in subparagraph (i) above are
collectively referred to herein as the "MERGER CONSIDERATION." The shares of SRI
Common Stock that are issued and outstanding immediately prior to the Effective
Time, other than Canceled Shares, are collectively referred to herein as the
"SHARES," and the holders thereof are referred to herein as the "HOLDERS."
(b) Conversion of Merger Subsidiary Capital Stock. Each share of Common
Stock, par value $.01 per share, of Merger Subsidiary ("MERGER SUBSIDIARY
STOCK"), issued and outstanding immediately prior to the
A-2
<PAGE> 89
Effective Time shall be converted into and become a right to receive one share
of Common Stock, par value $.10 per share, of the Surviving Corporation
("SURVIVING CORPORATION STOCK").
2.02 DEPOSIT PROCEDURES. At or prior to the Effective Time, Ringer shall
deposit or shall cause, the Merger Consideration and any dividends or
distributions relating to the Ringer Common Stock constituting a part of such
Merger Consideration to be deposited with First Trust, National Association, or
such other bank or trust company as may be designated by Ringer and acceptable
to SRI's management (the "PAYING AGENT"), for the benefit of the Holders and
Ringer to be distributed pursuant to the terms of this Agreement and the Paying
Agent Agreement (as defined in Section 12.03).
2.03 HOLDBACK AND ESCROW. Ten percent (10%) of the Merger Consideration
(the "GENERAL CLAIMS HOLDBACK AMOUNT") shall be subject to Ringer's Offset Right
(as defined in Section 11.02), and an additional ten percent (10%) of the Merger
Consideration (the "SPECIFIED CLAIMS HOLDBACK AMOUNT") shall be subject to
claims with respect to Ringer's rights to indemnification as provided in the
Shareholders' Agreement (as defined in Section 12.01). The General Claims
Holdback Amount and the Specified Claims Holdback Amount (collectively the
"HOLDBACK AMOUNTS") shall be held in escrow by the First Trust, National
Association, or such other bank or trust company as may be designated by Ringer
and acceptable to SRI's management (the "ESCROW AGENT") in accordance with this
Section 2.03 and subject to Section 11.02 and the terms of the Shareholders'
Agreement.
2.04 EXCHANGE PROCEDURES.
(a) The Paying Agent shall distribute the Merger Consideration in exchange
for Shares pursuant to the terms of this Agreement. Ringer shall make available
to the Paying Agent from time to time as needed, cash sufficient to pay cash in
lieu of fractional shares as described in this Section 2.04 and in Section 2.05.
(b) The Escrow Agent shall hold the General Claims Holdback Amount and the
Specified Claims Holdback Amount, including any dividends paid in respect
thereof prior to the Effective Time, in separate escrow accounts (respectively,
the "GENERAL CLAIMS ESCROW FUND" and the "SPECIFIED CLAIMS ESCROW FUND" and
collectively the "ESCROW FUNDS"), for the benefit of the Holders of Shares and
subject to Ringer's Offset Right pursuant to Section 11.02 (in the case of the
General Claims Escrow Fund) and rights to indemnification as provided in the
Shareholders' Agreement (in the case of the Specified Claims Escrow Fund).
Except as contemplated by this Section 2.04, Section 2.06(d), Section 11.02 and
the Shareholders' Agreement, the Escrow Funds shall not be used for any other
purpose.
(c) As soon as reasonably practicable after the Effective Time, the Paying
Agent shall mail to each record holder of a certificate or certificates that
immediately prior to the Effective Time represented Shares (the "CERTIFICATES"),
(i) a letter of transmittal (which shall be in customary form) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for such Holder's Shares. The letter of transmittal shall specify that delivery
of Certificates shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Paying
Agent. Upon surrender of a Certificate that immediately prior to the Effective
Time represented outstanding shares of SRI Common Stock for cancellation to the
Paying Agent, together with such letter of transmittal, duly executed, and such
other documents as may be required pursuant to such instructions, the Paying
Agent shall distribute in exchange therefor, subject to escrow of the
appropriate portions thereof included in the Holdback Amounts pursuant to
Section 2.03 (the "HOLDBACK SHARES"), (i) certificates representing the number
of whole shares of Ringer Common Stock issuable to such Holder pursuant to
Section 2.01 and (ii) cash in lieu of any fractional share thereof in accordance
with Section 2.05, and the Certificate so surrendered shall forthwith be
canceled. The shares of Ringer Common Stock initially distributed to the Holders
after deducting the Holdback Amounts are referred to herein as the "INITIAL
DISTRIBUTION AMOUNTS." Until surrendered as contemplated by this Section 2.04,
each Certificate shall be deemed at any time after the Effective Time to
represent solely the right to receive the portion of the Merger Consideration
attributable to the Shares formerly represented by such Certificate.
(d) If there is a transfer of Share ownership that is not registered in the
transfer records of SRI, a certificate representing the proper number of shares
of Ringer Common Stock may be issued to a person other
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than the person in whose name the Certificate so surrendered is registered, if,
upon presentation to the Paying Agent, such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and the person requesting
such payment shall pay any transfer or other Taxes (as defined in Section
3.15(k) hereof) required by reason of the issuance of shares of Ringer Common
Stock to a person other than the registered holder of such Certificate or
establish to the reasonable satisfaction of Ringer that such tax has been paid
or is not applicable.
(e) Subject to the provisions of Section 11.02 and the Shareholders"
Agreement, as the case may be, in the event Ringer exercises its Offset Right
against all or a portion of the General Claims Holdback Amount as provided in
Section 11.02 or its rights to indemnification against all or a portion of the
Specified Claims Holdback Amount as provided in the Shareholders' Agreement, the
Paying Agent promptly shall distribute to Ringer from the appropriate Holdback
Amount the number of Shares of Ringer Common Stock determined by dividing the
offset amount or the indemnification amount, as the case may be, by the closing
sale price per share of the Ringer Common Stock as reported on the Nasdaq Stock
Market for the trading day immediately preceding the Effective Date. Ringer
Common Stock delivered to Ringer to fund Offset Rights or rights to
indemnification pursuant to the Shareholders' Agreement shall constitute a
post-closing reduction of the Merger Consideration rather than a payment of a
liability by Holders of Shares.
2.05 NO FRACTIONAL SHARES.
(a) No certificates or scrip representing fractional shares of Ringer
Common Stock shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights of a shareholder of Ringer.
(b) Notwithstanding any other provision of this Agreement, each Holder of
Shares exchanged pursuant to the Merger who would otherwise have been entitled
to receive a fraction of a share of Ringer Common Stock (after taking into
account all Certificates delivered by such Holder) with respect to the Initial
Distribution Amounts or the release of any portion of the Holdback Amounts shall
receive, in lieu thereof, cash (without interest) in an amount equal to such
fractional part of a share of Ringer Common Stock multiplied by the closing sale
price per share of the Ringer Common Stock as reported on the Nasdaq Stock
Market for the trading day immediately preceding the Effective Date.
(c) No certificates representing fractional shares of Ringer Common Stock
shall be issued to Ringer in connection with the exercise of its Offset Right or
its rights to indemnification pursuant to the Shareholders' Agreement.
2.06 OTHER EXCHANGE MATTERS.
(a) Rights of Holders of SRI Capital Stock. On and after the Effective Time
and until surrendered for exchange, each Certificate representing Shares shall
be deemed for all purposes, except as provided in Section 2.05, to evidence
ownership of and to represent the right to receive such Holder's proportionate
share of the Merger Consideration to be paid therefor pursuant to Section 2.01
and Section 2.02. The record Holder of such Certificate shall, after the
Effective Time, be entitled to vote the shares of Ringer Common Stock into which
such Shares shall have been converted (including any Shares of Ringer Common
Stock then outstanding and included in the Holdback Amounts) on any matters on
which the holders of record of Ringer Common Stock, as of any date subsequent to
the Effective Date, shall be entitled to vote. After the Effective Date, there
shall be no further registration of transfers on the records of the Surviving
Corporation of outstanding certificates formerly representing Shares of SRI
Common Stock and, if a certificate formerly representing such Shares is
presented to the Paying Agent, it shall be canceled and exchanged for such
Holder's Merger Consideration as provided in Section 2.04. In any matters
relating to such Certificates, Ringer may rely conclusively upon the record of
shareholders maintained by SRI containing the names and addresses of the Holders
of record of Shares at the Effective Time.
(b) Distributions with Respect to Unexchanged Shares. Ringer will pay no
dividends and make no other distributions with respect to Ringer Common Stock to
the Holder of any unsurrendered Certificate evidencing Shares of SRI Common
Stock of shares of Ringer Common Stock included in such Holder's proportionate
share of the Merger Consideration, and Ringer will make no cash payment in lieu
of fractional shares to any
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such Holder pursuant to Section 2.05, until the Holder of such Certificate
surrenders such Certificate. Following surrender of any such Certificate, the
Paying Agent, on behalf of Ringer, shall pay to the record holder of the
certificate representing shares of Ringer Common Stock issued in exchange for
such Certificate, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of Ringer Common Stock
to which such holder is entitled pursuant to Section 2.05 and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Ringer Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such whole shares of Ringer Common Stock.
(c) No Further Ownership Rights in SRI Capital Stock. The Merger
Consideration delivered upon the surrender for exchange of Shares in accordance
with the terms hereof (including any cash paid pursuant to Section 2.05 or
Section 2.06(b)) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such Shares.
(d) Termination of Delivery Obligation. The Paying Agent shall deliver to
Ringer upon demand any portion of the Merger Consideration that remains
undistributed by the Paying Agent more than one year after the Effective Time.
Holders of Certificates who have not theretofore complied with this Article II
shall thereafter look only to Ringer for payment of their claims for Merger
Consideration as to which they may be entitled under Section 2.01 and Section
2.02, including any dividends or distributions with respect to Ringer Common
Stock.
(e) No Liability. None of Ringer, Merger Subsidiary, SRI, the Escrow Agent
or the Paying Agent shall be liable to any person in respect of any shares of
Ringer Common Stock (or dividends or distributions with respect thereto) or cash
in the Holdback Amounts delivered to a public official pursuant to any
applicable abandoned property, escheat, or similar law.
(f) Investment of Merger Consideration. The Escrow Agent shall invest any
cash included in the Escrow Fund in interest bearing accounts guaranteed,
directly or indirectly, by the federal government. Any interest and other income
resulting from such investments shall become part of the Escrow Fund and shall
be taxable to Ringer.
(g) Lost Certificates. If any Certificate shall have been lost, stolen, or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen, or destroyed, and, if required by the
Surviving Corporation, upon the delivery to the Paying Agent of a bond in such
sum as the Surviving Corporation may direct as indemnity against any claim that
may be made against it with respect to such Certificate, the Paying Agent will
issue in exchange for such lost, stolen, or destroyed Certificate the Merger
Consideration and any cash in lieu of fractional shares, and unpaid dividends
and distributions on shares of Ringer Common Stock deliverable in respect
thereof, pursuant to this Agreement.
(h) Stock Transfer Books. At the Effective Time, the stock transfer books
of SRI shall be closed and there shall be no further registration of transfers
of shares of SRI's capital stock thereafter on the records of SRI. From and
after the Effective Time, the holders of certificates representing shares of
SRI's capital stock immediately prior to the Effective Time shall cease to have
any rights with respect to such shares of SRI's capital stock except as
otherwise provided in this Agreement or by law.
(i) Adjustments. If, between the date hereof and the date on which the last
payment of either Holdback Amount is made (the "LAST PAYMENT DATES"), shares of
Ringer Common Stock shall be changed into a security of a different issuer, a
different class of shares or cash by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares, readjustment,
purchase, merger or other transaction, then the term Ringer Common Stock, for
purposes of this Agreement shall thereafter be deemed to refer to such different
shares or cash.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SRI
SRI hereby represents and warrants to Ringer and Merger Subsidiary that,
except as set forth in the Disclosure Schedule delivered by SRI to Ringer and
Merger Subsidiary on the date hereof and initialed by representatives of Ringer
and SRI, including any amendments thereto made by SRI pursuant to Section 5.07
(the "DISCLOSURE SCHEDULE"):
3.01 ORGANIZATION AND STANDING. SRI is a corporation duly incorporated,
validly existing and in good standing under the laws of the state of Georgia and
has the requisite corporate power and authority to execute and deliver this
Agreement, the Certificate of Merger and the agreements identified in Article
XII to which SRI is a party (the "SRI ANCILLARY AGREEMENTS") and to perform its
obligations hereunder and thereunder. The copies of the articles of
incorporation and bylaws of SRI set forth in the Disclosure Schedule reflect all
amendments made thereto and are correct and complete as of the date hereof.
3.02 EXECUTION, DELIVERY AND PERFORMANCE; VALID AND BINDING AGREEMENT. The
execution, delivery and performance of this Agreement, the Certificate of Merger
and the SRI Ancillary Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
requisite corporate action of SRI and its shareholders, and no other corporate
proceedings on its part are necessary to authorize the execution, delivery and
performance of this Agreement, the Certificate of Merger and the SRI Ancillary
Agreements. This Agreement and the SRI Ancillary Agreements have been duly
executed and delivered by SRI and constitute the valid and binding obligations
of SRI and its shareholders, enforceable in accordance with their terms (subject
to the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws of general application affecting creditors'
rights) and, and the Certificate of Merger, when executed and delivered by SRI,
will constitute the valid and binding obligation of SRI, enforceable in
accordance with its terms.
3.03 SUBSIDIARIES.
(a) "SUBSIDIARY" has the meaning ascribed to the term in Rule 1-02 of
Regulation S-X of the Securities and Exchange Commission (the "SEC"). The
Disclosure Schedule lists all of the Subsidiaries of SRI, and with respect to
the capital stock of each such Subsidiary:
(i) SRI owns, directly or through another Subsidiary, 100% of the
issued and outstanding capital stock of each such Subsidiary;
(ii) All of such shares of such capital stock have been duly
authorized, are validly issued, fully paid and nonassessable, and are not
subject to preemptive rights created by statute, such Subsidiary's articles
of incorporation or bylaws, or any other agreement to which either SRI or
such Subsidiary is bound; and
(iii) There are no contracts, commitments, understandings or
arrangements by which SRI or any Subsidiary is or may be bound to sell or
otherwise transfer any of such capital stock or relating to SRI's right to
vote or dispose of shares of such capital stock.
(b) Each Subsidiary is a corporation duly incorporated, validly existing
and in good standing under the laws of its state of incorporation as listed on
the Disclosure Schedule.
(c) With the exception of the Subsidiaries, SRI does not own any stock,
partnership interest, joint venture interest or any other security or ownership
interest issued by any other corporation, organization, joint venture,
partnership, limited liability company or entity.
3.04 CORPORATE POWER AND AUTHORITY. SRI and each Subsidiary has the
corporate power and authority and all authorizations, licenses, permits and
certifications necessary to own and operate its properties and to carry on its
business as now conducted and presently proposed to be conducted. SRI and each
Subsidiary is qualified to do business as a foreign corporation in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be so qualified, and where the failure to so qualify would have a
material adverse effect on the business or results of operations of SRI and the
Subsidiaries, taken as a whole ("MATERIAL ADVERSE EFFECT").
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3.05 NO BREACH. The execution, delivery and performance of this Agreement,
the Certificate of Merger and the SRI Ancillary Agreements by SRI and the
consummation by SRI of the transactions contemplated hereby and thereby do not
conflict with or result in any breach of any of the provisions of, constitute a
default under, result in a violation of, result in the creation of a right of
termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of SRI or any Subsidiary, or require any
authorization, consent, approval, exemption or other action by or notice to any
court, other governmental body or other "PERSON" (such term shall mean an
individual, corporation, partnership, association, joint-stock company, trust,
unincorporated organization, or government or political subdivision thereof)
under the provisions of the articles of incorporation or bylaws of SRI or any
Subsidiary or any contract, indenture, mortgage, lease, loan agreement or other
agreement, relationship, commitment, arrangement or instrument, written or oral,
by which SRI or any Subsidiary is bound or affected, or any law, statute, rule
or regulation or order, judgment or decree to which SRI or any Subsidiary is
subject.
3.06 GOVERNMENTAL AUTHORITIES; CONSENTS. Except for the filing of the
Certificate of Merger with the Secretary of State of the State of Georgia,
neither SRI nor any Subsidiary is required to submit any notice, report or other
filing with any governmental authority in connection with the execution or
delivery by SRI of this Agreement, the Certificate of Merger or the SRI
Ancillary Agreements or the consummation of the transactions contemplated hereby
or thereby. No consent, approval or authorization of any governmental or
regulatory authority is required to be obtained by SRI or any Subsidiary in
connection with the execution, delivery and performance of this Agreement, the
Certificate of Merger or the SRI Ancillary Agreements or the transactions
contemplated hereby or thereby.
3.07 CAPITAL STOCK OF SRI.
(a) On the date hereof, the authorized capital stock of SRI consists of
100,000 shares of SRI Common Stock, par value $.10, of which, as of the date
hereof, 500 shares are issued and outstanding. On the date hereof, SRI's capital
stock is held of record by the persons and in the amounts set forth in the
Disclosure Schedule. On the Effective Date, SRI's capital stock will be held of
record by the persons and in the amounts set forth in a disclosure schedule to
be provided to Ringer on the Effective Date. All such outstanding shares of
SRI's capital stock (i) have been duly authorized and are validly issued, fully
paid and nonassessable, (ii) are not subject to preemptive rights created by
statute, SRI's articles of incorporation or bylaws, or any other agreement to
which either SRI or, to the knowledge of SRI, SRI's shareholders are bound, and
(iii) were not issued in violation of any applicable securities laws that would
subject the Surviving Corporation to fines, penalties, or rescission or civil
damages that are material in amount. As used in this Agreement, "knowledge of
SRI" and similar words to that effect shall mean the actual knowledge of the
officers and directors of SRI and each of the Subsidiaries after due inquiry.
(b) There are no rights, subscriptions, warrants, options, conversion
rights or agreements of any kind outstanding to purchase or otherwise acquire
from SRI any shares of SRI's capital stock or other securities of SRI of any
kind ("OUTSTANDING PURCHASE RIGHTS") (and there are no agreements or other
obligations of SRI to grant any Outstanding Purchase Rights), and there are no
agreements or other obligations (contingent or otherwise) that may require SRI
to repurchase or otherwise acquire any shares of SRI's capital stock.
(c) The Disclosure Schedule sets forth those persons who are, in SRI's
reasonable judgment, "affiliates" of SRI within the meaning of Rule 145
promulgated by the SEC under the Securities Act of 1933, as amended (the
"SECURITIES ACT").
3.08 FINANCIAL STATEMENTS. The Disclosure Schedule sets forth copies of (i)
the unaudited consolidated balance sheets, as of August 31, 1997, of SRI and the
Subsidiaries (the "LATEST BALANCE SHEET") and the unaudited consolidated
statements of earnings, Shareholders equity and cash flows of SRI and the
Subsidiaries for the eleven-month period ended August 31, 1997 (such statements
and the Latest Balance Sheet being herein referred to as the "LATEST FINANCIAL
STATEMENTS"), and (ii) the audited consolidated balance sheets, as of September
30, 1996 and September 30, 1995, of SRI and the Subsidiaries and the audited
consolidated statements of earnings, Shareholders equity and cash flows of SRI
and the Subsidiaries for each of the years then ended (collectively, the "ANNUAL
FINANCIAL STATEMENTS"). The Latest Financial Statements and the Annual Financial
Statements are based upon the information contained in the books and records of
SRI and
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the Subsidiaries and fairly present the financial condition of SRI and the
Subsidiaries as of the dates thereof and respective results of operations for
the periods referred to therein. The Annual Financial Statements (including the
notes thereto) have been prepared in accordance with GAAP, consistently applied
through the periods indicated (except as indicated in the notes thereto), and
the Latest Financial Statements have been prepared in accordance with GAAP (as
such term applies to unaudited interim financial statements and thus such
statements may not contain all notes and may not contain prior period
comparative data which are required to be prepared in accordance with generally
accepted accounting principles in general and subject to normal year-end audit
adjustments), are consistent with the Annual Financial Statements.
3.09 ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the Latest
Balance Sheet, neither SRI nor any Subsidiary has any liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise, whether due or to
become due, whether known or unknown, and regardless of when asserted) arising
out of transactions or events heretofore entered into, or any action or
inaction, or any state of facts existing, with respect to or based upon
transactions or events heretofore occurring, except liabilities which have
arisen after the date of the Latest Balance Sheet in the ordinary course of
business (none of which is a material uninsured liability for breach of
contract, breach of warranty, tort, infringement, claim or lawsuit).
3.10 NO MATERIAL ADVERSE CHANGES. Since the date of the Latest Balance
Sheet (the "Balance Sheet Date"), with the exception of seasonal business
changes in the ordinary course, there has been no material adverse change in the
assets, financial condition, operating results, distributor, customer, employee
or supplier relations, business condition or prospects of SRI and the
Subsidiaries, taken as a whole.
3.11 ABSENCE OF CERTAIN DEVELOPMENTS. Since the Balance Sheet Date, neither
SRI nor any Subsidiary has (except (i) in the ordinary course of its business
consistent with past practices or (ii) as described in the Disclosure Schedule):
(a) borrowed any amount or incurred or become subject to any liability in
excess of $5,000, except (i) current liabilities incurred in the ordinary course
of business and (ii) liabilities under contracts entered into in the ordinary
course of business;
(b) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets with a fair market value in excess of $5,000,
except (i) liens for current property Taxes not yet delinquent, (ii) liens
imposed by law and incurred in the ordinary course of business for obligations
not yet delinquent with respect to claims by carriers, warehousemen, laborers,
materialmen and the like, (iii) liens in respect of pledges or deposits under
workers' compensation laws, or (iv) liens voluntarily created in the ordinary
course of business, all of which liens aggregate less than $25,000;
(c) discharged or satisfied any lien or encumbrance or paid any liability,
in each case with a value in excess of $5,000, other than current liabilities
(including the current portion of long-term liabilities) paid in the ordinary
course of business;
(d) sold, assigned or transferred (including, without limitation, transfers
to any employees, affiliates or shareholders) any tangible assets with a fair
market value in excess of $5,000, or canceled any debts or claims, in each case,
except in the ordinary course of business;
(e) sold, assigned or transferred (including, without limitation, transfers
to any employees, affiliates or shareholders) any patents, trademarks, trade
names, copyrights, trade secrets or other intangible assets;
(f) disclosed, to any person other than Ringer or Merger Subsidiary and
authorized representatives of Ringer or Merger Subsidiary, any proprietary
confidential information, other than pursuant to a confidentiality agreement
prohibiting the use or further disclosure of such information, which agreement
is identified in the Disclosure Schedule and is in full force and effect on the
date hereof;
(g) waived any rights of material value or suffered any extraordinary
losses or adverse changes in collection loss experience, whether or not in the
ordinary course of business or consistent with past practice;
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(h) declared or paid any dividends or other distributions with respect to
any shares of its capital stock other than to SRI or a Subsidiary or redeemed or
purchased, directly or indirectly, any shares of its capital stock or any
options, warrants or other rights to purchase the same;
(i) issued, sold or transferred any of its equity securities, securities
convertible into or exchangeable for its equity securities or options, warrants
or other rights to acquire its equity securities, or any bonds or debt
securities;
(j) taken any other action or entered into any other transaction other than
in the ordinary course of business and in accordance with past custom and
practice, or entered into any transaction with any Insider (as defined in
Section 3.23 hereof) other than employment arrangements otherwise disclosed in
this Agreement and the Disclosure Schedule, or the transactions expressly
contemplated by this Agreement;
(k) suffered any material theft, damage, destruction or loss of or to any
property or properties owned or used by it, whether or not covered by insurance;
(l) made or granted any bonus, or any wage, salary or compensation increase
to any director, officer, employee or consultant whose annual compensation in
the preceding fiscal year exceeded $50,000, or made or granted any increase in
any employee benefit plan or arrangement, or amended or terminated any existing
employee benefit plan or arrangement, or adopted any new employee benefit plan
or arrangement or made any commitment or incurred any liability to any labor
organization;
(m) made any single capital expenditure or commitment therefor in excess of
$5,000;
(n) made any loans or advances to, or guarantees for the benefit of, any
persons in excess of $5,000;
(o) made any charitable contributions or pledges in excess of $5,000;
(p) made any change in accounting principles or practices from those
utilized in the preparation of the Latest Financial Statements;
(q) experienced any amendment, modification or termination of any existing,
or entered into any new, contract, agreement, plan, lease, license, permit or
franchise which is, either individual or in the aggregate, material to its
business, operations, financial position or prospects, other than in the
ordinary course of business;
(r) experienced any labor dispute;
(s) experienced any change in any assumption underlying or method of
calculating any bad debt, inventory, contingency or other reserve;
(t) written off as uncollectible any note or account receivable, or
canceled any debts, other than in the ordinary course of business and consistent
with past practice;
(u) failed to replace or replenish inventory or supplies as such inventory
or supplies may have been depleted from time to time, collect accounts
receivable, pay accounts payable and has not shortened or lengthened the
customary payment cycles for any of its payables or receivables or otherwise
managed its working capital accounts other than in the ordinary course of
business and in a manner consistent with past practice;
(v) experienced any writedown or writeup of (or failed to writedown or
writeup in accordance with GAAP) the value of any inventories, receivables or
other assets, or revalued any of its assets;
(w) failed to maintain all material assets in accordance with good business
practice and in good operating condition and repair, ordinary wear and tear
excepted;
(x) experienced any lapse or termination of any material permit that was
issued or relates to its business, including any failure to renew any such
permit; or
(y) discontinued or altered, in any material respect, its advertising or
promotional activities or its pricing and purchasing policies.
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3.12 TITLE TO PROPERTIES.
(a) The real property listed as owned ("OWNED PROPERTY") or leased ("LEASED
PROPERTY") in the Disclosure Schedule constitutes all of the real property now
used or occupied by SRI or any Subsidiary, and ever owned used or occupied in
the past by SRI or any Subsidiary (including any and all structures, fixtures or
other improvements thereon, the "REAL PROPERTY"). Such Disclosure Schedule
includes the record title holder, location, uses thereof and SRI or Subsidiary
indebtedness thereon, if any, for all Real Property. SRI or a Subsidiary has
good and marketable fee simple title to all Owned Property, except for recorded
easements, covenants and other restrictions; utility easements; building
restrictions; zoning restrictions; and other easements, covenants and
restrictions existing generally with respect to properties of a similar
character, all of which are shown on such Disclosure Schedule and there are no
outstanding options to purchase the Owned Real Property. The Real Property has
access, sufficient for the conduct of the business of SRI as now conducted or as
presently proposed to be conducted, to public roads and to all utilities,
including electricity, sanitary and storm sewer, potable water, natural gas and
other utilities, used in the operation of the business of SRI at that location.
All structures, fixtures and other improvements on all Owned Property are within
the lot lines and do not encroach on the properties of any other Person, and the
use and operation of all Owned Property are not in violation of any applicable
building, zoning, safety, environmental, subdivision and other laws, ordinances,
regulations, codes, permits, licenses and certificates and all restrictions and
conditions affecting title. Except as described in the Disclosure Schedule, no
portion of any Owned Property is located in a flood plain, flood hazard area or
designated wetlands area. Since January 1, 1992, neither SRI nor any Subsidiary
has received any written or oral notice of assessments for public improvements
against any Owned Property or any written or oral notice or order by any
governmental body, any insurance company that has issued a policy with respect
to any of such properties or any board of fire underwriters or other body
exercising similar functions (other than as disclosed in the insurance reports
disclosed hereunder) that (i) relates to material violations of building, safety
or fire ordinances or regulations, (ii) claims any material defect or deficiency
with respect to any of such properties or (iii) requests that performance of any
material repairs, alterations or other work to or in any of such properties or
in the streets bounding the same. Complete and correct copies of all material
written reports on such matters from any insurance company that has issued a
policy with respect to any of such properties since January 1, 1994, have been
delivered to Ringer. To the knowledge of SRI, there is no pending condemnation,
expropriation, eminent domain or similar proceeding affecting all or any portion
of the Owned Property.
(b) The leases for the Leased Property (the "LEASES") are in full force and
effect, and SRI or a Subsidiary holds a valid and existing leasehold interest
under each of the Leases for the term set forth in the Disclosure Schedule. SRI
has delivered to Ringer complete and accurate copies of each of the Leases, and
none of the Leases has been modified in any respect, except to the extent that
such modifications are disclosed by the copies delivered to Ringer. Neither SRI
nor any Subsidiary is in material default, and to the knowledge of SRI no
circumstances exist which, if unremedied, would, either with or without notice
or the passage of time or both, result in such default under any of the Leases;
nor to the knowledge of SRI is any other party to any of the Leases in default.
(c) SRI or a Subsidiary owns good and marketable title to each of the
tangible properties and tangible assets reflected on the Latest Balance Sheet or
acquired since the date thereof, free and clear of all liens and encumbrances,
except for (i) liens for current Taxes not yet delinquent, (ii) liens set forth
in the Disclosure Schedule, (iii) the properties subject to the Leases, (iv)
assets disposed of since the date of the Latest Balance Sheet in the ordinary
course of business, (v) liens imposed by law and incurred in the ordinary course
of business for obligations not yet due to carriers, warehousemen, laborers and
materialmen and (vi) liens in respect of pledges or deposits under workers'
compensation laws, all of which liens aggregate less than $25,000.
(d) All of the buildings, machinery, equipment, tools, jigs, fixtures,
vehicles and other tangible assets necessary for the conduct of the business of
SRI and the Subsidiaries are in reasonable working condition and repair,
ordinary wear and tear excepted, and are usable in the ordinary course of
business. There are no defects in such assets or other conditions relating
thereto which adversely affect the operation or value of such assets. SRI or a
Subsidiary owns or leases under valid leases, all buildings, machinery,
equipment and other tangible
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assets necessary for the conduct of its business as presently conducted, except
for defects of title that do not materially affect the use of such assets by SRI
and the Subsidiaries and except for such assets that can be purchased or leased
for nominal expenditures.
3.13 ACCOUNTS RECEIVABLE. The accounts receivable reflected on the Latest
Balance Sheet and those arising thereafter are valid receivables, are not
subject to valid counterclaims or set-offs, and are collectible in accordance
with their terms, except to the extent of the bad debt reserve reflected on the
Latest Balance Sheet.
3.14 INVENTORY. The inventory of raw materials, work in process and
finished goods of SRI and each Subsidiary consists of items of a cost, quality
and quantity usable and, with respect to finished goods only, salable at the
normal profit levels of SRI and such Subsidiary in the ordinary course of the
business of SRI and such Subsidiary. The inventory of finished goods of SRI and
each Subsidiary is not slow-moving as determined in accordance with past
practices, obsolete or damaged and is merchantable and fit for its particular
use. SRI and each Subsidiary has on hand or has ordered and expects timely
delivery of such quantities of raw materials, and has on hand such quantities of
work in process and finished goods, in each case as are reasonably required to
timely fill current orders on hand which require delivery within 60 days and to
maintain the manufacture and shipment of products at its normal level of
operations. As of the date of the Latest Balance Sheet, the values at which such
inventory is carried on the Latest Balance Sheet are in accordance with GAAP.
The Disclosure Schedule contains a materially complete and accurate summary of
SRI's and each Subsidiary's inventory of raw materials, work in progress,
finished goods and reserve for obsolete and other inventory allowance or accrual
calculation schedules as of September 30, 1996 and August 31, 1997.
3.15 TAX MATTERS.
(a) Each of SRI, each Subsidiary and any affiliated, combined or unitary
group of which SRI or any Subsidiary is or was a member, any predecessor of SRI
or any Subsidiary, and any Plans (as defined in Section 3.21 hereof), as the
case may be (each, a "TAX AFFILIATE" and, collectively, the "TAX AFFILIATES"),
has: (i) timely filed (or has had timely filed on its behalf) all returns,
declarations, reports, estimates, information returns, and statements
("RETURNS") required to be filed or sent by it in respect of any Taxes or
required to be filed or sent by it by any taxing authority having jurisdiction
and all such Returns are true and correct in all material respects, except for
timing and categorization issues that would not have a Material Adverse Effect;
(ii) timely and properly paid (or has had paid on its behalf) all Taxes due and
payable with respect to the periods covered by such Returns; (iii) established
on its Latest Balance Sheet, in accordance with GAAP, reserves that are adequate
for the payment of any Taxes not yet due and payable for all Tax periods or
portions thereof ending on, prior to, or including the Closing Date, the amount
of which as of the Latest Balance Sheet Date is set forth in the Disclosure
Schedule; and (iv) complied with all applicable laws, rules, and regulations
relating to the withholding of Taxes and the payment thereof (including, without
limitation, withholding of Taxes under Sections 1441 and 1442 of the Code, or
similar provisions under any foreign laws), and timely and properly withheld
from individual employee wages or other payments to employees and paid over to
the proper governmental authorities all amounts required to be so withheld and
paid over under all applicable laws. True and correct copies of any and all
Returns filed by any Tax Affiliate have been provided to Ringer.
(b) There are no liens for Taxes upon any assets of SRI or any Subsidiary
or of any Tax Affiliate, except liens for Taxes not yet due. Neither SRI nor any
Subsidiary is a party to any tax sharing agreement or similar arrangement for
the payment or reimbursement of Taxes.
(c) No deficiency for any Taxes has been asserted, assessed or, to SRI's
knowledge, proposed against SRI, any Subsidiary or any Tax Affiliate that has
not been resolved and paid in full. No waiver, extension or comparable consent
given by SRI, any Subsidiary or any Tax Affiliate regarding the application of
the statute of limitations with respect to any Taxes or Returns is outstanding,
nor is any request for any such waiver or consent pending. There has been no Tax
audit or other administrative proceeding or court proceeding with regard to any
Taxes or Returns, nor is any such Tax audit or other proceeding pending, nor has
there been any notice to SRI or any Subsidiary by any Taxing authority regarding
any such Tax, audit or other proceeding, or, to the knowledge of SRI, is any
such Tax audit or other proceeding threatened with regard to any Taxes or
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Returns. SRI does not expect the assessment of any additional Taxes of SRI, any
Subsidiary or any Tax Affiliate and is not aware of any unresolved questions,
claims or disputes concerning the liability for Taxes of SRI, any Subsidiary or
any Tax Affiliate which would exceed the estimated reserves established on its
books and records.
(d) Neither SRI, any Subsidiary nor any Tax Affiliate is a party to any
agreement, contract or arrangement that would result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the meaning
of Section 280G of the Code, and the consummation of the transactions
contemplated by this Agreement will not be a factor causing payments to be made
by SRI, any Subsidiary or any Tax Affiliate that are not deductible (in whole or
in part) under Section 280G of the Code.
(e) Neither SRI, any Subsidiary nor any Tax Affiliate has requested any
extension of time within which to file any Return, which Return has not since
been filed.
(f) No property of SRI, any Subsidiary or any Tax Affiliate is property
that SRI or such Subsidiary or Tax Affiliate is or will be required to treat as
being owned by another person under the provisions of Section 168(f)(8) of the
Code (as in effect prior to amendment by the Tax Reform Act of 1986) or is "tax-
exempt use property" within the meaning of Section 168 of the Code.
(g) Neither SRI nor any Subsidiary or Tax Affiliate is required to include
in income any adjustment under Section 481(a) of the Code by reason of a
voluntary change in accounting method initiated by SRI or any Tax Affiliate as a
result of the Tax Reform Act of 1986 and neither SRI nor any Subsidiary or Tax
Affiliate has knowledge that the Internal Revenue Service has proposed any such
adjustment or change in accounting method.
(h) All transactions that could give rise to an understatement of federal
income tax (within the meaning of Section 6661 of the Code as it applied prior
to repeal) or an underpayment of tax (within the meaning of Section 6662 of the
Code) were reported in a manner for which there is substantial authority or were
adequately disclosed (or, with respect to Returns filed before the Effective
Time, will be reported in such a manner or adequately disclosed) on the Returns
required in accordance with Sections 6661(b)(2)(B) and 6662(d)(2)(B) of the
Code.
(i) Neither SRI, nor any Subsidiary or Tax Affiliate has engaged in any
transaction that would result in a deemed election under Section 338(e) of the
Code, and neither SRI nor any Subsidiary or Tax Affiliate will engage in any
such transaction within any applicable "consistency period" (as such term is
defined in Section 338 of the Code).
(j) Neither SRI, a nor any Subsidiary or Tax Affiliate has filed any
consent under Section 341(f) of the Code.
(k) For purposes of this Agreement, the term "TAXES" means all taxes,
charges, fees, levies, or other assessments, including, without limitation, all
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment, social security,
unemployment, excise, estimated, severance, stamp, occupation, property, or
other taxes, customs duties, fees, assessments, or charges of any kind
whatsoever, including, without limitation, all interest and penalties thereon,
and additions to tax or additional amounts imposed by any taxing authority,
domestic or foreign, upon SRI or any Tax Affiliate.
3.16 CONTRACTS AND COMMITMENTS.
(a) The Disclosure Schedule lists the following agreements, whether written
or, to SRI's knowledge, oral, to which SRI or any Subsidiary is a party (or by
which SRI or any Subsidiary or their assets are bound): (i) collective
bargaining agreement or contract with any labor union; (ii) bonus, pension,
profit sharing, retirement or other form of deferred compensation plan, other
than as described in the Disclosure Schedule; (iii) hospitalization insurance or
other welfare benefit plan or practice, whether formal or informal, other than
as described in the Disclosure Schedule; (iv) stock purchase or stock option
plan; (v) contract for the employment of any officer, individual employee or
other person on a full-time or consulting basis or relating to severance pay for
any such person, other than SRI's and the Subsidiaries normal employment
practices generally affecting all employees or classes of employees (such as
hourly or salaried classes of employees);
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(vi) agreement with employees and with consultants, vendors, customers or other
third parties requiring confidential treatment of SRI or Subsidiary confidential
information and/or transfer to SRI or any Subsidiary of intellectual property
rights created by employees and with consultants, vendors, customers or other
third parties; (vii) contract, agreement or understanding relating to the voting
of SRI's or any Subsidiary's capital stock or the election of directors of SRI
or any Subsidiary; (viii) agreement or indenture relating to the borrowing of
money, to letters of credit or to mortgaging, pledging or otherwise placing a
lien on any of the assets of SRI or any Subsidiary; (ix) guaranty of any
obligation for borrowed money or otherwise; (x) lease or agreement under which
it is lessee of, or holds or operates any property, real or personal, owned by
any other party; (xi) lease or agreement under which it is lessor of, or permits
any third party to hold or operate, any property, real or personal, for which
the annual rental exceeds $5,000; (xii) contract or group of related contracts
with the same party (other than any contract or group of related contracts for
the purchase or sale of products or services) continuing over a period of more
than six months from the date or dates thereof, not terminable by it on 30 days'
or less notice without penalty and involving more than $5,000; (xiii) contract
which prohibits SRI or any Subsidiary from freely engaging in business anywhere
in the world; (xiv) contract for the distribution of the products of SRI or any
Subsidiary (including any distributor, sales and original equipment manufacturer
contract); (xv) franchise agreement; (xvi) license agreement or agreement
providing for the payment of royalties or other compensation by SRI or any
Subsidiary in connection with intellectual property rights licensed from third
parties; (xvii) license agreement or agreement providing for the receipt of
royalties or other compensation by SRI or any Subsidiary in connection with
intellectual property rights owned, controlled or otherwise licensable by SRI or
any Subsidiary; (xviii) contract or commitment for capital expenditures in
excess of $5,000, (xix) agreement for the sale of any capital asset in excess of
$5,000; (xx) contract with any affiliate which in any way relates to SRI or any
Subsidiary (other than for employment on customary terms); or (xxi) agreement
with vendors, customers or other third parties requiring confidential treatment
of confidential information of such vendors, customers or other third parties;
(xxii) other agreement which is either material to the business of SRI or any
Subsidiary or was not entered into in the ordinary course of business (other
than agreements required to be listed in the Disclosure Schedule).
(b) The Disclosure Schedule lists the following agreements, whether oral or
written, to which SRI or any Subsidiary is a party or by which SRI or any
Subsidiary or any of their assets are bound: (i) contract or group of related
contracts with the same party for the purchase of products or services by SRI or
any Subsidiary under which the undelivered balance of such products or services
is in excess of $5,000; (ii) contract or group of related contracts with the
same party for the sale of products or services by SRI or any Subsidiary under
which the undelivered balance of such products or services (including, without
limitation, any free upgrades or ongoing services) has a sales price in excess
of $5,000; and (iii) sales agreement or other customer commitment (other than
the standard form of purchase order) which entitles any purchaser to a rebate or
right of set-off, to return any product of SRI or any Subsidiary after
acceptance thereof or to delay the acceptance thereof, to receive future
services, upgrades or enhancements, or which varies in any material respect from
SRI's or any Subsidiary's standard form agreements for sales.
(c) SRI and each Subsidiary has performed all material obligations required
to be performed through the date hereof by it in connection with the contracts
or commitments required to be disclosed in the Disclosure Schedule and has not
been notified of any claim of material default under any contract or commitment
required to be disclosed in the Disclosure Schedule; neither SRI nor any
Subsidiary has any present expectation or intention of not fully performing any
material obligation pursuant to any contract or commitment required to be
disclosed in the Disclosure Schedule; and neither SRI nor any Subsidiary has
knowledge of any material breach or anticipated material breach by any other
party to any contract or commitment required to be disclosed in the Disclosure
Schedule.
(d) Prior to the date of this Agreement, Ringer has been supplied with a
correct and complete copy of each written contract or commitment referred to in
the Disclosure Schedule, together with all known amendments, waivers or other
changes thereto.
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3.17 INTELLECTUAL PROPERTY RIGHTS.
(a) The Disclosure Schedule describes: (i) all patents and all
registrations for trademarks, service marks, trade names, corporate names,
copyrights and mask works that have been issued to SRI or any Subsidiary; and
(ii) each pending patent application or application for registration for
trademarks, service marks, trade names, corporate names, copyrights and mask
works that SRI or any Subsidiary has made with respect to intellectual property
owned by, or otherwise controlled by, SRI or any Subsidiary and used in,
developed for use in or necessary to the conduct of the business of SRI or any
Subsidiary as now conducted or as planned to be conducted as described herein
(the "OWNED INTELLECTUAL PROPERTY RIGHTS"). Except as set forth in the
Disclosure Schedule, SRI and each Subsidiary owns and possesses all right, title
and interest, or holds such other interest as is identified in the Disclosure
Schedule, in and to the rights set forth under such caption free and clear of
all liens, security interests or other encumbrances and has the full right to
exploit such Owned Intellectual Property Rights without payment of compensation
to any other party.
(b) The Disclosure Schedule describes all agreements granting to SRI or any
Subsidiary rights in patents, patent applications, trademarks, service marks,
trade names, corporate names, copyrights, mask works, trade secrets or other
intellectual property rights used in or necessary to the conduct of the business
of SRI as now conducted or as planned to be conducted as described herein (the
"LICENSED-IN INTELLECTUAL PROPERTY RIGHTS"). All such agreements are in force
and neither SRI nor any Subsidiary is in breach of any such agreement.
(c) The Disclosure Schedule describes all products marketed or that have
been marketed by SRI or any Subsidiary within the past two years and identifies
the method(s) of intellectual property protection utilized by SRI or any
Subsidiary with respect to such products.
(d) The Disclosure Schedule describes all agreements granting to third
parties any rights in Owned Intellectual Property Rights and any agreements to
grant intellectual property rights that SRI or any Subsidiary may acquire in the
future.
(e) Except as disclosed in the Disclosure Schedule, all of the Owned
Intellectual Property Rights will be assumed by, and will become intellectual
property rights of, the Surviving Corporation in the Merger, without the
requirement that any consent to assignment be obtained or any payment (other
than government filing or registration fees) be made. Except as disclosed in the
Disclosure Schedule, all licenses of the Licensed-In Intellectual Property
Rights will be assumed by, and will become valid agreements of, the Surviving
Corporation in the Merger, without the requirement that any consent to
assignment be obtained or any payment be made (other than future royalties as
provided in such agreements).
(f) SRI and each Subsidiary have taken all commercially reasonable steps to
acquire, protect and maintain the Owned Intellectual Property Rights. Without
limiting the generality of the foregoing, (i) all employees, contract workers,
consultants and other agents of SRI and each Subsidiary have executed agreements
sufficient to vest in SRI or such Subsidiary ownership or the right to use the
Owned Intellectual Property Rights on which they have performed services in the
business of SRI or such Subsidiary as currently conducted without the payment of
royalties or penalties; (ii) all maintenance, annuity, renewal and other such
fees and filings due on Owned Intellectual Property Rights have been paid or
made; and (ii) SRI has no knowledge of any defects in the Owned Intellectual
Property Rights that would lead to any of them becoming invalid or
unenforceable.
(g) Except as disclosed in the Disclosure Schedule, neither SRI nor any
Subsidiary has received any notice of, nor are there any facts known to SRI or
any Subsidiary which indicate a likelihood of, any infringement or
misappropriation by, or conflict from, any third party with respect to the Owned
Intellectual Property Rights or any Licensed-In Intellectual Property Rights
that are exclusively licensed to SRI or any Subsidiary; and no claim by any
third party contesting the validity of any Owned Intellectual Property Rights
has been made, is currently outstanding or, to the knowledge of SRI, is
threatened;
(h) Except as disclosed in the Disclosure Schedule, neither SRI nor any
Subsidiary has received any notice of any infringement, misappropriation or
violation by SRI or any Subsidiary of any intellectual property rights of any
third parties and neither SRI nor any Subsidiary, to its knowledge, has
infringed, misappropriated
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or otherwise violated any such intellectual property rights; and to the
knowledge of SRI, no infringement, misappropriation or violation of any
intellectual property rights of any third parties has occurred or will occur
with respect to products currently being sold by SRI or any Subsidiary or with
respect to the products currently under development (in their present state of
development) or with respect to the conduct of the business of SRI or any
Subsidiary as now conducted.
(i) Except as disclosed in the Disclosure Schedule, neither SRI nor any
Subsidiary has entered into any agreement restricting SRI or any Subsidiary from
selling, leasing or otherwise distributing any of its current products or
products under development to any class of customers, in any geographic area,
during any time period or in any segment of the market.
(j) To SRI's knowledge, SRI and each Subsidiary has the right to make
available to the Surviving Corporation all trade secrets and other confidential
information entrusted to SRI or any Subsidiary by third parties.
(k) There are no known quality defects in the designs contained in the
Owned Intellectual Property Rights and such designs comply with all applicable
laws.
3.18 LITIGATION. The Disclosure Schedule contains a detailed description of
all actions, suits, proceedings, orders or investigations pending or, to the
knowledge of SRI, threatened against SRI or any Subsidiary, at law or in equity,
or before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, nor
is there any basis therefor.
3.19 WARRANTIES; PRODUCTS.
(a) The Disclosure Schedule lists all claims outstanding, pending or, to
the knowledge of SRI, threatened for breach of any warranty relating to any
products sold by SRI or any Subsidiary prior to the date hereof. The description
of the product warranties and other material terms of sale of SRI and each
Subsidiary set forth in the Disclosure Schedule are correct and complete. The
reserves for warranty claims on the Latest Balance Sheet are consistent with
SRI's and each Subsidiary's prior practices and are fully adequate to cover all
warranty claims made or to be made against any products of SRI or any Subsidiary
sold prior to the date thereof.
(b) SRI's and each Subsidiary's current products have performed, and shall
perform after the Effective Time, substantially in accordance with SRI's and
such Subsidiary's technical specifications applicable to such products and
parts, subject to repair and replacement claims consistent with SRI's and such
Subsidiary's past experience. The foregoing representation and warranty:
(i) is contingent upon proper use of the products and parts in the
applications for which they were intended as indicated in SRI's and such
Subsidiary's accompanying user manual or similar documentation for the
products and parts; and
(ii) does not apply to any product or part which (A) has been altered,
except by SRI or such Subsidiary or at SRI's and such Subsidiary's
direction, (B) has not been installed, operated, repaired or maintained in
accordance with any installation, handling, maintenance or operating
instructions supplied by SRI or such Subsidiary, or (C) has been damaged by
acts of nature, vandalism, burglary, neglect, misuse or accident.
3.20 EMPLOYEES. (a) To the knowledge of SRI, no executive employee of SRI
or any Subsidiary and no group of the employees of SRI or any Subsidiary has any
plans to terminate his, her or their employment; (b) SRI and each Subsidiary has
complied with all laws relating to the employment of labor, including provisions
thereof relating to wages, hours, equal opportunity, collective bargaining and
the payment of social security and other Taxes; (c) neither SRI nor any
Subsidiary has any labor relations problem pending and SRI's labor relations are
satisfactory; (d) there are no workers' compensation claims pending against SRI
or any Subsidiary nor is SRI or any Subsidiary aware of any facts that would
give rise to such a claim; (e) no employee of SRI or any Subsidiary is subject
to any secrecy or noncompetition agreement or any other agreement or restriction
of any kind that would impede in any way the ability of such employee to carry
out fully all activities of such employee in furtherance of the business of SRI
or any Subsidiary; and (f) no
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employee or former employee of SRI or any Subsidiary, or any predecessor has any
claim with respect to any Intellectual Property Rights. The Disclosure Schedule
lists, as of the date set forth in the Disclosure Schedule, each employee of SRI
or any Subsidiary. The Disclosure Schedule also states the position, title,
remuneration (including any scheduled salary or remuneration increases), date of
employment and accrued vacation pay of each such employee as of such date.
3.21 EMPLOYEE BENEFIT PLANS.
(a) For the purpose of this Agreement, "ERISA" means the Employee
Retirement Income Security Act of 1974, as amended, and the term "Plan" means
every employee benefit plan (whether or not covered by ERISA) which is
maintained or contributed to by SRI or any Subsidiary for the benefit of present
or former employees, including those intended to provide: (i) medical, surgical,
health care, hospitalization, dental, vision, workers' compensation, life
insurance, death, disability, legal services, severance, sickness or accident
benefits, (ii) pension, profit sharing, stock bonus, retirement, supplemental
retirement or deferred compensation benefits (whether or not tax qualified),
(iii) bonus, incentive compensation, stock option, stock appreciation right,
phantom stock or stock purchase benefits, or (iv) salary continuation,
unemployment, supplemental unemployment, termination pay, vacation or holiday
benefits.
(b) The term "PLAN" shall also include every such plan: (i) which SRI or
any Subsidiary has committed to implement, establish, adopt or contribute to in
the future, (ii) for which SRI or any Subsidiary is or may be financially liable
as a result of the direct sponsor's affiliation to SRI or any Subsidiary or its
owners (whether or not such affiliation exists at the date of this Agreement and
notwithstanding that the plan is not maintained by SRI or any Subsidiary for the
benefit of its employees or former employees), (iii) which is in the process of
terminating (but such term does not include any plan that has been terminated
and completely wound up prior to the date of this Agreement such that neither
SRI nor any Subsidiary has any present or potential liability with respect to
such arrangement), or (iv) for or with respect to which SRI or any Subsidiary is
liable under any common law successor doctrine, express successor liability
provisions of law, provisions of a collective bargaining agreement, labor or
employment law or agreement with a predecessor employer.
(c) The Disclosure Schedule sets forth all Plans by name and brief
description identifying: (i) the type of Plan, (ii) the funding arrangements for
the Plan, (iii) the sponsorship of the Plan, and (iv) the participating
employers in the Plan.
(d) Each Plan identified in the Disclosure Schedule is further identified
on such Disclosure Schedule by reference to such one or more of the following
characteristics as may apply to such Plan: (i) defined contribution plan as
defined in Section 3(34) of ERISA or Section 414(i) of the Code, (ii) defined
benefit plan as defined in Section 3(35) of ERISA or Section 414(j) of the Code,
(iii) plan which is or is intended to be tax qualified under Section 401(a) or
403(a) of the Code, (iv) plan which is or is intended to be an employee stock
ownership plan as defined in Section 4975(e)(7) of the Code (and whether or not
such plan has entered into an exempt loan), (v) nonqualified deferred
compensation arrangement, (vi) employee welfare benefit plan as defined in
Section 3(1) of ERISA, (vii) multiemployer plan as defined in Section 3(37) of
ERISA or Section 414(f) of the Code, (viii) plan maintained by more than one
employer as defined in Section 413(c) of the Code (a "multiple employer plan"),
(ix) plan providing benefits after separation from service or termination of
employment, (x) plan maintained or contributed to by SRI or any Subsidiary which
owns any SRI or other employer securities as an investment, (xi) plan which
provides benefits (or provides increased benefits or vesting) as a result of a
change in control of SRI or any Subsidiary, (xii) plan which is maintained
pursuant to collective bargaining, and (xiii) a plan funded, in whole or in
part, through a voluntary employees' beneficiary association exempt from tax
under Section 501(c)(9) of the Code.
(e) The Disclosure Schedule sets forth the identity of each corporation,
trade or business (separately for each category below that applies): (i) which
is (or was during the preceding five years) under common control with SRI or any
Subsidiary within the meaning of Section 414(b) or (c) of the Code, (ii) which
is (or was during the preceding five years) in an affiliated service group with
SRI or any Subsidiary within the meaning of Section 414(m) of the Code, (iii)
which is (or was during the preceding five years) the legal employer of persons
providing services to SRI or any Subsidiary as leased employees within the
meaning of Section 414(n) of the Code, and (iv) with respect to which SRI or any
Subsidiary is a successor employer for
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purposes of group health or other welfare plan continuation rights (including
Section 601 et. seq. of ERISA) or the Family and Medical Leave Act.
(f) To the extent that they exist, SRI has furnished Ringer with true and
complete copies of: (i) the most recent determination letter, if any, received
by SRI or any Subsidiary from the Internal Revenue Service regarding each Plan,
(ii) the most recent determination or opinion letter ruling from the Internal
Revenue Service that each trust established in connection with Plans which are
intended to be tax exempt under Section 501(a) or (c) of the Code are so tax
exempt, (iii) all pending applications for rulings, determinations, opinions, no
action letters and the like filed with any governmental agency (including but
not limited to the Department of Labor, Internal Revenue Service, Pension
Benefit Guaranty Corporation and the SEC), (iv) the financial statements for
each Plan for the three most recent fiscal or Plan years (in audited form if
required by ERISA) and, where applicable, Annual Report/Return (Form 5500) with
disclosure schedules, if any, and attachments for each Plan, (v) the most
recently prepared actuarial valuation report for each Plan (including but not
limited to reports prepared for funding, deduction and financial accounting
purposes), (vi) Plan documents, trust agreements, insurance contracts, service
agreements and all related contracts and documents (including any employee
summaries and material employee communications) with respect to each Plan, and
(vii) collective bargaining agreements (including side agreements and letter
agreements) relating to the establishment, maintenance, funding and operation of
any Plan.
(g) The Disclosure Schedule identifies each employee of SRI or any
Subsidiary who is: (i) absent from active employment due to short or long term
disability, (ii) absent from active employment on a leave pursuant to the Family
and Medical Leave Act or a comparable state law, (iii) absent from active
employment on any other leave or approved absence (together with the reason for
such leave or absence), (iv) absent from active employment due to military
service (under conditions that give the employee rights to re-employment), or
(v) not an "at will" employee, except as "at will" status may be modified by
employee handbooks or employment practices applicable generally to all employees
or categories of employees (such as hourly and salaried categories).
(h) With respect to continuation rights arising under federal or state law
as applied to plans that are group health plans (as defined in Section 601 et.
seq. of ERISA), the Disclosure Schedule identifies: (i) each employee, former
employee or qualifying beneficiary who has elected continuation, and (ii) each
employee, former employee or qualifying beneficiary who has not elected
continuation coverage but is still within the period in which such election may
be made.
(i) Except as set forth in the Disclosure Schedule: (i) all Plans intended
to be tax qualified under Section 401(a) or Section 403(a) of the Code are so
qualified; (ii) all trusts established in connection with Plans which are
intended to be generally tax exempt under Section 501(a) or (c) of the Code are
generally tax exempt; (iii) to the extent required either as a matter of law or
to obtain the intended tax treatment and tax benefits, all Plans comply in all
material respects with the requirements of ERISA and the Code; (iv) all Plans
have been administered in all material respects in accordance with the documents
and instruments governing the Plans; (v) all reports and filings with
governmental agencies (including but not limited to the Department of Labor,
Internal Revenue Service, Pension Benefit Guaranty Corporation and the SEC)
required in connection with each Plan have been timely made; (vi) all
disclosures and notices required by law or Plan provisions to be given to
participants and beneficiaries in connection with each Plan have been properly
and timely made; (vii) to SRI's knowledge, no Plan, separately or in the
aggregate, requires or would result in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code, and the consummation
of the transactions contemplated by this Agreement will not be a factor in
causing payments to be made by Ringer or SRI or any Subsidiary that are not
deductible (in whole or in part) because of the application of Section 280G of
the Code; (viii) and SRI and each Subsidiary has made a good faith effort to
comply with the reporting and taxation requirements for FICA Taxes with respect
to any deferred compensation arrangements under Section 3121(v) of the Code.
(j) Except as set forth in the Disclosure Schedule: (i) all contributions,
premium payments and other payments required to be made in connection with the
Plans as of the date of this Agreement have been made; (ii) all contributions,
premium payments and other payments due from SRI or any Subsidiary in connection
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with the Plans but not made as of the date of this Agreement have been accounted
for in accordance with GAAP on the Latest Balance Sheet; (iii) no contribution,
premium payment or other payment has been made in support of any Plan that is in
excess of the allowable deduction for federal income tax purposes for the year
with respect to which the contribution was made (whether under Section 162,
Section 280G, Section 404, Section 419, Section 419A of the Code or otherwise);
and (iv) with respect to each Plan that is subject to Section 301 et. seq. of
ERISA or Section 412 of the Code, neither SRI nor any Subsidiary is liable for
any accumulated funding deficiency as that terms is defined in Section 412 of
the Code and the projected benefit obligations determined as of the date of this
Agreement do not exceed the assets of the Plan.
(k) Except as set forth in the Disclosure Schedule: (i) no action, suit,
charge, complaint, proceeding, hearing, investigation or claim is pending with
regard to any Plan other than routine uncontested claims for benefits; (ii)
except as based upon plans maintained by Ringer or its affiliates, the
consummation of the transactions contemplated by this Agreement will not cause
any Plan to increase benefits payable to any participant or beneficiary; (iii)
except as based upon plans maintained by Ringer or its affiliates, the
consummation of the transactions contemplated by this Agreement will not: (A)
entitle any current or former employee of SRI or any Subsidiary to severance
pay, unemployment compensation or any other payment, benefit or award, or (B)
accelerate or modify the time of payment or vesting, or increase the amount of
any benefit, award or compensation due any such employee; (iv) to SRI's
knowledge, no Plan is currently under examination or audit by the Department of
Labor, the Internal Revenue Service or the Pension Benefit Guaranty Corporation;
(v) neither SRI nor any Subsidiary has any actual or potential liability arising
under Title IV of ERISA as a result of any Plan that has terminated or is in the
process of terminating; (vi) neither SRI nor any Subsidiary has any actual or
potential liability under section 4201 et. seq. of ERISA for either a complete
withdrawal or a partial withdrawal from a multiemployer Plan; and (vii) with
respect to the Plans, neither SRI nor any Subsidiary has any liability (either
directly or as a result of indemnification) for (and the transaction
contemplated by this Agreement will not cause any liability for): (A) any excise
Taxes under section 4971 through section 4980B, section 4999, section 5000 or
any other section of the Code, (B) any penalty under section 502(i), section
502(l), Part 6 of Title I or any other provision of ERISA, or (C) any excise
Taxes, penalties, damages or equitable relief as a result of any prohibited
transaction, breach of fiduciary duty or other violation under ERISA or any
other applicable law.
(l) Except as set forth in the Disclosure Schedule: (i) all accruals
required under FAS 106 have been properly accrued on the financial statements of
SRI; (ii) no condition, agreement or Plan provision limits the right of SRI or
any Subsidiary to amend, cut back or terminate any Plan (except to the extent
such limitation arises under ERISA); (iii) neither SRI nor any Subsidiary has
any liability for life insurance, death or medical benefits after separation
from employment other than: (A) death benefits under the Plans set forth in the
Disclosure Schedule or (B) health care continuation benefits described in
section 4980B of the Code.
3.22 INSURANCE. The Disclosure Schedule lists and briefly describes each
insurance policy maintained by SRI or any Subsidiary with respect to the
properties, assets and operations of SRI or such Subsidiary and sets forth the
date of expiration of each such insurance policy. All of such insurance policies
are in full force and effect. Neither SRI nor any Subsidiary is in default with
respect to its obligations under any of such insurance policies.
3.23 AFFILIATE TRANSACTIONS. Other than pursuant to this Agreement, no
officer, director or employee of SRI or any Subsidiary or any member of the
immediate family of any such officer, director or employee, or any entity in
which any of such persons owns any beneficial interest (other than any publicly
held corporation whose stock is traded on a national securities exchange or in
the over-the-counter market and less than one percent of the stock of which is
beneficially owned by any of such persons) (collectively "INSIDERS"), has any
agreement with SRI or any Subsidiary (other than normal employment arrangements)
or any interest in any property, real, personal or mixed, tangible or
intangible, used in or pertaining to the business of SRI or any Subsidiary
(other than ownership of capital stock of SRI). None of the Insiders has any
direct or indirect interest (other than beneficial ownership of less than one
percent of the stock of a publicly held corporation whose stock is traded on a
national securities exchange or in the over-the-counter market) in any
competitor, supplier or customer of SRI or any Subsidiary or in any person, firm
or entity from whom or to whom SRI or any Subsidiary leases any property. For
purposes of this Section 3.23, the members of the immediate family of
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an officer, director or employee shall consist of the spouse, parents, children,
siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers-
and sisters-in-law of such officer, director or employee. All agreements and
transactions between SRI or any Subsidiary and any Insider identified in the
Disclosure Schedule were made for bona fide business purposes on terms
comparable to what could be obtained from an unaffiliated third party.
3.24 CUSTOMERS AND SUPPLIERS. The Disclosure Schedule lists the 15 largest
distributors and the 15 largest suppliers of each Subsidiary for the
eleven-month period ended August 31, 1997, and sets forth opposite the name of
each such customer or supplier the approximate amount of gross sales or
purchases by such Subsidiary attributable to such customer or supplier for such
period. Since the Balance Sheet Date, no customer or supplier listed in the
Disclosure Schedule has informed SRI or any Subsidiary that it will stop or
materially decrease the rate of business done with SRI or any Subsidiary.
3.25 DISTRIBUTORS. The Disclosure Schedule lists (a) all former
distributors of SRI or any Subsidiary that have been terminated since January 1,
1994 and the circumstances surrounding such termination; (b) all litigation and
disputes between SRI or any Subsidiary and any of their past or present
distributors, including any claims initiated by any distributor against SRI or
any Subsidiary, whether such litigation dispute resulted in a settlement,
financial payment or not; (c) to SRI's knowledge, all buying consortium
arrangements by which any distributor of SRI or any Subsidiary purchases goods
(including wholegoods, parts, supplies or other goods) or services from SRI or
any Subsidiary; and (d) all distributors of SRI or any Subsidiary that, to SRI's
knowledge, sell or distribute goods or services other than those of SRI or any
Subsidiary. There are no enforceable agreements with any distributor except as
set forth in the Disclosure Schedule. Each distributor of SRI and each
Subsidiary may be terminated without penalty or other liability other than the
repurchase of inventory and potential liability for floor plan exposure upon at
least 30 days' prior written notice, except as otherwise provided by distributor
protection laws in some states.
3.26 OFFICERS AND DIRECTORS; BANK ACCOUNTS. The Disclosure Schedule lists
all officers and directors of SRI and each Subsidiary and all of the bank
accounts of SRI and each Subsidiary (designating each authorized signer).
3.27 COMPLIANCE WITH LAWS; PERMITS.
(a) Except as set forth in the Disclosure Schedule, SRI, each Subsidiary,
and their respective predecessors and respective officers, directors, agents and
employees have complied in all material respects with all applicable laws,
regulations and other requirements, including, but not limited to, federal,
state, local and foreign laws, ordinances, rules, regulations and other
requirements pertaining to product labeling, consumer products safety, equal
employment opportunity, employee retirement, affirmative action and other hiring
practices, occupational safety and health, workers' compensation, unemployment
and building and zoning codes to which SRI or any Subsidiary (including any
product of SRI or any Subsidiary) may be subject, and, since January 1, 1992,
SRI has received no notice of any allegation or claim of any noncompliance and
no claims have been filed against SRI or any Subsidiary alleging a violation of
any such laws, regulations or other requirements. SRI has no knowledge of any
action, pending or threatened, to change the zoning or building ordinances or
any other laws, rules, regulations or ordinances affecting the Real Property.
Neither SRI nor any Subsidiary is relying on any exemption from or deferral of
any such applicable law, regulation or other requirement that would not be
available to the Surviving Corporation after the Effective Time.
(b) SRI and each Subsidiary has, in full force and effect, all material
licenses, permits and certificates, from federal, state, local and foreign
authorities (including, without limitation, federal and state agencies
regulating occupational health and safety) necessary to conduct its business and
own and operate its properties (other than Environmental Permits, as such term
is defined in Section 3.28(b) hereof) (collectively, the "PERMITS"). SRI and
each Subsidiary has conducted its business in substantial compliance with all
material terms and conditions of the Permits.
(c) Neither SRI nor any Subsidiary has made or agreed to make gifts of
money, other property or similar benefits (other than incidental gifts of
articles or general promotion and entertainment expenditures of
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nominal value) to any actual or potential customer, supplier, governmental
employee or any other person in a position to assist or hinder SRI or any
Subsidiary in connection with any actual or proposed transaction.
3.28 ENVIRONMENTAL MATTERS.
(a) As used in this Section 3.28, the following terms shall have the
following meanings:
(i) "HAZARDOUS MATERIALS" means any dangerous, toxic or hazardous
pollutant, contaminant, chemical, waste, material or substance as defined
in or governed by any federal, state or local law, statute, code,
ordinance, regulation, rule or other requirement relating to such substance
or otherwise relating to the environment or human health or safety,
including without limitation any waste, material, substance, pollutant or
contaminant that (i) might present a hazard to or cause any injury to human
health or safety or to the environment (ii) might cause a nuisance,
trespass, toxic tort or other common law claim with respect to SRI, any
Subsidiary or the Real Property, or (iii) might subject SRI or any
Subsidiary to any imposition of costs or liability under any Environmental
Law (as defined in Section 3.28(a)(ii) hereof).
(ii) "ENVIRONMENTAL LAWS" means all applicable federal, state and
local laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to pollution,
contamination or protection of the environment (including, without
limitation, all applicable federal, state and local laws, rules,
regulations, codes, ordinances, orders, decrees, directives, permits,
licenses and judgments relating to Hazardous Materials) in effect as of the
date of this Agreement.
(iii) "RELEASE" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any
other release or threatened release, however defined, whether intentional
or unintentional, of any Hazardous Material.
(iv) "CLEANUP" means the removal, remediation, decommissioning,
abatement, corrective action or other response with respect (including,
without limitation, testing, monitoring, sampling or investigation of any
kind) any Release or presence or other discovery of Hazardous Materials
(including,without limitation, chlorinated solvents, asbestos-containing
material, pesticides, insecticides, fungicides) or other adverse
environmental or safety conditions to the satisfaction of all applicable
governmental agencies, in compliance with applicable Environmental Laws.
(v) "REGULATORY ACTIONS" shall mean any claim, demand, action or
proceeding brought or instigated by any governmental agency in connection
with any Environmental Law (including, without limitation, civil, criminal
and/or administrative proceedings), whether or not seeking costs, damages,
penalties, or expenses.
(vi) "THIRD-PARTY CLAIMS" shall mean any claim, demand, suit,
proceeding, cause of action, penalty, cost, injunction or demand for
payment or compensation, asserted by any person or entity, whether or not
involving any injury or threatened injury to human health or safety,
property, the environment or natural resources, based on any Release of
Hazardous Materials or other adverse environmental or safety conditions, or
based on any action in negligence, trespass, strict liability, nuisance,
toxic tort or other Environmental Law or common law involving environmental
or safety matters.
(b) SRI, each Subsidiary and the Real Property are in compliance with all
applicable Environmental Laws. To the knowledge of SRI, all ownership or use of
the Real Property by any owners thereof or operators thereon other than SRI or
the Subsidiaries was at all times in compliance with all applicable
Environmental Laws, except where any such noncompliance, individually or in
aggregate, would not have a Material Adverse Effect.
(c) SRI and each Subsidiary has obtained, and maintained in full force and
effect, all environmental permits, licenses, certificates of compliance,
approvals and other authorizations necessary to conduct its business and operate
the Real Property (collectively, the "ENVIRONMENTAL PERMITS"). A correct and
complete copy of each such Environmental Permit shall be provided by SRI to
Ringer at least 14 days prior to the Effective Time. SRI and each Subsidiary has
conducted its business in compliance with all terms and
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conditions of the Environmental Permits. SRI and each Subsidiary has filed all
reports and notifications required to be filed under and pursuant to all
applicable Environmental Laws.
(d) (i) No Hazardous Materials have been generated, treated, contained,
handled, located, used, manufactured, processed, buried, incinerated, deposited,
stored, or released on, under or about any part of the Real Property that would
cause the Surviving Corporation or Ringer to incur response, remediation or
other costs related to Cleanup in order to comply with applicable Environmental
Laws or that would subject the Surviving Corporation or Ringer to fines or
penalties, (ii) the Real Property and any improvements thereon, contain no
asbestos, urea, formaldehyde, radon at levels above natural background,
polychlorinated biphenyls ("PCB"s) or pesticides that would cause the Surviving
Corporation or Ringer to incur response, remediation or other costs related to
Cleanup in order to comply with applicable Environmental Laws or that would
subject the Surviving Corporation or Ringer to fines, penalties, Regulatory
Actions or Third Party Claims, and (iii) no aboveground or underground storage
tanks are located on, under or about the Real Property.
(e) Neither SRI nor any Subsidiary has received any notice alleging in any
manner that it is, or might be potentially responsible for any Release of
Hazardous Materials, or any costs or liabilities arising under or for violation
of Environmental Laws.
(f) No expenditure, including penalties, fines or response, remediation or
other costs of Cleanup arising under applicable Environmental Laws, will be
required in order for Ringer, Merger Subsidiary or the Surviving Corporation to
comply with any Environmental Laws in effect at the time of the Effective Time
in connection with the operation or continued operation of the business of SRI
or any Subsidiary or the Real Property in a manner consistent with the current
operation thereof by SRI or any Subsidiary, other than expenditures comparable
to SRI's or such Subsidiary's historical level of expenditures for compliance
with Environmental Laws.
(g) Neither SRI, any Subsidiary nor the Real Property is or has been listed
on the United States Environmental Protection Agency National Priorities List of
Hazardous Waste Sites (the "NATIONAL PRIORITIES LIST"), or any other list,
schedule, law, inventory or record of hazardous or solid waste sites maintained
by any federal, state or local agency.
(h) SRI has disclosed and delivered to Ringer all environmental reports and
investigations which SRI or any Subsidiary or any of their agents,
representatives, consultants or counsel has obtained, ordered or reviewed with
respect to the business of SRI, any Subsidiary or the Real Property.
(i) To the knowledge of SRI, no part of the business of SRI, any Subsidiary
or the Real Property has been used as a landfill, dump or other disposal,
storage, transfer, handling or treatment area for Hazardous Materials, or as a
gasoline service station or a facility for selling, dispensing, storing,
transferring, disposing or handling petroleum and/or petroleum products.
(j) No lien has been attached or filed against SRI, any Subsidiary or the
Real Property in favor of any governmental or private entity for (i) any
liability or imposition of costs under or violation of any applicable
Environmental Law; or (ii) any Release of Hazardous Materials or other
environmental condition.
(k) The storage, transportation, handling, use or disposal, if any, by SRI
or any Subsidiary of Hazardous Materials on or under the Real Property and/or
disposal elsewhere, if any, of Hazardous Materials generated on or from the Real
Property is currently, and at all times has been, in compliance in all material
respects with all applicable Environmental Laws. Neither SRI nor any Subsidiary
has transported or arranged for the transportation or any Hazardous Materials or
other material or substances to any location which is: (i) listed on the
National Priorities List, or (ii) listed for possible inclusion on the National
Priorities List, in the Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980 ("CERCLA") or on any similar state list.
3.29 BROKERAGE. No third party shall be entitled to receive any brokerage
commissions, finder's fees, fees for financial advisory services or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of SRI or any
Subsidiary, other than fees for financial advisory services that have been paid
or accrued at or prior to the Effective Date.
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3.30 SHAREHOLDER AGREEMENTS. On or prior to the date hereof, SRI has
delivered to Ringer an executed copy of the Shareholder Agreement as described
in Section 12.01 hereof.
3.31 DISCLOSURE. Neither this Agreement nor any of the exhibits hereto nor
any of the documents delivered by or on behalf of SRI or any Subsidiary pursuant
to Article VIII hereof, the Disclosure Schedule or any of the financial
statements referred to in Section 3.08 hereof contains any untrue statement of a
material fact regarding SRI or any of the other matters dealt with in this
Article III relating to SRI or any Subsidiary or the transactions contemplated
by this Agreement. This Agreement, the exhibits hereto, the documents delivered
to Ringer by or on behalf of SRI or any Subsidiary pursuant to Article VIII
hereof, the Disclosure Schedule and the financial statements referred to in
Section 3.08 hereof do not omit any material fact necessary to make the
statements contained herein or therein, in light of the circumstances in which
they were made, not misleading, and there is no fact which has not been
disclosed to Ringer of which SRI has knowledge is aware which materially affects
adversely or could reasonably be anticipated to materially affect adversely the
business, including the operating results, assets, customer relations, employee
relations and business prospects, of SRI.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF RINGER
AND MERGER SUBSIDIARY
Ringer and Merger Subsidiary, jointly and severally, hereby represent and
warrant to SRI that:
4.01 INCORPORATION AND CORPORATE POWER. Each of Ringer and Merger
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Minnesota and the State of Georgia,
respectively, with the requisite corporate power and authority to execute and
deliver this Agreement and the agreements identified in Article XII to which it
is a party (the "RINGER ANCILLARY AGREEMENTS") and perform its obligations
hereunder and thereunder. The Merger Subsidiary has the requisite corporate
power and authority to execute and deliver the Certificate of Merger and perform
its obligations thereunder.
4.02 EXECUTION, DELIVERY AND PERFORMANCE; VALID AND BINDING AGREEMENT. The
execution, delivery and performance of this Agreement and the Ringer Ancillary
Agreements by Ringer and Merger Subsidiary, and the Certificate of Merger by
Merger Subsidiary, and the consummation of the transactions contemplated hereby
and thereby have been duly and validly authorized by all requisite corporate
action other than approval of the Merger by the holders of a majority of the
outstanding share of Ringer Common Stock, and no corporate proceedings on their
part other than such approval are necessary to authorize the execution, delivery
or performance of this Agreement, the Ringer Ancillary Agreements or the
Certificate of Merger. This Agreement and the Ringer Ancillary Agreements have
been duly executed and delivered by Ringer and Merger Subsidiary and constitute
the valid and binding obligations of Ringer and Merger Subsidiary, enforceable
in accordance with their terms (subject to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application affecting creditors' rights), and the Certificate of Merger,
when executed and delivered by Merger Subsidiary, will constitute the valid and
binding obligation of Merger Subsidiary, enforceable in accordance with its
terms.
4.03 NO BREACH. The execution, delivery and performance of this Agreement
and the Ringer Ancillary Agreements by Ringer and Merger Subsidiary, and the
Certificate of Merger by Merger Subsidiary, and the consummation by Ringer and
Merger Subsidiary of the transactions contemplated hereby and thereby do not
conflict with or result in any breach of any of the provisions of, constitute a
default under, result in a violation of, result in the creation of a right of
termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of Ringer or Merger Subsidiary, or require any
authorization, consent, approval, exemption or other action by or notice to any
court or other governmental body, under the provisions of the articles of
incorporation or bylaws of either Ringer or Merger Subsidiary, or any contract,
indenture, mortgage, lease, loan agreement or other agreement, relationship,
commitment, arrangement or instrument, written or oral, by which either Ringer
or Merger Subsidiary is bound or affected (other than Ringer's agreements with
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its principal lender), or any law, statute, rule or regulation or order,
judgment or decree to which either Ringer or Merger Subsidiary is subject.
4.04 MERGER SUBSIDIARY. All of the outstanding capital stock of Merger
Subsidiary is owned by Ringer free and clear of any lien, claim or encumbrance
or any agreement with respect thereto. Since the date of its incorporation,
Merger Subsidiary has not engaged in any activity of any nature except in
connection with or as contemplated by this Agreement, the Certificate of Merger
or the Ringer Ancillary Agreements.
4.05 GOVERNMENTAL AUTHORITIES; CONSENTS. Except for the filing of the
Certificate of Merger with the Secretary of State of the State of Georgia, and
any consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state and federal
securities laws and the laws of any foreign country, (a) neither Ringer nor
Merger Subsidiary is required to submit any notice, report or other filing with
any governmental authority in connection with the execution or delivery by it of
this Agreement, the Certificate of Merger or the Employment Agreements (as
defined in Section 12.03 hereof) or the consummation of the transactions
contemplated hereby or thereby, and (b) no consent, approval or authorization of
any governmental or regulatory authority or any other party or person is
required to be obtained by either Ringer or Merger Subsidiary in connection with
its execution, delivery and performance of this Agreement, the Certificate of
Merger or the Ringer Ancillary Agreements or the transactions contemplated
hereby or thereby.
4.06 BROKERAGE. No third party shall be entitled to receive any brokerage
commissions, finder's fees, fees for financial advisory services or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of Ringer or Merger
Subsidiary.
4.07 SEC DOCUMENTS. Ringer has filed all required reports, schedules,
forms, statements, and other documents with the SEC since January 1, 1995
(together with later filed documents that revise or supersede earlier filed
documents, the "RINGER SEC DOCUMENTS"). As of their respective dates, the Ringer
SEC Documents complied as to form in all material respects with the requirements
of the Securities Act, or the Exchange Act, as the case may be, and the rules
and regulations of the SEC promulgated thereunder applicable to such Ringer SEC
Documents. None of the Ringer SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Ringer included in the Ringer SEC Documents complied as of their
respective dates of filing with the SEC as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited statements, as
permitted by Form 10-QSB of the Exchange Act) applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto),
and fairly present the consolidated financial position of Ringer and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the Ringer SEC Documents, and except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice, neither Ringer nor any of its subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by generally accepted accounting principles to be set forth in a
consolidated balance sheet of Ringer and its consolidated subsidiaries or in the
notes thereto which, individually or in the aggregate, would have, a material
adverse effect on the business or results of operations of Ringer.
4.08 CAPITAL STOCK.
(a) The capital stock of Ringer consists only of Ringer Common Stock, and
except as hereinafter provided, the Ringer SEC Documents set forth Ringer's
capitalization in all material respects. All outstanding shares of Ringer Common
Stock have been duly authorized and validly issued and are fully paid and
nonassessable. None of such shares were issued in violation of any applicable
securities laws that would subject Ringer to fines, penalties or rescission or
civil damages that are material in amount. Ringer Common Stock is registered
pursuant to Section 12(b) of the Exchange Act and is listed on the NASDAQ
National
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Market System and all Ringer Common Stock issued as part of the Merger
Consideration will, upon issuance, be so registered and listed.
(b) Ringer owns, beneficially and of record, all issued and outstanding
shares of Merger Subsidiary Stock, which shares are validly issued, fully paid,
and non-assessable, and free and clear of all liens.
(c) Except as set forth in this Section 4.08 and except for changes since
the date of Ringer's most recent Ringer SEC Document resulting from the exercise
of employee and director options, (i) no shares of Ringer Common Stock or other
voting securities of Ringer are outstanding, (ii) no securities of Ringer
convertible into or exchangeable for shares of capital stock or voting
securities of Ringer are outstanding, and (iii) no options or other rights to
acquire from Ringer, and no obligation of Ringer to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of Ringer are outstanding (the items in clauses (i),
(ii) and (iii) being referred to collectively as the "RINGER SECURITIES." No
obligations of Ringer to repurchase, redeem or otherwise acquire any Ringer
Securities are outstanding.
4.09 CURRENT PLANS OR INTENTIONS. Ringer does not have any current plan or
intention to take any of the following actions within the two-year period
immediately following the Effective Date:
(a) Liquidate SRI or any Subsidiary;
(b) Merge SRI or any Subsidiary with or into another corporation, except if
SRI or such Subsidiary is the surviving corporation; or
(c) Cause SRI or any Subsidiary to sell or otherwise dispose of any of its
assets to any entity other than an SRI subsidiary, with the following exceptions
(i) sales or dispositions in the ordinary course of business or (ii) sales or
dispositions which would not violate the "substantially all" test as defined in
Rev. Proc. 777-37, 1977-2 C.B. 568 Section 3.01.
Except as expressly contemplated herein, it is the present intention of Ringer
to continue the line of business presently conducted by SRI and the
Subsidiaries.
4.10 DUE AUTHORIZATION OF STOCK ISSUED IN MERGER. Any shares of Ringer
Common Stock issued by Ringer to SRI's shareholders pursuant as part of the
Merger Consideration will, upon such issuance and delivery in accordance with
the terms of this Agreement, be duly authorized, validly issued, fully paid and
nonassessable and free of any preemptive rights of Ringer's shareholders.
ARTICLE V
COVENANTS OF SRI
5.01 CONDUCT OF THE BUSINESS. SRI and each Subsidiary shall observe each
term set forth in this Section 5.01 and agrees that, from the date hereof until
the Effective Time, unless otherwise consented to by Ringer in writing:
(a) The business of SRI and each Subsidiary shall be conducted only in, and
neither SRI nor any Subsidiary shall take any action except in, the ordinary
course of SRI's or such Subsidiary's business, on an arm's-length basis and in
accordance in all material respects with all applicable laws, rules and
regulations and SRI's or such Subsidiary's past custom and practice;
(b) Neither SRI nor any Subsidiary shall, directly or indirectly, do or
permit to occur any of the following: (i) issue or sell any additional shares of
capital stock, or any options, warrants, conversion privileges or rights of any
kind to acquire any shares of, any of its capital stock, (ii) sell, pledge,
dispose of or encumber any of its assets, except in the ordinary course of
business; (iii) amend or propose to amend its articles of incorporation or
bylaws; (iv) split, combine or reclassify any outstanding shares of capital
stock, or declare, set aside or pay any dividend or other distribution payable
in cash, stock, property or otherwise with respect to shares of capital stock;
(v) redeem, purchase or acquire or offer to acquire any shares of capital stock
or other securities; (vi) acquire (by merger, exchange, consolidation,
acquisition of stock or assets or otherwise) any corporation, partnership, joint
venture or other business organization or division or material assets thereof;
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(vii) incur any indebtedness for borrowed money or issue any debt securities
except the borrowing of working capital in the ordinary course of business and
consistent with past practice and the borrowing of money for facility expansion,
the upgrading of computer and paint systems, telephone system, production
equipment and tooling, in accordance with the capital spending plan previously
provided to Ringer; (viii) accelerate or defer, beyond the normal collection
cycle, or defer collection of manufacturers' rebates, promotional allowances and
other accounts receivable; or, other than in the ordinary course of business and
consistent with past practice, (ix) accelerate or defer the payment of
undisputed accounts payable or other accrued expenses owed to trade creditors or
other third parties having business relationships with SRI or any Subsidiary;
(x) enter into or propose to enter into, or modify or propose to modify, any
Lease or exercise or waive any option, or consent to any modification, act or
omission by any landlord requiring tenant's consent under any Lease; (xi) enter
into or propose to enter into or modify or propose to modify any agreement,
arrangement or understanding with respect to any of the matters set forth in
this Section 5.01(b); (xii) purchase inventories or supplies for its business;
(xiii) sell, lease, license or otherwise dispose of any assets or properties;
(xiv) accelerate or defer the construction of improvements at any of the
locations of its business; or (xv) accelerate or defer the purchase of fixtures,
equipment, leasehold improvements, vehicles, other items of machinery and
equipment and other capital expenditures;
(c) Except as contemplated herein, neither SRI nor any Subsidiary shall,
directly or indirectly, (i) enter into or modify any employment, severance or
similar agreements or arrangements with, or grant any bonuses, salary increases,
severance or termination pay to, any officers or directors or consultants; or
(ii) in the case of employees, officers or consultants who earn in excess of
$50,000 per year, take any action with respect to the grant of any bonuses,
salary increases, severance or termination pay or with respect to any increase
of benefits payable in effect on the date hereof other than in the ordinary
course of business and consistent with past practice;
(d) Except as contemplated herein, neither SRI nor any Subsidiary shall
adopt or amend any bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
trust, fund or group arrangement for the benefit or welfare of any employees or
any bonus, profit sharing, compensation, stock option, pension, retirement,
deferred compensation, employment or other employee benefit plan, agreement,
trust, fund or arrangements for the benefit or welfare of any director;
(e) Neither SRI nor any Subsidiary shall cancel or terminate its current
insurance policies or cause any of the coverage thereunder to lapse, unless
simultaneously with such termination, cancellation or lapse, replacement
policies providing coverage equal to or greater than the coverage under the
canceled, terminated or lapsed policies for substantially similar premiums are
in full force and effect;
(f) SRI and each Subsidiary shall (i) use its best efforts to preserve
intact its business organization and goodwill, keep available the services of
its officers and employees as a group and maintain satisfactory relationships
with suppliers, distributors, customers and others with which it has business
relationships; (ii) confer on a regular and frequent basis with representatives
of Ringer to report operational matters and the general status of ongoing
operations; (iii) not intentionally take any action which would render, or which
reasonably may be expected to render, any representation or warranty made by it
in this Agreement untrue at the Effective Time; (iv) notify Ringer of any
emergency or other change in the normal course of its business or in the
operation of its properties and of any governmental or third party complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) if such emergency, change, complaint, investigation or hearing
would be material, individually or in the aggregate, to the business, operations
or financial condition of SRI or any Subsidiary or to SRI's, Ringer's or Merger
Subsidiary's ability to consummate the transactions contemplated by this
Agreement; and (v) promptly notify Ringer in writing if SRI shall discover that
any representation or warranty made by it in this Agreement was when made, or
has subsequently become, untrue in any respect;
(g) Except as set forth in the Disclosure Schedule, SRI and each Subsidiary
shall (i) file any Tax returns, elections or information statements with respect
to any liabilities for Taxes of SRI or any Subsidiary or other matters relating
to Taxes of SRI or any Subsidiary which pursuant to applicable law must be filed
(after taking into account any properly applicable extensions of the due date of
such returns, elections or
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information statements) prior to the Closing Date; provided, however, that
neither SRI nor any Subsidiary shall file any such Tax returns, or other
returns, elections, claims for refund or information statements with respect to
any liabilities for Taxes (other than federal, state or local sales, use,
withholding or employment tax returns or statements for any Tax period, or
consent to any adjustment or otherwise compromise or settle any matters with
respect to Taxes, without prior consultation with and consent of Ringer (which
consent shall not be unreasonably withheld); (ii) promptly upon filing provide
copies of any such Tax returns, elections or information statements to Ringer;
(iii) make or rescind any such Tax elections or other discretionary positions
with respect to Taxes taken by or affecting SRI only upon prior consultation
with and consent of Ringer (which consent shall not be unreasonably withheld);
(iv) not amend any Return; (v) not change the rate or policy for any accrual or
reserve for Taxes or otherwise accrue therefor in a manner inconsistent with its
practices for previous periods as reflected in the Latest Financial Statements;
and (vi) not change any of its methods of reporting income or deductions for
federal income Tax purposes from those employed in the preparation of the
federal income Tax returns for the taxable year ended September 30, 1996, except
for changes required by changes in law; and
(h) SRI shall not perform any act referenced by (or omit to perform any act
which omission is referenced by) the terms of Section 3.11, except in the
ordinary course of business and consistent with past practice or as stated in
the Disclosure Schedule under the caption referencing such Section.
5.02 ACCESS TO BOOKS AND RECORDS. Between the date hereof and the Effective
Time, SRI shall afford to Ringer and its authorized representatives full access
at all reasonable times and upon reasonable notice to the offices, properties,
books, records, officers, employees and other items of SRI, and the work papers
of Smith & Howard, P.C., SRI's independent accountants ("SRI'S ACCOUNTANT"),
relating to work done by SRI's Accountant and otherwise provide such assistance
as is reasonably requested by Ringer in order that Ringer may have a full
opportunity to make such investigation and evaluation as it shall reasonably
desire to make of the business and affairs of SRI and each Subsidiary. In
addition, SRI, each Subsidiary and their respective officers and directors shall
cooperate fully (including providing introductions, where necessary) with Ringer
and to enable Ringer to contact such third parties, including customers,
prospective customers, specifying agencies, vendors or suppliers of SRI and each
Subsidiary as Ringer deems reasonably necessary to complete its due diligence.
5.03 REGULATORY FILINGS. SRI and each Subsidiary shall make, or cause to be
made all filings and submissions under any laws or regulations applicable to SRI
or such Subsidiary for the consummation of the transactions contemplated herein.
SRI and each Subsidiary will coordinate and cooperate with Ringer in exchanging
such information, will not make any such filing without providing to Ringer a
final copy thereof for its review and consent at least two full business days in
advance of the proposed filing date and will provide such reasonable assistance
as Ringer may request in connection with all of the foregoing.
5.04 FINANCIAL STATEMENTS. SRI shall have prepared and delivered to Ringer
consolidated quarterly and monthly financial statements for any periods ending
at least 15 days prior to the Effective Time.
5.05 CONDITIONS. SRI shall take all commercially reasonable actions
necessary or desirable to cause the conditions set forth in Section 8.01 to be
satisfied and to consummate the transactions contemplated herein as soon as
reasonably possible after the satisfaction thereof. Without limiting the
generality of the foregoing, SRI shall obtain, prior to the Effective Time, all
consents or waivers to the transactions contemplated herein that may be required
under any of the agreements or commitments of SRI or any Subsidiary that are
material to SRI's or any Subsidiary's business.
5.06 NO NEGOTIATIONS. Except as consented to in writing by Ringer, from the
date hereof until the Effective Time, neither SRI nor any Subsidiary shall,
directly or indirectly, through any officer, director, agent, affiliate,
employee or otherwise, solicit, initiate or encourage submission of any proposal
or offer from any person, group or entity relating to any acquisition of the
capital stock or business of SRI or any Subsidiary, or all or a material portion
of the assets of SRI or any Subsidiary, or other similar transaction or business
combination involving the business of SRI or any Subsidiary, and shall not
participate in any negotiations or discussions regarding or furnish to any other
person any information with respect to, or otherwise cooperate in any way with,
or assist or participate in, facilitate or encourage any effort or attempt by
any other person or
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entity to do or seek such acquisition or other transaction. SRI agrees that it
shall take the necessary steps to promptly inform, and cause each Subsidiary to
inform, any such third party of the obligations undertaken in this Agreement and
this Section 5.06. SRI agrees that it immediately shall inform Ringer in writing
of any such inquiry and shall keep Ringer informed, on a current basis, of the
status and terms of any such proposals or offers and the status of any such
discussions or negotiations.
5.07 NOTIFICATION; AMENDMENT TO DISCLOSURE SCHEDULE.
(a) SRI shall give prompt notice to Ringer of (i) the occurrence or failure
to occur of any event or the discovery of any information, which occurrence,
failure or discovery would be likely to cause any representation or warranty by
SRI contained in this Agreement to be untrue, inaccurate or incomplete after the
date hereof in any material respect or, in the case of any representation or
warranty given as of a specific date, would be likely to cause any such
representation or warranty on its part contained in this Agreement to be untrue,
inaccurate or incomplete in any material respect as of such specific date, and
(ii) any material failure of SRI to comply with or satisfy any covenant or
agreement to be complied with or satisfied by it hereunder.
(b) From time to time after the date hereof and prior to the Effective
Time, SRI shall promptly supplement or amend any of its representations and
warranties which apply to the period after the date hereof by delivering an
updated Disclosure Schedule to Ringer pursuant to this Section 5.8(b) with
respect to any matter hereafter arising which would render any such
representation or warranty after the date of this Agreement materially untrue,
inaccurate or incomplete as a result of such matter arising. Such supplement or
amendment to SRI's representations and warranties contained in an updated
Disclosure Schedule delivered pursuant to this Section 5.8(b) shall be deemed to
have modified the representations and warranties of SRI, and no such supplement
or amendment, or the information contained in such updated Disclosure Schedule,
shall constitute a breach of a representation or warranty of SRI; provided that
no such supplement or amendment may cure any breach of a covenant or agreement
of SRI under Articles V or VI. Within 15 days after receipt of such supplement
or amendment, Ringer may terminate this Agreement pursuant to Section 9.01(h)
hereof if the information in such supplement or amendment together with the
information in any and all of the supplements or amendments previously provided
by SRI indicate that SRI has suffered or is reasonably likely to suffer a
material adverse change (as described in Section 9.01(h).
ARTICLE VI
COVENANTS OF RINGER AND MERGER SUBSIDIARY
Ringer and Merger Subsidiary covenant and agree with SRI as follows:
6.01 REGULATORY FILINGS. Ringer or Merger Subsidiary shall, as promptly as
practicable after the execution of the Agreement, make or cause to be made all
filings and submissions under any laws or regulations applicable to Ringer and
Merger Subsidiary for the consummation of the transactions contemplated herein.
Ringer and Merger Subsidiary will coordinate and cooperate with SRI in
exchanging such information, will not make any such filing without providing to
SRI a final copy thereof for its review and consent at least two full business
days in advance of the proposed filing and will provide such reasonable
assistance as SRI may request in connection with all of the foregoing.
6.02 CONDITIONS. Ringer or Merger Subsidiary shall take all commercially
reasonable actions necessary or desirable to cause the conditions set forth in
Section 8.02 to be satisfied and to consummate the transactions contemplated
herein as soon as reasonably possible after the satisfaction thereof (but in any
event within three business days after such date).
6.03 PROXY STATEMENT. As promptly as practicable after the execution of
this Agreement, Ringer will file with the SEC a proxy statement under the
Securities Exchange Act soliciting approval of the Merger by the shareholders of
Ringer (as amended or supplemented by any amendment or supplement filed by
Ringer, the "PROXY STATEMENT"), and will use its best efforts to cause the Proxy
Statement to be approved for distribution to its shareholders. Ringer shall bear
the costs of SEC filing fees with respect to the Proxy Statement, the
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costs of printing the Proxy Statement and the costs of distributing the Proxy
Statement to Ringer shareholders.
6.04 STOCK EXCHANGE LISTINGS. Prior to issuance, Ringer will file all
documents required to be filed to list the Ringer Common Stock to be issued as
the Merger Consideration on the Nasdaq Stock Market and use its best efforts to
effect said listings.
ARTICLE VII
CONDUCT OF SRI AND RINGER AFTER THE ACQUISITION
During the period from the Effective Time until Ringer shall determine
otherwise, all employee compensation, benefit and welfare Plans of SRI shall
continue as stand-alone Plans, separate from those of Ringer, except as such
compensation arrangements may be modified pursuant to the Employment Agreements
and Section 7.02 hereof.
ARTICLE VIII
CONDITIONS TO CLOSING
8.01 CONDITIONS TO RINGER'S AND MERGER SUBSIDIARY'S OBLIGATIONS. The
obligation of Ringer and Merger Subsidiary to consummate the transactions
contemplated by this Agreement is subject to the satisfaction of the following
conditions at or before the Effective Time:
(a) The representations and warranties set forth in Article III hereof
shall be true and correct in all material respects at and as of the Effective
Time as though then made and as though the Effective Time had been substituted
for the date hereof throughout such representations and warranties (without
taking into account any disclosures by SRI of discoveries, events or occurrences
arising on or after the date hereof);
(b) SRI shall have performed in all material respects all of the covenants
and agreements required to be performed and complied with by it under this
Agreement prior to the Effective Time;
(c) SRI shall have obtained, or caused to be obtained, each consent and
approval necessary in order that the transactions contemplated herein not
constitute a breach or violation of, or result in a right of termination or
acceleration of, or creation of any encumbrance on any of SRI's or any
Subsidiary's assets pursuant to the provisions of, any agreement, arrangement or
undertaking of or affecting SRI or any Subsidiary or any license, franchise or
permit of or affecting SRI or any Subsidiary;
(d) This Agreement, the Certificate of Merger and the Merger shall have
been:
(i) duly and validly approved by the requisite vote of the
shareholders of Ringer, and
(ii) SRI shall have duly executed the Certificate of Merger;
(e) All material governmental filings, authorizations and approvals that
are required for the consummation of the transactions contemplated herein or by
the Certificate of Merger will have been duly made and obtained;
(f) There shall not be threatened, instituted or pending any action or
proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions contemplated herein or seeking to obtain material damages in
connection with such transactions, (ii) seeking to prohibit direct or indirect
ownership or operation by Ringer or Merger Subsidiary of all or a material
portion of the business or assets of SRI or any Subsidiary, or to cause Ringer
or Merger Subsidiary or any of their subsidiaries or SRI or any Subsidiary to
dispose of or to hold separately all or a material portion of the business or
assets of Ringer or Merger Subsidiary and their subsidiaries or of SRI or any
Subsidiary, as a result of the transactions contemplated hereby, (iii) seeking
to require direct or indirect transfer or sale by Ringer or Merger Subsidiary of
any of the shares of SRI Common Stock, (iv) seeking to invalidate or render
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unenforceable any material provision of this Agreement or the Certificate of
Merger or any of the SRI Ancillary Agreements, or (v) otherwise relating to and
materially adversely affecting the transactions contemplated hereby;
(g) There shall not be any action taken, nor any statute, rule, regulation,
judgment, order or injunction enacted, entered, enforced, promulgated, issued or
deemed applicable to the transactions contemplated herein by any federal, state
or foreign court, government or governmental authority or agency, which would
reasonably be expected to result, directly or indirectly, in any of the
consequences referred to in Section 8.01(f) hereof;
(h) Ringer, in conducting its due diligence investigation of the business
and financial condition of SRI and the Subsidiaries, shall not have discovered
any fact or circumstance existing as of the Effective Time which previously had
not been disclosed to Ringer regarding the business, assets, properties,
condition (financial or otherwise), results of operations or prospects of SRI
which is, individually or in the aggregate with other such facts and
circumstances, materially adverse to SRI or any Subsidiary or to the value of
the shares of SRI's capital stock;
(i) There shall have been no damage, destruction or loss of or to any
property or properties owned or used by SRI or any Subsidiary, whether or not
covered by insurance, which, in the aggregate, has, or would be reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect;
(j) Ringer shall have received from SRI's legal counsel a written opinion,
dated the date of the Effective Time, addressed to Ringer and satisfactory to
Ringer's legal counsel, with respect to such matters as Ringer shall reasonably
request;
(k) Ringer shall have received from its principal lender such approvals,
waivers and consents as may be necessary to permit the consummation of the
Merger without causing Ringer to violate or be in default under any agreements
with such lender;
(l) Ringer shall have received from Deloitte & Touche LLP, independent
auditors for Ringer, letters, dated the date of or shortly prior to the date of
the mailing of the Proxy Statement and the Effective Date, stating its opinion
that the Merger will qualify for pooling-of-interests accounting treatment;
(m) Prior to the Effective Time, SRI shall have delivered to Ringer all of
the following:
(i) certificates of each of the chief executive officer and the chief
financial officer of SRI dated as of the date of the Effective Time,
stating that to the knowledge of such officers that the conditions
precedent set forth in subsections (a) and (b) above have been satisfied;
(ii) copies of the third party and governmental consents and approvals
and of the authorizations referred to in subsections (c), (d) and (e)
above;
(iii) the minute books, stock transfer records, corporate seal and
other materials related to the corporate administration of SRI and each
Subsidiary;
(iv) a copy of the articles of incorporation of SRI and each
Subsidiary as then in effect, certified by the Secretary of State of the
State of Georgia, and a Certificate of Existence from the Secretary of
State of the State of Georgia evidencing the good standing of SRI and each
Subsidiary in such state;
(vi) a copy of each of (A) the text of the resolutions adopted by
SRI's board of directors authorizing the execution, delivery and
performance of this Agreement and the Certificate of Merger and the
consummation of all of the transactions contemplated herein and (B) the
bylaws of SRI and each Subsidiary as then in effect; along with
certificates executed on behalf of SRI and each Subsidiary by its corporate
secretary certifying to Ringer that such copies are correct and complete
copies of such resolutions and bylaws, respectively, and that such
resolutions and bylaws were duly adopted and have not been amended or
rescinded;
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(vii) incumbency certificates executed on behalf of SRI by its
corporate secretary certifying the signature and office of each officer
executing this Agreement, the Certificate of Merger and the SRI Ancillary
Agreements executed by SRI;
(viii) an executed copy of each of the SRI Ancillary Agreements; and
(ix) such other certificates, documents and instruments as Ringer
reasonably requests related to the transactions contemplated herein.
(n) The offer and issuance of the Ringer Common Stock pursuant to this
Agreement shall be exempt from the registration requirements of the Securities
Act and all applicable state securities laws.
8.02 CONDITIONS TO SRI'S OBLIGATIONS. The obligations of SRI to consummate
the transactions contemplated by this Agreement are subject to the satisfaction
of the following conditions at or before the Effective Time:
(a) The representations and warranties set forth in Article IV hereof will
be true and correct in all material respects at and as of the Effective Time as
though then made and as though the Effective Time had been substituted for the
date hereof throughout such representations and warranties;
(b) Ringer and Merger Subsidiary shall have performed in all material
respects all the covenants and agreements required to be performed by them under
this Agreement and the Certificate of Merger prior to the Effective Time, and
Merger Subsidiary shall have executed the Certificate of Merger;
(c) All material governmental filings, authorizations and approvals that
are required for the consummation of the transactions contemplated herein will
have been duly made and obtained;
(d) There shall not be threatened, instituted or pending any action or
proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions contemplated herein or seeking to obtain material damages in
connection with such transactions, (ii) seeking to invalidate or render
unenforceable any material provision of this Agreement, the Certificate of
Merger or any of the Related Agreements, or (iii) otherwise relating to and
materially adversely affecting the transactions contemplated hereby or thereby;
(e) There shall not be any action taken, nor any statute, rule, regulation,
judgment, order or injunction, enacted, entered, enforced, promulgated, issued
or deemed applicable to the transactions contemplated herein by any federal,
state or foreign court, government or governmental authority or agency, which
would reasonably be expected to result, directly or indirectly, in any of the
consequences referred to in Section 8.02(d) hereof;
(f) Ringer shall have received all state securities law authorizations
necessary to carry out the transactions contemplated by this Agreement;
(g) At or prior to the Effective Time, Ringer shall have delivered to SRI
(i) a certificate of appropriate officer(s) of Ringer dated as of the Effective
Date, stating that to the knowledge of such officer(s) the conditions precedent
set forth in subsections (a) and (b) above have been satisfied, and (ii) an
executed copy of each of the Related Agreements;
(h) SRI shall have received the opinion of Dorsey & Whitney LLP, Ringer's
counsel, with respect to such matters as SRI shall reasonably request; and
(i) The shares of Ringer Common Stock to be issued as Merger Consideration
shall have been approved for listing on the Nasdaq Stock Market.
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ARTICLE IX
TERMINATION
9.01 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by the mutual consent of Ringer, Merger Subsidiary and SRI;
(b) by Ringer or SRI, if there has been a material misrepresentation, a
material breach of warranty or a material breach of covenant on the part of the
other in the representations, warranties and covenants set forth in this
Agreement;
(c) by Ringer or SRI, if there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger, or there
shall be any action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
authority or agency, foreign or domestic, which would make the consummation of
the Merger illegal and such action, statute, rule, regulation or order shall
have become final and unappealable;
(d) by Ringer or SRI, if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental authority of agency, which would (i) prohibit
SRI's or Ringer's ownership or operation of all or a portion of SRI's or any
Subsidiary's business, or (ii) compel Ringer or SRI or any Subsidiary to dispose
of or hold separate all or a portion of the business or assets of SRI or such
Subsidiary or Ringer as a result of the Merger;
(e) by either Ringer or SRI, if the transactions contemplated herein have
not been consummated on or before January 31, 1998; provided that, neither will
be entitled to terminate this Agreement pursuant to this Section 9.01(e) if such
party's willful breach of this Agreement has prevented the consummation of the
transactions contemplated herein;
(f) by either Ringer or SRI, if any of the conditions to such party's
obligations to consummate the Merger described in Article VIII become impossible
to satisfy;
(g) by Ringer if the shareholders of Ringer shall have failed to approve
this Agreement and the Merger at the meeting described in the Proxy Statement
(including any adjournment or postponement thereof);
(h) by Ringer, if after the date hereof there shall have been a material
adverse change in the business, assets, properties, condition (financial or
otherwise), results of operations or prospects of SRI, or if an event (other
than a general industry or economic downturn or economic changes related to
seasonal conditions) shall have occurred which, so far as reasonably can be
foreseen, would result in any such change;
9.02 EFFECT OF TERMINATION. In the event of termination of this Agreement
by Ringer or SRI, as provided in Section 9.01, all provisions of this Agreement
shall terminate and there shall be no liability on the part of any of Ringer,
Merger Subsidiary or SRI, or their respective shareholders, officers or
directors, except (a) Sections 13.01 (press releases and announcements), 13.02
(expenses), 13.09 (governing law) and 13.10 (confidentiality) hereof shall
survive indefinitely, (b) the parties shall remain liable for willful breaches
of this Agreement prior to the time of such termination and (c) as provided in
Section 9.03.
ARTICLE X
THE SHAREHOLDERS' REPRESENTATIVE
10.01 APPOINTMENT. As used in this Agreement, the "SHAREHOLDERS'
REPRESENTATIVE" shall mean David K. Vansant, or any person appointed as a
successor Shareholders' Representative pursuant to Section 10.02 hereof.
10.02 ELECTION AND REPLACEMENT. During the period ending upon the date when
all obligations under this Agreement have been discharged (including all
obligations pursuant to Section 11.02 hereof), SRI's Holders who, held a
majority of the aggregate voting power of the Shares (a "MAJORITY"), may, from
time to time upon written notice to the Shareholders' Representative and Ringer,
remove the Shareholders' Representative
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or appoint a new Shareholders' Representative to fill any vacancy created by the
death, incapacitation, resignation or removal of the Shareholders'
Representative. Furthermore, if the Shareholders' Representative dies, becomes
incapacitated, resigns or is removed by a Majority, the Majority shall appoint a
successor Shareholders' Representative to fill the vacancy so created. If the
Majority fails to appoint such successor within 10 business days after a written
request by Ringer to appoint such successor, then Ringer shall appoint such
successor, and shall advise Holders who held Shares of such appointment by
written notice. A copy of any appointment by the Majority of the Shareholders'
Representatives of any successor Shareholders' Representative shall be provided
to Ringer promptly after it shall have been effected.
10.03 AUTHORITY. On behalf of the Holders, the Shareholders' Representative
shall be authorized to take action and to make and deliver any certificate,
notice, consent or instrument required or permitted to be made or delivered
under this Agreement or under the documents referred to in this Agreement (an
"INSTRUMENT"), which the Shareholders' Representative determines in his
discretion to be necessary, appropriate or desirable, and, in connection
therewith, to hire or retain, at the sole expense of the Holders, such counsel,
investment bankers, accountants, representatives and other professional advisors
as they determine in their sole and absolute discretion to be necessary,
advisable or appropriate in order to carry out and perform their rights and
obligations hereunder. Any party receiving an Instrument from the Shareholders'
Representative shall have the right to rely in good faith upon such Instrument,
and to act in accordance with the Instrument without independent investigation.
10.04 NO LIABILITY OF RINGER. Ringer and the Surviving Corporation shall
have no liability to any shareholder of SRI or otherwise arising out of the acts
or omissions of the Shareholders' Representative or any disputes among SRI's
shareholders. Ringer and the Surviving Corporation shall have no direct
liability to SRI's shareholders under this Agreement or the other agreements
referred to herein and may rely entirely on their dealings with, and notices to
and from, the Shareholders' Representative to satisfy any obligations Ringer and
the Surviving Corporation might have under this Agreement, any agreement
referred to herein or otherwise to SRI's shareholders. Without limiting the
foregoing, delivery to the Escrow Agent of a portion of the Merger Consideration
shall extinguish any obligations of Ringer to SRI's shareholders with respect to
such portion, and Ringer shall have no liability for subsequent misdelivery to
any shareholder of SRI by the Paying Agent or any act or omission of the
Shareholders' Representative with respect to such cash or certificates.
ARTICLE XI
SURVIVAL AND OFFSET
11.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any
investigation made by or on behalf of any of the parties hereto or the results
of any such investigation and notwithstanding the participation of such party in
the Closing, the representations and warranties of SRI contained in, or attached
to, this Agreement shall survive the Closing until the date upon which Ringer's
Accountant shall first release its audit report with respect to financial
consolidated financial statements of Ringer and its subsidiaries that include
SRI and the Subsidiaries (the "Offset Period") and shall have no further force
or effect thereafter.
11.02 RIGHT OF OFFSET.
(a) Subject to Section 11.02(f) hereof, Ringer shall have a right to offset
(the "OFFSET RIGHT"), from time to time, its "Losses" (as hereinafter defined)
against the General Claims Holdback Amount with respect to any loss, liability,
deficiency, damage, expense or cost (including reasonable legal expenses),
whether or not actually incurred or paid during the Offset Period (collectively,
the "LOSSES"), which Ringer, the Surviving Corporation or any of their
respective affiliates, officers, directors, employees or agents (the "PROTECTED
PARTIES") suffers, sustains or becomes subject to, as a result of:
(i) Any misrepresentation (a "MISREPRESENTATION") in any of the
representations and warranties of SRI contained in this Agreement or in any
of the exhibits, schedules, agreements, certificates and other documents
delivered or to be delivered by or on behalf of SRI pursuant to this
Agreement or otherwise attached to, or referenced or incorporated in, this
Agreement (collectively, the "RELATED DOCUMENTS");
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(ii) Any breach (a "BREACH") of, violation of, or failure to perform,
any agreement or covenant of SRI contained in this Agreement or any of the
Related Documents prior to the Effective Time;
(iii) Any Claim (as defined in Section 11.02(c) hereof) or threatened
Claim against the Protected Parties arising out of actions or inactions of
SRI with respect to SRI's business or the Real Property prior to the
Effective Time, including, but not limited to, all products liability
Claims arising out of actions or inactions prior to such time; and
(iv) Notwithstanding anything to the contrary contained in this
Section 11.02, the Ringer shall not exercise its Offset Right with respect
to any Loss unless and until the total amount of Losses shall exceed
$25,000, in which event it may exercise such right with respect to the
entire aggregate amount of Losses that equal or exceed $25,000.
Notwithstanding the foregoing, Losses as defined in this Section 11.02(a) shall
be reduced by the amount of any benefits or other similar payments received by
SRI or the Protected Parties from insurance companies insuring the claim that is
the subject of the Loss.
(b) Ringer may exercise its Offset Right, from time to time, in accordance
with the procedures set forth in paragraphs (c) and (d) of this Section 11.02,
against any payment or payments to be made out of the General Claims Holdback
Amount. Each time, if any, that Ringer exercises its Offset Right, Ringer shall
promptly deliver to the Shareholders' Representative a schedule signed by an
officer of Ringer reflecting the revised payments, after giving effect to such
exercise of its Offset Right, to be made to the Holders out of the General
Claims Holdback Amount. In the event Ringer exercises its Offset Right with
respect to Losses as a result of, in connection with or related to, any of the
matters described in Section 11.02(a) above, such offset shall be applied
against any payment or payments to be made out of the General Claims Holdback
Amount.
(c) In the event any of the Protected Parties becomes involved in any
legal, governmental or administrative proceeding which may result in Losses, or
if any such proceeding is threatened or asserted (any such third party action or
proceeding being referred to herein as a "CLAIM"), Ringer shall promptly notify
the Shareholders' Representative in writing of the nature of any such Claim and
Ringer's estimate of the Losses arising therefrom.
(i) The Shareholders' Representatives shall be entitled to contest and
defend such Claim; provided, that the Shareholders' Representative has a
reasonable basis for concluding such defense may be successful and
diligently contests and defends such Claim; provided, further, that, Ringer
in its sole and absolute discretion, may notify the Shareholders'
Representatives at any time that any such contest or defense must be
immediately terminated, in which case Ringer's Offset Right with respect to
such Claim shall thereupon terminate. Notice of the intention so to contest
and defend shall be given by the Shareholders' Representative to Ringer
within 20 days after Ringer provides notice of such Claim (but, in all
events, at least five business days prior to the date that an answer to
such Claim is due to be filed). Such contest and defense shall be conducted
by reputable attorneys employed by the Shareholders' Representative. Ringer
shall be entitled at any time, at its own cost and expense (which expense
shall not constitute a Loss unless the Shareholders' Representatives are
not adequately representing or, because of a conflict of interest between,
may not adequately represent, any interests of the Protected Parties, and
only to the extent that such expenses are reasonable), to participate in
such contest and defense and to be represented by attorneys of its own
choosing. If Ringer elects to participate in such defense, Ringer shall
cooperate with the Shareholders' Representative in the conduct of such
defense. Neither Ringer nor the Shareholders' Representative may concede,
settle or compromise any Claim without the consent of the other, which
consent shall not be unreasonably withheld; provided, that the
Shareholders' Representative may, without the consent of Ringer, settle any
Claim which is solely for money damages if the Shareholders' Representative
acknowledges that such Claim gives rise to a Loss that is subject to
Ringer's Offset Right hereunder and if the entire amount of the settlement
amount may be recovered by Ringer by means of Ringer's Offset Rights
hereunder. The Shareholders' Representatives shall have the right to have
the cost of defense, including reasonable legal expenses, paid or
reimbursed through the exercise of Ringer's Offset Rights. A request for
payment or reimbursement thereof shall constitute the acknowledgment of the
Shareholders' Representative that such costs constitutes a Loss that is
subject to
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Ringer's Offset Rights. Notwithstanding anything herein to the contrary,
such Offset Rights shall not be subject to the deductibles described in
Section 11.02(b).
(ii) Notwithstanding the foregoing, if: (A) a Claim seeks equitable
relief against any of the Protected Parties, (B) the subject matter of a
Claim relates to the ongoing business of any of the Protected Parties,
which Claim, if decided against such Protected Party, would materially
adversely affect the ongoing business or reputation of such Protected
Party, or (C) the estimated Losses of the Protected Parties related to the
Claim exceed the amount Ringer may recover using its Offset Right
hereunder, then, in each such case, Ringer alone shall be entitled to
contest, defend and settle such Claim in the first instance and, if Ringer
does not contest, defend or settle such Claim, Shareholders' Representative
shall have the right to contest and defend (but not settle) such Claim.
(d) In the event Ringer (on behalf of itself or any Protected Party) should
have a claim giving rise to an Offset Right that does not involve a Claim,
Ringer shall deliver a notice (the "OFFSET NOTICE") of such claim with
reasonable promptness to the Shareholders' Representative and the Escrow Agent.
The Offset Notice shall include an estimate of Ringer's Losses relating to such
claim. If the Shareholders' Representative notifies Ringer that the
Shareholders' Representative does not dispute the claim described in the Offset
Notice, or if the Shareholders' Representative fails to notify Ringer within 20
days after delivery of the Offset Notice of any such dispute with respect to
such claim, the Losses in the amount specified in the Offset Notice will be
conclusively deemed Losses and Ringer may exercise its Offset Right with respect
to such amount in accordance with the Offset Notice. If the Shareholders'
Representative has timely disputed such claim, Ringer and the Shareholders'
Representative will proceed in good faith to negotiate a resolution of such
dispute, and if not resolved through the negotiations of such representatives
within 60 days after the date of the Offset Notice of such claim, the parties
agree to resolve such dispute through binding arbitration in accordance with
Section 13.05.
(e) In the event of a Claim under Section 11.02(c) or a dispute relating to
the Offset Notice under Section 11.02(d), the Escrow Agent will retain property
then held by it in escrow under this Agreement in an amount sufficient to
satisfy the estimated value of such Claim or disputed Offset Notice until the
resolution of such Claim or dispute.
(f) Notwithstanding anything contained in this Agreement to the contrary,
the right of Ringer to exercise its Offset Right hereunder shall be subject to
the following limitations:
(i) Ringer shall not be entitled to exercise its Offset Right with
respect to any Losses unless Ringer delivers to the Shareholders'
Representatives an Offset Notice under Section 11.02(d) or notice of a
Claim under Section 11.02(c) relating to such Losses prior to the end of
the Offset Period.
(ii) Except as provided in the Shareholders' Agreements, the Offset
Right shall be Ringer's sole and exclusive remedy with respect to any
Losses that any Protected Party may suffer, sustain or become subject to
pursuant to the terms of this Agreement, and Ringer agrees that it shall
not, and hereby waives all rights to, institute or maintain any suit,
proceeding or action against the Holders or utilize or exercise any other
legal or equitable remedy for the purpose of recovering damages or other
relief with respect to any Losses (including, without limitation, an action
seeking to recover any portion of the purchase price previously paid to
SRI's shareholders) except for suits, proceedings or actions necessary to
enforce or implement the Offset Right; provided that, (A) nothing herein
shall prevent a party from bringing an action based upon allegations of
fraud or other intentional misconduct with respect to another party hereto
in connection with this Agreement, and (B) nothing herein shall limit in
any manner any other legal rights or remedies which any Protected Party
which is a party to an agreement identified under Article XII has against
another party to such agreement in accordance with the terms and conditions
provided therein.
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ARTICLE XII
ANCILLARY AGREEMENTS
12.01 SHAREHOLDERS AGREEMENT. Simultaneous with the execution and delivery
of this Agreement, Ringer, SRI and each shareholder of SRI identified on
Schedule 12.01 will enter into a shareholder agreement identical in form to
Exhibit 12.01 (the "SHAREHOLDERS' AGREEMENT").
12.02 ESCROW AGREEMENT. Simultaneous with the execution and delivery of
this Agreement, Ringer, SRI, the Shareholders Representative and Escrow Agent
will enter into an escrow agreement substantially in the form of Exhibit 12.02
(the "ESCROW AGREEMENT").
12.03 PAYING AGENT AGREEMENT. Simultaneous with the execution and delivery
of this Agreement, Ringer, the Shareholders' Representative and Paying Agent
will enter into a paying agent agreement substantially in the form of Exhibit
12.03 (the "PAYING AGENT AGREEMENT").
ARTICLE XIII
MISCELLANEOUS
13.01 PRESS RELEASES AND ANNOUNCEMENTS. Prior to the Effective Time, no
party hereto shall issue any press release (or make any other public
announcement) related to this Agreement or the transactions contemplated hereby
or make any announcement to the employees, customers or suppliers of SRI or any
Subsidiary without prior written approval of the other party hereto, except that
Ringer may issue any such release (or other announcement) as it determines, in
its sole discretion, as may be necessary to comply with the requirements of this
Agreement or applicable law or by obligations pursuant to any listing agreement
with any national securities exchange. If Ringer determines any such press
release or public announcement is so required, Ringer shall use reasonable
efforts to consult in good faith with SRI (but shall not be required to obtain
SRI's consent) prior to issuing such press release or making such announcement.
13.02 EXPENSES. Except as otherwise expressly provided for herein, SRI, the
Shareholders' Representative, Ringer and Merger Subsidiary will each pay all of
their own expenses (including attorneys', financial advisors' and accountants'
fees) in connection with the negotiation of this Agreement, the performance of
their respective obligations under this Agreement and the Certificate of Merger
and the consummation of the transactions contemplated hereby and thereby
(whether consummated or not). Each party will indemnify and hold harmless the
other against the claims of any brokers or finders in respect of the Merger.
13.03 AMENDMENT AND WAIVER. This Agreement may not be amended or waived
except in a writing executed by the party against which such amendment or waiver
is sought to be enforced; provided, however, that after the approval of this
Agreement by SRI's shareholders, no amendment may be made which reduces the
Merger Consideration or which effects any changes which would materially
adversely affect SRI's shareholders without the further approval of SRI's
shareholders provided, however, the Shareholders' Representative may approve
waivers of and amendments to the covenants of Ringer and SRI described in
Article VII. No course of dealing between or among any persons having any
interest in this Agreement will be deemed effective to modify or amend any part
of this Agreement or any rights or obligations of any person under or by reason
of this Agreement.
13.04 NOTICES. All notices, demands and other communications to be given or
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when personally delivered or three
days after being mailed, if mailed by first class mail, return receipt
requested, or when receipt is acknowledged, if sent by facsimile, telecopy or
other electronic transmission device. Notices,
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demands and communications to Ringer, Merger Subsidiary, SRI and the
Shareholders' Representative will, unless another address is specified in
writing, be sent to the address indicated below:
<TABLE>
<S> <C>
Notices to Ringer or Merger Subsidiary: with a copy to:
Ringer Corporation Dorsey & Whitney LLP
9555 James Avenue South, Suite 200 220 South Sixth Street
Bloomington, Minnesota 55431 Minneapolis, MN 55402
Attn: Chief Financial Officer Attn: Michael Trucano
Facsimile: (612) 340-8827
Notices to SRI: with a copy to:
Southern Resources, Inc. Cushing, Morris, Armbruster & Jones LLP
P.O Box 938 2110 International Tower
Fort Valley, Georgia 31030 229 Peachtree Street, N.E.
Attn: Chief Executive Officer Atlanta, GA 30303
Attn: W. Hampton Morris
Facsimile:
>Notices to Shareholders' Representative: with a copy to:
David K. Vansant Cushing, Morris, Armbruster & Jones LLP
c/o Southern Resources, Inc. 2110 International Tower
P.O Box 938 229 Peachtree Street, N.E.
Fort Valley, Georgia 31030 Atlanta, GA 30303
Attn: Chief Executive Officer Attn: W. Hampton Morris
Facsimile: (404) 658-9865
</TABLE>
13.05 ARBITRATION. In the event this Section 13.05 is applicable to any
dispute between the parties, the parties agree to resolve such dispute through
binding arbitration by a single arbitrator pursuant to the Commercial
Arbitration Rules of the American Arbitration Association. The arbitration shall
be conducted in Minneapolis, Minnesota. Any award rendered shall be final and
conclusive upon the parties and a judgment thereon may be entered in any court
of competent jurisdiction. All costs and expenses, including reasonable
attorneys' fees and experts' fees, of all parties incurred in any dispute which
is determined by arbitration pursuant to this Section 13.05 shall be borne by
the party determined to be liable in respect of such dispute; provided, however,
that if complete liability is not assessed against only one party, the parties
shall share the total costs in proportion to their respective amounts of
liability so determined. Except where clearly prevented by the area in dispute,
both parties agree to continue performing their respective obligations under
this Agreement while the dispute is being resolved. All negotiation and
arbitration proceedings under this Section 13.05 shall be treated as
confidential information in accordance with the provisions of the
confidentiality agreement between Ringer and SRI, dated August 15, 1997 (the
"CONFIDENTIALITY AGREEMENT"). Any arbitrator shall be bound by an agreement
containing confidentiality provisions at least as restrictive as those contained
in the Confidentiality Agreement. Nothing herein shall preclude a party hereto
from seeking equitable relief to prevent any immediate, irreparable harm to its
interest, including multiple breaches of this Agreement or the Related
Documents. Otherwise, these procedures are exclusive and shall be fully
exhausted prior to the initiation of any litigation. Either party may seek
specific enforcement of any arbitrator's decision under this Section 13.05. The
other party's only defense to such a request for specific enforcement shall be
fraud by or on the arbitrator.
13.06 ASSIGNMENT. This Agreement and all of the provisions hereof will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, except that neither this Agreement nor any of
the rights, interests or obligations hereunder may be assigned by any party
hereto without the prior written consent of the other parties hereto.
13.07 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such
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prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
13.08 COMPLETE AGREEMENT. This Agreement, the Certificate of Merger and the
Related Agreements and other exhibits hereto, the Disclosure Schedule and the
other documents referred to herein contain the complete agreement between the
parties and supersede any prior understandings, agreements or representations by
or between the parties, written or oral, which may have related to the subject
matter hereof in any way; provided, that the Confidentiality Agreement shall
remain in force and effect without modification thereof.
13.09 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument. Any such counterpart may be delivered by facsimile. Any party
delivering a counterpart by facsimile shall deliver an original copy within 48
hours, provided that the failure to so deliver an original shall not effect the
enforceability of this agreement against such party.
13.10 GOVERNING LAW. The internal law, without regard for conflicts of laws
principles, of the State of Minnesota will govern all questions concerning the
construction, validity and interpretation of this Agreement and the performance
of the obligations imposed by this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
RINGER CORPORATION
By
--------------------------------------
Its
--------------------------------------
SRI ACQUISITION CORP.
By
--------------------------------------
Its
--------------------------------------
SOUTHERN RESOURCES, INC.
By
--------------------------------------
Its
--------------------------------------
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FORM OF PROXY
RINGER CORPORATION
9555 JAMES AVENUE SOUTH, SUITE 200
BLOOMINGTON, MINNESOTA 55431-2543
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS DECEMBER 8, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Stanley Goldberg and Mark Eisenschenk, and each of
them, with power to act without the other and with all the right of substitution
in each, the proxies of the undersigned to vote all shares of Ringer Corporation
(the "Company") held by the undersigned on November 3, 1997, at the Special
Meeting of Shareholders of the Company, to be held on December 8, 1997 at 4:00
p.m. local time at the offices of the Company, 9555 James Avenue South, Suite
200, Bloomington, Minnesota 55431-2543, and all adjournments thereof, with all
powers the undersigned would possess if present in person. All previous proxies
given with respect to the meeting are revoked.
Receipt of Notice of Special Meeting of Shareholders and Proxy Statement is
acknowledged by your execution of this proxy. Complete, sign, date, and return
this proxy in the addressed envelope -- no postage required. Please mail
promptly to save further solicitation expenses.
<TABLE>
<S> <C>
1. Approval of Agreement and Plan of Merger [ ] FOR the Merger [ ] AGAINST the Merger [ ] ABSTAIN
dated as of October 3, 1997, by and among
Ringer Corporation, a wholly-owned
subsidiary of Ringer Corporation and
Southern Resources, Inc.
</TABLE>
(continued, and to be dated and signed, on other side)
2. To vote with discretionary authority upon such other matters as may come
before the meeting. (Discretionary authority will be only exercised with
respect to votes in favor or abstentions.)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS PROVIDED BY THE UNDERSIGNED
SHAREHOLDER, THIS PROXY WILL BE VOTED "FOR" ITEM 1 LISTED HEREIN. UPON ALL OTHER
MATTERS, THE PROXIES SHALL VOTE AS THEY DEEM IN THE BEST INTERESTS OF THE
COMPANY.
SIGNATURE(S)
---------------------------------------
---------------------------------------
DATED: , 1997
INSTRUCTION: When shares are held by
joint tenants, all joint tenants should
sign. When signing as attorney,
executor, administrator, trustee,
custodian, or guardian, please give
full title as such. If shares are held
by a corporation, this proxy should be
signed in full corporate name by its
president or other authorized officer.
If a partnership holds the shares
subject to this proxy, an authorized
person should sign in the name of such
partnership.
