HART HOLDING COMPANY INCORPORATED
1120 BOSTON POST ROAD
DARIEN, CONNECTICUT 06820
TELEPHONE: (203) 655-6855
INFORMATION STATEMENT
This Information Statement is furnished in connection with the consent
of the Majority Stockholder (as hereinafter defined) of Hart Holding Company
Incorporated, a Delaware corporation (the "Corporation"), with principal offices
at 1120 Boston Post Road, Darien, Connecticut 06820 in connection with (i) the
settlement of two class action lawsuits entitled Clare Lois Spark Loeb v. James
W. Hart, et al., CA 12830, and Rochelle Brooks v. James W. Hart, et al., CA
12831 (together, the "Class Action Lawsuits") filed in the Court of Chancery of
the State of Delaware (the "Court of Chancery"), challenging the proposed 300 to
one reverse stock split of the Corporation's common stock which was announced on
December 18, 1992 and (ii) the filing of an amendment to the Corporation's
Restated Certificate of Incorporation in order to effect the terms of the
settlement of the Class Action Lawsuits (the "Settlement") and the terms of the
reverse stock split, as revised by the Settlement. The terms of the Settlement
include, among other things, an increase in the cash consideration to be paid
for fractional shares to $2.25 per share ("Cash Consideration") and an
adjustment to the ratio of the reverse stock split to 600 to one.
The parties to the Class Action Lawsuits entered into a Stipulation
and Agreement of Compromise and Settlement dated January 28, 1994. Copies of a
notice summarizing the terms of the Stipulation and Agreement of Compromise and
Settlement have been sent to each stockholder of the Corporation and a hearing
as to the fairness of the Settlement, including the terms of the Reverse Stock
Split (as hereinafter defined), was held on April 15, 1994. On April 15, 1994,
the Court of Chancery approved the terms of the Settlement as fair to the
unaffiliated stockholders (the "Settlement Approval Date").
Following approval of the Settlement by the Court of Chancery, the
Board of Directors (the "Board of Directors" or the "Board") approved an
amendment to the Corporation's Restated Certificate of Incorporation (the
"Amendment") providing for a reduction in the number of authorized shares of
common stock from 40,000,000 shares of $.01 par value (the "Common Stock") to
75,000 shares of $1.00 par value (the "New Common Stock") and a 600 to one
reverse stock split (the "Reverse Stock Split") of the Corporation's Common
Stock. As a result of the Reverse Stock Split, stockholders will receive one
share of New Common Stock for each 600 shares of Common Stock currently held.
All shares not converted into New Common Stock will be converted into the right
to receive the Cash Consideration. Stockholders that hold fractional shares
after the Reverse Stock Split may elect to forego the Cash Consideration and
round up their fractional holdings to the next whole share (on a first-come,
first-served basis, subject to the availability of fractional shares) by paying
$2.25 for each 1/600 of a share needed to round up their holdings to equal one
share of New Common Stock. Stockholders with fractional holdings who do not
elect or are unable to purchase additional shares will cease to be stockholders
of the Corporation and the Corporation will acquire for cash their fractional
holdings for the Cash Consideration. Stockholders owning whole shares of New
Common Stock as a result of the Reverse Stock Split will be given the right to
tender such whole shares for a period of 30 days following the consummation of
the Reverse Stock Split for a purchase price of $1,350 per share of New Common
Stock (the "Purchase Offer"). The Purchase Offer will expire at 5:00 p.m.,
Eastern Daylight Time, on September 15, 1994, unless extended, and is not
conditioned on any minimum number of shares being tendered. In order to be
eligible to round up fractional shares of New Common Stock to the next whole
share of New Common Stock, a stockholder must be the stockholder of record with
respect to such shares on both the Settlement Approval Date and effective date
of the Reverse Stock Split. The Reverse Stock Split will result in the
Corporation's becoming a private company which will no longer file periodic
reports with the Securities and Exchange Commission (the "Commission").
The record date for the vote on the Amendment is April 15, 1994. Mr.
James W. Hart, Chairman of the Board and President of the Corporation (the
"Majority Stockholder"), has advised the Corporation that he intends to execute
a consent with respect to his shares, representing approximately 95% of the
outstanding Common Stock, in favor of the Reverse Stock Split and the Settlement
and approving and adopting the Amendment. Consequently, no additional vote of
unaffiliated stockholders will be required for approval of the Reverse Stock
Split and the Corporation does not intend to solicit additional votes or
consents. No appraisal rights are available to dissenting stockholders. See
"Appraisal Rights".
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY. STOCKHOLDERS SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES OF
COMMON STOCK AT THIS TIME.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
THE APPROXIMATE DAY OF MAILING OF THIS
INFORMATION STATEMENT IS JULY 20, 1994.
SUMMARY
The following is a summary of certain information contained elsewhere
in this Information Statement. This summary does not purport to be complete and
is qualified in its entirety by reference to the more detailed information
contained elsewhere herein.
BACKGROUND, CLASS ACTION LAWSUITS AND SETTLEMENT.
On December 14, 1992, the Board of Directors approved an amendment to
the Corporation's Restated Certificate of Incorporation to effect a 300 to 1
reverse stock split whereby each resulting fractional share would be redeemed by
the Corporation for $.50 per pre-split share (the "Initial Proposal"). Shortly
thereafter the Class Action Lawsuits were filed in the Court of Chancery
alleging that the Initial Proposal was unfair to the unaffiliated stockholders
of the Corporation. After extensive negotiations with representatives of the
plaintiffs in the Class Action Lawsuits (the "Plaintiffs' Representatives"), the
Corporation agreed to revise the Initial Proposal. The revisions to the Initial
Proposal which were incorporated into the Settlement include (i) increasing the
consideration to be paid for fractional shares of New Common Stock to $2.25 per
pre-split share and (ii) effecting the reverse stock split whereby stockholders
will receive one share of New Common Stock for each 600 shares of Common Stock
which they presently own.
Holders of shares of Common Stock not converted into whole shares of
New Common Stock (each a "Fractional Stockholder", collectively "Fractional
Stockholders") who do not elect or who are unable to purchase additional shares
would be redeemed at a purchase price of $2.25 for each pre-split share. In
addition, stockholders who wish to continue as stockholders of the Corporation
will be given the opportunity (on a first-come, first-served basis, subject to
the availability of fractional shares) to round up their fractional holdings to
the next whole share by paying $2.25 for each 1/600 of a share of New Common
Stock needed to round up their holdings to equal one share of New Common Stock.
Stockholders with whole shares of New Common Stock who do not wish to continue
as stockholders of the Corporation can elect to tender their shares to the
Corporation for a cash purchase price of $1,350 per share of New Common Stock,
which consideration is equivalent to $2.25 for each pre-split share. Each
stockholder whose share holdings exceed 600 pre-split shares, but are not evenly
divisible by 600, will be treated as a Fractional Stockholder with respect to
the fractional portion of such stockholder's post-split shares.
The Plaintiffs' Representatives retained Arthur S. Ainsberg with the
firm of Richard A. Eisner & Company, C.P.A.s (the "Plaintiffs' Financial
Advisor") to advise them, from a financial point of view, as to the fairness of
the Cash Consideration. A hearing was held on April 15, 1994, at which evidence
of the fairness of the Settlement was presented to the Court of Chancery and the
stockholders of the Corporation were provided the opportunity to object to the
Settlement. The Court of Chancery approved the terms of the Settlement.
Except for the options set forth above and elsewhere in this
Information Statement, stockholders will not have the right to receive payment
for their Existing Shares from the Corporation from the exercise of appraisal
rights or otherwise. Until the Effective Date, stockholders can attempt to sell
their Existing Shares in the open market if they so choose. No assurance can be
given that there will be willing buyers in the open market or what price such
buyers, if any, would be willing to pay for such Existing Shares. No
stockholders opted out of the Settlement or appealed the decision of the Court
of Chancery. The Court of Chancery also determined that the Corporation had
made reasonable efforts to contact all stockholders, including those on the
missing stockholder list, and therefore, the Settlement is binding on all
stockholders whether, in fact, they received notice of the Settlement.
CONSENT OF MAJORITY STOCKHOLDER.
Pursuant to the Settlement of the Class Action Lawsuits, the Board of
Directors on July 12, 1994 approved the Amendment to reduce the number of
authorized shares of Common Stock from 40,000,000 shares of $.01 par value to
75,000 shares of $1.00 par value, in order to effectuate a 600 for one Reverse
Stock Split of the Corporation's outstanding shares of Common Stock. Under the
Corporation's Restated Certificate of Incorporation and the Delaware General
Corporation Law, the affirmative vote or consent of the holders of greater than
50% of all outstanding shares of Common Stock will be required to approve and
adopt the Amendment. The Majority Stockholder beneficially owns approximately
95% of the outstanding shares of Common Stock. The Majority Stockholder has
indicated that he intends to execute a written consent in favor of the Amendment
and Settlement; consequently no additional shares need to be voted in favor of
the Amendment in order for the Amendment to be adopted.
THE AMENDMENT; REVERSE STOCK SPLIT TRANSACTION; PURCHASE OFFER.
Pursuant to the Amendment, the Corporation's Common Stock is to
undergo a 600 for one Reverse Stock Split in which every 600 shares of the
Corporation's Common Stock (each, an "Existing Share"), issued on the effective
date of the Reverse Stock Split will be automatically converted into one share
of the Corporation's New Common Stock. All Existing Shares not converted into
whole shares of New Common Stock will be redeemed at a price equal to $2.25 per
Existing Share. For a period of 30 days following the Effective Date (as
defined below), stockholders whose holdings are not evenly divisible by 600 may
elect to forego the Cash Consideration and round up the fractional portion of
their holdings to the next whole share by paying $2.25 for each 1/600 of a share
of New Common Stock needed to round up their holdings to equal one share of New
Common Stock. This will allow those stockholders who wish to remain
stockholders of the Corporation and maintain an equity interest in the
Corporation to do so, to the extent fractional shares of New Common Stock are
available. In order to be eligible to round up fractional shares of New Common
Stock to the next whole share of New Common Stock, a Fractional Stockholder must
be the stockholder of record with respect to such shares on both the Settlement
Approval Date and the Effective Date. After the expiration of such 30-day
period, certificates representing fractional shares of New Common Stock which
have not been surrendered (the "Outstanding Fractional Shares") shall only
evidence the right to receive the Cash Consideration.
Fractional shares of New Common Stock (i) will be available to
stockholders desiring to round up their holdings on a first-come, first-served
basis, (ii) will be provided only from fractional shares which have been
surrendered or Outstanding Fractional Shares and (iii) may be of limited
availability. See "Terms of Reverse Stock Split and Purchase Offer".
In addition, stockholders who continue to hold whole shares of New
Common Stock after the Reverse Stock Split is effected may tender such shares to
the Corporation for a period of 30 days (unless extended) following the
Effective Date, for a purchase price of $1,350 for each share of New Common
Stock, which is equivalent to $2.25 for each pre-split share repurchased (the
"Purchase Offer"). The Purchase Offer is being made pursuant to the terms of
the Settlement and is not conditioned upon any minimum number of shares of New
Common Stock being tendered.
The Court of Chancery was concerned with the number of missing
stockholders who may not receive notice of the Settlement. There are
approximately 950 record holders for which the Corporation does not have a
current mailing or forwarding address. The Corporation issued several press
releases throughout the course of the Class Action Lawsuits, the negotiation of
the Settlement, the execution of the Stipulation and Agreement of Compromise and
the approval of the Settlement by the Court of Chancery. On May 21, 1993, The
Wall Street Journal carried an article addressing the Settlement. In addition,
the Corporation made a survey of its missing stockholders by zip code and
published a notice to stockholders concerning the hearing of the Settlement in
the newspaper with the highest circulation in the area with the largest
concentration of missing stockholders. In addition, the Corporation checks the
addresses of all stockholders who call the Corporation, in an effort to reduce
the number of missing stockholders.
Despite the Corporation's efforts to locate missing stockholders,
many stockholders may not have received notice of the Settlement. The Court of
Chancery reviewed the efforts made by the Corporation to locate such missing
stockholders, and determined that the Corporation's efforts were adequate and
reasonable and that such missing stockholders would be bound by the terms of the
Settlement, including the Reverse Stock Split.
The terms of the Reverse Stock Split and the Purchase Offer are to be
applied uniformly to all stockholders, including those who have not received
actual notice of the Settlement. If a stockholder fails to elect to "round-up"
his fractional holdings or tender whole shares of New Common Stock within the
period of 30 days (unless extended) following the Effective Date, such
stockholder will only be entitled to receive the Cash Consideration for
certificates representing fractional shares of New Common Stock and a
certificate representing one share of New Common Stock for each 600 Existing
Shares owned by such stockholder. Amounts representing the Cash Consideration
which have not been distributed to stockholders will be held by the Corporation
for the normal state escheat period.
CERTAIN EFFECTS OF THE REVERSE STOCK SPLIT AND THE PURCHASE OFFER.
Upon the effectiveness of the Reverse Stock Split, stockholders of the
Corporation who hold, as of the Effective Date, less than 600 Existing Shares
and who do not elect to "round up" their holdings, will have their Existing
Shares automatically converted into the right to receive the Cash Consideration
and will no longer have any continuing interest as stockholders in the
Corporation. Holders of 600 Existing Shares or more, as of the Effective Date,
can elect to (i) retain or tender their whole shares of New Common Stock
pursuant to the Purchase Offer and (ii) to the extent such stockholders have
fractional shares of New Common Stock, round up or receive the Cash
Consideration with respect to their fractional shares. After the Reverse Stock
Split, price quotes will no longer be available through the National Association
of Securities Dealers' OTC Bulletin Board (the "NASDAQ OTC Bulletin Board").
The registration of the shares under the Securities Exchange Act of 1934 (the
"Exchange Act") will also be terminated, thus relieving the Corporation of the
periodic reporting requirements to which the Corporation is presently subject.
EFFECTIVE DATE.
The Amendment will be effective as of the date and time that the
Amendment is filed with the Secretary of State of the State of Delaware in
accordance with the Delaware General Corporation Law (the "Effective Date").
The Reverse Stock Split will be effective simultaneously with the Amendment
becoming effective. The Purchase Offer will commence on the Effective Date.
The Corporation's Board of Directors reserves the right to halt and terminate
the Reverse Stock Split at any time prior to the filing of the Amendment with
the Secretary of State of the State of Delaware, if it determines that
termination is in the best interest of the Corporation. In the event the
Reverse Stock Split is terminated, the Corporation will not commence the
Purchase Offer.
REASONS FOR THE REVERSE STOCK SPLIT AND THE PURCHASE OFFER.
The Corporation's Board of Directors and the Majority Stockholder
believe that the Corporation's stockholders derive little benefit from the
Corporation's status as a publicly-held corporation. Approximately 950
stockholders (just under one-half of the Corporation's record holders) do not
receive corporate communications, including proxy materials, due to changed
mailing addresses and lack of forwarding information. Market transactions in
the Common Stock occur infrequently. Except for periodic purchases by the
Corporation, over the last several years the Corporation estimates that third
party purchases or sales transactions have been insignificant. Therefore, it is
believed that the benefit of the public market for Common Stock is limited.
Moreover, the Corporation must incur significant general and administrative
costs related to its status as a public reporting corporation under the federal
securities laws. The Board of Directors and the Majority Stockholder also
believe planning and other management decisions would be simplified by the
deregistration of the Common Stock under the Exchange Act because such decisions
could be made solely on the basis of the Corporation's long-range business
interests without the necessary consideration of the short-term interest of its
public stockholders. The Purchase Offer, mandated by the terms of the
Settlement, provides stockholders who would otherwise continue to have an equity
interest in the Corporation following the Reverse Stock Split with the option to
sell their shares to the Corporation at a price equivalent to that received by
Fractional Stockholders.
CONFLICTS OF INTEREST.
The Board of Directors which approved and adopted the Initial
Proposal, the Settlement and the Amendment consists of Messrs. James W. Hart
and Richard A. Vollmer. Mr. Vollmer does not own any shares of outstanding
Common Stock. Mr. Vollmer had been an officer and from time to time a
consultant to the Corporation prior to 1992. Mr. Hart beneficially owns
approximately 95% of the outstanding Common Stock, and will continue to be a
stockholder of the Corporation following the Reverse Stock Split. To the extent
that Mr. Hart receives fractional shares of New Common Stock, it is his
intention to elect to round up any such fractional holdings to the next whole
share of New Common Stock. No independent committee of the Board of Directors
reviewed the fairness of the Reverse Stock Split. See "Special Factors --
Conflicts of Interest; Lack of Opinions, Appraisals and Reports".
POSITION OF THE BOARD OF DIRECTORS.
At a special meeting held on July 12, 1994, the Corporation's Board
of Directors unanimously approved and adopted the Amendment. Accordingly, the
Corporation's Board of Directors has concluded that the proposed Amendment,
Reverse Stock Split and Purchase Offer are fair to, and in the best interest of,
all stockholders of the Corporation. However, neither the Corporation, its
Board of Directors nor the Majority Stockholder makes any recommendation to any
stockholder as to whether to (i) round up fractional holdings to one whole share
of New Common Stock or (ii) tender shares of New Common Stock. The Board of
Directors has been advised that none of the directors and executive officers of
the Corporation who will own whole shares of New Common Stock following the
Reverse Stock Split expect to tender their shares pursuant to the Purchase
Offer.
SOURCE OF FUNDS.
The funds required to redeem the fractional shares created by the
Reverse Stock Split and purchase whole shares pursuant to the Purchase Offer
(estimated to be approximately $1,300,000 if no stockholders elect to round up
fractional holdings and all unaffiliated stockholders tender whole shares of New
Common Stock) are available from the current cash reserves of the Corporation.
Neither the Corporation nor the Majority Stockholder will be required to borrow
funds to effect the Reverse Stock Split or the Purchase Offer.
APPRAISAL RIGHTS.
No appraisal rights are provided to dissenting stockholders under the
laws of the State of Delaware, nor are such rights provided under the
Corporation's Restated Certificate of Incorporation in connection with the
Reverse Stock Split or the Purchase Offer. The Corporation and the Majority
Stockholder believe that the determination of fairness made by the Court of
Chancery with respect to the Settlement was the functional equivalent of the
hearing that would be afforded to dissenting stockholders in an appraisal
proceeding. In addition, the Plaintiffs' Representatives retained Plaintiffs'
Financial Advisor to advise them, from a financial point of view, as to the
fairness of the Cash Consideration. The Plaintiffs' Financial Advisor concluded
the Cash Consideration was fair.
NO FINANCIAL ADVISOR RETAINED BY THE CORPORATION
OR THE MAJORITY STOCKHOLDER.
Neither the Corporation nor the Majority Stockholder retained the
services of a financial advisor with respect to the Reverse Stock Split or the
Purchase Offer and neither the Corporation's Board of Directors nor the Majority
Stockholder received a fairness opinion from a financial advisor in reaching its
decision to make the Initial Proposal. However, the Plaintiffs' Representatives
did retain the Plaintiffs' Financial Advisor to assist them in determining the
fairness of the financial terms of the Settlement, including the terms of the
Reverse Stock Split and the Purchase Offer. An affidavit of Plaintiffs'
Financial Advisor was filed with the Court of Chancery in connection with the
fairness hearing held on April 15, 1994. The Plaintiffs' Financial Advisor has
determined that $2.25 per Existing Share is within the range of fair value, from
a financial point of view.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
Stockholders who receive cash either (i) upon redemption of their
fractional shares of New Common Stock as a result of the Reverse Stock Split or
(ii) upon tender of their shares of New Common Stock pursuant to the Purchase
Offer will recognize gain or loss based on their adjusted basis in the
fractional shares redeemed or the shares of New Common Stock repurchased. A
stockholder who rounds up his holdings to a whole share of New Common Stock will
not recognize any gain or loss and the adjusted basis of such stockholder in
such shares of New Common Stock will be the same as the stockholder's adjusted
tax basis in his exchanged shares of Common Stock plus $2.25 per 1/600 share of
New Common Stock so rounded up. The discussion of tax consequences contained in
this Information Statement was reviewed by the Corporation's tax department.
The Corporation did not receive an opinion of counsel or retain a tax expert in
connection with its assessment of the tax consequences of the Reverse Stock
Split. Each stockholder is urged to consult his or her own tax advisor. See
"Effects of the Reverse Stock Split -- Federal Income Tax Consequences".
BACKGROUND OF REVERSE STOCK
SPLIT AND PURCHASE OFFER
On December 14, 1992, the Board of Directors of the Corporation
approved a transaction whereby the Corporation's Restated Certificate of
Incorporation would be amended so as to effectuate a reverse stock split of the
Corporation's Common Stock and directed that the amendment effectuating such
transaction be placed on the agenda for the consideration of stockholders at the
special meeting to be held on January 12, 1993. Pursuant to the terms of the
amendment, the Common Stock would undergo a 300 for one reverse stock split (the
"Initial Proposal"). Pursuant to the Initial Proposal, fractional shares would
have been automatically converted into the right to receive from the Corporation
cash in the amount of $.50 for each such Existing Share. For a period of thirty
(30) days following the reverse stock split, stockholders with fractional shares
could have elected to round up their fractional holdings by paying $.50 for each
1/300 of a share needed to round up their holdings to equal a whole share on a
first-come, first-served basis, from fractional shares surrendered by other
stockholders.
The Corporation announced the terms of the Initial Proposal on
December 18, 1992, and shortly thereafter two class action lawsuits entitled
Clare Lois Spark Loeb v. James W. Hart, et al., CA 12830, and Rochelle Brooks v.
James W. Hart, et al., CA 12831 (the "Class Action Lawsuits") challenging the
Initial Proposal were filed in the Court of Chancery against the Corporation and
its directors. The Class Action Lawsuits alleged that the Initial Proposal was
unfair to stockholders other than the directors and their affiliates because (i)
the price proposed to be paid for fractional shares was too low, (ii) the
transaction was not subject to "arms length" negotiation or approval by
independent directors or stockholders and (iii) no opinion had been obtained
from a financial advisor as to the fairness of the price proposed to be paid for
fractional shares. The Class Action Lawsuits sought to enjoin the Corporation
from proceeding with the Initial Proposal, to award the class action plaintiffs
compensatory and/or recissory damages and to assess costs and disbursements
(including reasonable attorneys' and experts' fees) against the defendants. The
Corporation agreed to delay the pending special meeting in order to provide
Plaintiffs' Representatives with the opportunity to review the financial
condition of the Corporation and other matters relevant to the fairness of the
Initial Proposal.
Over the next 5 months the Corporation provided the Plaintiffs'
Representatives with substantial business and financial information concerning
the present condition and prospects of the Corporation. The Plaintiffs'
Representatives and the representatives of the Corporation and the defendants
participated in a number of conferences and meetings in an attempt to
familiarize the Plaintiffs' Representatives with the business and prospects of
the Corporation. Although having initially proposed a substantially higher
price for fractional shares, the Plaintiffs' Representatives, after extensive
negotiations, concluded that the Settlement, including the terms of the Reverse
Stock Split, the Cash Consideration and the Purchase Offer, was the best
proposal obtainable and that it is fair to the unaffiliated stockholders of the
Corporation. The transactions contemplated by the Settlement provide the
unaffiliated stockholders of the Corporation with an opportunity to realize an
immediate cash value for their surrendered shares or, if a stockholder so
chooses, an opportunity to round up to the next whole share of New Common Stock
and remain as a stockholder of the Corporation. In addition, an important
element of the transaction proposed in the Settlement is the option provided to
all unaffiliated stockholders who will hold whole shares of New Common Stock
following the Reverse Stock Split to tender such shares to the Corporation and
receive cash. The Cash Consideration for Existing Shares has been increased
from $.50, in the Initial Proposal, to $2.25, an increase of 350%.
TERMS OF REVERSE STOCK SPLIT
AND PURCHASE OFFER
REVERSE STOCK SPLIT
The Stipulation and Agreement of Compromise and Settlement evidencing
the Settlement was approved by the Court of Chancery on April 15, 1994.
Pursuant to the resolutions of the Board of Directors and subject to the
execution of the consent by the Majority Stockholder, the Corporation intends to
execute the Amendment to effect the Reverse Stock Split of the Corporation's
Common Stock and cause the Amendment to be filed. Upon the filing of the
Amendment, the Common Stock would automatically undergo a 600 for one Reverse
Stock Split, the number of authorized shares would be reduced to 75,000 and the
par value of the Existing Shares would be increased from $.01 to $1.00 per
share. As of the Effective Date, (i) each 600 Existing Shares held by a
stockholder will be automatically converted into one whole share of the
Corporation's New Common Stock, and (ii) each Existing Share held by a
Fractional Stockholder will, unless such Fractional Stockholder elects to round
up to the next whole share of New Common Stock, be automatically converted into
the right to receive the Cash Consideration. The Existing Shares owned by such
Fractional Stockholder will be automatically cancelled. Thereupon, such
Fractional Stockholder will cease to be a stockholder in the Corporation or to
have any interest in the equity or future prospects of the Corporation with
respect to such fractional shares. Each Stockholder whose share holdings exceed
600 Existing Shares, but are not evenly divisible by 600, will be treated as a
Fractional Stockholder with respect to such stockholder's fractional shares of
New Common Stock.
For a period of 30 days following the Effective Date, Fractional
Stockholders may elect to forego the Cash Consideration and round up their
fractional holdings by paying $2.25 for each 1/600 of a share of New Common
Stock needed to round up their holdings to equal a whole share of New Common
Stock. After the expiration of such 30-day period, the holder of a fractional
share of New Common Stock shall only be entitled to receive the Cash
Consideration. Fractional shares of New Common Stock (i) will be available to
Fractional Stockholders desiring to round up their holdings on a first-come,
first-served basis, (ii) will be provided only from fractional shares which have
been surrendered or Outstanding Fractional Shares and (iii) based on the
foregoing, may be of limited availability. The Corporation has appointed
American Stock Transfer & Trust Company as exchange agent (the "Exchange Agent")
to (i) receive shares, (ii) match up fractional shares for rounding up purposes
and (iii) disburse funds to stockholders pursuant to the Reverse Stock Split and
the Purchase Offer, as applicable. Stockholders should not send share
certificates or completed letters of transmittal to the Corporation. As the
Corporation's Exchange Agent receives elections from stockholders desiring to
round up their holdings, it will "match up" those requests with other
stockholders' fractional shares needed to provide rounding up stockholders with
a whole share of New Common Stock. To the extent that fractional shares
surrendered by stockholders during such 30-day period are not sufficient to
cover the number of fractional shares needed to provide all stockholders
desiring to round up to whole shares of New Common Stock, those stockholders who
are not "matched up" with surrendered fractional shares will be "matched-up with
Outstanding Fractional Shares. In the event Outstanding Fractional Shares are
not available for "matching up" purposes, those stockholders who are not
"matched up" with fractional shares will receive Cash Consideration in exchange
for their fractional shares. In order to be eligible to "round-up" fractional
shares, a stockholder must be the stockholder of record with respect to such
fractional shares of New Common Stock on both the Settlement Approval Date and
the Effective Date.
PURCHASE OFFER
Pursuant to the Stipulation and Agreement of Compromise and
Settlement, stockholders who will continue to hold whole shares of New Common
Stock after the Reverse Stock Split will have the right, commencing on the
Effective Date, to tender such whole shares to the Corporation and receive in
consideration therefor $1,350 per share of New Common Stock, which is equivalent
to $2.25 for each pre-split share. The Corporation will accept for payment and
purchase all shares of New Common Stock which are validly tendered prior to the
Expiration Date (as defined below) and not properly withdrawn as set forth
beloW. In order to be eligible to tender shares of New Common Stock pursuant to
the Purchase Offer, a stockholder must be the stockholder of record with respect
to such shares of New Common Stock on the date certificates evidencing such
shares are transmitted to the Corporation pursuant to the terms of the letter of
transmittal. The Purchase Offer is not conditioned on any minimum number of
shares being tendered. The Purchase Offer will not commence if the Board
determines, in its sole discretion, not to file the Amendment and effect the
Reverse Stock Split.
The term "Expiration Date" shall mean 5:00 p.m., Eastern Daylight
Time, on September 15, 1994, unless and until the Corporation elects, in its
sole discretion, to extend the period of time for which the Purchase Offer is
open, in which event the term "Expiration Date" shall mean the latest time and
date at which the Purchase Offer, as so extended, will expire.
The Corporation reserves the right, in its sole discretion, at any
time and from time to time, to extend the period of time during which the
Purchase Offer is open by giving oral or written notice to the Exchange Agent of
such extension as promptly as practicable. There can be no assurance that the
Corporation will exercise its right to extend the Purchase Offer. The
Corporation will promptly pay the Cash Consideration for shares of New Common
Stock deposited by or on behalf of stockholders. The Stipulation and Agreement
of Compromise and Settlement prohibits the Corporation from (i) decreasing the
number of shares of New Common Stock being sought, (ii) increasing or decreasing
the consideration offered to the holders of shares of New Common Stock, (iii)
terminating the Purchase Offer after the filing of the Amendment or (iv) making
any material change to the terms of the Purchase Offer.
After the Effective Date, no transfers of record of fractional shares
of New Common Stock will be permitted.
The Corporation reserves the absolute right to (i) reject any and all
tenders of New Common Stock if they are not in proper form or (ii) reject the
acceptance of or payment for shares of New Common Stock tendered which would, in
the opinion of the Corporation or its counsel, be unlawful. The Corporation
also reserves the absolute right to waive any defect or irregularity in the
tender of any shares of New Common Stock. The Corporation's interpretation of
the terms and conditions of the Purchase Offer (including the letter of
transmittal and the instructions) shall be final and binding on all parties.
Neither the Corporation nor any other person is or will be under any duty to
give notification of any defects or irregularities of any kind or for failure to
give any such notification. Tenders will not be deemed to have been made until
any such irregularities have been cured or waived.
Withdrawal Rights
Tenders of shares of New Common Stock made pursuant to the Purchase
Offer may be withdrawn at any time prior to the Expiration Date unless
previously accepted and paid for. Thereafter, such tenders are irrevocable,
except that they may be withdrawn any time after forty business days from the
commencement of the Purchase Offer, unless theretofore accepted for payment as
provided in the Purchase Offer.
For a withdrawal to be effective, a written, telegraphic, or facsimile
transmission of a notice of withdrawal must be timely received by the Exchange
Agent. Any such notice of withdrawal must specify the name of the person who
tendered the shares, the name of the registered holder(s) if different from the
name of the person who tendered the shares, the number of shares of New Common
Stock tendered, and the number of shares to be withdrawn. If certificates
representing shares to be withdrawn have been delivered or otherwise identified
to the Corporation, the serial numbers shown on the particular certificates
evidencing the shares to be withdrawn and a signed written notice of withdrawal
(with the signature guaranteed if the signature was required to be guaranteed
when the shares of New Common Stock were tendered or if the person making
withdrawal is not the person who tendered the shares of New Common Stock) must
be submitted prior to the physical release of the certificates for the shares of
New Common Stock to be withdrawn. Released certificates will be returned to the
registered holder of such shares of New Common Stock or as otherwise directed by
the letter of transmittal.
All questions as to the form and validity (including time of receipt)
of notices of withdrawal will be determined in the sole discretion of the
Corporation, which determination shall be final and binding. Neither the
Corporation nor any other person will be under any duty to give notification of
any defects or irregularities in any notice of withdrawal nor will any of them
incur any liability of any kind for failure to give any such notification.
Any shares of New Common Stock withdrawn will be deemed not validly
tendered for purposes of the Purchase Offer. However, withdrawn shares of New
Common Stock may be retendered at any subsequent time prior to the Expiration
Date. See "Terms of Reverse Stock Split and Purchase Offer -- Procedures for
Tendering Fractional Shares and Whole Shares".
PROCEDURES FOR TENDERING FRACTIONAL SHARES AND WHOLE SHARES
On or as soon as practicable after the Effective Date, the Corporation
will send letters of transmittal to stockholders for use in transmitting their
stock certificates representing shares of Common Stock to the Exchange Agent in
exchange for new certificates representing shares of New Common Stock, cash, or
some combination thereof, as appropriate in accordance with the terms hereof.
Stockholders should not send in any certificates representing shares of Common
Stock at this time. No Cash Consideration or delivery of a new certificate will
be made to a stockholder until such stockholder's outstanding certificates
together with the properly completed and duly executed letter of transmittal are
delivered to the Exchange Agent.
Stockholders having fractional shares of New Common Stock will be
requested to instruct the Exchange Agent within thirty 30 days following the
Effective Date if they elect to round up such fractional shares for whole shares
of New Common Stock and to enclose the appropriate payment therefor with their
letters of transmittal. Stockholders seeking to have their fractional holdings
rounded up will, after the end of the 30-day period, be promptly notified by the
Exchange Agent as to the amount of their resulting share ownership of New Common
Stock and will receive a refund of any amount paid by them to the Exchange Agent
for additional fractional shares if fractional shares were not available for
rounding up.
In order for stockholders to tender shares pursuant to the Purchase
Offer, certificates for each share of New Common Stock, together with a properly
completed and duly executed letter of transmittal, and any other required
documents, must be transmitted to and received by the Exchange Agent at its
address set forth in the letter of transmittal, before 5:00 p.m., Eastern
Daylight Time, on September 15, 1994, or, if the Purchase Offer is extended, by
the time and date specified in such extension.
The Cash Consideration will be paid after the Effective Date in cash,
net to the stockholder and without interest, with respect to all fractional
shares of New Common Stock which are not rounded up into a whole share of New
Common Stock and to all stockholders who tender their whole shares of New Common
Stock. Stockholders delivering any whole or fractional shares of New Common
Stock will not be obligated to pay brokerage fees or commissions with respect to
sales of any such fractional or whole shares of New Common Stock pursuant to the
Reverse Stock Split or the Purchase Offer, as applicable. The Corporation will
pay all charges and expenses of the Exchange Agent incurred in connection with
the Reverse Stock Split and the Purchase Offer.
If certificates for Existing Shares have been lost or destroyed, the
Corporation may, in its sole discretion, accept at the time of redemption or
tender a duly executed affidavit and indemnity agreement of such loss or
destruction, in form satisfactory to the Corporation, in lieu of such lost or
destroyed certificate. However, no such shares will be purchased by the
Corporation unless and until the Corporation receives a replacement certificate
duly issued by the Corporation, which may require posting of a bond.
Stockholders whose certificates have been lost or destroyed and who wish to
tender should contact the Exchange Agent as soon as possible after the Effective
Date.
In all cases, payment for fractional shares purchased pursuant to the
Reverse Stock Split or tendered shares purchased pursuant to the Purchase Offer
will be made only after the timely receipt by the Exchange Agent of certificates
representing such shares, a properly completed and duly executed letter of
transmittal, any required signature guarantees, any other required documents,
and only after all conditions of the Purchase Offer are satisfied or have been
waived by the Corporation.
All questions about the validity, form, eligibility (including time of
receipt), or acceptance for payment of fractional shares or whole shares of New
Common Stock, will be determined in the sole discretion of the Corporation.
That determination shall be final and binding on all parties.
It is a violation of Section 10(b) of the Exchange Act and Rule 10b-4
promulgated thereunder for a person to tender shares of New Common Stock for his
own account unless the person so tendering (i) owns such shares, or (ii) owns
other securities convertible into or exchangeable for such shares or owns an
option, warrant, or right to purchase such shares and intends to acquire such
shares for tender by conversion, exchange, or exercise of such option, warrant,
or right. Section 10(b) of the Exchange Act and Rule 10b-4 thereunder provide a
similar restriction applicable to the tender or guarantee of a tender on behalf
of another person. The tender of shares of New Common Stock pursuant to any of
the procedures described above will constitute a binding agreement between the
tendering holder of the shares of New Common Stock and the Corporation upon the
terms and subject to the conditions of the Purchase Offer, including the
tendering stockholder's representation that (i) such holder owns the shares
being tendered within the meaning of Rule 10b-4 under the Exchange Act and (ii)
the tender of such shares complies with Rule 10b-4.
INVESTMENT CONSIDERATIONS
Each stockholder should carefully review the following considerations
in deciding whether to round up fractional shares of New Common Stock or tender
whole shares of New Common Stock.
HOLDING COMPANY STRUCTURE
The Corporation is a holding company which currently derives all of
its operating income from its subsidiaries. The Corporation owns all of the
issued capital stock of Reeves Industries, Inc. ("Reeves Industries") (90% on a
fully diluted basis), which in turn owns 100% of the issued stock of Reeves
Brothers, Inc. ("Reeves"). The Corporation must ultimately rely upon
distributions from Reeves Industries or other investments to generate the funds
necessary to meet its obligations. The Reeves Industries bank loan agreement
and indentures contain restrictions that could prevent the payment of dividends
or other distributions to the Corporation. In addition, the ability of Reeves
Industries to make such payments will be subject to, among other things,
applicable state laws. Reeves Industries cannot currently make any dividend or
distributions to the Corporation.
LEVERAGE
In June 1992, Reeves Industries completed a public offering of
$122,500,000 aggregate principal amount of 11% Senior Notes due 2006 (the "11%
Senior Notes"), the proceeds of which were used to retire outstanding public
indebtedness and repay and terminate outstanding revolving loans. In August
1992, Reeves Industries and Reeves entered into a new revolving loan agreement
with a group of banks which provides Reeves Industries and Reeves with an
aggregate $35,000,000 revolving line of credit. In November 1992, Reeves
Industries redeemed $5,000,000 principal amount of the outstanding $16,000,000
aggregate principal amount of its 13 3/4% Subordinated Debentures due 2001. In
March 1994, Reeves Holdings, Inc. ("Reeves Holdings"), a wholly-owned
subsidiary of the Corporation which will become the parent corporation of Reeves
Industries, filed a Registration Statement with the Commission under the
Securities Act of 1933, as amended, in connection with a public offering of
senior discount debentures, intended to provide proceeds of approximately
$100,000,000. After giving effect to such offering, if consummated, and the
application of the proceeds therefrom, the Corporation's total consolidated
indebtedness on April 3, 1994 would have been $227.5 million, its stockholder's
equity would have been $23.5 million and its cash and cash equivalents would
have been $90.2 million. Completion of the senior discount debenture offering
is subject to market conditions and a number of factors outside the control of
the Corporation. No assurances can be given as to whether the offering will be
completed or what interest rate the debentures will bear if the offering is
completed.
The degree to which the Corporation is leveraged could have important
consequences to the holders of the shares of New Common Stock. Such
consequences include the following, any of which could affect the ability of the
Corporation's subsidiaries to make distributions to the Corporation and the
Corporation's ability to make payments with respect to its outstanding
indebtedness: (1) the Corporation's ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions or general
corporate purposes may be impaired; (2) a substantial portion of the
Corporation's consolidated cash flow from operations must be dedicated to the
payment of interest on indebtedness; and (3) the Corporation's leverage may make
it more vulnerable to economic downturns and may limit its ability to withstand
competitive pressures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
Given the highly leveraged financial position of the Corporation,
Reeves Holdings, Reeves Industries and Reeves, the Board of Directors believes
that an investment in the Corporation is inappropriate for those investors with
little economic interest in the Corporation. The Corporation has not paid a
dividend on its Common Stock since 1958. Stockholders with limited economic
interest are subject to the risks associated with an investment in a highly-
leveraged company without the benefit of a liquid market in which to dispose of
their shares.
CONTROLLING STOCKHOLDER
The Majority Stockholder beneficially owns approximately 95% of the
Corporation's issued and outstanding Common Stock. Therefore, the Majority
Stockholder controls all actions requiring stockholder approval, including the
election of directors, ensuring his ability to control the future direction and
management of the Corporation.
LACK OF PUBLIC INFORMATION; ILLIQUID PUBLIC MARKET.
Upon completion of the Reverse Stock Split, the Corporation
anticipates having less than 100 stockholders of record and that it will not be
required to file public information with the Commission thereafter. Although
the Corporation and the Majority Stockholder do not believe the public market
for its Common Stock is very liquid currently, they anticipate there will be
little or no market for shares of its New Common Stock. Thereafter,
stockholders that may need to subsequently realize on their investment in the
Corporation should consider the fact that a public market may not exist for
shares of the Corporation's New Common Stock after the completion of the Reverse
Stock Split.
SPECIAL FACTORS
PURPOSES OF THE REVERSE STOCK SPLIT
As a result of historical changes in the Corporation's business and
the composition of stock ownership, the Corporation and the Majority Stockholder
believe that the risks and expenses of continuing as a publicly-held company far
outweigh the benefits to current stockholders. Accordingly, the Board of
Directors proposed the Initial Proposal to achieve the following purposes:
(i) to reduce the number of stockholders of record of the
Corporation to less than 300 in order to terminate the
registration of the Corporation's Common Stock under the Exchange
Act;
(ii) to relieve the Corporation of the burden and costs
associated with the regulatory and reporting requirements of the
Exchange Act and the rules and regulations of the Commission
issued thereunder;
(iii) to facilitate management's long-term business plan of
emphasizing product development and improvement, cost
efficiencies, productivity, technological innovation, facility
upgrading and superior service and making strategic acquisitions
and divestitures without consideration of short-term profits;
(iv) to enable management to pursue the Corporation's long-term
business plan without consideration of its effect on unaffiliated
public stockholders and the risks of liability resulting from its
status as a public company;
(v) to make, by paying cash in lieu of the issuance of
fractional shares to Fractional Stockholders and to holders of
whole shares of New Common Stock that tender such shares, what
the Corporation believes is an investment that will benefit the
Corporation and its remaining stockholders in the long term at a
time when the Corporation has adequate cash to effectuate the
Reverse Stock Split; and
(vi) to reduce the cost of servicing stockholder accounts while
at the same time affording such stockholders an opportunity to
receive a fair price for their Existing Shares in an otherwise
illiquid market without incurring the attendant costs of a sale.
Although the specific terms of the Initial Proposal have been revised by the
Settlement and Reverse Stock Split, the foregoing purposes will be achieved by
the Reverse Stock Split.
BACKGROUND AND REASONS FOR THE REVERSE STOCK SPLIT
In considering the Reverse Stock Split, the Board of Directors and the
Majority Stockholder determined that there was little benefit to either the
Corporation or its stockholders from the Corporation's status as a public
company. The composition of stock ownership had changed to the point where
approximately 95% of the outstanding shares of Common Stock is currently held by
the Majority Stockholder. In addition, approximately 84% of the Corporation's
unaffiliated stockholders hold 100 or fewer shares of Common Stock and
approximately 48% of the Corporation's unaffiliated stockholders do not
currently receive information from the Corporation because the Corporation does
not have a current mailing or forwarding address for such stockholders. Given
that a disproportionate number of unaffiliated stockholders do not currently
receive the information prepared by the Corporation pursuant to the Exchange Act
and the rules and regulations promulgated thereunder and that an overwhelming
number of shares are held by the Majority Stockholder, the Board of Directors no
longer believes that it is efficient to allocate corporate resources, including
management time, to compliance with public company regulatory and reporting
requirements when few stockholders receive any benefit from such compliance.
Moreover, the Board considered the effect of its public company status on its
current operations. The Corporation's ability to compete would be enhanced if
management had the flexibility to make long-term decisions without consideration
of the short-term profits or the effect of such decisions on unaffiliated
stockholders.
Current Operations of the Corporation
The Corporation, through its subsidiary Reeves Industries, is a
diversified industrial company with operations in two principal business
segments, industrial coated fabrics, conducted through its Industrial Coated
Fabrics Group ("ICF"), and apparel textiles, conducted through its Apparel
Textile Group ("ATG"). In 1993, ICF contributed approximately 49.6% of the
Corporation's net sales and approximately 73.6% of its operating income and ATG
contributed approximately 50.4% of the Corporation's net sales and approximately
26.4% of its operating income (in each case, excluding unallocable corporate
expenses). Throughout its businesses, the Corporation emphasizes specialty
products, product quality, technological innovation and rapid responses to the
changing needs of its customers.
ICF specializes in the coating of various substrate fabrics with a
variety of products, such as synthetic rubber, vinyl, neoprene, urethane and
other elastomers, to produce a diverse line of products for industrial
applications. ICF's principal products include: (1) a complete line of printing
blankets used in offset lithography, (2) coated automotive airbag materials, (3)
specialty coated fabrics, including fluid control diaphragm materials, tank
seals, ducting materials and coated fabric materials used for military and
commercial life rafts and vests, aircraft escape slides, flexible fuel tanks and
general aviation products, and (4) coated fabrics used in industrial coverings,
including fabrics coated with rubber and vinyl which are used to make
tarpaulins, loading dock shelters and other industrial products.
The Corporation believes that ICF is one of the world's leading
producers of offset printing blankets and that ICF has the leading share of the
domestic market for coated automotive airbag materials. The Corporation also
believes that ICF is a leading domestic producer of specialty coated fabrics
used for a broad range of industrial applications. ICF's products generally
involve significant amounts of technological expertise and precise production
tolerances. The Corporation believes that ICF's product development,
formulation and production methods are among the most sophisticated in the
coated fabrics industry.
ATG manufactures, processes and sells specialty textile fabrics to
apparel and other manufacturers. Through its Greige Goods Division, ATG
processes raw materials into greige goods (i.e., undyed woven fabrics). Through
its Finished Goods Division, ATG functions as a converter and commission
finisher, purchasing greige goods from the Greige Goods Division and others and
contracting to have the goods dyed and finished for use in various end-products
or dyeing and finishing the goods itself.
The Corporation believes that ATG has developed strong positions in
niche markets in the apparel textile industry by offering unique custom-designed
fabrics to leading apparel and specialty garment manufacturers. ATG emphasizes
"short-run" product orders and targets market segments in which its
manufacturing flexibility, rapid response time, superior service and quality and
ability to supply exclusive blends are key competitive factors.
The Corporation's business strategy has focused on the sale of higher-
margin niche products and the establishment of leading positions in its
principal markets. The Corporation believes that this strategy, combined with
its diverse product and customer base, the development of new products and
substantial capital investment, has helped the Corporation increase its sales
and profitability in spite of adverse economic conditions in its U.S. and
European markets during 1990-1993.
Since 1991, the Corporation has significantly increased its level of
capital investment in its businesses to modernize and expand capacity, reduce
its overall cost structure, increase productivity and enhance its competitive
position. The Corporation intends to substantially increase its capital
investment in its businesses to approximately $140 million during the 1994-1997
period. In addition, as opportunities arise, the Corporation may seek to
augment its growth through strategic acquisitions, joint ventures and
investments in other industrial companies where the Corporation believes that it
can apply its professional management techniques to enhance a company's
operating performance. The Corporation regularly reviews acquisition
opportunities but is not currently a party to any agreement, or involved in
negotiation of an agreement, with respect to any material acquisition, joint
venture or investment.
Repurchase of the Corporation's Existing Shares
Over the past several years, in an attempt to provide liquidity for
stockholders desiring to sell their shares, the Corporation has engaged in a
program of open market and privately negotiated purchases of its Common Stock.
During 1992, the Corporation acquired 81,062 Existing Shares at prices
approximating $3.00 per share. The average quarterly purchase price paid during
each of the first through fourth quarters of 1992 was $3.00. The foregoing
purchases were made by the Corporation directly from individual stockholders,
primarily from calls from stockholders requesting that the Corporation buy their
shares. The balance of such repurchases were made through brokers. The
Corporation did not acquire any Existing Shares during 1993 or to date in 1994.
For information regarding over-the-counter high and low bid prices of Existing
Shares, see "Market And Dividend Information".
In 1990, the Board considered, but determined not to pursue, a reverse
stock split pursuant to which the consideration for fractional shares was set at
$2.125 per share of Common Stock. If the 1990 reverse stock split had been
completed, the Corporation would have remained a public company.
These repurchases of Existing Shares have reduced the amount of Common
Stock outstanding to an aggregate of 12,895,100 shares as of the Record Date, of
which 584,993 shares are held by stockholders other than officers and directors
of the Corporation.
In addition, the capital structure of the Corporation's wholly-owned
subsidiary, Reeves Industries, has undergone a number of changes resulting in
the retirement of shares and consolidation of the ownership of Reeves Industries
common stock.
Effective on December 31, 1991, the 1,000 shares of Reeves Industries
Series I Preferred Stock, valued in the aggregate at $9,410,000 were exchanged
for 18,820,000 shares of Reeves Industries common stock, valued at $.50 per
share. After giving effect to the exchange, the Corporation's equity interest
in Reeves Industries increased to 93.5%.
In April 1990, the Corporation and Reeves Industries filed a lawsuit
against the holders of certain previously issued warrants seeking the return of
1,918,132 shares of Reeves Industries common stock issued in connection with the
exercise of such warrants. The aggregate exercise price of the warrants was
$1,158,000. In November 1992, the lawsuit was settled and, pursuant to a court
order, 1,918,132 issued shares of Reeves Industries common stock held by Drexel
Burnham Lambert Incorporated ("Drexel") and partnerships affiliated with Drexel
or certain employees of Drexel were transferred to Reeves Industries for
$1,075,000 (approximately $.56 per share). After giving effect to the foregoing
transactions, the Corporation owned approximately 98.6% of the 34,967,973 shares
of Reeves Industries common stock outstanding on November 6, 1992.
On October 25, 1993, HHCI, Inc., a wholly-owned subsidiary of the
Corporation, merged with and into Reeves Industries. As a result of this
merger, Reeves Industries became a 100% owned subsidiary of the Corporation and
the stockholders of Reeves Industries received $.56 in cash for each share held
by such stockholder.
Concentration of Stockholdings
Although originally traded on the New York Stock Exchange and held by
a diverse group of individuals and institutional investors, including various
creditors, over time the ownership of Common Stock has come to be concentrated
in a handful of stockholders. Of the 2,005 stockholders of record, a total of
256 (approximately 13% of the Corporation's unaffiliated stockholders) hold only
one Existing Share each, 735 (approximately 37% of the Corporation's
unaffiliated stockholders) hold 10 or fewer Existing Shares and 1,674
(approximately 84% of the Corporation's unaffiliated stockholders) hold 100 or
fewer Existing Shares. All of such stockholders would become Fractional
Stockholders upon the effectiveness of the Reverse Stock Split. There are
approximately 950 record holders (approximately 48% of unaffiliated
stockholders) for which the Corporation does not have a current mailing or
forwarding address. Of such lost stockholders, approximately 87% hold 100 or
fewer Existing Shares and approximately 44% hold 10 or fewer Existing Shares.
Consequently, a substantial number of the Corporation's stockholders have little
economic interest in the Corporation. Approximately 96% of the outstanding
Existing Shares are beneficially owned by executive officers and directors of
the Corporation. See "Board of Directors, Executive Officers and Principal
Stockholders".
Reduction of Reporting Costs
The Board of Directors also considered that the Corporation incurs
general and administrative costs related to its status as a public reporting
company under the federal securities laws. Although Reeves Industries' loan
documents also require compilation of information comparable to that contained
in reports on Forms 10-K and 10-Q, the costs of preparing additional reports,
such as Forms 8-K and disclosure required pursuant to Section 16 of the Exchange
Act, as well as the expenses of preparing, printing and mailing proxy
solicitation materials and formal annual reports for distribution to
stockholders prior to each annual meeting, are a consequence of the
Corporation's registration pursuant to the Exchange Act. In addition to the
commitment of time and energy on the part of management, additional costs
incurred by the Corporation include legal, accounting and printing fees. On an
annual basis, the costs of being a publicly-held company total approximately
$85,000. This amount does not include the expense of officer and director
liability insurance, for which the Corporation is currently paying an annual
premium of $220,000. If the Corporation were not a publicly-held company, these
costs could be reduced or eliminated. The Corporation also incurs substantial
indirect costs as a result of, among other things, the executive time expended
to prepare and review various filings, furnish information to stockholders and
attend to other stockholder matters.
Although there are some stockholder benefits to retaining public
reporting status, the Board believes that the expenses of remaining a public
corporation are not justified by these benefits, particularly in light of the
lack of any meaningful market activity in the Existing Shares and the
unaffiliated stockholders' limited economic interest in the Corporation. Nor
does the Board believe that the additional protections afforded by the
securities laws to stockholders of a public company justify the expense of the
Corporation remaining a public corporation.
Furtherance of Business Plan
The Board of Directors believes that its decision to effect the
Reverse Stock Split is in furtherance of its long-range business plan to have
the Corporation focus on maintaining its competitive position through strategic
acquisitions and divestitures. As a non-public company, the Corporation would
have greater flexibility in negotiating the acquisition or disposition of
business entities or unprofitable operations. To the extent that the
Corporation will not have to comply with Commission regulations requiring the
issuance of press releases and periodic reports, the Corporation may realize
strategic benefits in structuring and financing proposed transactions. The
Corporation's over-all expenses would be reduced to the extent that it will no
longer incur the costs of complying with such regulations. Furthermore, the
expense of proxy solicitation of stockholder approval for certain actions of the
Corporation could be avoided. Consequently, the Corporation would be better
positioned to quickly identify, arrange necessary financing, and conclude
potential acquisitions and divestitures. Moreover, the Board does not presently
anticipate that the Corporation would take advantage of its status as a public
company to raise capital or effect acquisitions through the issuance of common
stock in the foreseeable future.
Enhanced Operating Flexibility
In addition to the time and expense required to ensure compliance
with applicable federal and state securities laws, the operation of a public
reporting company can limit the operating flexibility of corporate
management.
The Board of Directors believes that administrative control of the
Corporation would be simplified by the deregistration of the Common Stock under
the Exchange Act. Planning and other management decisions then could be made
solely on the basis of the Corporation's long-range business interests without
the necessary consideration of possible adverse short-term effects upon the
interests of its public stockholders.
Currently, the Corporation's status as a public company means that
management's decisions must be responsive to both the Corporation's long-range
business plans and the interests of its public stockholders. The Corporation's
operations have evolved to a point where these interests are too disparate.
Certain officers and directors beneficially own approximately 96% of the
Existing Shares and are required to base their management decisions, in part, on
the interest of unaffiliated stockholders who own less than 4% of the Existing
Shares.
In addition, the Board anticipates that as a result of its capital
expenditure requirements or in the event the Corporation makes a future
acquisition, additional leverage will be required to effect such a transaction.
The Board of Directors believes that the Corporation's current leverage position
is such that an investment in the Corporation is inappropriate for stockholders
with a de minimis investment in the Corporation. The Board of Directors
believes that in light of the overwhelming concentration of Existing Shares in
the hands of the Majority Stockholder, the Corporation's long-term business
plans would be facilitated if the Corporation were not a public company.
Little Benefit to Stockholders in an Illiquid Market
Finally, the Board of Directors believes that there is a very limited
market for the Common Stock and that its stockholders derive little benefit from
the Corporation's status as a publicly-held corporation. The Existing Shares
are traded in the over-the-counter market. The range of high and low bid prices
of the Common Stock for each quarterly period during the last two fiscal years
as supplied by the National Quotation Bureau, Inc. is set forth under the
caption "Market And Dividend Information". The Corporation believes that
transactions in the Existing Shares occur quite infrequently. The Corporation
itself has been the primary buyer of its Existing Shares. The limited supply of
shares traded in the public market and the predominant ownership by management
results in a market that management believes is inefficient and, as a
consequence, provides little opportunity for a stockholder to realize the value
of his investment in the Corporation after payment of commissions and other
market transaction costs. The Reverse Stock Split and the Purchase Offer
provide an opportunity to Fractional Stockholders to exchange their Existing
Shares at fair value.
DECISION TO PROPOSE THE REVERSE STOCK SPLIT
In an effort to address the escalating costs and operating constraints
resulting from the evolution of the Corporation's business as well as the
increasingly illiquid market for its shares, the Corporation has considered a
number of alternatives. One such alternative, the share repurchase program,
discussed above, had proved time-consuming and cumbersome. Considering the
profile of the Corporation's stockholder list, including the approximately 950
of 2,005 record holders (approximately 48% of unaffiliated stockholders) for
which the Corporation lacks current addresses, the program was not intended to,
and did not result in, an appreciable reduction in the number of stockholders.
Such missing stockholders own of record a total of approximately 90,000 Existing
Shares, and approximately 0.70% of the outstanding Existing Shares. The
Corporation has not made such repurchases of Existing Shares since November 16,
1992. The current bid price for Existing Shares is $1.00.
Commencing in the late fall of 1992, the Corporation gave preliminary
consideration as to how it might accomplish the goal of deregistering the Common
Stock under the Exchange Act, including the possibility of a reverse stock
split. A number of alternatives were considered, but because of its anticipated
effectiveness, the Initial Proposal was considered to be the most appropriate
transaction.
On November 23, 1992 and December 14, 1992, the Board of Directors met
to consider the appropriateness and desirability of the Initial Proposal to
establish a fair price for the fractional shares redeemed as a result of the
transaction. Following consideration of a number of factors, the Board
unanimously approved the Initial Proposal and decided that consideration of $.50
per Existing Share (the "Initial Proposal Cash Consideration") would be paid to
fractional stockholders in lieu of issuing fractional shares of new common stock
to such fractional stockholders. The Board directed that the Initial Proposal
be placed on the agenda for the consideration of stockholders at a special
meeting. On December 18, 1992, the Corporation announced the terms of the
Initial Proposal. Shortly thereafter, the Class Action Lawsuits were filed in
the Court of Chancery alleging that the Initial Proposal was unfair to the
unaffiliated stockholders of the Corporation because (i) the price proposed to
be paid for fractional shares was too low, (ii) the transaction was not subject
to "arms length" negotiation or approval by independent directors or
stockholders and (iii) no opinion had been obtained from a financial adviser as
to the fairness of the price proposed to be paid for fractional shares.
After extensive negotiations with Plaintiffs' Representatives, the
parties to the Class Action Lawsuits entered into a Stipulation and Agreement of
Compromise and Settlement. The Court of Chancery held a hearing on April 15,
1994 regarding the fairness of the Settlement and unaffiliated stockholders were
given an opportunity to object to the Settlement. On April 15, 1994 the Court
of Chancery entered an order approving the terms of the Settlement.
CONFLICTS OF INTEREST; LACK OF OPINIONS, APPRAISALS AND REPORTS
The Corporation's Board of Directors consists of two directors, one of
whom is the Majority Stockholder and as a result is an interested party to the
Reverse Stock Split. The other director, Mr. Vollmer, was an officer and from
time to time a consultant to the Corporation prior to 1992. Mr. James W. Hart,
Chairman of the Board and President of the Corporation, beneficially owns
approximately 95% of the Corporation's outstanding Common Stock and will
continue to be a stockholder of the Corporation upon the completion of the
Reverse Stock Split. See "Board of Directors, Executive Officers and Principal
Stockholders". The Board of Directors did not retain an unaffiliated
representative acting solely on behalf of stockholders for the purposes of
negotiating the terms of the Initial Proposal or the Reverse Stock Split, or
preparing a report covering the fairness of the Initial Proposal or the Reverse
Stock Split. Nor did an independent committee of the Board of Directors review
the fairness of the Initial Proposal or the Reverse Stock Split.
Neither the Corporation nor the Board of Directors nor any committee
of the Board has solicited or obtained any appraisal, report or opinion by any
outside party regarding the Initial Proposal or the Reverse Stock Split. The
Board chose not to retain the services of an independent advisor because it
believes the cost of such services would be excessive relative to the size and
cost of the Initial Proposal or the Reverse Stock Split.
In connection with the negotiation of the Settlement, the Corporation
provided the Plaintiffs' Representatives with substantial business and financial
information concerning the present condition and the prospects of the
Corporation. Plaintiffs' Representatives and representatives of the Corporation
and the defendants participated in numerous conferences and meetings regarding
the business and prospects of the Corporation from January 1993 through May 6,
1993 when a Memorandum of Understanding was entered into outlining the principal
terms of the Settlement. Subsequently further extensive confirmatory analysis
was done by the Plaintiffs' Representatives to confirm the merits of the
proposed Settlement for all the unaffiliated stockholders. On January 28, 1994,
the Corporation and the defendants executed the Stipulation and Agreement of
Compromise and Settlement and filed the same with the Court of Chancery. In
addition, the Plaintiffs' Representatives retained Arthur S. Ainsberg with the
firm of Richard A. Eisner & Company, C.P.A.s, to advise them, from a financial
point of view, as to the fairness of the Settlement. Although having initially
proposed a substantially higher price for fractional shares, the Plaintiffs'
Representatives concluded that the Settlement, including the terms of the
Reverse Stock Split, the Cash Consideration, and the Purchase Offer, was the
best offer obtainable from the Corporation and defendants and is fair to the
unaffiliated stockholders of the Corporation, from a financial point of view.
At a hearing held on April 15, 1994, evidence of the fairness of the
Settlement, including the fairness opinion prepared by the Plaintiffs' Financial
Advisor was presented to the Court of Chancery. At such hearing, the
unaffiliated stockholders of the Corporation were provided an opportunity to
object to the Settlement. No objection to the terms of the Settlement was made
and the court determined, after specific review of the confirmatory discovery
process undertaken by the Plaintiffs' Representatives, that the terms of the
Reverse Stock Split, as set forth in the Settlement, are fair. On April 15,
1994, the Court of Chancery entered an order approving the terms of the
Settlement.
The Board urges each stockholder, if any such stockholder becomes a
Fractional Stockholder, to seek advice in connection with such stockholder's
decision to either receive the Cash Consideration or "round up" his or her
holdings, or if such stockholder holds whole shares of New Common Stock after
the Reverse Stock Split, to seek advice in connection with such stockholder's
decision to tender such shares pursuant to the Purchase Offer or remain a
stockholder.
FAIRNESS OF THE REVERSE STOCK SPLIT
The Board of Directors met on July 12, 1994 to consider the
fairness of the Settlement and the Amendment. As part of its deliberations, the
Board considered its initial determination that the Initial Proposal was fair,
the changes to the Initial Proposal that resulted from the negotiations with the
Plaintiffs' Representatives, the affidavit of Plaintiffs' Financial Advisor and
the determination made by the Court of Chancery that the Settlement was fair.
The Board of Directors considered that the Plaintiffs' Representatives had
retained Plaintiffs' Financial Advisor to determine whether the terms of the
Settlement were fair from a financial point of vieW. Plaintiffs' Financial
Advisor concluded that the terms of the Settlement, including such Reverse Stock
Split, were fair to unaffiliated stockholders. The Board of Directors also
considered that the Court of Chancery provided unaffiliated stockholders with an
opportunity to object to the transaction at a hearing held on April 15, 1994.
At such hearing the Court of Chancery was presented with evidence regarding the
fairness of the Settlement, including the terms of the Reverse Split. There
were no objections made by unaffiliated stockholders at such hearing and the
Court of Chancery approved the terms of the Settlement as fair to the
unaffiliated stockholders. The Board of Directors also considered that the
terms of the Reverse Stock Split provide unaffiliated stockholders with the
opportunity to remain stockholders of the Corporation by rounding-up their
fractional holdings to the next whole share of New Common Stock. Alternatively,
a stockholder with shares of New Common Stock has the opportunity to liquidate
such holdings by tendering such shares to the Corporation pursuant to the
Purchase Offer. After consideration of the factors discussed below and
elsewhere in this Information Statement, the Board of Directors concluded that
the Settlement and Amendment, taken as a whole, was procedurally and otherwise
fair to, and in the best interests of, the unaffiliated stockholders of the
Corporation.
Fairness of the Settlement and the Amendment
In reaching its determination to approve the Initial Proposal, the
Board considered that a reverse stock split would provide those stockholders who
elect to receive the cash consideration for fractional shares with an
opportunity to liquidate their holdings, without incurring brokerage costs that
could be disproportionately high given the low market price of the Existing
Shares. In this regard, the Board recognized that the Corporation's list of
2,005 record holders contained a disproportionately high number of stockholders
holding small numbers of shares. For example, 260 stockholders of record
(approximately 13% of the Corporation's unaffiliated stockholders) held only one
Existing Share each and 745 stockholders of record (approximately 37% of the
Corporation's unaffiliated stockholders) held 10 or less Existing Shares. Over
1,700 stockholders of record (approximately 85% of the Corporation's
unaffiliated stockholders) held 100 or less Existing Shares. The Corporation
does not have current mailing addresses for approximately 950 stockholders.
Approximately 87% of such lost stockholders hold 100 or fewer shares and
approximately 44% of such lost stockholders hold 10 or fewer shares. As these
small stockholders would typically be charged minimum brokerage commissions
(which are in the $30 to $50 range) if they sought to sell their Existing
Shares, market sales through brokerage firms would be uneconomical for many
holders.
The Board also recognized that the cost savings the Corporation would
realize as a result of the deregistration of the Common Stock under the Exchange
Act, following the consummation of a reverse stock split, will indirectly inure
to the benefit of the continuing stockholders, including the unaffiliated
stockholders, to the extent the Corporation will no longer incur the costs
associated with the regulatory and reporting requirements of the Commission.
Administrative control of the Corporation would be simplified by deregistration
of the Common Stock under the Exchange Act. Moreover, the elimination of the
need to devote senior management time and attention to matters related to the
Corporation's publicly-traded status will enable the Corporation's management to
devote such time and attention to the Corporation's long-term business plans
involving the maintenance of its competitive position through the modernization
of its facilities and strategic acquisitions and divestitures. Strategic
planning and other management decisions could be made solely on the basis of the
Corporation's long-term business interests without the necessary consideration
of possible adverse short-term effects upon the interests of the smaller
stockholders.
In its deliberations considering the Initial Proposal, the Board
determined that the Initial Proposal would be beneficial to the Corporation as a
whole because the costs associated with the public reporting requirements of the
Exchange Act have, in its opinion, become excessive given the fact that only
approximately 5% of outstanding Existing Shares are held by unaffiliated
stockholders. The Board also believes that the risks associated with managing a
public company in which a large percentage of the stockholders have a relatively
small equity interest is disproportionately high relative to the benefits
afforded such stockholders by such public company status.
After considering the fairness of the Initial Proposal, the Board
considered various alternatives which could reduce the number of record holders
of Existing Shares to less than 300. The Board considered the alternative of
privately-negotiated or open-market purchases to be unfeasible because of the
large number of persons who hold small numbers of the Existing Shares and the
fact that many of these small holders appear to be lost stockholders. It would
be very difficult for the Corporation or its transfer agent to locate these
stockholders, as the only information available is the last known mailing
address. The Corporation believes that the list of bad addresses has
accumulated over the course of a number of years. In addition, the Corporation
does not have a record of the social security numbers of stockholders since no
dividends have been paid on the Common Stock since 1958. Given the established
difficulties in reaching these small holders, and the relatively illiquid and
inactive market for the Existing Shares, the Board was of the opinion that it
might not be possible, in any reasonable period of time, to make any significant
reduction in the number of stockholders through open-market purchases.
The Board of Directors also considered the alternative of a possible
self-tender offer with no reverse split. However, such alternative was rejected
because in light of the lack of means of contacting approximately 50% of its
unaffiliated stockholders, there was no assurance that a self-tender would
generate a sufficient response in order to result in the Corporation having
fewer than 300 stockholders, thereby permitting the Corporation to become a non-
reporting company under the Commission's rules and regulations. Moreover, the
cost of a self-tender offer would be disproportionately high compared to the
benefits to the stockholders. Consequently, the effectiveness of a negotiated
open market purchase or self-tender is severely diminished.
The Board concluded that the most efficient transaction would be the
Initial Proposal, pursuant to which each 300 Existing Shares held by a
stockholder would be converted into one share of new common stock. The
Corporation anticipated that the Initial Proposal would have reduced the number
of stockholders below the required going private threshold.
The Board then discussed the suggestion made by counsel that
stockholders with fractional shares that would otherwise be redeemed be allowed
to purchase additional fractional shares from those repurchased in order to
round up to a whole share. This would provide those stockholders who so chose
to remain stockholders of the Corporation rather than being cashed out. The
Board determined to structure the Initial Proposal to permit those stockholders
who would otherwise receive the Initial Proposal cash consideration with an
opportunity to continue to participate in the equity of the Corporation by
rounding up their fractional holdings. The procedures for and the effects of
rounding-up were discussed and considered during the negotiation of the
Settlement.
The Board also considered the effect on the remaining stockholders of
the Initial Proposal and noted, after discussion, that although public
information would no longer be required to be filed with respect to the
Corporation, the benefits discussed above were more significant and, therefore,
a reverse stock split would be beneficial to the remaining stockholders. The
Board acknowledged the fact that approximately 96% of the Existing Shares are
beneficially owned by officers and directors who will continue as stockholder of
the Corporation following the consummation of the transaction contemplated by
the Initial Proposal. However, the Board determined that it was not appropriate
to appoint an independent committee of the Board or an independent appraiser to
review the fairness of the Initial Proposal, nor to neutralize the vote of a
majority of stockholders by requiring separate minority approval, in view of the
cost of such actions relative to the size of the transaction, the significant
interest of the majority stockholders and the fact that stockholders who desire
to retain an equity interest in the Corporation will be given the opportunity to
round up fractional shares.
In connection with the Settlement of the Class Action Lawsuits, the
Initial Proposal was revised to increase the Initial Proposal cash consideration
to $2.25 per share and to effect the Reverse Stock Split at a ratio of 600 to
one. Stockholders will be given the opportunity to purchase additional
fractional shares in order to round up to a whole share at a price of $2.25 per
Existing Share. A limitation on the rounding up, however, would be that it
would be on a first-come, first-served basis and only to the extent that shares
being rounded up were matched with fractional shares surrendered or Outstanding
Fractional Shares. In addition, holders of whole shares of New Common Stock who
do not wish to continue as stockholders of the Corporation, can tender each
share of New Common Stock to the Corporation for a purchase price of $1,350 per
share, which is equivalent to $2.25 per pre-split share. See "Background of
Reverse Stock Split and Purchase Offer".
On April 15, 1994, a hearing was held to determine the fairness of
the Settlement, including the terms of the Reverse Stock Split and the Purchase
Offer. On April 15, 1994, the Court of Chancery approved the terms of the
Settlement, including the Reverse Stock Split and the Purchase Offer. On July
12, 1994, the Board of Directors approved the Amendment providing for the
Reverse Stock Split and reducing the number of authorized shares from 40,000,000
shares of $.01 par value to 75,000 shares of $1.00 par value.
Fairness of the Cash Consideration
In deciding upon the fairness of the Settlement and the Reverse Stock
Split, the Board of Directors considered a number of factors. In December 1992,
the Board, in connection with its consideration of the Initial Proposal, had
concluded that due to the infrequency of open market transactions, market prices
were not a meaningful factor. In fact, the Corporation and the Majority
Stockholder believe that much of the market activity prior to the announcement
of the Initial Proposal had been the result of the Corporation buying its own
shares directly from stockholders. Based on the records of its transfer agent,
the Corporation identified most of the activity in its stock as coming from
repurchases made by the Corporation. After the Board of Directors approved the
Initial Proposal, the Corporation stopped repurchasing shares. During this
period following the Initial Proposal there was little activity in the market
for the Corporation's stock. The Board considered that the market price of the
Common Stock might not be a valid indication of fair value due to the large
percentage of stock owned by officers and directors and to the lack of a liquid
public market. The Plaintiffs' Financial Advisor reached the same conclusion in
connection with his evaluation of the fairness of the Cash Consideration.
The Corporation's value on liquidation was determined by the Board to
be an inappropriate measure of value because (i) there is no present intention
of liquidating the Corporation or selling a substantial portion of its assets;
and (ii) if the Corporation were compelled to liquidate in a distress setting,
it would receive a disproportionately low consideration for its properties and
businesses. In addition to other matters, the Board considered the likelihood
that the Corporation would not pay dividends in the foreseeable future and
perhaps for an indefinite period of time because of restrictive debt covenants.
Although the Board generally considered the applicability of going concern
value, but did not calculate a dollar value thereof, it did not give such a
value special weight because the Corporation's principal stockholder is not
considering the sale of his interest or the sale of the company as a whole.
Furthermore, the Board did not consider going concern value to be an appropriate
measure since the transaction contemplated by the Initial Proposal will not
result in the disposition of the Corporation's entire business although it will
result in the termination of the equity interest of the Fractional Stockholders
in the Corporation. However, as discussed below, the Plaintiffs' Financial
Advisor considered the Corporation's "enterprise value" to be the appropriate
measure of value. The interest of the Fractional Stockholders (based on the
number of record holders of less than 600 shares) represents only approximately
1% of the total equity of the Corporation. The book value and tangible book
value of the Corporation as of December 31, 1993 were $20,409,000 ($1.58 per
Existing Share) and a negative $29,201,000 (a negative $2.26 per share),
respectively. The book value and tangible book value of the Corporation as of
the quarter ended April 3, 1994 were $23,941,000 ($1.86 per Existing Share) and
a negative $25,152,000 (a negative $1.95 per share), respectively. The Board
also noted that in 1990 it had considered, but determined not to pursue, a
reverse stock split pursuant to which the consideration for fractional shares
was set at $2.125 per Existing Share.
The Board of Directors also considered the impact of various factors
on the Corporation. The Board considered the degree to which Reeves Industries,
the Corporation's only significant asset, is leveraged. This factor was also
considered by the Plaintiffs' Financial Advisor. In June 1992, Reeves
Industries completed a successful debt offering of $122,500,000 of 11% Senior
Notes. The proceeds of the public debt offering were used to redeem all the
outstanding 12.5% Senior Notes and the 13% Senior Subordinated Debentures as
well as to repay and terminate the revolving loans outstanding under a bank loan
agreement. In connection with this transaction, Reeves Industries recorded in
1992 an extraordinary loss of approximately $5,775,000, net of applicable income
tax benefits of approximately $2,974,000, from the write-off of debt issuance
and financing costs associated with the retired debt and the payment of premiums
on the early extinguishment of such debt. In August 1992, Reeves Industries
obtained additional bank financing which provides Reeves Industries and Reeves
with an aggregate $35,000,000 revolving line of credit. As a result of the
refinancing of Reeves Industries, management believes it has reduced the risk of
Reeves Industries' failing to meet its debt obligations. However, the
Corporation continues to be a highly leveraged corporation.
Since the Board's consideration of the Initial Proposal, the
Corporation's wholly-owned subsidiary, Reeves Holdings, intends to commence a
public offering of senior discount debentures to provide proceeds of
approximately $100,000,000. After giving effect to Reeves Holdings' offering,
if completed, and the application of the proceeds, the Corporation's total
consolidated indebtedness on April 3, 1994, would have been $227.5 million. As
of December 31, 1993 and April 3, 1994, the Corporation's debt to equity ratio
was approximately 6.5 to 1 and 5.8 to 1, respectively. Completion of the senior
discount debenture offering is subject to market conditions and a number of
factors outside the control of the Corporation. No assurances can be given as
to whether the offering will be completed or what interest rate the debentures
will bear if the offering is completed. The Plaintiffs' Financial Advisor
considered the effect of this offering on the Corporation's leveraged position
in his analysis of the fairness of the Cash Consideration.
The Reeves Industries debt obligations substantially restrict the
payment of dividends on the Reeves Industries common stock. The new financing,
if issued, for Reeves Holdings will further limit the incurrence of additional
indebtedness by the Corporation's subsidiaries.
In considering the Initial Proposal, the Board of Directors believed
that the degree of leverage of Reeves Industries reduces the availability of
opportunities and increases the costs to the Corporation if the Corporation were
to raise additional capital in the public market. The Board discussed the lack
of liquidity in the market for the Corporation's Common Stock and that the
public equity and debt markets had become more difficult to use as alternative
sources of financing. At that time, the Board noted that there was no present
intention to raise capital in the public market.
The Board also reviewed a number of contingencies affecting the
Corporation and its subsidiaries, including certain unresolved tax matters and
certain pending litigation. Moreover, the Board considered the Corporation's
exposure to the uncertainties facing the economies of certain foreign countries
in which it manufactures or sells its products. Such contingencies were also
considered by the Plaintiffs' Financial Advisor.
The Board next considered its analysis and discussion in connection
with the approval in December 1991 of the Corporation's exchange of 1,000 shares
of Reeves Industries Series I Preferred Stock, par value $1.00 per share, for
18,820,000 shares of Reeves Industries common stock, par value $.01 per share
(the "Exchange Transaction"). For purposes of the Exchange Transaction, the
Corporation adopted resolutions setting the fair value of Reeves Industries
common stock at $.50 per share.
In view of the variety of factors considered in connection with its
evaluation of the fairness of the Initial Proposal, the Board of Directors did
not find it practicable to assign relative weights to the factors considered in
reaching its determination that, taken as a whole, the Initial Proposal was fair
to and in the best interests of the Corporation.
No independent committee of the Board of Directors reviewed the
fairness of the Initial Proposal. No unaffiliated representative acting solely
on behalf of stockholders for the purpose of negotiating the terms of the
Initial Proposal, or preparing a report covering the fairness of the Initial
Proposal, was retained by the Corporation.
The Board unanimously concluded that, based upon the above stated
factors, including the ability of stockholders to retain an equity interest in
the Corporation by rounding up their holdings, the Initial Proposal was
reasonable from the Corporation's standpoint and fair to both the fractional
stockholders and remaining stockholders of the Corporation after the
consummation of the transactions contemplated by the Initial Proposal. A
stockholder had the option to either receive the Cash Consideration for his
shares and cease to be a stockholder or round-up his holdings and remain a
stockholder of the Corporation.
The Board believes that all the factors set forth above, which it
considered relevant in connection with the Initial Proposal, are relevant
factors in its consideration of the Settlement and the Amendment. Further, in
connection with the Settlement of the Class Action Lawsuits, the Cash
Consideration to be paid for fractional shares was increased 350% to $2.25 as a
result of the Corporation's negotiations with the Plaintiffs' Representatives.
As described below, the Plaintiffs' Financial Advisor independently concluded
that the Cash Consideration is fair, from a financial point of vieW. In
addition, holders of whole shares of New Common Stock following the Reverse
Stock Split have the opportunity to tender their shares to the Corporation for a
purchase price of $1,350 per share of New Common Stock, which is the equivalent
to $2.25 for each pre-split share.
The Plaintiffs' Representatives retained an independent financial
adviser who concluded in an affidavit submitted to the Court of Chancery that
the Cash Consideration was fair to unaffiliated stockholders of the Corporation.
In concluding that the Cash Consideration is fair to the Corporation's public
stockholders, Plaintiffs' Financial Advisor considered that the market for the
Common Stock is illiquid and therefore not necessarily reflective of the
underlying value of the Common Stock. The Plaintiffs' Financial Advisor also
considered the November 1992 court-ordered transfers of Reeves Industries'
common stock from Drexel to Reeves Industries. The Plaintiffs' Financial
Advisor concluded that the most appropriate measurement of value, for purposes
of his opinion, is a multiple of the Corporation's earnings before interest, tax
and amortization of goodwill (EBITA). His opinion indicates that the
Corporation's EBITA in 1993 was $31,370,000, before a one-time restructuring
charge. The Plaintiffs' Financial Advisor determined that the appropriate
multiple of EBITA to use for purposes of valuing the Corporation should range
between five and six. This determination was based upon the Plaintiffs'
Financial Advisor's past experience and his review of financial information
provided to him by the Corporation. The Plaintiffs' Financial Advisor
calculated the value of the Corporation on an unleveraged basis (the enterprise
value) to range from $156.9 million to $188.2 million using the multiple of five
to six EBITA. The Plaintiffs' Financial Advisor reached a range of value between
$1.87 and $4.31 per share by subtracting the Corporation's debt balance at
December 31, 1993 of $132.7 million from the enterprise value and dividing the
resulting equity value of $24.2 million to $55.5 million by the 12.9 million
shares of Common Stock outstanding at December 31, 1993.
The Plaintiffs' Financial Advisor also considered that, with a debt to
equity ratio of 6.5 to 1 at December 31, 1993, the Corporation is highly-
leveraged. In early March 1993, the Corporation informed the Plaintiffs'
Financial Advisor of the proposed debt offering by Reeves Holdings. In his
affidavit to the Court of Chancery, the Plaintiffs' Financial Advisor considered
such offering when assessing the Corporation's high degree of leverage and the
risk such leverage creates for the Corporation's stockholders in the event of a
cyclical downturn in earnings. He also considered the cash demands in the
Corporation to be significant. In conclusion, the Plaintiffs' Financial Advisor
determined that fair value for the shares of the Corporation's Common Stock
should be at the low end of the $1.87 and $4.31 per share value range that he
had established and that the $2.25 per fractional share price is fair, from a
financial point of view.
On April 15, 1994, the Court of Chancery held a hearing as to the
fairness of the Settlement and provided unaffiliated stockholders of the
Corporation with the opportunity to object to the Settlement. There were no
objections raised at the hearing. On April 15, 1994, the Court of Chancery
entered an order approving the terms of the Settlement. The Board considered
the process involved in the Settlement, including the extensive negotiations,
the fairness opinion prepared by Plaintiffs' Financial Advisor, and the approval
of the Court of Chancery, as the most significant factor in determining the
fairness of the Reverse Stock Split. For these reasons, and those described in
"SPECIAL FACTORS -- Purposes of the Reverse Stock Split" and "SPECIAL FACTORS --
Background and Reasons for the Reverse Stock Split" above, the Board unanimously
approved the Reverse Stock Split.
VOTE OF MAJORITY STOCKHOLDER TO BE DETERMINATIVE
The Majority Stockholder has advised the Corporation that he intends
to vote his shares, representing approximately 95% of the outstanding Common
Stock, in favor of the Reverse Stock Split, the Settlement and the Amendment.
Consequently, no additional vote of unaffiliated stockholders will be required
for approval of the transaction.
EFFECTS OF THE REVERSE STOCK SPLIT
GENERAL EFFECTS
Upon the Majority Stockholder's execution of a written consent
approving and adopting the Amendment, the number of authorized shares of Common
Stock will be decreased from 40,000,000 to 75,000 and the par value of such
shares will be increased from $.01 per share to $1.00 per share. After giving
effect to the Reverse Stock Split, management expects that the number of
stockholders of record will be reduced such that registration of the shares of
New Common Stock pursuant to the Exchange Act could be terminated. In addition,
the quotation of prices of Existing Shares on the NASDAQ OTC Bulletin Board
would cease. The Corporation will no longer incur the expense of compliance
with the Exchange Act regulatory and reporting requirements. Corporate
resources currently devoted to such compliance (approximately $85,000 (exclusive
of management time)) can be allocated to other areas where they can be used more
efficiently.
Following completion of the Reverse Stock Split, Fractional
Stockholders electing to receive the Cash Consideration and holders of whole
shares of New Common Stock electing to tender their shares pursuant to the
Purchase Offer will cease to be stockholders or have any interest in the equity
or future prospects of the Corporation. Such stockholders will sustain the
detriment of foregoing any participation in the possible increase in the value
of the Corporation or the New Common Stock. Fractional Stockholders who elect
to round up their holdings and holders of whole shares of New Common Stock who
elect to retain their shares, however, will no longer have a public market in
which they may liquidate their shares of New Common Stock. The lack of such
liquidity could restrict their ability to resell or pledge shares of New Common
Stock as collateral for loans.
Assuming the Reverse Stock Split is consummated and in the event that
all outstanding shares are redeemed pursuant to the Reverse Stock Split or
repurchased pursuant to the Purchase Offer, the Majority Stockholder would
become the Corporation's sole stockholder. Although it cannot be determined at
this time whether all of the Corporation's minority stockholders will, in fact,
surrender their shares, the calculations below set forth the benefits that would
inure to the Majority Stockholder in such event. The net book value per share
held by the Majority Stockholder after giving effect to the payment for the
Fractional Shares and tendered new shares of New Common Stock would be reduced
from $1.58 to $1.53 per share as of December 31, 1993. The tangible book value
attributable to the Majority Stockholder's shares would be reduced from a
negative $2.26 to a negative $2.56 per share. After giving effect to such
transactions, the earnings per share with respect to the shares of Common Stock
owned by the Majority Stockholder would be increased from $.56 to $.68 for the
year ended December 31, 1993 and from $.18 to $.19 for the three months ended in
April 3, 1994. The Majority Stockholder would be therefore entitled to receive
the benefits of all future earnings attributable to the equity of the
Corporation, and stockholders that received cash for their equity interest in
the Corporation would not share in any future earnings of the Corporation.
TERMINATION OF EXCHANGE ACT REGISTRATION
The Existing Shares are currently registered under the Exchange Act.
Such registration may be terminated upon application of the Corporation to the
Commission if there are fewer than 300 record holders of the shares. Upon the
consummation of the Reverse Stock Split, the Corporation will have approximately
60 stockholders of record, assuming no Fractional Stockholders elect to purchase
Existing Shares under the terms of the Reverse Stock Split so as to become
holders of a whole share of New Common Stock and no holders of whole shares of
New Common Stock exercise their option to tender their shares to the
Corporation. The Corporation intends to make an application for termination of
registration of the shares of New Common Stock as promptly as possible after the
Effective Date. Termination of registration of the shares of New Common Stock
under the Exchange Act would substantially reduce the information required to be
furnished by the Corporation to its stockholders and to the Commission and would
make certain provisions of the Exchange Act, such as the short-swing profit
recovery provisions of Section 16(b), the requirement of furnishing a proxy or
information statement in connection with stockholder meetings pursuant to
Section 14(a), and the requirements of Rule 13E-3 under the Exchange Act with
respect to "going private" transactions, no longer applicable to the
Corporation. Furthermore, "affiliates" of the Corporation may be deprived of
the ability to dispose of such securities pursuant to Rule 144 promulgated under
the Exchange Act. If registration under the Exchange Act were terminated, the
shares of New Common Stock could not be utilized as "margin securities". The
Corporation estimates that termination of registration of the shares of New
Common Stock under the Exchange Act will save the Corporation approximately
$85,000 in legal, accounting, printing and other expenses per year, after taking
into account continuing reporting obligations under Reeves Holdings' and Reeves
Industries' respective loan documents.
EFFECT ON MARKET FOR SHARES
If the Amendment is approved, and, as contemplated, the shares of New
Common Stock are deregistered under the Exchange Act, the shares of New Common
Stock will not be eligible for quotation on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") nor listing on any
securities exchange. There will be a significant decrease in the amount and
availability of information about the Corporation, as well as a reduction in the
number of stockholders. All of these factors could adversely affect the
liquidity and market value of the shares of New Common Stock, and may also tend
to make the trading price of the shares of New Common Stock more volatile.
FEDERAL INCOME TAX CONSEQUENCES
The receipt by each Fractional Stockholder of cash in lieu of
fractional shares of New Common Stock pursuant to the Reverse Stock Split and
the receipt by each holder of whole shares of New Common Stock of cash in
connection with the tender of such shares pursuant to the Purchase Offer will be
a taxable transaction for federal income tax purposes under the United States
Internal Revenue Code of 1986, as amended (the "Code").
Under Section 302 of the Code, a stockholder will recognize gain or
loss upon receiving cash in lieu of fractional shares or upon the tender of
whole shares of New Common Stock pursuant to the Purchase Offer if (i) the
Reverse Stock Split or tender, as applicable, results in a "complete redemption"
of all of the stockholder's Existing Shares and shares of New Common Stock, (ii)
the receipt of cash is "substantially disproportionate" with respect to the
stockholder, or (iii) the receipt of cash is "not essentially equivalent to a
dividend" with respect to the stockholder. These three tests are applied by
taking into account not only shares that a stockholder actually owns, but also
shares that a stockholder constructively owns pursuant to Section 318 of the
Code, described below.
If any one of these three tests is satisfied, the stockholder will
recognize gain or loss equal to the difference between the amount of cash
received by the stockholder pursuant to the Reverse Stock Split or the tender,
as applicable, and the tax basis in the Existing Shares or the shares of New
Common Stock held by the stockholder. Provided that the Existing Shares or the
shares of New Common Stock, as applicable, constitute a capital asset in the
hands of the stockholder, this gain or loss will be long-term capital gain or
loss if such shares are held for more than one year and will be short-term
capital gain or loss if such shares are held for one year or less. In
determining the basis and holding period of a stockholder's New Common Stock,
the basis and holding period of such stockholder's Existing Shares will carry
over as the basis and holding period of such shares of New Common Stock.
Pursuant to the constructive ownership rules of Section 318 of the
Code, a stockholder is deemed to constructively own shares owned by certain
related individuals and entities in addition to shares actually owned by the
stockholder. For instance, an individual stockholder is considered to own
shares owned by or for his spouse and his children, grandchildren and parents
("family attribution"). In addition, a stockholder is considered to own a
proportionate number of shares owned by estates or certain trusts in which the
stockholder has a beneficial interest, by partnerships in which the stockholder
is a partner, and by corporations in which 50% or more in value of the stock is
owned directly or indirectly by or for such stockholder. Similarly, shares
directly or indirectly owned by beneficiaries of estates of certain trusts, by
partners of partnerships and, under certain circumstances, by stockholders of
corporations maybe considered owned by these entities ("entity attribution"). A
stockholder is also deemed to own shares which the stockholder has the right to
acquire by exercise of an option.
The receipt of cash by a stockholder pursuant to the Reverse Stock
Split or the Purchase Offer, as applicable, will result in a "complete
redemption" of all of the stockholder's Existing Shares or shares of New Common
Stock so long as the stockholder does not constructively own any shares of New
Common Stock immediately after the Reverse Stock Split or the receipt of payment
pursuant to the Purchase Offer. However, a stockholder may qualify for gain or
loss treatment under the "complete redemption" test even though such stockholder
constructively owns shares of New Common Stock provided that (i) the stockholder
constructively owns shares of New Common Stock as a result of the family
attribution rules (or, in some cases, as a result of a combination of the family
and entity attribution rules), and (ii) the stockholder qualifies for a waiver
of the family attribution rules (such waiver being subject to several
conditions, one of which is that the stockholder has no interest in the
Corporation immediately after the Reverse Stock Split or the receipt of payment
pursuant to the Purchase Offer (including as an officer, director or employee),
other than an interest as a creditor).
It is anticipated that most Fractional Stockholders and stockholders
tendering shares of New Common Stock will qualify for capital gain or loss
treatment as a result of satisfying the "complete redemption" requirements.
However, if the constructive ownership rules prevent compliance with these
requirements, such stockholder may nevertheless qualify for capital gain or loss
treatment by satisfying either the "substantially disproportionate" or the "not
essentially equivalent to a dividend" requirements. In general, the receipt of
cash pursuant to the Reverse Stock Split or the Purchase Offer will be
"substantially disproportionate" with respect to the stockholder if the
percentage of shares of New Common Stock constructively owned by the stockholder
immediately after the Reverse Stock Split, or the receipt of payment pursuant to
the Purchase Offer, is less than 80% of the percentage of Existing Shares
actually and constructively owned by the stockholder immediately before the
Reverse Stock Split or the Purchase Offer. Alternatively, the receipt of cash
pursuant to the Reverse Stock Split or the Purchase Offer will, in general, be
"not essentially equivalent to a dividend" if the Reverse Stock Split or the
receipt of payment pursuant to the Purchase Offer results in a "meaningful
reduction" in the stockholder's proportionate interest in the Corporation.
If none of the three tests described above is satisfied, the
stockholder will be treated as having received a taxable dividend in an amount
equal to the entire amount of cash received by the stockholder pursuant to the
Reverse Stock Split or the Purchase Offer.
The receipt of whole shares of New Common Stock in the Reverse Stock
Split by stockholders of the Corporation who do not exercise their tender option
with respect to such shares will be a non-taxable transaction for federal income
tax purposes. Consequently, a stockholder of the Corporation receiving shares
of New Common Stock will not recognize gain or loss, or dividend income, as a
result of the Reverse Stock Split with respect to the shares of New Common Stock
received. In addition, the basis and holding period of such stockholder's
Existing Shares will carry over as the basis and holding period of such
stockholder's shares of New Common Stock, subject to a basis increase equal to
any payment made to round up fractional shares.
The backup withholding rules require a payor to deduct and withhold a
tax if (a) the payee fails to furnish a taxpayer identification number ("TIN")
to the payor, (b) the IRS notifies the payor that the TIN furnished by the payee
is incorrect, (c) the payee has failed to report properly the receipt of
"reportable payments" on several occasions and the IRS has notified the payor
that withholding is required, or (d) there has been a failure of the payee to
certify under the penalty of perjury that a payee is not subject to withholding
under Section 3406 of the Code. As a result, if any one of the events discussed
above occurs, the Corporation, its paying agent or other withholding agent will
be required to withhold a tax equal to 31% of any "reportable payment" made in
connection with the Reverse Stock Split or the Purchase Offer. A "reportable
payment" includes, among other things, dividends and amounts paid through
brokers in retirement of securities. Any amounts withheld from a payment to a
stockholder under the backup withholding rules will be allowed as a refund or
credit against such stockholder's federal income tax, provided that the required
information is furnished to the IRS. Certain stockholders (including
corporations and certain tax exempt organizations) are not subject to the backup
withholding and information reporting requirements.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT AND THE
PURCHASE OFFER TO THE STOCKHOLDERS WITHOUT REFERENCE TO THE PARTICULAR FACTS AND
CIRCUMSTANCES OF ANY PARTICULAR STOCKHOLDER. EACH STOCKHOLDER IS URGED TO
CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES
TO SUCH STOCKHOLDER OF THE REVERSE STOCK SPLIT AND PARTICIPATION IN THE PURCHASE
OFFER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER
TAX LAWS).
APPRAISAL RIGHTS
No appraisal rights are provided to dissenting stockholders under the
laws of the State of Delaware, the jurisdiction in which the Corporation is
incorporated, nor are such rights provided under the Corporation's Restated
Certificate of Incorporation in connection with the Reverse Stock Split. The
Court of Chancery held a hearing as to the fairness of the Settlement, including
the terms of the Reverse Stock Split. At such hearing, evidence of the fairness
of the Settlement was presented to the Court of Chancery, including the opinion
of Plaintiffs' Financial Advisor, and the stockholders of the Corporation were
provided the opportunity to object to the Settlement. The Court of Chancery
determined that the terms of the Settlement, including the Reverse Stock Split,
were fair to the Corporation's stockholders. The Corporation and the Majority
Stockholder believe that the determination of fairness made by the Court of
Chancery with respect to the Settlement was the functional equivalent of the
hearing that would be afforded to dissenting stockholders in an appraisal
hearing. Additionally, since stockholders have the right to remain as
stockholders by rounding-up to the next whole share of New Common Stock, the
Corporation and the Majority Stockholder believe that the Reverse Stock Split is
structured to be fair to all stockholders.
RECOMMENDATION OF BOARD OF DIRECTORS, VOTE REQUIRED
The Board of Directors, including Richard A. Vollmer, the only
Director who is not a stockholder or officer of the Corporation, has unanimously
approved the Amendment necessary to effect the Reverse Stock Split. There are
no contracts, arrangements, understandings or relationships in connection with
the Reverse Stock Split or the Purchase Offer between the Corporation, its
officers or its directors, and any other person with respect to any securities
of the Corporation.
The proposed Amendment to effect the Reverse Stock Split must, under
the terms of the Corporation's Restated Certificate of Incorporation, be
approved by a vote of not less than a majority of the Existing Shares. The
General Corporation Law of the State of Delaware, specifically Section 228(a)
thereof, provides that ". . . any action required by this chapter to be taken
at any annual or special meeting of such stockholders of a corporation, or any
action which may be taken at any annual or special meeting of such stockholders,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by
holders of outstanding stock having not less than the minimum of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted . . .". The Board of
Directors has been informed that the Majority Stockholder intends to execute a
written consent in favor of the Amendment (see "Vote of Majority Stockholder to
be Determinative").
EXCHANGE OF SHARES AND PAYMENT IN LIEU OF
ISSUANCE OF FRACTIONAL SHARES
If the Amendment is approved by the Majority Stockholder, the Board of
Directors will cause the Certificate of Amendment to be filed with the Secretary
of State of the State of Delaware and a notice of such filing ("Notice of
Filing") along with the Letter of Transmittal (as hereinafter defined) and
instructions to be transmitted to the stockholders of the Corporation promptly
after the Effective Date. American Stock Transfer & Trust Company has been
appointed exchange agent (the "Exchange Agent") to carry out the exchange of
certificates for shares of New Common Stock and/or the Cash Consideration.
On the Effective Date, each certificate representing shares of Common
Stock will be deemed for all corporate purposes, and without any further action
on the part of the holder thereof, to evidence ownership of the appropriate
reduced number of shares of New Common Stock and/or the right to receive the
Cash Consideration for any fractional interest. In addition, any stockholder
holding fewer than 600 Existing Shares will cease to have any rights with
respect to the New Common Stock, except to receive the Cash Consideration or,
for a period of 30 days following the Effective Date, to round up (through the
Exchange Agent) such stockholder's fractional interest in shares of New Common
Stock. Stockholders may elect to forego the Cash Consideration and round up
their fractional holdings by paying $2.25 for each 1/600 of a share needed to
round up their holdings to equal a whole share (or an additional whole share, as
the case may be) of New Common Stock. After the expiration of such 30-day
period, the holder of a fractional share of New Common Stock shall only be
entitled to receive the Cash Consideration. Each stockholder whose share
holdings exceed 600 Existing Shares, but are not evenly divisible by 600, will
be treated as a Fractional Stockholder with respect to such stockholder's
fractional shares of New Common Stock.
Fractional shares of New Common Stock (i) will be provided to
stockholders desiring to round up their holdings by the Exchange Agent on a
first-come, first-served basis, (ii) will be provided only from fractional
shares of New Common Stock which have been surrendered by other stockholders or
Outstanding Fractional Shares and (iii) based on the foregoing, may therefore be
of limited availability. As the Corporation's Exchange Agent receives elections
from stockholders desiring to round up their holdings, it will "match up"
fractional shares surrendered by other stockholders with the fractional shares
needed to provide rounding up stockholders with a whole share of New Common
Stock. To the extent that fractional shares surrendered by stockholders during
such 30-day period are not sufficient to cover the number of fractional shares
needed to provide all stockholders desiring to round up to whole shares of New
Common Stock, those stockholders who are not "matched up" with surrendered
fractional shares will be "matched up" with Outstanding Fractional Shares. In
the event Outstanding Fractional Shares are not available for "matching up"
purposes, those stockholders who are not "matched up" with fractional shares
will receive the Cash Consideration in exchange for their fractional shares. In
order to round up, the stockholder must own the fractional interest as of the
Settlement Approval Date as well as the Effective Date. To the extent that a
beneficial stockholder divides his shares into more than one record holder
position, the Corporation will not allow such beneficial stockholder to purchase
more fractional shares than necessary to round up to one whole share of New
Common Stock as if such beneficial stockholder had not divided his shares.
Each holder of the Corporation's Existing Shares will receive one
share of New Common Stock for each 600 Existing Shares previously held by such
stockholder. After the Effective Date, no transfer of record of fractions of
shares of New Common Stock will be permitted. For a period of 30 days following
the Effective Date, holders of whole shares of New Common Stock may elect to
tender all or a portion of such shares to the Corporation for a purchase price
of $1,350 per share of New Common Stock.
Stockholders having fractional interests in shares of New Common Stock
will be requested to so instruct the Exchange Agent within 30 days following the
Effective Date if they elect to round up such interests and to enclose the
appropriate payment therefor with their Letters of Transmittal. Stockholders
seeking to have their fractional holdings rounded up will be promptly notified
by the Exchange Agent as to the amount of their resulting share ownership and
will receive a refund of any amount paid by them to the Exchange Agent for
additional fractional shares if fractional shares were not available for
rounding up. Stockholders will be entitled to receive shares of New Common
Stock, or the Cash Consideration, only by transmitting to the Exchange Agent
stock certificate(s) for Existing Shares, together with the properly executed
and completed Letter of Transmittal and such evidence of ownership of such
shares as the Corporation may require. The payment of the Cash Consideration
will be made to Fractional Stockholders only upon surrender of the relevant
certificates; such payment will be made promptly after receipt of a properly
completed Letter of Transmittal and stock certificate(s) for Existing Shares.
Similarly, stockholders who will remain such after the Effective Date will not
receive certificates for shares of New Common Stock unless and until the
certificates representing their Existing Shares are surrendered.
Stockholders seeking to tender all or any portion of their shares of
New Common Stock must do so at or prior to the Expiration Date. Such
stockholders will be entitled to receive $1,350 per each share of New Common
Stock tendered only by transmitting to the Exchange Agent stock certificate(s)
for shares of New Common Stock, together with the properly executed and
completed Letter of Transmittal and such evidence of ownership of shares as the
Corporation may require. Payment for tendered shares of New Common Stock will
be made to stockholders only upon surrender of the relevant certificates; such
payment will be made promptly after receipt of a properly completed Letter of
Transmittal and stock certificates for the tendered shares.
THE NOTICE OF FILING AND THE LETTER OF TRANSMITTAL WILL BE TRANSMITTED
BY THE CORPORATION TO STOCKHOLDERS AT A DATE SUBSEQUENT TO THE EFFECTIVE DATE.
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THE NOTICE OF FILING
AND LETTER OF TRANSMITTAL ARE RECEIVED AND SHOULD SURRENDER THEIR CERTIFICATES
ONLY TO THE EXCHANGE AGENT WITH SUCH LETTER OF TRANSMITTAL.
There will be no service charges payable by stockholders in connection
with the exchange of their certificates or in connection with the payment of
cash either in lieu of the issuance of fractional shares of New Common Stock or
the tender of whole shares of New Common Stock. These costs will be borne by
the Corporation.
SOURCE AND AMOUNT OF FUNDS, EXPENSES
The total amount of funds which will be required by the Corporation to
fund the cash payments in lieu of the issuance of fractional shares of New
Common Stock under the Reverse Stock Split and to purchase shares of New Common
Stock from unaffiliated stockholders pursuant to the Purchase Offer is estimated
to be as much as $1,300,000 (based on the stock records of the Corporation as of
April 13, 1994 and assuming no stockholders elect to round up fractional
holdings and all unaffiliated stockholders tender shares of New Common Stock),
including estimated fees and expenses of approximately $110,525.
The Corporation will pay all expenses in connection with the Reverse
Stock Split and Purchase Offer and intends to finance such expenses from its
current cash reserves. The following table sets forth the approximate amount of
such expenses expected to be incurred in connection with the effectuation of the
Reverse Stock Split and the Purchase Offer:
Approximate
Item Amount
Legal $75,000.00
Printing 5,000.00
Accounting 13,000.00
Exchange Agent 15,000.00
Filing Fees 525.00
Miscellaneous 2,000.00
Total $110,525.00
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the years ended December 31, 1989, 1990, 1991, 1992 and 1993 and at the end
of such periods has been derived from the consolidated financial statements of
the Corporation which have been audited by Price Waterhouse, independent
accountants. The selected consolidated financial data set forth below with
respect to the quarters ended March 28, 1993 and April 3, 1994 and at the end of
such periods, are unaudited but have been prepared on a basis substantially
consistent with the audited financial statements and, in the opinion of
management, contain all adjustments consisting only of normal recurring
adjustments, necessary for a fair presentation. The results of operations for
the quarter ended April 3, 1994 are not necessarily indicative of results to be
expected for the full year. The financial data set forth below is qualified by
and should be read in conjunction with the Consolidated Financial Statements and
the related notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" included elsewhere in this Information
Statement.
The historical operations and balance sheet data included in the
selected data set forth below are derived from the consolidated financial
statements of the Corporation (in thousands except per share data and ratios).
<T>
[S] [C] [C] [C] [C] [C] [C] [C]
QUARTER ENDED
DECEMBER 31, MARCH 28, APRIL 3,
1989 1990 1991 1992 1993 1993 1994
STATEMENT OF
OPERATIONS DATA (1):
Net Sales
Industrial Coated
Fabrics Group $114,313 $119,749 $ 121,264 $126,576 $140,735 $
31,066 $37,264
Apparel Textile
Group 143,035 138,110 148,295 144,528 142,918 32,714 35,733
Total net sales $257,348 $257,859 $ 269,559 $271,104 $283,653 $
63,780 $72,997
Operating income
Industrial Coated
Fabrics Group $24,715 $23,250 $23,940 $24,732 $29,287 $6,641 $6,651
Apparel Textile
Group 11,513 10,059 10,121 10,693 11,583 1,841 3,004
Corporate expenses (6,888) (8,137) (8,059) (8,851) (10,915)
(2,312) (2,105)
Facility restructuring
charges (1,003) ---- ----
Total operating
income $29,340 $25,172 $26,002 $26,574 $28,952 $6,170 $7,550
Income from
continuing
operations $5,812 $5,348 $4,214 $6,145 $8,238 $1,583 $2,314
Income (loss)
before
extra-
ordinary
items
and
cumulative
effect of a
change
in
accounting
principle $15,234 $(26,959) $6,667 $6,145 $8,238 $1,583 $2,314
Net income
(loss) $15,405 $(26,959) $6,667 $3,442 $8,238 $1,583 $2,314
Interest expense
and
amortization
of financing
costs and debt
discount $22,590 $19,934 $21,777 $17,633 $16,426 ($4,152)($4,085)
Income from
continuing
operations per
share $ .33 $ .35 $ .28 $ .41 $ .56 $ .11 $ .18
Ratio of
earnings to
fixed
charges (2) 1.5x 1.3x 1.2x 1.5x 1.8x 1.4x 1.8x
QUARTER ENDED
DECEMBER 31, MARCH 28, APRIL 3,
1989 1990 1991 1992 1993 1993 1994
EARNINGS (LOSS) PER
COMMON SHARE
Primary:
Income from
continuing
operations $ .33 $ .35 $ .28 $ .41 $ .56 $ .11 $ .18
Income (loss)
before
extraordinary
item .83 (1.77) .44 .41 .56 .11 .18
Extraordinary item .02 ---- ---- (.38) ---- ----
- - - - - - - - - - - - - - - ----
Net income (loss) .85 (1.77) .44 .23 .56 .11 .18
Fully diluted:
Income from
continuing
operations $ .33 $ .35 $ .27 $ .41 $ .56 $ .11 $ .18
Income (loss)
before
extraordinary
item .83 (1.77) .43 .41 .56 .11 .18
Net income (loss) .85 (1.77) .43 .23 .56 .11 .18
Weighted average
number of shares
Primary 15,998 15,242 15,228 15,130 14,686 14,913 13,103
Fully diluted 15,998 15,256 15,339 15,130 14,686 14,913 13,103
Operating Data:
Depreciation and
goodwill
amortization
expense $6,394 $6,707 $7,178 $8,187 $8,624 $2,207 $2,327
Capital
expenditures 6,821 7,007 11,015 15,788 16,506 (2,051) (5,686)
Balance Sheet Data:
Total assets (3)
$249,550 $230,597 $ 217,135 $196,006 $206,375 $205,049
$ 212,058
Working Capital $98,591 $83,301 $52,596 $56,059 $52,501 $63,905 $58,479
Total assets less
deferred R&D
charges (4)
and goodwill $198,920 $181,171 $ 169,062 $148,927 $160,711 $158,321
$ 166,748
Long-term debt
(including
current portion)$149,863 $148,837 148,960 $132,921 $132,677 $140,290
$138,402
Stockholders'
equity (5) 39,675 11,513 17,283 14,184 20,409 14,056 23,941
Book value per
share: $2.97 $0.87 $1.33 $1.10 $1.58 $1.09 $1.86
</t>
Footnotes to Statement of Operations and Balance Sheet Data:
(1) The fiscal year ended December 31, 1989 has been restated to reflect
the exclusion of the discontinued operations of the ARA Automotive Group.
See Footnote 3, Discontinued Operations and Facility Restructuring Charges,
of the Notes to Consolidated Financial Statements of the Corporation.
(2) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before income taxes,
plus fixed charges. Fixed charges consist of interest on all
indebtedness, amortization of financing costs and debt discount, and one-
third of all rentals, which is considered representative of the interest
portion included therein, after adjustments for amounts related to
discontinued operations.
(3) Total assets include the assets of discontinued operations prior to
disposal. In 1990, Reeves discontinued the operations of Reeves' ARA
Automotive Group.
(4) The Corporation has no deferred R&D charges.
(5) The decline in stockholders' equity from 1989 to 1990 includes the
recognition of a net loss of $34,594,000 from the disposal of the remaining
operations of Reeves' ARA Automotive Group. The decline in stockholders'
equity from 1991 to 1992 primarily reflects translation adjustments of
$6,626,000 caused by foreign currency fluctuations.
The Reverse Stock Split will not have a material impact on the
Corporation's financial position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Corporation is a holding company, the principal assets of which
consist of its ownership of 100% of the stock of Reeves Industries
(approximately 90% on a fully-diluted basis). The Corporation currently derives
all of its operating income from Reeves Industries.
The Corporation acquired Reeves Industries in 1986. Under the
direction of the Corporation's management, Reeves Industries' operations have
benefited from new product developments and a series of productivity
improvements, including improved manufacturing processes and information
systems, work force reductions and technological upgrading of facilities and
production methods. Between 1991 and 1993, the Corporation invested
approximately $52.1 million in its businesses, including the cost of equipment
leased under operating leases of $8.8 million, in order to modernize and expand
capacity, reduce its overall cost structure, increase productivity and enhance
its competitive position. Between 1991 and 1993, the Corporation's sales and
operating income increased from $269.6 million to $283.7 million and from $26.0
million to $30.4 million (before facility restructuring charges of $1.0 million
and other charges of $.5 million in 1993), respectively. The Corporation's
operating results have improved primarily due to increased sales and profits
related to coated automotive airbag materials and productivity improvements
achieved through increased capital investment. These results have been achieved
despite the continuation of recessionary influences which have adversely
affected sales of Reeves Industries' apparel textile and printing blanket
products in its U.S. and European markets.
RESULTS OF OPERATIONS (1991-1993 AND QUARTERS
ENDED MARCH 28, 1993 AND APRIL 3, 1994)
Sales
Consolidated sales increased from $269.6 million in 1991 to $283.7
million in 1993 (5.2%) due to increased sales of the Industrial Coated Fabrics
Group (16.0%) related primarily to growth in coated automotive airbag materials,
partially offset by a decline in sales of the Apparel Textile Group (3.6%) due
to a shift to basic, lower margin products, price competition, adverse
recessionary influences affecting domestic textile markets and the cessation of
ATG's weaving operations at its Woodruff, South Carolina facility in 1993.
Consolidated sales increased $9.2 million (14.5%) in the first quarter of 1994
as compared to the first quarter of 1993, due to growth in sales of coated
automotive air bag materials and apparel textiles.
Industrial Coated Fabrics Group.
ICF's sales were $121.3 million, $126.6 million and $140.7 million in
1991, 1992 and 1993, respectively. The 16.0% increase during the period was due
to increased sales of specialty coated fabrics, primarily coated automotive
airbag materials, partially offset by a decline in offset printing blanket
volume. The increase in coated automotive airbag materials sales was due to an
increase in unit volume caused by the increased use of driver-side airbags
primarily in cars manufactured in the United States. The decline in domestic
printing blanket sales was primarily due to reduced demand as a result of the
slowdown in the printing industry. Sales of Reeves Industries' Italian
subsidiary ("Reeves S.p.A.") fluctuated during the period primarily due to
movements in foreign currency exchange rates. ICF's net sales increased $6.2
million (20.0%) during the first quarter of 1994 as compared to the first
quarter of 1993. ICF's net sales increased primarily due to higher unit volume
for specialty coated fabric materials, primarily coated automotive airbag
materials. This increase was partially offset by a decrease in other coated
fabric product lines, principally domestic printing blankets continuing the
trend experienced in 1992 and 1993.
Apparel Textile Group.
ATG's sales were $148.3 million, $144.5 million and $142.9 million in
1991, 1992 and 1993, respectively. The 2.6% sales decline in 1992 as compared
to 1991 was evenly distributed between ATG's greige and finishing divisions.
The decline in each division was primarily due to unusually strong sales in 1991
to the U.S. military as a result of Operation Desert Storm and, to a lesser
extent, the economic recession in the United States in 1992. ATG's products
experienced both a decline in unit volume as well as a shift to more basic,
lower margin products in 1992 as compared to 1991. The 1.1% decline experienced
in 1993 as compared to 1992 resulted from a decrease in greige goods sales as a
result of the cessation of weaving operations at the Woodruff, South Carolina
facility due to declining sales to the U.S. military, offset partially by
increased sales of finished goods due to greater demand for higher quality and
more varied product offerings and styles. ATG's net sales increased $3.0
million (9.2%) during the first quarter of 1994 as compared to the first quarter
of 1993. ATG's net sales increase reflects growth in unit volume due to
stronger customer demand in the finished goods division partially offset by
lower greige goods volume due to the elimination of weaving capacity at the
Woodruff, South Carolina facility.
Operating Income
Consolidated operating income was $26.0 million, $26.6 million and
$29.0 million in 1991, 1992 and 1993, respectively. The 11.5% increase between
1991 and 1993 resulted primarily from increased profits contributed by ICF's
specialty materials products (predominantly coated automotive airbag materials)
and, to a lesser extent, increased profits contributed by ATG (in spite of
reduced sales volume) as a result of cost reductions and productivity gains
achieved during the period related to its capital investment prograM. The
operating income increase experienced during the period was partially offset by
increased corporate expenses and, in 1993, by facility restructuring charges of
$1.0 million. Operating income, as a percentage of sales, increased from 9.6%
in 1991 to 9.8% in 1992 and to 10.2% in 1993. Operating income for the first
quarter of 1994 was $7.6 million compared to $6.2 million for the first quarter
of 1993. As a percentage of net sales, operating income increased to 10.3% of
net sales for the first quarter of 1994 compared to 9.7% in the same period of
1993. Operating income growth was primarily due to higher sales volume and cost
reductions implemented at ATG in 1993 and, to a lesser extent, lower corporate
expenses.
Industrial Coated Fabrics Group.
ICF's operating income was $23.9 million, $24.7 million and $29.3
million in 1991, 1992 and 1993, respectively, and represented 19.7%, 19.5% and
20.8% of ICF's sales in such years. Operating income growth in 1992 as compared
to 1991 was due primarily to increased sales of coated automotive airbag
materials and, to a lesser extent, the elimination of certain lower-margin
specialty coated fabric products. The 18.6% increase in operating income in
1993 as compared to 1992 was primarily due to the benefits of economies of scale
realized in connection with increased sales of coated automotive airbag
materials. Operating income from printing blankets declined in 1992 and 1993
reflecting the worldwide slowdown in the printing industry partially offset by
efficiencies experienced by Reeves S.p.A. primarily related to increased
material yields. ICF's operating income for the first quarter of 1994 was
essentially unchanged from the first quarter of 1993 but, as a percentage of
sales, decreased to 17.8% from 21.4%. Increases in operating income generated
by sales of coated automotive airbag materials were offset by: (i) lower
operating income from printing blankets due to significant development and other
costs associated with the introduction of new products, (ii) foreign currency
exchange losses resulting from the strengthening of the Italian lira against
certain other currencies and (iii) lower volume and higher development costs
related to other coated fabrics product lines.
Apparel Textile Group.
ATG's operating income was $10.1 million, $10.7 million and $11.6
million in 1991, 1992 and 1993, respectively, and represented 6.8%, 7.4% and
8.1% of ATG's sales in such years. The operating income and margin improvement
experienced during the period was achieved in spite of an overall 3.6% sales
decline reflecting the benefits of cost reductions and productivity improvements
realized from ATG's capacity modernization program initiated at its Chesnee and
Bishopville, South Carolina facilities. ATG's operating income for the first
quarter of 1994 increased by $1.2 million (63.2%) as compared to the first
quarter of 1993, primarily as a result of increased sales volume in the finished
goods division and manufacturing cost reductions. The manufacturing cost
reductions resulted principally from completion of the Chesnee facility
modernization in the first quarter of 1994 and the transfer of greige goods
capacity from the Woodruff facility to Chesnee. Operating income as a
percentage of sales increased to 8.4% from 5.6%.
Corporate Expenses.
Corporate expenses were $8.1 million, $8.9 million and $10.9 million
in 1991, 1992 and 1993, respectively, and represented 3.0%, 3.3% and 3.8% of
consolidated sales in such years. The increase in corporate expenses during the
period related primarily to increased staffing and compensation expense
necessary to support corporate development activities. In 1993, corporate
expenses included a provision for costs related to Reeves Industries'
discontinued Buena Vista, Virginia facility of $.5 million. Corporate expenses
decreased $.2 million (9.0%) during the first quarter of 1994 as compared to the
first quarter of 1993. The decrease resulted primarily from a gain arising from
the settlement of a pension obligation related to a discontinued pension plan.
Goodwill Amortization and Facility Restructuring Charges.
The Corporation recorded provisions for goodwill amortization of $1.2
million in 1991 and $1.4 million in 1992 and 1993. In 1993, the Corporation
also recorded facility restructuring charges of $1.0 million. The one-time
charges related primarily to the cessation of weaving activities at Reeves
Industries' Woodruff, South Carolina facility due to declining sales to the U.S.
military, the conversion of that facility into a captive yarn mill and
consolidation of weaving capacity at ATG's remaining facilities. Prior to
restructuring, the Corporation conducted weaving operations at its Woodruff,
Osage and Chesnee plants. The Woodruff facility's looms were deemed to be
technologically outdated. As part of the restructuring, the Corporation added
an additional shift at its Osage facility and installed 53 state-of-the-art
looms at its Chesnee facility. As a result, the weaving capacity at the
Woodruff facility was eliminated.
Restructuring costs incurred consisted primarily of: employee
severance and other related costs ($.3 million), equipment modifications,
relocations and other related costs ($.2 million) and facility charges related
to the shut-down of the weaving operations ($.5 million). The Corporation does
not expect to incur additional costs related to this restructuring.
Interest Expense, Net
Interest expense, net consists of consolidated interest expense plus
amortization of financing costs and debt discounts less interest income on
investments. Interest expense, net was $20.7 million, $17.2 million and $16.2
million in 1991, 1992 and 1993, respectively, and $4.1 million in each of the
first quarters of 1993 and 1994. Included in such net amounts are provisions
for the amortization of financing costs and debt discounts totaling $1.3
million, $1.0 million and $.7 million in 1991, 1992 and 1993, respectively, and
$.2 million in each of the first quarters of 1993 and 1994. The decline in
interest expense, net during the period resulted primarily from the repayment of
bank debt, the refinancing of Reeves Industries' long-term debt in 1992 with
proceeds from the sale of the 11% Senior Notes and the repurchase of a portion
of the outstanding subordinated debentures.
Income Taxes
The Corporation's effective income tax rate on income from continuing
operations before income taxes for 1991, 1992 and 1993 was 9.8%, 30.6% and
34.9%, respectively. The effective income tax rate on income from continuing
operations for 1991 and 1992 differed from the federal statutory rate of 34%
primarily due to the impact of goodwill amortization and Reeves S.p.A.'s lower
effective tax rate. The higher effective income tax rate in 1992 as compared to
1991 was primarily due to an increase in domestic taxable income which is taxed
at a higher rate than income earned at Reeves S.p.A., a new Italian tax
affecting Reeves S.p.A.'s tax liability and the adoption of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109").
During 1993, the Corporation established a $.8 million valuation
reserve against its deferred tax assets reflecting estimated utilization of
foreign tax credits. The Corporation has foreign tax credit carryforwards of
$1.9 million of which $1.7 million expire in 1994 and $.2 million expire at
varying dates through 1997. The valuation reserve was established based on its
estimate of foreign source taxable income expected to be received from Reeves
S.p.A. during the foreign tax credit carryover period.
Income from Continuing Operations
Income from continuing operations was $4.2 million, $6.1 million and
$8.2 million in 1991, 1992 and 1993, respectively, and $1.6 million and $2.3
million in the first quarters of 1993 and 1994, respectively. Income from
continuing operations excluded (i) a gain on disposal of discontinued
operations, net of taxes, aggregating $2.8 million in 1991, (ii) an
extraordinary loss of $6.1 million in 1992 from the write-off of financing costs
and debt discounts related to the early extinguishment of long-term debt in the
Corporation's 1992 refinancing and (iii) a gain of $3.0 million in 1992 related
to the cumulative effect of adopting a change in accounting principle (FAS 109).
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
The Corporation has made substantial capital investments in its
businesses (approximately $83 million) since 1986. Commencing in 1991, the
Corporation began significantly increasing its levels of capital investment in
its businesses in order to modernize and expand capacity, reduce its overall
cost structure, increase productivity and enhance its competitive position.
Between 1991 and 1993, the Corporation invested approximately $52.1 million in
aggregate ($11.0 million in 1991, $15.8 million in 1992, $16.5 million in 1993
and $8.8 million, representing the cost of manufacturing equipment leased under
operating leases, in 1992 and 1993).
Between 1991 and 1993, the Corporation invested approximately $13
million in ICF's domestic facilities in order to purchase new production
equipment, increase productivity and expand capacity in its traditional lines of
business as well as to enter the coated automotive airbag materials market. In
addition, ICF spent approximately $12 million in its Reeves S.p.A. facilities to
construct an 80,000 square foot addition and purchase related equipment. Such
investment increased capacity to manufacture offset printing blankets and
installed coated fabrics capacity in Europe to meet anticipated demand for
sophisticated specialty materials. Between 1991 and 1993, the Corporation
invested approximately $24.2 million in ATG's facilities at Chesnee and
Bishopville, South Carolina to increase productivity and manufacturing
flexibility, expand capacity for more sophisticated fabrics and allow more rapid
response to market demand and a broader product offering. Of such $24.2
million, approximately $8.8 million represents the cost of manufacturing
equipment leased under operating leases.
The Corporation intends to substantially increase its capital
investment in its existing businesses during the 1994-1997 period. In the first
quarter of 1994, the Corporation spent $5.7 million as compared to $2.1 million
in the first quarter of 1993. The Corporation currently anticipates in excess
of $40 million of capital expenditures in 1994 and in excess of $100 million of
aggregate spending between 1995 and 1997. In 1994, the Corporation anticipates
spending approximately $17 million to construct, furnish and equip a state-of-
the-art plant in Spartanburg, South Carolina to weave automotive airbag
materials, approximately $5 million to complete the capacity expansion of ATG's
Chesnee, South Carolina plant and approximately $16 million to expand the
capacity of and improve productivity at ICF's worldwide coated fabrics and
offset printing blanket facilities. Projected capital expenditures beyond 1994
are expected to complete ATG's modernization and expansion of its textile
capacity, expand ICF's automotive airbag materials capacity in response to
anticipated domestic and international market requirements and enhance the
profitability and competitive position of ICF's printing blanket and traditional
coated fabrics businesses through additional spending for cost reductions and
productivity improvements.
As a result of the nature of the Corporation's business and its
substantial expenditures for capital improvements over the last several years,
current and future capital expenditure requirements are flexible as to both
timing and amount of capital required. In the event that cash flow proves
inadequate to fund currently projected expenditures, such expenditures can be
adjusted so as not to exceed available funds.
Liquidity
The Corporation's EBITDA (before facility restructuring and other
charges) was $32.6 million, $34.4 million and $39.0 million in 1991, 1992 and
1993, respectively, and $8.4 million and $9.9 million in the first quarters of
1993 and 1994, respectively. The Corporation's net cash provided by operating
activities increased from $8.4 million in 1991 to $15.3 million in 1992 and
$25.6 million in 1993. The improvement in net cash provided by operating
activities resulted from higher levels of income from continuing operations and
significant improvements in working capital management. The Corporation had a
cash deficit from operations of $(7.4) million in the first quarter of 1994 as
compared to a deficit of $(4.7) million in the first quarter of 1993, due to
increased working capital requirements necessary to support higher sales
volumes.
The Corporation anticipates that it will be able to meet its projected
working capital, capital expenditure and debt service requirements through
internally generated funds, borrowings available under an existing $35 million
Bank Credit Agreement, funds available through an equipment leasing facility and
if completed, a portion of the net proceeds from the sale of the Reeves
Holdings' senior discount debentures.
In August 1992, in conjunction with the refinancing of the
Corporation's bank and institutional indebtedness, the Corporation entered into
the Bank Credit Agreement which provides it with an aggregate $35 million
revolving line of credit and letter of credit facility. The Bank Credit
Agreement expires on December 31, 1995 and is secured by accounts receivable and
inventories. As of April 3, 1994, the Corporation had available borrowing
capacity (net of $1.4 million of outstanding letters of credit) of $27.9 million
under the Bank Credit Agreement.
In May 1994, the Corporation received a commitment from an equipment
lessor to finance up to $12.0 million of capital equipment pursuant to long-term
operating leases, of which $3.1 million was utilized in May 1994. The
Corporation believes that a substantial portion of the balance will be utilized
in 1994.
The Corporation enters into foreign exchange forward contracts to
limit risk of changes in foreign currency exchange rates associated with certain
assets and future foreign currency transactions, primarily cash flows from
accounts receivable and firm purchase commitments. Gains and losses on these
contracts are deferred until the underlying hedge transaction is completed. The
cash flows from the forward contracts are classified consistent with the cash
flows from the transactions being hedged. To the extent that they are matched
with underlying sale transactions, these contracts do not subject the
Corporation to risk from foreign exchange rate movements, because gains and
losses on the contracts offset losses and gains on the transactions being
hedged.
At April 3, 1994, the Corporation had foreign currency hedge contracts
outstanding, equivalent to $11.1 million to exchange various currencies,
including the U.S. dollar, Japanese yen, pound sterling, Deutsche mark, and
French franc into Italian lire. The contracts mature during 1994. The April 3,
1994 fair value of these foreign currency hedge contracts was $11.2 million.
Impact Of Inflation
The Corporation does not believe that its financial results have been
materially impacted by the effects of inflation.
OTHER MATTERS
In February 1992, the Corporation received approximately $17 million
from the federal government in payment of a tax refund. The refund resulted
from the Corporation carrying back tax operating losses generated in 1991,
primarily related to the disposal of the ARA Automotive Group, to offset
previous years' taxable income.
In 1992, the Corporation adopted FAS 109 effective as of the beginning
of 1992. Under FAS 109, in the year of adoption, previously reported results of
operations for the year are restated to reflect the effects of applying FAS 109,
and the cumulative effect of adoption on prior years' results of operations is
shown in the income statement in the year of change. The cumulative effect of
this change in accounting principle increased net income by $3.0 million in
1992.
BUSINESS
GENERAL
The Corporation, through its subsidiary, Reeves Industries, is a
diversified industrial corporation with operations in two principal business
segments, industrial coated fabrics, conducted through its Industrial Coated
Fabrics Group, and apparel textiles, conducted through its Apparel Textile
Group. In 1993, ICF contributed approximately 49.6% of the Corporation's net
sales and approximately 73.6% of its operating income, and ATG contributed
approximately 50.4% of the Corporation's net sales and approximately 26.4% of
its operating income (in each case, excluding unallocable corporate expenses).
Throughout its businesses, the Corporation emphasizes specialty products,
product quality, technological innovation and rapid responses to the changing
needs of its customers.
ICF specializes in the coating of various substrate fabrics with a
variety of products such as synthetic rubber, vinyl, neoprene, urethane and
other elastomers, to produce a diverse line of products for industrial
applications. ICF's principal products include: (1) a complete line of printing
blankets used in offset lithography, (2) coated automotive airbag materials, (3)
specialty coated fabrics and (4) coated fabrics used in industrial coverings.
The Corporation believes that ICF is one of the world's leading
producers of offset printing blankets and that ICF has the leading share of the
domestic market for coated automotive airbag materials. The Corporation also
believes that ICF is a leading domestic producer of specialty coated fabrics
used for a broad range of industrial applications. ICF's products generally
involve significant amounts of technological expertise and precise production
tolerances. The Corporation believes that ICF's product development,
formulation and production methods are among the most sophisticated in the
coated fabrics industry.
ATG manufactures, processes and sells specialty textile fabrics to
apparel and other manufacturers. Through its Greige Goods Division, ATG
processes raw materials into griege goods (i.e., undyed woven fabrics). Through
its Finished Goods Division, ATG functions as a converter and commission
finisher, purchasing greige goods (from the Griege Goods Division and others)
and contracting to have the goods dyed and finished or dyeing and finishing the
goods itself. The dyed and finished goods are then sold for use in a variety of
end-products.
The Corporation believes that ATG has developed strong positions in
niche markets in the apparel textile industry by offering unique, custom-
designed fabrics to leading apparel and specialty garment manufacturers. ATG
emphasizes "short-run" product orders and targets market segments in which its
manufacturing flexibility, rapid response time, superior service and quality and
the ability to supply exclusive blends are key competitive factors.
The Corporation's business strategy has focused on the sale of higher-
margin niche products and the establishment of leading positions in its
principal markets. The Corporation believes that this strategy, combined with
its diverse product and customer base, the development of new products and
substantial capital investment, has helped the Corporation increase its sales
and profitability in spite of adverse economic conditions in its U.S. and
European markets during 1990-1993.
Since 1991, the Corporation has significantly increased its level of
capital investment in its businesses to modernize and expand capacity, reduce
its overall cost structure, increase productivity and enhance its competitive
position. The Corporation intends to substantially increase its capital
investment in its businesses to approximately $140 million during the 1994-1997
period. In addition, as opportunities arise, the Corporation may seek to
augment its growth through strategic acquisitions, joint ventures and
investments in other industrial companies where the Corporation believes that it
can apply its professional management techniques to enhance a company's
operating performance.
The following table shows the amount of total revenue contributed by
product lines which accounted for 10% or more of the Corporation's consolidated
revenues in any of the last three fiscal years.
YEAR ENDED DECEMBER 31,
1991 1992 1993
(in thousands)
Industrial Coated Fabrics Group:
Specialty Materials $55,581 $61,684 $78,151
Graphic Arts 65,683 64,892 62,584
$121,264 $126,576 $140,735
Apparel Textile Group:
Finished Goods
and Dyeing and Finishing $74,893 $72,977 $77,416
Greige Goods 73,402 71,551 65,502
$148,295 $144,528 $142,918
INDUSTRIAL COATED FABRICS GROUP
The Industrial Coated Fabrics Group specializes in the coating of
various substrate fabrics with a variety of products, such as synthetic rubber,
vinyl, neoprene, urethane, and other elastomers, to produce a diverse line of
products for industrial applications.
ICF's products comprise four categories: (1) a complete line of
printing blankets used in offset lithography, (2) coated automotive airbag
materials, (3) specialty coated fabrics, including fluid control diaphragm
materials, tank seals, ducting materials and coated fabric materials used for
military and commercial life rafts and vests, aircraft escape slides, flexible
fuel tanks and general aviation products, and (4) coated fabrics used in
industrial coverings, including fabrics coated with rubber and vinyl which are
used to make tarpaulins, loading dock shelters and other industrial products.
ICF's products require significant amounts of technological expertise
and the Corporation believes that ICF's product development, formulation and
production methods are among the most sophisticated in the coated fabrics
industry. Since 1990, ICF has been awarded seven patents with respect to
polyurethane coatings and has eight pending patent applications relating to
printing blankets, airbag fabric and specialty coatings. Approximately eight
other patent applications are in process.
ICF generally manufactures specialty coated fabrics according to a
production backlog. ICF's products, other than printing blankets and coated
automotive airbag material, involve relatively short runs and custom
manufacturing. Printing blankets are sold primarily to distributors and
dealers. ICF's other products are sold directly to end users and fabricators by
its direct sales force. No customer of ICF represented 10% or more of the
Corporation's consolidated sales in 1993.
Printing Blankets
The Corporation believes that ICF is one of the world's leading
producers of printing blankets used in offset lithography, the predominant
printing process for the commercial, financial, publication and industrial
printing markets.
Offset printing blankets are used in the printing process to transfer
a printed image from a metal printing plate onto paper or other printing
material. ICF markets a complete line of conventional, compressible and sticky-
back blankets under the VulcanO name. The Corporation's line includes the 714O,
the first compressible printing blanket, the 2,000O Plus, an advanced general
purpose blanket, the Vision SRTM, a premium blanket targeted at the sheet-fed
market, and the MarathonO, a blanket targeted to the high-speed web press
market. Each blanket in the product line is designed for a specific printing
need and ICF sells an appropriate blanket for most types of commercial,
financial, publication and industrial printing applications.
The Corporation believes that ICF's blankets consistently offer high
performance and quality. This performance is due to a number of proprietary
features of the blankets, many of which are the subject of pending patent
applications. Distinctive characteristics of ICF's blankets include unique
printing surface compounds, improved composition and placement of compressible
layers, surface buffing and water and solvent-resistant back plies.
Purchasers of ICF's blankets include commercial, financial and
industrial printers and publishers of newspapers and magazines. ICF's blankets
are sold to over 10,000 U.S. printers and more than 15,000 foreign printers, in
64 countries worldwide.
ICF has established a network of over 60 distributors and 125 dealers
in the United States, Canada and Latin America to market its printing blankets.
In addition, ICF is represented by a distributor in most of the other countries
in which it does business. The Corporation's distributors typically purchase
rolls of uncut blankets from ICF and then cut, finish and package the blankets
prior to delivery to dealers or end-users. Internationally, ICF's relationships
with distributors tend to be long-standing and exclusive, with most distributors
dealing only in ICF's printing blankets and ICF selling only to such
distributors in their respective territories. Domestic distributors tend to
carry printing blankets from a number of manufacturers. Dealers generally
purchase finished blankets from distributors for resale. ICF services all of
its customers, and its direct sales force actively markets and promotes ICF's
printing blankets.
Automotive Airbag Materials
Reeves believes that ICF has the leading share of the domestic market
for coated automotive airbag materials. ICF is a significant supplier of such
material to TRW, Inc. ("TRW") and the Safety Restraints Division of Allied-
Signal, Inc. ("Allied-Signal"). Allied-Signal supplies Morton International
("Morton") with airbag components. TRW and Morton are two of four major
domestic manufacturers of airbag systems and, together with Allied-Signal,
supply all of the domestic automobile manufacturers and many of the European and
Japanese automobile manufacturers. The Corporation believes that TRW and Morton
account for in excess of 50% of the worldwide market for airbag systems.
National Highway Traffic Safety Administration regulations currently
mandate the use of both driver-side and passenger-side airbags for all 1998
model year passenger cars and 1999 model year light trucks, vans and
multipurpose vehicles ("LTVs"). A phase-in schedule establishes that at least
95% of a manufacturer's passenger cars built on or after September 1, 1996 for
sale in the United States, must be equipped with an airbag at the driver's and
the right front passenger's seating positions. All LTVs built after September
1, 1997, must have some form of automatic occupant protection, and at least 80%
must have either driver-side or driver-side and passenger-side airbags.
Due to market demand for airbag-equipped vehicles, automobile
manufacturers have been installing airbags (primarily driver-side) more
extensively than required by the foregoing regulations. The Corporation expects
sales of airbag systems and coated airbag fabric to increase substantially in
future years and believes that ICF is well-positioned to benefit from such
growth.
Following the lead of the U.S. automobile manufacturers, European and
Asian automobile manufacturers have begun installation of automobile airbags.
No legislation or regulation presently requires the installation of airbags
outside of the United States market. Reeves S.p.A. has sufficient capacity for
production of coated airbag material if demand develops outside of the United
States for such products.
Corporation participation in the airbag market to date has been
through the use of coated airbag fabric in driver-side applications where coated
airbag fabric offers certain advantages such as greater thermal insulation to
withstand the rapid inflation of the airbag by means of hot gases and
impermeability to prevent the escape of gases. Side-impact airbags (presently
offered on certain models of Volvo and Mercedes Benz) are expected to use coated
airbag fabric.
Most passenger-side airbags are currently designed to use uncoated
fabrics. Passenger-side airbags deploy more slowly than driver-side airbags.
Consequently, they can be manufactured at a lower cost using uncoated fabric.
The Corporation does not presently produce an uncoated airbag fabric. Although
there can be no assurance that it will be able to do so, the Corporation plans
to participate in the growth of passenger-side applications through an expansion
program capitalizing on its textile expertise and research and development
efforts. As part of this program, the Corporation is constructing an
approximately 100,000 square foot facility in Spartanburg, South Carolina for
weaving both coated and uncoated airbag fabric. The facility is expected to be
operational by the end of 1994.
Through its research and development activities, the Corporation is
continuously working to develop new proprietary fabric technologies and
procedures for the next generation of driver-side and passenger-side airbags.
Airbag fabrics must meet rigorous specifications, testing and certification
requirements and airbag fabric contracts tend to be awarded several years in
advance. These factors may deter the entry of other manufacturers into this
business.
Specialty Coated Fabrics
The Corporation believes that ICF is a leading domestic producer of
specialty coated fabrics used for a broad range of industrial applications.
ICF's specialty coated fabrics business is largely customer or "job shop"
oriented. In 1993, more than 90% of ICF's sales of specialty coated fabrics
were derived from fabrics manufactured to meet particular customers'
specifications.
Specialty coated fabrics generally consist of a fabric base, or
substrate layer, and an elastomer coating (i.e., coating consisting of an
elastic substance, such as rubber) which is applied to the fabric base. The
Corporation believes that ICF's line of elastomer-fabric combinations is the
most comprehensive in the industry, enabling it to design products to satisfy
its customers' needs. Fabric bases used in ICF's specialty coated fabrics
include polyester, nylon, cotton, fiberglass and silk. ICF's elastomers include
natural rubber, nitrile, ThiokolO, NeopreneO, silicone, HypalonO, VitonO and
polyurethane.
ICF sells its specialty coated fabrics under the registered trademark
ReevecoteO. The Corporation believes that ICF has established a reputation for
quality and product innovation in specialty coated fabrics by virtue of ICF's
technological capability, advanced plant and equipment, research and development
facilities and specialized chemists and engineers.
ICF's specialty coated fabrics are separated into five product lines:
General Purpose Goods.
This product line includes air cells, tank seals, gaskets, compressor
valves, aerosol seals and washers and coated fabrics used by other manufacturers
in the production of insulation materials, soundproofing and inflatable "lifting
bags" used to jack up automobiles or trucks.
Gas Meter Diaphragms.
ICF manufactures a line of rubber diaphragm material for use in gas
meters which are the primary mechanisms in gas meters for controlling gas floW.
ICF's products are sold to most of the major manufacturers of gas meters.
Synthetic Diaphragms.
The Corporation's synthetic diaphragms are used in carburetors,
controls, meters, compressors, fuel pumps and other applications.
Specialty Products.
ICF manufactures a large number of miscellaneous specialty coated
products, including v-cups for oil rig drills, expansion joints and urethane
specialty items, such as fuel containers, commercial diaphragms and desiccant
bags.
Military, Marine and Aerospace Products.
ICF produces coated fabrics used in truck and equipment covers,
waterproof duffel bags, pneumatic air mattresses, collapsible tanks for fuel and
water storage, temporary shelters, rafts, inflatable boats, various types of
safety devices, pneumatic and electrical plane de-icers, specialty molded
aircraft parts, aerospace fuel cells, aircraft evacuation slides, helicopter
floats, surveillance balloons and miscellaneous iteMs. A portion of ICF's work
in this area is performed as a subcontractor on United States government
contracts. ICF's direct sales force sells primarily to fabricators who use
ICF's specialty coated fabrics in products sold to end-users.
Industrial Coverings Fabrics
ICF sells coated fabrics to customers that produce a wide variety of
industrial coverings, including truck tarpaulins, trailer covers, cargo covers,
agricultural covers, hangar curtains, industrial curtains, boat covers, athletic
field covers, temporary shelters, semi-bulk containers and specialized flotation
devices used for the containment of oil spills and other environmental
pollutants. ICF's industrial coverings fabrics are produced by the same methods
as its specialty coated fabrics and are sold under the CoverlightO registered
trademark.
The industrial coverings fabrics business also includes coated fabric
for loading dock shelters, which are pads or bumpers placed around the exterior
of a loading dock door for weathersealing. ICF sells to manufacturers of
loading dock shelter systems and believes it is the leading supplier of loading
dock shelter material produced with rubber and other special elastomers.
ICF's sales force sells primarily to fabricators of industrial
coverings who in turn sell to end-users. Sales personnel concentrate on the
largest producers of industrial coverings and loading dock shelter systems in
the United States.
Competition
ICF's competitive environment varies by product line For graphic arts
products (in which the Corporation believes it is one of the three leading
firms), the Corporation's principal competitors are Day International and W.R.
Grace. To a lesser extent, the Corporation also competes with a number of other
firms, including David M, Kinyo, Zippy, Sumitomo, DYC and Meiji. In its
specialty materials product line, except for airbag materials, the Corporation
produces numerous products and competes in a number of highly fragmented market
segments where competition varies by product. In the United States, competition
comes from Chemprene, Archer Rubber, Seaman Corp., Cooley, Fairprene and
selected foreign suppliers. The Corporation's coated automotive airbag
materials compete against those of Milliken and Highland Industries as well as
several other small manufacturers. The Corporation believes its share of the
coated automotive airbag materials market is in excess of 50%. Quality,
compliance with exacting product specifications, delivery terms and price are
important factors in competing effectively in ICF's markets.
APPAREL TEXTILE GROUP
The Apparel Textile Group consists of two divisions, Greige Goods and
Finished Goods. ATG concentrates on segments of the market where its
manufacturing flexibility, rapid response time, superior service, quality and
the ability to supply customers with exclusive blends are key competitive
factors. No customer of ATG represented 10% or more of the Corporation's
consolidated sales in 1993.
ATG's Greige Goods Division processes raw materials into undyed woven
fabrics known as greige goods. The Greige Goods Division manufactures greige
goods of synthetic fibers, wool, silk, flax and various combinations of these
fibers. Products of the Greige Goods Division are primarily utilized for
apparel and the Greige Good Division's most significant customers are outside
converters and, to a lesser extent, ATG's Finished Goods Division.
The Corporation believes that the Greige Goods Division is
distinguished from its competitors by its ability to efficiently manufacture
small yardage runs, its rapid response time, the high quality of its products
and its ability to produce samples rapidly on demand. ATG's greige goods plants
engage principally in short production runs producing specialty fabrics
requiring a variety of blends and textures. Fabrics are produced by the Greige
Goods Division according to an order backlog and are typically "sold ahead"
three to four months in advance. Most of the Greige Goods Division's sales are
sold under firm contracts. In comparison to manufacturers of large volume
commodity fabrics such as print cloth, corduroy and denim, the Greige Goods
Division has been less adversely affected in recent years by foreign imports
because of its position as a small quantity, specialty fabric producer.
ATG's Finished Goods Division functions as a converter and commission
finisher. The Finished Goods Division purchases greige goods from the Greige
Goods Division and other greige suppliers and either contracts to have such
goods converted into finished fabrics of varying weights, colors, designs and
finishes or converts them itself. The dyed and finished fabrics are used in
various end-products and sold primarily to apparel manufacturers in the women's
wear, rainwear/outerwear, men's/boys' wear and career apparel markets.
The Corporation believes that ATG's Finished Goods Division is one of
the most flexible operations of its kind in the United States due to the variety
of products it can finish and the broad range of dyeing processes and finishes
it is able to offer. The Finished Goods Division focuses on high value-added
fabrics with unique colors and specialty finishes. The Finished Goods
Division's fabrics are currently being used by a number of the leading men's and
women's sportswear manufacturers and its dyeing and finishing services are sold
to major domestic converters.
A wide variety of fabrics can be woven at the Greige Goods Division's
two weaving plants. The dyeing and finishing plant of the Finished Goods
Division is equipped to do a variety of piece dyeing, as well as to provide
specialty finishings. This manufacturing flexibility increases ATG's ability to
respond rapidly to changes in market demand.
Substantially all of the Apparel Textile Group's products are sold
directly to customers through its own sales force. The balance is sold through
brokers and agents.
Competition
The textile industry is highly competitive. While there are a number
of integrated textile companies, many larger than ATG, no single company
dominates the United States market. Competition from imported fabrics and
garments continues to be a significant factor adversely affecting much of the
domestic textile industry. Because of the nature of ATG's markets, the
Corporation believes it is less susceptible to foreign imports than the industry
as a whole and is more insulated from the risk of foreign imports than high-
volume commodity producers. The most important factors in competing effectively
in ATG's product markets are service, price, quality, styling, texture, pattern
design and color. ATG seeks to maintain its market position in the industry
through a high degree of manufacturing flexibility, product quality and
competitive pricing policies.
The Greige Goods Division distinguishes itself from its competitors by
its ability to manufacture runs as small as 40,000 square yards, its rapid
response time and the high quality of the products manufactured. The Greige
Goods Division has extensive proprietary technical knowledge in the structure of
its spinning and weaving operations, which the Corporation believes represents a
significant competitive advantage.
The Finished Goods Division is capable of finishing a wide variety of
products and offers a broad range of dyeing processes and finishes. This
manufacturing flexibility increases the Finished Goods Division's ability to
respond rapidly to changes in market demand, which the Corporation believes
enhances its competitive position.
RAW MATERIALS, MANUFACTURERS AND SUPPLIERS
The principal raw materials used by ICF include polymeric resins,
natural and synthetic elastomers, organic and inorganic pigments, aromatic and
aliphatic solvents, polyurethanes, polyaramids and calendered fabrics. ATG
principally utilizes wool, flax, specialty yarn, man-made fibers, including
acrylics, polyesters, acetates, rayon and nylon and a wide variety of dyes and
chemicals. Such raw materials are largely purchased in domestic markets and are
available from a variety of sources. The Corporation is not presently
experiencing any difficulty in obtaining raw materials. However, the
Corporation has from time to time experienced difficulty in obtaining the
substrate fabric that it uses to produce coated automotive airbag materials.
The Corporation anticipates that the completion of its new weaving facility in
Spartanburg, South Carolina may reduce the risk of such supply shortages.
Airbag fabric produced by the new facility will be subject to rigorous testing
and certification before it will be available for production.
FOREIGN OPERATIONS
All of Reeves' foreign operations are conducted through Reeves S.p.A.,
a wholly-owned subsidiary located in Lodi Vecchio, Italy. Reeves S.p.A. forms a
part of Reeves' ICF Group. The financial data of Reeves S.p.A. is as follows:
1991 1992 1993
(in thousands)
Sales $35,437 $38,444 $36,932
Net income 6,808 9,165 7,446
Assets 33,011 31,608 33,092
The financial results of Reeves S.p.A. do not include any allocations
of corporate expenses or consolidated interest expense.
BACKLOG
The following is a comparison of open order backlogs at December 31 of
each year presented:
1991 1992 1993
(in thousands)
Industrial Coated
Fabrics Group $16,942 $16,824 $17,072
Apparel Textile Group 47,129 32,994 39,390
Totals $64,071 $49,818 $56,462
The increase in ICF's backlog from 1992 to 1993 is due to growth in
the coated automotive airbag materials business. The decrease in the Apparel
Textile Group backlog from 1991 to 1992 was the result of a decrease in military
sales, which were unusually strong in 1991 as a result of Operation Desert Storm
and reduced orders due to market uncertainty. The increase in the ATG backlog
from 1992 to 1993 is due to the addition of several new customers in the
Finished Goods Division.
The backlog as of December 31, 1993 for the Industrial Coated Fabrics
Group and the Apparel Textile Group is reasonably expected to be filled in 1994.
Under certain circumstances, orders may be canceled at the Corporation's
discretion prior to the commencement of manufacturing. Any significant decrease
in backlog resulting from lost customers could adversely affect future
operations if these customers are not replaced in a timely manner.
ENVIRONMENTAL MATTERS
The Corporation is subject to a number of federal, state and local
laws and regulations pertaining to air emissions, water discharges, waste
handling and disposal, workplace exposure and release of chemicals. During
1993, expenditures in connection with the Corporation's compliance with federal,
state and local environmental laws and regulations did not have a material
adverse effect on its earnings, capital expenditures or competitive position.
Although the Corporation cannot predict what laws, regulations and policies may
be adopted in the future, based on current regulatory standards, the Corporation
does not expect such expenditures to have a material adverse effect on its
operations.
EMPLOYEES
On April 3, 1994, the Corporation employed approximately 2,273 people,
of whom 1,829 were in production, 188 were in general and administrative
functions, 53 were in sales and 203 were at Reeves S.p.A. At such date, ICF had
approximately 848 employees and ATG had approximately 1,371 employees, with the
remainder of the Corporation's employees in general and administrative
positions.
PROPERTIES
The Corporation's principal facilities, their primary functions and
their locations are as follows:
LOCATION FUNCTION OWNED LEASED
Size (Sq. Ft.)
MANUFACTURING FACILITIES
Industrial Coated
Fabrics Group
Ruthrfordton, NC Specialty Materials 215,000
Spartanburg, SC Graphic Arts 308,364
Lodi Vecchio, Italy Graphic Arts and
Specialty Materials 160,000 4,900
Subtotal 683,364 4,900
LOCATION FUNCTION OWNED LEASED
Size (Sq. Ft.)
Apparel Textile Group
Woodruff, SC Greige Goods 368,587
Chesnee, SC Greige Goods 303,100
Bessemer City, NC Greige Goods 218,992
Bishopville, SC Finished Goods 226,684 2,400
Bishopville, SC Warehouse 72,650
Subtotal 1,117,363 75,050
Total Manufacturing Facilities 1,800,727 79,950
Non-Manufacturing Facilities
New York, NY Administrative
and Sales 12,000
Spartanburg, SC Administrative
and Sales 43,000
Darien, CT Administrative 6,800
Total Non-Manufacturing
Facilities 43,000 18,800
TOTAL 1,843,727 98,750
The Corporation is a party to facility leases with terms ranging from
month-to-month to fifteen years, with rental expense aggregating $.5 million for
the twelve months ended December 31, 1993. The Corporation believes that all of
its facilities are suitable and adequate for the current conduct of its
operations.
LEGAL PROCEEDINGS
The Corporation believes that there are no legal proceedings, other
than ordinary routine litigation incidental to the business of the Corporation,
to which the Corporation or any of its subsidiaries are a party. Management is
of the opinion that the ultimate outcome of existing legal proceedings would not
have a material adverse effect on the Corporation's consolidated financial
position or results of operations.
MARKET AND DIVIDEND INFORMATION
The Existing Shares consist of the Corporation's Common Stock, par
value $.01 per share. SUCCESSFUL COMPLETION OF THE REVERSE STOCK SPLIT IS
EXPECTED TO RESULT IN THE DEREGISTRATION OF THE NEW COMMON STOCK UNDER THE
EXCHANGE ACT AND THE NEW COMMON STOCK NOT BEING ELIGIBLE FOR QUOTATION ON NASDAQ
NOR LISTING ON ANY SECURITIES EXCHANGE. The Corporation's Existing Shares are
traded over-the-counter.
The range of high and low bid prices of the Existing Shares for each
quarterly period during the last two fiscal years as supplied by the National
Quotation Bureau, Inc. is set forth beloW. These over-the-counter market
quotations represent inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
FISCAL YEAR ENDED HIGH LOW
December 31, 1992
First Quarter 2 1/2 2 1/2
Second Quarter 2 1/2 2 1/2
Third Quarter 2 3/4 2 1/2
Fourth Quarter 3 1/4 1
December 31, 1993
First Quarter 1 1
Second Quarter 1 1/2 1
Third Quarter 1 1
Fourth Quarter 1 1
December 31, 1994
First Quarter 1 1
On April 14, 1994, the last trading day prior to the announcement of
the entry by the Court of Chancery of an order approving the Settlement, the
high and low bid price of the Existing Shares of the Corporation was $1.00. At
March 30, 1994, there were 12,895,100 Existing Shares outstanding held by
approximately 2,005 holders of record.
Although there are no contractual restrictions on the Corporation's
ability to pay dividends, as a practical matter, such ability is limited as a
result of significant restrictions on the ability of Reeves Holdings, Reeves
Industries and Reeves Brothers to pay dividends or make advances or
distributions to their stockholders, including the Corporation, pursuant to the
terms of the loan agreements and the indentures covering existing public
indebtedness. The Corporation has not paid dividends since 1958.
FINANCIAL INFORMATION
The Corporation hereby incorporates by reference the information on
industry segments contained in Part 1, Item 1, pages 1 through 6 of the portions
of the Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 which are attached hereto as an Exhibit (the "1992 10-K"), the
information on foreign operations contained in Part 1, Item 1, pages 5 and 6 of
the 1992 10-K, the Selected Financial Data contained in Part II, Item 6, pages 7
through 9 of the 1992 10-K, the Financial Statements and notes thereto contained
in Part II, Item 8, following page 19 of the 1992 10-K, the report of
independent accountants thereon contained in Part II, Item 8, page 19 of the
1992 10-K, the Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in Part II, Item 7, pages 10 through 16 of the
1992 10-K, the information on industry segments contained in Part I, Item 1,
pages 3 through 12 of the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 (the "1993 10-K"), the information on
foreign operations contained in Part I, Item 1, page 11 of the 1993 10-K, the
Selected Financial Data contained in Part II, Item 6, pages 15 through 17 of the
1993 10-K, the Financial Statements and the notes thereto contained in Part II,
Item 8, pages 23 through 43 of the 1993 10-K, the report of independent
accountants thereon contained in Part II, Item 8, page 22 of the 1993 10-K, the
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Item 7, pages 17 through 21 of the 1993 10-K, the
financial information contained in Part I, Item 1, pages 3 through 11 of the
Corporation's Quarterly Report on Form 10-Q for the quarterly period ended April
3, 1994 (the "April 10-Q") and the Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in Part I, Item 2, pages
12 through 15 of the April 10-Q.
BOARD OF DIRECTORS, EXECUTIVE OFFICERS,
AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of April 3,
1994 known to the Corporation regarding the directors, executive officers and
principal stockholders of the Corporation and their beneficial ownership of
Existing Shares. Each person set forth in the table below is a United States
citizen. The business address of each of Mr. Augustus I. duPont, Ms. Jennifer
H. Fray and Messrs. Douglas B. Hart, James W. Hart, James W. Hart, Jr., Steven
W. Hart and Joseph P. O'Brien is c/o Hart Holding Company Incorporated, 1120
Boston Post Road, Darien, Connecticut 06820. The business address of Anthony L.
Cartagine is 104 West 40th Street, New York, New York 10018. The business
address of each of Messrs. V. William Lenoci and Patrick M. Walsh is c/o Reeves
Industries, Inc., Highway 29 South, P.O. Box 1898, Spartanburg, South Carolina
29304.
The directors, executive officers and principal stockholders and
information with respect to the occupation and employment during the last five
years of such persons, as applicable, are set forth below:
Name Position Age as of Amount Of Percentage
January 1, 1993 Beneficial Common Stock
Ownership of
Common Stock
Anthony L. Cartagine
Vice President of
Reeves Industries
and Reeves;
President-Apparel
Textile Group of
Reeves 59 1,000 0%
Augustus I. duPont
Vice President and
General Counsel of
Reeves Industries
and Reeves 42 0 0%
Jennifer H. Fray
Secretary and
General Counsel
of the Corporation;
Secretary
and Assistant General
Counsel
of Reeves Industries
and Reeves 29 0 0%
Douglas B. Hart Senior Vice President
-Operations
of Reeves Industries
and Reeves 31 0 0%
James W. Hart (1)(2)
Director, Chairman
of the Board, President,
Chief Executive Officer,
Chief Operating Officer
and Chief Financial Officer
of the Corporation;
Chairman of the Board and
Director of Reeves
Industries
and Reeves 60 13,623,507 94.6%
Name Position Age as of Amount Of Percentage
January 1, 1993 Beneficial Common Stock
Ownership of
Common Stock
James W. Hart, Jr.(3)
President, Chief
Executive Officer and
Chief Operating Officer
of Reeves Industries and
Reeves 40 60,300 0.5%
Steven W. Hart (4)
Executive Vice President,
Chief Financial Officer and
Treasurer of Reeves Industries
and Reeves 37 240,300 1.9%
V. William Lenoci Vice President of
Reeves Industries
and Reeves; President
and Chief Executive Officer-
Industrial Coated Fabrics
Group of Reeves 58 5,000 0%
Joseph P. O'Brien Vice President-Finance
of Reeves
Industries and
Reeves 53 0 0%
Richard A. Vollmer Director of the
Corporation 66 0 0%
Patrick M. Walsh Vice President-
Administration of
Reeves Industries
and Reeves 53 0 0%
All Officers and 13,930,107 96%
Directors as a Group
(11 persons) (1)
______________
(1) As of April 3, 1994, James W. Hart is the beneficial owner of 13,623,507
shares of Common Stock (approximately 95%) of which (i) 12,123,507 shares are
owned directly, and (ii) 1,500,000 shares are subject to a presently exercisable
option (the "Hart Holding Option") issued in November 1993. The Hart Holding
Option expires on December 31, 2028 and provides for the issuance of up to
4,000,000 shares upon exercise of options as follows: 1,500,000 immediately
exercisable at $2.25 per share; 1,500,000 exercisable one year from grant date
at $2.50 per share; and 1,000,000 exercisable two years from grant date at $2.75
per share. James W. Hart may be deemed the controlling person of the
Corporation.
(2) On January 26, 1994, James W. Hart was granted an option to purchase up to
3,800,000 shares of common stock of Reeves Industries, which has an expiration
date of December 31, 2023. The option is exercisable at $.56 per share for
1,400,000 shares (exercisable immediately), $.75 per share for 1,400,000 shares
(exercisable one year from grant date) and $1.00 per share for 1,000,000 shares
(exercisable two years from grant date).
(3) As of April 3, 1994, James W. Hart, Jr. is the beneficial owner of 60,300
shares of Common Stock (representing less than 1% of such outstanding Common
Stock), of which 300 shares are owned directly and the balance is subject to a
presently exercisable option.
(4) As of April 3, 1994, Steven W. Hart is the beneficial owner of 240,300
shares of Common Stock (1.9%) of which 180,300 shares are owned directly and the
balance is subject to a presently exercisable option.
Mr. Cartagine has been with Reeves Brothers since 1964. He was named
President - Greige Goods Division of the Apparel Textile Group in 1984 and
President of the Apparel Textile Group in 1986. He was named Vice President of
Reeves Industries and Reeves in 1988.
Mr. duPont joined Reeves Industries and Reeves in May 1994 as Vice
President and General Counsel. From 1987 to 1992, Mr. duPont served as Vice
President, General Counsel and Secretary of Sprague Technologies, Inc. ("STI"),
a manufacturer of electronic components, and during 1993 he served as Vice
President, General Counsel and Secretary of American Annuity Group, Inc., an
insurance holding company and successor by merger to STI.
Ms. Fray joined the Corporation, Reeves Industries and Reeves in
September 1992 as Assistant General Counsel. In 1992, she was named Secretary
of the Corporation, Reeves Industries and Reeves. In June 1994, she was named
General Counsel of the Corporation. From 1990 to 1992, Ms. Fray was engaged in
studies leading to a Master of Laws Degree in Taxation from Boston University,
from 1990 to 1991 she was employed as a Tax Associate at Coopers & Lybrand,
certified public accountants in Boston, Massachusetts and from 1987 to 1990 she
was engaged in studies leading to a Juris Doctor Degree from Suffolk University.
Mr. Douglas B. Hart served as a Director of Reeves Industries and
Reeves from 1991 to 1992. He was named Vice President - Real Estate in 1989,
Senior Vice President in 1991 and Senior Vice President - Operations in 1992 of
Reeves Industries and Reeves. Mr. Hart served as a Director of the Corporation
from 1991 to 1992, as Vice President - Real Estate of the Corporation from 1988
to 1991 and as Senior Vice President of the Corporation from 1991 to 1992. In
1992, Mr. Hart became President, Chief Executive Officer and Chief Operating
Officer of Hart Investment Properties Corporation, a wholly-owned diversified
corporate investment entity of the Corporation, with current holdings in real
estate. Prior to 1989, Mr. Hart was Assistant Vice President at Sentinel Real
Estate Corporation in New York, an owner/developer of malls, shopping centers,
office buildings and single family residential communities throughout the United
States.
Mr. James W. Hart has been Director of Reeves Industries and Reeves
since 1986 and became Chairman of the Board in 1987. Mr. Hart served as
President and Chief Executive Officer of Reeves Industries and Reeves from 1988
until 1992. Mr. Hart has been a Director, President, Chief Executive Officer,
and Chairman of the Board of the Corporation since 1975 and became Chief
Operating Officer and Chief Financial Officer of the Corporation in 1992.
Mr. James W. Hart, Jr. served as a Director of Reeves Industries and
Reeves from 1986 to 1992. Mr. Hart became Vice President of Reeves Industries
and Reeves in 1987 and was named Senior Vice President - Operations in 1988 and
Executive Vice President and Chief Operating Officer in 1989. In 1992, he was
named President, Chief Executive Officer and Chief Operating Officer of Reeves
Industries and Reeves. Mr. Hart served as a Director of the Corporation from
1984 to 1992. He served as Vice President of the Corporation from 1984 to 1992,
Senior Vice President - Operations of the Corporation from 1988 to 1992 and as
Executive Vice President and Chief Operating Officer of the Corporation from
1989 to 1992.
Mr. Steven W. Hart served as a Director of Reeves Industries and
Reeves from 1986 to 1992. He became Vice President of Reeves Industries and
Reeves in 1987 and was named Senior Vice President and Chief Financial Officer
in 1988, Executive Vice President and Chief Financial Officer in 1989 and
Treasurer in 1994. Mr. Hart served as a Director, Treasurer and Chief Financial
Officer of the Corporation from 1984 to 1988, Senior Vice President of the
Corporation from 1988 to 1989 and Executive Vice President of the Corporation
from 1989 to 1992. Mr. Hart joined the Corporation in 1983 as Vice President -
Strategic Planning.
Mr. Lenoci has been with Reeves since 1967. He was named President -
Industrial Coated Fabrics Group in 1986 and Vice President of Reeves Industries
and Reeves in 1988. In 1990 he became Chief Executive Officer of the Industrial
Coated Fabrics Group.
Mr. O'Brien joined Reeves Industries and Reeves in 1993 as Vice
President - Finance. From 1980 to 1993, Mr. O'Brien served as Vice President -
Finance of Howmet Corporation, an integrated manufacturer of components for gas
turbine jet engines and aircraft structural parts.
Mr. Richard A. Vollmer has been a Director of the Corporation since
1983. Mr. Vollmer served as a Director of Reeves Industries and Reeves from
1987 to 1989. From 1989 to 1992, Mr. Vollmer served as Director - Financial
Planning of Reeves Industries and Reeves. In 1992, Mr. Vollmer retired from
Reeves Industries and Reeves. Prior to 1989, Mr. Vollmer was an independent
financial consultant.
Mr. Walsh has been with Reeves since 1987, as Director of Human
Resources. In 1990, he was elected Vice President - Administration of Reeves
and, in 1993, Vice President - Administration of Reeves Industries.
Mr. James W. Hart is the father of Ms. Fray and Messrs. Douglas B.
Hart, James W. Hart, Jr. and Steven W. Hart.
Directors of the Corporation are elected at each annual meeting of the
stockholders. The term of office of each director is from the time of his
election and qualification until the next annual meeting of stockholders and
until his successor shall have been duly elected and qualified, unless such
director shall have earlier been removed. Executive officers serve at the
discretion of the Boards of Directors of the Corporation, Reeves Industries and
Reeves, as applicable.
One of the two directors is an officer of the Corporation and
beneficially owns approximately 95% of the Existing Shares. One director
recently retired as an officer of Reeves Industries and Reeves and such director
does not own any Existing Shares.
ADDITIONAL INFORMATION
The Corporation is subject to the informational requirements of the
Exchange Act and in accordance therewith files periodic and current reports
and other information with the Commission. The Corporation has filed a
Schedule 13E3 with the Commission in connection with the proposed Reverse
Stock Split and a Schedule 13E-4 with the Commission in connection with
the Purchase Offer. This Information Statement does not contain all of
the information set forth in the Schedule 13E-3 and the Schedule 13E-
4, certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. The Schedule 13E-3, including exhibits,
Schedule 13E-4, including exhibits, and other filings made by the
Corporation as described above, may be inspected without charge, and copies
may be obtained at prescribed rates, at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 FifthStreet, N.W.,
Washington, D.C. 20549; 14th Floor, 75 Park Place, New York 10007;
and 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such materials can also be obtained by mail, upon payment of the
Commission's prescribed rates, from the Commission's Public Reference Section
at 450 Fifth Street, N.W., Washington, D.C. 20549.
By Order of the Board of Directors
James W. Hart
Chairman
