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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
------------------------
ENVIROTEST SYSTEMS CORP.
(Name of Issuer)
ENVIROTEST SYSTEMS CORP.
(Name of Person(s) Filing Statement)
------------------------
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
------------------------
29409W105
(Cusip Number of Class of Securities)
ENVIROTEST SYSTEMS CORP.
246 SOBRANTE WAY
SUNNYVALE, CA 94086
(408) 774-6300
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
------------------------
COPY TO:
NICHOLAS P. SAGGESE, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE
LOS ANGELES, CA 90071-3144
(213) 687-5000
------------------------
AUGUST 19, 1997
(Date Tender Offer First Published, Sent or Given to Security Holders)
------------------------
CALCULATION OF FILING FEE
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TRANSACTION VALUATION* AMOUNT OF FILING FEE
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$20,000,000.00 $4,000.00
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* Calculated solely for purposes of determining the filing fee, based upon the
purchase of 4,444,444 shares of Class A Common Stock at the maximum tender
offer price per share of $4.50.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
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Amount Previously Paid: N/A Filing Party:
N/A
Form or Registration No.: N/A Date File: N/A
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This Issuer Tender Offer Statement on Schedule 13E-4 (the "Statement")
relates to the tender offer by Envirotest Systems Corp., a Delaware corporation
("Envirotest" or the "Company"), to purchase up to 4,444,444 shares of its Class
A Common Stock, par value $.01 per share (the "Shares"), at prices, net to the
seller in cash, not greater than $4.50 nor less than $3.75 per Share, upon the
terms and subject to the conditions set forth in the Offer to Purchase, dated
August 19, 1997 (the "Offer to Purchase") and the related Letter of Transmittal
(which, as they may be amended from time to time, are herein collectively
referred to as the "Offer"). Copies of the Offer to Purchase and the Letter of
Transmittal are filed as Exhibits (a)(1) and (a)(2), respectively, to this
Statement.
ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer is Envirotest Systems Corp., a Delaware
corporation. The address of its principal executive offices is 246 Sobrante Way,
Sunnyvale, California 94086.
(b) The information set forth in "Introduction," "Section 1. Number of
Shares; Proration" and "Section 8. Interests of Directors and Executive
Officers; Transactions and Arrangements Concerning the Shares" in the Offer to
Purchase is incorporated herein by reference. The Offer is being made to all
holders of Shares, including executive officers, directors and affiliates of the
Company. The Company has been advised that no executive officer intends to
tender Shares pursuant to the Offer. The Company has been advised, however, that
certain of its directors holding an aggregate of 2,664,021 Shares have reserved
the right to tender shares pursuant to the Offer but have not yet decided
whether to do so. The Company does not anticipate that such directors will
inform the Company if and when any decision to tender Shares is made. The
Company will not supplement or amend the Offer if any such directors actually
tender Shares in the Offer.
(c) The information set forth in "Introduction" and "Section 6. Price Range
of Shares" in the Offer to Purchase is incorporated herein by reference.
(d) This Statement is being filed by the Issuer.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth in "Section 9. Source and Amount of
Funds" in the Offer to Purchase is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
(a)-(j) The information set forth in "Introduction," "Section 7. Background
and Purpose of the Offer; Certain Effects of the Offer," "Section 8. Interests
of Directors and Executive Officers; Transactions and Arrangements Concerning
the Shares," "Section 9. Source and Amount of Funds" and "Section 11. Effects of
the Offer on the Market for Shares; Registration Under the Exchange Act" in the
Offer to Purchase is incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth in "Section 8. Interests of Directors and
Executive Officers; Transactions and Arrangements Concerning the Shares" in the
Offer to Purchase is incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth in "Introduction," "Section 7. Background and
Purpose of the Offer; Certain Effects of the Offer" and "Section 8. Interests of
Directors and Executive Officers; Transactions and Arrangements Concerning the
Shares" in the Offer to Purchase is incorporated herein by reference.
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ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in "Introduction" and "Section 15. Fees and
Expenses" in the Offer to Purchase is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
(a)-(b) The information set forth in "Section 10. Certain Information About
the Company" in the Offer to Purchase is incorporated herein by reference. The
information set forth on (i) pages 43 through 72 of the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996, filed as Exhibit
(g)(1) hereto; (ii) pages 43 through 70 of the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995, filed as Exhibit (g)(2)
hereto; (iii) pages 3 through 8 of the Company's Quarterly Report for the
quarter ended June 30, 1997, filed as Exhibit (g)(3) hereto; and (iv) pages 3
through 8 of the Company's Quarterly Report for the quarter ended June 30, 1996,
filed as Exhibit (g)(4) hereto; in each case, is incorporated herein by
reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Not applicable.
(b) The information set forth in "Section 12. Certain Legal Matters;
Regulatory and Foreign Approvals" in the Offer to Purchase is incorporated
herein by reference.
(c) The information set forth in "Section 11. Effects of the Offer on the
Market for Shares; Registration Under the Exchange Act" in the Offer to Purchase
is incorporated herein by reference.
(d) Not applicable.
(e) The information set forth in the Offer to Purchase and the related
Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1)
and (a)(2), respectively, is incorporated herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
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(a)(1) Form of Offer to Purchase dated August 19, 1997.
(a)(2) Form of Letter of Transmittal.
(a)(3) Form of Notice of Guaranteed Delivery.
(a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees.
(a)(5) Form of Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
(a)(6) Form of Letter dated August 19, 1997, to shareholders from the Chairman of the
Board of Directors of the Company.
(a)(7) Press Release issued by the Company dated August 13, 1997.
(a)(8) Form of Press Release issued by the Company dated August 19, 1997.
(a)(9) Form of Summary Advertisement dated August 19, 1997.
(a)(10) Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9.
(b) Not applicable.
(c)(1) Stockholders' Agreement, dated as of March 30, 1993.
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(c)(2) Amended and Restated Stockholders' Agreement dated as of April 10, 1992.
(c)(3) Amendment No. 1 to Amended and Restated Stockholders' Agreement dated as of
November 10, 1992.
(c)(4) Amendment No. 2 to Amended and Restated Stockholders' Agreement dated as of
March 30, 1993.
(d) Not Applicable.
(e) Not Applicable.
(f) Not Applicable.
(g)(1) Pages 43 through 72 of the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996.
(g)(2) Pages 43 through 70 of the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995.
(g)(3) Pages 3 through 8 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(g)(4) Pages 3 through 8 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996.
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4
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this Statement is true, complete and correct.
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ENVIROTEST SYSTEMS CORP.
By: /s/ CHESTER C. DAVENPORT
-----------------------------------------
Name: Chester C. Davenport
Title: Chairman
</TABLE>
Dated: August 19, 1997
5
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INDEX TO EXHIBITS
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ITEM DESCRIPTION PAGE
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(a)(1) Form of Offer to Purchase dated August 19, 1997..................................................
(a)(2) Form of Letter of Transmittal....................................................................
(a)(3) Form of Notice of Guaranteed Delivery............................................................
(a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.........
(a)(5) Form of Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees.................................................................................
(a)(6) Form of Letter dated August 19, 1997 to shareholders from the Chairman of the Board of Directors
of the Company.................................................................................
(a)(7) Press Release issued by the Company dated August 13, 1997........................................
(a)(8) Form of Press Release issued by the Company dated August 19, 1997................................
(a)(9) Form of Summary Advertisement dated August 19, 1997..............................................
(a)(10) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9............
(b) Not Applicable...................................................................................
(c)(1) Stockholders' Agreement, dated as of March 30, 1993..............................................
(c)(2) Amended and Restated Stockholders' Agreement dated as of April 10, 1992..........................
(c)(3) Amendment No. 1 to Amended and Restated Stockholders' Agreement dated as of November 10, 1992....
(c)(4) Amendment No. 2 to Amended and Restated Stockholders' Agreement dated as of March 30, 1993.......
(d) Not Applicable...................................................................................
(e) Not applicable...................................................................................
(f) Not applicable...................................................................................
(g)(1) Pages 43 through 72 of the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.............................................................................
(g)(2) Pages 43 through 70 of the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.............................................................................
(g)(3) Pages 3 through 8 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997...........................................................................................
(g)(4) Pages 3 through 8 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996...........................................................................................
</TABLE>
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EXHIBIT (a)(1)
ENVIROTEST SYSTEMS CORP.
Offer to Purchase for Cash Up to 4,444,444 Shares
of its Class A Common Stock Par Value $.01 Per Share
at a Purchase Price not Greater Than $4.50
Nor Less Than $3.75 Per Share
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON SEPTEMBER 17, 1997, UNLESS THE OFFER IS EXTENDED.
ENVIROTEST SYSTEMS CORP., A DELAWARE CORPORATION ("ENVIROTEST" OR THE
"COMPANY"), INVITES ITS SHAREHOLDERS TO TENDER SHARES OF ITS CLASS A COMMON
STOCK, PAR VALUE $.01 PER SHARE (THE "SHARES"), TO THE COMPANY AT PRICES NOT
GREATER THAN $4.50 NOR LESS THAN $3.75 PER SHARE IN CASH, AS SPECIFIED BY
TENDERING SHAREHOLDERS, UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH
IN THIS OFFER TO PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL (WHICH
TOGETHER CONSTITUTE THE "OFFER").
THE COMPANY WILL, UPON THE TERMS AND SUBJECT TO THE CONDITIONS OF THE OFFER,
SELECT THE LOWEST SINGLE PER SHARE PRICE (NOT GREATER THAN $4.50 NOR LESS THAN
$3.75 PER SHARE), NET TO THE SELLER IN CASH (THE "PURCHASE PRICE"), THAT WILL
ALLOW IT TO BUY 4,444,444 SHARES (OR SUCH LESSER NUMBER OF SHARES AS ARE VALIDLY
TENDERED AND NOT WITHDRAWN) PURSUANT TO THE OFFER INCLUDING THE PROCEDURE
PURSUANT TO WHICH SHARES WILL BE ACCEPTED FOR PAYMENT AND THE PRORATION TERMS
DESCRIBED HEREIN. SHARES TENDERED AT PRICES IN EXCESS OF THE PURCHASE PRICE AND
SHARES NOT PURCHASED BECAUSE OF PRORATION WILL BE RETURNED. TENDERED SHARES MAY
BE WITHDRAWN AT ANY TIME UNTIL 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 17,
1997, UNLESS THE OFFER IS EXTENDED BY THE COMPANY AND, UNLESS PREVIOUSLY
PURCHASED, AFTER 12:00 MIDNIGHT, NEW YORK CITY TIME ON OCTOBER 14, 1997.
--------------
THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED.
THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE SECTION 5.
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THE SHARES ARE LISTED AND TRADED ON THE AMERICAN STOCK EXCHANGE, INC. UNDER THE
SYMBOL "ENR". ON AUGUST 12, 1997, THE LAST FULL TRADING DAY ON THE AMERICAN
STOCK EXCHANGE PRIOR TO THE ANNOUNCEMENT OF THE OFFER, THE CLOSING PER SHARE
SALES PRICE AS REPORTED ON THE AMERICAN STOCK EXCHANGE COMPOSITE TAPE was $3 5/8
per Share. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE
SHARES. SEE SECTION 6.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE OFFER. HOWEVER,
SHAREHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO,
HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH SHARES SHOULD BE
TENDERED. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATION TO ANY SHAREHOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING SHARES. THE COMPANY HAS BEEN ADVISED THAT NO EXECUTIVE OFFICER INTENDS
TO TENDER SHARES PURSUANT TO THE OFFER. THE COMPANY HAS BEEN ADVISED, HOWEVER,
THAT CERTAIN OF ITS DIRECTORS HAVE RESERVED THE RIGHT TO TENDER SHARES PURSUANT
TO THE OFFER BUT HAVE NOT YET DECIDED WHETHER TO DO SO. SEE SECTION 8.
--------------
THE DEALER MANAGER FOR THE OFFER IS:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
--------------
AUGUST 19, 1997
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IMPORTANT
Any shareholders desiring to tender all or any portion of their Shares
should either (i) complete and sign the Letter of Transmittal or a facsimile
thereof in accordance with the instructions in the Letter of Transmittal, mail
or deliver it with any required signature guarantee and any other required
documents to Continental Stock Transfer & Trust Company (the "Depositary"), and
either mail or deliver the stock certificates for such Shares to the Depositary
(with all such other documents) or follow the procedure for book-entry delivery
set forth in Section 2, or (ii) request a broker, dealer, commercial bank, trust
company or other nominee to effect the transaction for such shareholder. A
shareholder having Shares registered in the name of a broker, dealer, commercial
bank, trust company or other nominee must contact that broker, dealer,
commercial bank, trust company or other nominee if such shareholder desires to
tender such Shares. Shareholders who desire to tender Shares and whose
certificates for such Shares are not immediately available or who cannot comply
with the procedure for book-entry transfer on a timely basis or whose other
required documentation cannot be delivered to the Depositary, in any case, by
the expiration of the Offer should tender such Shares by following the
procedures for guaranteed delivery set forth in Section 2. TO EFFECT A VALID
TENDER OF SHARES, SHAREHOLDERS MUST VALIDLY COMPLETE THE LETTER OF TRANSMITTAL,
INCLUDING THE SECTION RELATING TO THE PRICE AT WHICH THEY ARE TENDERING SHARES.
Questions and requests for assistance or for additional copies of this Offer
to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may
be directed to the Information Agent at its address and telephone number set
forth on the back cover of this Offer to Purchase.
2
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SUMMARY
THIS GENERAL SUMMARY IS PROVIDED FOR THE CONVENIENCE OF THE COMPANY'S
SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT AND
MORE SPECIFIC DETAILS CONTAINED IN THIS OFFER TO PURCHASE AND THE RELATED LETTER
OF TRANSMITTAL AND ANY AMENDMENTS HERETO OR THERETO.
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Number of Shares to be Purchased............. 4,444,444 Shares (or such lesser number of
Shares as are validly tendered and not
withdrawn).
Purchase Price............................... The Company will select the lowest single per
Share net cash price, not greater than $4.50
nor less than $3.75 per Share, that will
allow it to buy 4,444,444 Shares (or such
lesser number of Shares as are validly
tendered and not withdrawn) pursuant to the
Offer. Each shareholder desiring to tender
Shares must specify in the Letter of
Transmittal the minimum price (not greater
than $4.50 nor less than $3.75 per Share) at
which such shareholder is willing to have
Shares purchased by the Company.
How to Tender Shares......................... See Section 2. Call the Information Agent or
consult your broker for assistance.
Brokerage Commissions........................ None.
Stock Transfer Tax........................... None, if payment is made to the registered
holder.
Expiration and Proration Dates............... September 17, 1997, at 5:00 p.m., New York
City time, unless extended by the Company.
Proration.................................... In the event that proration of tendered
Shares is required, proration for each
shareholder tendering Shares shall be based
on the ratio of the number of Shares tendered
by such shareholder at or below the Purchase
Price to the total number of Shares tendered
by all shareholders at or below the Purchase
Price.
Payment Date................................. As soon as practicable after the Expiration
Date.
Position of the Company and its Directors.... Neither the Company nor its Board of
Directors makes any recommendation to any
shareholder as to whether to tender or
refrain from tendering Shares.
Withdrawal Rights............................ Tendered Shares may be withdrawn at any time
until 5:00 p.m., New York City time, on
September 17, 1997, unless the Offer is
extended by the Company and, unless
previously purchased, after 12:00 Midnight,
New York City time, on October 14, 1997. See
Section 3.
Further Developments Regarding the Offer..... Call the Information Agent or consult your
broker.
Intention of Largest Shareholder............. Chester Davenport, the Chairman of the Board
of Directors of the Company, who beneficially
owns
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an aggregate of 3,531,145 Shares,
representing approximately 22.7% of the
outstanding Shares (including Shares issuable
upon exercise of Options (as defined below)
held by Mr. Davenport exercisable within
sixty days and Shares issuable upon the
conversion of the Company's Class B Common
Stock, par value $.01 per share (the "Class B
Shares"), held by Mr. Davenport) as of August
15, 1997, has advised the Company that he
does not intend to tender any Shares pursuant
to the Offer. If the Company purchases
4,444,444 Shares pursuant to the Offer, and
Mr. Davenport does not tender any Shares, the
beneficial ownership of Mr. Davenport would
increase to approximately 31.7% of the Shares
outstanding immediately after the Offer. As a
result of Mr. Davenport's ownership of Class
B Shares, which have 1.75 votes per share, as
of August 15, 1997, Mr. Davenport controls,
directly or indirectly, approximately 27.2%
of the vote on all matters (other than with
respect to the election of directors)
presented to shareholders entitled to vote
thereon. If the Company purchases 4,444,444
Shares pursuant to the Offer, and Mr.
Davenport does not tender any Shares, such
voting power would be increased to
approximately 37.2% immediately after the
Offer. See Section 8.
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THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON
BEHALF OF THE COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM
TENDERING SHARES PURSUANT TO THE OFFER. THE COMPANY HAS NOT AUTHORIZED ANY
PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH
THE OFFER ON BEHALF OF THE COMPANY OTHER THAN THOSE CONTAINED IN THIS OFFER TO
PURCHASE OR IN THE LETTER OF TRANSMITTAL. DO NOT RELY ON ANY SUCH RECOMMENDATION
OR ANY SUCH INFORMATION OR REPRESENTATIONS, IF GIVEN OR MADE, AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
TABLE OF CONTENTS
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SECTION PAGE
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SUMMARY......................................................................................................... 3
INTRODUCTION.................................................................................................... 6
THE OFFER....................................................................................................... 7
1. Number of Shares; Proration.......................................................................... 7
2. Procedure for Tendering Shares....................................................................... 9
3. Withdrawal Rights.................................................................................... 12
4. Purchase of Shares and Payment of Purchase Price..................................................... 13
5. Certain Conditions of the Offer...................................................................... 14
6. Price Range of Shares................................................................................ 16
7. Background and Purpose of the Offer; Certain Effects of the Offer.................................... 16
8. Interests of Directors and Executive Officers; Transactions and Arrangements Concerning the Shares... 19
9. Source and Amount of Funds........................................................................... 21
10. Certain Information about the Company................................................................ 21
11. Effects of the Offer on the Market for Shares; Registration under the Exchange Act................... 28
12. Certain Legal Matters; Regulatory and Foreign Approvals.............................................. 28
13. Certain Federal Income Tax Consequences.............................................................. 29
14. Extension of the Offer; Termination; Amendments...................................................... 31
15. Fees and Expenses.................................................................................... 31
16. Miscellaneous........................................................................................ 32
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TO THE HOLDERS OF SHARES OF CLASS A COMMON STOCK OF
ENVIROTEST SYSTEMS CORP.:
INTRODUCTION
Envirotest Systems Corp., a Delaware corporation ("Envirotest" or the
"Company"), invites its shareholders to tender shares of its Class A Common
Stock, par value $.01 per share (the "Shares"), to the Company at prices not
greater than $4.50 nor less than $3.75 per Share in cash, as specified by
tendering shareholders, upon the terms and subject to the conditions set forth
in this Offer to Purchase and the related Letter of Transmittal (which together
constitute the "Offer").
The Company will, upon the terms and subject to the conditions of the Offer,
select the lowest single per Share price (not greater than $4.50 nor less than
$3.75 per Share), net to the seller in cash (the "Purchase Price"), that will
allow it to buy 4,444,444 Shares (or such lesser number of Shares as are validly
tendered and not withdrawn) pursuant to the Offer including the procedure
pursuant to which Shares will be accepted for payment and the proration terms
described herein. Shares tendered at prices in excess of the Purchase Price and
Shares not purchased because of proration will be returned.
THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING
TENDERED. THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE
SECTION 5.
The Company will return at its own expense all Shares not purchased pursuant
to the Offer, including Shares tendered at prices greater than the Purchase
Price and Shares not purchased because of proration. The Purchase Price will be
paid net to the tendering shareholder in cash for all Shares purchased.
Tendering shareholders will not be obligated to pay brokerage commissions,
solicitation fees or, subject to Instruction 7 of the Letter of Transmittal,
stock transfer taxes on the Company's purchase of Shares pursuant to the Offer.
HOWEVER, ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE, SIGN
AND RETURN TO THE DEPOSITARY (AS DEFINED BELOW) THE SUBSTITUTE FORM W-9 THAT IS
INCLUDED WITH THE LETTER OF TRANSMITTAL MAY BE SUBJECT TO REQUIRED BACKUP
FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS PROCEEDS PAYABLE TO SUCH
SHAREHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE SECTION 2. In addition,
the Company will pay all fees and expenses of Donaldson, Lufkin & Jenrette
Securities Corporation (the "Dealer Manager"), D.F. King & Co., Inc. (the
"Information Agent") and Continental Stock Transfer & Trust Company (the
"Depositary") in connection with the Offer. See Section 15.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE OFFER. HOWEVER,
SHAREHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO,
HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH SHARES SHOULD BE
TENDERED. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING SHARES. THE COMPANY HAS BEEN ADVISED THAT NO EXECUTIVE OFFICER INTENDS
TO TENDER SHARES PURSUANT TO THE OFFER. THE COMPANY HAS BEEN ADVISED, HOWEVER,
THAT CERTAIN OF ITS DIRECTORS HOLDING AN AGGREGATE OF 2,664,021 SHARES HAVE
RESERVED THE RIGHT TO TENDER SHARES PURSUANT TO THE OFFER BUT HAVE NOT YET
DECIDED WHETHER TO DO SO. SEE SECTION 8.
The Company's Board of Directors believes that the Company's financial
condition and outlook and current market conditions make this an attractive time
to repurchase a portion of the outstanding Shares. In addition, the Board of
Directors believes that the Offer is in the best interest of the Company and its
shareholders and it further believes that it will enhance shareholder value in
the short term and the long
6
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term. In addition, the Offer affords to those shareholders who desire liquidity
an opportunity to sell all or a portion of their Shares without the usual
transaction costs associated with open market sales.
The Offer provides shareholders who are considering a sale of all or a
portion of their Shares the opportunity to determine the price or prices (not
greater than $4.50 nor less than $3.75 per Share) at which they are willing to
sell their Shares and, if any such Shares are purchased pursuant to the Offer,
to sell those Shares for cash to the Company. Shareholders who determine not to
accept the Offer will increase their proportionate interest in the Company's
equity, and thus in the Company's future earnings and assets, subject to the
Company's right to issue additional Shares and other equity securities in the
future. See Section 8.
The Company has obtained the requisite consents from the holders of the
Company's 9 1/8% Senior Notes due 2001 (the "9 1/8% Notes") and 9 5/8% Senior
Subordinated Notes due 2003 (the "9 5/8% Notes") to certain amendments to the
indentures governing such notes, which amendments are necessary to permit the
Company to repurchase the Shares pursuant to the Offer. Such amendments,
however, will not become operative until an offer to purchase up to $50 million
aggregate principal amount of the 9 1/8% Notes expires, regardless of the amount
of the 9 1/8% Notes tendered or acquired. As a result, concurrently herewith,
holders of the 9 1/8% Notes will be invited to tender up to $50 million
aggregate principal amount of 9 1/8% Notes pursuant to a debt tender offer (the
"9 1/8% Notes Offer") that expires at 5:00 p.m., New York time, on September 17,
1997, the Expiration Date for the Offer. Although the 9 1/8% Notes Offer is not
conditioned upon the consummation of the Offer, the expiration of the 9 1/8%
Notes Offer is a condition precedent to the consummation of the Offer. See
Section 5.
The Company believes that the reduction of the Company's outstanding debt if
the Company purchases any of the $50 million aggregate principal amount of the
9 1/8% Notes, and the resulting reduction in the Company's debt service
requirements, are also in the best interest of the Company and its shareholders
and will enhance shareholder value in the short term and the long term.
As of August 15, 1997, there were 13,204,396 Shares outstanding and
1,029,443 Shares issuable upon exercise of outstanding vested stock options (the
" Class A Options"). As of such date, the Company also had 1,249,749 outstanding
shares of its Class B Common Stock, $.01 par value per share (the "Class B
Shares"), 791,026 shares issuable upon exercise of outstanding vested Class B
Stock Options (the "Class B Options" and, together with the Class A Options, the
"Options") and 2,026,111 shares of its Class C Common Stock, $.01 par value per
share (the "Class C Shares"). The Class B Shares and the Class C Shares are each
convertible into Shares at the option of the holder on a one-for-one basis.
As of August 12, 1997, there were 282 holders of record of the Shares. The
4,444,444 Shares that the Company is offering to purchase represent
approximately 33.7% of the outstanding Shares (approximately 24.3% assuming the
exercise of all outstanding Options and the conversion of all outstanding Class
B Shares and Class C Shares into Shares). The Shares are listed and traded on
the American Stock Exchange, Inc. ("AMEX") under the symbol "ENR." On August 12,
1997, the last full trading day on AMEX prior to the announcement of the Offer,
the closing per Share sales price as reported on the AMEX Composite Tape was
$3 5/8. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE
SHARES.
THE OFFER
1. NUMBER OF SHARES; PRORATION
Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment (and thereby purchase) 4,444,444 Shares or such lesser number
of Shares as are validly tendered prior to the Expiration Date (and not
withdrawn in accordance with Section 3) at a net cash price (determined in the
manner set forth below) not greater than $4.50 nor less than $3.75 per Share.
The term "Expiration Date" means 5:00 p.m., New York City time, on September 17,
1997, unless and until the Company in its sole
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discretion shall have extended the period of time during which the Offer is
open, in which event the term "Expiration Date" shall refer to the latest time
and date at which the Offer, as so extended by the Company, shall expire. See
Section 14 for a description of the Company's right to extend the time during
which the Offer is open and to delay, terminate or amend the Offer. Subject to
the terms and conditions set forth herein, if the Offer is oversubscribed,
Shares tendered at or below the Purchase Price before the Expiration Date will
be eligible for proration. The proration period also expires on the Expiration
Date.
The Company will select the lowest single Purchase Price that will allow it
to buy 4,444,444 Shares (or such lesser number as are validly tendered and not
withdrawn) pursuant to the Offer, taking into account the number of Shares so
tendered and the prices specified by tendering shareholders. The Company
reserves the right, in its sole discretion, to purchase more than 4,444,444
Shares pursuant to the Offer. See Section 14. In accordance with applicable
regulations of the Securities and Exchange Commission (the "Commission"), the
Company may purchase pursuant to the Offer an additional amount of Shares not to
exceed 2% of the outstanding Shares without amending or extending the Offer. If
(i) the Company increases or decreases the price to be paid for the Shares, the
Company increases the number of Shares being sought and such increase in the
number of Shares being sought exceeds 2% of the outstanding Shares, or the
Company decreases the number of Shares being sought and (ii) the Offer is
scheduled to expire at any time earlier than the expiration of a period ending
on the tenth business day from, and including, the date that notice of such
increase or decrease is first published, sent or given in the manner specified
in Section 14, the Offer will be extended until the expiration of such period of
ten business days. For purposes of the Offer, a "business day" means any day
other than a Saturday, Sunday or Federal holiday and consists of the time period
from 12:01 a.m. through 12:00 Midnight, New York City time.
THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING
TENDERED. THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE
SECTION 5.
In accordance with Instruction 5 of the Letter of Transmittal, each
shareholder desiring to tender Shares must specify the price (not greater than
$4.50 nor less than $3.75 per Share) at which such shareholder is willing to
have the Company purchase Shares. As promptly as practicable following the
Expiration Date, the Company will, in its sole discretion, select the lowest
single Purchase Price (not greater than $4.50 nor less than $3.75 per Share)
that it will pay for Shares validly tendered and not withdrawn pursuant to the
Offer, taking into account the number of Shares so tendered and the prices
specified by tendering shareholders. The Company will pay the Purchase Price,
even if such Shares were tendered below the Purchase Price, for all Shares
validly tendered prior to the Expiration Date at prices at or below the Purchase
Price and not withdrawn, upon the terms and subject to the conditions of the
Offer. All Shares not purchased pursuant to the Offer, including Shares tendered
at prices greater than the Purchase Price and Shares not purchased because of
proration, will be returned to the tendering shareholders at the Company's
expense as promptly as practicable following the Expiration Date.
If the number of Shares validly tendered at or below the Purchase Price and
not withdrawn prior to the Expiration Date is less than or equal to 4,444,444
Shares (or such greater number of Shares as the Company may elect to purchase in
accordance with the terms hereof), the Company will, upon the terms and subject
to the conditions of the Offer, purchase at the Purchase Price all Shares so
tendered.
PRORATION. Upon the terms and subject to the conditions of the Offer, in
the event that prior to the Expiration Date more than 4,444,444 Shares (or such
greater number of Shares as the Company may elect to purchase pursuant to the
Offer in accordance with the terms hereof) are validly tendered at or below the
Purchase Price and not withdrawn, the Company will purchase such validly
tendered Shares on a pro rata basis. In the event that proration of tendered
Shares is required, the Company will determine the final proration factor as
promptly as practicable after the Expiration Date. Proration for each
shareholder tendering Shares shall be based on the ratio of the number of Shares
tendered by such shareholder at or below the Purchase Price to the total number
of Shares tendered by all shareholders at or below the
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Purchase Price. This ratio will be applied to shareholders tendering Shares to
determine the number of Shares that will be purchased from each such shareholder
pursuant to the Offer. Although the Company does not expect to be able to
announce the final results of such proration until approximately three business
days after the Expiration Date, it will announce preliminary results of
proration by press release as promptly as practicable after the Expiration Date.
Shareholders can obtain such preliminary information from the Information Agent
and may be able to obtain such information from their brokers.
As described in Section 13, the number of Shares that the Company will
purchase from a shareholder may affect the United States Federal income tax
consequences to the shareholder of such purchase and therefore may be relevant
to a shareholder's decision whether to tender Shares. The Letter of Transmittal
affords each tendering shareholder the opportunity to designate the order of
priority in which Shares tendered are to be purchased in the event of proration.
This Offer to Purchase and the related Letter of Transmittal will be mailed to
record holders of Shares, and will be furnished to brokers, banks and similar
persons whose names, or the names of whose nominees, appear on the Company's
shareholder list or, if applicable, who are listed as participants in a clearing
agency's security position listing for subsequent transmittal to beneficial
owners of Shares.
2. PROCEDURE FOR TENDERING SHARES
PROPER TENDER OF SHARES. For Shares to be validly tendered pursuant to the
Offer:
(i) the certificates for such Shares (or confirmation of receipt of such
Shares pursuant to the procedures for book-entry transfer set forth below),
together with a properly completed and duly executed Letter of Transmittal
(or manually signed facsimile thereof) with any required signature
guarantees or an Agent's Message (defined below), and any other documents
required by the Letter of Transmittal, must be received prior to 5:00 p.m.,
New York City time, on the Expiration Date by the Depositary at its address
set forth on the back cover of this Offer to Purchase; or
(ii) the tendering shareholder must comply with the guaranteed delivery
procedure set forth below.
AS SPECIFIED IN INSTRUCTION 5 OF THE LETTER OF TRANSMITTAL, EACH SHAREHOLDER
DESIRING TO TENDER SHARES PURSUANT TO THE OFFER MUST PROPERLY INDICATE IN THE
SECTION CAPTIONED "PRICE (IN DOLLARS) PER SHARE AT WHICH SHARES ARE BEING
TENDERED" IN THE LETTER OF TRANSMITTAL THE PRICE (IN MULTIPLES OF $.25) AT WHICH
SUCH SHAREHOLDER'S SHARES ARE BEING TENDERED. Shareholders desiring to tender
Shares at more than one price must complete separate Letters of Transmittal for
each price at which Shares are being tendered, except that the same Shares
cannot be tendered (unless properly withdrawn previously in accordance with the
terms of the Offer) at more than one price. IN ORDER TO VALIDLY TENDER SHARES,
ONE AND ONLY ONE PRICE BOX MUST BE CHECKED IN THE APPROPRIATE SECTION ON EACH
LETTER OF TRANSMITTAL.
Tendering shareholders are requested in the Letter of Transmittal to
indicate whether they are tendering Shares on behalf of beneficial owners of
such Shares and, if so, to indicate (i) on behalf of how many beneficial owners
such Shares are being tendered and (ii) the number of such beneficial holders
who are tendering all Shares beneficially owned by such holder. Pursuant to the
listing rules of AMEX, the Company is required to maintain a minimum number of
beneficial owners of its Shares. The information provided by tendering
shareholders will assist the Company in determining whether it will be in
compliance with such requirements following the Offer. See Section 5.
SIGNATURE GUARANTEES AND METHOD OF DELIVERY. Signatures on the Letter of
Transmittal need not be guaranteed if (i) the Letter of Transmittal is signed by
the registered holder(s) of the Shares (which term, for purposes of this
Section, shall include any participant in The Depository Trust Company or the
Philadelphia Depository Trust Company (the "Book-Entry Transfer Facilities")
whose name appears on a
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security position listing as the holder of the Shares) tendered therewith and
such holder(s) have not completed the box entitled "Special Payment
Instructions" or the box entitled "Special Delivery Instructions" on the Letter
of Transmittal, or (ii) such Shares are tendered for the account of a member
firm of a registered national securities exchange, a member of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company
(not a savings bank or savings and loan association) having an office, branch or
agency in the United States (each such entity being hereinafter referred to as
an "Eligible Institution"). In all other cases, all signatures on the Letter of
Transmittal must be guaranteed by a firm that is a recognized member of an
acceptable medallion guarantee program. See Instruction 1 of the Letter of
Transmittal. If a certificate representing Shares is registered in the name of a
person other than the signer of a Letter of Transmittal, or if payment is to be
made, or Shares not purchased or tendered are to be issued, to a person other
than the registered holder, the certificate must be endorsed or accompanied by
an appropriate stock power, in either case signed exactly as the name of the
registered holder appears on the certificate, with the signature on the
certificate or stock power guaranteed by a firm that is a recognized member of
an acceptable medallion guarantee program. In this regard see Section 4 for
information with respect to applicable stock transfer taxes. In all cases,
payment for Shares tendered and accepted for payment pursuant to the Offer will
be made only after timely receipt by the Depositary of certificates for such
Shares (or a timely confirmation of a book-entry transfer of such Shares into
the Depositary's account at one of the Book-Entry Transfer Facilities as
described above), a properly completed and duly executed Letter of Transmittal
(or manually signed facsimile thereof) or an Agent's Message and any other
documents required by the Letter of Transmittal.
THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING SHARE CERTIFICATES, THE
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION AND
RISK OF THE TENDERING SHAREHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
BOOK-ENTRY DELIVERY. The Depositary will establish an account with respect
to the Shares at each of the Book-Entry Facilities for purposes of the Offer
within two business days after the date of this Offer to Purchase. Any financial
institution that is a participant in a Book-Entry Transfer Facility's system may
make book-entry delivery of the Shares by causing such facility to transfer such
Shares into the Depositary's account in accordance with such facility's
procedure for such transfer. Even though delivery of Shares may be effected
through book-entry transfer into the Depositary's account at one of the Book-
Entry Transfer Facilities, a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile thereof) with any required signature
guarantees or an Agent's Message (as defined herein), along with any other
required documents must, in any case, be transmitted to and received by the
Depositary at one of its addresses set forth on the back cover of this Offer to
Purchase prior to the Expiration Date, or the guaranteed delivery procedure set
forth below must be followed. DELIVERY OF THE LETTER OF TRANSMITTAL AND ANY
OTHER REQUIRED DOCUMENTS TO ONE OF THE BOOK-ENTRY TRANSFER FACILITIES DOES NOT
CONSTITUTE DELIVERY TO THE DEPOSITARY.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Depository and forming a part of a timely confirmation of a
book-entry transfer of Shares, which states that DTC has received an express
acknowledgement from the participant in DTC tendering the Shares, that such
participant has received and agrees to be bound by the terms of the Letter of
Transmittal and that the Company may enforce such agreement against the
participant.
GUARANTEED DELIVERY. Shareholders whose Share certificates are not
immediately available, who cannot deliver their Shares and all other required
documents to the Depositary or who cannot complete the procedure for delivery by
book-entry transfer prior to the Expiration Date may tender their Shares
pursuant to the guaranteed delivery procedure set forth below:
(i) such tender must be made by or through an Eligible Institution;
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(ii) a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company must be received
by the Depositary (by hand, mail, overnight courier, telegram or facsimile
transmission), prior to the Expiration Date (indicating the price at which
the Shares are being tendered), including any required signature guarantee
in the form set forth in such Notice of Guaranteed Delivery; and
(iii) the certificates for all physically delivered Shares in proper form
for transfer by delivery, or confirmation of a book-entry transfer into the
Depositary's account at one of the Book-Entry Transfer Facilities of all
Shares delivered electronically, in each case together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) or
an Agent's Message and any other documents required by this Letter of
Transmittal, must be received by the Depositary within five AMEX trading
days after the date the Depositary receives such Notice of Guaranteed
Delivery.
If any tendered Shares are not purchased, or if less than all Shares
evidenced by a shareholder's certificates are tendered, certificates for
unpurchased Shares will be returned as promptly as practicable after the
expiration or termination of the Offer or, in the case of Shares tendered by
book-entry transfer at a Book-Entry Transfer Facility, such Shares will be
credited to the appropriate account maintained by the tendering shareholder at
the appropriate Book-Entry Transfer Facility, in each case without expense to
such shareholder.
BACKUP FEDERAL INCOME TAX WITHHOLDING. Under the Federal income tax backup
withholding rules, unless an exemption applies under the applicable law and
regulations, 31% of the gross proceeds payable to a shareholder or other payee
pursuant to the Offer must be withheld and remitted to the Internal Revenue
Service, unless the shareholder or other payee provides such person's taxpayer
identification number (employer identification number or social security number)
to the Depositary and certifies under penalties of perjury that such number is
correct. Therefore, each tendering shareholder should complete and sign the
Substitute Form W-9 included as part of the Letter of Transmittal so as to
provide the information and certification necessary to avoid backup withholding,
unless such shareholder otherwise establishes to the satisfaction of the
Depositary that the shareholder is not subject to backup withholding. Certain
shareholders (including, among others, all corporations and certain foreign
shareholders (in addition to foreign corporations)) are not subject to these
backup withholding and reporting requirements. In order for a foreign
shareholder to qualify as an exempt recipient, that shareholder must submit an
IRS Form W-8 or a Substitute Form W-8, signed under penalties of perjury,
attesting to that shareholder's exempt status. Such statements can be obtained
from the Depositary. See Instructions 9 and 10 of the Letter of Transmittal.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING EQUAL TO 31% OF THE GROSS
PAYMENTS MADE TO SHAREHOLDERS FOR SHARES PURCHASED PURSUANT TO THE OFFER, EACH
SHAREHOLDER WHO DOES NOT OTHERWISE ESTABLISH AN EXEMPTION FROM SUCH WITHHOLDING
MUST PROVIDE THE DEPOSITARY WITH THE SHAREHOLDER'S CORRECT TAXPAYER
IDENTIFICATION NUMBER AND PROVIDE CERTAIN OTHER INFORMATION BY COMPLETING THE
SUBSTITUTE FORM W-9 INCLUDED WITH THE LETTER OF TRANSMITTAL.
For a discussion of certain Federal income tax consequences to tendering
shareholders, see Section 13.
TENDERING SHAREHOLDER'S REPRESENTATION AND WARRANTY; COMPANY'S ACCEPTANCE
CONSTITUTES AN AGREEMENT. It is a violation of Rule 14e-4 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), for a person
acting alone or in concert with others, directly or indirectly, to tender Shares
for such person's own account unless at the time of tender and at the Expiration
Date such person has a "net long position" equal to or greater than the amount
tendered in (i) the Shares and will deliver or cause to be delivered such Shares
for the purpose of tender to the Company within the period specified in the
Offer, or (ii) other securities immediately convertible into, exercisable for or
exchangeable into Shares
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("Equivalent Securities") and, upon the acceptance of such tender, will acquire
such Shares by conversion, exchange or exercise of such Equivalent Securities to
the extent required by the terms of the Offer and will deliver or cause to be
delivered such Shares so acquired for the purpose of tender to the Company
within the period specified in the Offer. Rule 14e-4 also provides a similar
restriction applicable to the tender or guarantee of a tender on behalf of
another person. A tender of Shares made pursuant to any method of delivery set
forth herein will constitute the tendering shareholder's representation and
warranty to the Company that (i) such shareholder has a "net long position" in
Shares or Equivalent Securities being tendered within the meaning of Rule 14e-4
and (ii) such tender of Shares complies with Rule 14e-4. The Company's
acceptance for payment of Shares tendered pursuant to the Offer will constitute
a binding agreement between the tendering shareholder and the Company upon the
terms and subject to the conditions of the Offer.
DETERMINATIONS OF VALIDITY; REJECTION OF SHARES; WAIVER OF DEFECTS; NO
OBLIGATION TO GIVE NOTICE OF DEFECTS. All questions as to the number of Shares
to be accepted, the price to be paid therefor and the validity, form,
eligibility (including time of receipt) and acceptance for payment of any tender
of Shares will be determined by the Company, in its sole discretion, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any or all tenders it determines not to be in
proper form or the acceptance of or payment for which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Offer and any defect or irregularity in the
tender of any particular Shares or any particular shareholder. No tender of
Shares will be deemed to be properly made until all defects or irregularities
have been cured or waived. None of the Company, the Dealer Manager, the
Depositary, the Information Agent or any other person is or will be obligated to
give notice of any defects or irregularities in tenders, and none of them will
incur any liability for failure to give any such notice.
CERTIFICATES FOR SHARES, TOGETHER WITH A PROPERLY COMPLETED LETTER OF
TRANSMITTAL AND ANY OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL, MUST
BE DELIVERED TO THE DEPOSITARY AND NOT TO THE COMPANY OR THE DEALER MANAGER. ANY
SUCH DOCUMENTS DELIVERED TO THE COMPANY OR THE DEALER MANAGER WILL NOT BE
FORWARDED TO THE DEPOSITARY AND THEREFORE WILL NOT BE DEEMED TO BE VALIDLY
TENDERED.
3. WITHDRAWAL RIGHTS
Except as otherwise provided in this Section 3, tenders of Shares pursuant
to the Offer are irrevocable. Shares tendered pursuant to the Offer may be
withdrawn at any time before the Expiration Date and, unless accepted for
payment by the Company as provided in this Offer to Purchase, may also be
withdrawn after 12:00 Midnight, New York City time, on October 14, 1997.
For a withdrawal to be effective, the Depositary must receive (at its
address set forth on the back cover of this Offer to Purchase) a notice of
withdrawal in written, telegraphic or facsimile transmission form on a timely
basis. Such notice of withdrawal must specify the name of the person who
tendered the Shares to be withdrawn, the number of Shares tendered, the number
of Shares to be withdrawn and the name of the registered holder, if different
from that of the person who tendered such Shares. If the certificates have been
delivered or otherwise identified to the Depositary, then, prior to the release
of such certificates, the tendering shareholder must also submit the serial
numbers shown on the particular certificates evidencing the Shares and the
signature on the notice of withdrawal must be guaranteed by a firm that is a
recognized member of an acceptable medallion guarantee program (except in the
case of Shares tendered by an Eligible Institution). If Shares have been
tendered pursuant to the procedure for
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book-entry transfer set forth in Section 2, the notice of withdrawal must
specify the name and the number of the account at the applicable Book-Entry
Transfer Facility to be credited with the withdrawn Shares and otherwise comply
with the procedures of such facility. All questions as to the form and validity,
including time of receipt, of notices of withdrawal will be determined by the
Company, in its sole discretion, which determination shall be final and binding
on all parties. None of the Company, the Dealer Manager, the Depositary, the
Information Agent or any other person is or will be obligated to give any notice
of any defects or irregularities in any notice of withdrawal, and none of them
will incur any liability for failure to give any such notice. Withdrawals may
not be rescinded, and any Shares properly withdrawn will thereafter be deemed
not tendered for purposes of the Offer. However, withdrawn Shares may be
retendered before the Expiration Date by again following any of the procedures
described in Section 2.
If the Company extends the Offer, is delayed in its purchase of Shares or is
unable to purchase Shares pursuant to the Offer for any reason, then, without
prejudice to the Company's rights under the Offer, the Depositary may, subject
to applicable law, retain on behalf of the Company all tendered Shares, and such
Shares may not be withdrawn except to the extent tendering shareholders are
entitled to withdrawal rights as described in this Section 3.
4. PURCHASE OF SHARES AND PAYMENT OF PURCHASE PRICE
The Company will, upon the terms and subject to the conditions of the Offer,
select the lowest single per Share Purchase Price that will allow it to buy
4,444,444 Shares (or such lesser number of Shares as are validly tendered and
not withdrawn) pursuant to the Offer, taking into account the number of Shares
so tendered and the prices specified by tendering shareholders, and will accept
for payment and pay for (and thereby purchase) Shares validly tendered at or
below the Purchase Price and not withdrawn as soon as practicable after the
Expiration Date. For purposes of the Offer, the Company will be deemed to have
accepted for payment (and therefore purchased), subject to proration, Shares
that are validly tendered at or below the Purchase Price and not withdrawn when,
as and if it gives oral or written notice to the Depositary of its acceptance of
such Shares for payment pursuant to the Offer. The Company reserves the right,
in its sole discretion, to purchase more than 4,444,444 Shares pursuant to the
Offer. See Section 14. In accordance with applicable regulations of the
Commission, the Company may purchase pursuant to the Offer an additional amount
of Shares not to exceed 2% of the outstanding Shares without amending or
extending the Offer. If (i) the Company increases or decreases the price to be
paid for the Shares, the Company increases the number of Shares being sought and
such increase in the number of Shares being sought exceeds 2% of the outstanding
Shares, or the Company decreases the number of Shares being sought and (ii) the
Offer is scheduled to expire at any time earlier than the expiration of a period
ending on the tenth business day from, and including, the date that notice of
such increase or decrease is first published, sent or given in the manner
specified in Section 14, the Offer will be extended until the expiration of such
period of ten business days.
Upon the terms and subject to the conditions of the Offer, the Company will
purchase and pay a single per Share Purchase Price for all of the Shares
accepted for payment pursuant to the Offer as soon as practicable after the
Expiration Date. In all cases, payment for Shares tendered and accepted for
payment pursuant to the Offer will be made promptly (subject to possible delay
in the event of proration) but only after timely receipt by the Depositary of
certificates for Shares (or of a timely confirmation of a book-entry transfer of
such Shares into the Depositary's account at one of the Book-Entry Transfer
Facilities), a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) or an Agent's Message and any other required
documents.
Payment for Shares purchased pursuant to the Offer will be made by
depositing the aggregate Purchase Price therefor with the Depositary, which will
act as agent for tendering shareholders for the purpose of receiving payment
from the Company and transmitting payment to the tendering shareholders. In the
event of proration, the Company will determine the proration factor and pay for
those tendered Shares accepted for payment as soon as practicable after the
Expiration Date. Under no circumstances will
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the Company pay interest on the Purchase Price including, without limitation, by
reason of any delay in making payment. Certificates for all Shares not
purchased, including all Shares tendered at prices greater than the Purchase
Price and Shares not purchased due to proration, will be returned (or, in the
case of Shares tendered by book-entry transfer, such Shares will be credited to
the account maintained with one of the Book-Entry Transfer Facilities by the
participant who so delivered such Shares) as promptly as practicable following
the Expiration Date or termination of the Offer without expense to the tendering
shareholder. In addition, if certain events occur, the Company may not be
obligated to purchase Shares pursuant to the Offer. See Section 5.
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer; provided, however,
that if payment of the Purchase Price is to be made to, or (in the circumstances
permitted by the Offer) if unpurchased Shares are to be registered in the name
of, any person other than the registered holder, or if tendered certificates are
registered in the name of any person other than the person signing the Letter of
Transmittal, the amount of all stock transfer taxes, if any (whether imposed on
the registered holder or such other person), payable on account of the transfer
to such person will be deducted from the Purchase Price unless evidence
satisfactory to the Company of the payment of such taxes or exemption therefrom
is submitted. See Instruction 7 of the Letter of Transmittal.
ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY, SIGN
AND RETURN TO THE DEPOSITARY THE SUBSTITUTE FORM W-9 INCLUDED WITH THE LETTER OF
TRANSMITTAL MAY BE SUBJECT TO REQUIRED BACKUP FEDERAL INCOME TAX WITHHOLDING OF
31% OF THE GROSS PROCEEDS PAID TO SUCH SHAREHOLDER OR OTHER PAYEE PURSUANT TO
THE OFFER.
5. CERTAIN CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, the Company shall not be
required to accept for payment, purchase or pay for any Shares tendered, and may
terminate or amend the Offer or may postpone the acceptance for payment of, or
the purchase of and the payment for Shares tendered, subject to Rule 13e-4(f)
promulgated under the Exchange Act, if at any time on or after August 19, 1997
and prior to the time of payment for any such Shares (whether any Shares have
theretofore been accepted for payment, purchased or paid for pursuant to the
Offer) any of the following events shall have occurred (or shall have been
determined by the Company to have occurred) that, in the Company's judgment in
any such case and regardless of the circumstances giving rise thereto (including
any action or omission to act by the Company), makes it inadvisable to proceed
with the Offer or with such acceptance for payment or payment:
(a) there shall have been threatened, instituted or pending before any
court, agency, authority or other tribunal any action, suit or proceeding by
any government or governmental, regulatory or administrative agency or
authority or by any other person, domestic or foreign, or any judgment,
order or injunction entered, enforced or deemed applicable by any court,
authority, agency or tribunal, which (i) challenges or seeks to make
illegal, or to delay or otherwise directly or indirectly to restrain,
prohibit or otherwise affect the making of the Offer, the acquisition of
Shares pursuant to the Offer or is otherwise related in any manner to, or
otherwise affects, the Offer; or (ii) could, in the sole judgment of the
Company, materially affect the business, condition (financial or other),
income, operations or prospects of the Company and its subsidiaries, taken
as a whole, or otherwise materially impair in any way the contemplated
future conduct of the business of the Company and its subsidiaries, taken as
a whole, or materially impair the Offer's contemplated benefits to the
Company; or
(b) there shall have been any action threatened or taken, or any
approval withheld, or any statute, rule or regulation invoked, proposed,
sought, promulgated, enacted, entered, amended, enforced or deemed to be
applicable to the Offer or the Company or any of its subsidiaries, by any
14
<PAGE>
government or governmental, regulatory or administrative authority or agency
or tribunal, domestic or foreign, which, in the sole judgment of the
Company, would or might directly or indirectly result in any of the
consequences referred to in clause (i) or (ii) of paragraph (a) above; or
(c) there shall have occurred (i) the declaration of any banking
moratorium or any suspension of payments in respect of banks in the United
States (whether or not mandatory); (ii) any general suspension of trading
in, or limitation on prices for, securities on any United States national
securities exchange or in the over-the-counter market; (iii) the
commencement of a war, armed hostilities or any other national or
international crisis directly or indirectly involving the United States;
(iv) any limitation (whether or not mandatory) by any governmental,
regulatory or administrative agency or authority on, or any event which, in
the sole judgment of the Company, might materially affect, the extension of
credit by banks or other lending institutions in the United States; (v) any
significant decrease in the market price of the Shares or in the market
prices of equity securities generally in the United States or any change in
the general political, market, economic or financial conditions or in the
commercial paper markets in the United States or abroad that could have in
the sole judgment of the Company a material adverse effect on the business,
condition (financial or otherwise), income, operations or prospects of the
Company and its subsidiaries, taken as a whole, or on the trading in the
Shares; (vi) in the case of any of the foregoing existing at the time of the
announcement of the Offer, a material acceleration or worsening thereof; or
(vii) any decline in either the Dow Jones Industrial Average or the S&P 500
Composite Index by an amount in excess of 10% measured from the close of
business on August 19, 1997; or
(d) any change shall occur or be threatened in the business, condition
(financial or other), income, operations or prospects of the Company and its
subsidiaries, taken as a whole, which in the sole judgment of the Company is
or may be material to the Company and its subsidiaries taken as a whole; or
(e) a tender or exchange offer with respect to some or all of the Shares
(other than the Offer), or a merger or acquisition proposal for the Company,
shall have been proposed, announced or made by another person or shall have
been publicly disclosed, or the Company shall have learned that any person
or "group" (within the meaning of Section 13(d)(3) of the Exchange Act)
shall have acquired or proposed to acquire beneficial ownership of more than
5% of the outstanding Shares, or any new group shall have been formed that
beneficially owns more than 5% of the outstanding Shares; or
(f) pursuant to the 1992 Stockholders' Agreement (as defined in Section
8), any Stockholder or Permitted Transferee (as each such term is defined
therein) shall, within 10 days of receiving notice from the Company of the
commencement of the Offer, have given written notice to the Company that
consummation of the Offer will give rise to a Voting Regulatory Problem (as
defined in Section 8) for such Stockholder or Permitted Transferee; or
(g) the Company shall have determined in its sole judgment that the
acceptance for payment of, or payment for some or all of, the Shares could
violate, conflict with or constitute a breach of any order, statute
(including the Delaware General Corporation Law (the "DGCL")), rule,
regulation, executive order, decree, or judgment of any court to which the
Company may be bound or subject; or that the Shares could likely be delisted
from trading on AMEX following the Offer; or
(h) The 9 1/8% Notes Offer shall not have expired (See Section 7); or
(i) Houlihan Lokey (as defined in Section 7) shall not have delivered to
the Company a "bring-down" opinion in form and substance satisfactory to the
Company with respect to the Houlihan Lokey Opinion (as defined in Section
7).
The foregoing conditions are for the Company's sole benefit and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition (including any action or inaction by the Company) or may be waived by
the Company in whole or in part. The Company's failure at any time to
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<PAGE>
exercise any of the foregoing rights shall not be deemed a waiver of any such
right, and each such right shall be deemed an ongoing right that may be asserted
at any time and from time to time. Any determination by the Company concerning
the events described above and any related judgment or decision by the Company
regarding the inadvisability of proceeding with the purchase of or payment for
any Shares tendered will be final and binding on all parties.
6. PRICE RANGE OF SHARES
The Shares are currently listed and traded on AMEX. Through August 8, 1997,
the Shares were listed and traded on the NASDAQ National Market System
("NASDAQ"). The high and low closing sales prices per Share on the NASDAQ
Composite Tape as compiled from published financial sources are listed below.
The Company has not paid any quarterly cash dividends during the periods
indicated:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1995
4th Quarter (ended September 30, 1995)................................... $ 6.125 $ 3.125
FISCAL 1996
1st Quarter (ended December 31, 1995).................................... $ 4.250 $ 2.250
2nd Quarter (ended March 31, 1996)....................................... 3.625 2.500
3rd Quarter (ended June 30, 1996)........................................ 3.125 2.500
4th Quarter (ended September 30, 1996)................................... 3.875 1.750
FISCAL 1997
1st Quarter (ended December 31, 1996).................................... $ 3.625 $ 2.125
2nd Quarter (ended March 31, 1997)....................................... 3.188 2.250
3rd Quarter (ended June 30, 1997)........................................ 3.250 1.438
</TABLE>
On August 12, 1997, the last full trading day on AMEX prior to the
announcement of the Offer, the closing per Share sales price as reported on the
AMEX Composite Tape was $3 5/8. The closing sales price per Share as reported on
NASDAQ was $3 1/16 per Share on August 8, the day the Company first announced it
was considering a share buy-back. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR THE SHARES.
7. BACKGROUND AND PURPOSE OF THE OFFER; CERTAIN EFFECTS OF THE OFFER
The Company's Board of Directors believes that the Company's financial
condition and outlook and current market conditions make this an attractive time
to repurchase a portion of the outstanding Shares. In addition, the Board of
Directors believes that the Offer is in the best interest of the Company and its
shareholders and it further believes that it will enhance shareholder value in
the short term and the long term. In addition, the Offer affords to those
shareholders who desire liquidity an opportunity to sell all or a portion of
their Shares without the usual transaction costs associated with open market
sales.
The Offer provides shareholders who are considering a sale of all or a
portion of their Shares the opportunity to determine the price or prices (not
greater than $4.50 nor less than $3.75 per Share) at which they are willing to
sell their Shares and, if any such Shares are purchased pursuant to the Offer,
to sell those Shares for cash to the Company. Shareholders who determine not to
accept the Offer will increase their proportionate interest in the Company's
equity, and thus in the Company's future earnings and assets, subject to the
Company's right to issue additional Shares and other equity securities in the
future. See Section 8.
The Company has obtained the requisite consents from the holders of the
9 1/8% Notes and the 9 5/8% Notes to certain amendments to the indentures
governing such notes, which amendments are necessary to permit the Company to
repurchase the Shares pursuant to the Offer. Such amendments, however, will not
become operative until an offer to purchase up to $50 million aggregate
principal amount of the
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<PAGE>
9 1/8% Notes expires, regardless of the amount of the 9 1/8% Notes tendered or
acquired. As a result, concurrently herewith, holders of the 9 1/8% Notes will
be invited to tender up to $50 million aggregate principal amount of 9 1/8%
Notes pursuant to the 9 1/8% Notes Offer, which offer expires at 5:00 p.m., New
York time, on September 17, 1997, the Expiration Date for the Offer. Although
the 9 1/8% Notes Offer is not conditioned upon the consummation of the Offer,
the expiration of the 9 1/8% Notes Offer is a condition precedent to the
consummation of the Offer. See Section 5.
The Company believes that the reduction of the Company's outstanding debt if
the Company purchases any of the $50 million aggregate principal amount of the
9 1/8% Notes, and the resulting reduction in the Company's debt service
requirements are also in the best interest of the Company and its shareholders
and will enhance shareholder value in the short term and the long term.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE OFFER. HOWEVER,
SHAREHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO,
HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH SHARES SHOULD BE
TENDERED. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING SHARES AND NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS HAS
AUTHORIZED ANY PERSON TO MAKE ANY SUCH RECOMMENDATION. THE COMPANY HAS BEEN
ADVISED THAT NO EXECUTIVE OFFICER INTENDS TO TENDER SHARES PURSUANT TO THE
OFFER. THE COMPANY HAS BEEN ADVISED, HOWEVER, THAT CERTAIN OF ITS DIRECTORS
HOLDING AN AGGREGATE OF 2,664,021 SHARES HAVE RESERVED THE RIGHT TO TENDER
SHARES PURSUANT TO THE OFFER BUT HAVE NOT YET DECIDED WHETHER TO DO SO. SEE
SECTION 8.
The Company may in the future purchase additional Shares on the open market,
in private transactions, through tender offers or otherwise. Any such purchases
may be on the same terms as, or on terms that are more or less favorable to
shareholders than, the terms of the Offer. However, Rule 13e-4 promulgated under
the Exchange Act generally prohibits the Company and its affiliates from
purchasing any Shares, other than pursuant to the Offer, until at least ten
business days after the expiration or termination of the Offer. Any possible
future purchases by the Company will depend on many factors, including, without
limitation, the ability of the Company to make Restricted Payments and
Investments (as defined under the indentures governing the 9 1/8% Notes and the
9 5/8% Notes), the market price of the Shares, the results of the Offer, the
Company's business and financial position and general economic and market
conditions.
As indicated in the Unaudited Adjusted Selected Pro Forma Consolidated
Financial Information of the Company set forth herein, upon completion of the
Offer, and the concurrent 9 1/8% Notes Offer, the Company's shareholders' equity
will be negative. To assist the Company's Board of Directors (the "Board") in
its decision to undertake the Offer, the Company retained Houlihan Lokey Howard
& Zukin, Financial Advisors, Inc. ("Houlihan Lokey"), a nationally recognized
independent investment banking firm. Houlihan Lokey delivered an oral
presentation and a written opinion to the Board and the Company dated as of
August 12, 1997 (the "Houlihan Lokey Opinion"), furnishing the Board with
analysis regarding its conclusions set forth in its opinion. The Houlihan Lokey
Opinion does not address the Company's underlying business decision to effect
the transactions described herein. Furthermore, Houlihan Lokey did not negotiate
any aspect of the transactions described herein or advise the Company with
respect to alternatives available to it and the Houlihan Lokey Opinion does not
advise the Company or its shareholders as to the fairness of the transactions.
17
<PAGE>
After careful consideration of the Houlihan Lokey Opinion and information
provided by management of the Company, the Board determined that the amount of
surplus (i.e., net assets over the amount of capital) of the Company, both prior
to and after giving effect to (i) the transactions relating to the amendments to
certain provisions of the indentures (the "Consent Solicitation") governing the
9 1/8% Notes and the 9 5/8% Notes, including without limitation the payment of
the maximum amount of the consent payments, as set forth in the Consent
Solicitation Statements of the Company dated August 4, 1997 (as supplemented,
the "Consent Solicitation Statements"), and the payment of all related fees and
expenses, and (ii) the 9 1/8% Notes Offer, regardless of the amount of the
9 1/8% Notes tendered or acquired, and the payment of all related fees and
expenses, exceeds the aggregate maximum amount of the consideration to be paid
for the Shares and all fees and expenses incurred and to be incurred in
connection with the Offer (regardless of whether the Shares acquired in the
Offer are retired or held in treasury in accordance with the DGCL), and
therefore, that the completion of such transactions, would not cause an
impairment of the Company's capital.
In addition, the Board also concluded that both immediately prior to and
immediately after giving effect to the Offer, the 9 1/8% Notes Offer and the
Consent Solicitation (i) the Company would be able to pay its debts, liabilities
and obligations, contingent and otherwise, as they become due, and (ii) the
value of the Company's assets would exceed the value of its liabilities and
obligations, contingent and otherwise by an amount, in excess of the Company's
capital (regardless of whether the Shares acquired in the Offer are retired or
held in treasury in accordance with the DGCL).
In rendering the Houlihan Lokey Opinion, Houlihan Lokey valued the assets of
the Company, as a going concern (including goodwill) both immediately before and
on a pro forma basis immediately after giving effect to the Offer and (i) the
transactions contemplated by the Consent Solicitation, including without
limitation the payment of the maximum amount of the consent payments as set
forth in the Consent Solicitation Statements and the payment of all related fees
and expenses, and (ii) the 9 1/8% Notes Offer, regardless of the amount of the
9 1/8% Notes tendered or acquired, and the payment of all related fees and
expenses.
In connection with its valuation, Houlihan Lokey was provided historical and
projected operating results. The Houlihan Lokey Opinion states that Houlihan
Lokey relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to it had been reasonably prepared
and reflected the best currently available estimates of the future financial
results and condition of the Company. In addition to this information, Houlihan
Lokey was provided other operating data and information, all of which was
accepted by Houlihan Lokey, without independent verification, as representing a
fair statement of historical and projected results of the Company in the opinion
of management of the Company. In addition, the Houlihan Lokey Opinion states
that, in the course of its investigation in connection with the Houlihan Lokey
Opinion, nothing led Houlihan Lokey to believe that its acceptance and reliance
of such operating data and information was unreasonable. In rendering the
Houlihan Lokey Opinion, Houlihan Lokey relied upon the Company's statement that
there had been no material adverse change in the assets, financial condition,
business or prospects of the Company since the date of the most recent financial
statements made available to it.
Houlihan Lokey did not make any physical inspection or independent appraisal
of any of the properties or assets of the Company. In addition, the Houlihan
Lokey Opinion is necessarily based on business, economic, market and other
conditions as they existed at the time of the opinion and as they could be
evaluated at such time.
Houlihan Lokey concluded that, based upon and subject to the conditions and
assumptions contained in the Houlihan Lokey Opinion, assuming the Offer had been
consummated as proposed as of the date of the Houlihan Lokey Opinion,
immediately before and on a pro forma basis immediately after giving effect to
the Offer and the (i) transactions contemplated by the Consent Solicitation,
including without limitation the payment of the maximum consent payments as set
forth in the Consent Solicitation Statements and the
18
<PAGE>
payment of all related fees and expenses, and (ii) the 9 1/8% Notes Offer,
regardless of the amount of the 9 1/8% Notes tendered or acquired, and the
payment of all related fees and expense:
(a) the fair value and present fair saleable value of the Company's assets
would exceed the Company's stated liabilities and identified contingent
liabilities;
(b) the Company would be able to pay its debts as they mature;
(c) the capital remaining in the Company after consummation of the Offer,
the Consent Solicitation and the 9 1/8% Notes Offer would not be
unreasonably small for the business in which the Company is engaged, as
management indicated it is now conducted and is proposed to be conducted
following the consummation of the Offer, the Consent Solicitation and the
9 1/8% Notes Offer;
(d) the Company would be able to pay its stated liabilities (including
identified contingent liabilities) as they mature; and
(e) the fair value and present fair saleable value of the Company's assets
would exceed the Company's stated liabilities and identified contingent
liabilities by an amount at least equal to the total par value of its
capital stock.
8. INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS; TRANSACTIONS AND ARRANGEMENTS
CONCERNING THE SHARES
As of August 15, 1997, there were 13,204,396 Shares outstanding and
1,029,443 Shares issuable upon exercise of all outstanding vested Class A
Options. As of such date, the Company also had 1,249,749 outstanding Class B
Shares, 791,062 shares issuable upon exercise of outstanding vested Class B
Options and 2,026,111 outstanding Class C Shares. The Class B Shares and the
Class C Shares are each convertible into Shares at the option of the holder on a
one-for-one basis.
As of August 15, 1997, the Company's directors and executive officers as a
group (11 persons) beneficially owned 9,603,634 Shares (including 1,508,720
Shares issuable to such persons upon exercise of Options exercisable within
sixty days of such date and 1,249,749 Shares issuable to such persons upon
conversion of the Class B Shares and Class C Shares) which constituted 60.2% of
the outstanding Shares (including Shares issuable if Options held by the
Company's directors and executive officers exercisable within sixty days of such
date were exercised and if Class B Shares and Class C Shares held by such
persons were converted into Shares) at such time. If the Company purchases
4,444,444 Shares pursuant to the Offer (24.3% of the outstanding Shares as of
August 15, 1997 assuming exercise of all outstanding Options and conversion of
all outstanding Class B Shares and Class C Shares) and no director or executive
officer tenders Shares pursuant to the Offer, then after the purchase of Shares
pursuant to the Offer, the Company's directors and executive officers as a group
would beneficially own approximately 83.4% of the outstanding Shares (including
Shares issuable if Options held by the Company's directors and executive
officers exercisable within sixty days of such date were exercised and if Class
B Shares and Class C Shares held by such persons were converted into Shares).
Chester Davenport, the Chairman of the Board of Directors of the Company,
who benefically owns an aggregate of 3,531,145 Shares (including Shares issuable
upon exercise of Options held by Mr. Davenport exercisable within sixty days and
Shares issuable upon the conversion of the Class B Shares held by Mr.
Davenport), representing approximately 22.7% of the outstanding Shares
(including Shares issuable upon exercise of Options held by Mr. Davenport
exercisable within sixty days and Shares issuable upon the conversion of the
Class B Shares held by Mr. Davenport) as of August 15, 1997, has advised the
Company that he does not intend to tender any Shares pursuant to the Offer. If
the Company purchases 4,444,444 Shares pursuant to the Offer, and Mr. Davenport
does not tender any Shares, the beneficial ownership of Mr. Davenport would
increase to approximately 31.7% of the Shares outstanding immediately after the
Offer. As a result of Mr. Davenport's ownership of the Class B Shares, as of
August 15, 1997,
19
<PAGE>
Mr. Davenport controls, directly or indirectly, approximately 27.2% of the vote
on all matters (other than with respect to election of directors as described
below) presented to shareholders entitled to vote thereon. If the Company
purchases 4,444,444 Shares pursuant to the Offer, and Mr. Davenport does not
tender any Shares, such voting power would be increased to approximately 37.2%
immediately after the Offer.
The Company has been advised that no other executive officer intends to
tender Shares pursuant to the Offer. The Company has been advised, however, that
certain directors of the Company holding an aggregate of 2,664,021 Shares have
reserved the right to tender Shares pusuant to the Offer but have not yet
decided whether to do so. The Company does not anticipate that such directors
will inform the Company if and when any decision to tender Shares is made. The
Company will not supplement or amend the Offer if any such directors actually
tender Shares in the Offer. If the Company purchases 4,444,444 Shares pursuant
to the Offer, including all Shares tendered by such directors, and assuming no
other director or executive officer of the Company tenders Shares in the Offer,
the percentage of outstanding Shares owned beneficially by all of the Company's
directors and executive officers as a group would increase to approximately
83.4% of the Shares then outstanding (including for this purpose, Shares that
may be acquired by such directors and executive officers pursuant to the
exercise of Options exercisable within 60 days of the date hereof and Shares
issuable to such persons upon conversion of the Class B Shares and Class C
Shares). The Company has no agreement, arrangement or understanding with any of
its directors, executive officers, or affiliates concerning tenders of Shares by
them pursuant to the Offer.
Pursuant to the Company's Restated Certificate of Incorporation, the holder
of the Shares, voting seperately as a class, are entitled to elect three
directors, and the holders of the Class B Shares, voting seperately as a class,
are entitled to elect the remaining six directors. In addition, other than with
respect to the election of directors, the Shares have one vote per Share and the
Class B Shares have 1.75 votes per share. Unless otherwise required by law, the
Class C Shares generally have no voting rights. Mr. Davenport benefically owns
all of the outstanding Class B Shares.
Pursuant to the Stockholders' Agreement, dated March 30, 1993, among Chester
C. Davenport, Slivy C. Edmonds, Georgetown Partners Limited partnership
("Georgetown"), Apollo Investment Fund, L.P. ("Apollo"), Chemical Equity
Associates ("CVP"), TSG Ventures Inc. ("TSG"), and any person who subsequent to
March 30, 1993 holds Class B Shares, the Class B Shares are to be voted such
that no more than four of the six Class B elected directors shall consist of
persons who are: (i) officers or full time employees of the Company; (ii) Mr.
Davenport, Ms. Edmonds or their affiliates or officers, directors, partners or
employees of their affiliates or (iii) family members of either (i) or (ii). In
addition, certain parties have agreed to convert all of their Class B Shares
into Shares upon receiving a written notice from Apollo, CVP or TSG requesting
conversion based upon the occurrence of any one of the following events: (i) Mr.
Davenport ceasing to control, directly or indirectly, the voting of a majority
of the outstanding Class B Shares; or (ii) Mr. Davenport, Ms. Edmonds, members
of their immediate families and trusts or other entities created for their
estate-planning purposes fail to have a direct or indirect pecuniary interest in
at least five percent of the then outstanding shares of all classes of common
stock of the Company in the aggregate.
Pursuant to an Amended and Restated Stockholders' Agreement (the "1992
Stockholders' Agreement") dated as of April 10, 1992 among the Company,
Georgetown, Gnitrow Ltd, Equico Capital Corporation, Amoco Venture Capital
Company, UNC Ventures II, L.P., UNC Ventures, Inc, MESBIC Ventures, Inc.,
Internationale Nederlanden (U.S.) Finance Corporation, Skopbank, Apollo, CVP and
certain individuals and each of their Permitted Transferees (as defined therein)
(collectively, the "1992 Stockholders"), the Company is required to give written
notice to each 1992 Stockholder before the Company redeems, purchases or
otherwise acquires any securities. THE DISTRIBUTION OF THIS OFFER TO PURCHASE TO
EACH 1992 STOCKHOLDER SHALL CONSTITUTE SUCH WRITTEN NOTICE PURSUANT TO THE 1992
STOCKHOLDERS' AGREEMENT OF THE COMPANY'S INTENTION TO PURCHASE SECURITIES.
20
<PAGE>
The 1992 Stockholders' Agreement provides that upon the written request of
any 1992 Stockholder made within 10 days after its receipt of notice from the
Company stating that, after giving effect to any redemption, purchase or other
acquisition of securities of the Company, such 1992 Stockholder would have a
Voting Regulatory Problem (defined below), the Company shall defer taking such
action, including the purchase of the Shares pursuant to the Offer, for such
period (not to extend beyond 30 days after such 1992 Stockholder's receipt of
the Company's original notice) as such 1992 Stockholder requests to permit it
and its affiliates to reduce the quantity of the Company's securities so owned
in order to avoid the Voting Regulatory Problem. For purposes hereof, a Voting
Regulatory Problem is one in which such 1992 Stockholder and its affiliates
would own, control, or have power over a greater quantity of securities of any
kind issued by the Company or any other entity than is permitted under any
requirement of any governmental authority.
Based upon the Company's records and upon information provided to the
Company by its directors, executive officers, associates and subsidiaries,
neither the Company nor, to the best of the Company's knowledge, any associates
or subsidiaries or persons controlling the Company, any directors or executive
officers of the Company or any of its subsidiaries, or any associates or
subsidiaries of any of the foregoing, has effected any transactions in the
Shares during the 40 business days prior to the date hereof.
Except as set forth in this Offer to Purchase, neither the Company nor, to
the best of the Company's knowledge, any person controlling the Company or any
of its directors or executive officers, is a party to any contract, arrangement,
understanding or relationship with any other person relating, directly or
indirectly, to the Offer with respect to any securities of the Company
(including, but not limited to, any contract, arrangement, understanding or
relationship concerning the transfer or the voting of any such securities, joint
ventures, loan or option arrangements, puts or calls, guarantees of loans,
guarantees against loss or the giving or withholding of proxies, consents or
authorizations).
9. SOURCE AND AMOUNT OF FUNDS
Assuming that the Company purchases 4,444,444 Shares pursuant to the Offer
at a purchase price of $4.50 per Share, the Company expects the maximum
aggregate cost applicable to the Offer, to be approximately $29.5 million
(including (i) the payment of the maximum consent fee payable to the holders of
the 9 1/8% Notes and the 9 5/8% Notes pursuant to the Consent Solicitation for
certain amendments to the the indentures governing such notes, which amendments
are necessary to allow the Company to consummate the Offer, (ii) fees and
expenses necessary to consummate the 9 1/8% Notes Offer, the expiration of which
is necessary to consummate the Offer and (iii) other related fees and expenses).
In addition, the Company may be required to pay up to an additional $50 million
to purchase 9 1/8% Notes, if validly tendered pursuant to the 9 1/8% Notes
Offer. The Company estimates that substantially all of the funds necessary to
pay such amounts will come from cash currently held by the Company.
10. CERTAIN INFORMATION ABOUT THE COMPANY
This Offer to Purchase contains forward looking statements, within the
meaning of Section 21E of the Securities Exchange Act of 1934, with respect to
the Company's expectations or belief concerning future events. The Company
cautions that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements. Such factors include, but are not limited to, general
economic conditions, pending legislation or changes in existing legislation, the
cyclical nature of the vehicle emission testing industry, the amounts of
reserves recognized by the Company, the number of annual tests performed by the
Company, the commencement of operations for a particular program and the total
capital expenditure requirement for such program, the amount of revenues that
will be generated under a contract and the ultimate outcome of pending
litigation. A number of such factors are set forth in the Company's filings with
the Commission, including the Company's Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q.
SUMMARY. The Company is the leading provider of centralized vehicle
emissions testing programs for states and municipalities. These programs are
established in accordance with federal regulations to test motor vehicle
emissions for compliance with air pollution standards. As of June 30, 1997, the
Company
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<PAGE>
operated 14 of the 21 currently existing contractor-operator centralized
programs in North America, and in fiscal 1997 will perform nearly 11.5 million
of the approximately 16.6 million tests conducted in these programs. Envirotest
is the most experienced operator in the industry, having performed more than 148
million tests since its inception in 1974. In addition, the Company is the only
domestic provider of contractor-operated centralized testing services outside
the United States.
Envirotest provides governmental authorities an all-inclusive service
whereby it designs, constructs, and operates centralized vehicle emissions
programs. In a centralized program, vehicles are inspected in high volume,
test-only facilities, operated either by a private contractor or a governmental
authority. A program network generally consists of 6 or more facilities, each of
which contains multiple testing lanes. In a decentralized program, vehicles are
tested at numerous privately-owned facilities, such as gas stations and repair
shops, which typically also perform emissions repair work. Some states have
considered programs that contain elements of both a centralized and
decentralized program.
The Company's services include: designing a network that provides
convenience to motorists; identifying and procuring adequate inspection sites;
constructing emissions facilities with multiple test lanes; designing and
installing a vehicle emissions inspection system and computer network to collect
and process emissions testing data; and managing and operating the inspection
program using sophisticated software and equipment developed by the Company.
The Company's principal executive offices are located at 246 Sobrante Way,
Sunnyvale, California 94086 and its telephone number is (408) 774-6300.
RECENT DEVELOPMENTS.
FLORIDA CONTRACT. On February 27, 1997, the Company announced that it had
signed an agreement with the State of Florida extending the current contract for
two additional years to March 31, 2000 at the same test fee. The extension is
expected to generate aggregate revenues of up to $32 million.
ILLINOIS CONTRACT. On June 6, 1997 the Company announced that it had signed
an agreement with the State of Illinois to upgrade the State's existing
centralized auto emissions testing program to an enhanced program. The agreement
also extends the program, which expired on June 30, 1997, to 2006. Capital
expenditures required to implement the new program are expected to total
approximately $75 million.
Under the terms of the new contract, the Company will continue to perform
basic emissions testing throughout the implementation phase of the new program.
Enhanced testing will commence in early 1999. The Company will earn a portion of
its contracted revenue during the implementation period for performance of the
basic test and other services provided during this period. Revenues for the
nine-year term are expected to total approximately $385 million.
The expected total program revenues of approximately $385 million includes
an amount not to exceed $48 million that will be paid to the Company by the
State during the course of the implementation of the program upgrade. These
payments may be applied toward the expenditures required to implement the
program.
CALIFORNIA CANCELLATION/SETTLEMENT. As of March 31, 1997, the State of
California elected to terminate the Company's contract to provide remote sensing
services. The contract was expected to extend through June 30, 1998 and provide
$2.3 million of revenue to the Company. The termination was related to the
State's decision to reassess its future vehicle emissions testing program.
The Company expects to enter into a Settlement Agreement with the State of
California which resolves the issues related to the termination of the Company's
contract with the State of California. Under the terms of the proposed
Settlement Agreement, the Company will be paid $2.7 million, inclusive of
outstanding receivables.
PENNSYLVANIA SETTLEMENT. On December 11, 1996, the Company sold its right
to receive the two remaining installment payments totaling $80 million (the
"Receivables Assets") in principal amount due under a settlement agreement with
the Commonwealth of Pennsylvania (the "Settlement Agreement") for approximately
$79.4 million.
22
<PAGE>
The transaction was effected through a sale of the Receivables Assets from
Envirotest Partners ("Partners"), a Pennsylvania general partnership owned by
Envirotest and Envirotest Technologies, Inc., to a newly formed wholly owned
subsidiary of the Company, ES Funding Corp. ("Funding"). Funding, in turn,
transferred the Receivables Assets to an affiliate of a Pennsylvania bank.
Funding and Partners provided certain representations in connection with the
transaction, including representations as to enforceability of the Settlement
Agreement against the Commonwealth, and agreed to repurchase the Receivables
Assets if Partners fails to comply with its obligations under the Settlement
Agreement.
The Settlement Agreement requires the Company to use its best efforts to
dispose of the assets it acquired to perform vehicle emissions testing services
in Pennsylvania. If the net proceeds received by the Company from the sale of
the assets is less than $55 million, Pennsylvania is obligated to pay the
Company fifty percent of the difference up to $11 million no later than July 31,
1998. Should the net proceeds from the sale of the real estate and other program
related assets exceed $55 million, the Company is obligated to pay the
Commonwealth 75% of the amount by which the net proceeds exceed $55 million.
Based upon the experience with recent sales of these assets and the sufficiency
of reserves, the Company believes that upon final disposition of properties no
loss will be recognized.
Gain on the Pennsylvania settlement of $3.9 million during the third fiscal
quarter 1997 represents adjustments to provisions made in prior periods for
claims resulting as a consequence of the Pennsylvania contract cancellation that
have been settled, resolved or are unlikely to present future liability. A
one-time gain on the Pennsylvania settlement of $15.3 million was included in
the nine months ended June 30, 1996.
Under the terms of the indentures governing the 9 1/8% Notes and the 9 5/8%
Notes, in the event the Receivables Assets are deemed to be Net Cash Proceeds
(as defined in the indentures), the Company is required to invest such proceeds
within 24 months in a Related Business (as defined in the indentures) or make an
offer to purchase 9 1/8% Notes at a price of par, plus accrued and unpaid
interest to the date of purchase. This Offer is being made pursuant to and in
accordance with Section 4.14 of the indentures and, as a result, the proceeds
used by the Company to repurchase the 9 1/8% Notes will reduce the amount
required to be applied by the Company in accordance with Section 4.14 of the
indentures as a result of the sale of Receivables Assets.
OHIO. In July 1997, the Ohio legislature passed legislation related to the
Ohio vehicle inspection program (which is currently an enhanced program) that
included the following key provisions:
- Requires a basic test in the program regions operated by the Company;
- Establishes an inspection fee ceiling of $18.75;
- Allows an annual CPI adjustment to the inspection fee with a cap of $.50;
and
- Requires that the State negotiate the requisite changes to the program
within 30 days. If the contract is not modified within 30 days, then it
will be submitted to binding arbitration.
The Company currently collects fees of $17.15, $18.93 and $16.98 for each of
its test regions in the State. It is unclear how such legislation, if enacted,
would effect the fees charged in each of the Company's test regions within the
State.
Governor Voinovich has indicated that he intends to veto the legislation,
however a veto is not expected until early September. The Senate voted 24 to 9
in favor of the legislation (a Senate veto override needs 20 votes) and the
House passed the bill by a margin of 71 to 25 (60 votes are needed for a veto
override).
OTHER. On August 15, 1997, the Company entered into an agreement with
Hughes Aircraft Company to acquire the assets comprising Hughes' remote
emissions sensor product line and related technologies for $3.7 million. In
addition, the Company will pay a 3% royalty on future net revenues related to
remote sensing sales and services over the next five years up to a cap of $10
million. These royalty payments are contingent upon future revenues from remote
sensing sales and services. For the twelve months ended September 30, 1996 and
the nine months ended June 30, 1997, the Company's net revenues from its remote
sensing division were $1.2 million. The closing of the acquisition is expected
to occur by August 31, 1997 and is subject to customary closing conditions,
including completion to the Company's satisfaction of its due diligence review.
23
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information for the
fiscal years ended September 30, 1995 and 1996 has been derived from the audited
consolidated financial statements of the Company contained in the Company's
Annual Reports on Form 10-K for the fiscal years ended September 30, 1995 and
September 30, 1996. This information should be read in conjunction with and is
qualified in its entirety by reference to such audited financial statements and
related notes thereto. The selected historical consolidated financial
information for the nine month periods ended June 30, 1996 and 1997 has not been
audited but in the opinion of management contains all material adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation. Such information was derived from the unaudited consolidated
financial statements of the Company included in the Company's Quarterly Reports
on Form 10-Q for the quarterly periods ended June 30, 1996 and 1997. This
information should be read in conjunction with and is qualified in its entirety
by reference to such financial statements and related notes thereto.
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL YEAR ENDED NINE MONTHS ENDED
-------------------- ------------------------
SEPT. 30, SEPT. 30, JUNE 30, JUNE 30,
1995 1996 1996 1997
--------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenues............................................. $ 104,757 $ 124,472 $ 90,764 $ 101,803
Loss before income taxes...................................... (15,504) (19,426) (11,674) (7,768)
Net loss...................................................... (14,861) (25,064) (17,164) (7,768)
Ratio of earnings to fixed charges(1)......................... -- -- -- --
Balance Sheet Data:
Working capital............................................... 1,770 116,608 39,607 120,038
Total assets.................................................. 457,273 480,784 496,913 465,437
Total indebtedness............................................ 388,391 429,096 430,990 422,882
Shareholders' equity.......................................... 38,045 13,154 20,999 5,370
Per Share Data:(2)
Net loss per common share..................................... (0.93) (1.51) (1.04) (0.47)
Book value per common share (unaudited)(3).................... 2.37 0.79 1.27 0.32
Weighted average number of common shares outstanding.......... 16,059 16,552 16,530 16,620
</TABLE>
- ------------------------
(1) No ratios of earnings to fixed charges have been presented as earnings were
insufficient to cover fixed charges in all periods presented. The earnings
deficiencies were $15,504,000, $19,426,000, $11,674,000 and $7,768,000 for
the years ended September 30, 1995, and 1996 and for the nine months ended
June 30, 1996 and 1997, respectively.
(2) All per share data is calculated based on the weighted average number of
common shares outstanding. The potential dilutive effect from the issuance
of stock options is not presented since its inclusion would be anti-
dilutive.
(3) Book value per share is calculated as total shareholders equity divided by
the weighted average number of common shares outstanding at the end of the
period.
24
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited selected pro forma consolidated financial
information gives effect to the purchase of the Shares pursuant to the Offer.
Such financial information has been prepared by the Company's management based
on the historical financial statements of the Company and its subsidiaries,
giving effect to the assumptions and adjustments in the accompanying notes as if
the purchase of the Shares had occurred, for purposes of the statement of
operations data, on the first day of the periods presented and, for purposes of
the balance sheet data, on the applicable balance sheet date. The unaudited
selected pro forma consolidated financial information should be read in
conjunction with the historical financial information included and incorporated
herein by reference and does not purport to be indicative of the results that
would actually have been obtained for the periods presented, or what the
Company's financial position would have been, had the purchase of Shares
pursuant to the Offer been completed at the dates indicated or to project the
Company's results of operations or financial condition for any future period or
date.
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1996 NINE MONTHS ENDED JUNE 30, 1997
------------------------------------------- -------------------------------------------
PRO FORMA(1) PRO FORMA(1)
------------------------------ ------------------------------
ASSUMED $4.50 ASSUMED $3.75 ASSUMED $4.50 ASSUMED $3.75
HISTORICAL PURCHASE PRICE PURCHASE PRICE HISTORICAL PURCHASE PRICE PURCHASE PRICE
----------- -------------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
Statement of Operations Data:
Contract revenues............. 124,472 $ 124,472 $ 124,472 $ 101,803 $ 101,803 $ 101,803
Loss before income taxes...... (19,426) (21,093) (20,904) (7,768) (9,018) (8,877)
Net loss...................... (25,064) (26,731) (26,542) (7,768) (9,018) (8,877)
Ratio of earnings to fixed
charges(2).................. -- -- -- -- -- --
Balance Sheet Data:
Working capital............... 116,608 87,108 90,441 120,038 90,538 93,871
Total assets.................. 480,784 451,284 454,617 465,437 435,937 439,270
Total indebtedness............ 429,096 429,096 429,096 422,882 422,882 422,882
Shareholders' equity
(deficit)................... 13,154 (16,346) (13,013) 5,370 (24,130) (20,797)
Per Share Data:(3)
Net loss per common share..... (1.51) (2.21) (2.19) (0.47) (0.74) (0.73)
Book value per common share
(unaudited)(4).............. 0.79 (1.35) (1.07) 0.32 (1.98) (1.71)
Weighted average number of
common shares outstanding... 16,552 12,108 12,108 16,620 12,176 12,176
</TABLE>
- --------------------------
(1) The pro forma information assumes that the Shares are purchased by the
Company pursuant to the Offer at $4.50 per Share and $3.75 per Share.
Expenses directly related to the Offer are assumed to be $9.5 million, and
are included as part of the cost of the Shares to be acquired. Expenses of
the Offer include (i) a consent fee of $6.5 million payable to the holders
of the 9 1/8% Notes and the 9 5/8% Notes pursuant to the Consent
Solicitation for certain amendments to the indentures governing such notes,
which amendments are necessary to allow the Company to consummate the Offer,
(ii) fees and expenses necessary to consummate the 9 1/8% Notes Offer, the
expiration of which is required to consummate the Offer, and (iii) other
related fees and expenses. The pro forma information also assumes loss of
interest income for each of the periods presented.
(2) No ratios of earnings to fixed charges have been presented as earnings were
insufficient to cover fixed charges in all periods presented.
(3) All per share data is calculated based on the weighted average number of
common shares outstanding during the period. The potential dilutive effect
from the issuance of stock options is not presented since its inclusion
would be anti-dilutive.
(4) Book value per share is calculated as total shareholders equity divided by
the weighed average number of common shares outstanding at the end of the
period.
25
<PAGE>
ADJUSTED SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited adjusted selected pro forma consolidated financial
information gives effect to (i) the purchase of Shares pursuant to the Offer and
(ii) the purchase of $50 million aggregate principal amount of 9 1/8% Notes at a
price of par plus accrued and unpaid interest pursuant to the 9 1/8% Notes
Offer. Such financial information has been prepared by the Company's management
based on the historical financial statements of the Company and its
subsidiaries, giving effect to the assumptions and adjustments in the
accompanying notes as if such purchases had occurred, for purposes of the
statement of operations data, on the first day of the periods presented and, for
purposes of the balance sheet data, on the applicable balance sheet date. The
unaudited adjusted selected pro forma consolidated financial information should
be read in conjunction with the selected historical financial information
included and incorporated herein by reference and does not purport to be
indicative of the results that would actually have been obtained for the periods
presented, or what the Company's financial position would have been, had the
purchase of Shares pursuant to the Offer or the 9 1/8% Notes Offer been
completed at the dates indicated or to project the Company's results of
operations or financial condition for any future period or date.
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1996 NINE MONTHS ENDED JUNE 30, 1997
------------------------------------------- -------------------------------------------
PRO FORMA(1) PRO FORMA(1)
------------------------------ ------------------------------
ASSUMED $4.50 ASSUMED $3.75 ASSUMED $4.50 ASSUMED $3.75
HISTORICAL PURCHASE PRICE PURCHASE PRICE HISTORICAL PURCHASE PRICE PURCHASE PRICE
----------- -------------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenues.................... $ 124,472 $ 124,472 $ 124,472 $ 101,803 $ 101,803 $ 101,803
Income (loss) before income taxes and
extraordinary items................ (19,426) (19,029) (18,840) (7,768) (7,613) (7,471)
Extraordinary items.................. -- (2,242) (2,242) -- (1,905) (1,905)
Net loss............................. (25,064) (26,909) (26,720) (7,768) (9,518) (9,376)
Ratio of earnings to fixed
charges (2)........................ -- -- -- -- -- --
Balance Sheet Data:
Working capital...................... 116,608 37,108 40,441 120,038 40,538 43,871
Total assets......................... 480,784 399,489 402,822 465,437 383,112 386,445
Total indebtedness................... 429,096 379,096 379,096 422,882 372,882 372,882
Shareholders' equity (deficit)....... 13,154 (17,951) (14,617) 5,370 (25,625) (22,291)
Per Share Data: (3)
Loss before extraordinary items...... (1.51) (2.03) (2.02) (0.47) (0.62) (0.61)
Extraordinary items.................. -- (0.19) (0.19) -- (0.16) (0.16)
Net loss per common share............ (1.51) (2.22) (2.21) (0.47) (0.78) (0.77)
Book value per common share
(unaudited) (4).................... 0.79 (1.48) (1.21) 0.32 (2.10) (1.83)
Weighted average number of common
shares outstanding................. 16,552 12,108 12,108 16,620 12,176 12,176
</TABLE>
- --------------------------
(1) The pro forma information assumes that the Shares are purchased by the
Company pursuant to the Offer at $4.50 per share and $3.75 per share.
Expenses directly related to the Offer are assumed to be $9.5 million, and
are included as part of the cost of the Shares to be acquired. Expenses of
the Offer include (i) a consent fee of $6.5 million payable to the holders
of the 9 1/8% Notes and the 9 5/8% Notes pursuant to the Consent
Solicitation for certain amendments to the indentures governing such notes,
which amendments are necessary to allow the Company to consummate the Offer,
(ii) fees and expenses necessary to consummate the 9 1/8% Notes Offer, the
expiration of which is required to consummate the Offer and (iii) other
related fees and expenses. The pro forma information also reflects the
elimination of amortization of deferred issuance costs, original issue
discounts, interest expenses and interest income with respect to the 9 1/8%
Notes repurchased.
(2) No ratios of earnings to fixed charges have been presented as earnings were
insufficient to cover fixed charges in all periods presented.
26
<PAGE>
(3) All per share data is calculated based on the weighted average number of
common shares outstanding during the period. The potential dilutive effect
from the issuance of stock options is not presented since its inclusion
would be anti-dilutive.
(4) Book value per share is calculated as total shareholders equity divided by
the total number of common shares outstanding at the end of the period.
27
<PAGE>
ADDITIONAL INFORMATION. The Company is subject to the informational filing
requirements of the Exchange Act and, in accordance therewith, is obligated to
file reports and other information with the Commission relating to its business,
financial condition and other matters. Information, as of particular dates,
concerning the Company's directors and executive officers, their remuneration,
options granted to them, the principal holders of the Company's securities and
any material interest of such persons in transactions with the Company is
required to be disclosed in proxy statements distributed to the Company's
shareholders and filed with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 2120, Washington
D.C. 20549; at its regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, New York, New York
10048. Copies of such material may also be obtained by mail, upon payment of the
Commission's customary charges, from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549.
The Commission also maintains a Web site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Such reports, proxy statements and other information concerning the
Company also can be inspected at the offices of AMEX at 86 Trinity Place, New
York, New York 10006, on which the Shares are listed.
11. EFFECTS OF THE OFFER ON THE MARKET FOR SHARES; REGISTRATION UNDER THE
EXCHANGE ACT
The Company's purchase of Shares pursuant to the Offer will reduce the
number of Shares that might otherwise trade publicly and is likely to reduce the
number of shareholders. The Company does not believe that its purchase of Shares
pursuant to the Offer will cause its remaining Shares to be delisted from AMEX.
See Section 5.
The Shares are currently "margin securities" under the rules of the Federal
Reserve Board. This has the effect, among other things, of allowing brokers to
extend credit on the collateral of the Shares. The Company believes that,
following the purchase of Shares pursuant to the Offer, the Shares which remain
ouststanding will continue to be "margin securities" for purposes of the Federal
Reserve Board's margin regulations.
Shares the Company acquires pursuant to the Offer will be retained as
treasury stock by the Company (unless and until the Company determines to retire
such Shares) and will be available for the Company to issue without further
shareholder action (except as required by applicable law or, if retired, the
rules of any securities exchange on which Shares are listed) for purposes
including, but not limited to, the acquisition of other businesses, the raising
of additional capital for use in the Company's business and the satisfaction of
obligations under existing or future employee benefit plans. The Company has no
current plans for issuance of the Shares repurchased pursuant to the Offer.
The Shares are registered under the Exchange Act, which requires, among
other things, that the Company furnish certain information to its shareholders
and to the Commission and comply with the Commission's proxy rules in connection
with meetings of the Company's shareholders. The Company believes that its
purchase of Shares pursuant to the Offer will not result in the Shares becoming
eligible for deregistration under the Exchange Act.
12. CERTAIN LEGAL MATTERS; REGULATORY AND FOREIGN APPROVALS
The Company is not aware of any license or regulatory permit that appears to
be material to its business that might be adversely affected by its acquisition
of Shares as contemplated in the Offer or of any approval or other action by any
government or governmental, administrative or regulatory authority or agency,
domestic or foreign, that would be required for the Company's acquisition of
Shares as contemplated by the Offer. Should any approval be required to be
obtained or other action be required to be
28
<PAGE>
taken, the Company currently contemplates that it will seek such approval or
take such other action. The Company cannot predict whether it may determine that
it is required to delay the acceptance for payment of, or payment for, Shares
tendered pursuant to the Offer pending the outcome of any such matter. There can
be no assurance that any such approval or other action, if needed, would be
obtained or taken or would be obtained or taken without substantial conditions
or that the failure to obtain any such approval or take such other action might
not result in adverse consequences to the Company's business. The Company's
obligations under the Offer to accept for payment and pay for Shares are subject
to certain conditions. See Section 5.
13. CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain Federal income tax consequences of
tendering Shares pursuant to the Offer. This discussion is based on Federal
income tax law now in effect, which is subject to change, possibly
retroactively. This summary does not discuss all of the tax consequences that
may be relevant to certain types of shareholders in light of their individual
investment circumstances (including certain financial institutions,
broker-dealers, insurance companies, tax-exempt organizations and foreign
taxpayers) or persons who hold Shares as a position in a "straddle", "hedging"
or "conversion" transaction for Federal income tax purposes. This summary
assumes that shareholders hold their Shares as "capital assets" (generally,
property held for investment) under Section 1221 of the Internal Revenue Code of
1986, as amended (the "Code"). Each shareholder is urged to consult his tax
advisor regarding the specific Federal, state, local and foreign income, and
other tax consequences of tendering Shares pursuant to the Offer.
GENERAL
An exchange of Shares for cash pursuant to the Offer will be a taxable
transaction for Federal income tax purposes. As a consequence of the exchange, a
shareholder will, depending on such shareholder's particular circumstances, be
treated either as having "sold" his Shares or as having received a
"distribution" from the Company, with the tax consequences described below.
Pursuant to section 302 of the Code, a shareholder whose Shares are
exchanged pursuant to the Offer will be treated as having sold such Shares, and
thus will recognize gain or loss, provided that the exchange (i) is "not
essentially equivalent to a dividend" with respect to such shareholder, (ii) is
"substantially disproportionate" with respect to such shareholder, or (iii)
results in a "complete termination" of such shareholder's equity interest in the
Company, each as discussed below. In applying these tests, a shareholder will be
treated as owning Shares actually or constructively owned by certain individuals
and entities related to the shareholder. In addition, if a shareholder who
exchanges Shares pursuant to the Offer also contemporaneously sells Shares
otherwise than pursuant to the Offer, such other sales may possibly be taken
into account in determining whether the shareholder satisfies any of the three
tests described below.
A shareholder will satisfy the "not essentially equivalent to a dividend"
test if the reduction in such shareholder's proportionate interest in the
Company which results from an exchange of Shares for cash pursuant to the Offer
constitutes a "meaningful reduction" given such shareholder's particular facts
and circumstances. The Internal Revenue Service has indicated in a published
ruling that any reduction in the percentage interest of a shareholder whose
relative stock interest in a publicly-held corporation is minimal (I.E., an
interest of less than 1% should satisfy this requirement) and who exercises no
control over corporate affairs should constitute such a "meaningful reduction".
An exchange of Shares for cash will be "substantially disproportionate" for
a shareholder if the percentage of the then outstanding Shares actually and
constructively owned by such shareholder immediately after the exchange is less
than 80% of the percentage of the Shares actually and constructively owned by
such shareholder immediately before the exchange.
29
<PAGE>
A shareholder that exchanges all of the Shares actually or constructively
owned by such shareholder for cash will be treated as having completely
terminated such shareholder's equity interest in the Company.
SALE OR DISTRIBUTION TREATMENT
If a shareholder is treated as having sold Shares under any of the tests
described above, such shareholder will recognize capital gain or loss equal to
the difference between the amount of cash received and such shareholder's
adjusted tax basis in the Shares exchanged therefor.
If a shareholder who exchanges Shares pursuant to the Offer is not treated
as having sold such shareholder's Shares, pursuant to section 302 of the Code,
the entire amount of cash received by such shareholder will be treated as the
distribution of a dividend to the extent of the Company's current and
accumulated earnings and profits, and will be includible in such shareholder's
income without reduction for the tax basis of the Shares tendered in the
exchange. No loss will be recognized. The shareholder's tax basis in the Shares
exchanged will be added to such shareholder's adjusted tax basis in his
remaining Shares. To the extent that the distribution is treated as a dividend
to a corporate shareholder, such corporate shareholder will be (i) eligible for
a dividends-received deduction (subject to applicable limitations) and (ii)
subject to the "extraordinary dividend" provisions of the Code. To the extent,
if any, that the distribution exceeds the Company's current and accumulated
earnings and profits, it will be treated first as a tax-free return of capital
to the extent of such shareholder's adjusted tax basis in the Shares and
thereafter as capital gain.
The Company cannot predict whether or to what extent the Offer will be
oversubscribed. If the Offer is oversubscribed, proration of tenders pursuant to
the Offer will cause the Company to accept fewer Shares than are tendered.
Therefore, no assurance can be given as to whether a sufficient number of a
shareholder's Shares will be exchanged pursuant to the Offer to ensure that such
exchange will be treated as a sale, rather than as a distribution, for Federal
income tax purposes pursuant to the rules discussed above.
MAXIMUM TAX RATES APPLICABLE TO CAPITAL GAIN
Under the recently enacted Taxpayer Relief Act of 1997, net capital gain
(I.E., generally, capital gain in excess of capital loss) recognized by an
individual upon the sale of a capital asset that has been held for more than 18
months will generally be subject to tax at a rate not to exceed 20%. Net capital
gain recognized by an individual from the sale of a capital asset that has been
held for more than 12 months but not for more than 18 months will continue to be
subject to tax at a rate not to exceed 28%, and capital gain recognized from the
sale of a capital asset that has been held for 12 months or less will continue
to be subject to tax at ordinary income tax rates. In addition, capital gain
recognized by a corporate taxpayer will continue to be subject to tax at the
ordinary income tax rates applicable to corporations.
NET OPERATING LOSSES
Generally, a cumulative change of greater than 50% in the stock ownership of
a corporation within a 3 year period (an "ownership change") will, for Federal
income tax purposes, limit the amount of pre-ownership change net operating
losses that the corporation may use during the post-ownership change period. The
Company believes that the consummation of the Offer will not result in an
ownership change. No assurance may be given, however, whether the consummation
of the Offer, when taken together with future equity issuances or transfers
among shareholders (which transfers may not be within the control of the
Company) would trigger an ownership change.
30
<PAGE>
14. EXTENSION OF THE OFFER; TERMINATION; AMENDMENTS
The Company expressly reserves the right, in its sole discretion, at any
time and from time to time, and regardless of whether or not any of the events
set forth in Section 5 shall have occurred or shall be deemed by the Company to
have occurred, to extend the period of time during which the Offer is open and
thereby delay acceptance for payment of, and payment for, any Shares by giving
oral or written notice of such extension to the Depositary and making a public
announcement thereof. The Company also expressly reserves the right, in its sole
discretion, to terminate the Offer and not accept for payment or pay for any
Shares not theretofore accepted for payment or paid for or, subject to
applicable law, to postpone payment for Shares upon the occurrence of any of the
conditions specified in Section 5 hereof by giving oral or written notice of
such termination or postponement to the Depositary and making a public
announcement thereof. The Company's reservation of the right to delay payment
for Shares which it has accepted for payment is limited by Rule 13e-4(f)(5)
promulgated under the Exchange Act, which requires that the Company must pay the
consideration offered or return the Shares tendered promptly after termination
or withdrawal of a tender offer. Subject to compliance with applicable law, the
Company further reserves the right, in its sole discretion, and regardless of
whether any of the events set forth in Section 5 shall have occurred or shall be
deemed by the Company to have occurred, to amend the Offer in any respect
(including, without limitation, by decreasing or increasing the consideration
offered in the Offer to holders of Shares or by decreasing or increasing the
number of Shares being sought in the Offer). Amendments to the Offer may be made
at any time and from time to time effected by public announcement thereof, such
announcement, in the case of an extension, to be issued no later than 9:00 a.m.,
New York City time, on the next business day after the last previously scheduled
or announced Expiration Date. Any public announcement made pursuant to the Offer
will be disseminated promptly to shareholders in a manner reasonably designed to
inform shareholders of such change. Without limiting the manner in which the
Company may choose to make any public announcement, except as provided by
applicable law (including Rule 13e-4(e)(2) promulgated under the Exchange Act),
the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to the
Dow Jones News Service.
If the Company makes a material change in the terms of the Offer or the
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-4(d)(2) and 13e-4(e)(2) promulgated under the Exchange Act, which require
that the minimum period during which an offer must remain open following
material changes in the terms of the offer or information concerning the offer
(other than a change in price or a change in percentage of securities sought)
will depend upon the facts and circumstances, including the relative materiality
of such terms or information. If (i) the Company increases or decreases the
price to be paid for Shares or the Company increases the number of Shares being
sought and such increase in the number of Shares being sought exceeds 2% of the
outstanding Shares, or the Company decreases the number of Shares being sought,
and (ii) the Offer is scheduled to expire at any time earlier than the
expiration of a period ending on the tenth business day from, and including, the
date that notice of such increase or decrease is first published, sent or given,
the Offer will be extended until the expiration of such period of ten business
days.
15. FEES AND EXPENSES
The Company has retained Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") to act as the Dealer Manager in connection with the Offer. DLJ will
receive a fee for their services as Dealer Manager of $125,000. The Company also
has agreed to reimburse DLJ for certain expenses incurred in connection with the
Offer, including out-of-pocket expenses and the reasonable fees and
disbursements of their counsel and to indemnify DLJ against certain liabilities
in connection with the Offer, including certain liabilities under the federal
securities laws. DLJ has rendered various investment banking and other advisory
services to the Company in the past, for which they have received customary
compensation, and can be expected to render similar services to the Company in
the future. The Company has retained D.F.
31
<PAGE>
King & Co., Inc. as Information Agent and Continental Stock Transfer & Trust
Company as Depositary in connection with the Offer. The Information Agent and
the Depositary will receive reasonable and customary compensation for their
services. The Company will also reimburse the Information Agent and the
Depositary for out-of-pocket expenses, including reasonable attorneys' fees, and
has agreed to indemnify the Information Agent and the Depositary against certain
liabilities in connection with the Offer, including certain liabilities under
the Federal securities laws. The Dealer Manager and Information Agent may
contact shareholders by mail, telephone, telex, telegraph and personal
interviews, and may request brokers, dealers and other nominee shareholders to
forward materials relating to the Offer to beneficial owners. Neither the
Information Agent nor the Depositary has been retained to make solicitations or
recommendations in connection with the Offer.
The Company will not pay fees or commissions to any broker, dealer,
commercial bank, trust company or other person for soliciting tenders pursuant
to the Offer. The Company will, however, on request, reimburse such persons for
customary handling and mailing expenses incurred in forwarding materials in
respect of the Offer to the beneficial owners for which they act as nominees. No
such broker, dealer, commercial bank or trust company has been authorized to act
as the Company's agent for purposes of the Offer. The Company will pay (or cause
to be paid) any stock transfer taxes on its purchase of Shares, except as
otherwise provided in Instruction 7 of the Letter of Transmittal.
16. MISCELLANEOUS
The Company is not aware of any jurisdiction where the making of the Offer
is not in compliance with applicable law. If the Company becomes aware of any
jurisdiction where the making of the Offer is not in compliance with any valid
applicable law, the Company will make a good faith effort to comply with such
law. If, after such good faith effort, the Company cannot comply with such law,
the Offer will not be made to (nor will tenders be accepted from or on behalf
of) the holders of Shares residing in such jurisdiction. In any jurisdiction the
securities or blue sky laws of which require the Offer to be made by a licensed
broker or dealer, the Offer is being made on the Company's behalf by the Dealer
Manager or one or more registered brokers or dealers licensed under the laws of
such jurisdiction.
Pursuant to Rule 13e-4 promulgated under the Exchange Act, the Company has
filed with the Commission an Issuer Tender Offer Statement on Schedule 13E-4
(the "Schedule 13E-4") which contains additional information with respect to the
Offer. The Schedule 13E-4, including the exhibits and any amendments thereto,
may be examined, and copies may be obtained, at the same places and in the same
manner as is set forth in Section 10 with respect to information concerning the
Company.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF THE COMPANY OR THE DEALER MANAGER IN CONNECTION WITH
THE OFFER OTHER THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE RELATED
LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DEALER
MANAGER.
ENVIROTEST SYSTEMS CORP.
August 19, 1997
32
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted from Eligible
Institutions. The Letter of Transmittal and certificates for Shares should be
sent or delivered by each shareholder of the Company or his or her broker,
dealer, bank or trust company to the Depositary at one of its addresses set
forth below.
THE DEPOSITARY FOR THE OFFER IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
BY FACSIMILE TRANSMISSION:
BY MAIL: (FOR ELIGIBLE INSTITUTIONS BY HAND OR OVERNIGHT COURIER:
Reorganization Department ONLY) Reorganization Department
2 Broadway, 19th Floor (212) 509-5150 2 Broadway, 19th Floor
New York, New York 10004 (212) 509-5152 New York, New York 10004
CONFIRMATION BY TELEPHONE:
(212) 509-4000
Reorganization Department
ext. 229
</TABLE>
Any questions or requests for assistance may be directed to the Dealer
Manager or the Information Agent at the telephone numbers and addresses listed
below. Requests for addition copies of this Offer to Purchase, the Letter of
Transmittal or other tender offer materials may be directed to the Information
Agent and such copies will be furnished promptly at the Company's expense.
Shareholders may also contact their local broker, dealer commercial bank or
trust company for assistance concerning the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 549-6864 (Toll Free)
Banks and Brokers call (212) 269-5550 (Call Collect)
THE DEALER MANAGER FOR THE OFFER IS:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
2121 Avenue of the Stars
Los Angeles, California 90067
(310) 282-5511 (Call Collect)
Attention: Joe Samluk
33
<PAGE>
Exhibit (a)(2)
LETTER OF TRANSMITTAL
TO TENDER SHARES OF CLASS A COMMON STOCK
OF
ENVIROTEST SYSTEMS CORP.
PURSUANT TO THE OFFER TO PURCHASE DATED AUGUST 19, 1997
- --------------------------------------------------------------------------------
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00P.M., NEW YORK
CITY TIME, ON WEDNESDAY, SEPTEMBER 17, 1997, UNLESS THE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
THE DEPOSITARY FOR THE OFFER IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
BY FACSIMILE TRANSMISSION:
BY MAIL: (FOR ELIGIBLE INSTITUTIONS ONLY) BY HAND OR BY OVERNIGHT
COURIER:
Reorganization Department (212) 509-5150 Reorganization Department
2 Broadway, 19th Floor (212) 509-5152 2 Broadway, 19th Floor
New York, New York 10004 New York New York 10004
CONFIRMATION BY TELEPHONE:
(212) 509-4000
Reorganization Department
ext. 229
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
(SEE INSTRUCTIONS 3 AND 4)
----------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN EXACTLY AS NAME(S) APPEAR(S) ON SHARES TENDERED
CERTIFICATE(S)) (ATTACH ADDITIONAL SIGNED LIST IF NECESSARY)
- ------------------------------------------------------------------------------------------------------
TOTAL NUMBER
OF SHARES NUMBER OF
CERTIFICATE REPRESENTED BY SHARES
NUMBER(S)(1) CERTIFICATE(S) TENDERED(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
TOTAL SHARES
- ----------------------------------------------------------------------------------------------------
Indicate in this box the order (by certificate number) in which Shares are to be purchased in the
event of proration.(3) (Attach additional signed list if necessary.)
See Instruction 13
1st 2nd 3rd 4th 5th:
- ----------------------------------------------------------------------------------------------------
(1) Need not be completed by shareholders tendering Shares by book-entry transfer.
(2) Unless otherwise indicated, it will be assumed that all Shares represented by each Share
certificate delivered to the Depositary are being tendered hereby. See Instruction 4.
(3) If you do not designate an order, then in the event less than all Shares tendered are purchased
due to proration, Shares will be selected for purchase by the Depositary. See Instruction 13.
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE
INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL CAREFULLY.
<PAGE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. DELIVERIES TO THE COMPANY WILL NOT
BE FORWARDED TO THE DEPOSITARY AND THEREFORE WILL NOT CONSTITUTE VALID DELIVERY.
DELIVERIES TO BOOK-ENTRY TRANSFER FACILITIES WILL NOT CONSTITUTE VALID DELIVERY
TO THE DEPOSITARY.
This Letter of Transmittal is to be used only if certificates are to be
forwarded herewith or if delivery of Shares (as defined below) is to be made by
book-entry transfer to the Depositary's account at The Depository Trust Company
("DTC") or Philadelphia Depository Trust Company ("PDTC") (hereinafter
collectively referred to as the "Book-Entry Transfer Facilities") pursuant to
the procedures set forth in Section 2 of the Offer to Purchase (as defined
below).
Shareholders who cannot deliver their Share certificates and any other
documents required to the Depositary by the Expiration Date (as defined in the
Offer to Purchase) must tender their Shares using the guaranteed delivery
procedure set forth in Section 2 of the Offer to Purchase. See Instruction 2.
(BOXES BELOW FOR USE BY ELIGIBLE INSTITUTIONS ONLY)
/ / CHECK HERE IF TENDERED SHARES ARE ENCLOSED HEREWITH
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO
THE DEPOSITARY'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
Check Applicable Box: / / DTC / / PDTC
Account No. ________________________________________________________________
Transaction Code No. _______________________________________________________
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s)_____________________________________________
Date of Execution of Notice of Guaranteed Delivery__________________________
Name of Institution that Guaranteed Delivery________________________________
If delivery is by book-entry transfer:
Name of Tendering Institution_______________________________________________
Account No.
- ------------------------------------------------ at / / DTC / / PDTC
Transaction Code No.________________________________________________________
Ladies and Gentlemen:
The undersigned hereby tenders to Envirotest Systems Corp., a Delaware
corporation (the "Company"), the above-described shares of its Class A Common
Stock, par value $.01 per share (the "Shares"), at the price per Share indicated
in this Letter of Transmittal, net to the seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase, dated August 19,
1997 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in
this Letter of Transmittal (which together constitute the "Offer").
Subject to, and effective upon, acceptance for payment of and payment for
the Shares tendered herewith in accordance with the terms and subject to the
conditions of the Offer (including, if the Offer is extended or amended, the
terms and conditions of any such extension or amendment), the undersigned hereby
sells, assigns and transfers to, or upon the order of, the Company all right,
title and interest in and to all the Shares that are being tendered hereby or
orders the registration of such Shares tendered by book-entry transfer that are
purchased pursuant to the Offer to or upon the order of the Company and hereby
irrevocably constitutes and appoints the Depositary the true and lawful agent
and attorney-in-fact of the undersigned with respect to such Shares, with full
power of substitution (such power of attorney being deemed to be an irrevocable
power coupled with an interest), to:
(i) deliver certificates for such Shares, or transfer ownership of such
Shares on the account books maintained by any of the Book-Entry Transfer
Facilities, together, in any such case, with all accompanying
<PAGE>
evidences of transfer and authenticity, to or upon the order of the Company
upon receipt by the Depositary, as the undersigned's agent, of the Purchase
Price (as defined below) with respect to such Shares;
(ii) present certificates for such Shares for cancellation and transfer
on the books of the Company; and
(iii) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Shares, all in accordance with the terms of the
Offer.
The undersigned hereby represents and warrants to the Company that the
undersigned has full power and authority to tender, sell, assign and transfer
the Shares tendered hereby and that, when and to the extent the same are
accepted for payment by the Company, the Company will acquire good, marketable
and unencumbered title thereto, free and clear of all liens, restrictions,
charges, encumbrances, conditional sales agreements or other obligations
relating to the sale or transfer thereof, and the same will not be subject to
any adverse claims. The undersigned will, upon request, execute and deliver any
additional documents deemed by the Depositary or the Company to be necessary or
desirable to complete the sale, assignment and transfer of the Shares tendered
hereby.
The undersigned represents and warrants to the Company that the undersigned
has read and agrees to all of the terms of the Offer. All authority herein
conferred or agreed to be conferred shall not be affected by and shall survive
the death or incapacity of the undersigned, and any obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Except as stated in the Offer, this
tender is irrevocable.
The undersigned understands that tenders of Shares pursuant to any one of
the procedures described in Section 2 of the Offer to Purchase and in the
Instructions will constitute the undersigned's representation and warranty to
the Company that (i) the undersigned has a net long position in the Shares or
equivalent securities being tendered within the meaning of Rule 14e-4
promulgated under the Securities Exchange Act of 1934, as amended, and (ii) the
tender of such Shares complies with Rule 14e-4. The Company's acceptance for
payment of Shares tendered pursuant to the Offer will constitute a binding
agreement between the undersigned and the Company upon the terms and subject to
the conditions of the Offer.
The names and addresses of the registered holders should be printed, if they
are not already printed above, exactly as they appear on the certificates
representing Shares tendered hereby. The certificate numbers, the number of
Shares represented by such certificates, the number of Shares that the
undersigned wishes to tender and the purchase price at which such Shares are
being tendered should be indicated in the appropriate boxes on this Letter of
Transmittal.
The undersigned understands that the Company will determine a single per
Share price (not greater than $4.50 nor less than $3.75 per Share), net to the
Seller in cash (the "Purchase Price"), that it will pay for Shares validly
tendered and not withdrawn pursuant to the Offer, taking into account the number
of Shares so tendered and the prices specified by tendering shareholders. The
undersigned understands that the Company will select the lowest Purchase Price
that will allow it to purchase 4,444,444 Shares (or such lesser number of Shares
as are validly tendered at prices not greater than $4.50 nor less than $3.75 per
Share) and not withdrawn pursuant to the Offer. The undersigned understands that
all Shares validly tendered at prices at or below the Purchase Price and not
withdrawn will be purchased at the Purchase Price, net to the seller in cash,
upon the terms and subject to the conditions of the Offer, including its
proration provisions, and that the Company will return all other Shares,
including Shares tendered at prices greater than the Purchase Price and not
withdrawn and Shares not purchased because of proration.
The undersigned recognizes that, under certain circumstances set forth in
the Offer to Purchase, the Company may terminate or amend the Offer or may
postpone the acceptance for payment of, or the payment for, Shares tendered or
may not be required to purchase any of the Shares tendered hereby or may accept
for payment fewer than all of the Shares tendered hereby.
Unless otherwise indicated under "Special Payment Instructions," please
issue the check for the Purchase Price of any Shares purchased, and/or return
any Shares not tendered or not purchased, in the name(s) of the undersigned
(and, in the case of Shares tendered by book-entry transfer, by credit to the
account at the applicable Book-Entry Transfer Facility). Similarly, unless
otherwise indicated under "Special Delivery Instructions," please mail the check
for the Purchase Price of any Shares purchased and/or any certificates for
Shares not tendered or not purchased (and accompanying documents, as
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both "Special Payment Instructions" and "Special
Delivery Instructions" are completed, please issue the check for the Purchase
Price of any Shares purchased and/or return any Shares not tendered or not
purchased in the name(s) of, and mail such check and/or any certificates to, the
person(s) so indicated. The undersigned recognizes that the Company has no
obligation, pursuant to the "Special Payment Instructions," to transfer any
Shares from the name of the registered holder(s) thereof if the Company does not
accept for payment any of the Shares so tendered.
<PAGE>
The undersigned understands that acceptance of Shares by the Company for
payment will constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Offer.
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PRICE (IN DOLLARS) PER SHARE
AT WHICH SHARES ARE BEING TENDERED
IF SHARES ARE BEING TENDERED AT MORE THAN ONE PRICE, A SEPARATE LETTER OF
TRANSMITTAL FOR EACH PRICE SPECIFIED MUST BE USED. (SEE INSTRUCTION 5)
CHECK ONLY ONE BOX. IF MORE THAN ONE BOX IS CHECKED, OR IF NO
BOX IS CHECKED, THERE IS NO VALID TENDER OF SHARES.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ 3.75 / / $ 4.00 / / $ 4.25 / / $ 4.50
</TABLE>
If you do not wish to specify a purchase price, check the following box, in
which case you will be deemed to have tendered at the Purchase Price determined
by the Company in accordance with the terms of the Offer (persons checking this
box need not indicate the price per Share in the box entitled "Price (In
Dollars) Per Share At Which Shares are Being Tendered" in this Letter of
Transmittal). / /
BENEFICIAL OWNERSHIP INFORMATION
IT IS REQUESTED THAT THIS SECTION BE COMPLETED BY ALL REGISTERED HOLDERS
TENDERING SHARES ON
BEHALF OF BENEFICIAL OWNERS. FAILURE TO DO SO WILL NOT RESULT IN AN INVALID
TENDER.
/ / Check box to certify that you are tendering Shares on behalf of a
beneficial holder(s) and indicate (i) the number of such beneficial holders
and (ii) the number of such beneficial holders who are tendering all Shares
held by such holder.
No. of beneficial holders: ____
No. of beneficial holders tendering all Shares beneficially owned:____
<PAGE>
- ------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY if the check for the aggregate Purchase Price of
Shares purchased and/or certificates for Shares not tendered or not purchased
are to be issued in the name of someone other than the undersigned.
Issue / / check and/or / / certificate(s) to:
Name ________________________________________________________________________
_____________________________________________________________________________
(PLEASE PRINT)
Address _____________________________________________________________________
_____________________________________________________________________________
(INCLUDE ZIP CODE)
_____________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
Book-Entry Facility Account
No. _________ / / DTC PDTC
Medallion Guarantee:
----------------------------------------------------
- ------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY if the check for the Purchase Price of Shares
purchased and/or certificates for Shares not tendered or not purchased are
to be mailed to someone other than the undersigned or to the undersigned at
an address other than that shown below the undersigned's signature(s).
Mail / / check and/or / / certificates to:
____________________________________________________________________________
____________________________________________________________________________
(PLEASE PRINT)
Address ____________________________________________________________________
____________________________________________________________________________
(INCLUDE ZIP CODE)
Book-Entry Facility Account
No. _________ / / DTC PDTC
Medallion Guarantee:
----------------------------------------------
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL SHAREHOLDERS)
----------------------------------------------------------------------------
Signature(s) of Owner(s) ___________________________________________________
Dated __________________________ ,1997
Name(s) ____________________________________________________________________
(PLEASE PRINT)
Capacity (full title)_______________________________________________________
Address ____________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone No. ________________________________________________
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
Share certificate(s) or on a security position listing or by person(s)
authorized to become registered holder(s) by certificates and documents
transmitted herewith. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer of a corporation or other person acting
in a fiduciary or representative capacity, please set forth full title and
see Instruction 6.)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 6)
Name of Firm _______________________________________________________________
Authorized Signature _______________________________________________________
Name _______________________________________________________________________
(PLEASE PRINT)
Title ______________________________________________________________________
Address ____________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone No. ________________________________________________
Dated __________________________, 1997
- --------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm that is a
recognized member of an acceptable medallion guarantee program, unless (i) this
Letter of Transmittal is signed by the registered holder(s) of the Shares (which
term, for purposes of this document, shall include any participant in a
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of Shares) tendered herewith and such holder(s) have not completed
the box entitled "Special Payment Instructions" or the box entitled "Special
Delivery Instructions" on this Letter of Transmittal, or (ii) such Shares are
tendered for the account of an Eligible Institution (as defined in the Offer to
Purchase). See Instruction 6.
2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARE CERTIFICATES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be used either if Share
certificates are to be forwarded herewith or if delivery of Shares is to be made
by book-entry transfer pursuant to the procedures set forth in Section 2 of the
Offer to Purchase. Certificates for all physically delivered Shares, or a
confirmation of a book-entry transfer into the Depositary's account at one of
the Book-Entry Transfer Facilities of all Shares delivered electronically, as
well as a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) or an Agent's Message (as defined in the
Offer to Purchase), and any other documents required by this Letter of
Transmittal, must be received by the Depositary at one of its addresses set
forth on the front page of this Letter of Transmittal prior to the Expiration
Date. If certificates are forwarded to the Depositary in multiple deliveries, a
properly completed and duly executed Letter of Transmittal must accompany each
such delivery.
Shareholders whose Share certificates are not immediately available, who
cannot deliver their Shares and all other required documents to the Depositary
or who cannot complete the procedure for delivery by book-entry transfer prior
to the Expiration Date may tender their Shares pursuant to the guaranteed
delivery procedure set forth in Section 2 of the Offer to Purchase. Pursuant to
such procedure: (i) such tender must be made by or through an Eligible
Institution, (ii) a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company (with any required
signature guarantees) must be received by the Depositary prior to the Expiration
Date, and (iii) the certificates for all physically delivered Shares in proper
form for transfer by delivery, or a confirmation of a book-entry transfer into
the Depositary's account at one of the Book-Entry Transfer Facilities of all
Shares delivered electronically, in each case together with a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) or an Agent's
Message and any other documents required by this Letter of Transmittal, must be
received by the Depositary within five American Stock Exchange trading days
after the date of execution of such Notice of Guaranteed Delivery, all as
provided in Section 2 of the Offer to Purchase.
THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING SHARE CERTIFICATES, THE
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION AND
RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
No alternative or contingent tenders will be accepted. By executing this
Letter of Transmittal (or facsimile thereof), the tendering shareholder waives
any right to receive any notice of the acceptance for payment of the Shares.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the
certificate numbers and/or the number of Shares should be listed on a separate
signed schedule and attached to this Letter of Transmittal.
4. PARTIAL TENDERS (NOT APPLICABLE TO SHAREHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER). If fewer than all the Shares represented by any certificate
delivered to the Depositary are to be tendered, fill in the number of Shares
that are to be tendered in the box entitled "Number of Shares Tendered." In such
case, a new certificate for the remainder of the Shares represented by the old
certificate will be sent to the person(s) signing this Letter of Transmittal,
unless otherwise provided in the "Special Payment Instructions" or "Special
Delivery Instructions" boxes on this Letter of Transmittal, as promptly as
practicable following the expiration or termination of the Offer. All Shares
represented by certificates delivered to the Depositary will be deemed to have
been tendered unless otherwise indicated.
5. INDICATION OF PRICE AT WHICH SHARES ARE BEING TENDERED. For Shares to
be validly tendered, the shareholder must check the box indicating the price per
Share at which such shareholder is tendering Shares under "Price (In Dollars)
Per Share At Which Shares Are Being Tendered" in this Letter of Transmittal.
ONLY ONE BOX MAY BE CHECKED. IF MORE THAN ONE BOX IS CHECKED OR IF NO BOX IS
CHECKED, THERE IS NO VALID TENDER OF SHARES. A shareholder wishing to tender
portions of such shareholder's Share holdings at different prices must complete
a separate Letter of Transmittal for each price at which such shareholder wishes
to tender each such portion of such shareholder's Shares. The same Shares cannot
be tendered (unless previously validly withdrawn as provided in Section 3 of the
Offer to Purchase) at more than one price.
<PAGE>
6. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Shares
tendered hereby, the signatures(s) must correspond with the name(s) as written
on the face of the certificates without alteration, enlargement or any change
whatsoever.
If any of the Shares tendered hereby is held of record by two or more
persons, all such persons must sign this Letter of Transmittal.
If any of the Shares tendered hereby are registered in different names on
different certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of certificates.
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares tendered hereby, no endorsements of certificates or separate stock powers
are required unless payment of the purchase price is to be made to, or Shares
not tendered or not purchased are to be registered in the name of, any person
other than the registered holder(s), in which case the certificate(s) evidencing
the Shares tendered hereby must be endorsed or accompanied by appropriate stock
powers, in either case signed exactly as the name(s) of the registered holder(s)
appear(s) on such certificates. Signatures on any such certificates or stock
powers must be guaranteed by a firm that is a recognized member of an acceptable
medallion guarantee program. See Instruction 1.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Shares tendered hereby, certificates evidencing the
Shares tendered hereby must be endorsed or accompanied by appropriate stock
powers, in either case, signed exactly as the name(s) of the registered
holder(s) appear(s) on such certificate(s). Signature(s) on any such
certificates or stock powers must be guaranteed by a firm that is a recognized
member of an acceptable medallion guarantee program. See Instruction 1.
If this Letter of Transmittal or any certificate or stock power is signed by
a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
the Company of the authority of such person so to act must be submitted.
7. STOCK TRANSFER TAXES. The Company will pay or cause to be paid any
stock transfer taxes with respect to the sale and transfer of any Shares to it
or its order pursuant to the Offer. If, however, payment of the aggregate
Purchase Price is to be made to, or Shares not tendered or not purchased are to
be registered in the name of, any person other than the registered holder(s), or
if tendered Shares are registered in the name of any person other than the
person(s) signing this Letter of Transmittal, the amount of any stock transfer
taxes (whether imposed on the registered holder(s), such other person or
otherwise) payable on account of the transfer to such person will be deducted
from the purchase price unless satisfactory evidence of the payment of such
taxes, or exemption therefrom, is submitted. See Section 4 of the Offer to
Purchase. Except as provided in this Instruction 7, it will not be necessary to
affix transfer tax stamps to the certificates representing Shares tendered
hereby.
8. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the purchase
price of any Shares tendered hereby is to be issued in the name of, and/or any
Shares not tendered or not purchased are to be returned to, a person other than
the person(s) signing this Letter of Transmittal, or if the check and/or any
certificates for Shares not tendered or not purchased are to be mailed to
someone other than the person(s) signing this Letter of Transmittal or to an
address other than that shown above in the box captioned "Description of Shares
Tendered," then the boxes captioned "Special Payment Instructions" and/or
"Special Delivery Instructions" on this Letter of Transmittal should be
completed. Shareholders tendering Shares by book-entry transfer will have any
Shares not accepted for payment returned by crediting the account maintained by
such shareholders at the Book-Entry Transfer Facility from which such transfer
was made.
9. TAXPAYER IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income
tax law generally requires that a registered holder whose Shares are accepted
for purchase, or such registered holder's assignee (in either case, the "Payee")
provide the Depositary (the "Payor") with a correct Taxpayer Identification
Number ("TIN"), which, in the case of a Payee who is an individual, is such
Payee's social security number. If the Depositary is not provided with the
correct TIN or an adequate basis for an exemption, such Payee may be subject to
a $50 penalty imposed by the Internal Revenue Service and backup withholding in
an amount equal to 31% of the gross proceeds received pursuant to the Offer. If
such withholding results in an overpayment of taxes, a refund may be obtained.
To prevent backup withholding, each Payee must provide such Payee's correct
TIN by completing the "Substitute Form W-9" set forth herein, certifying that
the TIN provided is correct (or that such Payee is awaiting a TIN) and that (i)
the Payee is exempt from backup withholding, (ii) the Payee has not been
notified by the Internal Revenue Service that such Payee is subject to backup
withholding as a result of a failure to report all interest or dividends, or
(iii) the Internal Revenue Service has notified the Payee that such Payee is no
longer subject to backup withholding. To
<PAGE>
prevent backup withholding, a foreign Payee must submit an IRS Form W-8 or a
Substitute Form W-8, signed under penalty of perjury, attesting to such Payee's
exempt status. Such forms may be obtained form the Depositary.
If the Payee does not have a TIN, such Payee should consult the enclosed
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 (the "W-9 Guidelines") for instructions on applying for a TIN, write
"Applied For" in the space for the TIN in Part 1 of the Substitute Form W-9, and
sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer
Identification Number set forth herein. If the Payee does not provide his TIN to
Depositary within 60 days, backup withholding will begin and continue until such
Payee furnishes his TIN to the Depositary. NOTE: WRITING "APPLIED FOR" ON THE
FORM MEANS THAT THE PAYEE HAS ALREADY APPLIED FOR A TIN OR THAT SUCH PAYEE
INTENDS TO APPLY FOR ONE IN THE NEAR FUTURE.
If the Shares are held in more than one name or are not in the name of the
actual owner, consult the W-9 Guidelines for information on which TIN to report.
Exempt Payees (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. To prevent possible erroneous backup withholding, an Exempt Payee
should write "Exempt" in Part 2 of Substitute Form W-9. See the W-9 Guidelines
for additional instructions.
10. WITHHOLDING ON FOREIGN PAYEES. Even if a foreign Payee has provided
the required certification to avoid backup withholding, the Depositary will
withhold United States Federal income taxes equal to 30% of the gross payments
payable to such Payee unless the Depositary determines that a reduced rate of
withholding is available pursuant to a tax treaty or that an exemption from
withholding is applicable because such gross proceeds are effectively connected
with the conduct of a trade or business in the United States. For this purpose,
a foreign Payee is any Payee that is not (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity created or organized in
or under the laws of the United States, any State or any political subdivision
thereof or (iii) an estate or trust, the income of which is subject to United
States Federal income taxation regardless of the source of such income. In order
to obtain a reduced rate of withholding pursuant to a tax treaty, a foreign
Payee must deliver to the Depositary a properly completed IRS Form 1001. In
order to obtain an exemption from withholding on the grounds that the gross
proceeds paid pursuant to the Offer are effectively connected with the conduct
of a trade or business within the United States, a foreign Payee must deliver to
the Depositary a properly completed IRS Form 4224. The Depositary will determine
a Payee's status as a foreign shareholder and eligibility for a reduced rate of,
or an exemption from, withholding by reference to outstanding certificate or
statements concerning eligibility for a reduced rate of, or exemption form,
withholding (E.G., IRS Form 1001 or IRS Form 4224) unless facts and
circumstances indicate that such reliance is not warranted. A foreign Payee may
be eligible to obtain a refund of all or a portion of any tax withheld if such
Payee meets the "complete redemption," "substantially disproportionate" or "not
essentially equivalent to a dividend" test described in the "Certain Federal
Income Tax Consequences" section of the Offer to Purchase, or is otherwise able
to establish that no tax or a reduced amount of tax is due. Backup withholding
generally will not apply to amounts subject to the 30% or treaty-reduced rate of
withholding. Foreign Payees are urged to consult their tax advisors regarding
the application of United States Federal income tax withholding including
eligibility for a withholding tax reduction or exemption and refund procedures.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Any questions or
requests for assistance may be directed to the Information Agent at its
telephone number and address listed below. Requests for additional copies of the
Offer to Purchase, this Letter of Transmittal or other tender offer materials
may be directed to the Information Agent, and such copies will be furnished
promptly at the Company's expense. Shareholders may also contact their local
broker, dealer, commercial bank or trust company for documents relating to, or
assistance concerning, the Offer.
12. IRREGULARITIES. All questions as to the number of Shares to be
accepted, the price to be paid therefor and the validity, form, eligibility
(including time of receipt) and acceptance for payment of any tender of Shares
will be determined by the Company, in its sole discretion, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any or all tenders it determines not to be in proper form or the
acceptance of or payment for which may, in the opinion of the Company's counsel,
be unlawful. The Company also reserves the absolute right to waive any of the
conditions of the Offer and any defect or irregularity in the tender of any
particular Shares or any particular shareholder. No tender of Shares will be
deemed to be validly made until all defects or irregularities have been cured or
waived. None of the Company, the Dealer Manager, the Depositary, the Information
Agent or any other person is or will be obligated to give notice of any defects
or irregularities in tenders, and none of them will incur any liability for
failure to give any such notice.
13. ORDER OF PURCHASE IN EVENT OF PRORATION. As described in Section 1 of
the Offer to Purchase, shareholders may designate the order in which their
Shares are to be purchased in the event of proration. The order of purchase may
have an effect on the United States Federal income tax classification of any
gain or loss on the Shares purchased. See Sections 1 and 13 of the Offer to
Purchase.
<PAGE>
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF) OR AN AGENT'S
MESSAGE TOGETHER WITH SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER
AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE DEPOSITARY, OR THE
NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY, PRIOR TO THE
EXPIRATION DATE. SHAREHOLDERS ARE ENCOURAGED TO RETURN A COMPLETED SUBSTITUTE
FORM W-9 WITH THEIR LETTER OF TRANSMITTAL.
PAYER'S NAME: CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1: PLEASE PROVIDE YOUR TIN Social Security Number
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY or
BY SIGNING AND DATING BELOW Employer Identification Number
-------------------
-----------------------------------------------------------------
PART 2: For Payees exempt from backup withholding, see the
enclosed Guidelines for Certification of Taxpayer Identification
PAYER'S REQUEST FOR TAXPAYER Number on Substitute Form W-9 and complete as instructed therein.
IDENTIFICATION NUMBER (TIN)
-----------------------------------------------------------------
PART 3: Awaiting TIN / /
- ---------------------------------------------------------------------------------------------------
CERTIFICATION--Under the penalties of perjury, I certify that (i) the number shown on this form is
my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me) and
either (a) I have mailed or delivered an application to receive a taxpayer identification number
to the appropriate IRS center or Social Security Administration office or (b) I intend to mail or
deliver an application in the near future) and (ii) I am not subject to backup withholding
because: (a) I am exempt from backup withholding; or (b) I have not been notified by the IRS that
I am subject to backup withholding as a result of a failure to report all interest or dividends;
or (c) the IRS has notified me that I am no longer subject to backup withholding. Certification
instructions--You must cross out Item (ii) above if you have been notified by the IRS that you are
currently subject to backup withholding because of underreporting interest or dividends on your
tax return.
Signature ----------------------------------------------------------------- Date
--------------------
Name (Please Print)
Address (Include Zip Code)
- ---------------------------------------------------------------------------------------------------
FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY
PAYMENTS MADE TO YOU PURSUANT TO THIS OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
- ---------------------------------------------------------------------------------------------------
</TABLE>
THE INFORMATION AGENT FOR THE OFFER IS:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 549-6864 (Toll Free)
Banks and Brokers call (212) 269-5550 (Call Collect)
THE DEALER MANAGER FOR THE OFFER IS:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
2121 Avenue of the Stars
Los Angeles, California 90067
(310) 282-5511 (Call Collect)
Attention: Joe Samluk
<PAGE>
EXHIBIT (a)(3)
ENVIROTEST SYSTEMS CORP.
NOTICE OF GUARANTEED DELIVERY
OF SHARES OF CLASS A COMMON STOCK
This form, or a form substantially equivalent to this form, must be used to
accept the Offer (as defined below) if certificates for the shares of Class A
Common Stock of Envirotest Systems Corp. are not immediately available, if the
procedure for book-entry transfer cannot be completed on a timely basis, or if
time will not permit all other documents required by the Letter of Transmittal
to be delivered to the Depositary (as defined below) prior to the Expiration
Date (as defined in Section 1 of the Offer to Purchase defined below). Such form
may be delivered by hand or transmitted by mail or overnight courier, or, for
Eligible Institutions (as defined in the Offer to Purchase) only, by facsimile
transmission, to the Depositary. See Section 2 of the Offer to Purchase. THE
ELIGIBLE INSTITUTION, WHICH COMPLETES THIS FORM, MUST COMMUNICATE THE GUARANTEE
TO THE DEPOSITARY AND MUST DELIVER THE LETTER OF TRANSMITTAL AND CERTIFICATES
FOR SHARES TO THE DEPOSITARY WITHIN THE TIME SHOWN HEREIN. FAILURE TO DO SO
COULD RESULT IN A FINANCIAL LOSS TO SUCH ELIGIBLE INSTITUTION.
THE DEPOSITARY FOR THE OFFER IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
BY FACSIMILE TRANSMISSION:
BY MAIL: (FOR ELIGIBLE INSTITUTIONS BY HAND OR BY OVERNIGHT
Reorganization Department ONLY) COURIER:
2 Broadway, 19th floor (212) 509-5150 Reorganization Department
New York New York 10004 (212) 509-5152 2 Broadway, 19th floor
New York New York 10004
</TABLE>
CONFIRMATION BY TELEPHONE:
(212) 509-4000
Reorganization Department
ext. 229
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON A
LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY A FIRM THAT IS A
RECOGNIZED MEMBER OF AN ACCEPTABLE MEDALLION GUARANTEE PROGRAM UNDER THE
INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE
SPACE PROVIDED IN THE SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Envirotest Systems Corp., a Delaware
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Offer to Purchase, dated August 19, 1997 (the "Offer to Purchase"),
and the related Letter of Transmittal (which together constitute the "Offer"),
receipt of which is hereby acknowledged, the number of shares of Class A Common
Stock, par value $.01 per share (the "Shares"), of the Company listed below,
pursuant to the guaranteed delivery procedure set forth in Section 2 of the
Offer to Purchase.
<TABLE>
<S> <C>
Number of Shares:
- ------------------------------------------- -------------------------------------------
Name(s) (Please Print)
Certificate Nos.: (if available)
- ------------------------------------------- -------------------------------------------
- ------------------------------------------- -------------------------------------------
If Shares will be tendered by book-entry (Address)
transfer:
Name of Tendering Institution:
- ------------------------------------------- -------------------------------------------
Area Code and Telephone Number
Account No.: -------------- at (check one):
/ / The Depository Trust Company
/ / Philadelphia Depository Trust Company
-------------------------------------------
Signature(s)
</TABLE>
PRICE (IN DOLLARS) PER SHARE
AT WHICH SHARES ARE BEING TENDERED
- --------------------------------------------------------------------------------
IF SHARES ARE BEING TENDERED AT MORE THAN ONE PRICE,
A SEPARATE NOTICE OF GUARANTEED DELIVERY FOR EACH PRICE
SPECIFIED MUST BE USED.
- --------------------------------------------------------------------------------
CHECK ONLY ONE BOX. IF MORE THAN ONE BOX IS CHECKED, OR
IF NO BOX IS CHECKED, THERE IS NO VALID
TENDER OF SHARES.
- --------------------------------------------------------------------------------
/ / $3.75 / / $4.00 / / $4.25 / / $4.50
- --------------------------------------------------------------------------------
If you do not wish to specify a purchase price, check the following box, in
which case you will be deemed to have tendered at the Purchase Price determined
by the Company in accordance with the terms of the Offer (persons checking this
box need not indicate the price per Share in the box entitled "Price (In
Dollars) Per Share At Which Shares Are Being Tendered" above). / /
2
<PAGE>
GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a member of a registered national securities
exchange or the National Association of Securities Dealers, Inc. or a commercial
bank or trust company (not a savings bank or savings and loan association)
having an office, branch or agency in the United States hereby guarantees (i)
that the above-named person(s) has a net long position in the Shares being
tendered within the meaning of Rule 14e-4 promulgated under the Securities
Exchange Act of 1934, as amended, (ii) that such tender of Shares complies with
Rule 14e-4 and (iii) to deliver to the Depositary at one of its addresses set
forth above certificate(s) for the Shares tendered hereby, in proper form for
transfer, or a confirmation of the book-entry transfer of the Shares tendered
hereby into the Depositary's account at The Depository Trust Company or the
Philadelphia Depository Trust Company, together with a properly completed and
duly executed Letter(s) of Transmittal (or facsimile(s) thereof) with any
required signature guarantee(s) or an Agent's Message (as defined in The Offer
to Purchase) and any other required documents, all within five American Stock
Exchange trading days after the date hereof.
<TABLE>
<S> <C>
- ------------------------------------------- -------------------------------------------
Name of Firm Authorized Signature
- ------------------------------------------- -------------------------------------------
Address Name
- ------------------------------------------- -------------------------------------------
City, State, Zip Code Title
-------------------------------------------
Dated: , 1997 Area Code and Telephone Number
</TABLE>
DO NOT SEND SHARE CERTIFICATES WITH THIS FORM.
YOUR SHARE CERTIFICATES MUST BE SENT WITH
THE LETTER OF TRANSMITTAL.
3
<PAGE>
Exhibit (a)(4)
ENVIROTEST SYSTEMS CORP.
OFFER TO PURCHASE FOR CASH UP TO 4,444,444 SHARES
OF ITS CLASS A COMMON STOCK AT A PURCHASE PRICE
NOT GREATER THAN $4.50 NOR LESS THAN $3.75 PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 17, 1997, UNLESS THE OFFER IS
EXTENDED.
August 19, 1997
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
In our capacity as Dealer Manager, we are enclosing the material listed
below relating to the offer of Envirotest Systems Corp., a Delaware corporation
(the "Company"), to purchase up to 4,444,444 shares of its Class A Common Stock,
par value $.01 per share, (the "Shares"), at prices not greater than $4.50 nor
less than $3.75 per Share, net to the seller in cash, as specified by tendering
shareholders, upon the terms and subject to the conditions set forth in the
Offer to Purchase, dated August 19, 1997 (the "Offer to Purchase"), and in the
related Letter of Transmittal (which together constitute the "Offer").
The Company will select the lowest single per Share price (not greater than
$4.50 nor less than $3.75 per Share) (the "Purchase Price") that will allow it
to purchase 4,444,444 Shares (or such lesser number of Shares as is validly
tendered at prices not greater than $4.50 nor less than $3.75 per Share) and not
withdrawn pursuant to the Offer, taking into account the number of Shares so
tendered and the prices specified by tendering shareholders. The Company will
purchase all Shares validly tendered at prices at or below the Purchase Price
and not withdrawn, upon the terms and subject to the conditions of the Offer,
including the provisions relating to proration described in the Offer to
Purchase. See Section 1 of the Offer to Purchase.
The Purchase Price will be paid in cash, net to the seller, with respect to
all Shares purchased. Shares tendered at prices in excess of the Purchase Price
and Shares not purchased because of proration will be returned.
THE OFFER IS NOT CONDITIONED ON ANY MINIMUM NUMBER OF SHARES BEING TENDERED.
THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE SECTION 5 OF THE
OFFER TO PURCHASE.
We are asking you to contact your clients for whom you hold Shares
registered in your name (or in the name of your nominee) or who hold Shares
registered in their own names. Please bring the Offer to their attention as
promptly as possible. The Company will, upon request, reimburse you for
reasonable and customary handling and mailing expenses incurred by you in
forwarding any of the enclosed materials to your clients.
For your information and for forwarding to your clients, we are enclosing
the following documents:
1. The Offer to Purchase.
2. The Letter of Transmittal for your use and for the information of
your clients.
3. A letter to shareholders of the Company from Chester C. Davenport,
the Chairman of the Company.
4. The Notice of Guaranteed Delivery to be used to accept the Offer if
the Shares and all other required documents cannot be delivered to the
Depositary by the Expiration Date (each as defined in the Offer to
Purchase).
<PAGE>
5. A letter that may be sent to your clients for whose accounts you
hold Shares registered in your name or in the name of your nominee, with
space for obtaining such clients' instructions with regard to the Offer.
6. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 providing information relating to backup federal income
tax withholding.
7. A return envelope addressed to Continental Stock Transfer & Trust
Company, the Depositary.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 17, 1997, UNLESS THE OFFER IS EXTENDED.
The Company will not pay any fees or commissions to any broker, dealer or
other person for soliciting tenders of Shares pursuant to the Offer. The Company
will, upon request, reimburse brokers, dealers, commercial banks and trust
companies for reasonable and customary handling and mailing expenses incurred by
them in forwarding materials relating to the Offer to their customers. The
Company will pay all stock transfer taxes applicable to its purchase of Shares
pursuant to the Offer, subject to Instruction 7 of the Letter of Transmittal.
As described in the Offer to Purchase, if more than 4,444,444 Shares have
been validly tendered at or below the Purchase Price and not withdrawn prior to
the Expiration Date, as defined in Section 1 of the Offer to Purchase, the
Company will accept Shares for purchase on a pro rata basis.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE OFFER. HOWEVER,
SHAREHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO,
HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH SHARES SHOULD BE
TENDERED. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING SHARES. THE COMPANY HAS BEEN ADVISED THAT NO EXECUTIVE OFFICER INTENDS
TO TENDER SHARES PURSUANT TO THE OFFER. THE COMPANY HAS BEEN ADVISED, HOWEVER,
THAT CERTAIN OF ITS DIRECTORS HOLDING AN AGGREGATE OF 2,664,021 SHARES HAVE
RESERVED THE RIGHT TO TENDER SHARES PURSUANT TO THE OFFER BUT HAVE NOT YET
DECIDED WHETHER TO DO SO.
Any questions or requests for assistance or additional copies of the
enclosed materials may be directed to the Information Agent or the Dealer
Manager at their respective addresses and telephone numbers set forth on the
back cover of the enclosed Offer to Purchase.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY, THE DEALER MANAGER, THE
INFORMATION AGENT OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE
ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH
THE OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS
CONTAINED THEREIN.
2
<PAGE>
Exhibit (a)(5)
ENVIROTEST SYSTEMS CORP.
OFFER TO PURCHASE FOR CASH
UP TO 4,444,444 SHARES OF ITS CLASS A COMMON STOCK
NOT GREATER THAN $4.50 NOR LESS THAN $3.75 PER SHARE
- --------------------------------------------------------------------------------
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON WEDNESDAY, SEPTEMBER 17, 1997, UNLESS THE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
August 19, 1997
To Our Clients:
Enclosed for your consideration are the Offer to Purchase, dated August 19,
1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which
together constitute the "Offer") setting forth an offer by Envirotest Systems
Corp., a Delaware corporation (the "Company"), to purchase up to 4,444,444
shares of its Class A Common Stock, par value $.01 per share (the "Shares"), at
prices not greater than $4.50 nor less than $3.75 per Share, net to the seller
in cash, as specified by tendering shareholders, upon the terms and subject to
the conditions of the Offer. Also enclosed herewith is certain other material
related to the Offer, including a letter from Chester C. Davenport, Chairman of
the Company, to shareholders.
The Company will select the lowest single per Share price (not greater than
$4.50 nor less than $3.75 per Share) (the "Purchase Price") that will allow it
to purchase 4,444,444 Shares (or such lesser number of Shares as are validly
tendered at prices not greater than $4.50 nor less than $3.75 per Share) and not
withdrawn pursuant to the Offer, taking into account the number of Shares so
tendered and the prices specified by tendering shareholders. The Company will
purchase all Shares validly tendered at prices at or below the Purchase Price
and not withdrawn, upon the terms and subject to the conditions of the Offer,
including the provisions thereof relating to proration. See Section 1 of the
Offer to Purchase.
WE ARE THE HOLDERS OF RECORD OF SHARES HELD FOR YOUR ACCOUNT. AS SUCH, A
TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND
PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR
YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR
YOUR ACCOUNT.
We request instructions as to whether you wish us to tender any or all of
the Shares held by us for your account, upon the terms and subject to the
conditions set forth in the Offer to Purchase and the Letter of Transmittal.
Your attention is invited to the following:
1. You may tender Shares at prices (in multiples of $.25), which cannot
be greater than $4.50 nor less than $3.75 per Share, as indicated in the
attached Instruction Form, net to you in cash.
2. The Offer is extended for up to 4,444,444 Shares, constituting
approximately 33.7% of the total Shares outstanding as of August 15, 1997
(24.3% assuming the exercise of all outstanding Options and the conversion
of all outstanding Class B Shares and Class C Shares, as such terms are
defined in The Offer to Purchase). The Offer is not conditioned on any
minimum number of Shares being tendered. The Offer is, however, subject to
certain other conditions set forth in the Offer to Purchase.
3. The Offer, proration period and withdrawal rights will expire at
5:00 P.M., New York City time, on Wednesday, September 17, 1997, unless the
Offer is extended. Your instructions to us should be forwarded to us in
ample time to permit us to submit a tender on your behalf.
<PAGE>
4. As described in the Offer to Purchase, if more than 4,444,444 Shares
have been validly tendered at or below the Purchase Price and not withdrawn
prior to the Expiration Date, as defined in Section 1 of the Offer to
Purchase, the Company will purchase Shares on a pro rata basis.
5. Tendering shareholders will not be obligated to pay any brokerage
commissions or solicitation fees on the Company's purchase of Shares in the
Offer. Any stock transfer taxes applicable to the purchase of Shares by the
Company pursuant to the Offer will be paid by the Company, except as
otherwise provided in Instruction 7 of the Letter of Transmittal.
6. If you wish to tender portions of your Shares at different prices,
you must complete a separate Instruction Form for each price at which you
wish to tender each portion of your Shares. We must submit separate Letters
of Transmittal on your behalf for each price you will accept.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE OFFER. HOWEVER,
SHAREHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO,
HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH SHARES SHOULD BE
TENDERED. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING SHARES. THE COMPANY HAS BEEN ADVISED THAT NO EXECUTIVE OFFICER INTENDS
TO TENDER SHARES PURSUANT TO THE OFFER. THE COMPANY HAS BEEN ADVISED, HOWEVER,
THAT CERTAIN OF ITS DIRECTORS HOLDING AN AGGREGATE OF 2,664,021 SHARES HAVE
RESERVED THE RIGHT TO TENDER SHARES PURSUANT TO THE OFFER BUT HAVE NOT YET
DECIDED WHETHER TO DO SO.
If you wish to have us tender any or all of your Shares held by us for your
account upon the terms and subject to the conditions set forth in the Offer to
Purchase, please so instruct us by completing, executing and returning to us the
attached Instruction Form. An envelope to return your instructions to us is
enclosed. If you authorize tender of your Shares, all such Shares will be
tendered unless otherwise specified on the Instruction Form. YOUR INSTRUCTIONS
SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR
BEHALF BY THE EXPIRATION OF THE OFFER.
The Offer is being made to all holders of Shares. The Company is not aware
of any jurisdiction where the making of the Offer is not in compliance with
applicable law. If the Company becomes aware of any jurisdiction where the
making of the Offer is not in compliance with any valid applicable law, the
Company will make a good faith effort to comply with such law. If, after such
good faith effort, the Company cannot comply with such law, the Offer will not
be made to (nor will tenders be accepted from or on behalf of) the holders of
Shares residing in such jurisdiction. In any jurisdiction the securities or blue
sky laws of which require the Offer to be made by a licensed broker or dealer,
the Offer is being made on the Company's behalf by the Dealer Manager or one or
more registered brokers or dealers licensed under the laws of such jurisdiction.
2
<PAGE>
INSTRUCTION FORM
WITH RESPECT TO OFFER TO PURCHASE FOR CASH
UP TO 4,444,444 SHARES OF CLASS A COMMON STOCK
OF
ENVIROTEST SYSTEMS CORP.
AT A PURCHASE PRICE NOT GREATER THAN
$4.50 NOR LESS THAN $3.75 PER SHARE
The undersigned acknowledge(s) receipt of your letter and the enclosed Offer
to Purchase, dated August 19, 1997, and the related Letter of Transmittal (which
together constitute the "Offer") in connection with the Offer by Envirotest
Systems Corp. (the "Company") to purchase up to 4,444,444 shares of its Class A
Common Stock, par value $.01 per share (the "Shares"), at prices not greater
than $4.50 nor less than $3.75 per Share, net to the undersigned in cash, as
specified by the undersigned, upon the terms and subject to the terms and
conditions of the Offer.
This will instruct you to tender to the Company the number of Shares
indicated below (or, if no number is indicated below, all Shares) that are held
by you for the account of the undersigned, at the price per Share indicated
below, upon the terms and subject to the conditions of the Offer.
SHARES TENDERED
/ / By checking this box, all Shares held by us for your account will be
tendered. If fewer than all Shares held by us for your account are to be
tendered, please check the box and indicate below the aggregate number
of Shares to be tendered by us.
______________ Shares
Unless otherwise indicated, it will be assumed that all Shares held by us
for your account are to be tendered.
3
<PAGE>
PRICE (IN DOLLARS) PER SHARE
AT WHICH SHARES ARE BEING TENDERED
- --------------------------------------------------------------------------------
IF SHARES ARE BEING TENDERED AT MORE THAN ONE PRICE,
A SEPARATE INSTRUCTION FORM FOR EACH PRICE SPECIFIED MUST BE USED.
- --------------------------------------------------------------------------------
CHECK ONLY ONE BOX. IF MORE THAN ONE BOX IS CHECKED, OR
IF NO BOX IS CHECKED, THERE IS NO VALID TENDER OF SHARES.
- --------------------------------------------------------------------------------
/ / $3.75
/ / $4.00
/ / $4.25
/ / $4.50
If you do not wish to specify a purchase price, check the following box, in
which case you will be deemed to have tendered at the Purchase Price determined
by the Company in accordance with the terms of the Offer (persons checking this
box need not indicate the price per Share in the box entitled "Price (In
Dollars) Per Share At Which Shares Are Being Tendered" above). / /
THE METHOD OF DELIVERY OF THIS DOCUMENT IS AT THE ELECTION AND RISK OF THE
TENDERING SHAREHOLDERS. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY.
SIGN HERE
--------------------------------------
Signature(s)
Name
--------------------------------------
Dated: , 1997
Address
-------------------------------------------------------------------------------
--------------------------------------
--------------------------------------
Social Security or Taxpayer ID No.
4
<PAGE>
Exhibit (a)(6)
<TABLE>
<S> <C>
ENVIROTEST SYSTEMS CORP.
[LOGO] 6903 Rockledge Drive
Suite 214
Bethesda, MD 20817
</TABLE>
August 19, 1997
Dear Shareholder:
Envirotest Systems Corp. is offering to purchase up to 4,444,444 shares of
its Class A Common Stock at a price not greater than $4.50 nor less than $3.75
per share. The Company is conducting the Offer through a procedure commonly
referred to as a "Dutch Auction." This procedure allows you to select the price
within the specified price range at which you are willing to sell all or a
portion of your shares to the Company.
The Offer is explained in detail in the enclosed Offer to Purchase and
Letter of Transmittal. If you wish to tender your shares, instructions on how to
tender shares are provided in the enclosed materials. I encourage you to read
these materials carefully before making any decision with respect to the Offer.
Neither the Company nor its Board of Directors makes any recommendation to any
shareholder whether to tender any or all shares.
Please note that the Offer is scheduled to expire at 5:00 p.m., New York
City time, on Wednesday, September 17, 1997, unless extended by the Company.
Questions regarding the Offer should be directed to D.F. King & Co., Inc., the
Information Agent, at 1-800-549-6864.
Sincerely,
/s/ Chester C. Davenport
Chester C. Davenport
CHAIRMAN
<PAGE>
EXHIBIT (a)(7)
[Logo] ENVIROTEST NEWS
SYSTEMS
Contact: Robert Siegfried
Adam Weiner
Kekst and Company
(212) 521-4800
ENVIROTEST SYSTEM'S BOARD AUTHORIZES
DUTCH TENDER OFFER FOR UP TO $20 MILLION
OF THE COMPANY'S OUTSTANDING COMMON STOCK
BOARD ALSO AUTHORIZES PURCHASE OF UP TO
$50 MILLION AGGREGATE PRINCIPAL AMOUNT OF
OUTSTANDING 9-1/8 % SENIOR NOTES
FOR IMMEDIATE RELEASE
- ---------------------
SUNNYVALE, CA, AUGUST 13, 1997--Envirotest Systems Corp. (AMEX-ENR) today
announced that its Board of Directors has authorized the purchase by the
Company of up to $20 million of its outstanding Class A Common Stock, par
value $.01 per share (the "Common Stock"), pursuant to a "Dutch Auction"
equity tender offer in which shareholders will be invited to tender shares of
Common Stock within a range of prices to be determined by the pricing
committee established by the Board of Directors.
In addition, the Company has also announced that its Board of Directors has
authorized the purchase by the Company of up to $50 million aggregate
principal amount of its outstanding 9-1/8% Senior Notes due 2001 at a price of
100%, plus accrued and unpaid interest to and including the purchase date,
pursuant to a self-tender offer.
Commencement of each of the tender offers is conditioned upon the Company's
receipt of the requisite consents from the holders of the Company's
outstanding 9-1/8% Notes and 9-5/8% Senior Subordinated Notes due 2003 to
certain amendments to the indentures governing such notes, which amendments
would permit the Company to, among other things, repurchase the shares of
Common Stock pursuant to the equity offer. The Company's Consent Solicitation
for such amendments expires on Monday, August 18, 1997.
<PAGE>
The amendment will not become operative until the offer to purchase up to
$50 million aggregate principal amount of the 9-1/8% Notes expires. As a
result, the Dutch Auction equity tender offer will be conditioned upon, among
other things, the expiration of the debt tender offer.
It is expected that each of the offers will commence as soon as practicable
following the receipt of the requisite consents to the amendments to the
9-1/8% Notes and 9-5/8% Notes. The Company expects to fund the debt and
equity tender offers from cash on hand.
Envirotest Systems Corp. is the largest provider of vehicle inspection
services in the country and the only domestic company that provides vehicle
inspection services outside the United States.
This press release contains statements that are forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
which represent the Company's expectations or beliefs concerning future
events. The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements. A number of such factors are set
forth in the Company's filings with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q.
# # #
<PAGE>
EXHIBIT(a)(8)
[LOGO] NEWS
CONTACT: Robert Siegfried or Adam Weiner
Kekst and Company
(212) 521-4800
FOR IMMEDIATE RELEASE
ENVIROTEST COMMENCES EQUITY AND DEBT TENDER OFFERS
SUNNYDALE, CA, AUGUST 19, 1997 -- Envirotest Systems Corp. (AMEX:ENR) today
announced that it has commenced its previously authorized "Dutch Auction"
equity tender offer for up to 4,444,444 shares of its outstanding Class A
Common Stock, par value $.01 per share (the "Common Stock")(or approximately
24.3% of its outstanding shares of Common Stock, including vested options and
shares of Class B and Class C Common Stock).
Pursuant to the Dutch Auction tender offer, shareholders will be invited to
tender shares of Common Stock at prices not greater than $4.50, nor less than
$3.75 per share. The Company will determine the single lowest per share price
within that price range that will allow the Company to purchase up to
4,444,444 shares of Common Stock (or such lesser number of shares as are
properly tendered), based upon the number of shares properly tendered and
the prices specified by the tendering shareholders. If the tender offer is
oversubscribed, shares properly tendered at or below the purchase price will
be subject to proration. The equity tender offer is not conditioned on any
minimum number of shares being tendered.
In addition, the Company has also announced that it has commenced its
previously authorized tender offer to purchase up to $50 million aggregate
principal amount of its outstanding 9.125% Senior Notes due 2001. The
expiration of the offer to purchase up to $50 million of 9.125% Notes is a
condition precedent to the completion of the Dutch Auction equity tender
offer.
Each of the offers will expire at 5:00 p.m., New York City time, on September
17, 1997, unless the offers are extended. The Company expects to fund the
debt and equity tender offers from cash on hand.
Neither the Company nor its Board of Directors makes any recommendation to
holders of the Common Stock or 9.125% Notes whether to tender or refrain from
tendering their securities. Each such holder must make the decision whether
to tender and, if so, how many shares, and at what prices to tender shares of
Common Stock or the amount of 9.125% Notes to tender. Certain directors and
executive officers, who collectively hold
<PAGE>
2,664,021 shares of Common Stock, have informed the Company that they desire
to maintain the flexibility to tender shares, although they have not yet made
a decision whether to tender shares pursuant to the equity offer.
Donaldson, Lufkin & Jenrette Securities Corporation will act as Dealer
Manager and D.F. King & Co., Inc. will act as Information Agent for each of
the tender offers.
Envirotest Systems Corp. is the largest provider of vehicle inspection
services in the country and the only domestic company that provides vehicle
inspection services outside the United States.
This press release contains statements that are forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
which represent the Company's expectations or beliefs concerning future
events. The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements. A number of such factors are set
forth in the Company's filings with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q.
###
<PAGE>
EXHIBIT (a)(9)
THIS ANNOUNCEMENT IS NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION OF AN OFFER
TO SELL SHARES. THE OFFER IS MADE SOLELY BY THE OFFER TO PURCHASE DATED
AUGUST 19, 1997 AND THE RELATED LETTER OF TRANSMITTAL. THE OFFER IS NOT
BEING MADE TO, NOR WILL THE COMPANY ACCEPT TENDERS FROM OR ON BEHALF OF,
HOLDERS OF SHARES IN ANY JURISDICTION IN WHICH THE OFFER OR ITS
ACCEPTANCE WOULD VIOLATE THAT JURISDICTION'S LAW. THE COMPANY IS NOT
AWARE OF ANY JURISDICTION IN WHICH THE MAKING OF THE OFFER OR THE
TENDER OF SHARES WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION. IN JURISDICTIONS WHOSE LAWS REQUIRE THAT THE OFFER
BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE
DEEMED TO BE MADE ON THE COMPANY'S BEHALF BY DONALDSON,
LUFKIN & JENRETTE SECURITIES CORPORATION, OR BY ONE OR
MORE REGISTERED BROKERS OR DEALERS LICENSED UNDER THE
LAWS OF SUCH
JURISDICTION.
NOTICE OF OFFER TO PURCHASE FOR CASH
BY
ENVIROTEST SYSTEMS CORP.
UP TO 4,444,444 SHARES OF ITS CLASS A COMMON STOCK
AT A PURCHASE PRICE NOT GREATER THAN $4.50
NOR LESS THAN $3.75 PER SHARE
Envirotest Systems Corp., a Delaware corporation (the "Company"), invites
its shareholders to tender up to 4,444,444 shares of its Class A Common Stock,
par value $.01 per share (the "Shares"), to the Company at prices not greater
than $4.50 nor less than $3.75 per Share in cash, as specified by tendering
shareholders, upon the terms and subject to the conditions set forth in the
Offer to Purchase, dated August 19, 1997 (the "Offer to Purchase"), and in the
related Letter of Transmittal (which, as may be amended or supplemented from
time to time, together constitute the "Offer"). The Shares are listed and traded
on the American Stock Exchange, Inc. under the symbol "ENR."
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00
P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 17, 1997, UNLESS THE OFFER IS EXTENDED.
The Offer is not conditioned on any minimum number of Shares being tendered.
The Offer is, however, subject to certain other conditions set forth in the
Offer to Purchase.
The Board of Directors of the Company has approved the making of the Offer.
However, shareholders must make their own decision whether to tender Shares and,
if so, how many Shares to tender and the price or prices at which Shares should
be tendered. Neither the Company nor its Board of Directors makes any
recommendation to any shareholder as to whether to tender or refrain from
tendering Shares. The Company has been advised that none of its executive
officers intends to tender any Shares pursuant to the Offer. The Company has
been advised, however, that certain of its directors holding an aggregate of
2,664,021 Shares have reserved the right to tender Shares pursuant to the Offer
but have not yet decided whether to do so.
The Company will, upon the terms and subject to the conditions of the Offer,
select the lowest single per Share price (not greater than $4.50 nor less than
$3.75 per Share), net to the seller in cash (the "Purchase Price"), that will
allow it to buy 4,444,444 Shares (or such lesser number of Shares as are validly
tendered and not withdrawn) pursuant to the Offer including the procedure
pursuant to which Shares will be accepted for payment and the proration terms
described in the Offer to Purchase. The Company will pay the Purchase Price for
all Shares validly tendered prior to the Expiration Date at prices at or below
the Purchase Price and not withdrawn, upon the terms and subject to the
conditions of the Offer. The term "Expiration Date" means 5:00 p.m., New York
City time, on September 17, 1997, unless and until the Company in its sole
discretion shall have extended the period of time during which the Offer is
open, in which event the term "Expiration Date" shall refer to the latest time
and date at which the Offer, as so extended by the Company, shall expire. The
Company reserves the right, in its sole discretion, to purchase more than
4,444,444 Shares pursuant to the Offer. If the number of Shares validly tendered
at or below the Purchase Price and not withdrawn prior to the Expiration Date is
less than or equal to 4,444,444 Shares (or such greater number of Shares as the
Company may elect to purchase in accordance with the terms of the Offer to
Purchase), the Company will, upon the terms and conditions of the Offer,
purchase at the Purchase Price all shares so tendered. In all cases, payment for
Shares tendered and accepted for payment pursuant to the Offer will be made
promptly (subject to possible delay in the event of proration) but only after
timely receipt by Continental Stock Transfer & Trust Company (the "Depositary")
of certificates for Shares (or a timely confirmation of a book-entry transfer of
such Shares into the account of the Depositary at one of the Book-Entry Transfer
Facilities (as defined in the Offer to Purchase)), a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile thereof) or an
Agent's Message (as defined in the Offer to Purchase) in lieu of a Letter of
Transmittal, and any other required documents.
Upon the terms and subject to the conditions of the Offer, in the event that
prior to the Expiration Date more than 4,444,444 Shares (or such greater number
of Shares as the Company may elect to purchase pursuant to the Offer in
accordance with the terms of the Offer to Purchase) are validly tendered at or
below the Purchase Price and not withdrawn, the Company will purchase such
validly tendered Shares on a pro rata basis.
<PAGE>
The Company's Board of Directors believes that the Company's financial
condition and outlook and current market conditions make this an attractive time
to repurchase a portion of the outstanding Shares. In addition, the Board of
Directors believes that the Offer is in the best interest of the Company and its
shareholders and it further believes that it will enhance shareholder value in
the short term and the long term. In addition, the Offer affords to those
shareholders who desire liquidity an opportunity to sell all or a portion of
their Shares without the usual transaction costs associated with open market
sales.
The Company expressly reserves the right, in its sole discretion, at any
time or from time to time to extend the period of time during which the Offer is
open and thereby delay acceptance for payment of, and payment for, any Shares by
giving oral or written notice of such extension to the Depositary and making a
public announcement thereof. Subject to certain conditions set forth in the
Offer to Purchase, the Company also expressly reserves the right, in its sole
discretion, to terminate the Offer and not accept for payment or pay for any
Shares not theretofore accepted for payment or paid for or, subject to
applicable law, to postpone payment for Shares.
Shares tendered pursuant to the Offer may be withdrawn at any time before
the Expiration Date and, unless accepted for payment by the Company as provided
in the Offer to Purchase, may also be withdrawn after 12:00 Midnight, New York
City time, on October 14, 1997. For a withdrawal to be effective, the Depositary
must receive a notice of withdrawal in written, telegraphic or facsimile
transmission form on a timely basis. Such notice of withdrawal must specify the
name of the person who tendered the Shares to be withdrawn, the number of Shares
tendered, the number of Shares to be withdrawn and the name of the registered
holder, if different from that of the person who tendered such Shares. If the
certificates have been delivered or otherwise identified to the Depositary,
then, prior to the release of such certificates, the tendering shareholder must
also submit the serial numbers shown on the particular certificates evidencing
the Shares and the signature on the notice of withdrawal must be guaranteed by a
firm that is a recognized member of an acceptable medallion guarantee program
(except in the case of Shares tendered by an Eligible Institution). If Shares
have been tendered pursuant to the procedure for book-entry transfer, the notice
of withdrawal must specify the name and the number of the account at the
applicable Book-Entry Transfer Facility to be credited with the withdrawn Shares
and otherwise comply with the procedures of such facility.
The Offer to Purchase and the Letter of Transmittal contain important
information which should be read carefully before shareholders decide whether to
accept or reject the Offer and, if accepted, at what price or prices to tender
their Shares. These materials are being mailed to record holders of Shares and
are being furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the Company's shareholder list (or, if
applicable, who are listed as participants in a clearing agency's security
position listing) for transmittal to beneficial holders of Shares.
The information required to be disclosed by Rule 13e-4(d)(l) under the
Securities Exchange Act of 1934, as amended, is contained in the Offer to
Purchase and is incorporated by reference herein.
Additional copies of the Offer to Purchase and the Letter of Transmittal may
be obtained from the Information Agent and will be furnished at the Company's
expense. Questions and requests for assistance may be directed to the
Information Agent or the Dealer Manager as set forth below:
THE INFORMATION AGENT FOR THE OFFER IS:
D.F. KING & CO., INC.
77 Water Street
New York, New York 10005
(800) 549-6864 (Toll Free)
Banks and Brokers call (212) 269-5550 (Call Collect)
THE DEALER MANAGER FOR THE OFFER IS:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
2121 Avenue of the Stars
Los Angeles, California 90067
(310) 282-5511 (Call Collect)
<PAGE>
Exhibit (a)(10)
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.--
Social Security numbers have nine digits separated by two hyphens, E.G.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen, E.G., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
- ------------------------------------------------------------- -------------------------------------------------------------
GIVE THE GIVE THE EMPLOYER
SOCIAL SECURITY IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF-- FOR THIS TYPE OF ACCOUNT: NUMBER OF--
<C> <S> <C> <C> <C> <C>
- ------------------------------------------------------------- -------------------------------------------------------------
1. An individual's account The individual 8. Sole proprietorship The owner(4)
account
2. Two or more individuals The actual owner of the 9. A valid trust, estate, The legal entity (do not
(joint account) account or, if combined or pension trust furnish the identifying
funds, the first number of the personal
individual on the representative or
account(1) trustee unless the legal
entity itself is not
designated in the
account title)(5)
3. Husband wife (joint The actual owner of the 10. Corporate account The corporation
account) account or, if joint
funds, either person (1)
4. Custodian account of a The minor (2) 11. Religious, charitable, The organization
minor (Uniform Gift to or educational
Minors Act) organization account
5. Adult and minor (joint The adult or, if the 12. Partnership account held The partnership
account) minor is the only in the name of the
contributor, the business
minor(1)
6. Account in the name of The ward, minor, or 13. Association, club, or The organization
guardian or committee incompetent person(3) other tax-exempt
for a designated ward, organization
minor, or incompetent
person
7. a. A revocable savings The grantor-trustee(1) 14. A broker or registered The broker or nominee
trust account (in nominee
which grantor is
also trustee)
b. Any "trust" account The actual owner(1) 15. Account with the The public entity
that is not a legal Department of
or valid trust under Agriculture in the name
State law of a public entity (such
as a State or local
government, school
district, or prison)
that receives
agricultural program
payments
<CAPTION>
- ------------------------------------------------------------- -------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner. If the owner does not have an employer
identification number, furnish the owner's social security number.
(5) List first and circle the name of the legal trust, estate or pension trust.
NOTE: IF NO NAME IS CIRCLED WHEN THERE IS MORE THAN ONE NAME, THE NUMBER WILL
BE CONSIDERED TO BE THAT OF THE FIRST NAME LISTED.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain form SS-5, Application for a Social Security Number Card (for
resident individuals), Form SS-4, Application for Employer Identification Number
(for businesses and all other entitites), or Form W-7 for International Taxpayer
Identification Number (for alien individuals required to file U.S. tax returns),
at an office of the Social Security Administration or the Internal Revenue
Service.
To complete Substitute Form W-9, if you do not have a taxpayer identification
number, write "Applied For" in the space for the taxpayer identification number
in Part I, sign and date the Form, and give it to the requester. Generally, you
will then have 60 days to obtain a taxpayer identification number and furnish it
to the requester. If the requester does not receive your taxpayer identification
number within 60 days, backup withholding, if applicable, will begin and will
continue until you furnish your taxpayer identification number to the requester.
PAYEES EXEMPT FROM BACKUP WITHHOLDING PENALTIES
Payees specifically exempted from backup withholding on ALL payments include the
following:*
- - A corporation.
- - A financial institution.
- - An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(b)(7).
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
politial subdivision or instrumentality thereof.
- - A foreign government or a political subdivision, agency or instrumentality
thereof.
- - An international organization or any agency or instrumentality thereof.
- - A registered dealer in securities or commodities registered in the United
States or a possession of the United States.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - An entity registered at all times during the tax year under the Investment
Company Act of 1940.
- - A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the United
States and which have at least one nonresident partner.
- --------------------------
* Unless otherwise noted herein, all references below to section numbers or to
regulations are references to the Internal Revenue Code and the regulation
promulgated thereunder.
- - Payments of patronage dividends where the amount received is not paid in
money.
- - Payments made by certain foreign organizations.
- - Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- - Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if (i) this interest is $600 or more, (ii) the
interest is paid in the course of the payer's trade or business and (iii) you
have not provided your correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- - Payments described in section 6049(b)(5) to non-resident aliens.
- - Payments on tax-free covenant bonds under section 1451.
- - Payments made by certain foreign organizations.
- - Payments made to a nominee.
EXEMPT PAYEES DESCRIBED ABOVE SHOULD FILE A SUBSTITUTE FORM W-9 TO AVOID
POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE THIS FORM WITH THE PAYER, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM,
SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER.
Certain payments other than interest, dividends and patronage dividends that are
not subject to information reporting are also not subject to backup withholding.
For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A.
PRIVACY ACT NOTICES. Section 6109 requires most recipients of dividends,
interest or other payments to give taxpayer identification numbers to payers who
must report the payments to the IRS. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. Payers must be
given the numbers whether or not recipients are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividends, and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.-- If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reason-able cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE STATEMENTS WITH RESPECT TO WITHHOLDING.-- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.-- If you falsify
certifications or affirmations, you are subject to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE>
EXHIBIT (c)(1)
STOCKHOLDERS' AGREEMENT
STOCKHOLDERS' AGREEMENT, dated as of March 30, 1993 and effective upon
the consummation of the Offerings (as defined herein) (the "Agreement"), by
and among Chester C. Davenport, Slivy C. Edmonds, Georgetown Partners Limited
Partnership, a Maryland limited partnership ("Georgetown"), Apollo Investment
Fund, L.P., a Delaware limited partnership ("Apollo"), Chemical Equity
Associates, A California Limited Partnership ("CVP"), TSG Ventures Inc., a
Delaware corporation ("TSG"), and any person who hereafter holds shares of
Class B Common Stock (as defined herein) (the "New Class B Holders").
Mr. Davenport, Ms. Edmonds, Georgetown, Apollo, CVP, TSG and the New Class B
Holders are collectively referred to herein as the "Stockholders" and
individually as a "Stockholder."
WHEREAS, each of Apollo, CVP and TSG is the beneficial owner of
unregistered shares of common stock of Envirotest Systems Corp. (the
"Company"), which shares are subject to restrictions on resale by federal
securities law; and
WHEREAS, Georgetown is the record and beneficial holder of all of the
outstanding shares of, and options to purchase, Class B Common Stock, par
value $.01 per share, of the Company (the "Class B Common Stock"), which
shares are subject to mandatory conversion under certain circumstances as set
forth in the Restated Certificate of Incorporation of the Company (attached
hereto as Schedule I is a description of the beneficial ownership of common
stock of the Company, and options to purchase common stock of the Company, of
the parties hereto as of the effective date of this Agreement); and
WHEREAS, through its ownership of Class B Common Stock, Georgetown is
entitled to elect six of the nine directors of the Company pursuant to
Article Fifth of the Restated Certificate of Incorporation of the Company; and
WHEREAS, the Company intends to sell up to 3,910,000 shares of its Class A
Common Stock, par value $.01 per share (the "Class A Common Stock") and
$100,000,000 aggregate principal amount of ___% Senior Subordinated Notes due
2003 in concurrent underwritten public offerings (the "Offerings").
NOW, THEREFORE, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used herein:
<PAGE>
(a) "Affiliate" shall mean (i) any person directly or indirectly
controlling, controlled by, or under common control with, another person, and
(ii) a person owning or controlling 51% or more of the outstanding voting
securities of such other person.
(b) "control," with respect to any person, shall mean the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise.
(c) "person" shall mean any individual, partnership, corporation,
joint venture, association, joint-stock company, trust, unincorporated
organization, union, business association, firm, government or agency or
political subdivision thereof, or other entity.
2. RESTRICTIONS ON CLASS B DIRECTORS.
(a) Georgetown and the New Class B Holders agree that they shall
cause the Class B Common Stock to be voted such that no more than four of the
six Class B Directors (as such term is defined in the Restated Certificate of
Incorporation of the Company) shall consist of persons who are: (i) officers
or full-time employees of the Company; (ii) Mr. Davenport, Ms. Edmonds or
their Affiliates, or officers, directors, partners or employees of their
Affiliates; or (iii) family members (including parents, spouse and children)
of either (i) or (ii).
3. CONVERSION OF CLASS B COMMON STOCK UPON CERTAIN EVENTS.
(a) Georgetown, Mr. Davenport, Ms. Edmonds and each of the New
Class B Holders agree to provide written notice (the "Event Notice") to each
of Apollo, CVP and TSG promptly (and in any event within five (5) business
days) after the occurrence of any of the following:
(i) Mr. Davenport ceases to control, directly or indirectly,
the voting of a majority of the outstanding shares of Class B Common Stock
(such control is deemed to be ceased if Mr. Davenport dies or suffers a
severe or irreversible physical or mental disability that renders him
incapable of controlling the voting of such shares); or
(ii) Mr. Davenport, Ms. Edmonds, members of the immediate
families of either and trusts or other entities created for estate-planning
purposes whose beneficiaries are members of their immediate families fail to
have, in the aggregate, a direct or indirect (through one or more
intermediaries or entities, in proportion to their economic interest therein)
pecuniary interest in at least five percent of the then outstanding shares of
all classes of common stock of the Company in the aggregate (the
-2-
<PAGE>
"Common Stock"), including, for purposes of this calculation, shares of Common
Stock issuable upon exercise of options.
(b) Georgetown and the New Class B Holders agree to convert all of
their shares of Class B Common Stock into shares of Class A Common Stock
pursuant to the procedures set forth in the Company's Restated Certificate of
Incorporation within five (5) business days after receipt by any of them of a
written notice (the "Conversion Notice") from Apollo, CVP or TSG (to the
extent enforcement is permitted by such party pursuant to paragraph (c)
below), which notice shall (i) request such conversion under this Agreement;
(ii) represent that the party giving such notice is then able to enforce this
Agreement under the terms hereof, and (iii) set forth, in detail, such
party's record and beneficial ownership of Common Stock of the Company at the
date of such notice; PROVIDED, HOWEVER, that such conversion shall only be
required if (i) one of the events set forth in (a)(i) or (a)(ii) shall have
occurred; and (ii) a Conversion Notice with respect to such event shall have
been given not later than sixty (60) days after the giving of the Event
Notice (which 60 day period may be waived or extended in writing,
unilaterally, in the sole discretion of Mr. Davenport or his executor or
personal representative). Georgetown and the New Class B Holders shall have
the right to request in writing, and Apollo, CVP and TSG shall promptly
respond in writing, for confirmation that a particular transfer of Class B
Common Stock either will not dilute the pecuniary interest of the requesting
party in such shares, or will cause a dilution thereof specified in the
request.
(c) The provisions contained in Sections 2(a) and 3(b) of this
Agreement shall be enforceable only by Apollo, CVP and TSG, and shall no longer
be enforceable by Apollo, CVP or TSG, as applicable, if such entity, together
with its Affiliates, at any time, fails to "beneficially own" (as that term is
used in Rule 13d-3 under the Securities Exchange Act of 1934) unregistered
shares of Common Stock representing five percent or more of the then outstanding
Common Stock.
4. RESTRICTIVE ENDORSEMENT. Each certificate representing shares of
Class B Common Stock and options, warrants or other rights for the purchase of
Class B Common Stock now or hereafter held by Georgetown Partners or a New Class
B Holder shall be stamped with a legend in substantially the following form:
"THE SECURITES REPRESENTED BY THIS CERTIFICATE OR AGREEMENT ARE
SUBJECT TO A STOCKHOLDERS' AGREEMENT DATED AS OF MARCH ___, 1993, A
COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY AND WILL BE
FURNISHED TO ANY PROSPECTIVE PURCHASERS ON REQUEST. BY ACCEPTANCE OF
THIS CERTIFICATE OR AGREEMENT, EACH HOLDER HEREOF AGREES TO BE BOUND
BY THE PROVISIONS OF THE STOCKHOLDERS' AGREEMENT."
-3-
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR AGREEMENT HAVE
BEEN ISSUED PURSUANT TO A CLAIM OF EXEMPTION FROM THE REGISTRATION OR
QUALIFICATION PROVISIONS OR FEDERAL AND STATE SECURITES LAWS AND MAY
NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR
QUALIFICATION PROVISIONS OR APPLICABLE FEDERAL AND STATE SECURITIES
LAWS OR APPLICABLE EXEMPTIONS THEREFROM."
Georgetown and each New Class B Holder agree to deliver all certificates
for shares of Class B Common Stock and options, warrants or other rights for the
purchase of Class B Common Stock owned by such person to the Company for the
purpose of affixing such legend thereto.
(b) Each of Apollo, CVP and TSG agrees to provide written notice to
each of Georgetown, Mr. Davenport and Ms. Edmonds promptly after the time that
Apollo, CVP or TSG, as the case may be, fails to, together with its Affiliates,
"beneficially own" (as that term is used in Rule 13d-3 under the Securities
Exchange Act of 1934) unregistered shares of Common Stock representing five
percent or more of the then outstanding Common Stock.
5. TRANSFEREES OF CLASS B COMMON STOCK. Any New Class B Holder who
acquires shares of Class B Common Stock, by accepting such shares, shall be
deemed to be a party to this Agreement and to agree to be subject to all the
terms and conditions of this Agreement as if such New Class B Holder had signed
this Agreement as a Stockholder.
6. EQUITABLE RELIEF. The parties hereto agree and declare that legal
remedies may be inadequate to enforce the provisions of this Agreement,
including but not limited to the provisions of Section 2 and 3 hereof, and that
equitable relief, including specific performance and injunctive relief, may be
used to enforce the provisions of this Agreement.
7. UNWIND. Georgetown, Mr. Davenport, Ms. Edmonds and the New Class B
Holders agree that, if the Offerings are not consummated on or prior to June 1,
1993, they will cause the Company to restore in all respects the charter, bylaws
and common stock of the Company (including, without limitation, the number of
shares owned by each stockholder, the class of stock held, and the rights and
preferences of each class) as the same were in existence on March 25, 1993.
8. ARBITRATION. Any controversy arising under, out of, in connection
with, or relating to, this Agreement, and any amendment hereof, or the breach
hereof, shall be determined and settled by arbitration in New York, New York, by
a person or persons mutually agreed upon, or in the event of a disagreement as
to the selection of the arbitrator or arbitrators, in accordance with the rules
then
-4-
<PAGE>
obtaining of the American Arbitration Association. Any award rendered therein
shall specify the findings of fact of the arbitrators and the reasons for such
award, with the reference to and reliance on relevant law. Any such award shall
be final and binding on each and all of the parties thereto and their personal
representatives, and judgement may be entered thereon in any court having
jurisdiction thereof.
9. MISCELLANEOUS.
(a) NOTICES. Any and all notices, designations, consents, offers,
acceptances, or any other communication provided for herein shall be made by
hand delivery, first-class mail (registered or certified, return receipt
requested), telex, telecopier, or overnight air courier guaranteeing next day
delivery to the following addresses and/or telecopy numbers:
If to Chester C. Davenport,
Slivy C. Edmonds or
Georgetown Partners
Limited Partnership: Georgetown Partners Limited
Partnership
6903 Rockledge Drive
Suite 214
Bethesda, Maryland 20817
Telecopy: (301) 530-9538
With a copy to: Akin, Gump, Strauss, Hauer &
Feld, L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Attention: Bruce S. Mendelsohn, P.C.
Telecopy: (202) 887-4288
If to Apollo: Apollo Advisors, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, California 90067
Attention: David B. Kaplan
Telecopy: (310) 201-4199
and Apollo Advisors, L.P.
1301 6th Avenue
38th Floor
New York, New York 10019
Attention: Craig M. Cogut, Esq.
Telecopy: (212) 261-4102
-5-
<PAGE>
With a copy to: Kirkland & Ellis
655 15th Street, N.W.
Washington, D.C. 20005
Attention: Harvey M. Eisenberg, Esq.
Telecopy: (202) 879-5200
If to CVP: Chemical Equity Associates
270 Park Avenue
5th Floor
New York, New York 10017-2070
Attention: Arnold Chavkin
Telecopy: (212) 270-2327
With a copy to: Kirkland & Ellis
655 15th Street, N.W.
Washington, D.C. 20005
Attention: Harvey M. Eisenberg, Esq.
Telecopy: (202) 879-5200
If to TSG: TSG Ventures Inc.
1055 Washington Blvd.
10th Floor
Stamford, Connecticut 06091
Attention: Cleveland A. Christophe
Telecopy: (212) 641-7657
With a copy to: James B. Carlson
Mayer, Brown & Platt
787 Seventh Avenue, Suite 2400
New York, New York 10019
Telecopy: (212) 262-1910
Except as otherwise provided in this Agreement, each such notice shall be
deemed given at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if telecopied; and
the next business day after timely delivery to the courier, if sent by
overnight air courier guaranteeing next day delivery.
(b) AMENDMENT. The provisions of this Agreement may be amended only
by an instrument signed by all Stockholders, except that the signature of
Apollo, CVP or TSG shall not be required if such entity shall no longer be
entitled to enforce this Agreement pursuant to Section 3(c) above.
(c) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
-6-
<PAGE>
(d) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO
CONFLICTS OF LAWS PROVISIONS.
(e) BENEFIT AND BINDING EFFECT; ASSIGNMENT. This Agreement shall
be binding upon and shall inure to the benefit of the Stockholders, and their
respective successors, executors, administrators and personal representatives
and heirs and permitted assigns. The rights and obligations of Apollo, CVP
and TSG hereunder may not be assigned, in whole or in part, except to an
Affillate. In the event that any part of this Agreement shall be held to be
invalid or unenforceable, the remaining parts hereof shall nevertheless
continue to be valid and enforceable as though the invalid portions were not
a part hereof.
(f) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, discussions and understandings.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement of the
day and year first above written.
/s/ Chester C. Davenport
----------------------------------------
Chester C. Davenport
/s/ Slivy C. Edmonds
----------------------------------------
Slivy C. Edmonds
GEORGETOWN PARTNERS LIMITED PARTNERSHIP
By: DHE PARTNERS,
its general partner
By: ROCKSPRING MANAGEMENT,
its general partner
By: /s/ Chester C. Davenport
-------------------------------
Name:
Title:
APOLLO INVESTMENT FUND, L.P.
By: APOLLO ADVISORS, L.P.,
its general partner
By: APOLLO CAPITAL MANAGEMENT, INC.,
its general partner
By: /s/ [illegible]
-------------------------------
Name: [illegible]
Title: Vice President
CHEMICAL EQUITY ASSOCIATES,
A California Limited Partnership
By: CHEMICAL VENTURE PARTNERS,
its general partner
By: /s/ Arnold L. Chavkin
------------------------------
Name: Arnold L. Chavkin
Title: General Partner
-8-
<PAGE>
TSG VENTURES INC.
By: /s/ Cleveland Christophe
------------------------------------
Name: Cleveland Christophe
Title: Principal
-9-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Shares Options
------------------------------------- ----------------------
Persons Class A Class B Class C Class A Class B
- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Georgetown
Partners
Limited
Partnership: 341,159 1,714,583 1,248,351
Chester C.
Davenport 289,542
Slivy C.
Edmonds *
Apollo
Investment
Fund, L.P. 2,026,111
Chemical Equity
Associates 2,026,111
TSG Ventures
Inc. 2,456,818
</TABLE>
* Not yet determined.
-10-
<PAGE>
EXHIBIT (c)(2)
---------------------------------------------------
ENVIROTEST SYSTEMS CORP.
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
Dated as of April 10, 1992
---------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
Section 1. Transfers of Shares, Options or Warrants . . . . . . . . .
Section 2. Rights of First Offer . . . . . . . . . . . . . . . . . .
Section 3. Rights of Inclusion . . . . . . . . . . . . . . . . . . . 1
Section 4. Rights to Compel Sale . . . . . . . . . . . . . . . . . . 1
Section 5. Corporate Governance . . . . . . . . . . . . . . . . . . . 1
Section 6. Registration Rights . . . . . . . . . . . . . . . . . . . 2
Section 7. Transfers of Management Shares . . . . . . . . . . . . . . 4
Section 8. Purchase Rights . . . . . . . . . . . . . . . . . . . . . 5
Section 9. Put Rights . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 10. Financial Information . . . . . . . . . . . . . . . . . . 6
Section 11. Regulatory Matters . . . . . . . . . . . . . . . . . . . . 6
Section 12. Voting Shares . . . . . . . . . . . . . . . . . . . . . . 6
Section 13. Share and Warrant Certificates . . . . . . . . . . . . . . 6
Section 14. Equitable Relief . . . . . . . . . . . . . . . . . . . . . 6
Section 15. Arbitration . . . . . . . . . . . . . . . . . . . . . . . 6
Section 16. Compliance with Securities Laws . . . . . . . . . . . . . 6
Section 17. Irrevocable Proxy . . . . . . . . . . . . . . . . . . . . 6
Section 18. Call of Senior Subordinated Notes . . . . . . . . . . . . 6
Section 19. Additional Share Issuance to New Investors . . . . . . . . 6
Section 20. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 6
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule I - SCHEDULE OF STOCKHOLDERS
i
<PAGE>
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT, dated as of April 10, 1992
(the "Agreement"), by and among ENVIROTEST SYSTEMS CORP., a Delaware
corporation (the "Company"), Georgetown Partners Limited Partnership, a
Maryland limited partnership ("Georgetown"), Gnitrow Ltd., a company
organized under the laws of the United Kingdom ("PITA"), Equico Capital
Corporation, a Delaware corporation ("ECC"), Amoco Venture Capital Company, a
Delaware corporation ("Amoco"), UNC Ventures II, L.P., a Delaware limited
partnership ("UNC II"), UNC Ventures, Inc., a Delaware corporation ("UNC
Ventures" and, collectively with UNC II, "UNC"), MESBIC Ventures, Inc., a Texas
corporation ("MESBIC"), Internationale Nederlanden (U.S.) Finance
Corporation, a Delaware corporation ("NMB"), Skopbank, a Finnish banking
corporation ("Skopbank"), Apollo Investment Fund, L.P., a Delaware limited
partnership ("Apollo"), Chemical Equity Associates, a California limited
partnership ("CVP"), and each of the individuals listed on the Schedule of
Securityholders attached hereto as Schedule I, as such schedule may be
amended by the Company from time to time to include members of the management
of the Company or its Affiliates who hereafter acquire shares of capital
stock of the Company or options to purchase such shares (the "Management
Stockholders"). Georgetown, PITA, ECC, Amoco, UNC, MESBIC, NMB, Skopbank,
Apollo, CVP, the New Investors and the Management Stockholders are
collectively referred to herein as the "Stockholders" and individually as a
"Stockholder." Amoco, UNC and MESBIC are collectively referred to herein as
the "Investor Group." Apollo and CVP are collectively referred to herein as
the "New Investors." Except as otherwise provided herein, references to
Georgetown, PITA, ECC, Amoco, UNC, MESBIC, NMB, Skopbank, Apollo, CVP, the
New Investors and the Management Stockholders shall include any and all
Permitted Transferees (as defined in Section 1(h) hereof) of such parties.
References to the Stockholders shall include any Permitted Transferees of the
Stockholders.
WHEREAS, the Company is authorized to issue 30,000 shares of Class A Common
Stock, par Value $.01 per share (the "Class A Common Stock"), of which an
aggregate of 1,318.91 shares are currently issued and outstanding, and 30,000
shares of Class B Common Stock, par value $.01 per share, of which an aggregate
of 262.43 shares are currently issued and outstanding (the "Class B Common
Stock" and
<PAGE>
collectively with the Class A Common Stock, the "Common Stock"). (As used
herein, the term "Shares" means (i) currently issued and outstanding shares
of Class A Common Stock and Class B Common Stock, (ii) SHARES OF COMMON
STOCK, issued after the date hereof upon conversion of currently outstanding
shares of Common Stock or upon the exercise of currently outstanding Options
(as defined below) or Warrants (as defined below), (iii) Additional Shares
(as defined below) and shares of Common Stock issued upon the exercise of
Additional Warrants (as defined below), and (iv) securities issued with
respect to any additional issuance upon, or exchange or reclassification of,
SHARES, or any other form of recapitalization, consolidation, merger, share
split, or share dividend with respect to Shares);
WHEREAS, the Company has issued to NMB and Skopbank warrants (the
"Warrants") to purchase up to 1,720.32 shares of Class B Common Stock, pursuant
to the Warrant Agreement, dated as of April 10, 1992 (the "Warrant Agreement"),
among NMB, Skopbank and the Company;
WHEREAS, included among the Shares are the 2,599.14 shares of Class B
Common Stock issued to the New Investors (all Shares held by the New Investor,
including any Shares that may hereafter be acquired are referred to herein as
its "New Investor Shares");
WHEREAS, the Company has issued to Georgetown and the Management
Stockholders options to purchase up to 1,077.51 shares of Common Stock and may,
in its direction, issue to members of management of the Company or its
Affiliates additional options to purchase shares of Common Stock (collectively,
the "Options");
WHEREAS, each Stockholder is the record and beneficial owner of the number
of Shares, Options or Warrants, appearing opposite his or its name on Schedule
I, free and clear of all options, liens, encumbrances or charges of any kind
(collectively, "Liens"), except as provided herein and in the Warrant Agreement;
WHEREAS, certain of the parties hereto have entered into that certain
Stockholders' Agreement, dated as of December 21, 1990 (the "Prior Stockholders'
Agreement"), which they desire to amend and restate in its entirety by this
Agreement;
2
<PAGE>
NOW, THERFORE, the parties hereto agree as follows:
1. TRANSFERS OF SHARES, OPTIONS OR WARRANTS.
(a) Each Stockholder agrees that, except in a transaction or
transactions specifically permitted or required by this Section 1 or Sections 4
or 7 of this Agreement, he or it shall not, either directly or indirectly,
transfer, sell, assign, mortgage, hypothecate, pledge, create a security
interest in or lien upon, encumber, give, place in trust, or otherwise
voluntarily or involuntarily dispose of (collectively, "transfer") any of the
Shares, Options or Warrants held by such Stockholder, including Shares, Options
or Warrants that may hereafter be acquired by such Stockholder, unless such
stockholder complies with the provisions of Section 2, 3 and 16 and, in the case
of Management Stockholders, Section 7 hereof.
(b) TRANSFER OF SHARES, OPTIONS, OR WARRANTS TO AFFILIATES.
Subject to Sections 1(c), 1(h) and 16, and, with respect to Management
Stockholders, Section 7, each Stockholder may, without the consent of any of
the other parties hereto and without complying with the provisions of
Sections 2 and 3 hereof, directly or indirectly, transfer Shares, Options or
Warrants to any Affiliate of such Stockholder, or, if such Stockholder is an
individual, pursuant to the laws of descent and distribution. In the event
of any such transfer, except as otherwise provided herein, a transferee or
subsequent transferee of a Stockholder shall be entitled to the rights and
privileges provided to such Stockholder herein and shall be bound and
obligated to the extent of such Stockholder by the provisions hereof.
As used herein, "Affiliate" shall mean (i) any person directly or
indirectly controlling, controlled by, or under common control with, another
person, (ii) a person owning or controlling 51% or more of the outstanding
voting securities of such other person, (iii) any officer, director, partner or
employee of such other person, (iv) with respect to each of Georgetown, Apollo
and CVP, any employee thereof, any partner thereof, any partner of any partner
thereof, or any person directly or indirectly controlled by, or under common
control with, any general partner thereof, and (v) any parent, spouse or child
(or any trust for the benefit of any parent, spouse or child) of any of the
foregoing.
3
<PAGE>
(c) RESTRICTIONS ON GEORGETOWN SHARES OR OPTIONS. Notwithstanding
anything to the contrary contained in this Agreement, Georgetown agrees that it
shall not (i) directly or indirectly, transfer any of the shares or Options held
by Georgetown if such disposition would constitute a default or Event of Default
under the Credit Agreement (as defined therein) or constitute a Change of
Control under the Indenture (as defined therein) or (ii) transfer in any respect
its Director Rights (as hereinafter defined). Georgetown hereby agrees that
Chester C. Davenport is and will remain in control of Georgetown.
(d) CERTAIN DEFINITIONS. As used herein,
(i) "Credit Agreement" shall mean that certain Credit Agreement,
dated as of March 30, 1992, by and among Hamilton Test Systems, Inc. ("HTS"),
the guarantors named therein, the banks party thereto, and International
Nederlanden Bank N.V., New York Branch, as Agent, or any refinancing or
restatement thereof,
(ii) "Indenture" shall mean that certain Indenture, dated as of
April 10, 1992, by and among HTS, the guarantors named therein and the trustee
named therein,
(iii) "Senior Subordinated Notes shall mean the 13 1/2%
Senior Subordinate Notes due 2000 issued under the Indenture,
(iv) a Stockholder's "Director Rights" shall mean the specific
rights, if any, of such Stockholder to designate, nominate or remove directors
in accordance with Section 5 hereof,
(v) a Stockholder's "Representative Rights" shall mean the
specific rights, if any, of a Stockholder to appoint a representative to attend
meetings of the Company's Board of Directors in accordance with Section 5
hereof, and
(vi) "person" shall mean any individual, partnership,
corporation, joint venture, association, joint-stock company, trust,
unincorporated organization, union, business association, firm, government or
agency or political subdivision thereof, or other entity,
(vii) "control", with respect to any person, shall mean the
power to direct the management and
4
<PAGE>
policies of such person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise.
(e) TRANSFERS BY PITA. Subject to Sections 1(h) and 16 and without
complying with the provisions of Section 2 or 3 hereof, PITA may at any time and
from time to time transfer any or all of its Shares and, at its option, in
connection therewith, its Director Rights, to any person (other than any person
that directly competes with HTS). For the purposes hereof, PITA or any
transferee of PITA to whom PITA's Director Rights shall have been assigned being
herein referred to as the "PITA Investor."
(f) TRANSFERS BY NMB, SKOPBANK, THE APOLLO INVESTOR AND THE CVP
INVESTOR. Subject to Sections 1(h) and 16, and without complying with the
provisions of SECTION 2 or 3 hereof, (i) NMB and Skopbank may, at any time and
from time to time, transfer any or all of the Warrants, shares or Class B Common
Stock issuable upon the exercise of the Warrants, shares of Class A Common Stock
issuable upon conversion of such shares of Class B Common Stock or shares of
Class B Common Stock issuable upon conversion of such Class A Common Stock (all
such shares being referred to herein as "Warrant Shares") to any person, (ii)
each of the New Investors may at any time and from time to time, transfer any or
all of its New Investor Shares and, at its option, in connection therewith, its
Directors Rights or Representative Rights, as the case may be, to any person,
PROVIDED that such New Investor also transfers in connection therewith not less
than 25% of the aggregate principal amount of Senior Subordinated Notes then
outstanding, (iii) each of the New Investors may, at any time and from time to
time, transfer any or all of its New Investor Shares in one transaction or in
series of related transactions; PROVIDED that such New Investor also transfers
in connection therewith not less than $2,500,000 aggregate principal amount of
Senior Subordinated Notes; and (iv) if required by applicable law or regulation,
either of the New Investors may transfer any or all of its New Investor Shares
to any person or persons (with or without its Representative Rights but without
its Director Rights), PROVIDED that such New Investor shall have provided prior
written notice of such requirement to the Company. Apollo or any transferee of
Apollo to whom Apollo's Director Rights shall have been assigned being herein
referred to as the "Apollo Investor," and CVP or any transferee of CVP to whom
CVP's Repre-
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sentative Rights shall have been assigned being herein referred to as the "CVP
Investor."
(g) OTHER TRANSFERS. Without limiting the provisions of Sections 1(c)
and 1(f) hereof, each of ECC, the Investor Group, the Apollo Investor, and
the CVP Investor may, subject to Sections 1(h), 3 and 16, transfer Shares or
Options owned by it without complying with the rights of first offer set
forth in Section 2 hereof; PROVIDED, HOWEVER, that in the event that the ECC,
the Investor Group, the Apollo Investor, or the CVP Investor shall so
Transfer any Shares or Options pursuant to this Section 1(g), any Director
Rights that it may have shall terminate and be of no further force or effect
and, thereafter, the holders (the "Majority Independent Stockholders") of a
majority of the Shares then held by Stockholders other than Stockholders who
continue to have Director Rights (the "Independent Shares") shall have the
Director Rights that formerly belonged to the Stockholder or Stockholders
whose Director Rights were terminated by operation of this Section 1(g).
(h) CONDITION TO PERMITTED TRANSFERS. As a condition to any transfer
permitted pursuant to this Section 1 (other than Section 1(i), each
transferee that is not a party hereto shall, prior to such transfer, agree in
writing to be bound by all of the provisions of this Agreement applicable to
the transferor and no such transferee shall be permitted to make any transfer
other than in accordance with the terms of this Agreement. Any transferee of
Shares, Options or Warrants pursuant to a transaction permitted by this
Section 1 shall be referred to as a "Permitted Transferee." Except as
otherwise provided herein, each Permitted Transferee shall be entitled to the
rights and privileges, including the right to transfer Shares, Options or
Warrants, and shall be bound and obligated to the extent of the original
transferor Stockholder under this Agreement.
(i) TRANSFER RESTRICTIONS. The provisions of Section 1, 2, 3 and 7 of this
Agreement shall not apply to any transfer pursuant to a Public Offering of
Registrable Securities (as such terms are hereinafter defined) made pursuant to
Section 6(b) or 6(c) hereof.
2. RIGHTS OF FIRST OFFER.
(a) Except as provided in Section 1 and with respect to Management
Stockholders, Section 7 hereof,
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any Stockholder (a "Selling Stockholder") who desires to transfer (x) any or
all of its or his Shares or Options or (y) any or all of its or his Shares or
Options together with any of the Company's 13 1/2 % Subordinated Notes due
2000 (the "Junior Subordinated Notes") (the securities to be transferred
being referred to herein as the "Sale Securities") to a third party purchaser
or purchasers shall first offer to sell such Sale Securities to the other
Stockholders (the "Offeree Stockholders") in their Proportionate Percentage
(as defined in Section 2 (d) hereof), at a price determined in the sole
discretion of such Selling Stockholder (an "Offer"). Each such Offer shall
be made by written notice to the Company and the Offeree Stockholders. Upon
receipt of such notice, each Offeree Stockholder shall have 30 days (the
"Offer Period") to offer to purchase from the Selling Stockholder all, but
not less than all, of the Offeree Stockholder's Proportionate Percentage of
the Sale Securities, at the cash price determined by the Selling Stockholder
and upon the terms and conditions set forth in clauses (i) through (vi) of
the definition of Firm Offer below. If an Offeree Stockholder elects to
accept an Offer, it or he shall make a Firm Offer within the Offer Period by
providing written notice thereof to the Selling Stockholder, with copies
thereof to the Company and each of the other Offeree Stockholders. A Firm
Offer shall be irrevocable for a period of 30 days. As used herein, "Firm
Offer" means a written all cash offer for the purchase of the Sale Securities:
(i) Requiring no representations or warranties from the
Company or the Selling Stockholder other than representations from
such Selling Stockholder that it or he has the corporate or
individual authority to sell such Sale Securities, is the sole owner
of such Sale Securities, and has good and valid title to such Sale
Securities, free and clear of any and all Liens, and the sale of such
Sale Securities, does not violate any agreement to which he or it is
a party or by which he or it is bound ("Customary Limited
Representations");
(ii) Containing no conditions other than a financing
condition (in which case the offer must be accompanied by a
non-refundable deposit equal to at least 5% of the proposed purchase
price and financing commitments from financial institutions in the
business of providing
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acquisition financing that are subject only to customary conditions);
(iii) Requiring no continuing obligations on the part of the
Selling Stockholder;
(iv) In the case of an Offer without the financing
condition, accompanied by demonstrated capacity to finance the
transaction;
(v) Providing for the purchase of the Offeree's
Proportionate Percentage of the Sale Securities; and
(vi) Including an absolute release by the Offeree
Stockholder of the Selling Stockholder and its Affiliates from any and
all claims arising out of their investment in, and activities
relating to, the Company.
(b) If any Offer is not accepted by an Offeree Stockholder, then a
succeeding Offer or Offers for the sale and all Sale Securities as to which
there was no such acceptance shall thereafter be deemed to have been made by
the Selling Stockholder to those Offeree Stockholders who accepted the
preceding Offer, in their Proportionate Percentage, at the same price and
upon the same terms and conditions at which they were offered to the initial
Offeree Stockholders, until such time as all Offers pursuant to Section 2(a)
hereof and this Section 2(b) are accepted or the time within which acceptance
is required has expired and no Offer made during such period is accepted.
Each successive Offer hereunder shall be deemed to have been made immediately
upon the expiration of the period of the prior Offers, and each Offeree
Stockholder shall have a period of five business days after the commencement
of each Offer within which to accept the Offer, which acceptance must be for
all and not part of the Offeree Stockholder's Proportionate Percentage of the
Sale Securities so offered. If an Offeree elects to accept any Offer made
pursuant to this Section 2(b), it or he shall signify its or his acceptance
within the applicable 5 business day period by providing written notice
thereof in the form of a Firm Offer to the Selling Stockholder, with copies
thereof to the Company and each of the other Stockholders. The Company shall
maintain records of each successive Offer and the Sale Securities accepted
for purchase pursuant thereto, and shall apprise
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each Stockholder of the status thereof upon request. No acceptance of
any offer made by an Offeree Stockholder pursuant to Section 2(a) hereof or
this Section 2(b) shall be effective unless Offers are accepted by one or
more of the Offeree Stockholders for all of the Sale Securities being offered.
Upon the receipt of Firm Offers for all of the Sale Securities, the
Selling Stockholder shall notify each Offeree Stockholder who has made a Firm
Offer (a "Committed Stockholder") of a closing date selected by the Selling
Stockholder (the "Closing Date"), which shall be no earlier than 60 nor later
than 75 days after the Selling Stockholder made its initial written offer.
If one or more Committed Stockholders shall fail or be unable to close on the
purchase of their portion of the Sale Securities on the Closing Date, such
closing shall nevertheless occur with the other Committed Stockholders. In
addition to any rights and remedies the Selling Stockholder may have against
a defaulting Committed Stockholder, (x) a defaulting Committed Stockholder
will forfeit any deposit given to the Selling Stockholder and (y) a
defaulting Committed Stockholder shall not be entitled to participate in the
rights provided by this Section 2 for a period of 12 months after such
default.
(c) If all of the Sale Securities offered pursuant to the
provisions of this Section 2 are not accepted for purchase by the Offeree
Stockholders during the respective offering periods provided in this Section
2 or are not purchased as provided in this Section 2, the Selling Stockholder
shall have the right to sell all (but not less than all) of the Sale
Securities to any purchaser or purchasers at a price, whether in cash,
securities or otherwise, having a value no less than 95% of the offering
price, and upon such other terms and conditions as the Selling Stockholder
may elect, free from the restrictions of this Section 2 (but subject to
Section 3 hereof) in a bona fide transaction or transactions during a period
of 120 days after the date that the last Offer expires under this Section 2.
Any Securities not sold pursuant to the immediately preceding sentence prior
to the expiration of 120-day period referred to therein shall once again be
subject to the rights of first offer set forth in this Section 2.
(d) As used herein, the term "Proportionate Percentage" shall mean,
with respect to any Offeree Stockholder entitled to receive a particular
Offer, a percentage (expressed as a decimal fraction rounded to the nearest
one-
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hundredth) obtained by dividing (x) the number of Shares owned by such
Stockholder (including the underlying Shares of any Options or Warrants owned
by such Stockholder) by (y) the aggregate number of Shares owned by all
Offeree Stockholders (including the underlying Shares of any Options or
Warrants owned by such Stockholders) entitled to receive such offer.
3. RIGHTS OF INCLUSION. Except as provided in Section 1 and, with
respect to Management Stockholders, Section 7 hereof:
(a) No Stockholder or Stockholders shall, in any one transaction or
any series of related transactions (except a sale to other Stockholders
pursuant to Section 2(b) hereof), transfer to a third party more than 10% of
the Shares unless the terms and conditions of such transfer include an offer
to each of the other Stockholders to include, at the option of each of the
other Stockholders, in such transfer, a number of Shares, Warrants or Options
owned by the other Stockholders determined in accordance with subsection 3(c)
below. If any Stockholders (the "Offeree Stockholders") receive a bona fide
offer from a third party to purchase or otherwise acquire a number of Shares
or Options equal to at least 10% of the Shares, which offer the Offeree
Stockholders intend to accept, the Offeree Stockholders shall then cause the
third party's offer to be reduced to writing (which writing shall include an
offer to purchase or otherwise acquire Shares, Warrants or Options from any
of the other Stockholders according to the terms and conditions of Sections
3(b) and 3(c) hereof) and shall send written notice of the third party's
offer (the "Notice") to each of the other Stockholders. The Notice shall be
accompanied by a true and correct copy of the third party's offer. At any
time within 15 days after receipt of the Notice, each of the other
Stockholders may accept the offer included in the Notice for up to such
number of Shares, Warrants or Options as is determined in accordance with the
provisions of Section 3(c) below by furnishing written notice of such
acceptance to the Offeree Stockholder and the third-party offeror. Any
Stockholder who accepts such offer may indicate in his written notice, if he
or it so elects, his or its desire to sell a number of Shares, Warrants or
Options in excess of his Proportionate Percentage share thereof, stating the
maximum number of Shares, Warrants or Options in excess of such Proportionate
Percentage which such Stockholder desires to sell (such Stockholder's "Excess
Amount"), which amount, together with
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such Proportionate Percentage, shall not exceed the lesser of (i) the total
number of Shares, Options and Warrants owned by such Stockholder and (ii) the
total number of Shares, Options and Warrants offered to be purchased by a
third party purchaser.
(b) If within 15 days after the receipt of the Notice any of the other
Stockholders has not accepted the offer contained in the Notice, such party
shall be deemed to have waived any and all rights with respect to the sale or
other disposition of Shares, Warrants or Options described in the Notice.
(c) The Shares, Warrants or Options to be sold pursuant to this Section
3 shall be purchased by the third party purchaser in the following order of
priority: (i) first, from each Stockholder (including the Stockholder
initiating the sale of securities) who has elected to participate in the sale
pursuant to subsection 3(a), in accordance with his respective Proportionate
Percentage of the total number of Shares, Warrants or Options to be acquired
by the third party; (ii) second, to the extent any Stockholder has declined
to sell a number of Shares, Warrants or Options proposed to be transferred
equal to his Proportionate Percentage of Shares, Warrants or Options to be
acquired, then from the Offeree Stockholder and the other Stockholders, in
accordance with the Excess Amount indicated in their respective notices or
determined in accordance with the following sentence (unless such amount
exceeds the aggregate number of Shares, Warrants or Options proposed to be
sold to such third party, in which event the Excess Amounts of such
Stockholders shall be reduced according to their respective Proportionate
Percentage). For the purposes hereof, the Offeree Stockholder's Excess
Amount shall be deemed to be the lesser of (x) the difference between the
number of Shares then owned by the Offeree Stockholder and such Stockholder's
Proportionate Percentage of the total number of Shares, Options and Warrants
offered to be purchased by the third party, and (y) the total number of
Shares, Options and Warrants offered to be purchased by such Third Party
Purchaser less such Proportionate Percentage.
(d) The purchase from the Stockholders pursuant to this Section 3 shall
be on the same terms and conditions, including the per share price and the
date of transfer, as are received by the Offeree Stockholder and stated in
the Notice provided to the other Stockholders;
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PROVIDED, HOWEVER, that no other Stockholders shall be required to make any
representations or warranties in connection with such sale except Customary
Limited Representations.
(e) The Offeree Stockholder shall notify the Company and the other
Stockholders who have exercised their inclusion rights pursuant to this
Section 3 within five days of the end of the 15-day period referred to in
subsection 3(b), of the number of Shares, Warrants or Options each
Stockholder has been allocated to sell pursuant to subsection 3(c). Each
other Stockholder, within five days of receipt of such notice, shall deliver
to the Offeree Stockholder the certificate or certificates representing the
Shares, Warrants or Options, to be sold pursuant to such offer by such
Stockholder, together with a limited power-of-attorney authorizing the
Offeree Stockholder to sell or otherwise dispose of the Shares, Warrants or
Options to be sold pursuant to the terms of such third party's offer.
(f) Simultaneously with the consummation of transfer of the Shares,
Warrants or Options of the Offeree Stockholder, the Offeree Stockholder shall
notify the Company and the other Stockholders who have exercised their
inclusion rights pursuant to Section 3 that the consummation of such
transaction has occurred and shall promptly, but in any event not later than
3 business days thereafter, remit to such Stockholders the total sales price
of the Shares, Warrants or Options of such Stockholders sold pursuant
thereto, net of such Stockholder's pro rata share of all out-of-pocket fees,
expenses and costs incidental to such sale (collectively, "Sale Expenses")
other than those payable to an Affiliate of any Offeree Stockholder, and
shall furnish such other evidence of the completion and time of completion of
such transfer and the terms thereof as may be reasonably requested by such
Stockholders.
(g) To the extent that no other Stockholders have exercised their
rights of inclusion pursuant to this Section 3, the Offeree Stockholder shall
have 90 days in which to transfer not more than the number of Shares,
Warrants or Options described in the Notice, on terms and conditions not more
favorable to the Offeree Stockholder than those set forth in the Notice.
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4. RIGHTS TO COMPEL SALE.
(a) If Stockholders entitled to vote at least 54% of the then
outstanding Voting Shares (as defined in Section 12 hereof) propose to sell
in any transaction or any series of related transactions all of the Shares,
Options and Warrants) to a third party (other than to an Affiliate of an
Offeror Stockholder (as defined below)) in an arm's-length transaction, such
Offeror Stockholders may require all but not less than all of the remaining
Stockholders to sell all but not less than all the Shares, Options and
Warrants owned by them to such third party for the same per share
consideration (equitably adjusted to take into account the exercise price of
any Options or Warrants) and otherwise on the terms and conditions provided in
this Section 4; PROVIDED, HOWEVER, that (A) Georgetown shall be one of such
Offeror Stockholders, (B) if the Sale Date (as defined below) is prior to the
second anniversary of the date hereof, the New Investors shall both be
Offeror Stockholders, and (C) if the Sale Date is on or after the second
anniversary of the date hereof, either (1) the New Investors shall both be
Offeror Stockholders or (2) the aggregate sale price (net of Sale Expenses)
would result in a cumulative annual rate of return (compounded semiannually)
to each of the New Investors from the date hereof through the Sale Date equal
to the following: (x) 35%, if such sale occurs after the second anniversary
of the date hereof but prior to the fifth anniversary of the date hereof, and
(y) 25%, if such sale occurs on or after the fifth anniversary of the date
hereof (it being understood that one or more of the other Stockholders may
agree to increase the net proceeds payable to the New Investors on such sale
by an amount sufficient to satisfy the conditions set forth in clause (2)
above).
If Stockholders entitled to vote at least 70% of the then outstanding
Voting Shares propose to sell in any transaction or any series of related
transactions all of the Shares, Options and Warrants to a third party (other
than to an Affiliate of an Offeror Stockholder) in an arm's-length transaction,
such Offeror Stockholders may require all but not less than all of the remaining
Stockholders to sell all but not less than all the Shares, Options and Warrants
owned by them to such third party for the same consideration per share and
otherwise on the terms and conditions provided in this Section 4; PROVIDED,
HOWEVER, that (A) if the sale occurs on or before the second anniversary of the
date hereof and Chester C. Davenport is Chairman of the Company,
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Georgetown shall be one of such Offeror Stockholders and (B) if such sale occurs
prior to the fourth anniversary of the date hereof, either (i) the New Investors
shall both be Offeror Stockholders or (ii) the aggregate sale price (net of Sale
Expenses) would result in a cumulative annual rate of return (compounded
semiannually) to each of the New Investors from the date hereof through the Sale
Date equal to the following: (x) 35%, if such sale occurs prior to the first
anniversary of the date hereof, (y) 30%, if such sale occurs on or after the
first anniversary of the date hereof but prior to the second anniversary of the
date hereof, and (z) 25%, if such sale occurs on or after the second anniversary
of the date hereof but prior to the fourth anniversary of the date hereof (it
being understood that one or more of the other Stockholders may agree to
increase the net proceeds payable to the New Investors on such sale by an amount
sufficient to satisfy the conditions set forth in clause (2) above).
As used in this Section 4, the term "Offeror Stockholders" means
Stockholders with the requisite percentage of Voting Shares who compel a sale
pursuant to this Section 4(a).
(b) At the option of the Offeror Stockholders, any sale of the Company
permitted by Section 4(a) hereof may be structured as a merger, consolidation or
sale of all or substantially all of the consolidated assets of the Company, and
each Stockholder hereby agrees, to the fullest extent permitted by applicable
law, to vote all of the Shares it is entitled to vote in favor of such
transaction. Notwithstanding any provision of this Agreement to the contrary,
the Company shall be prohibited from any merger, consolidation or sale of all or
substantially all of its assets if such transaction would not be permitted under
this Section 4 if structured as a sale of Shares.
(c) For purpose of Section 4(a) hereof, the return to a New Investor
shall be equal to the greater of:
(i) the return that would be obtained by an investor
calculated solely on (A) New Money Investments (as defined below)
by such New Investor and any of its Affiliates on or after the date
hereof but on or prior to the Sale Date, (B) all cash paid on or after
the date hereof but on or prior to the Sale Date by the Company or a
third party on the Sale Date to
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holders of such New Money Investments, whether or not then owned by such
New Investor, including cash payments in respect of principal of, or
premium or interest on, New Money Investments constituting Indebtedness
("New Money Debt") and cash dividends and distributions with respect to
New Money Securities constituting equity ("New Money Equity") (but
excluding any funds relating thereto escrowed pursuant to clause (e)
below), and (C) New Money Debt held by the holders of the New Money
Investments immediately following the Sale Date, valued at the lesser
of par and accreted value, PROVIDED that such holders have
agreed to receive such New Money Debt; or
(ii) the return to such New Investor calculated solely on (A) cash
investments made on or after the date hereof but on or prior to the Sale
Date by such New Investor or any of its Affiliates in the Company or any of
its subsidiaries ("New Money Investments") (whether debt, equity or
otherwise, and including the cash exercise or conversion price of any
exchangeable or convertible securities), including the purchase of Shares,
and Senior Subordinated Notes on the date hereof, (B) all cash actually
received on or after the date hereof but on or prior to the Sale Date by
such New Investor and its Affiliates with respect to New Money Investments,
including cash payments with respect to principal of, or premium or
interest on, New Money Debt and cash dividends and distributions with
respect to New Money Equity (but excluding any funds escrowed pursuant to
clause (e below), and (C) New Money Debt held by such New Investor
immediately following the Sale Date, valued at the lesser of par and
accreted value; PROVIDED, that such New Investor has agreed to receive
such New Money Debt.
Upon the request of the Offeror Stockholders, which request includes the
terms of the proposed sale transaction, the Company or the New Investors will
calculate the cumulative annual rates of return in accordance with clauses (i)
or (ii) above, respectively, and promptly furnish to each other and such Offeror
Stockholders their calculations thereof in reasonable detail.
(d) The Offeror Stockholders shall send written notice of the exercise
of their rights pursuant to this Section 4 to each of the remaining Stockholders
(the "Drag-Along Notice") setting forth the consideration per
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share to be paid by a third party purchaser and the other terms and conditions
of the transaction. Within 10 days following the date of the Drag-Along Notice,
each of the remaining Stockholders shall either attend the closing of the sale
and deliver, or deliver to a representative of the Offeror Stockholders
designated in the notice, certificates representing the Shares, Options and
Warrants held by such Stockholder, duly endorsed, together with all other
documents required to be executed in connection with such transactions. If a
remaining Stockholder should fail to deliver such certificates to the Offeror
Stockholders, the Company shall cause the books and records of the Company to
show that such Shares, Options or Warrants are bound by the provisions of this
Section 4 and that such Shares, Options or Warrants shall be transferred only to
the third party purchaser upon surrender for transfer by the holder thereof.
Simultaneously with the consummation of the sale of the Shares, Options and
Warrants of the Offeror Stockholders and the Shares, Options and Warrants of the
remaining Stockholders pursuant to this Section 4, the Offeror Stockholders
shall promptly, but in any event not later than 3 business days thereof, remit
to each of the other Stockholders the total sales price of the Shares, Options
or Warrants of such Stockholder sold pursuant thereto, net of such Stockholder's
pro rata share of all out-of-pocket Sale Expenses other than those payable to an
Affiliate of any Offeror Stockholder, and shall furnish such other evidence of
the completion and time of completion of such sale or other disposition and the
terms thereof as may be reasonably requested by such Stockholders.
(e) The purchase from the Stockholders pursuant to this Section 4
shall be on the same terms and conditions (including the per share price
(equitably adjusted to take into account the exercise price of any Options or
Warrants) and the date of transfer (the "Sale Date")) as are to be received by
the Offeror Stockholders, which terms and conditions shall be stated in the Drag
Along Notice (PROVIDED, HOWEVER, that if any securities are to be received by
the Stockholders in connection with such sale, each Stockholder will have the
right to receive non-voting securities on the terms provided in the Company's
Certificate of Incorporation and Section 11 hereof); and (ii) no other
Stockholder shall be required to make any representations or warranties in
connection with such sale other than Customary Limited Representations. The
agreement of sale may set aside a pro-rata portion of the proceeds
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payable with respect to the Shares, Options and Warrants of the Company in
escrow, upon terms satisfactory to the Offeror Stockholders, as a source of
indemnification to be provided to the purchaser(s). Upon termination of such
escrow, each Stockholder shall be entitled to receive his or its pro-rata share
of any funds remaining in escrow, after the payment of all indemnity claims, the
fees and expenses of the escrow agent and the out-of-pocket expenses of any
representative of the Stockholders pursuant to the escrow agreement in
connection with the administration of the escrow and the settlement, compromise
and/or defense of any claims made against the escrow.
5. CORPORATE GOVERNANCE.
(a) NUMBER OF DIRECTORS. Except as required by law in any foreign
jurisdiction or with the unanimous consent of all of the directors of the
Company, the Company and each of the Stockholders agree to take such action,
including the voting of the Class A Shares owned or controlled by such
Stockholder, as may be necessary to cause the Company and each of its wholly-
owned subsidiaries to be managed by a Board of Directors consisting of nine
members, in accordance with the provisions of this Section 5. For purposes of
this Section 5, except as the context otherwise requires, references to
directors or to the Board of Directors shall include directors and the Board of
Directors of the Company and each of its wholly-owned subsidiaries.
(b) INITIAL BOARD OF DIRECTORS. If the Board of Directors on the
date hereof shall not consist of Chester C. Davenport, Sylvia Edmonds, George
Singleton, William J. Beckham, Jr., one person nominated by GEORGETOWN, one
person nominated by the PITA INVESTOR, one person nominated by ECC, one
person nominated by the holders of a majority of the Shares held by the INVESTOR
GROUP, (the "Investor Group Majority") and one person nominated by the APOLLO
INVESTOR, then immediately after the date hereof, the Stockholders shall take
such action and cause the then directors to take such action as may be necessary
so as to cause the Board of Directors to consist of the foregoing nine members.
(c) SUBSEQUENT NOMINATIONS. Subject to Section 5(g) hereof, the
Stockholders shall, at any time that directors are to be elected, take such
action as may be necessary to nominate or to cause the Board of Directors to
nominate and recommend, as the proposed members of the Board
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of Directors, (i) five persons designated by Georgetown (each a
"Georgetown Director"); PROVIDED, HOWEVER, that (A) if Mr. Beckham shall, for
any reason, cease serving as a director, Georgetown shall consult with the
PITA Investor, the New Investors and ECC prior to designating his successor
(and thereafter, prior to designating any further successors to the
directorship initially held by Mr. Beckham) and (B) if there is a Change of
Control (as defined in the Indenture) or Chester C. Davenport shall cease to
control Georgetown (a "Change of Control Event"), the number of persons to be
designated by Georgetown pursuant to this clause (i) shall be reduced from
five to three (or, if a Phase II Event has occurred, from four to three);
(ii) one person designated by ECC (the "ECC Director"); (iii) one person
designated by the PITA Investor (the "PITA Director"); (iv) one person
designated by the Investor Group; and (v) one person designated by the
Apollo Investor; PROVIDED, HOWEVER, if a Change of Control Event shall
occur, the number of persons to be designated by the Apollo Investor
pursuant to this clause (v) shall be increased from one to three (each
director designated by the Apollo Investor, an "Apollo Director"). Each of
the Stockholders agrees that (x) Amoco, UNC and MESBIC shall each have the
right to appoint a single representative to attend, at the Company's expense,
but not to vote as a director at, meetings of the Board of Directors
(referred to herein as the Investor Group's "Representative Rights") and (y)
CVP shall have the right to appoint a single representative to attend, at the
Company's expense, but not to vote as a director at, meetings of the Board of
Directors (referred to herein as CVP's "Representative Rights"). The Company
shall provide prior notice of all meetings of the Board of Directors to each
such representative and shall provide to such representative all information
and documents provided to directors in advance of any meeting of the Board of
Directors.
(d) REMOVAL. After the date hereof, Georgetown shall be entitled
at any time with or without cause to designate any Georgetown Director for
removal as a director; the PITA Investor shall be entitled at any time with
or without cause to designate any PITA Director for removal as a director;
ECC shall be entitled at any time with or without cause to designate any ECC
Director for removal as a director; the Investor Group Majority shall be
entitled at any time with or without cause to designate any Investor Group
Director for removal as director; and the Apollo Investor shall be entitled
at any time with or without cause
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to designate any Apollo Director for removal as director. The Company
and Stockholders agree to take such action, and to cause the remaining
directors to take such action, within five (5) days after any such
designation, as is necessary to remove a director designated for removal
in accordance with the foregoing.
(e) FILLING VACANCIES. If at any time a vacancy is created on the
Board of Directors by reason of the death, removal or resignation of any
director, the Company and Stockholders agree to take such action, and to
cause the remaining directors to take such action, within twenty days after
such occurrence, to approve and elect a person to fill such vacancy, which
person shall be designated for election as a director by Georgetown, if the
person who has ceased to be a director was a Georgetown Director (but if the
person who has ceased to be a director is Mr. Beckham or any successor to the
directorship initially held by Mr. Beckham, Georgetown shall consult with
ECC, the PITA Investor and the New Investors prior to filling such vacancy);
by ECC, if the person who has ceased to be a director was an ECC Director; by
the PITA Investor, if the person who has ceased to be a director was a PITA
Director; by the Investor Group Majority, if the person who has ceased to be
a director was an Investor Group Director; or by the Apollo Investor, if the
person who ceased to be a director was an Apollo Director.
(f) COVENANT TO VOTE. Each Stockholder shall vote (including, if
applicable, pursuant to written consent) the shares of Class A Common Stock
owned or controlled by such Stockholder upon all matters submitted to a vote of
the stockholders of the Company in conformity with the specific terms and
provisions of this Agreement. Without limiting the foregoing, each Stockholder
shall vote the shares of Class A Common Stock owned or controlled by him or it
(i) at each annual or special meeting of stockholders called for the purpose of
voting on the election or removal of directors and (ii) by consensual action of
stockholders with respect to the election or removal of directors, in favor of
the election or removal of the directors designated in accordance with this
Section 5. The Company shall vote, or cause to be voted, the capital stock of
its subsidiaries in conformity with the specific terms and provisions hereof.
(g) COVENANT DEFAULTS. In the event any of the following events
shall occur: (i) three Covenant
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Defaults (as hereinafter defined) within a period of two years, (ii) any
default in the payment of principal or interest under the Credit Agreement or
the Indenture that has not been cured or waived within 15 days after the same
is due and payable (without consideration of any applicable grace period),
(iii) the acceleration of any amount due and payable under the terms and
provisions of the Credit Agreement or the Indenture, (iv) any material
default under the Credit Agreement or the Indenture that has not been cured
or waived within 90 days after the notice thereof, or (v) a declaration under
the Credit Agreement or the Indenture of an Event of Default (in each case as
defined therein), and upon the election in writing of each of ECC (after
consultation with UNC, Amoco and MESBIC), the PITA Investor and the Apollo
Investor (after consultation with the CVP Investor) within 180 days after
having received notice of such defaults or such acceleration, as the case may
be (a "Phase II Event"), unless a Change of Control Event has occurred, the
Stockholders shall take such action, and shall cause the directors to take
such action, as may be necessary, to remove one Georgetown Director (chosen
by Georgetown) and to replace such director with a director chosen by a
majority of the remaining directors.
Each of the Stockholders agrees that following a Phase II Event (x) CVP
shall retain its Representative Rights and (y) in addition to the continuing
Director Rights hereunder of PITA and the Investor Group, each of the PITA
Investor, UNC, Amoco and MESBIC shall have the right to appoint a single
representative to attend at the Company's expense, but not to vote as a
director at, meetings of the Board of Directors (herein referred to as its
"Representative Rights"). The Company shall provide prior notice of all
meetings of the Board of Directors to each such representative and shall
provide to such representative all information and documents provided to
directors in advance of any meeting of the Board.
As used herein, "Covenant Default" shall mean (A) a breach of a financial
covenant under the Credit Agreement (it being understood and agreed that the
breach of more than one financial covenant at any one time shall be deemed
one Covenant Default for purposes hereof); or (B) any other material breach
of the Credit Agreement or the Indenture, in each case whether or not such
default or breach has been waived or the Credit Agreement or the Indenture,
as the case may be, has been amended to cure such breach or default; PROVIDED,
HOWEVER, that a Covenant Default shall not include
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any waiver under or amendment of the Credit Agreement or the Indenture, as
the case may be, intended generally (i) to cause the financial covenants or
other provisions thereof to reflect more accurately the business of the
Company (but not to change such covenants as a result of poor business or
financial performance), or (ii) to cure any default or breach that is not
material in nature; or (C) a breach of this Agreement wilfully caused by
Georgetown that has a material and adverse effect on one or more
Stockholders.
(h) SUPERMAJORITY PROVISIONS.
(i) Prior to a Phase II Event, without the approval of the
Board of Directors, given by (x) unanimous written consent of the directors,
(y) the affirmative vote at any regular or special meeting of the Board of
Directors of the Company of at least 6 directors or (z) if for any reason
fewer than 6 persons shall be serving on the Board of Directors, the
affirmative vote of all the directors then in office, the Company shall not
permit, and the Company shall not permit any subsidiary to permit:
(A) the issuance of capital stock or securities
convertible or exchangeable into, or rights to acquire, additional capital
stock (collectively, "Capital Stock"), other than pursuant to the Warrant
Agreement, the Warrants, the Additional Warrants, Section 8 or 19 hereof,
the Options and the conversion of any Class A Shares or Class B Shares
into the other class of Common Stock;
(B) dividends on, distributions with respect to, or
repurchases or redemptions of, Capital Stock, except (1) as provided in the
Warrant Agreement, as in effect on the date hereof, and (2) stock
repurchases from any employees of the Company upon the termination of
such employee's employment with the Company, subject to the satisfaction
of each of the following conditions on the date of such purchase and after
giving effect thereto: (x) no default under the Credit Agreement or the
Indenture shall have occurred and be continuing; (y) the aggregate amount
paid in any 12-month period in connection with such purchases shall not
exceed $250,000; and (z) the aggregate amount paid in connection with all
such purchases shall not exceed $750,000;
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(C) the sale, lease or other disposition of assets
in a single transaction or related series of transactions in excess of the
greater of $2,500,000 or 18% of the consolidated stockholders' equity of
the Company and its subsidiaries;
(D) the purchase, lease or other acquisition of
assets in a single transaction or related series of transactions in excess
of the greater of $2,500,000 or 18% of the consolidated stockholders'
equity of the Company and its subsidiaries;
(E) the amendment, alteration, modification or
repeal of the Certificate of Incorporation or the by-laws of the Company or
of any subsidiary;
(F) the merger, consolidation or other business
combination, or sale of all or substantially all of the assets of the
Company or of any subsidiary;
(G) the incurrence of Indebtedness (as defined in
the Indenture) in excess of the greater of $1,000,000 or 18% of the
consolidated stockholders' equity of the Company and its subsidiaries other
than (x) as contemplated by a capital expenditure budget approved pursuant
to clause (x) below and (y) letters of credit or other financing of
ordinary course of business transactions;
(H) (i) changes in or amendments of the Options or
the Management Services Agreement between Georgetown and the Company, dated
as of April 10, 1992 (the "Management Agreement") or (ii) any transactions
between the Company or any of its subsidiaries and any Affiliate of the
Company other than (x) transactions pursuant to the Management Agreement,
(y) transactions contemplated hereby, and (z) transactions with any
subsidiary of the Company;
(I) entering into any new line of business other
than the business engaged in by the Company or any of its subsidiaries as
at
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the date hereof or ceasing to be engaged in any line of business engaged
in by the Company or any of its subsidiaries as at the date hereof;
(J) material amendments or modifications of the
Credit Agreement, the UT Leases (as such term is defined in the Credit
Agreement), the Warrant Agreement, the Warrants or the Options;
(K) the approval or amendment of the Company's
annual operating and capital budgets;
(L) investments in corporations, partnerships,
trusts or other entities that are not subsidiaries of the Company other
than Cash Equivalents (as defined in the Indenture);
(M) any refinancing, substitution or renewal of the
Credit Agreement;
(N) if at any time Gross Profit (as defined below)
for the Trailing Four Quarter Period (as defined in the Indenture) is
less than or equal to the product of (i) 70% and (ii) Fiscal 1992 Gross
Profit, the incurrence of selling, general and administrative expenses
during any quarter in excess of those provided for in the operating
budget approved pursuant to clause (K) above. For purposes of this
clause (N), "Gross Profit" means, for any period, the difference of (i)
the amount which, in accordance with GAAP, is set forth opposite the
caption "Contract Revenue" on the Company's consolidated income statement
for such period and (ii) the amount which, in accordance with GAAP, is
set forth opposite the caption "Cost of Revenues" on such consolidated
income statement for such period;
(O) the appointment of any committee of the Board of
Directors;
(P) change any accounting policy or practice other
than as mandated by generally accepted accounting principles then in effect;
and
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(Q) after a Change of Control Event, the appointment
or election of a chief executive officer of the Company.
(ii) Regardless of whether a Phase II Event has
occurred, without the prior written consent or the affirmative vote at a
meeting of Stockholders (whether or not called in accordance with the
Delaware General Corporation Law or applicable by-laws) entitled to vote at
least 71% of the Non-Management Voting Shares (as defined in Section 12
hereof), the Company shall not, and shall not permit any of its subsidiaries
to, (x) take any actions referred to in subparagraphs (A), (B), (C), (D),
(E), (F), (H), (I), (J), (L) (M) or (N) of Section 5(h)(i), (y) incur
indebtedness in excess of the greater of $2,500,000 or 18% of the
consolidated stockholders' equity of the Company and its subsidiaries (other
than as set forth in clauses (x) and (y) of subparagraph (G) above), or (z)
sell or otherwise dispose of, in a single transaction or related series of
transactions, more than 40% of the book value or fair market value of the
consolidated assets of the Company and its subsidiaries; provided, however,
that if a Change of Control Event shall have occurred, action requiring
approval pursuant to this Section 5(h)(ii) (other than with respect to
Sections 5(h)(i)(J) and (M), which shall continue to require the
affirmative vote of holders of at least 71% of the Non-Management Voting
Shares) shall require the affirmative vote of either of (1) holders of at
least 80% of the Non-Management Voting Shares or (2) holders of at least 96%
of the Non-Management Voting Shares other than Non-Management Voting Shares
then owned or controlled by Georgetown. For purposes of this Section 5(h)
(ii), in the event any Stockholder entitled to vote on any matter pursuant to
this Section 5(h)(ii) shall abstain from such vote, all Non-Management
Voting Shares held by such Stockholder shall be deemed to have been voted on
such matter in the same manner as the majority of the Non-Management Voting
Shares voted on such matter.
6. REGISTRATION RIGHTS
(a) The following definitions shall apply with respect to
this Section 6:
(i) "Holders" shall mean any person (other than the
Company) who is or shall become a party to this Agreement and any
combination
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of them, and the term "Holder" shall mean any such person.
(ii) "Public Offering" shall mean a bona fide public offering,
whether or not underwritten, of equity securities or any securities
convertible into or exchangeable into equity securities of the Company
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Securities Act").
(iii) "Registrable Securities" shall mean the Shares (it being
understood and agreed that a Holder of Warrants or Options shall be deemed to
be the holder of the Registrable Securities for which such Warrants or
Options are exercisable); PROVIDED, HOWEVER, that any such share shall cease
to be a Registrable Security if and when (x) a Registration Statement with
respect to the disposition of such share shall have become effective under
the Securities Act and such share shall have been disposed of pursuant to
such effective registration statement or (y) such share shall have been sold
in a public transaction exempt from registration pursuant to Rule 144
promulgated under the Securities Act ("Rule 144"). The Company shall take
such action as is necessary to enable the Holder of any Warrants or Options
that are exercisable into Registrable Securities to exercise such Warrants or
Options simultaneously with their sale pursuant to a Public Offering or, at
the request of such Holder, to cause such Warrants or Options to be purchased
by the underwriters in an underwritten Public Offering as hereinafter
provided.
(iv) "Registration Statement" shall mean any registration
statement of the Company that covers any of the Registrable Securities
pursuant to the provisions of this Agreement, including the prospectus
included therein, any amendment or supplement thereof, including
posteffective amendments, all exhibits and all material incorporated by
reference or deemed to be incorporated by reference in such Registration
Statement.
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(v) "Company Securities" shall mean any equity securities or any
securities convertible into or exchangeable for equity securities proposed to
be issued and sold by the Company pursuant to a Registration Statement.
(vi) "SEC" shall mean the United States Securities and Exchange
Commission.
(vii) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(viii) "Warrant Registration Event" shall mean the earlier to
occur of (A) the date on which the Company first becomes subject to the
reporting requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (B) the date on which the
Company shall have failed to purchase all of the Warrants and/or Warrant
Shares set forth in a Put Notice pursuant to, and in accordance with, Section
9 of the Warrant Agreement; PROVIDED that no Warrant Registration event
described in clause (B) above shall be deemed to have occurred prior to the
fourth anniversary of the date hereof.
(b) DEMAND REGISTRATIONS.
(i) Upon the written request of one or more Holders holding in
the aggregate at least 50% of the Registrable Securities (the "Initiating
Holders") requesting that the Company effect the registration of such
Initiating Holders' Registrable Securities under the Securities Act (which
request shall specify the Registrable Securities so requested to be
registered, the proposed amounts thereof and the intended method of
disposition), the Company shall promptly give written notice of such
requested registration to all Holders and, as expeditiously as reasonably
possible, use its best efforts to effect the registration under the
Securities Act of the Registrable Securities that the Company has been so
requested to register, for disposition in accordance with the intended method
of disposition stated in such request. The Company shall not be obligated to
effect any registration pursuant to this Section 6(b)(i) (A) before April
10, 1996,
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(B) during the 90 day period commencing on the effective date
of an underwritten primary offering of the Company's equity
securities (or such longer period reasonably required by the managing
underwriter(s) of such offering), or (C) after the Company has
effected one such registration pursuant to this Section 6(b)(i).
(ii) At any time after the occurrence of a WARRANT
REGISTRATION EVENT, upon the request of one or more Holders of
a majority of the shares of Common Stock subject to the Warrants
and Warrant Shares that constitute Registrable Securities requesting
that the Company effect the registration of such Holders' Registrable
Securities under the Securities Act (which request shall specify
the Registrable Securities so requested to be registered, the
proposed amounts thereof and the intended method of disposition),
the Company shall as expeditiously as reasonably possible, use its
best efforts to effect the registration under the Securities Act
of the Registrable Securities that the Company has been so requested
to register for disposition in accordance with the intended method
of disposition stated in such request (the "Bank Demand Registration").
The Company shall not be obligated to effect more than one
registration pursuant to this Section 6(b)(ii). Prior to any
Holders requesting a Bank Demand Registration, the Holders proposing
to make such request shall give at least 30 days notice thereof to
each of the other Holders of Warrants and the Warrant Shares and
such other Holders shall have the right to participate in such
request and, subject to Section 6(e), the Bank Demand Registration.
If either (A) a Registration Statement in respect of a
Bank Demand Registration is not filed with the SEC on or prior
to 90 days after request pursuant to this clause (ii) (the "File
Date") or (B) the Company shall not have used its best efforts to
cause a Registration Statement in respect of a Bank Demand
Registration requested pursuant to this clause (ii) to become
effective and such Registration Statement has not become effective
on or prior to 120 days after such request (the "Effectiveness Date")
(the Filing Date, in the case of clause (A) above or the
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Effective Date, in the case of clause (B) above, being referred
to herein as the "Event Date"), then the Company agrees to pay,
as liquidated damages, and not as a penalty, to Holders requesting
the Bank Demand Registration (in proportion to the Registrable
Securities requested to be registered by such Holders) the
aggregate sum of $6,250 per week, PROVIDED, HOWEVER, that such
liquidated damages will, in each case, cease to accrue on and after
the date (x) a Registration Statement in respect of the Bank Demand
Registration is filed, with respect to liquidated damages for
failure to file by the Filing Date, or (y) the date a Registration
Statement in respect of the Bank Demand Registration is declared
effective, with respect to liquidated damages for failure to be
declared effective by the Effective Date; PROVIDED, HOWEVER, that
no liquidated damages shall accrue during the period referred to in
6(b)(v) below.
(iii) At any time after April 10, 1995, upon the request
of one or more Holders holding in the aggregate at least 51% of the
NEW INVESTOR SHARES that constitutes Registrable Securities requesting
that the Company effect the registration of such Holders' Registrable
Securities under the Securities Act (which request shall specify the
Registrable Securities so requested to be registered, the proposed
amounts thereof and the intended method of disposition), the Company
shall as expeditiously as reasonably possible, use its best efforts
to effect the registration under the Securities Act of the Registrable
Securities that the Company has been so requested to register, for
disposition in accordance with the intended method of disposition
stated in such request (a "New Investor Demand Registration").
The Company shall not be obligated to effect (A) more than one
registration pursuant to this Section 6(b)(iii) before April 10,
1996, or (B) more than a total of two registrations pursuant to this
Section 6(b)(iii).
(iv) A registration requested pursuant to this Section 6(b)
shall not be deemed to have been effected (w) unless it has been
declared effective by the SEC, PROVIDED that a registration that
does not become effective after the Company has filed a Registration
Statement
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<PAGE>
with respect thereto solely by reason of the refusal to
proceed of the Initiating Holders shall be deemed to have
been effected by the Company at the request of such Initiating
Holders unless the Initiating Holders shall have elected to pay all
registration expenses referred to in Section 6(j)(ii) hereof
in connection with such registration, (x) if, after becoming
effective, such registration is interfered with by any stop order,
injunction or other order or requirement of the SEC or other
governmental agency or court for any reason other than a
misrepresentation or an omission by the Initiating Holders,
(y) if the conditions to closing specified in the purchase agreement
or underwriting agreement, if any, entered into in connection with
such registration are not satisfied other than by reason of some
wrongful act or omission, or act or omission in bad faith, by such
Initiating Holders or (z) unless in the case of the Bank Demand
Registration or a New Investor Demand Registration, at least
100% of the Registrable Securities requested to be included therein
shall have been registered.
(v) The Company may postpone, for up to ninety (90) days, the
filing or the effectiveness of a Registration Statement for a
registration requested pursuant to this Section 6(b) if the Board of
Directors reasonably believes the requested registration would have a
material adverse effect on, or interfere in any material respect with,
any proposal or plan by the Company to engage in any public financing
or any material pending corporate development or transaction, including,
without limitation, a material acquisition of assets (other than in
the ordinary course of business), any tender offer or any merger,
consolidation or other similar transaction material to the Company
and its subsidiaries taken as a whole. In no event shall the Company
exercise its rights under this Section 6(b)(v) more than once
(A) during any six-month period or (B) in respect of the same proposal,
plan, development or transaction.
(c) PIGGYBACK REGISTRATION. If, at any time, the Company proposes to
file a registration statement in connection with a Public Offering (other than
(A) a
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registration statement on Form S-4 or S-8, or any similar form which is a
successor to said Forms, or (B) a registration statement filed in connection
with an exchange offer or an offering of securities solely to the Company's
existing stockholders) that may be used for the registration of any of the
Registrable Securities (a "Piggyback Registration Statement"), then the Company
shall give written notice of such proposed filing at least 30 days before the
anticipated filing date of such Piggyback Registration Statement to all Holders,
offering such Holders the opportunity to include in such Piggyback
Registration Statement such amount of Registrable Securities as
they may request. Each Holder desiring to have Registrable Securities
registered pursuant to this Section 6(c) shall advise the Company in writing
within 20 days after the date of receipt of the Company's notice (which request
shall set forth the amount of Registrable Securities for which registration is
requested). Subject to Section 6(e), the Company shall include in any such
Piggyback Registration Statement all Registrable Securities so requested to be
included. No registration effected pursuant to a request or requests referred
to in this Section (6)(c) shall be deemed to have been effected pursuant to
Section 6(b).
If the Company shall previously have received a request for
registration pursuant to Section 6(b) or pursuant to this Section 6(c), and if
such previous registrations shall not have been withdrawn or abandoned, the
Company will not effect any registration of any Company Securities under the
Securities Act (other than a registration on Form S-4 or Form S-8, or any
similar form which is a successor to any of said Forms) until a period of three
months shall have elapsed from the effective date of such previous registration,
and the Company will so provide in any registration rights agreements hereafter
entered into with respect to any of its securities.
The Company shall have the right to discontinue, without liability to
any Holder, any registration under this Section 6(c) at any time prior to the
effective date of such registration if the registration of other securities
giving rise to such registration under this Section 6(c) is discontinued; but no
such discontinuation shall preclude an immediate or subsequent request for
registration pursuant to Section 6(b).
(d) CERTAIN LIMITATIONS ON REGISTRATION RIGHTS. The Company, in
its sole discretion, shall select
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the underwriter or underwriters, including the managing or lead underwriter
or underwriters, who are to undertake any offering of securities with respect
to which Holders have registration rights pursuant to Section 6(c) hereof and
shall have the right to approve (such approval not to be unreasonably
withheld) the underwriter or underwriters, including the managing or lead
underwriter or underwriters, who are to undertake any offering of securities
with respect to which the Holders have registration rights pursuant to Section
6(b) hereof. In the case of a registration under Section 6(b), if the
Holders of a majority of the Registrable Securities to be included therein
have determined to enter into an underwriting agreement in connection
therewith, or, in the case of a registration under Section 6(c), if the Board
of Directors of the Company or holders of securities initially requesting or
demanding such registration have determined to enter into an underwriting
agreement in connection therewith, all Registrable Securities to be included
in any such registration shall be subject to such underwriting agreement
(providing it is customary and reasonable) and no person may participate in
any such registration unless such person agrees to sell such person's
Registrable Securities on the basis provided in the underwriting arrangements
approved by such Holders, the Board of Directors of the Company or such
holders, as the case may be, and completes and/or executes all customary
questionnaires, indemnities, underwriting agreements and other reasonable
documents that must be executed under the terms of such underwriting
arrangements; PROVIDED, HOWEVER, that, if pursuant to their rights set forth
in this Section 6, NMB or Skopbank participate in any underwritten Public
Offering hereunder, upon the request of NMB and/or Skopbank, as the case may
be, in order to permit it or them to participate in such underwritten Public
Offering notwithstanding any legal or regulatory prohibition on its or their
exercise of Warrants and/or ownership of Shares, the underwriting agreement
shall provide that, unless prohibited by applicable law or regulation, the
underwriter or underwriters shall be required to purchase from NMB or
Skopbank, as applicable, at the closing of such Public Offering, Warrants
representing the number of Registrable Securities to be sold by NMB and/or
Skopbank, as the case may be, for a purchase price equal to the public
offering price per share of such Registrable Securities minus (A) the
underwriters discount or commission applicable to such Registrable Securities
and (B) the exercise price of such Warrants.
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(e) ALLOCATION OF SECURITIES INCLUDED IN REGISTRATION STATEMENT.
In the case of a registration pursuant to Section 6(b)(i), (ii) or (iii)
that is underwritten, if the managing underwriter of such offering shall
advise the Company and the Holders electing (pursuant to Section 6(b)) to
include Registrable Securities in the Registration Statement, in writing,
that (A) the total amount of securities requested to be included therein
creates a substantial risk that the proceeds or price per unit that will be
derived from such registration will be reduced or (B) the number of
securities to be registered exceeds the amount of securities that can be
reasonably sold in such offering, the Company shall include in such
registration: (x) first, all Registrable Securities requested to be included
in such registration pursuant to Section 6(b)(i), or with respect to
registrations pursuant to Sections 6(b)(ii) or (iii) all Registrable
Securities constituting Warrant Shares or New Investor Shares (as applicable)
requested to be included in such registration pursuant to Section 6(b)(ii)
or (iii), as the case may be (unless such amount exceeds the amount which
such underwriter advises can be sold, in which case the Company shall include
in such registration such maximum amount allocated pro rata among the Holders
of such Registrable Securities based upon the percentage of Shares then owned
such Holders), (y) second, with respect to any registrations pursuant to
Section 6(b)(ii) and (iii), any other Registrable Securities requested to be
included in such registration pursuant to Section 6(c) hereof (unless such
amount exceeds the amount which such underwriter advises can be sold, in
which case the Company shall include in such registration such maximum amount
allocated pro rata among the Holders of such Registrable Securities based
upon the percentage of Registrable Securities then owned by such Holders),
and (z) third, according to such priorities as the Company may agree with the
holders of other securities seeking to participate in any registration
pursuant to provisions of registration rights permitted by Section 6(i)
hereof.
In the case of any other underwritten registration pursuant to which
Holders are entitled to include Registrable Securities pursuant to Section
6(c), if the managing underwriter shall advise the Company and the Holders
electing (pursuant to Section 6(c) hereof) to include Registrable Securities
in the Piggyback Registration Statement, in writing, that (A) the inclusion
in any registration of some or all of the Registrable Securities
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sought to be registered by the Holders requesting such registration and the
other securities sought to be registered creates a substantial risk that the
proceeds or price per unit that will be derived from such registration will
be reduced or (B) the number of securities to be registered is too large a
number to be reasonably sold, then (x) the number of Company Securities
sought to be registered shall first be included in such registration and (y)
the number of securities sought to be registered for each Holder of
Registrable Securities shall be reduced pro rata, based upon the percentage
of Registrable Securities then owned by such Holders.
(f) LIMITATIONS ON SALE OR DISTRIBUTION OF SECURITIES. If a
registration under Section 6(b) or 6(c) hereof shall be in connection with an
underwritten public offering, each Holder agrees not to effect any public
sale or distribution, including any sale pursuant to Rule 144 or Rule 144A
under the Securities Act, of any equity securities or of any security
convertible into or exchangeable or exercisable for any equity security of
the Company (other than as part of such underwritten public offering) within
ten days before or 90 days after the effective date of such Registration
Statement.
(g) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company
will not effect or permit to occur any combination or subdivision of shares
that would adversely affect the ability of the Holder of any Registrable
Securities to include such Registrable Securities in any registration
contemplated by this Agreement or the marketability of such Registrable
Securities in any such registration.
(h) RULE 144. If the Company shall have filed a registration
statement pursuant to the requirements of Section 12 of the Exchange Act or a
registration statement pursuant to the requirements of the Securities Act,
the Company will timely file the reports required to be filed by it under the
Securities Act or the Exchange Act (including but not limited to the reports
under Sections 13 and 15(d) of the Exchange Act referred to in Rule 144(c)
(1)) and the rules and regulations adopted by the SEC thereunder (or, if the
Company is not required to file such reports, will, upon the request of any
Holder, make publicly available other information), and will take such
further action as any Holder may reasonably request, all to the extent
required from time to time to enable such Holder to sell his or its
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Shares or Warrants, as the case may be, without registration under the
Securities Act within the limitation of the exemptions provided by (i) Rule
144 or Rule 144A under the Securities Act, as such Rules may be amended from
time to time, or (ii) any similar rules or regulations hereafter adopted by
the SEC. Upon the request of any Holder, the Company will deliver to such
Holder a written statement as to whether it has complied with such
requirements.
(i) REGISTRATION RIGHTS TO OTHERS. If the Company shall at any
time after the date hereof provide to any holder of any securities of the
Company rights with respect to the registration of such securities under the
Securities Act, such rights shall not be in conflict with the rights provided
in this Section 6 or more favorable to the grantee than the rights provided
in Section 6(b)(i).
(j) GENERAL PROVISIONS. The following provisions shall apply in
connection with any Holder's Registrable Securities proposed to be included
in a Registration Statement under Section 6(b) or 6(c) hereof:
(i) Each Holder shall promptly provide the Company with such
information as it shall reasonably request, in writing, and that is
available to such Holder in order to prepare the Registration
Statement and related prospectus, including (without limitation)
information regarding each such Holder's plan of distribution.
(ii) All reasonable and necessary expenses in connection with
the preparation of such Registration Statement and related prospectus
and, except as set forth below, the sale of securities contemplated
thereby, including, without limitation, (A) any and all legal,
accounting (including the expenses of any audit and/or "comfort"
letter) and filing fees (including expenses associated with filings
required to be made with the NASD (including, if applicable, the fees
and expenses of any "qualified independent underwriter" and its
counsel, as may be required by the rules and regulations of the
NASD)), (B) blue sky fees and expenses, (C) word processing,
printing and duplicating expenses and (D) all other fees and expenses
customarily paid by issuers or sellers of securities (but not
including fees and disbursements of financial
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experts retained by any Holder and not underwriting discounts and
commissions attributable to the Registrable Securities registered in
the registration) shall be borne by the Company; PROVIDED, HOWEVER,
that the Company shall bear the expenses of only one counsel to the
Holders, which counsel shall be chosen by the Holders of a majority of
the Registrable Securities requesting registration pursuant to Section
6(b) or, if none, by the Holders of a majority of the Registrable
Securities included in such registration (as defined below).
(iii) In connection with the Company's registration
obligations pursuant to Section 6(b) and Section 6(c) hereof, the
Company shall use its best efforts to permit the sale of such
Registrable Securities in accordance with the intended method or
methods of distribution thereof, and pursuant thereto, the Company
shall as expeditiously as possible:
(A) prepare and file with the SEC, as soon as practicable,
but in no event later than 90 days after any request in the case of
a Registration pursuant to Section 6(b), a Registration Statement
or Registration Statements relating to the applicable registration
on any appropriate form under the Securities Act, which form shall
be available for the sale of the Registrable Securities in
accordance with the intended method or methods of a distribution
thereof and shall include all financial statements (including, if
applicable, financial statements of any subsidiary of the Company
that shall have guaranteed any indebtedness of the Company)
required by the SEC to be filed therewith, cooperate and assist in
any filings required to be made with the NASD and use its best
efforts to cause such Registration Statement to become and remain
effective; PROVIDED that before filing a Registration Statement or
prospectus or any amendments or supplements thereto, the Company
shall furnish to the Holders of the Registrable Securities covered
by such Registration Statement and the underwriters, if any, copies
of all such documents proposed to be filed, which documents shall
be subject to the reasonable review of such
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Holders and underwriters and the Company shall not file any such
Registration Statement or prospectus or any amendments or supplements
thereto to which the Holders of a majority of the shares covered by
such Registration Statement shall reasonably object, in writing, on a
timely basis;
(B) prepare and file with the SEC such
amendments and post-effective amendments to the Registration
Statement as may be necessary to keep the Registration Statement
effective for twelve (12) months, or such shorter period
terminating when all Registrable Securities covered by such
Registration Statement have been sold; cause the prospectus to be
supplemented by any required prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 under the Securities
Act; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
Registration Statement during the applicable period in accordance
with the intended method or methods of distribution by the sellers
thereof set forth in such Registration Statement or supplement to
the prospectus the Company shall not be deemed to have used its
best efforts to keep a Registration Statement effective during the
applicable period if it voluntarily takes any action that would
result in selling Holders of the Registrable Securities covered
thereby not being able to sell such Registrable Securities during
that period unless such action is required under applicable law;
(C) notify the selling Holders of Registrable Securities
and the managing underwriters, if any, promptly, and (if requested
by any such person) confirm such advice in writing, (1) when the
prospectus or any prospectus supplement or post-effective amendment
has been filed, and, with respect to the Registration Statement or
any post-effective amendment, when the same has become effective,
(2) of any request by the SEC for amendments or supplements to the
Registration Statement or the prospectus or for additional
information, (3) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of
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any proceedings for that purpose, (4) if at any time the
representations and warranties of the Company contemplated by
paragraph (N) below cease to be true and correct, (5) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceedings for
such purpose, (6) of the happening of any event that makes any
statement made in the Registration Statement, the prospectus or any
document incorporated therein by reference untrue or which requires
the making of any changes in the Registration Statement, the
prospectus or any document incorporated therein by reference in order
to make the statements therein not misleading and (7) of the
Company's reasonable determination that a post-effective amendment to
a Registration Statement would otherwise be required;
(D) make every reasonable effort to obtain the withdrawal
of any order suspending the effectiveness of the Registration
Statement, or the lifting of any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities
for sale in any jurisdiction, at the earliest possible moment;
(E) if requested by the managing underwriter or
underwriters or a Holder of Registrable Securities being sold in
connection with an underwritten offering, promptly incorporate in a
prospectus supplement or post-effective amendment such information
as the managing underwriters and the Holders of a majority of the
Registrable Securities being sold reasonably agree should be
included therein relating to the plan of distribution with respect
to such Registrable Securities, including, without limitation,
information with respect to the amount of Registrable Securities
being sold to such underwriters, the purchase price being paid
thereof or by such underwriters and with respect to any other terms
of the underwritten (or best efforts underwritten) offering of the
Registrable Securities to be sold in such offering; and make all
required filings of such prospectus supplement or post-effective
amendment as soon as notified of the
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matters to be incorporated in such prospectus supplement or post-
effective amendment;
(F) furnish to each selling Holder of Registrable
Securities and each managing underwriter, without charge, at least
one signed copy of the Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, all
documents incorporated therein by reference and all exhibits
(including those incorporated by reference);
(G) deliver to each selling Holder of Registrable
Securities and the underwriters, if any, without charge, as many
copies of the prospectus (including each preliminary prospectus)
and any amendment or supplement thereto as such persons may
reasonably request; the Company consents to the use of the
prospectus or any amendment or supplement thereto by each of the
selling Holders of Registrable Securities and the underwriters, if
any, in connection with the offering and sale of the Registrable
Securities covered by the prospectus or any amendment or supplement
thereto;
(H) prior to any Public Offering of Registrable Securities,
register or qualify or cooperate with the selling Holders of
Registrable Securities, the underwriters, if any, and their respective
counsel in connection with the registration or qualification of such
Registrable Securities for offer and sale under the securities or blue
sky laws of such jurisdictions as any seller or underwriter reasonably
requests in writing and keep each such registration or qualification
(or exemption therefrom) effective during the period such Registration
Statement is required to be kept effective and do any and all other
acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the
Registration Statement; PROVIDED, HOWEVER, that the Company shall not
be required to qualify generally to do business in any jurisdiction
where it is not then so qualified or to take any action that would
subject it to general service of process in any such jurisdiction
where it is not
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then so subject or subject the Company to any tax in any such
jurisdiction where it is not then so subject;
(I) cooperate with the selling Holders of Registrable
Securities and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificate shall not bear
any restrictive legends and shall be in a form eligible for deposit
with the Depository Trust Company; and enable such Registrable
Securities to be in such denominations and registered in such names
as the managing underwriters may request at least two business days
prior to any sale of Registrable Securities to the underwriters;
(J) use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers
thereof or the underwriters, if any, to consummate the disposition
of such Registrable Securities;
(K) upon the occurrence of any event contemplated by
paragraph (C)(6) or (C)(7) above, prepare a supplement or
post-effective amendment to the Registration Statement or the
related prospectus or any document incorporated therein by
reference or file any other required document so that, as
thereafter delivered to the purchasers of the Registrable
Securities, the prospectus will not contain an untrue statement of
a material fact or omit to state any material fact necessary to
make the statements therein not misleading;
(L) cause all Registrable Securities covered by the
Registration Statement to be either listed on each securities
exchange or quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System on which similar
securities issued by the Company are then listed or quoted if
requested by the Holders of a
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majority of such Registrable Securities or the managing underwriters,
if any;
(M) not later than the effective date of the applicable
Registration, provide a CUSIP number for all Registrable Securities
and provide the applicable trustees or transfer agents with printed
certificates for the Registrable Securities that are in a form
eligible for deposit with Depositary Trust Company;
(N) enter into such customary agreements (including an
underwriting agreement) and take all such other actions in
connection therewith in order to expedite or facilitate the
disposition of such Registrable Securities and in such connection,
whether or not an underwriting agreement is entered into and
whether or not the registration is an underwritten registration,
(1) make such representations and warranties to the Holders of such
Registrable Securities and to the underwriters, if any, in form,
substance and scope as are customarily made by issuers to
underwriters in similar underwritten offerings; (2) obtain opinions
of counsel to the Company and updates thereof, which counsel and
opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters, if any, addressed to
each Selling Holder or Registrable Securities and each underwriter,
if any, covering the matters customarily covered in opinions
requested in underwritten offerings; (3) obtain "cold comfort"
letters and updates thereof from the Company's independent
certified public accountants addressed to each Selling Holder of
Registrable Securities and each underwriter, if any, such letters
to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by accountants in
connection with underwritten offerings; (4) if an underwriting
agreement is entered into, the same shall set forth in full the
indemnification provisions and procedures of Section 6(1) hereof
with respect to all parties to be indemnified pursuant to said
Section; and (5) the Company shall deliver such documents and
certificates as may be requested by the Holders of a majority of
the Registrable Securities being sold and the
40
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managing underwriters, if any, to evidence compliance with paragraph
(K) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company.
The above shall be done at each closing under such underwriting or
similar agreement or as and to the extent required thereunder;
(O) make available for inspection by a representative of the
Holders of a majority of the Registrable Securities, any underwriter
participating in any disposition pursuant to such registration, and
any attorney or accountant retained by the sellers of Registrable
Securities or such underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all
information reasonably requested by any such representative,
underwriter, attorney or accountant in connection with such
registration; provided that any records, information or documents that
are designated by the Company in writing as confidential shall be kept
confidential by such persons unless (i) disclosure of such information
is required by court or administrative order or is necessary to
respond to inquiries of regulatory authorities, (ii) disclosure of
such information, based upon the advice of counsel to such person and
notice thereof to the Company, is required by law, (iii) such
information becomes generally available to the public other than as a
result of a disclosure or failure to safeguard by such person or (iv)
such information becomes available to such person from a source other
than the Company or another person known by such persons to be under a
similar obligation of confidentiality to the Company;
(P) otherwise comply with all applicable rules and
regulations of the SEC, and make generally available to its security
holders, earnings statements satisfying the provisions of Section 11(a)
of the Securities Act, no later than forty-five (45) days after the
end of any 12-month period (or ninety (90) days, if such period is a
fiscal year) (1) commencing at the end of any fiscal quarter in which
Registrable Securities are
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sold to underwriters in a firm or best efforts underwritten offering,
or (2) if not sold to underwriters in such an offering, beginning with
the first month of the Company's first fiscal quarter commencing after
the effective date of the Registration Statement, which statements
shall cover said 12-month periods; and
(Q) promptly prior to the filing of any document that is
to be incorporated by reference into the Registration Statement or
prospectus (after initial filing of the Registration Statement),
provide copies of such document to counsel to the selling Holders of
Registrable Securities and to the managing underwriters, if any; make
the Company's representatives available for discussion of such
document and make such changes in such document (other than any
exhibits thereto) prior to the filing thereof as counsel for such
underwriters may reasonably request.
(iv) Each Holder of Registrable Securities agrees by acquisition
of such Registrable Securities that, upon receipt of any notice from
the Company of the happening of any event of the kind described in
paragraph (K) hereof, such Holder shall forthwith discontinue
disposition of Registrable Securities until such Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by
paragraph (K) hereof, or until it is advised in writing (the "Advice")
by the Company that the use of the prospectus may be resumed, and has
received copies of any additional or supplemental filings that are
incorporated by reference in the prospectus, and, if so directed by the
Company, such Holder shall deliver to the Company (at the Company's
expense) all copies, other than permanent file copies then in such
Holder's possession, of the prospectus covering such Registrable
Securities current at the time of receipt of such notice. In the event
the Company shall give any such notice, the time periods regarding the
maintenance of the effectiveness of any Registration Statement in
Section 6(b) and 6(c) hereof shall be extended by the number of days
during the period from and including the date of the giving of such
notice pursuant to Section 6(j)(iii)(C)(6) hereof to and including
the date
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when each seller of Registrable Securities covered by such Registration
Statement shall have received the copies of the supplemented or amended
prospectus contemplated by paragraph (K) hereof or the Advice.
(k) INDEMNIFICATION.
(i) If any Registrable Securities are registered or qualified
for sale under the Securities Act pursuant to the provisions of Section
6(b) or 6(c) hereof, the Company shall indemnify and hold harmless each
Holder thereby offering such Registrable Securities for sale (a
"Seller"), and each underwriter of such Registrable Securities, and each
other person, if any, who controls any such Seller or underwriter within
the meaning of the Securities Act, to the fullest extent lawful, from
and against any and all losses, claims, damages or liabilities (or
actions in respect thereof) joint or several, to which such Seller or
underwriter or controlling person may become subject under the
Securities Act or the applicable securities laws or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof), as incurred, arise out of or are based upon (A) any untrue
statement or alleged untrue statement of any material fact contained in
any Registration Statement under which such Registrable Securities were
registered or qualified under applicable securities laws, any
preliminary prospectus or final prospectus relating to such Registrable
Securities, or any amendment or supplement thereto, or (B) the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or (C) any violation by the Company or any of its employees
or agents of any rule or regulation under applicable securities laws or
other laws applicable to the Company, or (D) any action or inaction by
the Company in connection with any such registration or qualification of
Registrable Securities as contemplated hereby; and the Company shall
reimburse each such Seller, underwriter, and each such controlling
person for all reasonable out-of-pocket costs (including reasonable
out-of-pocket costs of preparation and
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<PAGE>
reasonable attorneys' fees) and other expenses reasonably incurred by such
Seller or underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or
action; PROVIDED, HOWEVER, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission in such Registration
Statement, such preliminary prospectus, such final prospectus or such
amendment or supplement thereto (i) in reliance upon and in conformity
with written information relating to such Seller or underwriter or
controlling person furnished to the Company by any Seller or underwriter
or controlling person specifically and expressly for use in the
preparation thereof; or (ii) if such untrue statement or alleged untrue
statement, omission or alleged omission is completely corrected in an
amendment or supplement to the prospectus and the Seller, underwriter or
controlling person thereafter fails to deliver such prospectus as so
amended or supplemented prior to or concurrently with the sale of the
Registrable Securities to the person asserting such loss, claim, damage
or liability after the Company has furnished such holder with a
sufficient number of copies of the same.
(ii) If any Registrable Securities are registered or
qualified for sale under the Securities Act pursuant to the provisions
of Section 6(b) or 6(c) hereof, each Seller agrees severally, and not
jointly, to indemnify and hold harmless the Company, each other Seller,
each person who controls the Company or any other Seller within the
meaning of the Securities Act, and each officer and director of such
controlling persons from and against any losses, claims, damages or
liabilities, joint or several, to which the Company, such controlling
person or any such officer or director may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement of any material fact contained in any
Registration Statement under which
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<PAGE>
such Registrable Securities were registered or qualified under the
Securities Act, any preliminary prospectus or final prospectus relating
to such securities, or any amendment or supplement thereto, or arise out
of or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, which untrue statement or omission was made
therein in reliance upon and in conformity with written information
relating to such Seller furnished to the Company by such Seller or
controlling person specifically for use in connection with the
preparation thereof or arise out of or are based upon any violation by
such Seller of any rule or regulation under the Securities Act, and
shall reimburse the Company, such controlling person of the Company and
each such officer or director of such controlling person for any legal
or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action. In no event shall the liability of a Seller of Registrable
Securities hereunder be greater in amount than the dollar amount of the
net proceeds received upon the sale of the Registrable Securities giving
rise to such indemnification obligation.
(iii) Promptly after receipt by a person entitled to
indemnification under this Section 6(k) (an "indemnified party") of
notice of the commencement of any action, claim or proceeding as to
which indemnity may be sought hereunder, such indemnified party shall,
if a claim for indemnification hereunder in respect thereof is to be
made against any other party hereto (an "indemnifying party"), give
written notice to such indemnifying party of the commencement of such
action, claim or proceeding, but the omission so to notify the
indemnifying party will not relieve it from any liability that it may
have to any indemnified party otherwise than pursuant to the provisions
of this Section 6(k) and shall also not relieve the indemnifying party
of its obligations under this Section 6(k) except to the extent that the
omission results in a failure of actual timely notice to the
indemnifying party and such indemnifying party is damaged as a result of
the
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failure to give timely notice. In case any such action, claim or
proceeding is brought against an indemnified party, and such indemnified
party notifies an indemnifying party of the commencement thereof, the
indemnifying party shall be entitled (at its own expense) to participate
in and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense, with
counsel reasonably satisfactory to such indemnified party, of such
action, claim or proceeding. Any such indemnified party shall have the
right to employ separate counsel in any such action, claim or proceeding
and to participate in the defense thereof, but, if the indemnifying
party has assumed the defense thereof, the fees and expenses of such
counsel shall be the expenses of such indemnified party unless (a) the
indemnifying party has agreed to pay such fees and expenses; or (b) the
indemnifying party shall have failed to promptly assume the defense of
such action, claim or proceeding and to employ counsel reasonably
satisfactory to the indemnified party; or (c) the named parties to any
such action, claim or proceeding (including any impleaded parties)
include both such indemnified party and the indemnifying party or an
Affiliate of the indemnifying party, and such indemnified party shall
have been advised by counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party or such Affiliate (in which case, if
such indemnified party notifies the indemnifying party in writing that
it elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the
defense thereof, it being understood, however, that the indemnifying
party shall not, in connection with any one such action, claim or
proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction, arising out of the same
general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified parties,
unless in the reasonable judgment of any such indemnified party a
conflict of interest may
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exist between such indemnified party and any other of such indemnified
parties with respect to such action, claim or proceeding, in which event
the indemnifying party shall be obligated to pay the fees and expenses
of such additional counsel or counsels). The indemnifying party shall
not be liable for any settlement of any such action, claim or proceeding
effected without its written consent, which consent shall not be
unreasonably withheld. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any
pending action, claim or proceeding in respect of which any indemnified
party is a party and is entitled to indemnity hereunder, unless such
settlement includes an unconditional release of such indemnified party
from all liability or claims that are the subject matter thereof.
(iv) If for any reason the indemnification provided for in this
Section 6(k) is unavailable to an indemnified party or insufficient to
hold it harmless as contemplated by this Section 6(k), then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, claim, damage, liability,
cost or expense in such proportion as is appropriate to reflect not only
the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party
and the indemnifying party, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and
indemnified party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission of a
material fact, has been taken or made by, or relates to information
supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action, statement or omission.
The amount paid or payable by a party as a result of any losses, claims,
damages, liabilities, costs and expenses shall be deemed to include any
legal or other fees or expenses reasonably incurred by such
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<PAGE>
party in connection with any investigation or action, claim or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(k)(iv) were determined by pro
rata allocation or by any other method of allocation that does not take
into account the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section
6(k)(iv), an indemnifying party that is a selling Holder of Registrable
Securities shall not be required to contribute any amount in excess of
the dollar amount of the proceeds received by such Holder with respect
to the sale of any Registrable Securities. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
7. TRANSFERS OF MANAGEMENT SHARES.
(a) CERTAIN DEFINITIONS. The terms defined below shall have the
following meanings when used in this Section 7:
(i) "Acquisition" shall mean the purchase of all the issued
and outstanding shares of Hamilton Test Systems, Inc. ("HTS") by Hamilton
Acquisition Corp. ("Acquisition Corp."), a wholly owned subsidiary of
the Company, and the subsequent merger of Acquisition Corp. with and
into HTS.
(ii) "Applicable Closing Date" shall mean (A) with respect
to Shares or Options acquired by a Management Stockholder prior to the
date hereof (including Shares hereafter acquired upon the exercise of such
Options), the Initial Closing Date, and (B) with respect to Shares or
Options acquired by a Management Stockholder after the date hereof, the
Closing Date.
(iii) "Cause," when used in connection with the termination
of a Management Stockholder's employment with Holdings, means the
Management Stockholder (A) shall have willfully failed to perform any of
his material obligations
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or shall have demonstrated willful misconduct in the performance of his
duties to Holdings or shall have willfully failed to follow the
instructions of the Board and shall have failed to cure such failure
within thirty (30) days after receiving written notice thereof from the
Board; or (B) shall have consistently performed his duties to Holdings
in a negligent fashion; or (C) shall have committed any act of fraud,
theft or dishonesty against Holdings; or (D) the Employee shall be
convicted of (or plead NOLO CONTENDERE to) any felony, fraud or
embezzlement.
(iv) "Closing Date" means the date of this Agreement.
(v) "Holdings" means the Company and all other entities in which
the Company from time to time owns, directly or indirectly, 50% or more
of the stock or assets.
(vi) "Initial Closing Date" means December 21, 1990.
(b) RESTRICTIONS ON TRANSFER. No Management Stockholder shall
effect a transfer of any Shares or Options prior to the third
anniversary of the Applicable Closing Date other than (i) pursuant to
Section 7(c) in connection with the Purchase Option (as hereinafter
defined), (ii) pursuant to Section 4, (iii) pursuant to Section 7(c) in
connection with a merger, consolidation, sale of assets, sale of stock
or similar business combination transaction approved by the Board of
Directors and stockholders of the Company, (iv) in connection with a
Public Offering in which the Management Stockholder is entitled to
participate pursuant to Section 6 hereof or (v) with the consent of the
Company (as evidenced by a resolution duly adopted by at least a
majority of the nonemployee members of the Company's Board of
Directors). In exercising the consent and approval provided for in
clause (v), the Company may employ its sole discretion in evaluating the
nature of the proposed transferee and the Company may impose such
conditions on transfer as it deems appropriate in its sole discretion,
including but not limited to requirements that the transferee be an
employee of Holdings and that the transferee purchase the Management
Stockholder's Shares as a "Management Stockholder" subject to the
restrictions of this Section 7. In the event any transfer is authorized
pursuant to clause (v)
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to an employee of Holdings as a "Management Stockholder," such employee
shall execute an agreement, in form and substance satisfactory to the
Company, pursuant to which such employee shall agree to be bound by such
terms and conditions hereof, and such other provisions as the Company
may determine, and upon such execution such employee shall be entitled
to the benefit of such provisions hereof and such other provisions as
the Company determines and are set forth in such agreement. The
foregoing provisions of this Section shall not preclude a transfer of
any Shares or Options by a Management Stockholder by will or the laws of
descent and distribution on account of the death of such Management
Stockholder; PROVIDED, HOWEVER, that the executors, administrators,
heirs and transferees of such Management Stockholder shall agree in
writing to be subject to and bound by all of the terms and conditions
hereof, including without limitation Section 7 hereof; and PROVIDED
FURTHER, upon the death of any Management Stockholder after the third
anniversary of the Applicable Closing Date, such Stockholder's Shares or
Options that are transferred by will or the laws of descent and
distribution shall no longer be subject to the provisions of this
Section 7. Any purported transfer in violation of this Agreement shall
be null and void and of no force and effect and the purported
transferees shall have no rights or privileges in or with respect to the
Company; PROVIDED, HOWEVER, following the third anniversary of the
Applicable Closing Date, the restrictions on transfer contained in this
Section 7 shall be of no further force and effect.
(c) PURCHASE OPTION.
(i) GENERAL TERMS. In the event that prior to the third
anniversary of the Applicable Closing Date, any Management
Stockholder shall cease to be employed by Holdings for any reason
(including, without limitation, death, disability, resignation or
termination by Holdings with or without Cause), other than by
reason of a leave of absence approved by Holdings, such Management
Stockholder (or his heirs, executors, administrators, transferees,
successors or assigns) shall give prompt notice to the Company of
such termination of employment, and the Company, or if the Company
is prohibited by law or has insufficient funds to effect such
repurchase, each of the other Stockholders, shall have the right
and option at any time within 60 days after
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the later of the effective date of such termination of employment
(the "Termination Date") or the date on which the Company receives
such notice, to purchase from such Management Stockholder, or his
heirs, executors, administrators, transferees, successors or
assigns, as the case may be, (i) any or all of the Shares or
Options then owned by such Management Stockholder at a purchase
price equal to the Option Purchase Price (as hereinafter defined)
and/or (ii) any or all of the outstanding principal amount of the
Junior Subordinated Notes then owned by such Management
Stockholder at face value plus accrued interest. If, pursuant to
the immediately preceding sentence, the Company is unable to
purchase Shares or Options, the Company shall give prompt notice
to the other Stockholders of the availability of such Shares or
Options for purchase in accordance with this Section (c)(i). If,
in accordance with the first sentence of this Section (c)(1), the
other Stockholders elect to purchase more Shares or Options than
the amount of Shares or Options such Management Stockholder owns,
the Stockholders so electing shall purchase the Shares and/or
Options PRO RATA in accordance with the number of Shares owned by
such Stockholders. The Company may give notice to the terminated
Management Stockholder of its intention to purchase such Shares or
Options at any time not later than 60 days after the later of the
Termination Date or the date on which the Company receives such
notice of such termination. (The right of the Company or the
other Stockholders, as applicable, set forth in this Section 7(c)
to purchase a terminated Management Stockholder's Shares or
Options is hereinafter collectively referred to as the "Purchase
Option"). A Stockholder's agreement to assume such obligation
will relieve the Company of its obligations under Section 7(c)(i)
(C) with regard to the particular Management Stockholder and such
Management Stockholder shall have no recourse against the Company
under Section 7(c)(i)(c).
(A) EXERCISE OF PURCHASE OPTION. The Purchase Option
shall be exercised by written notice to such Management
Stockholder (or his heirs, executors, administrators, transferees,
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successors or assigns) signed by an officer of the Company on behalf
of the Company or the Stockholders, as applicable, and shall set
forth the number of Shares or Options desired to be purchased. Such
notice shall set forth a time and place of closing no earlier than
10 days and no later than 30 days after the date of notice is
sent. At such closing, the seller shall deliver certificates
evidencing the number of Shares or Options to be purchased by each
buyer, accompanied by stock powers duly endorsed in blank or duly
executed instruments of transfer with the signature guaranteed by
a member firm of the New York Stock Exchange, Inc. or a commercial
bank or trust company organized under the laws of the United
States or any state thereof, and any other documents that are
necessary to transfer to the buyer good title to the Shares or
Options to be transferred, free and clear of all pledges, security
interests, liens, charges, encumbrances, equities, claims and
options of whatever nature other than those imposed under this
Agreement, and concurrently with such delivery, buyer(s) shall
deliver to the seller the full amount of the Option Purchase Price
for such Shares or Options in cash by certified or bank cashier's
check.
(B) OPTION PURCHASE PRICE. Subject to Section 7(c)(i)(D)
below, the "Option Purchase Price" for (i) Shares to be purchased
from a Management Stockholder pursuant to the Purchase Option
(such number of Shares, the "Purchase Number") shall equal the
price calculated as set forth in the table below opposite the
applicable Termination Date of such Management Stockholder and
(ii) Options to be purchased from a Management Stockholder shall
be equal to the Option Purchase Price applicable to the underlying
shares of Common Stock (in accordance with (i) above) less the
exercise price of such Options:
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If the Shares Were Acquired
by the Management Stockholder
Prior to the Closing Date and Option
the Termination Date Occurs: Purchase Price
- ----------------------------- --------------
On or prior to the second Adjusted Cost Price
anniversary of the Initial multiplied by 66-2/3% of the
Closing Date Purchase Number, plus
Adjusted Book Value Price
multiplied by 33-1/3% of the
Purchase Number
After the second anniversary Adjusted Cost Price
of the Initial Closing Date, multiplied by 33-1/3% of the
and on or prior to the third Purchase Number, plus
anniversary of the Initial Adjusted Book Value Price
Closing Date multiplied by 66-2/3% of the
Purchase Number
On or prior to the first Adjusted Cost Price
anniversary of the Closing multiplied by 100% of the
Date Purchase Number
After the first anniversary Adjusted Cost Price
of the Closing Date, and on multiplied by 66-2/3% of the
or prior to the second Purchase Number, plus
anniversary of the Closing Adjusted Book Value Price
Date multiplied by 33-1/3% of the
Purchase Number
After the second anniversary Adjusted Cost Price
of the Closing Date, and on multiplied by 33-1/3% of the
or prior to the third Purchase Number, plus
anniversary of the Closing Adjusted Book Value Price
Date multiplied by 66-2/3% of the
Purchase Number
As used herein, "Adjusted Cost Price" for each Share means the
lesser of (i) the original purchase price per Share (adjusted for any
stock dividend payable upon, or subdivision or combination of, the
Common Stock) and (ii) the "Adjusted Book Value Price" for each Share;
"Adjusted Book Value Price" for each Share means the consolidated net
worth of the Company per common share (adjusted to reflect the pro
forma exercise in full of any dilutive securities) reflected in the
Company's audited consolidated
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financial statements as of the end of the fiscal year next preceding
the Termination Date; PROVIDED, HOWEVER, that for purposes of
determining such price there shall be restored to the net worth as
reflected on such audited financial statements (a) the effects of
amortization of the excess of cost over net assets of businesses
acquired recorded as intangible assets (but excluding goodwill) and
deferred charges resulting from purchase accounting adjustments
pursuant to Accounting Principles Board Opinion Nos. 16 and 17
resulting from the Acquisition (but only to the extent of the
incremental amount by which such intangible assets and deferred
charges exceed the intangible assets and deferred charges that existed
on the books of HTS immediately prior to the Acquisition), (b) the
depreciation charges resulting from the revaluation of HTS' assets to
current fair market value in connection with the Acquisition (but only
to the extent of the incremental amount by which such depreciation
charges exceed the depreciation charges that existed on the books of
HTS immediately prior to the Acquisition), and (c) the effects of
amortization of the excess of cost over net assets of businesses
acquired recorded as goodwill resulting from purchase accounting
adjustments pursuant to Accounting Principles Board Opinion Nos. 16
and 17 resulting from the Acquisition; and PROVIDED, FURTHER, that at
any time after the Company has effected a Public Offering of its
Common Stock, then the "Adjusted Book Value Price" shall equal the
average of the last reported prices for which Common Stock was sold
prior to the close of business on each of the last ten business days
prior to the Termination Date.
(C) ADJUSTMENTS TO OPTION PURCHASE PRICE. If the Company
or another Stockholder, as applicable, exercises the Purchase Option
with respect to any or all of the Shares or Options of any Management
Stockholder whose employment with Holdings was terminated without
Cause (the "Called Shares"), and if within six months after the
closing pursuant to such exercise of the Purchase Option by the
Company or such other Stockholder
(1) the Company is merged into, consolidated with or otherwise
combined with or acquired by another person or entity, or there is a
liquidation of the Company, or there is a Public Offering (a
"Subsequent Offering") of the Company's Common Stock pursuant to an
effective
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Registration Statement under the Securities Act in which other
Management Stockholders participate as selling stockholders (other
than (1) a registration statement on Form S-8 or any successor forms
or any other registration statement relating to a special offering to
Holdings' employees or (2) a registration statement relating to a Unit
Offering (as hereinafter defined)); and
(2) the per share consideration received by the stockholders of the
Company in such transaction, or the per share net proceeds received
for the Company's Common Stock in the Subsequent Offering, as the case
may be (in each case after being adjusted downward to reflect what the
per share consideration or per share net offering proceeds, as the
case may be, would have been had the Shares of such terminated
Management Stockholder purchased by the Company or its designee
pursuant to the Purchase Option been outstanding on the date of the
closing of such transaction or Subsequent Offering) exceed the
Adjusted Book Value Price used in calculating the Option Purchase
Price pursuant to the exercise of the Purchase Option,
then such Management Stockholder shall be entitled to receive from the
Company or the other Stockholder, as applicable, an amount per share equal to
such excess multiplied by the applicable Adjusted Book Value Price percentage
within 30 days after the closing of any such transaction or Subsequent
Offering; PROVIDED, HOWEVER, that in the case of a Subsequent Offering in
which such Management Stockholder would have been entitled to sell fewer than
the number of shares equal to the Purchase Number multiplied by the
applicable Adjusted Book Value Price percentage based upon the rights and
restrictions in Section 6 hereof, the amount of any payment under this
provision shall be proportionately reduced to reflect the number of shares
the Management Stockholder would have been entitled to sell in the Subsequent
Offering.
As used herein, a "Unit Offering" shall mean a Public Offering of a
combination of debt and equity securities of the Company in which (i) not
more than 10% of the gross proceeds received for the sale of such securities
is attributed to such equity securities, and (ii) after giving effect to such
offering, the Company does not have a class of equity securities required to
be registered under the Exchange Act.
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(D) SALE IN PUBLIC OFFERING. Nothing herein shall prevent any
Management Stockholder from selling Shares or Options in any Public Offering
to which the provisions of Section 6 are applicable; PROVIDED, HOWEVER, that
(i) if less than all of such Management Stockholder's Shares are sold in such
offering, for purposes of any subsequent calculation hereunder of the Option
Purchase Price, the Option Purchase Price for Shares shall equal: (a) the
Adjusted Cost Price multiplied by the product of the applicable Adjusted Cost
Price percentage and the Adjusted Purchase Number (as defined below), plus
(b) the Adjusted Book Value Price multiplied by the product of the applicable
Adjusted Book Value Price percentage and the Adjusted Purchase Number, less
(c) the product of the Publicly-Sold Stock (as defined below) and the
Adjusted Book Value Price, where: (x) "Publicly-Sold Stock" means the total
number of shares of Stock previously sold by the respective Management
Stockholder in a Public Offering, (y) "Adjusted Purchase Number" means the
sum of the Purchase Number and the Publicly-Sold Stock, and (z) the Option
Purchase Price at all times shall equal or exceed the product of the Adjusted
Cost Price and the Purchase Number; and (ii) this section shall continue to
apply in accordance with its terms to all Shares not sold in any such Public
Offering.
(E) In the event that the Company does not agree to purchase any
Shares or Options pursuant to this Section 7(c) within the 60-day period set
forth in subsection (i), such Shares or Options shall then be offered to the
other Stockholders pursuant to the terms and provisions of Section 2 hereof.
(ii) COMPANY'S FIRST REFUSAL RIGHT. In the event that, prior to the
third anniversary of the date hereof, (x) a Management Stockholder is no
longer employed by Holdings; (y) the Company or another Stockholder, as
applicable, has declined to exercise the Purchase Option with respect to any
of such Management Stockholder's Shares or Options; and (z) the Management
Stockholder thereafter proposes to sell any or all of such Shares to a third
party in a bona fide transaction, the Management Stockholder may not transfer
such Shares without first offering to sell
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<PAGE>
them to the Company and the other Stockholders pursuant to this
Section 7(b).
The Management Stockholder shall deliver a written notice (a "Sale
Notice") to the Company describing in reasonable detail the Shares or Options
being offered, the name of the offeree, the purchase price requested and all
other material terms of the proposed transfer. Upon receipt of the Sale
Notice, the Company, or if the Company is prohibited by law or has
insufficient funds to elect such purchase, the other Stockholders, shall have
the right and option to purchase all, but not less than all, of the Shares or
Options being offered at the price and on the terms of the proposed transfer
set forth in the Sale Notice; PROVIDED, HOWEVER, that if the Company is
unable to purchase Shares or Options hereby, it shall give prompt notice of
such fact to the other Stockholders; and PROVIDED, FURTHER, if, in accordance
with this sentence, the other Stockholders elect to purchase more Shares or
Options than the amount of Shares or Options such Management Stockholder
owns, the Stockholders so electing shall purchase the Shares and/or Options
PRO RATA in accordance with the number of Shares owned by such Stockholders.
Within 30 days after receipt of the Sale Notice, the Company or the other
Stockholders, as applicable, shall notify such Management Stockholder whether
or not it wishes to purchase all the offered Shares or Options.
If the Company or the other Stockholders, as applicable, elect to
purchase all the offered Shares or Options, the closing of the purchase and
sale of such Shares or Options shall be held at the place and on the date
established by the Company or the other Stockholders, as applicable, in its
notice to the Management Stockholder in response to the Sale Notice, which in
no event shall be less than 10 or more than 30 days from the date of such
notice. In the event that the Company or the other Stockholders, as
applicable, do not elect to purchase all the offered Shares or Options, the
Management Stockholder may, subject to the other provisions of this
Agreement, transfer the offered Shares or Options to the offeree specified in
the Sale Notice at a price no less than the price specified in the Sale
Notice and on other terms no more favorable to the transferee(s) thereof than
specified in the Sale Notice during the 180-day period immediately following
the last date on which the Company or the other Stockholders, as applicable,
could have elected to purchase the offered securities. Any such securities
not transferred within such
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<PAGE>
180-day period will be subject to the provisions of this Section 7(c)(ii)
upon subsequent transfer.
(d) INVOLUNTARY TRANSFERS. In the event that the Shares or
Options owned by any Management Stockholder shall be subject to sale or other
transfer (the date of such sale or transfer shall hereinafter be referred to
as the "Transfer Date") prior to the third anniversary of the Applicable
Closing Date by reason of (i) bankruptcy or insolvency proceedings, whether
voluntary or involuntary, or (ii) distraint, levy, execution or other
involuntary transfer, then such Management Stockholder shall give the Company
written notice thereof promptly upon the occurrence of such event stating the
terms of such proposed transfer, the identity of the proposed transferee, the
price or other consideration, if readily determinable, for which the Shares
or Options are proposed to be transferred, and the number of Shares or
Options to be transferred. After its receipt of such notice or, failing such
receipt, after the Company otherwise obtains actual knowledge of such a
proposed transfer, the Company, or if the Company is prohibited by law or has
insufficient funds to elect such purchase, the other Stockholders, shall have
the right and option to purchase all, but not less than all of such Shares or
Options which right shall be exercised by written notice given by the Company
or other Stockholders, as applicable, to such proposed transferor within 60
days following the Company's receipt of such notice or, failing such receipt,
the Company's obtaining actual knowledge of such proposed transfer; PROVIDED,
HOWEVER, that if the Company is unable to purchase Shares or Options hereby,
it shall give prompt notice of such fact to the other Stockholders; and
PROVIDED, FURTHER, if, in accordance with this sentence, the other
Stockholders elect to purchase more Shares or Options than the amount such
Management Stockholder owns, the Stockholders so electing shall purchase the
Shares or Options PRO RATA in accordance with the number of Shares owned by
such Stockholders. Any purchase pursuant to this Section 7(d) shall be at
the price and on the terms applicable to such proposed transfer. If the
nature of the event giving rise to such involuntary transfer is such that no
readily determinable consideration is to be paid for the transfer of the
Shares or Options, the price to be paid by the Company or the other
Stockholders, as applicable, shall be the Option Purchase Price that would
have been applicable hereunder had the Management Stockholder incurred a
Termination Date as of the date of such proposed transfer for the Shares.
The closing of the purchase and sale of Shares or
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Options shall be held at the place and the date to be established by the
Company or the other Stockholders, as applicable, which in no event shall be
less than 10 or more than 30 days from the date on which the Company or the
other Stockholders, as applicable, give notice of its election to purchase
Shares or Options. At such closing, the Management Stockholder shall deliver
certificates evidencing the number of shares of Stock to be purchased by the
Company or the other Stockholders, as applicable, accompanied by stock or
bond powers, as the case may be, duly endorsed in blank or duly executed
instruments of transfer, in either case with the signature guaranteed by a
member firm of the New York Stock Exchange, Inc. or a commercial bank or
trust company organized under the laws of the United States or any state
thereof, and any other documents that are necessary to transfer to the
Company or the other Stockholders, as applicable, good title to such of the
securities to be transferred, free and clear of all pledges, security
interests, liens, charges, encumbrances, equities, claims and options of
whatever nature other than those imposed under this Agreement, and
concurrently with such delivery, the Company or the other Stockholders, as
applicable, shall deliver to the Management Stockholder the full amount of
the purchase price for such securities in cash by certified or bank cashier's
check.
(e) RIGHTS GRANTED NOT TO AFFECT EMPLOYMENT. Neither this
Agreement nor the rights granted to any Management Stockholder hereunder
shall confer, or be construed to confer, upon any Management Stockholder any
right to continue in the employment of Holdings.
8. PURCHASE RIGHTS.
If the Company proposes to issue or sell any shares of its Common Stock
or Common Stock Equivalents (as hereinafter defined), the Company shall, not
later than fifteen (15) business days prior to the consummation of such
transaction, notify in writing each Stockholder of such transaction. Such
notice shall describe the proposed sale or issuance, identify the proposed
purchaser, and contain an offer to each Stockholder to sell to such
Stockholder, at the same price and for the same consideration to be paid by
the proposed purchaser, such Stockholder's PRO RATA portion (which shall be
such Stockholder's percentage ownership of the Common Stock outstanding on a
fully diluted basis) of the Common Stock or Common Stock Equivalents to be
issued or sold. If any Stockholder to which an offer was required to
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<PAGE>
be made pursuant to the preceding sentence fails to accept such offer within
fifteen (15) business days after its receipt thereof, the Company may proceed
for a period of 90 days with such proposed issuance or sale of the securities
offered to such Stockholder, free of any right on the part of such
Stockholder under this Section 8 in respect thereof.
This Section 8 shall not apply to: (A) grants of employee stock options
or stock purchase rights; (B) sales or issuances of Common Stock or Common
Stock Equivalents pursuant to the Warrant Agreement or upon exercise of
employee stock options, employee stock purchase rights, the Warrants, the
Options or any conversion of Class A Common Stock or Class B Common Stock
into the other class of Common Stock; (C) securities sold pursuant to a
Public Offering; (D) securities distributed ratably to all holders of Common
Stock and Common Stock Equivalents on a per share equivalent basis (which
shall be such Stockholders' percentage of the Common Stock outstanding on a
fully diluted basis) or (E) issuances pursuant to Section 19 hereof.
"Common Stock Equivalents" shall mean rights, warrants, options,
convertible securities, exchangeable securities, or other rights, exercisable
for or convertible or exchangeable into, directly or indirectly, common stock
of the Company and securities convertible or exchangeable into common stock
of the Company, whether at the time of issuance, upon the passage of time, or
upon the occurrence of some future event.
9. PUT RIGHTS. Without the prior written consent of the holders of 70%
of the Voting Shares (which holders shall include (i) CVP so long as it
continues to own not less than 80% of the Shares owned by it on the date
hereof and (ii) Apollo so long as it continues to own not less than 80% of
the Shares owned by it on the date hereof), the holders of Warrants and
Warrant Shares shall not be entitled to require that the Company purchase,
and the Company shall not purchase any Warrants or Warrant Shares described
in a Put Notice delivered pursuant to Section 9 of the Warrant Agreement;
PROVIDED, HOWEVER, that this Section shall not be construed to prevent
holders of Warrants or Warrant Shares from delivering a Put Notice (as
defined in Section 9 of the Warrant Agreement) or to prevent the occurrence
of a Warrant Registration Event or in any way limit the registration rights
hereunder of the holders of any Warrants or Warrant Shares following the
occurrence of a Warrant Registration Event.
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10. FINANCIAL INFORMATION. The Company agrees to provide to each
Stockholder all financial information that is required to be delivered by the
Company pursuant to the Credit Agreement. Unless otherwise required by
applicable law, each Stockholder shall, at all times, keep confidential and
not divulge, furnish or make accessible to anyone (other than to its
attorneys, accountants and other investment advisors, on a confidential
basis, and any prospective Permitted Transferee who is not a direct
competitor of the Company or any of its subsidiaries, as long as such
Transferee agrees to be subject to a confidentiality agreement reasonably
acceptable to the Company) such financial information to the extent not
already generally known to the public. In the event that the Credit
Agreement is terminated for any reason, the Company shall provide to each
Stockholder financial information similar to that required by the Credit
Agreement at the same times, to the extent practicable, as that required by
the Credit Agreement.
11. REGULATORY MATTERS.
(a) REGULATORY COMPLIANCE COOPERATION.
(i) If a Stockholder determines that it has a Regulatory
Problem (as defined below), the Company agrees to take all such actions as
are reasonably requested by such Stockholder (x) to effectuate and facilitate
any transfer by such Stockholder of any Securities (as defined below) of the
Company then held by such Stockholder to any person designated by such
Stockholder, (y) to permit such Stockholder (or any Affiliate of such
Stockholder) to exchange all or any portion of the voting Securities then
held by such person on a share-for-share basis for shares of a class of
non-voting Securities of the Company, which non-voting Securities shall be
identical in all respects to such voting Securities, except that such new
Securities shall be non-voting and shall be convertible into voting
Securities on such terms as are requested by such Purchaser in light of
regulatory considerations then prevailing, and (z) to continue and preserve
the respective allocation of the voting interests with respect to the Company
provided for in this Agreement and with respect to such Stockholder's
ownership of the Company's voting Securities. Such actions may include,
without limitation, (x) entering into such additional agreements as are
reasonably requested by such Stockholder to permit any Person(s) designated
by such Stockholder to exercise any voting power which is relinquished by
such Stockholder upon any exchange of voting
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Securities for non-voting Securities of the Company and (y) entering into such
additional agreements, adopting such amendments to the Certificate of
Incorporation and by-laws of the Company and taking such additional actions
as are reasonably requested by such Stockholder in order to effectuate the
intent of the foregoing. Each Stockholder agrees to cooperate with the
Company in complying with this Section 11(a), including, without limitation,
voting to approve amending the Company's Certificate of Incorporation in a
manner reasonably requested by the Stockholder requesting such amendment.
(ii) If a purchaser has the right or opportunity to acquire
any of the Company's Securities from the Company, any Stockholder or any
other Person (as the result of a preemptive offer, pro rata offer or
otherwise), at such Stockholder's request the Company will offer to sell (or
if the Company is not the seller, to cooperate with the seller and such
Stockholder to permit such seller to sell) such non-voting Securities on the
same terms as would have existed had such Stockholder acquired the Securities
so offered and immediately requested their exchange for non-voting Securities
pursuant to paragraph (i) above.
(iii) Before the Company redeems, purchases or otherwise
acquires, directly or indirectly, or converts or takes any action with
respect to the voting rights of, any Securities, the Company shall give
written notice of such pending action to each Stockholder. Upon the written
request of any Stockholder made within 10 days after its receipt of any such
notice stating that after giving effect to such action such Stockholder would
have a Voting Regulatory Problem, the Company shall defer taking such action
for such period (not to extend beyond 30 days after such Stockholder's
receipt of the Company's original notice) as such Stockholder requests to
permit it and its Affiliates to reduce the quantity of the Company's
Securities they own in order to avoid the Regulatory Problem. In addition,
the Company shall not be a party to any merger, consolidation,
recapitalization or other transaction pursuant to which any Stockholder would
be required to take any voting Securities, or any Securities convertible
into, or exchangeable or exercisable for, voting Securities, which might
reasonably be expected to cause such Purchaser to have a Voting Regulatory
Problem.
(iv) In the event that any subsidiary of the Company ever
offers to sell any of its Securities, then
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the Company will cause such subsidiary to enter into agreements with each
Stockholder substantially similar to this Section 11.
(b) COVENANT NOT TO AMEND. The Company and each Stockholder agree
not to amend or waive the voting or other provisions of this Agreement or the
Company's Certificate of Incorporation if such amendment or waiver would
cause any Stockholder to have a Voting Regulatory Problem, provided that any
such Stockholder notifies the Company that it would have a Voting Regulatory
Problem promptly after it has notice of such proposed amendment or waiver.
(c) CERTAIN DEFINITIONS. As used in this Section 11:
"REGULATORY PROBLEM" means (i) any set of facts or
circumstances wherein it has been asserted by any governmental
regulatory agency (or a Stockholder believes that there is a
substantial risk of such assertion) that such Stockholder is not
entitled to hold, or exercise any significant right with respect
to, the Securities or (ii) a Voting Regulatory Problem.
"SECURITIES" means with respect to any Person, such
Person's capital stock or any options, warrants or other securities
that are directly or indirectly convertible into, or exercisable or
exchangeable for, such Person's capital stock. Whenever a
reference herein to Securities is referring to any derivative
Securities, the rights of a Stockholder shall apply to such
derivative Securities and all underlying Securities directly or
indirectly issuable upon conversion, exchange or exercise of such
derivative securities.
"VOTING REGULATORY PROBLEM" shall exist when a
Person and such Person's affiliates would own, control or have
power over a greater quantity of Securities of any kind issued by
the Company or any other entity than are permitted under any
requirement of any governmental authority.
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12. VOTING SHARES.
(a) Whenever this Agreement requires the consent of a specified
percentage of Voting Shares, each Stockholder shall be entitled to one vote
per Voting Share, PROVIDED that the holders of Non-Voting Shares shall not
have any right to vote such Shares and Apollo (or its express assignee, but
not necessarily its Permitted Transferees) shall be entitled to a number of
extra votes equal to the number of Non-Voting Shares.
To determine whether such specified percentage was obtained, the number
of votes cast shall be divided by the total number of Voting Shares. (For
example, if the number of votes casted equals 51 and the number of Voting
Shares equals 100, then the consent of 51% of the Voting Shares shall be
deemed to have been obtained.)
(b) As used in this Agreement, the following terms shall have the
meanings set forth below:
"CONVERSION EVENT" shall have the meaning set forth in the Certificate
of Incorporation of the Company.
"CVP SHARES" on any date means all Shares outstanding on such date that
are held by CVP or its Affiliates; provided that such Shares shall cease to
be CVP Shares immediately upon their transfer pursuant to a Conversion Event.
"CVP VOTING SHARES" on any date means the lesser of (a) the number of
Voting Shares outstanding on such date, MULTIPLIED BY the Legally Permitted
Percentage and (b) the number of CVP Shares outstanding on such date.
"LEGALLY PERMITTED PERCENTAGE" means 4.99%, or such greater or lesser
percentage that CVP reasonably determines (and notifies the Company) would
result in the maximum number of CVP Voting Shares held by all holders thereof
to equal the maximum number of CVP Voting Shares that CVP and its Affiliates
may own, control or have the power to vote under any law, regulation, rule or
other requirement of any governmental authority at the time applicable to CVP
or its Affiliates.
"NON-MANAGEMENT VOTING SHARES" means all Voting Shares other than Voting
Shares owned by Management Stockholders on the date hereof.
64
<PAGE>
"NON-VOTING SHARES" on any date means the total number of CVP Shares
outstanding on such date MINUS the total number of CVP Voting Shares
outstanding on such date.
"VOTING SHARES" on any date means, solely for purposes of this
Agreement, all Shares outstanding on such date held by a Stockholder and all
Shares issuable to any Stockholder upon the exercise of any Options; provided
that Voting Shares shall exclude any Shares issued or issuable upon exercise
of the Warrants.
13. SHARE AND WARRANT CERTIFICATES.
(a) RESTRICTIVE ENDORSEMENT. Each certificate representing the
Shares or Warrants now or hereafter held by a Stockholder subject to this
Agreement shall be stamped with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED AS OF APRIL 10, 1992, A COPY
OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY AND WILL BE FURNISHED TO ANY
PROSPECTIVE PURCHASERS ON REQUEST. BY ACCEPTANCE OF THIS CERTIFICATE, EACH
HOLDER HEREOF AGREES TO BE BOUND BY THE PROVISIONS OF THE STOCKHOLDERS'
AGREEMENT."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
PURSUANT TO A CLAIM OF EXEMPTION FROM THE REGISTRATION OR QUALIFICATION
PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS
OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS
THEREFROM."
Each Stockholder agrees that he will deliver all certificates for Shares,
Options or Warrants owned by him to the Company for the purpose of affixing such
legend thereto.
(b) REPLACEMENT CERTIFICATES. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
certificate representing Shares, Options or Warrants issued hereunder and of a
bond or other indemnity reasonably satisfactory to the Company and upon
reimbursement to the Company of all reasonable expenses incident thereto, and
upon surrender of such certificate, if mutilated, the Company will make and
deliver a new certificate of like tenor in lieu of such
65
<PAGE>
lost, stolen, destroyed or mutilated certificate; PROVIDED, HOWEVER, that a
Stockholder shall not be required to post any bond (but such Stockholder may
be required to enter into an indemnity agreement reasonably satisfactory to
the Company) if such Stockholder certifies that a Share, Option or Warrant
has been lost, destroyed or wrongfully taken and demands that the Company
issue and, if applicable, the transfer agent countersign a replacement
certificate.
14. EQUITABLE RELIEF. The parties hereto agree and declare that legal
remedies may be inadequate to enforce the provisions of this Agreement and
that equitable relief, including specific performance and injunctive relief,
may be used to enforce the provisions of this Agreement.
15. ARBITRATION. Any controversy arising under, out of, in connection
with, or relating to, this Agreement, and any amendment hereof, or the breach
hereof, shall be determined and settled by arbitration in New York, New York,
by a person or persons mutually agreed upon, or in the event of a
disagreement as to the selection of the arbitrator or arbitrators, in
accordance with the rules then obtaining of the American Arbitration
Association. Any award rendered therein shall specify the findings of fact
of the arbitrators and the reasons for such award, with the reference to and
reliance on relevant law. Any such award shall be final and binding on each
and all of the parties thereto and their personal representatives, and
judgment may be entered thereon in any court having jurisdiction thereof.
16. COMPLIANCE WITH SECURITIES LAWS. Each Stockholder hereby
acknowledges and agrees that the Shares, Options and Warrants have not been
registered under the Securities Act and, therefore, cannot be sold unless
subsequently registered under the Securities Act and any applicable state
securities laws or unless an exemption from such registration is available.
Notwithstanding anything to the contrary contained herein, the Company may
require, as a condition precedent to any transfer of Shares, Options or
Warrants permitted hereby, the delivery by the transferor of an opinion of
counsel, reasonably satisfactory to the Company, to the effect that such
transfer is permitted under the Securities Act and any applicable state
securities laws.
66
<PAGE>
17. IRREVOCABLE PROXY.
(a) Each Management Stockholder hereby appoints and constitutes
Chester C. Davenport as his attorney-in-fact, with full power of substitution
and with full power and authority to:
(i) vote all Voting Shares owned by such Management Stockholder,
either in person or by proxy at any stockholders' meeting, or by
any written consent, in whatever manner such attorney-in-fact, in
his sole discretion, deems appropriate (and, in any event, in any
manner required by this Agreement); and
(ii) vote all such Voting Shares held by such Management
Stockholder to approve or disapprove of any action, consent,
amendment or waiver presented for consideration of the Stockholders
pursuant to this Agreement or otherwise.
Each Management Stockholder ratifies and approves all acts of any such
attorney-in-fact taken in good faith. No such attorney-in-fact shall be
liable for any acts or omissions nor for any error in judgment or mistake of
fact or law; PROVIDED, that each attorney-in-fact will be liable for any such
act, omission, error or mistake to the extent resulting from his own actions
taken in bad faith. This power, being coupled with an interest, is
irrevocable; PROVIDED, HOWEVER, this power shall terminate and be of no
further force or effect following a Change of Control Event.
18. CALL OF SENIOR SUBORDINATED NOTES. Without the consent of the
Apollo Investor, the Company agrees not to redeem any of the Senior
Subordinated Notes pursuant to the Indenture prior to the third anniversary
of the date hereof.
19. ADDITIONAL SHARE ISSUANCE TO NEW INVESTORS. If, pursuant to
Section 4(e) of the Warrant Agreement, the Company shall issue additional
Warrants (the "Additional Warrants"), the Company shall, concurrently with
such issuance, at the option of any New Investor, sell, issue and deliver to
such New Investor, at a purchase price of $.01 per share, such additional
number of shares of Class B Common Stock (the "Additional Shares") necessary
to cause the number of New Investor Shares and Additional Shares owned by
such New Investor to equal (after giving effect to the issuance of the
Additional Warrants and the Additional
67
<PAGE>
Shares) the same percentage of the then outstanding fully-diluted shares of
Common Stock as the New Investor Shares owned by such New Investor equal to the
number of fully-diluted shares of Common Stock outstanding immediately prior to
the issuances of the Additional Warrants and the Additional Shares. The Company
and NMB agree that Section 4(e) of the Warrant Agreement shall, subject to the
terms thereof, be interpreted to provide NMB with an additional 3% of the fully-
diluted shares of Common Stock outstanding after giving effect to the issuance
of the Additional Warrants and the Additional Shares.
20. MISCELLANEOUS.
(a) NOTICES. Any and all notices, designations, consents, offers,
acceptances, or any other communication provided for herein shall be made by
hand delivery, first-class mail (registered or certified, return receipt
requested), telex, telecopier, or overnight air courier guaranteeing next day
delivery: (i) in the case of the Company, to Envirotest Systems Corp., c/o
Georgetown Partners, 6903 Rockledge Drive, Suite 214, Bethesda, MD, 20817
(Attention: Chester Davenport) and (ii) in the case of any Stockholder, to
the address of the party appearing under his name on the Schedule of
Stockholders attached hereto (or to such other address as may be designated
by such party). Except as otherwise provided in this Agreement, each such
notice shall be deemed given at the time delivered by hand, if personally
delivered; five business days after being deposited in the mail, postage
prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next business day after timely delivery
to the courier, if sent by overnight air courier guaranteeing next day
delivery.
(b) AMENDMENT. The provisions of this Agreement may be amended by
the approval of the holders of at least 90% of the Voting Shares.
Notwithstanding the foregoing, (i) the amendment or waiver of Section 11
shall also require the consent of CVP, ECC, NMB and Skopbank; (ii) the prior
written consent of NMB shall be required with respect to any amendment to any
Section of this Agreement (other than Section 5) to the extent that the
rights of NMB or Skopbank as a holder of Warrants or Warrant Shares would be
adversely affected; (iii) the provisions of Section 9 may be amended or
waived only by the approval of the holders required to consent to action
thereunder; and (iv) the amendment or waiver of any provision hereof with
respect to
68
<PAGE>
a matter that relates to the rights of a particular Stockholder but not all
Stockholders generally (including, without limitation, the provisions
relating to a Stockholder's Director Rights or Representative Rights) shall
not be amended without such Stockholder's written consent. Notwithstanding
the foregoing, no consent of any Stockholder shall be required in connection
with any amendment hereof to add any person or entity as a Stockholder.
(c) TERMINATION. Sections 1, 2, 3, 4, 5, 7, 8, 10, 15, 17 and 18 of
this Agreement shall terminate on the earlier to occur of (i) ten (10) years
from the date hereof or (ii) the registration of any of the Company's equity
securities under the Securities Act (other than a registration on Form S-4 or
Form S-8, or any similar form which is a successor to any of said Forms).
Section 9 hereof shall terminate twelve (12) years from the date hereof.
(d) WAIVER. No failure or delay on the part of the Stockholders
or any of them in exercising any right, power or privilege hereunder, and no
course of dealing between the Company and the Stockholders or any of them
shall operate as a waiver thereof nor shall any single or partial exercise of
any right, power or privilege hereunder preclude the simultaneous or later
exercise of any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights and
remedies which the Stockholders or any of them would otherwise have. No
notice to or demand on the Company in any case shall entitle the Company to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Stockholders or any of them to take
any other or further action in any circumstances without notice or demand.
(e) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
(f) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
(g) BENEFIT AND BINDING EFFECT. This Agreement shall be binding upon
and shall inure to the benefit of
69
<PAGE>
the Company, its successors and assigns, and each of the Stockholders, and their
respective executors, administrators and personal representatives and heirs and
assigns. In the event that any part of this Agreement shall be held to be
invalid or unenforceable, the remaining parts hereof shall nevertheless continue
to be valid and enforceable as though the invalid portions were not a part
hereof.
(h) ENTIRE AGREEMENT. This Agreement (and, with respect to the
Warrants, the Warrant Agreement) contains the entire understanding of the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements, discussions and understandings, including, without limitation,
the Prior Stockholders' Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
ENVIROTEST SYSTEMS CORP.
By:
------------------------------
Name:
Title:
GEORGETOWN PARTNERS LIMITED
PARTNERSHIP
By: DHE PARTNERS
its General Partner
By: ROCKSPRING MANAGEMENT,
its General Partner
By:
------------------------------
Name: Chester C. Davenport
Title: President
70
<PAGE>
EXHIBIT B
FORM OF GUARANTY
For value received, Envirotest Systems Corp., a Delaware corporation,
HTS Holdings, Inc., a Delaware corporation, SD-Scicon, Inc., a Delaware
corporation and Systems Control, Inc., a Delaware corporation, jointly and
severally, hereby unconditionally guarantee to the Holder of the Security
upon which this Guaranty is endorsed the due and punctual payment, on a
limited and subordinated basis, of the principal of and interest on such
Security when and as the same shall become due and payable according to the
terms of such Security and Article Twelve of the Indenture. The Guaranty of
the Security upon which this Guaranty is endorsed will not become effective
until the Trustee signs the certificate of authentication on such Security.
HTS Holdings, Inc. Envirotest Systems Corp.
By:____________________________ By:____________________________
Attest:____________________________ Attest:____________________________
SD-Scicon, Inc. Systems Control, Inc.
By:____________________________ By:____________________________
Attest:____________________________ Attest:____________________________
B-1
<PAGE>
EXHIBIT (c)(3)
DRAFT 10/05/92
ENVIROTEST SYSTEMS CORP.
AMENDMENT NO. 1
Amendment No. 1, dated as of November 10, 1992, to the Amended and
Restated Stockholders' Agreement, dated as of April 10, 1992 (the
"Agreement"), among Envirotest Systems Corp., a Delaware corporation (the
"Company"), and the parties listed on the signature pages thereto. Unless
otherwise defined herein, all terms used herein shall have the meaning
ascribed to them in the Agreement.
WHEREAS, on the date hereof, the Company is issuing and selling, pursuant
to the Envirotest Systems Corp. 1992 Employee Stock Purchase Plan, shares of
Class B Common Stock, par value $.01 per share, of the Company to, among
others, each of Nicholas Dow, Stephen J. Petersen, Paul S. Cherepinsky,
Martin J. McFarland, Monty M. Montgomery, John P. Barbarino, James R.
Brandenburg, Daniel C. Palmer and Raj Modi, each an employee of certain
subsidiaries of the Company (each, an "Employee"); and
WHEREAS, the Company desires to amend the Agreement to effect the
addition of each Employee as a Stockholder and as a Management Stockholder;
and
WHEREAS, Section 20(b) of the Agreement provides for amendment of the
Agreement to effect the addition of any person or entity as a Stockholder
without the consent of the other parties thereto.
NOW, THEREFORE, each Employee is hereby added as a Stockholder and as a
Management Stockholder.
IN WITNESS WHEREOF, the undersigned has executed this Amendment as of the
date first written above.
ENVIROTEST SYSTEMS CORP.
By:
----------------------------------
Name:
Title:
<PAGE>
EXHIBIT (c)(4)
AMENDMENT NO. 2 TO
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
Amendment No. 2, dated as of March 30, 1993, to the Amended and Restated
Stockholders' Agreement, dated as of April 10, 1992, as amended by Amendment
No. 1 to the Amended and Restated Stockholders' Agreement, dated as of
November 10, 1992 (the "Agreement"), among Envirotest Systems Corp., a
Delaware corporation (the "Company"), and the parties listed on the signature
pages thereto. Unless otherwise defined herein, all terms used herein shall
have the meaning ascribed to them in the Agreement.
WHEREAS, the parties to the Agreement desire to amend the Agreement to
accelerate by one year the date on which a Demand Registration, a Bank Demand
Registration and a New Investor Demand Registration may first be requested
under the Agreement.
NOW THEREFORE, in consideration of the agreements contained herein and
for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. AMENDMENT OF SECTION 6(a)(viii) OF THE AGREEMENT. Clause (viii) of
Section 6 (a) of the Agreement is hereby deleted in its entirety and replaced
by the following:
"(viii) "Warrant Registration Event" shall mean the earlier to occur of
(A) the date on which the Company first becomes subject to the reporting
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and (B) the date on which the
Company shall have failed to purchase all of the Warrants and/or Warrant
Shares set forth in a Put Notice pursuant to, and in accordance with,
Section 9 of the Warrant Agreement; PROVIDED that no Warrant
Registration event described in clause (B) above shall be deemed to have
occurred prior to the third anniversary of the date hereof."
<PAGE>
2. AMENDMENT OF SECTION 6(b)(i) OF THE AGREEMENT. Clause (i) of Section
6(b) of the Agreement is hereby deleted in its entirety and replaced by the
following:
"(i) Upon the written request of one or more Holders holding in the
aggregate at least 50% of the Registrable Securities (the "Initiating
Holders") requesting that the Company effect the registration of such
Initiating Holders' Registrable Securities under the Securities Act
(which request shall specify the Registrable Securities so requested to
be registered, the proposed amounts thereof and the intended method of
disposition), the Company shall promptly give written notice of such
requested registration to all Holders and, as expeditiously as
reasonably possible, use its best efforts to effect the registration
under the Securities Act of the Registrable Securities that the Company
has been so requested to register, for disposition in accordance with
the intended method of disposition stated in such request. The Company
shall not be obligated to effect any registration pursuant to this
Section 6(b)(i) (A) before April 10, 1995, (B) during the 90 day period
commencing on the effective date of an underwritten primary offering of
the Company's equity securities (or such longer period reasonably
required by the managing underwriter(s) of such offering), or (C) after
the Company has effected one such registration pursuant to this Section
6(b)(i)."
3. AMENDMENT OF SECTION 6(b)(iii) OF THE AGREEMENT. Clause (iii) of
Section 6(b) of the Agreement is hereby deleted in its entirety and replaced
by the following:
"(iii) At any time after April 10, 1994, upon the request of one or more
Holders holding in the aggregate at least 51% of the New Investor Shares
that constitute Registrable Securities requesting that the Company
effect the registration of such Holders' Registrable Securities under
the Securities Act (which request shall specify the Registrable
Securities so requested to be registered, the proposed amounts thereof
and the intended method of disposition), the Company shall as
expeditiously as reasonably possible, use its best efforts to effect the
registration under the Securities Act of the Registrable Securities that
the Company has been so requested to register, for disposition in
accordance with the intended method of disposition stated in such
request (a "New Investor Demand Registration"). The Company shall not
be obligated to effect (A) more than one registration pursuant to this
Section 6(b)(iii) before April 10, 1995, or (B) more than a total of two
registrations pursuant to this Section 6(b)(iii).
-2-
<PAGE>
4. EFFECTIVE DATE OF AMENDMENT. This Amendment No. 2 shall become
effective upon the consummation of the initial public offering of the
Company's Class A Common Stock, par value $.01 per share; PROVIDED, HOWEVER,
that this Amendment No. 2 shall be of no force and effect if such offering is
not consummated on or prior to June 1, 1993.
5. MISCELLANEOUS.
(a) This Amendment shall be deemed part of the Agreement for any and
all purposes. The Agreement, except to the extent amended hereby, is in all
respects hereby ratified and confirmed and shall be and remain in full force
and effect without change.
(b) This Amendment may be executed in any number of counterparts, each
of which shall be and shall be taken to be an original, and all such
counterparts shall be taken together constitute one and the same instrument.
(c) THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAWS PRINCIPLES THEREOF.
-3-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 2 as
of the date first written above.
ENVIROTEST SYSTEMS CORP.
BY: /s/ Chester C. Davenport
------------------------------------
Name: Chester C. Davenport
Title: Chairman of the Board
GEORGETOWN PARTNERS LIMITED
PARTNERSHIP
By: DHE PARTNERS, its general
partner
By: ROCKSPRING MANAGEMENT,
its general partner
By: /s/ Chester C. Davenport
--------------------------
Name: Chester C. Davenport
Title: President
APOLLO INVESTMENT FUND, L.P.
By: APOLLO ADVISORS, L.P.
its general partner
By: APOLLO CAPITAL MANAGEMENT,
INC., its general partner
By: /s/ [Illegible]
--------------------------
Name: [Illegible]
Title: Vice-President
CHEMICAL EQUITY ASSOCIATES,
A California Limited Partnership
By: CHEMICAL VENTURE PARTNERS,
its general partner
By: /s/ Arnold L. Chavkin
--------------------------
Name: Arnold L. Chavkin
Title: General Partner
- 4 -
<PAGE>
HANSEATIC CORPORATION
By: /s/ Paul Bidderman
----------------------------------
Name: Paul Bidderman
Title: Treasurer
KANE PARTNERS, L.P.
By: KPGP Corporation,
its general partner
By: /s/ Richard L. Gelfond
-----------------------------
Name: Richard L. Gelfond
Title: Vice President
TSG VENTURES INC.
By: /s/ Cleveland Christophe
-------------------------------
Name: Cleveland Christophe
Title: Principal
AMOCO VENTURE CAPITAL COMPANY
By: /s/ Wally Lennox
-------------------------------
Name: Wally Lennox
Title: President
UNC VENTURES II, L.P.
By: /s/ Edward Dugger III
-------------------------------
Name: Edward Dugger III
Title: General Partner
UNC VENTURES, INC.
By: /s/ Edward Dugger III
-------------------------------
Name: Edward Dugger III
Title: President
- 5 -
<PAGE>
MESBIC VENTURES, INC.
By: /s/ Thomas G. Gerron
-------------------------------
Name: Thomas G. Gerron
Title: Sr. VP/CFO
/s/ George J. Singleton
-------------------------------
George J. Singleton
-------------------------------
Marilyn Barkan
/s/ Rodney Boorse
-------------------------------
Rodney Boorse
-------------------------------
Paul S. Cherepinsky
-------------------------------
Nicholas Dow
/s/ Martin J. Mcfarland
-------------------------------
Martin J. McFarland
-------------------------------
Stephen J. Peterson
/s/ Daniel P. Walter
-------------------------------
Daniel Walter
/s/ Jack Hesse 3/27/93
-------------------------------
Jack Hesse
/s/ Ronald M. Lancaster
-------------------------------
Ronald M. Lancaster
-------------------------------
Monty M. Montgomery
- 6 -
<PAGE>
/s/ John R. Wallauch
-------------------------------
John R. Wallauch
/s/ Lawrence H. Taylor
-------------------------------
Lawrence H. Taylor
-------------------------------
James R. Brandenburg
-------------------------------
Dennis C. Palmer
/s/ Rajandra G. Modi
-------------------------------
Rajandra G. Modi
- 7 -
<PAGE>
EXHIBIT (g)(1)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Envirotest Systems Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Envirotest
Systems Corp. and its Subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Envirotest
Systems Corp. and its Subsidiaries as of September 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
San Jose, California
December 13, 1996
43
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
ASSETS 1996 1995
- - ------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 53,104 $ 17,079
Short-term investments 7,991 1,347
Settlement due from Commonwealth of
Pennsylvania 80,000 --
Contract receivables, net of allowance for doubtful accounts
of $449 and $375, respectively 10,969 8,208
Prepaid expenses 2,131 1,967
Deferred income taxes -- 1,376
Other 4,301 1,613
-------- --------
Total current assets 158,496 31,590
Restricted cash 21,108 31,497
Property, plant and equipment, net 192,400 173,507
Assets held under capital leases, net 46,108 27,138
Assets held for sale, net 32,246 5,209
Assets subject to settlement -- 149,629
Intangible assets, net 14,927 17,752
Deferred debt acquisition costs, net of accumulated
amortization of $5,720 and $3,378, respectively 13,159 13,412
Deferred charges, net of accumulated amortization of $7,407
and $3,217, respectively 1,189 3,178
Deferred income taxes -- 4,100
Other 1,151 261
-------- --------
Total assets $480,784 $457,273
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
44
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- - ------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 3,825 $ 12,742
Accrued interest 1,689 1,499
Accrued expenses and other current liabilities 27,080 13,499
Current portion of capital lease and long-term debt 4,740 1,485
Current portion of other long-term debt 3,880 --
Income taxes payable 674 595
-------- --------
Total current liabilities 41,888 29,820
Senior subordinated debt 125,000 125,000
Senior long-term debt, net of discount of $808 and $989,
respectively 199,192 199,011
Capital lease and long-term debt, net of current portion 58,155 62,895
Other long-term debt, net of current portion 38,129 --
Other 5,266 2,502
-------- --------
Total liabilities 467,630 419,228
-------- --------
Commitments and contingencies (Note 19).
Stockholders' equity:
Common stock, $0.01 per share par value; Class A Common
stock, 40,000,000 shares authorized, 13,204,396 and
12,883,571 shares issued and outstanding at September 30,
1996 and 1995, respectively; Class B Common stock,
5,000,000 shares authorized, 1,389,749 and 1,248,249 shares
issued and outstanding at September 30, 1996 and 1995,
respectively; Class C Common stock, 5,000,000 shares
authorized, 2,026,111 shares issued and outstanding 166 162
Additional paid-in capital 60,172 60,028
Cumulative currency adjustment (96) (121)
Accumulated deficit (41,510) (16,446)
-------- --------
18,732 43,623
Less predecessor carry-over basis (5,578) (5,578)
-------- --------
Total stockholders' equity 13,154 38,045
-------- --------
Total liabilities and stockholders' equity $480,784 $457,273
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
45
<PAGE>
ENVIROTEST SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1996, 1995 and 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
1996 1995 1994
- - ------------------------------------------------------------------------------
Contract revenues $ 124,472 $ 104,757 $ 96,395
Costs of services 102,149 73,097 52,052
----------- ----------- -----------
Gross profit 22,323 31,660 44,343
Operating costs and expenses:
General and administrative 18,619 18,683 13,883
Selling 3,163 6,228 5,221
Consolidation expense 1,850
Amortization 3,427 4,017 4,390
Reserve for surplus properties -- 892 --
Gain on Pennsylvania settlement (15,307) -- --
----------- ----------- -----------
Income from operations 10,571 1,840 20,849
Other expense (income):
Interest expense 38,940 21,315 23,567
Interest income (3,259) (4,255) (6,697)
Interest income from Pennsylvania
settlement (5,684) -- --
Minority interest -- 284 393
----------- ----------- -----------
Income (loss) before income taxes (19,426) (15,504) 3,586
Income tax expense (benefit) 5,638 (643) 1,412
----------- ----------- -----------
Net income (loss) $ (25,064) $ (14,861) $ 2,174
----------- ----------- -----------
Earnings (loss) per common and common
equivalent share $ (1.51) $ (0.93) $ 0.12
Weighted average common and common
equivalent shares 16,552,497 16,059,165 17,546,495
----------- ----------- -----------
Earnings (loss) per common share -
assuming full dilution $ (1.51) $ (0.93) $ 0.12
Weighted average common and common
equivalent shares 16,552,497 16,059,165 17,546,495
----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
46
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1996, 1995 and 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Additional Cumulative Predecessor
Common Stock Paid-In Currency Accumulated Carry-over
Shares Amount Capital Adjustment Deficit Basis Total
------ ------ ---------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, October 1, 1993 15,891,178 $159 $58,852 $(204) $(3,759) $(5,578) $49,470
Appreciation in warrant value (564) (564)
Exercise of warrants 80,598 1 1,692 1,693
Foreign currency translation
adjustment 137 137
Net income 2,174 2,174
---------- ---- -------- ----- ------- ------- -------
Balances, September 30, 1994 15,971,776 160 59,980 (67) (1,585) (5,578) 52,910
Issuance of common stock
upon exercise of stock
options 186,155 2 48 50
Foreign currency translation
adjustment (54) (54)
Net loss (14,861) (14,861)
---------- ---- ------- ----- -------- -------- -------
Balances, September 30, 1995 16,157,931 162 60,028 (121) (16,446) (5,578) 38,045
Issuance of common stock
upon exercise of stock
options 462,325 4 144 148
Foreign currency translation
adjustment 25 25
Net loss (25,064) (25,064)
---------- ---- ------- ----- -------- -------- -------
Balances, September 30, 1996 16,620,256 $166 $60,172 $(96) $(41,510) $(5,578) $13,154
---------- ---- ------- ----- -------- -------- -------
---------- ---- ------- ----- -------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
47
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1996, 1995 and 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(25,064) $(14,861) $2,174
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 24,538 16,800 10,612
Amortization of loan discount and
deferred debt acquisition costs 2,516 3,384 1,578
Reserve for surplus properties -- 892 --
Minority interest in net income
of consolidated subsidiary -- 284 393
Gain on sale of property, plant
and equipment and assets held for
sale (114) -- --
Gain on Pennsylvania settlement (15,307) -- --
Deferred taxes 5,476 (863) 681
Other 18 584 --
Changes in assets and liabilities:
Contract receivables (2,511) (11) (686)
Prepaid and other current assets (1,793) (493) (1,507)
Deferred charges (2,200) (5,034) (2,099)
Other long-term assets (813) 514 727
Accounts payable 470 (4,212) 6,492
Accrued interest 190 (5,536) 1,120
Accrued expenses and other
current liabilities 1,358 2,222 1,239
Advances from customers -- -- (712)
Income taxes payable 79 (369) 446
Other long-term liabilities 731 1,178 (159)
-------- ------- -------
Net cash provided by (used in)
operating activities $(12,426) $(5,521) $20,299
-------- ------- -------
-------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
48
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended September 30, 1996, 1995 and 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities:
(Purchase) maturity of short-term
investments $(6,644) $23,199 $(24,546)
Purchases of property, plant and
equipment (49,724) (118,895) (69,350)
Proceeds from sale of property,
plant and equipment 3,835 2,656 --
Proceeds from Pennsylvania settlement 65,000 -- --
Proceeds from sale of Pennsylvania
assets 2,362 -- --
Pennsylvania assets subject to
settlement -- (88,963) --
Payment for purchase of Systems
Control, Inc., net of cash acquired (2,560) -- --
Purchase of minority interest in
consolidated subsidiary -- (1,247) --
Purchase of intangible assets -- -- (6,068)
Other -- 6 (5)
------- -------- --------
Net cash provided by (used in)
investing activities 12,269 (183,244) (99,969)
------- -------- --------
Cash flows from financing activities:
Repayment of senior long-term debt (2,457) -- --
Repayment of capital lease obligations (1,485) (4,751) (469)
Capitalization of loan fees (1,765) (2,749) (9,609)
Proceeds from debt offering 31,345 -- --
Proceeds from issuance of common stock 148 50 --
Proceeds from borrowings of senior
long-term debt -- -- 198,732
Proceeds from capital lease and
long-term debt -- 64,380 --
Decrease (increase) in restricted cash 10,389 (31,497) --
------- -------- --------
Net cash provided by financing activities 36,175 25,433 188,654
------- -------- --------
Effect of exchange rate on cash and
cash equivalents 7 196 137
------- -------- --------
Net increase (decrease) in cash and
cash equivalents 36,025 (163,136) 109,121
Cash and cash equivalents, beginning
of year 17,079 180,215 71,094
------- -------- --------
Cash and cash equivalents, end of year $53,104 17,079 180,215
------- -------- --------
</TABLE>
Supplemental cash flow information:
Cash paid for interest and income taxes for the years ended September 30,
<PAGE>
1996, 1995 and 1994 was as follows:
Interest net of capitalized interest $38,751 $26,851 $21,184
Income taxes 245 332 299
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
49
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Envirotest Systems Corp. ("Envirotest" or the "Company") markets, installs
and operates centralized vehicle emissions testing programs under contracts
entered into with state and municipal governments within the United States
and a program in British Columbia, Canada. The Company also offers states and
municipalities services in a variety of sophisticated data management and
vehicle identification capabilities.
The Company's services include: designing a network that provides convenience
to motorists, identifying and procuring adequate inspection systems;
constructing emission facilities with multiple test lanes; designing and
installing a vehicle emissions inspection sites and computer network to
collect and process emissions testing data; and managing and operating the
inspection program using computer software and equipment developed by the
Company.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Envirotest
Systems Corp. and all of its domestic and foreign subsidiary companies. All
material intercompany balances and transactions have been eliminated.
Minority interest in equity of subsidiary represents the minority partner's
proportionate share of the equity of Ebco-Hamilton Partners ("EHP"). At
September 30, 1994, the Company owned 50.0000006% of EHP. On July 24, 1995,
the Company, through its wholly owned subsidiary, Envirotest Holdings Inc.,
purchased the third party interest in Ebco-Hamilton Partners ("EHP"), the
partnership which operates the Company's British Columbia, Canada centralized
vehicle emissions testing program. The purchase price of $1,200 was paid in
cash. The acquisition was accounted for as a purchase. The results of the
acquired interest in EHP have been combined with the results of the Company
since the date of acquisition.
50
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
In January 1996, the Company purchased from Systems Control, Inc. ("SC")
Systems Control, Inc., a State of Washington corporation, and operator of the
State of Washington centralized emissions testing program, intellectual
property of SC and an option to purchase the stock or assets of SC's Indiana
subsidiary. The option was exercised in June 1996 and the Company acquired
the contract with the State of Indiana to operate its centralized emissions
testing contract and the related assets. The total purchase price was
$4,700. If the acquisitions had occurred on October 1, 1995, the Company's
results of operations for the year ended September 30, 1996 would not have
been materially different.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to
be cash equivalents. Cash and cash equivalents are stated at cost which
approximates market value. Included in the Company's cash and cash
equivalents are approximately $52,500 and $16,500 primarily in commercial
paper invested through registered broker/dealers at September 30, 1996 and
1995, respectively. The Company intends to hold these investments until
maturity.
51
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
SHORT-TERM INVESTMENTS Short-term investments have an initial maturity of
greater than three months and are carried at cost which approximates market
value. Short term investments of $7,991 as of September 30, 1996, consisted
of commercial papers having the highest rating obtainable from either Moody's
Investor Service, Inc. or Standard & Poor's Corporation Inc. with maturity
dates ranging from December 1996 through February 1997. Short term
investments of $1,347 as of September 30, 1995 consisted of certificates of
deposit with a financial institution, which collateralize letters of credit.
CONTRACT RECEIVABLES
The Company's contract revenues and receivables consist of uncollateralized
amounts due from state, municipal and foreign governments.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Research
and development expense for the periods ended September 30, 1996, 1995, and
1994 were approximately $44, $33 and $245 respectively, and are included in
general and administrative expenses.
RESTRICTED CASH Restricted cash of $21,108 at September 30, 1996 primarily
consisted of cash collaterals provided to banks for the Company's financing
and performance bonds related to the emissions testing contracts with state
governments. Included in this amount is $6,438, $2,137, $1,700, and $600 cash
collaterals required under credit agreements for the financing of Ohio,
Indiana, Wisconsin, and Washington programs, respectively. Also, $8,651 in
proceeds from bonds issued by the Indiana Development Finance Authority for
the Indiana program which is under construction are being held in trust
pending use of the fund.
PROPERTY, PLANT, EQUIPMENT AND CAPITAL LEASE
Property, plant and equipment are recorded at cost. The capital lease is
recorded at the present value of the future lease principal payments.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets as follows:
52
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
Buildings and site improvements 30 years
Machinery and equipment 2-10 years
Leasehold improvements Lease term
Buildings and site improvements are depreciated on a straight line basis over
the estimated useful life, generally 30 years. Quarterly, the Company
prepares an analysis to compare the estimated book value of the buildings,
site improvements and land at the estimated completion date of individual
contracts (assuming certain renewals, if any) to the estimated residual
value. Adjustments to depreciable lives are made accordingly.
It is possible, given the political, legislative and competitive environment
in which the Company operates, that the estimates discussed above could
change and may result in accelerated depreciation charges. Also, the actual
values realized on disposal could differ from the amounts used in estimating
the residual values of these properties.
Interest costs relating to the acquisition and construction of major projects
are capitalized and depreciated over the estimated useful lives of the
related assets. Interest expense capitalized for the years ended September
30, 1996, 1995 and 1994 was $981, $14,027 and $1,533, respectively.
The cost of maintenance and repairs is charged to expense in the year
incurred. Expenditures which increase the useful lives of property and
equipment are capitalized.
When items are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in income.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their estimated
useful lives as follows:
Goodwill 12 years
Government contracts 12 years
Computer software 5 years
License agreement 10-17 years
Covenants not-to-compete 5 years
53
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
Beneficial ground lease 12 years
Copyrights 12 years
It is the Company's policy to re-evaluate the estimated useful life of each
of its intangible assets on a quarterly basis and may adjust the estimated
useful life accordingly. It is possible, given the political, legislative
and competitive environment in which the Company operates, that the estimates
discussed above could change and may result in accelerated amortization
charges.
DEFERRED DEBT ACQUISITION COSTS
Costs associated with obtaining long-term debt financing have been
capitalized and are amortized over the repayment term of the related debt.
DEFERRED CHARGES
Significant expenses incurred in bringing new emissions testing programs into
operation including, staff recruitment, staff training, public information
and similar pre-operating costs are deferred and amortized over a
twelve-month period commencing with the start of the program operations.
CONTRACT REVENUES
For vehicle emissions inspection contracts, revenue is based upon the fees
that are collectible for the tests that have been performed.
The Company's contract revenues from five major customers, which individually
account for in excess of 10% of the Company's total contract revenue, were
$20,300, $18,700, $17,000, $16,500 and $12,000 for the year ended September
30, 1996; $16,500, $15,300, $14,500, $13,300 and $12,300 for the year ended
September 30, 1995, and $16,100, $13,600, $13,500, $13,400, and $10,300 for
the year ended September 30, 1994.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are
54
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the local currency of its international
subsidiary is the functional currency. In accordance with Statement of
Financial Accounting Standard No. 52, "Foreign Currency Translation", the
assets and liabilities denominated in foreign currency are translated into
U.S. dollars at the current rate of exchange existing at period-end and
revenues and expenses are translated at average monthly exchange rates.
Related translation adjustments are reported as a separate component of
stockholders' equity, whereas, gains or losses resulting from foreign
currency transactions are included in results of operations.
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) per share is based upon the weighted average number of shares
of common stock and common stock equivalents outstanding during the period.
Common stock equivalents are included in the per share calculation where the
effect of their inclusion would be dilutive. The treasury method is used in
computing incremental common stock equivalents which would result from
exercise of outstanding dilutive stock options and warrants.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, other receivables and
accrued liabilities are a reasonable estimate of their fair value due to
their short term nature. The estimated values of the Company's long term debt
and are based on interest rates at September 30, for issues with similar
remaining maturities.
The estimated fair value amounts of the Company's financial instruments have
been determined by the Company, using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, thus, the estimates provided herein are not
necessarily indicative of the amounts that could be realized in a current
market exchange.
The Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the
fair value is different than the book
55
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
value of those financial instruments. When the fair value is equal to the
book value no additional disclosure is made. The Company uses quoted market
prices whenever available to calculate these fair values. When quoted market
prices are not available, the Company uses standard pricing models for
various types of financial instruments which take into account the present
value of estimated future cash flows. The effect of using different market
assumptions and/or estimation methodologies may be material to the estimated
fair value amounts.
RECENT PRONOUNCEMENTS
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation (SFAS No. 123),"
which establishes a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those
companies who elect not to adopt the new method of accounting. While the
Company studies the impact of the pronouncement, it continues to account for
employees' stock options under Accounting Principles Board(APB) Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123 will be
effective for the Company's 1997 fiscal year.
CONCENTRATIONS OF CREDIT RISK As of September 30, 1996, the Company's cash
and cash equivalents and short-term investments, which consist principally of
demand deposits and commercial paper, were on deposit with a number of
commercial banks and an investment house. In addition, receivables include
$80,000 due from the Commonwealth of Pennsylvania. (See Note 6.) The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Financial instruments that potentially
subject the Company to concentrations of credit risk principally comprise,
cash and cash equivalents, short-term investments, accounts receivable
(including amounts due from governments due on settlement of contract issues)
and long-term debt.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at September 30,
1996 and 1995:
1996 1995
-------- -------
Property, plant and equipment:
Land $30,805 $24,828
56
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
Buildings and site improvements 96,945 82,334
Machinery and equipment 90,300 53,539
Leasehold improvements 3,792 4,147
-------- --------
221,842 164,848
Construction in progress 10,787 33,398
-------- --------
232,629 198,246
Less accumulated depreciation (40,229) (24,739)
-------- --------
$192,400 $173,507
-------- --------
4. ASSETS HELD UNDER CAPITAL LEASES:
Assets held under capital leases consisted of the following at September 30,
1996 and 1995:
1996 1995
------- -------
Land $ 5,667 $ 3,185
Buildings and site improvements 41,545 6,503
------- -------
47,212 9,688
Construction in progress - 17,504
------- -------
47,212 27,192
Less accumulated amortization (1,104) (54)
------- -------
$46,108 $27,138
------- -------
At September 30, 1995, construction in progress includes $2,467 for land and
$15,037 for buildings and site improvements which are leased assets under
construction, respectively.
5. ASSETS HELD FOR SALE:
Assets held for sale represent property, plant and equipment at testing sites
formerly operated under the Maryland program which terminated December 31,
1994, and 74 sites in Pennsylvania. These properties are currently being
marketed for sale.
At September 30, 1996 and 1995, an estimated loss on sale of properties of
$109,495 and $892 has been recognized. The estimated loss is based on
management's estimates of the amounts
57
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
expected to be realized on the sale of these assets, net of disposal costs.
The amounts the Company will ultimately realize may differ materially from
the amounts assumed in arriving at the estimated loss. $109,402 of the loss
relates to the write down of the Pennsylvania assets. This amount has been
included in the calculation of the Gain on Pennsylvania Settlement (see Note
6).
58
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
Assets held for sale consisted of the following at September 30, 1996 and 1995:
1996 1995
------- ------
Land, buildings and site improvements $30,773 $5,440
Machinery and equipment 2,074 593
------- ------
32,847 6,033
Less accumulated depreciation (601) (824)
------- ------
$32,246 $5,209
------- ------
6. GAIN ON PENNSYLVANIA SETTLEMENT:
Legislation adopted by the Commonwealth of Pennsylvania General Assembly
directed the Pennsylvania Department of Transportation ("PennDOT") to delay
implementation of the Pennsylvania emissions testing program until March 31,
1995, and to design and submit to the federal Environmental Protection Agency
by March 1, 1995, an alternative emissions testing program that consisted of
decentralized test-and-repair facilities or a hybrid of decentralized
test-and-repair and centralized test-only components and that complied with
federal law. On February 28, 1995, the Governor announced an indefinite
suspension of the implementation of any program until the Commonwealth
receives clarification regarding the elements of a testing program that the
federal EPA would find acceptable.
On December 15, 1995, the Company entered into a General Release and
Settlement Agreement ("Agreement") with The Commonwealth of Pennsylvania
which resolves the issues related to the Company's contract with PennDOT.
Under the terms of the Agreement, the Company was paid $25,000 on December
29, 1995 and $40,000 on July 31, 1996 and will be paid $40,000 on each of
July 1997, and 1998 plus interest at 6% from December 15, 1995. In addition,
the Company will sell the assets and retain the proceeds and the Commonwealth
will pay the Company (in July
59
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1998) 50% of the amount by which the net proceeds from the sale of the
assets (as defined by the Agreement, as amended December 1996) are less than
$55,000 up to a maximum of $11,000 plus interest at 6% from December 15,
1995. Should the net proceeds from the sale of the assets exceed $55,000,
the Company will pay the Commonwealth 75% of the amount by which the net
proceeds exceed $55,000. The Company is of the opinion that sufficient
reserves have been recognized and that upon final disposition of properties
no additional loss will be recognized.
The gain on the Pennsylvania Settlement has been calculated as follows:
Proceeds (excluding contingent payment) $145,000
Property, plant and equipment write down (109,402)
Other assets write down (7,732)
Additional reserves (12,559)
--------
$15,307
On December 11, 1996, the Company sold its right to receive the two remaining
installment payments totaling $80,000 in principal amount under the Agreement
for approximately $79,405. The Company retained the right to receive
accrued interest of approximately $1,749 payable on July 31, 1997.
The transaction was effected through a sale of the Receivables Assets from
Envirotest Partners, a Pennsylvania general partnership owned by Envirotest
and ETI, to a newly formed wholly owned subsidiary of the Company, ES Funding
Corp. ("Funding"). Funding, in turn, transferred the Receivables Assets to
an affiliate of a Pennsylvania bank. Funding and Envirotest Partners
provided certain representations in connection with the transaction,
including representations as to enforceability of the Agreement against the
Commonwealth, and agreed to repurchase the Receivables Assets if Envirotest
Partners fails to comply with its obligations under the Agreement.
60
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
7. INTANGIBLE ASSETS:
Intangible assets consisted of the following at September 30, 1996 and 1995:
1996 1995
------- -------
Government contracts $21,921 $21,294
Covenants not-to-compete 3,988 3,988
Computer software 2,521 2,521
Goodwill 2,415 2,415
License agreement 1,903 1,903
Copyrights 1,000 1,000
Beneficial ground lease - 153
------- -------
33,748 33,274
Less accumulated amortization (18,821) (15,522)
------- -------
$14,927 $17,752
------- -------
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consisted of the following at
September 30, 1996 and 1995:
1996 1995
------- -------
Accrued employee-related expenses $ 5,693 $ 5,134
Accrued real and personal property taxes 2,238 2,077
Pennsylvania settlement and reserves 10,123 -
Accrued interest 1,689 1,499
Corporation relocation reserve 1,500 -
Deferred revenue of Washington program 1,499 -
Other 4,338 4,789
------- -------
$27,080 $13,499
------- -------
Pennsylvania settlement reserves represents reserves for claims related to
construction contract and closing costs of the program.
61
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
9. SENIOR SUBORDINATED DEBT:
Senior subordinated debt consisted of the following at September 30, 1996 and
1995:
1996 1995
-------- --------
Senior Subordinated Notes, due April 1, 2003;
interest at 9 5/8%, payable semi-annually $125,000 $125,000
-------- --------
The Senior Subordinated Notes ("Notes") are not redeemable by the Company
prior to April 1998. Thereafter, the Notes will be redeemable at any time at
the option of the Company, in whole or in part, at the redemption prices
beginning at 103.609% of the principal amount for the period beginning April
1, 1998 and declining ratably to 100% of the principal amount on or after
April 1, 2001 plus accrued or unpaid interest to the date of redemption.
The Notes are unsecured obligations of the Company, subordinated in right of
payment to all Senior Debt (as defined). The Notes carry various covenants,
including a limitation on payment of dividends, incurrence of additional
indebtedness and issuance of disqualified stock (as defined).
As of September 30, 1996 and 1995, the fair value of the Notes, which is
determined based on quoted market price, was $101,875 and $62,500,
respectively.
10. SENIOR LONG-TERM DEBT:
Senior long-term debt consisted of the following at September 30, 1996 and
1995:
1996 1995
-------- --------
Senior Long-Term Notes, due March 15, 2001;
interest at 9 1/8 % (net of discount of $808 and
$989, respectively) $199,192 $199,011
-------- --------
The Senior Notes are not redeemable by the Company prior to March 15, 1998.
Thereafter, the Senior Notes will be redeemable at any time at the option of
the Company, in whole or in part, at
62
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
redemption prices beginning at 103.083% of the principal amount for the
period beginning March 15, 1998 and declining ratably to 100% of the
principal amount on or after March 15, 2000 plus accrued or unpaid interest
to the date of redemption.
The Senior Notes are senior unsecured obligations of the Company, senior in
right of payment to the 9 5/8% Senior Subordinated Notes of the Company. The
Senior Notes carry various covenants, including a limitation on payment of
dividends, incurrence of additional indebtedness and issuance of disqualified
stock (as defined).
As of September 30, 1996 and 1995, the fair value of the Senior Notes, which
is determined based on quoted market price, was $184,000 and $140,000,
respectively.
11. OTHER LONG TERM DEBT
On December 29, 1995, the Company's wholly owned subsidiary, Envirotest
Wisconsin, Inc., issued $17,000 principal amount of notes (the "Notes").
The Notes bear interest at the rate of 7.53% per annum with monthly payments,
including interest, beginning at approximately $230 and increasing to
approximately $340 with maturity on November 30, 2002. The Notes are
collateralized by all assets utilized in the Wisconsin program. At September
30, 1996, the unpaid principal balance is $16,010.
In January 1996, the Company acquired Systems Control, Inc., a Washington
corporation (SC-WA), the operator of the centralized emissions testing
program in the State of Washington. At the time of the acquisition, SC-WA
had debt outstanding under a credit agreement. As of September 30, 1996,
the outstanding balance is $11,654 and bears interest at various rates with
an effective rate of 8.64% at September 30, 1996 and is collateralized by all
real property of the vehicle emissions program in the State of Washington.
This agreement requires monthly payments of approximately $240 with a balloon
payment at maturity on December 31, 1999 of $4,500. This credit agreement
requires a cash collateral amount of $600 as of September 30, 1996 and
through maturity and requires certain covenants related to tangible net
worth, capital ratio, cash flow ratio and distributions of SC-WA be
maintained.
In June 1996, the Company issued $14,345 principal amount of notes for the
Indiana program. The notes bear interest at the rate of 7.82% per annum with
quarterly payments, including
63
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
interest of approximately $540 and mature in 2006. Principal payments begin
June 1997. The notes are collateralized by all assets utilized in the
Indiana program.
The other long-term debt matures as follows:
1997 $3,880
1998 5,289
1999 5,779
2000 9,441
2001 4,510
Thereafter 13,110
-------
Total principal payments 42,009
Less current portion (3,880)
-------
$38,129
-------
-------
12. STOCK OPTIONS:
The Company has adopted a Stock Option Plan (the "Plan") providing for the
grant of options to purchase shares of Class A Common Stock to certain
employees of the Company and its subsidiaries and to Outside Directors (as
defined) on an annual, nondiscretionary basis. The Plan provides for the
grant of options intended to qualify as Incentive Stock Options ("ISOs") as
defined by Section 422 of the Internal Revenue Code and options that do not
qualify as ISOs ("NQSOs"). The exercise price per share for all ISOs
generally may not be less than 100% of the fair market value on the date of
grant. The exercise price per share for NQSOs may be less than, equal to or
greater than the fair market value on the date of grant, but not less than
par value, except that the exercise price for NQSOs granted to Outside
Directors shall be the fair market value on the date of grant. Under the
Plan, such options are exercisable according to a vesting schedule pursuant
to the terms of each Option Agreement. Unless earlier terminated by the
Board of Directors, the Plan will terminate in January 2003, 10 years after
its effective date.
In 1993, pursuant to an agreement for consulting services, a director and
principal stockholder of the Company was granted options to purchase 50,000
shares of Class A Common Stock at an exercise price of $9.75 per share and
50,000 shares at an exercise price of $14.00 per share. Options to purchase
25,000 shares of each of the foregoing options (an aggregate of 50,000)
64
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
vested upon grant, with the remaining options vesting in September 1994. The
unexercised options expire August 31, 1998.
The following table summarizes the status of, and changes in, options granted
during the years ended September 30, 1996, 1995 and 1994:
Shares Under Option Price Per
Option Share
------------ ----------------
Outstanding at October 1, 1993 2,451,305 $0.27 - $16.00
Granted 396,000 $16.00 - $22.00
Exercised - -
Canceled (125,000) $16.00
--------- ---------------
Outstanding at September 30, 1994 2,722,305 $0.27 - $22.00
Granted 457,500 $6.13
Exercised (186,155) $0.27
Canceled and expired (787,000) $15.88 - $22.00
Reissued 454,000 $6.13
--------- ---------------
Outstanding at September 30, 1995 2,660,650 $0.27 - $20.00
Granted 400,000 $2.75 - $2.80
Exercised (462,325) $0.27 - $0.48
Canceled (185,000) $0.27 - $16.00
--------- ---------------
Outstanding at September 30, 1996 2,413,325 $0.27 - $20.00
--------- ---------------
Options exercisable at:
September 30, 1994 1,939,305
September 30, 1995 1,664,150
September 30, 1996 1,505,950
13. STOCKHOLDERS' EQUITY:
Envirotest Systems Corp. was incorporated on August 20, 1990 for the purpose
of purchasing Hamilton Test Systems, Inc. ("HTS"), a wholly owned subsidiary
of United Technologies Corporation (the "Prior Parent"). At the time of the
HTS acquisition, a subsidiary of the Prior Parent had an equity interest in
Envirotest of approximately 23.6% of the outstanding stock.
65
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
Generally Accepted Accounting Principles require that a portion of the equity
participation in Envirotest by the Prior Parent be valued using the
carry-over basis of its equity interest in HTS prior to the acquisition.
Accordingly, a portion of HTS' assets were recorded at the book value of the
Prior Parent. The effect of the predecessor carry-over basis ($5,578) is
reflected as a component of stockholders' equity.
Payment of cash dividends is restricted by the terms of the Indenture
covering the Senior Subordinated Notes (under a formula based upon the
consolidated net income of the Company plus proceeds of equity offerings, and
subject to the maintenance of a certain consolidated fixed charge coverage
ratio).
14. INCOME TAXES:
Income (loss) before income taxes and income tax expense (benefit) for the
years ended September 30, 1996, 1995 and 1994 are shown below:
1996 1995 1994
-------- -------- ------
Income (loss) before income taxes:
Domestic operations $(18,938) $(16,105) $3,165
Foreign operations (488) 601 421
-------- -------- ------
Total (19,426) (15,504) 3,586
-------- -------- ------
Income tax:
Domestic operations:
Current 162 350 592
Deferred 5,161 (1,159) 515
-------- -------- ------
Total domestic 5,323 (809) 1,107
-------- -------- ------
Foreign operations:
Current 152
Deferred 315 166 153
-------- -------- ------
Total foreign 315 166 305
-------- -------- ------
Total $5,638 $(643) $1,412
-------- -------- ------
-------- -------- ------
66
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
The Company's tax expense (benefit) differs from the expense (benefit)
calculated using the statutory federal income tax rate for the following
reasons:
1996 1995 1994
------- ------- ------
Tax expense (benefit) at statutory
federal income tax rate $(6,605) $(5,271) $1,219
Increase (decrease) resulting from:
Goodwill amortization 66 66 66
Nondeductible expenses 179 172 70
Adjustments of the valuation allowance 13,044 5,400 895
State income taxes, net of federal
tax benefit (837) (1,162) (1,021)
Foreign taxes, net of federal
tax benefit (52) 152 138
Other (157) - 45
------ ------ ------
Total income tax expense (benefit) $5,638 $ (643) $1,412
------ ------ ------
The components of deferred tax balances as of September 30, 1996 and 1995 are
as follows:
1996 1995
------ ------
Deferred taxes:
Accrued vacation pay $551 $607
Charitable contributions 372 351
Other liabilities 3,007 1,659
Pennsylvania settlement reserves 2,972 ---
Net operating loss carryforwards 20,268 15,840
Difference between financial reporting
and tax bases of fixed
and intangible assets (7,718) (6,369)
Valuation allowance (19,452) (6,612)
------- ------
Net deferred taxes $0 $5,476
------- ------
67
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
The net change in the valuation allowance for the deferred tax assets of the
Company is as follows:
1996 1995
------ ------
Beginning balance $6,612 $1,212
Adjustment of valuation allowance
due to a reassessment of the
realizability of deferred tax assets 12,840 5,400
------- ------
Ending balance $19,452 $6,612
------- ------
------- ------
At September 30, 1996 the Company had federal net operating loss
carryforwards for federal tax purposes of approximately $46,418. The amounts
expire between 2006 and 2011. The state loss carryforwards vary in amount
and expiration date depending upon the jurisdiction.
15. DEFINED CONTRIBUTION PLAN AND SUPPLEMENTAL RETIREMENT PLAN:
The Company has adopted a defined contribution 401(k) plan (the "Plan")
covering substantially all of its employees. Eligible employees may
contribute up to 16% of base compensation to the Plan. The Company has an
optional matching program where the Company can match 50% of the employee's
first 6% of contribution. Company-matched contributions vest in full after
three years of an employee's credited service to the Company. The Company
also has an option to make additional profit-sharing contributions equal to
2% of the base salary of each Plan participant. Defined contribution expense
for the Company was approximately $696, $586 and $578, for the years ended
September 30, 1996, 1995 and 1994, respectively.
The Company has supplemental employee retirement plans covering six of its
key employees or former employees. The plan benefits for each employee range
from $13 to $100 per year commencing at age 65 for a period of ten years
payable in equal monthly installments. The plans also provide death and
disability benefits in the event of the death or total disability of an
employee while employed by the Company. The Company's policy is to fund the
plan through certain life insurance policies or through the general
unrestricted assets of the Company. Supplemental retirement expense for the
Company was approximately $119, $511 and $118, for the years ended September
30, 1996, 1995 and 1994, respectively.
68
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
16. RELATED PARTY TRANSACTIONS:
In 1993, the Company entered into a three-year agreement for consulting
services with a director and principal stockholder of the Company. The
agreement provides for a base consulting fee of $240 plus expenses annually
for the first year and $120 annually thereafter, as well as the grant of
options. For the years ended September 30, 1996, 1995 and 1994, the Company
expensed $120, $122 and $247, respectively, under this agreement.
As the Company has previously disclosed in its periodic reports filed with
the Securities and Exchange Commission under the Securities and Exchange Act
of 1934, the facilities and assets utilized by the Company in the Cuyahoga
County, Ohio I/M testing program (the "Ohio Assets") and the Tennessee I/M
testing program (the "Tennessee Assets") were leased to the Company pursuant
to separate Sale and leaseback Agreements with Kane Partners, L.P. ("Kane
Partners"). Richard Gelfond, a director of the Company, is Vice President of
the General Partner of Kane Partners and holds a 25% limited partnership
interest in Kane Partners. Chester C. Davenport, Chairman of the Company,
holds a 25% limited partnership interest in Kane Partners. In November 1992,
Kane Partners acquired the underlying leasehold property and the related
rights and obligations from the original lessors of the Ohio and Tennessee
Assets.
The statute and regulations governing Ohio's new I/M 240 test program require
that the land and buildings be owned by a third party having no affiliation
with the operator of the program. The Ohio program is divided into four
separate zones, three of which were subject to competitive bid and, when
awarded, complied with this requirement. The fourth zone, Cuyahoga County,
was subject to an existing contract held by Envirotest at the time contracts
for the other zones were awarded by the State (two of which were awarded to
the Company). As a condition to entering into a new 10 year contract with
Envirotest to conduct I/M 240 vehicle inspections in Cuyahoga County, Ohio
(and not submitting this zone to a competitive bid), the State of Ohio
required Envirotest to comply with its new I/M legislation and caused Kane
Partners to divest its ownership interest in the Ohio Assets. Accordingly,
the third party developer utilized approximately $10,000 of the net proceeds
of the Authority offering described in Note 17 to acquire ownership of the
Ohio Assets that will be utilized in the new Cuyahoga County, Ohio program to
be operated by the Company. As a result, the land and buildings utilized by
the Company under its three Ohio I/M 240 program contracts will be owned by
the developer and leased to the Company.
69
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
In connection with the negotiations related to the Ohio Assets, the Company
agreed to purchase from Kane Partners the Tennessee Assets for $1,800 and one
Ohio test site that will not be utilized in the new test program for $300,
for an aggregate purchase price of $2,100. Although Tennessee Assets and
Ohio Assets have been subject to separate sale and leaseback agreements, the
assets have served as functional security for a financing provided to the
Company in 1990 and were held by Kane Partners since 1992 for the same
purpose. Kane Partners utilized a portion of the aggregate proceeds received
by it from the sale of the Ohio Assets and Tennessee Assets to retire certain
debt obligations held by Chemical Venture Partners and Apollo Advisors, L.P.,
affiliates of which are directors of the Company and beneficially own
approximately 14% and 17%, respectively, of the Company's outstanding Class A
Common Stock. These debt obligations were incurred by Kane Partners in
connection with its initial acquisition of the Ohio Assets and Tennessee
Assets.
In connection with the evaluation and approval of the acquisition of the Ohio
Assets and the Tennessee Assets, and as required by the Senior Notes debt
covenants, a committee of disinterested directors of the Company retained an
independent financial advisor which rendered an opinion stating that (i) the
purchase price paid for the Ohio Assets and Tennessee Assets (collectively,
the "Purchase Price") was fair to the public shareholders of the Company from
a financial point of view, and (ii) the Purchase Price was fair and
reasonable to the Company from a financial point of view and was on financial
terms which are at least as favorable as financial terms which could be
obtained by the Company in a comparable transaction made on an arm's length
basis with persons who are not related persons.
As discussed in Note 17, the Company leased land and facilities in Ohio and
Nashville, Tennessee from Kane Partners during 1994 and 1995. Total lease
expenses under these leases were approximately $1,567 and $2,084 for the
years ended September 30, 1995 and 1994, respectively.
17. CAPITAL LEASE AND LONG-TERM DEBT OBLIGATION:
On June 30, 1995, the Ohio Air Quality Development Authority (Authority)
issued $64,380 of bonds with a 8.1% interest rate to finance the costs of the
acquisition, construction, renovation and equipping of the Company's
emissions testing network in Ohio. The bonds are subject to mandatory sinking
fund redemption and are due December 31, 2005. The land and buildings are
70
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
owned by a developer (the "Developer") and leased to the Company pursuant to
a capital lease. The equipment is owned by the Company. The Developer and
the Company separately have entered into loan agreements with the Authority
under which the payments will provide for timely payment of principal and
interest on the bonds. The Developer and the Company have entered into a
master lease agreement pursuant to which the developer will lease the land
and buildings to the Company. The proceeds are held in trust pending use
of the funds and the unexpended proceeds are reflected on the Company's
balance sheet as restricted cash.
Pursuant to the master lease and loan agreements, all revenues from the
operation of the Ohio emissions testing network are paid into certain
accounts held by the Trustee pursuant to a cash management services
agreement. The excess of revenues from operations over the amount required
to be paid monthly to the Authority under the loan agreements and to the Ohio
Environmental Protection Agency per the contracts will be available to the
Company. The bonds are collateralized by all Ohio program assets.
The future minimum annual payments under the master lease and Company loan
agreement for fiscal years ending September 30, are as follows:
1997 $10,430
1998 9,623
1999 9,617
2000 9,638
2001 9,636
Thereafter 40,894
-------
Total minimum payments 89,838
Amount representing interest (26,943)
-------
Present value of minimum payments 62,895
Less current portion (4,740)
-------
$58,155
-------
71
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
18. OPERATING LEASES:
The Company is obligated under noncancelable operating leases for the
building sites in Vancouver, British Columbia. The Vancouver lease runs for
seven years ending August 31, 1999, with monthly payments averaging
approximately $300. The Company has the option to renew this lease for an
additional seven year period.
As of September 30, 1996, approximate future minimum lease commitments under
noncancelable operating leases are as follows:
1997 $5,225
1998 5,068
1999 4,643
2000 922
2001 711
Thereafter 615
-------
$17,184
-------
Rental expense for the years ended September 30, 1996, 1995 and 1994 was
approximately $4,112, $6,406 and $5,944, respectively, net of sublease income
of approximately $289 and $40 for 1996 and 1995, respectively.
19. COMMITMENTS AND CONTINGENCIES:
The Company's principal commitments at September 30, 1996 consisted of
construction contracts of approximately $4,900 of which $1,800 has already
been incurred for the Indiana program.
72
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
The Company has several performance bonds on its long-term contracts. These
bonds are required by the contracts and vendor agreements in the event the
Company cannot perform and complete the contracts and agreements. In
addition, a bank holds a letter of credit in the amount of $2,400 guaranteed
by the Company in connection with its performance obligations in respect of
the Washington State contract. In the opinion of management, the Company
will be able to fulfill the requirements of the long-term contracts and
leases.
The State of Connecticut has made certain claims stating that the Company
owes the State $2,400 plus accruing amounts for certain cost savings in the
start up of the enhanced testing program in Connecticut. The Company cannot
predict the outcome of this complaint. However, the Company believes that it
has sufficient defense against these claims.
In October 1996, a class action lawsuit was filed asserting the 10 year
contract between Ohio Environmental Protection Agency (OEPA) and the Company
is unconstitutional and, thus, void. The complaint does not request money
damages, except for attorney fees and costs, but seeks to have the Ohio motor
vehicle emission inspection program and the Company's contract enjoined and
declared unconstitutional. Subsequently, the Company filed its motion to
intervene as an additional party defendant in order to protect its interest
in the contract challenged by the plaintiffs' action. The Company believes
that it has valid defenses to the claims contained in the complaint and
intends to defend the matter vigorously.
73
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
The Company is a party to various other legal proceedings and claims in the
ordinary course of business. Although the claims cannot be estimated, in the
opinion of management, the resolution of these matters will not have a
material adverse effect on the Company's consolidated financial position and
results of operations.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of the Company's quarterly results of operations
for the years ended September 30, 1996 and 1995:
1996 QUARTERS ENDED
DEC. 31 MAR. 31 JUN. 30 SEP. 30
- - -----------------------------------------------------------------------------
Total contract revenues $28,184 $30,024 $32,556 $33,708
Gross profit 6,292 1,812 7,416 6,803
Net income (loss) 5,588 (16,415) (6,337) (7,900)
Earnings (loss) per common and
common equivalent share $0.32 $(0.99) $(0.38) $(0.46)
Earnings (loss) per common share -
assuming full dilution $0.32 $(0.99) $(0.38) $(0.46)
1995 QUARTERS ENDED
DEC. 31 MAR. 31 JUN. 30 SEP. 30
- - -----------------------------------------------------------------------------
Total contract revenues $22,745 $24,149 $29,066 $28,797
Gross profit 9,929 6,849 8,133 6,749
Net loss (211) (1,837) (2,409) (10,404)
Loss per common and common
equivalent share $(0.01) $(0.12) $(0.15) $(0.64)
Loss per common share -
assuming full dilution $(0.01) $(0.12) $(0.15) $(0.64)
21. FOREIGN OPERATIONS:
The Company's contract revenues from its foreign subsidiary, which is located
in Vancouver, British Columbia, Canada were approximately $10,147, $12,285 and
$13,450 for the years ended
74
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
September 30, 1996, 1995 and 1994, respectively, and were earned from a
single customer. Identifiable assets of the foreign subsidiary totaled
approximately $6,913, $5,686 and $6,221 at September 30, 1996, 1995 and 1994,
respectively. The foreign subsidiary had a gross profit of approximately
$572, $1,875 and $2,464 for the years ended September 30, 1996, 1995 and
1994, respectively.
22. SUMMARIZED SEPARATE FINANCIAL INFORMATION:
The Company's consolidated subsidiaries, Envirotest Technologies, Inc.
("ETI"), Remote Sensing Technology, Inc. and Envirotest Partners ("Partners")
are guarantors of the Senior Notes and Notes. The total assets, net equity
and net income of all the subsidiaries not guaranteeing the Senior Notes and
Notes are less than ten percent of the respective amounts reported in the
consolidated financial statements. As required by Rule 3-10(a) of Regulation
S-X, this footnote sets forth the summarized financial information of the
guarantor subsidiaries as of September 30, 1996 and 1995 and for the years
ended September 30, 1996, 1995 and 1994.
In accordance with Staff Accounting Bulletin No. 73, the summarized financial
information reflects the push down of the Company's debt, related interest
expense and allocable debt issue costs associated with the Company's
acquisition of ETI. In addition, as required by Staff Accounting Bulletin
No. 55, the summarized financial information reflects all of the expenses
that the Company incurred on the guarantors' behalf. Except for interest
expense, certain general and administrative expenses and income taxes,
expenses are separately identifiable and therefore, charged directly to the
guarantors. Interest expense is allocated based on the amount of debt
related to the acquisition of ETI; common general and administrative expenses
are allocated based on management's assessment of the actual costs associated
with the guarantors' operations; and income tax expense is provided in the
guarantors' financial data on a separate return basis. Management believes
that the methods used to allocate expenses to the guarantors are reasonable.
75
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
COMBINED SUMMARIZED BALANCE SHEET DATA
SEPTEMBER 30, 1996 AND 1995
1996 1995
- - ---------------------------------------------------------------------------
ASSETS
Current assets $ 8,193 $ 5,886
Non-current assets 129,046 250,961
-------- --------
Total assets $137,239 $256,847
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to parent $ 18,535 $144,596
Other current liabilities 8,191 10,242
-------- --------
Total current liabilities 26,726 154,838
Non-current liabilities 84,459 80,074
Stockholders' equity 26,054 21,935
-------- --------
Total liabilities and stockholders' equity $137,239 $256,847
-------- --------
COMBINED SUMMARIZED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994
- - ------------------------------------------------------------------------------
Contract revenues $30,743 $45,047 $52,317
Gross profit 20,530 24,379 30,216
Net income 4,114 4,948 10,726
76
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
77
<PAGE>
EXHIBIT (g)(2)
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $17,079 $180,215
Short-term investments 1,347 24,546
Contract receivables, net of allowance for doubtful accounts of
$375 and $354, respectively 8,208 8,026
Prepaid expenses 1,967 1,357
Other current assets 1,613 3,624
Deferred income taxes 1,376 901
-------- --------
Total current assets 31,590 218,669
Restricted cash 31,497 -
Property, plant and equipment, net 173,507 151,415
Assets under capital lease, net 27,138 3,118
Assets held for sale, net 5,209 -
Assets subject to settlement 149,629 -
Intangible assets, net 17,752 24,453
Deferred debt acquisition costs, net accumulated amortization
of $3,378 and $1,520, respectively 13,412 13,866
Deferred charges, net of accumulated amortization of $3,217 and $194,
respectively 3,178 2,199
Deferred income taxes 4,100 3,710
Other assets 261 775
-------- --------
$457,273 $418,205
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-43-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 12,742 $ 16,921
Accrued interest 1,499 7,035
Accrued expenses and other current liabilities 13,499 9,851
Current portion of capital lease and long-term debt obligation 1,485 533
Income taxes payable 595 964
--------- ---------
Total current liabilities 29,820 35,304
Senior subordinated debt 125,000 125,000
Senior long-term debt, net of discount of $989 and $1,170, respectively 199,011 198,830
Capital lease and long-term debt obligation 62,895 4,218
Other long-term liabilities 2,502 1,324
Minority interest - 619
--------- ---------
Total liabilities 419,228 365,295
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 per share par value; Class A Common Stock,
40,000,000 shares authorized, 12,883,571 and 12,331,082 shares
issued and outstanding at September 30, 1995 and 1994,
respectively; Class B Common Stock, 5,000,000 shares authorized,
1,248,249 and 1,614,583 shares issued and outstanding at
September 30, 1995 and 1994, respectively; Class C Common Stock,
5,000,000 shares authorized, 2,026,111 shares issued
and outstanding 162 160
Additional paid-in capital 60,028 59,980
Cumulative currency adjustment (121) (67)
Retained deficit (16,446) (1,585)
--------- ---------
43,623 58,488
Less predecessor carry-over basis (5,578) (5,578)
--------- ---------
Total stockholders' equity 38,045 52,910
--------- ---------
Total liabilities and stockholders' equity $457,273 $418,205
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-44-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contract revenues $104,757 $96,395 $88,534
Costs of services 73,097 52,052 49,491
----------- ----------- -----------
Gross profit 31,660 44,343 39,043
General and administrative expense 18,683 13,883 9,892
Selling expense 6,228 5,221 3,405
Amortization expense 4,017 4,390 3,500
Reserve for surplus properties 892 - -
----------- ----------- -----------
Income from operations 1,840 20,849 22,246
Other expense (income):
Interest expense 21,315 23,567 13,370
Other 63 (26) 446
Interest income (4,318) (6,671) (1,220)
Minority interest 284 393 (1,754)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary
item (15,504) 3,586 11,404
Income tax expense (benefit) (643) 1,412 4,651
----------- ----------- -----------
Income (loss) before extraordinary item (14,861) 2,174 6,753
Extraordinary loss - early extinguishment of debt, net of
$7,295 in income taxes ($1,373 to related parties,
net of income taxes) - - (11,411)
----------- ----------- -----------
Net income (loss) $ (14,881) $ 2,174 $(4,658)
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per common and common equivalent share:
Income (loss) before extraordinary item $ (0.93) S 0.12 $0.40
Extraordinary item - - (0.68)
----------- ----------- -----------
Net income (loss) $ (0.93) $0.12 $ (0.28)
Weighted average common shares and common
equivalent shares 16,059,185 17,546,495 16,714,380
----------- ----------- -----------
Earnings (loss) per common share - assuming full dilution:
Income (loss) before extraordinary item $ (0.93) $0.12 $ 0.40
Extraordinary item - - (0.68)
----------- ----------- -----------
Net income (loss) $ (0.93) $0.12 $ (0.28)
Weighted average common shares and common
equivalent shares 16,059,165 17,546,495 16,718,167
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-45-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(AMOUNT IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Retained Treasury Stock Predecessor
------------------- Paid-in Currency Earnings ------------------- Carry-over
Shares Amount Capital Adjustment (Deficit) Shares Amount Basis Total
---------- ------ ---------- ---------- --------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992 12,321,308 $ 123 $17,829 $ (112) $ 976 (102,141) $ (78) $ (5,578) $ 13,160
Net proceeds from issuance
of common stock 3,672,011 37 49,483 49,520
Retirement of warrants (7,519) (7,519)
Appreciation in warrant value (941) (941)
Cancellation of treasury stock (102,141) (1) (77) 102,141 78 -
Foreign currency translation
adjustment (92) (92)
Net loss (4,658) (4,658)
---------- ------ ---------- ---------- --------- -------- -------- ----------- --------
Balance at September 30, 1993 15,891,178 159 58,852 (204) (3,759) - - (5,578) 49,470
Appreciation in warrant value (564) (564)
Exercise of warrants 80,598 1 1,682 1,683
Foreign currency translation
Adjustment 137 137
Net Income 2,174 2,174
---------- ------ ---------- ---------- --------- -------- -------- ----------- --------
Balance at September 30, 1994 15,971,776 160 59,980 (67) (1,585) - - (5,578) 52,910
Issuance of common stock
upon exercise of stock options 186,155 2 48 50
Foreign currency translation
adjustment (54) (54)
Net Loss (14,861) (14,861)
---------- ------ ---------- ---------- --------- -------- -------- ----------- --------
Balance at September 10, 1995 16,157,931 $ 162 $60,028 $ (121) $(16,446) - $ - $ (5,578) $ 38,045
---------- ------ ---------- ---------- --------- -------- -------- ----------- --------
---------- ------ ---------- ---------- --------- -------- -------- ----------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-46-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (14,861) $2,174 $ (4,658)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 16,800 10,612 11,123
Amortization of loan discount and deferred debt acquisition costs 3,384 1,578 1,555
Reserve for surplus properties 892 - -
Minority interest in net income (loss) of consolidated subsidiary 284 393 (1,754)
Other non-cash items 584 - -
Accrued interest on debt converted to principal - - 121
Unrealized foreign currency loss - - 273
Extraordinary loss on early extinguishment of debt, net of taxes - - 11,411
Change in assets and liabilities:
Increase in contract receivables (11) (686) (976)
Increase in prepaid and other current assets (493) (1,507) (1,869)
(Increase) decrease in deferred taxes (863) 681 4,282
Increase in deferred charges (5,034) (2,099) (63)
(Increase) decrease in other long-term assets 514 727 (1,535)
Increase (decrease) in accounts payable (4,212) 6,492 573
Increase (decrease) in accrued interest (5,536) 1,120 4,239
Increase (decrease) in accrued expenses and other current liabilities 2,222 1,239 (316)
Decrease in advances from customers - (712) (1,436)
Increase (decrease) in income taxes payable (369) 446 (822)
Increase (decrease) in other long-term liabilities 1,178 (159) (54)
---------- --------- --------
Net cash provided by (used in) operating activities (5,521) 20,299 20,094
---------- --------- --------
Cash flows from investing activities:
(Purchase) maturity of short-term investments 23,199 (24,546) -
Purchases of property, plant, equipment and assets under capital lease (118,895) (69,350) (3,091)
Proceeds from sale of property, plant and equipment 2,656 - -
Increase in assets subject to settlement (88,963) - -
Purchase of minority interest in Canadian subsidiary (1,247) - -
Purchases of intangible assets - (6,068) (50)
Insurance proceeds for damaged assets - - 1,015
Other investing activities 6 (5) (129)
---------- --------- --------
Net cash used in investing activities $ (183,244) $ (99,969) $ (2,255)
---------- --------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-47-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of senior long-term debt $ - $ - $ (85,500)
Repayment of senior subordinated debt - - (25,000)
Repayment of junior subordinated debt - - (1,975)
Repayment of obligations under capital lease (4,751) (489) (414)
Repurchase of common stock purchase warrants - - (12,531)
Payment of prepayment penalty - - (2,250)
Capitalization of loan fees (2,749) (9,609) (6,026)
Proceeds from issuance of senior subordinated notes - - 125,000
Proceeds from initial public stock offering - - 54,400
Costs of initial public stock offering - - (5,407)
Proceeds from issuance of common stock 50 - 527
Proceeds from borrowings of senior long-term debt - 198,732 -
Proceeds from capital lease and long-term debt obligation 64,380 - -
Increase in restricted cash (31,497) - -
Other - - 5
---------- --------- --------
Net cash provided by financing activities 25,433 188,654 40,829
---------- --------- --------
Effect of exchange rate on cash 196 137 63
---------- --------- --------
Net increase (decrease) in cash and cash equivalents (163,136) 109,121 58,731
Cash and cash equivalents, beginning of year 180,215 71,094 12,363
---------- --------- --------
Cash and cash equivalents, end of year $17,079 $180,215 $71,094
---------- --------- --------
---------- --------- --------
</TABLE>
Supplemental cash flow information:
Cash paid for interest and income taxes for the years ended September 30,
1995, 1994 and 1993 was as follows:
(in thousands) 1995 1994 1993
-----------------------------------------------------------------
Interest $37,448 $21,184 $7,316
Income taxes 332 299 2,562
In May 1994, additional Class A common stock was issued upon exercise of
common stock purchase warrants.
In May 1993, long-term debt due to the minority interest partner in
Ebco-Hamilton Partners of approximately $707,000 was transferred to an
equity interest by a resolution of the Management Committee of the
Partnership.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-48-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Envirotest Systems Corp. ("Envirotest" or the "Company") and its
subsidiaries market, install and operate twelve centralized vehicle
emissions testing programs under contracts entered into with state and
municipal governments within the United States and one program in British
Columbia, Canada. The Company also offers states and municipalities
services in a variety of sophisticated data management and vehicle
identification capabilities.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated balance sheet includes the accounts of Envirotest Systems
Corp. and all of its domestic and foreign subsidiary companies. All
significant intercompany balances and transactions have been eliminated.
Minority interest in equity of subsidiary represents the minority partner's
proportionate share of the equity of Ebco-Hamilton Partners ("EHP"). At
September 30, 1994 and 1993, the Company owned 50.0000006% of EHP. On July
24, 1995, the Company, through its wholly owned subsidiary, Envirotest
Holdings Inc., purchased the third party interest in Ebco-Hamilton Partners
("EHP"), the partnership which operates the Company's British Columbia,
Canada centralized vehicle emissions testing program. The purchase price of
$1.2 million was paid in cash. The acquisition was accounted for as a
purchase. The results of the acquired interest in EHP have been combined
with the results of the Company since the date of acquisition.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents. Cash and cash equivalents are stated at cost
which approximates market value. Included in the Company's cash and cash
equivalents are approximately $16.5 million and $173 million primarily in
commercial paper invested through registered broker/dealers at September
30, 1995 and 1994, respectively. The Company intends to hold these
investments until maturity.
SHORT-TERM INVESTMENTS
Short-term investments have an initial maturity of greater than three
months and are carried at cost which approximates market. Short term
investments of $1.3 million as of September 30, 1995 consist of
certificates of deposit with a financial institution, which collateralize
letters of credit. Short term investments of $24.5 million as of September
30, 1994 consisted of commercial paper having the highest rating obtainable
from either Moody's Investor Service, Inc. or Standard & Poor's Corporation
Inc. and matured in October 1994.
-49-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONTRACT RECEIVABLES
The Company's contract revenues and receivables consist of uncollateralized
amounts due from state, municipal and foreign governments.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Research
and development expense for the periods ended September 30, 1995, 1994, and
1993 were approximately $33,000, $245,000 and $531,000, respectively, and
are included in general and administrative expenses.
RESTRICTED CASH
Restricted cash represents proceeds from bonds issued by the Ohio Air
Quality Development Authority to finance the costs of acquisition,
construction, renovation and equipping of the Company's emissions testing
network in Ohio which are being held in trust pending use of those funds.
Included in this amount is $6,438,000 which collateralizes a letter of
credit.
PROPERTY, PLANT, EQUIPMENT AND CAPITAL LEASE
Property, plant and equipment are recorded at cost. The capital lease is
recorded at the present value of the future lease principal payments.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets as follows:
Buildings and site improvements 30 years
Machinery and equipment 2-10 years
Leasehold improvements Lease term
Buildings and site improvements are depreciated on a straight line basis
over the estimated useful life of 30 years. Quarterly, the Company prepares
an analysis to compare the estimated book value of the buildings, site
improvements and land at the estimated completion date of individual
contracts (assuming certain renewals, if any) to the estimated residual
value. Adjustments to depreciable lives are made accordingly.
It is possible, given the political and competitive environment in which
the Company operates, that the estimates discussed above could change and
may result in accelerated depreciation charges. Also, the actual values
realized on disposal could differ from the amounts used in estimating the
residual values of these properties.
Interest costs relating to the acquisition and construction of major
projects are capitalized and depreciated over the estimated useful lives of
the related assets. Interest expense capitalized for the years ended
September 30, 1995, 1994 and 1993 was $14,027,000, $1,533,000 and $89,000,
respectively.
The cost of maintenance and repairs is charged to expense in the year
incurred. Expenditures which increase the useful lives of property and
equipment are capitalized.
-50-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
When items are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in income.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:
Goodwill 12 years
Government contracts 12 years
Computer software 5 years
License agreement 10-17 years
Covenants not-to-compete 5 years
Beneficial ground lease 12 years
Copyrights 12 years
It is the Company's policy to re-evaluate the estimated useful life of each
of its intangible assets on a quarterly basis and may adjust the estimated
useful life accordingly.
DEFERRED DEBT ACQUISITION COSTS
Costs associated with obtaining long-term debt financing have been
capitalized and are amortized on a straight-line basis over the repayment
term of the related debt.
DEFERRED CHARGES
Significant expenses incurred in bringing new emissions testing programs
into operation including staff recruitment, staff training, public
information and similar pre-operating costs are deferred and amortized over
a twelve-month period commencing with the start of the program operations.
CONTRACT REVENUES
For vehicle emissions inspection contracts, revenue is based upon the fees
that are collectible for the tests that have been performed.
The Company's contract revenues from five major customers, which
individually account for in excess of 10% of the Company's total contract
revenue, were $16.5 million, $15.3 million, $14.5 million, $13.3 million
and $12.3 million for the year ended September 30, 1995; $16.1 million,
$13.6 million, $13.5 million, $13.4 million and $10.3 million for the year
ended September 30, 1994 and $15.3 million, $13.8 million, $12.8 million,
$10.4 million, and $9.2 million for the year ended September 30, 1993.
INCOME TAXES
Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("FAS 109"), requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are
-51-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the local currency of its international
subsidiary is the functional currency. In accordance with Statement of
Financial Accounting Standard No. 52, "Foreign Currency Translation", the
assets and liabilities denominated in foreign currency are translated into
U.S. dollars at the current rate of exchange existing at period-end and
revenues and expenses are translated at average monthly exchange rates.
Related translation adjustments are reported as a separate component of
stockholders' equity, whereas, gains or losses resulting from foreign
currency transactions are included in results of operations.
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) per share is based upon the weighed average number of shares
of common stock and common stock equivalents outstanding during the period.
The treasury method is used in computing incremental common stock
equivalents which would result from exercise of outstanding dilutive stock
options and warrants. In addition, in accordance with Securities and
Exchange Commission Staff Accounting Bulletin (SAB) No. 83, common shares
issued by the Company in the twelve months preceding the initial public
offering at prices substantially lower than the initial public offering
price have been included in the calculation of common stock and common
stock equivalents (using the treasury stock method) as if they were
outstanding for the entire period presented.
Such common shares and common equivalent shares have been adjusted to
reflect a 1300-for-1 stock split authorized by the Board of Director as
discussed in Note 12. All per share amounts have been retroactively
restated to reflect such common stock split.
RECLASSIFICATIONS AND PRESENTATION
Certain reclassifications have been made for consistent presentation.
- 52 -
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at September 30,
1995 and 1994:
(IN THOUSANDS) 1995 1994
----------------------------------------------------------------------
Property, plant and equipment
Land $ 24,828 $ 22,198
Buildings and site improvements 82,334 45,652
Machinery and equipment 53,539 19,585
Leasehold improvements 4,147 4,469
-------- --------
164,848 91,904
Construction in progress 33,398 75,752
-------- --------
198,246 167,656
Less accumulated depreciation 24,739 16,241
-------- --------
$ 173,507 $151,415
-------- --------
-------- --------
4. ASSETS UNDER CAPITAL LEASE:
Assets under capital lease consisted of the following at September 30, 1995
and 1994:
(IN THOUSANDS) 1995 1994
----------------------------------------------------------------------
Land $ 3,185 $ -
Buildings and site improvements 6,503 5,077
Machinery and equipment - 1,191
------- ------
9,688 6,268
Construction in progress 17,504 -
------- ------
27,192 6,268
Less accumulated amortization 54 3,150
------- ------
$27,138 $3,118
------- ------
------- ------
At September 30, 1995 Construction in progress includes $2,467 for land and
$15,037 for buildings and site improvements which are leased assets under
construction.
5. ASSETS HELD FOR SALE:
Assets held for sale represent property, plant and equipment at testing
sites formerly operated under the Maryland program which terminated
December 31, 1994, and two
- 53 -
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ASSETS HELD FOR SALE: (CONTINUED)
testing sites in Minnesota which will no longer be needed under new State
legislation. These properties are currently being marketed for sale. An
estimated loss on sale of properties of $892 has been provided for as of
September 30, 1995. The estimated loss is based on management's best
estimates of the amounts expected to be realized on the sale of these
assets. The amounts the Company will ultimately realize could differ
materially in the near term from the amounts assumed in arriving at the
estimated loss.
Assets held for sale (at cost) consisted of the following at September 30,
1995:
(IN THOUSANDS) 1995
----------------------------------------------------------
Land $2,157
Buildings and site improvements 3,283
Machinery and equipment 593
------
6,033
Less accumulated depreciation 824
------
$5,209
------
------
6. ASSETS SUBJECT TO SETTLEMENT:
As previously reported by the Company in its financial statements,
legislation adopted by the Pennsylvania General Assembly directed the
Pennsylvania Department of Transportation (PennDOT) to delay implementation
of the Pennsylvania emissions testing program until March 31, 1995, and to
design and submit to the federal Environmental Protection Agency by March
1, 1995 an alternative emissions testing program that consisted of
decentralized test-and-repair facilities or a hybrid of decentralized
test-and-repair and centralized test-only components and that complied with
federal law. On February 28, 1995, the Governor announced an indefinite
suspension of the implementation of any program until the Commonwealth
receives clarification regarding the elements of a testing program that the
federal EPA would find acceptable. The Company entered into an agreement
with the Commonwealth of Pennsylvania in April 1995 in an effort to resolve
the various contractual claims and issues resulting from the decision by
the Commonwealth to suspend its emissions testing program. The agreement
provided for a 90 day framework for negotiations to address these matters,
and contemplated the filing of certain claims by the Company in order to
preserve its legal rights during the course of negotiations. In this
connection, the Company filed a complaint with the Commonwealth of
Pennsylvania Board of Claims on May 10, 1995 seeking monetary damages and
other appropriate relief. A second protective action was filed by the
Company on May 15, 1995, in the Commonwealth Court of the Commonwealth of
Pennsylvania seeking declaratory and equitable relief and damages. Both
actions were filed by the Company in order to preserve its legal rights
under the relevant statute of limitations in Pennsylvania.
- 54 -
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ASSETS SUBJECT TO SETTLEMENT: (CONTINUED)
On December 15, 1995, the Company entered into a General Release and
Settlement Agreement ("Agreement") with The Commonwealth of Pennsylvania
which resolves the issues related to the Company's contract with PennDOT.
Under the terms of the Agreement, the Company was paid $25 million on
December 29, 1995 and will be paid $40 million on each of July 1996, 1997,
and 1998 plus interest at 6% from December 15, 1995. In addition, the
Company will sell the assets and retain the proceeds and the Commonwealth
will pay the Company (in July 1998) 50% of the amount by which the net
proceeds from the sale of the assets (as defined by the Agreement) are less
than $55 million up to a maximum of $15 million plus interest at 6% from
December 15, 1995. Should the net proceeds from the sale of the assets
exceed $55 million, the Company will pay the Commonwealth 75% of the amount
by which the net proceeds exceed $55 million.
Assets subject to settlement (at cost) consisted of the following at
September 30, 1995:
(IN THOUSANDS) 1995
-------------------------------------------------------------------
Land $ 13,854
Buildings and site improvements 95,685
Machinery and equipment 19,052
Capitalized interest 12,411
Intangibles 2,735
Deferred charges 4,761
Other 1,131
--------
$149,629
--------
--------
7. INTANGIBLE ASSETS:
Intangible assets consisted of the following at September 30, 1995 and 1994
(IN THOUSANDS) 1995 1994
---------------------------------------------------------------------------
Government contracts $21,294 $24,146
Covenants not-to-compete 3,988 3,988
Computer software 2,521 2,521
Goodwill 2,415 2,415
License agreement 1,903 1,903
Copyrights 1,000 2,625
Beneficial ground lease 153 153
------- -------
33,274 37,751
Less accumulated amortization 15,522 13,298
------- -------
$17,752 $24,453
------- -------
------- -------
- 55 -
<PAGE>
ENVIROTEST SYSTEM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consisted of the following
at September 30, 1995 and 1994:
(IN THOUSANDS) 1995 1994
-----------------------------------------------------------------------
Accrued employee-related expenses $ 5,134 $3,705
Accrued real and personal property taxes 2,077 1,225
Other accrued expenses 6,288 4,921
------- ------
$13,499 $9,851
------- ------
------- ------
9. SENIOR SUBORDINATED DEBT:
Senior subordinated debt consisted of the following at September 30, 1995
and 1994:
(IN THOUSANDS) 1995 1994
------------------------------------------------------------------------
Senior Subordinated Notes, due April 1, 2003,
interest at 9 5/8%, payable semi-annually $125,000 $ 125,000
The Senior Subordinated Notes ("Notes") are not redeemable by the Company
prior to April 1998. Thereafter, the Notes will be redeemable at any time
at the option of the Company, in whole or in part, at the redemption prices
beginning at 103.609% of the principal amount for the period beginning
April 1, 1998 and declining ratably to 100% of the principal amount on or
after April 1, 2001 plus accrued or unpaid interest to the date of
redemption.
The Notes are unsecured obligations of the Company, subordinated in right
of payment to all Senior Debt (as defined). The Notes carry various
covenants, including a limitation on payment of dividends, incurrence of
additional indebtedness and issuance of disqualified stock (as defined).
As of September 30, 1995 and 1994, the fair value of the Notes, which is
determined based on quoted market price, was $62.5 million and $114
million, respectively.
10. SENIOR LONG-TERM DEBT:
Senior long-term debt consisted of the following at September 30, 1995 and
1994:
(IN THOUSANDS) 1995 1994
--------------------------------------------------------------------------
Senior Long-Term Notes, due March 15, 2001,
interest at 9 1/8 %, payable semi-annually
beginning September 15, 1994 (net of discount
of $989 and $1,170, respectively) $199,011 $198,830
In March 1994, the Company issued the Senior Long-Term Notes ("Senior
Notes") to the public. The Senior Notes are not redeemable by the Company
prior to March 15,
-56-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SENIOR LONG-TERM DEBT: (CONTINUED)
1998. Thereafter, the Senior Notes will be redeemable at any time at the
option of the Company, in whole or in part, at redemption prices beginning
at 103.083% of the principal amount for the period beginning March 15, 1998
and declining ratably to 100% of the principal amount on or after March 15,
2000 plus accrued or unpaid interest to the date of redemption.
The Senior Notes are senior unsecured obligations of the Company, senior in
right of payment to the 9 5/8% Senior Subordinated Notes of the Company.
The Senior Notes carry various covenants, including a limitation on payment
of dividends, incurrence of additional indebtedness and issuance of
disqualified stock (as defined).
As of September 30, 1995 and 1994, the fair value of the Senior Notes,
which is determined based on quoted market price, was $140 million and $184
million, respectively.
11. STOCK OPTIONS:
In January 1993, the Company adopted a Stock Option Plan (the "Plan")
providing for the grant of options to purchase up to 1,930,285 shares of
Class A Common Stock to certain employees of the Company and its
subsidiaries and to Outside Directors (as defined) on an annual,
nondiscretionary basis. The Plan provides for the grant of options intended
to qualify as Incentive Stock Options ("ISO"s) as defined by Section 422 of
the Internal Revenue Code and options that do not qualify as ISOs
("NQSO"s). The exercise price per share for all ISOs generally may not be
less than 100% of the fair market value on the date of grant. The exercise
price per share for NQSOs may be less than, equal to or greater than the
fair market value on the date of grant, but not less than par value, except
that the exercise price for NQSOs granted to Outside Directors shall be the
fair market value on the date of grant. Under the Plan, such options are
exercisable according to a vesting schedule pursuant to the terms of each
Option Agreement. Unless earlier terminated by the Board of Directors, the
Plan will terminate in January 2003, 10 years after its effective date.
In September 1993, pursuant to an agreement for consulting services, a
director and principal stockholder of the Company was granted options to
purchase 50,000 shares of Class A Common Stock at an exercise price of
$9.75 per share and 50,000 shares at an exercise price of $14.00 per share.
Options to purchase 25,000 shares of each of the foregoing options (an
aggregate of 50,000) vested upon grant, with the remaining options vesting
in September 1994. The unexercised options expire August 31, 1998.
-57-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS: (CONTINUED)
The following table summarizes the status of, and changes in, options
granted during the years ended September 30, 1995, 1994 and 1993:
SHARES UNDER OPTION PRICE
OPTION PER SHARE
------------ -------------
Outstanding at September 30, 1992 1,400,763 $0.27-$0.48
Granted 1,050,542 $9.75-$16.00
Exercised - -
Canceled - -
--------- -------------
Outstanding at September 30, 1993 2,451,305 $0.27-$16.00
Granted 396,000 $16.00-$22.00
Exercised - -
Canceled (125,000) $16.00
--------- -------------
Outstanding at September 30, 1994 2,722,305 $0.27-$22.00
Granted 457,500 $6.13
Exercised (186,155) $0.27
Canceled and expired (787,000) $15.88-$22.00
Reissued 454,000 $6.13
--------- -------------
Outstanding at September 30, 1995 2,660,650 $0.27-$20.00
--------- -------------
--------- -------------
Options exercisable at:
September 30, 1993 1,595,534
September 30, 1994 1,939,305
September 30, 1995 1,664,150
Statement of Financial Accounting Standards No. 123 - Accounting for
Stock-Based Compensation will be effective for the first quarter of the
Company's 1997 fiscal year. This statement introduces a fair-value based
method of accounting for stock-based compensation. It encourages, but does
not require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees based on the
new fair-value accounting rules. Companies that choose not to adopt the new
fair-value accounting rules will be required to disclose pro forma net
income and earnings per share under the new method. Management has not yet
determined which method it will adopt.
12. STOCKHOLDERS' EQUITY:
Envirotest Systems Corp. was incorporated on August 20, 1990 for the
purpose of purchasing Hamilton Test Systems, Inc. ("HTS"), a wholly owned
subsidiary of United Technologies Corporation (the "Prior Parent"). At the
time of the HTS acquisition, a subsidiary of the Prior Parent had an equity
interest in Envirotest of approximately
-58-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY: (CONTINUED)
3.6% of the outstanding stock. Generally Accepted Accounting Principles
require that a portion of the equity participation in Envirotest by the
Prior Parent be valued using the carry-over basis of its equity interest in
HTS prior to the acquisition. Accordingly, a portion of HTS' assets were
recorded at the book value of the Prior Parent. The effect of the
predecessor carry-over basis ($5,578) is reflected as a component of
stockholders' equity.
On April 1, 1993, the Company issued to the public 3.4 million shares of
Class A Common Stock and $125 million principal amount of 9 5/8% Senior
Subordinated Notes due 2003. The net proceeds of approximately $168.1
million received by the Company from the sale of the shares and Notes was
used to repay outstanding long-
term indebtedness and to pay certain prepayment uses in connection
therewith totaling $109.4 million, and to repurchase warrants to purchase
shares of the Company's Class A Common Stock for $12.5 million. The balance
of the proceeds of approximately $46.2 million was used for general
corporate purposes, including working capital.
In January 1993, the Board of Directors approved a recapitalization (the
"Recapitalization"). As part of the Recapitalization, the Company's
existing Class A Common Stock was reclassified as Class B Common Stock and
the existing Class B Common Stock was reclassified as Class A Common Stock.
Under the Recapitalization, the holders of Class B Common Stock have
relatively more voting powers than the holders of Class A Common Stock.
Class B Common Stock is convertible into Class A Common Stock.
The Recapitalization also provided for the reclassification of certain
shares of existing Class B Common Stock into a newly established nonvoting
Class C Common Stock which, subject to certain limitations, is convertible
into Class A Common Stock. September 30, 1992 balances have been restated
to reflect the Recapitalization.
Also in January 1993, the Board of Directors authorized a 1300-for-1 stock
split of the Company's Common Stock. September 30, 1992 balances have been
restated to reflect the common stock split.
Payment of cash dividends is restricted by the terms of the Indenture
covering the Senior Subordinated Notes (under a formula based upon the
consolidated net income of the Company plus proceeds of equity offerings,
and subject to the maintenance of a certain consolidated fixed charge
coverage ratio).
-59-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
13. INCOME TAXES:
Income (loss) before income taxes and after extraordinary item and income
tax expense (benefit) for the years ended September 30, 1995, 1994 and 1993
are shown below:
(IN THOUSANDS) 1995 1994 1993
---------------------------------------------------------------------------
Income (loss) before income taxes and
after extraordinary item:
Domestic operations $(16,105) $3,165 $(4,505)
Foreign operations 601 421 (2,797)
-------- ------ -------
Total consolidated (15,504) 3,586 (7,302)
Income tax:
Domestic operations:
Current 350 592 100
Deferred (1,159) 515 (2,057)
-------- ------ -------
Total domestic (809) 1,107 (1,957)
-------- ------ -------
Foreign operations:
Current - 152 -
Deferred 166 153 (687)
-------- ------ -------
Total foreign 166 305 (687)
-------- ------ -------
Total consolidated $ (643) $1,412 $(2,644)
-------- ------ -------
-------- ------ -------
-60-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES: (CONTINUED)
Income tax expense (benefit) is included in the financial statements as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes associated with income (loss) before
extraordinary item $(643) $1,412 $ 4,651
Taxes associated with extraordinary item - - (7,295)
----- ------ -------
Total income tax expense (benefit) $(643) $1,412 $(2,644)
----- ------ -------
----- ------ -------
</TABLE>
The Company's tax expense (benefit) differs from the expense (benefit)
calculated using the statutory federal income tax rate for the following
reasons:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense(benefit) at statutory federal income tax rate $(5,271) $ 1,219 $(2,483)
Increase (decrease) resulting from:
Goodwill amortization 66 66 66
Nondeductible expenses 172 70 25
Adjustments of the valuation allowance (FAS 109) 5,400 895 (245)
State income taxes, net of federal tax benefit (1,162) (1,021) (127)
Foreign taxes, net of federal tax benefit 152 138 -
Other - 45 120
------- ------- -------
Total income tax expense (benefit) $ (643) $ 1,412 $(2,644)
------- ------- -------
------- ------- -------
</TABLE>
The components of deferred tax balances as of September 30, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred taxes:
Capitalized lease $ - $ 327
Accrued vacation pay 607 301
Charitable contributions 351 218
Other liabilities 1,659 600
Net operating loss carryforwards 15,840 7,455
Differences between financial reporting and tax bases of
fixed and intangible assets (6,369) (3,078)
Valuation allowance (6,612) (1,212)
------- -------
Net deferred taxes $ 5,476 $ 4,611
------- -------
------- -------
</TABLE>
-61-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES: (CONTINUED)
The net change in the valuation allowance for the deferred tax assets of
the Company is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $(1,212) $ (317)
Adjustment of valuation allowance due to a
reassessment of the realizability of deferred
tax assets (5,400) (895)
------- -------
Ending balance $(6,612) $(1,212)
------- -------
------- -------
</TABLE>
The Company has recorded a deferred tax asset of $5,476 reflecting the
benefit of approximately $38 million in loss carryforwards (net of
temporary differences and valuation allowance), which expire in varying
amounts between 2006 and 2010. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes it is "more likely
than not", as defined by FAS 109, that the recorded deferred tax asset will
be realized because the Company's elusive long-term emissions testing
contracts provide stable and predictable revenues. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward
period are reduced.
At September 30, 1995 the Company had federal net operating loss
carryforwards for tax purposes of approximately $32 million. The amounts
expire between 2006 and 2010. The state loss carryforwards vary in amount
and expiration date depending upon the jurisdiction.
14. DEFINED CONTRIBUTION PLAN AND SUPPLEMENTAL RETIREMENT PLAN:
Effective January 1, 1991, the Company adopted a defined contribution
401(k) plan (the "Plan") covering substantially all of its employees.
Eligible employees may contribute up to 16% of base compensation to the
Plan. The Company has an optional matching program where the Company can
match 50% of the employee's first 6% of contribution. Company-matched
contributions vest in full after three years of an employee's credited
service to the Company. The Company also has an option to make additional
profit-sharing contributions equal to 2% of the base salary of each Plan
participant. Defined contribution expense for the Company was approximately
$586,000, $578,000, and $451,000, for the years ended September 30, 1995,
September 30, 1994, and September 30, 1993, respectively.
The Company has supplemental employee retirement plans covering six of its
key employees or former employees. The plan benefits for each employee
range from $13,000 to $100,000 per year commencing at age 65 for a period
of ten years payable in equal monthly installments. The plans also provide
death and disability benefits in the event of the death or total disability
of an employee while employed by
-62-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. DEFINED CONTRIBUTION PLAN AND SUPPLEMENTAL RETIREMENT PLAN: (CONTINUED)
the Company. The Company's policy is to fund the plan through certain life
insurance policies or through the general unrestricted assets of the
Company. Supplemental retirement expense for the Company was approximately
$511,000, $118,000, and $161,000, for the years ended September 30, 1995,
September 30, 1994, and September 30, 1993, respectively.
15. RELATED PARTY TRANSACTIONS:
In exchange for performing ongoing financial and consulting services, the
Company paid the principal voting stockholder approximately $250,000 during
the year ended September 30, 1993 under a management services agreement.
Also under the management services agreement, the principal voting
stockholder received a bonus upon the initial public offering of the
Company of approximately $521,000. Concurrent with the Company's initial
public offering, the management services agreement was terminated.
Also in connection with the initial pubic offering, the Company paid a
principal stockholder and director of the Company management and advisory
fees of $750,000. In addition, the Company paid approximately $101,000
during the year ended September 30, 1993 for ongoing financial and advisory
services to the same principal stockholder. Also in September 1993, the
Company entered into a three-year agreement for consulting services with
the same director and principal stockholder of the Company. The agreement
provides for a base consulting fee of $240,000 plus expenses annually for
the first year and $120,000 annually thereafter, as well as the grant of
options. For years ended September 30, 1995, 1994 and 1993, the Company
expensed $122,000, $247,000 and $39,000, respectively, under this
agreement.
As the Company has previously disclosed in its periodic reports filed with
the Securities and Exchange Commission under the Securities and Exchange
Act of 1934, the facilities and assets utilized by the Company in the
Cuyahoga County, Ohio I/M testing program (the "Ohio Assets") and the
Tennessee I/M testing program (the "Tennessee Assets") were leased to the
Company pursuant to separate Sale and leaseback Agreements with Kane
Partners, L.P. ("Kane Partners"). Richard Gelfond, a director of the
Company, is Vice President of the General Partner of Kane Partners and
holds a 25% limited partnership interest in Kane Partners. Chester C.
Davenport, Chairman and acting Chief Executive Officer of the Company,
holds a 25% limited partnership interest in Kane Partners. In November
1992, Kane Partners acquired the underlying leasehold property and the
related rights and obligations from the original lessors of the Ohio and
Tennessee Assets.
The statute and regulations governing Ohio's new I/M 240 test program
require that the land and buildings be owned by a third party having no
affiliation with the operator of the program. The Ohio program is divided
into four separate zones, three of which were subject to competitive bid
and, when awarded, complied with this requirement.
-63-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS: (CONTINUED)
The fourth zone, Cuyahoga County, was subject to an existing contract held
by Envirotest at the time contracts for the other zones were awarded by the
State (two of which were awarded to the Company). As a condition to entering
into a new 10 year contract with Envirotest to conduct I/M 240 vehicle
inspections in Cuyahoga County, Ohio (and not submitting this zone to a
competitive bid), the State of Ohio required Envirotest to comply with its
new I/M legislation and caused Kane Partners to divest its ownership
interest in the Ohio Assets. Accordingly, the third party developer utilized
approximately $10 million of the net proceeds of the Authority offering
described in Note 16 to acquire ownership of the Ohio Assets that will be
utilized in the new Cuyahoga County, Ohio program to be operated by the
Company. As a result, the land and buildings utilized by the Company under
its three Ohio I/M 240 program contracts will be owned by the developer and
leased to the Company.
In connection with the negotiations related to the Ohio Assets, the Company
agreed to purchase from Kane Partners the Tennessee Assets for $1.8 million
and one Ohio test site that will not be utilized in the new test program
for $0.3 million, for an aggregate purchase price of $2.1 million. Although
Tennessee Assets and Ohio Assets have been subject to separate sale and
leaseback agreements, the assets have served as functional security for a
financing provided to the Company in 1990 and were held by Kane Partners
since 1992 for the same purpose. Kane Partners utilized a portion of the
aggregate proceeds received by it from the sale of the Ohio Assets and
Tennessee Assets to retire certain debt obligations held by Chemical
Venture Partners and Apollo Advisors, L.P., affiliates of which are
directors of the Company and beneficially own approximately 14.2% and 17%,
respectively, of the Company's outstanding Class A Common Stock. These debt
obligations were incurred by Kane Partners in connection with its initial
acquisition of the Ohio Assets and Tennessee Assets.
In connection with the evaluation and approval of the acquisition of the
Ohio Assets and the Tennessee Assets, and as required by the Senior Notes
debt covenants, a committee of disinterested directors of the Company
retained an independent financial advisor which rendered an opinion stating
that (i) the purchase price paid for the Ohio Assets and Tennessee Assets
(collectively, the "Purchase Price") was fair to the public shareholders of
the Company from a financial point of view, and (ii) the Purchase Price was
fair and reasonable to the Company from a financial point of view and was
on financial terms which are at least as favorable as financial terms which
could be obtained by the Company in a comparable transaction made on an
arm's length basis with persons who are not related persons.
As discussed in Note 16, the Company leased land and facilities in Ohio and
Nashville, Tennessee from Kane Partners during 1993, 1994 and part of 1995.
Total lease expenses under these leases were approximately $1,567,000,
$2,084,000 and $2,093,000 for the years ended September 30, 1995, 1994 and
1993.
-64-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CAPITAL LEASE AND LONG-TERM DEBT OBLIGATION:
On June 30, 1995, the Ohio Air Quality Development Authority (Authority)
issued $64,380,000 of bonds with a 8.1% interest rate to finance the costs
of the acquisition, construction, renovation and equipping of the Company's
emissions testing network in Ohio. The bonds are subject to mandatory
sinking fund redemption and are due December 31, 2005. The land and
buildings are owned by a developer (the "Developer") and leased to the
Company pursuant to a capital lease. The equipment is owned by the Company.
The Developer and the Company separately have entered into loan agreements
with the Authority under which the payments will provide for timely payment
of principal and interest on the bonds. The Developer and the Company have
entered into a master lease agreement pursuant to which the developer will
lease the land and buildings to the Company. The Company has the option to
renew for two additional periods of five years each at a nominal rate. The
Company has the option to purchase the land and buildings for $1 at the
expiration or renewal of the lease or termination of the contracts with the
Ohio Environmental Protection Agency. The proceeds are held in trust
pending use of the funds and the unexpended proceeds are reflected on the
Company's balance sheet as restricted cash.
Pursuant to the master lease and loan agreements, all revenues from the
operation of the Ohio emissions testing network will be paid into certain
accounts held by the Trustee pursuant to a cash management services
agreement. The excess of revenues from operations over the amount required
to be paid monthly to the Authority under the loan agreements and to the
Ohio Environmental Protection Agency per the contracts will be available to
the Company. The bonds are collateralized by all Ohio program assets.
The future minimum annual payments under the master lease and Company loan
agreement for fiscal years ending September 30, are as follows:
(IN THOUSANDS)
------------------------------------------------------------
1996 $ 6,675
1997 9,601
1998 9,583
1999 9,582
2000 9,588
Thereafter 51,059
-------
Total minimum payments 96,088
Amount representing interest 31,708
-------
Present value of minimum payments $64,380
-------
-------
-65-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. OPERATING LEASES:
The Company is obligated under noncancelable operating leases for the
building sites in Vancouver, British Columbia. The Vancouver lease runs for
seven years ending August 31, 1999, with monthly payments averaging
approximately $300,000. The Company has the option to renew this lease for
an additional seven year period. As of September 30, 1995, approximate
future minimum lease commitments under noncancelable operating leases are
as follows:
(IN THOUSANDS)
------------------------------------------------------------
1996 $ 5,526
1997 5,054
1998 5,024
1999 4,517
2000 860
Thereafter 1,288
-------
$22,267
-------
-------
Rental expense for the years ended September 30, 1995, 1994 and 1993 was
approximately $6,406,000, $5,944,000 and $5,553,000, respectively, net of
sublease income of approximately $40,000 for 1995 and $206,000 for 1993.
18. COMMITMENTS AND CONTINGENCIES:
The Company is exposed to certain potential claims encountered in the
normal course of business. Although the claims cannot be estimated, in the
opinion of management, the resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
The Company's principal commitments at September 30, 1995 consisted of
construction contracts of approximately $5.5 million, of which $3.5 million
has already been incurred, for the Wisconsin program.
The Company has several performance bonds on its long-term contracts. These
bonds are required by the contacts and vendor agreements in the event the
Company cannot perform and complete the contracts and agreements. In the
opinion of management, the Company will be able to fulfill the requirements
of the long-term contracts and leases.
-66-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of the Company's quarterly results of operations
for the years ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 QUARTERS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC. 31 MAR. 31 JUN. 30 SEP. 30
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total contract revenues $22,745 $24,149 $29,066 $ 28,797
Gross profit 9,929 6,849 8,133 6,749
Net income (loss) (211) (1,837) (2,409) (10,404)
Earnings (loss) per common and
common equivalent share:
Income before extraordinary item $ (0.01) $ (0.12) $ (0.15) $ (0.64)
Net income (loss) $ (0.01) $ (0.12) $ (0.15) $ (0.64)
Earnings (loss) per common share -
assuming full dilution:
Income before extraordinary item $ (0.01) $ (0.12) $ (0.15) $ (0.64)
Net income (loss) $ (0.01) $ (0.12) $ (0.15) $ (0.64)
</TABLE>
<TABLE>
<CAPTION>
1994 QUARTERS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC. 31 MAR. 31 JUN. 30 SEP. 30
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total contract revenues $22,770 $21,674 $25,375 $28,576
Gross profit 10,278 8,698 12,565 12,802
Net income loss) 1,496 347 268 63
Earnings (loss) per common and
common equivalent share:
Income before extraordinary item $ 0.08 $ 0.02 $ 0.02 $ 0.00
Net income (loss) $ 0.08 $ 0.02 $ 0.02 $ 0.00
Earnings (loss) per common share -
assuming full dilution:
Income before extraordinary item $ 0.08 $ 0.02 $ 0.02 $ 0.00
Net income (loss) $ 0.08 $ 0.02 $ 0.02 $ 0.00
</TABLE>
20. EXTRAORDINARY LOSS:
In April 1993 the Company repaid certain notes payable to stockholders and
senior long-term debt using a portion of the proceeds of the Company's
initial public offering. At the time of the repayment of existing debt from
the proceeds of the offerings, unamortized debt issuance costs and
discounts, together with applicable prepayment fees, were written off as an
extraordinary charge of $11.4 million, net of taxes.
-67-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FOREIGN OPERATIONS:
The Company's contract revenues from its subsidiary, which is located in
Vancouver, British Columbia and began operations in September 1992, were
approximately $12,285,000, $13,450,000 and $9,232,000 for the periods ended
September 30, 1995, 1994 and 1993, respectively, and were earned from a
single customer. Identifiable assets of the foreign subsidiary totaled
approximately $5,686,000 and $6,221,000 at September 30, 1995 and 1994,
respectively. The foreign subsidiary had a gross profit (loss) of
approximately $1,875,000, $2,464,000 and ($2,388,000) for the years ended
September 30, 1995, 1994 and 1993, respectively.
22. SUMMARIZED SEPARATE FINANCIAL INFORMATION:
The Company's consolidated subsidiaries, Envirotest Technologies, Inc.
("ETI"), Remote Sensing Technology, Inc. and Envirotest Partners
("Partners") are guarantors of the Senior Notes and Notes. The total
assets, net equity and net income of all the subsidiaries not guaranteeing
the Senior Notes and Notes are less than ten percent of the respective
amounts reported in the consolidated financial statements. As required by
Rule 3-10(a) of Regulation S-X, this footnote sets forth the summarized
financial information of the guarantor subsidiaries as of September 30,
1995 and 1994 and for the years ended September 30, 1995, 1994 and 1993.
In accordance with Staff Accounting Bulletin No. 73, the summarized
financial information reflects the push down of the Company's debt, related
interest expense and allocable debt issue costs associated with the
Company's acquisition of ETI. In addition, as required by Staff Accounting
Bulletin No. 55, the summarized financial information reflects all of the
expenses that the Company incurred on the guarantors' behalf. Except for
interest expense, certain general and administrative expenses and income
taxes, expenses are separately identifiable and therefore, charged directly
to the guarantors. Interest expense is allocated based on the amount of
debt related to the acquisition of ETI; common general and administrative
expenses are allocated based on management's assessment of the actual costs
associated with the guarantors' operations; and income tax expense is
provided in the guarantors' financial data on a separate return basis.
Management believes that the methods used to allocate expenses to the
guarantors are reasonable.
-68-
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SUMMARIZED SEPARATE FINANCIAL INFORMATION: (CONTINUED)
COMBINED SUMMARIZED BALANCE SHEET DATA
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets $ 5,886 $ 8,964
Non-current assets 250,961 123,355
-------- --------
Total assets $256,847 $132,319
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to parent $144,596 $ -
Other current liabilities 10,242 18,635
-------- --------
Total current liabilities 154,838 18,635
Non-current liabilities 80,074 96,243
Stockholders' equity 21,935 17,441
-------- --------
Total liabilities and stockholders' equity $256,847 $132,319
-------- --------
-------- --------
</TABLE>
COMBINED SUMMARIZED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Contract revenues $45,047 $52,317 $51,053
Gross profit 24,379 30,216 30,075
Income before extraordinary item 4,948 10,726 9,954
Net income 4,948 10,726 2,782
</TABLE>
-69-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
70
<PAGE>
EXHIBIT (g)(3)
3
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
-------------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 93,634 $ 53,104
Short-term investments, net 52,466 7,991
Settlement due from Commonwealth of Pennsylvania - 80,000
Contract receivables, net 8,770 10,969
Prepaid and other current assets 6,476 6,432
--------- ---------
Total current assets 161,346 158,496
Restricted cash 19,676 21,108
Property, plant and equipment, net 183,906 192,400
Assets held under capital lease, net 44,608 46,108
Assets held for sale, net 28,671 32,246
Intangible assets, net 13,030 14,927
Deferred debt acquisition costs, net 12,710 13,159
Deferred charges, net 145 1,189
Other assets 1,345 1,151
--------- ---------
Total assets $ 465,437 $ 480,784
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,004 $3,825
Accrued interest 9,184 1,689
Current portion of long-term debt 4,834 4,740
Current portion of capital lease and long-term debt obligation 4,990 3,880
Accrued expenses and other current liabilities 20,296 27,754
--------- ---------
Total current liabilities 41,308 41,888
Senior long-term debt, net 199,328 199,192
Senior subordinated debt 125,000 125,000
Capital lease and long-term debt obligation, net of current portion 54,405 58,155
Other long-term debt, net of current portion 34,325 38,129
Other long-term liabilities 5,701 5,266
--------- ---------
Total liabilities 460,067 467,630
Stockholders' equity:
Common stock 166 166
Additional paid-in capital 60,172 60,172
Cumulative currency adjustment (115) (96)
Unrealized gains on short-term securities 3 -
Accumulated deficit (49,278) (41,510)
Predecessor carry-over basis (5,578) (5,578)
--------- ---------
Total stockholders' equity 5,370 13,154
--------- ---------
Total liabilities and stockholders' equity $ 465,437 $ 480,784
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE>
4
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
------------ ------------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Contract revenues $36,909 $32,556 $101,803 $90,764
Costs of services 23,619 25,140 74,048 75,244
---------- -------- -------- --------
Gross profit 13,290 7,416 27,755 15,520
Selling, general and administrative expenses 4,688 5,172 13,967 15,621
Consolidation expense - - - 1,850
Amortization expense 520 872 1,861 2,756
Gain on Pennsylvania settlement (3,950) - (3,950) (15,307)
---------- -------- -------- --------
Income from operations 12,032 1,372 15,877 10,600
Other expense (income):
Interest expense 10,262 10,182 30,104 28,574
Interest income (2,381) (2,477) (6,571) (6,312)
Other 18 4 112 12
---------- -------- -------- --------
Income (loss) before income taxes 4,133 (6,337) (7,768) (11,674)
Income tax expense - - - 5,490
---------- -------- -------- --------
Net Income (loss) $4,133 ($6,337) ($7,768) ($17,164)
========== ======== ======== ========
Income (Loss) per common and common
equivalent share $0.24 ($0.38) ($0.47) ($1.04)
========== ======== ======== ========
Weighted average common shares and
common equivalent shares 17,241 16,620 16,620 16,530
========== ======== ======== ========
Income (Loss) per common share - assuming
full dilution $0.24 ($0.38) ($0.47) ($1.04)
========== ======== ======== ========
Weighted average common shares and common
equivalent shares 17,347 16,620 16,620 16,530
========== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE>
5
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1997 1996
----------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities $10,836 $19,066
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (52,466) -
Maturity and sales of short-term investments 7,991 1,347
Unrealized gains on short-term investments 3
Payment for purchase of Systems Control, Inc.,
net of cash acquired - (1,056)
Proceeds from sale of property, plant and equipment 8,170 1,696
Purchases of property, plant, equipment and assets
under capital lease (8,291) (42,845)
--------- ---------
Net cash used in investing activities (44,593) (40,858)
Cash flows from financing activities:
Proceeds from sale of Pennsylvania receivable 79,405 -
Proceeds from borrowings of long-term debt - 31,345
Decrease in restricted cash 1,432 5,898
Repayment of long-term debt (2,850) (1,637)
Repayment of obligations under capital lease (3,500) (365)
Capitalization of loan fees (208) (855)
Other 3 148
--------- ---------
Net cash provided by financing activities 74,282 34,534
Effect of exchange rate on cash 5 24
--------- ---------
Net increase in cash and cash equivalents 40,530 12,766
Cash and cash equivalents, beginning of period 53,104 17,079
--------- ---------
Cash and cash equivalents, end of period $93,634 $29,845
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
6
ENVIROTEST SYSTEMS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
The accompanying condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and related footnotes included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1996, filed with the Securities and Exchange
Commission.
Operating results for the interim periods shown in this report are not
necessarily indicative of the results to be expected for the full fiscal year.
2. SHORT TERM INVESTMENTS
Short-term investments primarily consist of corporate commercial paper and
certificates of deposit with original maturities beyond three months and less
than twelve months. These investments are carried at amortized cost that
approximates fair value.
3. DEFERRED CHARGES
The Company incurs significant expenses associated with bringing new
emissions testing programs into operation, including staff recruiting and
training, public information and similar pre-operating costs. These expenses are
deferred and amortized over a twelve month period beginning with the
commencement of the emissions program. At June 30, 1997, the Company had
incurred and deferred approximately $0.1 million, net of accumulated
amortization, of such expenses relating to the Indiana emissions program. The
Company expects that its results of operations during any fiscal period that
includes the commencement of a program will be adversely impacted by this
accelerated amortization.
4. PENNSYLVANIA SETTLEMENT
On December 11, 1996, the Company sold its right to receive the two
remaining installment payments totaling $80 million (the "Receivables Assets")
in principal amount due under a settlement agreement with the Commonwealth of
Pennsylvania (the "Settlement Agreement") for approximately $79,405,000.
The transaction was effected through a sale of the Receivables Assets from
Envirotest Partners ("Partners"), a Pennsylvania general partnership owned by
Envirotest and ETI, to a newly formed wholly owned subsidiary of the Company, ES
Funding Corp. ("Funding"). Funding, in turn, transferred the Receivables Assets
to an affiliate of a Pennsylvania bank.
6
<PAGE>
7
Funding and Partners provided certain representations in connection with the
transaction, including representations as to enforceability of the Settlement
Agreement against the Commonwealth, and agreed to repurchase the Receivables
Assets if Partners fails to comply with its obligations under the Settlement
Agreement.
The Settlement Agreement requires the Company to use its best efforts to
dispose of the assets it acquired to perform vehicle emissions testing services
in Pennsylvania. If the net proceeds received by the Company from the sale of
the assets is less than $55 million, Pennsylvania is obligated to pay the
Company fifty percent of the difference up to $11 million no later than July 31,
1998. The amount of this contingent payment was reduced from $15 million in an
amendment to the Settlement Agreement that permitted the Company to complete the
sale of the receivable assets. Should the net proceeds from the sale of the real
estate and other program related assets exceed $55 million, the Company is
obligated to pay the Commonwealth 75% of the amount by which the net proceeds
exceed $55 million. Based upon the experience with recent sales of these assets
and the sufficiency of reserves, the Company is of the opinion that upon final
disposition of properties no loss will be recognized.
Gain on the Pennsylvania settlement of $3.9 million during the third
fiscal quarter 1997 represents adjustments to provisions made earlier for claims
resulting as a consequence of the Pennsylvania contract cancellation that have
been settled, resolved or are unlikely to present future liability. A gain on
the Pennsylvania settlement of $15.3 million was included in the nine months
ended June 30, 1996.
5. BUSINESS ACQUISITION
In January 1996, the Company purchased from Systems Control, Inc. ("SCI")
the stock of SCI-WA, a Washington company and operator of the State of
Washington centralized emissions testing program, all intellectual property of
SCI and an option to purchase SCI's Indiana subsidiary for $3.2 million. The
Company exercised the option in June, 1996 and purchased the assets of the
Indiana subsidiary. The results of operations of SCI-WA have been included in
consolidated results from the date of acquisition.
6. INCOME TAXES
The deferred tax asset is fully reserved as of June 30, 1997. The amount
of the deferred tax asset considered realizable may change in the near term if
estimates of future taxable income are revised based on financial performance of
the Company and other economic events.
7. LEGAL PROCEEDINGS
The State of Connecticut has made certain claims stating that the Company
owes the State $2.4 million plus accruing amounts for certain cost savings in
the start up of the enhanced testing program in Connecticut. The Company cannot
predict the outcome of this complaint. However, the Company believes that it has
valid defense against these claims.
The Company is a defendant in Grendell, et al. V. Ohio EPA et al., a
taxpayers' class action suit originally filed on October 3, 1996 in Geauga
County Court of Common Pleas, State of Ohio. The case has been remanded to the
Common Pleas Court in Franklin County, Ohio. Plaintiffs seek to enjoin the Ohio
motor vehicle emission inspection program and the Company's Ohio contracts as
invalid and void based on certain Ohio constitutional provisions.
7
<PAGE>
8
The Company believes that it has valid defenses to the claims contained in the
complaint and intends to defend the matter vigorously.
On May 12, 1997, the Company was served with a complaint asserting that
Timothy Dore purports to represent a class of all "front range drivers who have
paid to have their vehicle emissions systems tested by the Company" in the state
of Colorado. The complaint, filed in Denver District Court, states two claims
for relief, breach of contract and negligence, and seeks damages, equal to the
difference in price between the new emissions test and the old tail pipe tests,
for all tests for members of the class undertaken on the front range since
implementation of the Company's testing program. The complaint also seeks
cancellation of the contract for the State of Colorado. The Company believes
that it has valid defenses to the claims contained in the complaint and intends
to defend the matter vigorously. On June 30, 1997 the Company filed a motion to
dismiss the action. And on July 18, 1997 the Plaintiffs filed a motion for
Partial Summary Judgment on the issue of their standing to sue as third party
beneficiaries of the Company's contract for the State of Colorado.
The Company is a party to various other legal proceedings and claims in
the ordinary course of business. The Company does not believe that the outcome
of any pending matters will have a material adverse affect on its consolidated
financial position or results of operations.
See Part II., Item 1 - Legal Proceedings for further discussion.
8
<PAGE>
EXHIBIT (g)(4)
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
June 30, September 30,
1996 1995
----------- -------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,845 $ 17,079
Short-term investments 1,347
Current portion of settlement due
from Commonwealth of Pennsylvania 40,000 -
Contract receivables, net of allowance
for doubtful accounts of $429 9,100 8,208
and $354, respectively
Prepaid and other current assets 8,313 3,580
Deferred income taxes - 1,376
----------- -------------
Total current assets 87,258 31,590
Restricted cash 25,599 31,497
Property, plant and equipment, net
of accumulated depreciation of $36,260
and $24,739, respectively 189,145 173,507
Settlement due from Commonwealth
of Pennsylvania 95,000 -
Assets under capital lease, net 46,356 27,138
Assets held for sale, net 22,549 5,209
Assets subject to settlement - 149,629
Intangible assets, net of accumulated
amortization of $18,116 and $15,522,
respectively 15,609 17,752
Deferred debt acquisition costs, net of
accumulated amortization of $5,100
and $3,378, respectively 12,894 13,412
Deferred charges, net of accumulated
amortization of $6,462 and $3,217,
respectively 1,749 3,178
Deferred income taxes - 4,100
Other assets 754 261
----------- -------------
Total assets $496,913 $457,273
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,078 $ 12,742
Accrued interest 9,231 1,499
Current portion of long-term debt 3,649 -
Current portion of capital lease
and long-term debt obligation 4,220 1,485
Other current liabilities 27,473 14,094
----------- -------------
Total current liabilities 47,651 29,820
Senior long-term debt, net of discount of $853
and $989, respectively 199,147 199,011
Senior subordinated debt 125,000 125,000
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Long-term debt 39,179 -
Capital lease and long-term debt obligation 59,795 62,895
Other long-term liabilities 5,142 2,502
----------- -------------
Total liabilities 475,914 419,228
Commitments and contingencies
Stockholders' equity:
Common stock 166 162
Additional paid-in capital 60,172 60,028
Retained deficit (33,601) (16,446)
Other stockholders' equity (5,738) (5,699)
----------- -------------
Total stockholders' equity 20,999 38,045
----------- -------------
Total liabilities and
stockholders' equity $ 496,913 $ 457,273
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
<PAGE>
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
Three Nine
Months Ended Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Contract revenues $32,556 $29,066 $ 90,764 $75,960
Costs of services 25,140 20,933 75,244 51,049
--------- --------- --------- ---------
Gross profit 7,416 8,133 15,520 24,911
Selling, general and administrative expenses 5,172 7,458 15,621 18,745
Consolidation expense - - 1,850 -
Amortization expense 872 1,032 2,756 2,985
Gain on Pennsylvania settlement - - (15,307) -
--------- --------- --------- ---------
Income (loss) from operations 1,372 (357) 10,600 3,181
Other expense (income):
Interest expense 10,182 4,193 28,574 14,005
Other 4 (10) 12 67
Interest income (2,477) (605) (6,312) (3,866)
Minority interest - 15 - 275
--------- --------- --------- ---------
Income (loss) before income taxes (6,337) (3,950) (11,674) (7,300)
Income tax expense (benefit) (1,541) 5,490 (2,843)
--------- --------- --------- ---------
Net income (loss) $(6,337) $(2,409) (17,164) $(4,457)
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per common and common
equivalent share $ (0.38) $ (0.15) $ (1.04) $ (0.28)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares and
common equivalent shares 16,620 16,134 16,530 16,026
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per common share - assuming
full dilution $ (0.38) $ (0.15) $ (1.04) $ (0.28)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares and common
equivalent shares 16,620 16,134 16,530 16,026
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities $ 19,066 $ (3,189)
--------- ---------
Cash flows from investing activities:
Maturity of short-term investments 1,347 21,799
Payment for purchase of Systems Control, Inc.,
net of cash acquired (1,056) --
Proceeds from sale of property, plant and equipment 1,696 1,221
Purchases of property, plant, equipment and assets
under capital lease (42,845) (177,542)
Purchases of intangible assets -- (250)
--------- ---------
Net cash used in investing activities (40,858) (154,772)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 31,345 --
Proceeds from capital lease and long-term debt
obligations -- 64,380
Proceeds deposited in restricted accounts -- (56,574)
Repayment of long-term debt (1,637) --
Decrease in restricted cash 5,898 --
Repayment of obligations under capital lease (365) (4,751)
Capitalization of loan fees (855) (2,629)
Other 148 50
--------- ---------
Net cash provided by (used in) financing activities 34,534 476
Effect of exchange rate on cash 24 71
--------- ---------
Net increase (decrease) in cash and cash equivalents 12,766 (157,414)
Cash and cash equivalents, beginning of period 17,079 180,215
--------- ---------
Cash and cash equivalents, end of period $ 29,845 $ 22,801
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ENVIROTEST SYSTEMS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The accompanying condensed consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and related footnotes included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1995, filed with the Securities
and Exchange Commission.
Operating results for the interim periods shown in this report are
not necessarily indicative of the results to be expected for the full fiscal
year.
2. DEFERRED CHARGES
The Company incurs significant expenses associated with bringing new
emissions testing programs into operation, including staff recruiting and
training, public information and similar pre-operating costs. These expenses
are deferred and amortized over a twelve month period beginning with the
commencement of the emissions program. At June 30, 1996, the Company had
incurred and deferred approximately $1.7 million, net of accumulated
amortization, of such expenses relating to the Indiana, Ohio and Wisconsin
emissions programs. The Company expects that its results of operations
during any fiscal period that includes the commencement of a program will be
adversely impacted by this accelerated amortization.
3. PENNSYLVANIA SETTLEMENT
The Company, the Commonwealth of Pennsylvania and the Pennsylvania
Department of Transportation entered into a General Release and Settlement
Agreement, dated December 15, 1995 (the "Settlement Agreement"), settling the
claims of the Company under its contract dated November 1993 to implement and
operate the Pennsylvania vehicle emissions testing program which was
suspended by action of the Pennsylvania General Assembly.
The Settlement Agreement requires the Commonwealth to pay the
Company $145 million in four installments with interest at the rate of 6.0%
accruing from December 15, 1995. The first installment of $25,000,000 was
paid on December 29, 1995 and the second installment of $40,000,000 plus
$4,223,000 in accrued interest was paid on July 31, 1996. The last two
installments of $40,000,000, plus interest, are due on July 31, 1997 and
1998. In addition, the Commonwealth is obligated to pay the Company (in July
1998) 50% of the amount by which the net proceeds from the sale of the assets
(as defined by the Settlement Agreement) are less than
6
<PAGE>
$55 million up to a maximum of $15 million plus interest at 6% from December
15, 1995. Should the net proceeds from the sale of the real estate and
other program related assets exceed $55 million, the Company is obligated to
pay the Commonwealth 75% of the amount by which the net proceeds exceed $55
million.
4. LONG-TERM DEBT
On December 29, 1995, the Company's wholly owned subsidiary,
Envirotest Wisconsin, Inc., issued $17,000,000 principal amount of notes (the
"Notes"). The Notes bear interest at the rate of 7.53% per annum with
monthly payments, including interest, beginning at approximately $230,000 and
increasing to approximately $340,000 with maturity on November 30, 2002. The
Notes are collateralized by all assets utilized in the Wisconsin program.
In January 1996, the Company acquired Systems Control, Inc., a
Washington corporation (SCI-WA), the operator of the centralized emissions
testing program in the State of Washington. (See Note 5 below.) At the time
of the acquisition, SCI-WA had debt outstanding under its credit agreement.
As of June 30, 1996, the outstanding balance is $12.1 million and bears
interest at various rates with an effective rate of 8.64% at June 30 and is
collateralized by all real property of the vehicle emissions program in the
State of Washington. This agreement requires monthly payments of $243,450
(adjusted annually for changes in interest rates) with a balloon payment at
maturity on December 31, 1999 of $4.5 million. This credit agreement
requires a cash collateral amount of $0.6 million as of June 30, 1996 and
through maturity and requires certain covenants related to tangible net
worth, capital ratio, cash flow ratio and distributions of SCI-WA be
maintained.
In June 1996, the Company issued $14.3 million principal amount of
notes for the Indiana program. The notes bear interest at the rate of 7.82 %
per annum with quarterly payments, including interest of approximately
$550,000 and mature in 2006. Interest will be paid beginning September 1996
with principal payments beginning June 1997. The notes are collateralized by
all assets utilized in the Indiana program.
5. BUSINESS ACQUISITION
In January 1996, the Company purchased from Systems Control, Inc.
("SCI") the stock of SCI-WA, a Washington company and operator of the State
of Washington centralized emissions testing program, all intellectual
property of SCI and an option to purchase the stock or assets of SCI's
Indiana subsidiary. The option was exercised in June 1996, and the Company
acquired the contract with the State of Indiana to operate its centralized
vehicle emissions testing contract and the related assets. The results of
operations of SCI have been consolidated as of the respective dates of
acquisition.
7
<PAGE>
The purchase cost of $4.7 million (including $1.5 million paid for
the assets of SCI's Indiana subsidiary) has been allocated as follows:
(millions)
Current assets $ 2.5
Fixed assets 17.0
Intellectual property 0.6
Other noncurrent assets 0.4
Current liabilities (2.5)
Long term debt (11.3)
Other noncurrent liabilities (2.0)
---------
Total $ 4.7
---------
---------
6. CONSOLIDATION EXPENSE
The Company recorded a consolidation expense in March 1996 of $1.9
million representing the costs associated with the closure of the Phoenix
corporate headquarters and other restructuring costs. In addition, the
Company recorded an expense of $1.5 million (included with selling, general
and administrative expense) representing the estimated cost of relocating
employees to the new corporate headquarters in Sunnyvale, California.
7. INCOME TAXES
The deferred tax asset of $16.4 million has been fully reserved as
of June 30, 1996. For the three month period ended June 30, 1996, the
Company increased the valuation allowance from $14.2 million to $16.4
million. The amount of the deferred tax asset considered realizable,
however, could change in the near term if estimates of future taxable income
are revised.
8. LEGAL PROCEEDINGS
The State of Connecticut has made certain claims stating that the
Company owes the State $2.4 million plus accruing amounts for certain cost
savings in the start up of the enhanced testing program in Connecticut. The
Company cannot predict the outcome of this complaint. However, the Company
believes that it has sufficient defense against these claims. (See Part II.,
Item 1 - Legal Proceedings for further discussion.)
8
