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[ENVIROTEST SYSTEMS LOGO] ENVIROTEST SYSTEMS CORP.
6903 Rockledge Drive
Bethesda, Maryland 20817
301/530-8110
FAX: 301/530-9538
August 19, 1998
Dear Stockholder:
I am pleased to report that, on August 12, 1998, Envirotest Systems Corp.
(the "Company"), entered into a merger agreement with Stone Rivet, Inc.
("Purchaser"), a Delaware corporation and a wholly owned subsidiary of
Environmental Systems Products, Inc. ("Parent"), a Delaware corporation, that
provides for the acquisition of the Company by Purchaser at a price of $17.25
per share in cash. Under the terms of the proposed transaction, Purchaser is
today commencing a cash tender offer (the "tender offer") for all outstanding
shares of the Company common stock at $17.25 per share. Following the successful
completion of the tender offer, Purchaser will be merged into the Company and
all shares not purchased in the tender offer will be converted into the right to
receive $17.25 per share in cash in the merger. Parent is an indirect wholly
owned subsidiary of Newmall Limited, a private limited company organized under
the laws of the United Kingdom. Newmall Limited is controlled by the Alchemy
Investment Plan, an investment consortium that is advised by Alchemy Partners.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TENDER OFFER AND
DETERMINED THAT THE TERMS OF EACH OF THE TENDER OFFER AND THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ALL THE COMPANY STOCKHOLDERS
ACCEPT THE TENDER OFFER AND TENDER THEIR SHARES TO PURCHASER.
As previously announced in May of this year, the Company has been actively
exploring strategic alternatives aimed at enhancing stockholder value. In
evaluating the range of options open to the Company as a result of this process,
the Board of Directors has determined that the tender offer and the merger
represent the best alternative for the Company and its stockholders. In arriving
at its recommendations, the Board of Directors gave careful consideration to a
number of factors, each of which is described in the attached Schedule 14D-9
that is being filed today with the Securities and Exchange Commission. These
factors included the opinion of Credit Suisse First Boston Corporation,
financial advisor to the Company, that, as of the date of such opinion and
subject to the assumptions made, matters considered and limitations set forth in
its opinion, the cash consideration of $17.25 per share to be received by the
Company stockholders pursuant to the tender offer and the merger is fair from a
financial point of view to such stockholders.
Stockholders should note that the merger agreement includes a condition
requiring the tender of at least 90% of the Company's outstanding shares prior
to the expiration of the Offer. Stockholders should also note that the
likelihood that this condition will be satisfied is increased by the fact that
certain stockholders have agreed with Purchaser to tender shares representing
approximately 50% of the currently outstanding shares and that certain directors
and officers of the Company have indicated their intention to tender shares
representing approximately an additional 7% of the currently outstanding shares.
In the event that this condition is not satisfied, the merger agreement requires
the Company to seek stockholder approval for the merger at a duly held
stockholders' meeting. The affirmative vote of a majority of the currently
outstanding shares entitled to vote would result in approval of the merger.
Certain stockholders of the Company have agreed to vote shares representing
approximately 41% of the voting shares in favor of the merger, and certain
directors and officers of the Company have indicated their intention of voting
shares representing approximately an additional 12% of the voting shares in
favor of the merger.
While a vote in favor of the merger by way of stockholder approval is
virtually assured by the factors set out above, the Board of Directors
recommends that stockholders tender their shares pursuant to the tender offer.
Stockholders are further reminded that they will receive the cash consideration
of $17.25 per share on an earlier date if shares are tendered pursuant to the
tender offer than the date on which such consideration would be received in the
event that the merger is effected by way of stockholder approval.
Enclosed is the Company's Solicitation/Recommendation Statement on Schedule
14D-9 and Purchaser's Offer to Purchase and related materials, including a
Letter of Transmittal for use in tendering shares. We urge you to carefully read
the enclosed materials, including Credit Suisse First Boston Corporation's
fairness opinion which is attached to the Schedule 14D-9.
The management and directors of the Company thank you for the support you
have given the Company.
Sincerely,
/s/ CHESTER D. DAVENPORT
------------------------
Chester D. Davenport
Chairman of the Board
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================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
ENVIROTEST SYSTEMS CORP.
(NAME OF SUBJECT COMPANY)
------------------------
ENVIROTEST SYSTEMS CORP.
(NAME OF PERSON FILING STATEMENT)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASSES OF SECURITIES)
29409W105
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------
C. MICHAEL ALSTON, ESQ.
ENVIROTEST SYSTEMS CORP.
6903 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(301) 530-8110
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF
THE PERSON FILING STATEMENT)
------------------------
With a copy to:
PETER D. LYONS, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
212-848-4000
================================================================================
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is Envirotest Systems Corp., a Delaware
corporation (the "Company"). The address of the principal executive offices of
the Company is 246 Sobrante Way, Sunnyvale, California 94086. The title of the
classes of equity securities to which this Solicitation/Recommendation Statement
on Schedule 14D-9 of the Company (the "Statement") relates is the shares of
Class A Common Stock, par value $.01 per share, of the Company (the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER
This Statement relates to a tender offer by Stone Rivet, Inc., a Delaware
corporation ("Purchaser") and a wholly owned subsidiary of Environmental Systems
Products, Inc., a Delaware corporation ("Parent"), disclosed in a Tender Offer
Statement on Schedule 14D-1 (the "Schedule 14D-1") dated August 19, 1998 to
purchase all Outstanding Shares at a price of $17.25 per Share, net to the
seller in cash, without interest thereon, upon the terms and subject to the
conditions set forth in the Offer to Purchase dated August 19, 1998 (the "Offer
to Purchase") and the related Letter of Transmittal (the "Letter of
Transmittal") (which together constitute the "Offer").
The Offer is being made pursuant to an Agreement and Plan of Merger dated
as of August 12, 1998 (the "Merger Agreement") among Parent, Purchaser and the
Company. The Merger Agreement provides that, among other things, as soon as
practicable after the consummation of the Offer and satisfaction or, if
permissible, waiver of the conditions to the Merger, Purchaser shall be merged
with and into the Company (the "Merger"), the separate existence of Purchaser
shall cease and the Company shall continue as the surviving corporation (the
"Surviving Corporation"). A copy of the Merger Agreement is filed as Exhibit 1
to this Statement and is incorporated herein by reference.
According to the Offer to Purchase, the principal executive offices of
Parent and Purchaser are located at 7 Kripes Road, East Granby, Connecticut
06026.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and address of the Company, which is the person filing this
Statement, are set forth in Item 1 above.
(b) Certain contracts, agreements, arrangements or understandings between
the Company or its affiliates and certain of its executive officers, directors
or affiliates are described in the Company's Information Statement under the
heading "Material Contracts and Agreements with Executive Officers". A copy of
the Information Statement is set forth on Annex I hereto and is incorporated
herein by reference in its entirety. Except as described or incorporated by
reference herein, to the knowledge of the Company, as of the date hereof, there
exists no material contract, agreement, arrangement or understanding and no
actual or potential conflict of interest between the Company or its affiliates
and (i) the Company, its executive officers, directors or affiliates or (ii)
Purchaser or its executive officers, directors or affiliates.
PURPOSE OF THE OFFER; THE MERGER AGREEMENT
Purpose. The purpose of the Offer is to enable Parent and its affiliates,
through Purchaser, to acquire control of, and acquire the entire equity interest
in, the Company. Following the Offer, Purchaser and Parent intend to acquire any
remaining equity interest in the Company not acquired in the Offer by
consummating the Merger.
Merger Agreement. Set forth below is a summary of the material provisions
of the Merger Agreement, a copy of which is filed as Exhibit 1 to this Statement
on Schedule 14D-9. Such Exhibit should be available for inspection and copies
should be obtained, in the manner set forth in Section 7 of the Offer to
Purchase (except that it will not be available at the regional offices of the
SEC). The following summary is qualified in its entirety by reference to the
Merger Agreement.
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THE OFFER. The Merger Agreement provides that, upon the terms and
subject to the conditions thereof, Purchaser will commence the Offer as
promptly as reasonably practicable, but in no event later than five
business days after the initial public announcement of Purchaser's
intention to commence the Offer. The obligation of Purchaser to accept for
payment Shares tendered pursuant to the Offer is subject, among other
things, to the condition (the "Minimum Condition") that there be validly
tendered and not withdrawn prior to the expiration of the Offer (i) that
number of Shares that would represent 90% of all outstanding Shares
determined on a primary basis on the date of purchase (assuming conversion
of all shares of Class B Common Stock, par value $.01 per share ("Class B
Shares"), and shares of Class C Common Stock, par value $.01 per share
("Class C Shares"), into Shares), and (ii) 100% of the Shares that are
issuable upon conversion (and assuming conversion thereof) of all
outstanding Class B Shares and Class C Shares on the date of purchase.
Under the Merger Agreement, the Minimum Condition may not be waived without
the prior approval of the Company (except that the Minimum Condition may be
waived without such prior approval if at least the number of Shares,
assuming conversion of all Class B Shares and Class C Shares into Shares,
that when added to any Shares already owned by Parent shall constitute a
majority of the then outstanding Shares on a primary basis, shall have been
validly tendered and not withdrawn prior to the expiration of the Offer)
and that no change in the Offer may be made which decreases the price per
Share payable in the Offer, reduces the maximum number of Shares to be
purchased in the Offer, imposes conditions to the Offer in addition to
those set forth under Section 13 of the Offer to Purchase or otherwise is
materially adverse to the Company or its stockholders. Certain other
conditions to the Offer are described in Section 13 of the Offer to
Purchase. In the event that, upon the expiration of the Offer (included any
extension thereof), the Minimum Condition is not satisfied or waived, the
Merger Agreement requires that the Company file and that Parent and
Purchaser assist in the filing of a proxy statement for the purpose of
seeking and obtaining stockholder approval of the Merger Agreement and the
Merger.
THE MERGER. The Merger Agreement provides that, upon the terms and
subject to the conditions thereof, and in accordance with the relevant
provisions of the Delaware General Corporation Law ("DGCL"), as soon as
practicable following the satisfaction or waiver, if permissible, of the
conditions described below under "Conditions to the Merger," Purchaser will
be merged with and into the Company with the Company as the surviving
corporation in the Merger (the "Surviving Corporation"). The Merger will
become effective at the time of filing of a certificate of merger, as
required by the DGCL (the "Effective Time"). At the Effective Time, by
virtue of the Merger and without any action on the part of the Purchaser,
the Company or its stockholders, each Share and each Class B Share and
Class C Share issued and outstanding immediately prior to the Effective
Time (other than any Class A, B or C Shares held in the treasury of the
Company, or owned by Purchaser, Parent or any direct or indirect wholly
owned subsidiary of Parent or of the Company and any Class A, B or C Shares
which are held by stockholders who have not voted in favor of the Merger or
consented thereto in writing and who shall have demanded properly in
writing appraisal for such Shares in accordance with the DGCL) shall be
canceled and shall be converted automatically into the right to receive an
amount equal to the Offer Price in cash (the "Merger Consideration") net to
the holder, without any interest thereon.
STOCKHOLDERS MEETING. The Merger Agreement provides that the Company
will, if required by applicable law, call and hold a special meeting of its
stockholders as soon as practicable following the consummation or
termination of the Offer, as applicable, for the purpose of approving the
Merger transaction contemplated thereby (the "Stockholders' Meeting") and
prepare and file with the SEC under the Exchange Act a proxy statement with
respect to the Stockholders' Meeting described above (the "Proxy
Statement"). The Company has agreed in the Merger Agreement to use its
reasonable best efforts to respond to any comments of the SEC or its staff
and to cause the Proxy Statement to be mailed to the Company's stockholders
as promptly as practicable after responding to all such comments to the
satisfaction of the staff, and to keep Parent informed of all its
correspondence with the SEC with respect to the Proxy Statement. Pursuant
to the Merger Agreement, the Company, through its Board of Directors, will
recommend to its stockholders that the Merger Agreement be approved.
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The Merger Agreement provides that, notwithstanding the preceding
paragraph, in the event that the Purchaser shall acquire at least 90% of
the then outstanding Shares, subject to certain conditions, Parent, the
Purchaser and the Company agree, at the request of Purchaser, to take all
necessary and appropriate action to cause the Merger to become effective in
accordance with Section 253 of the DGCL, as soon as reasonably practicable
after such acquisition, without a meeting of the Company's stockholders, in
accordance with the DGCL.
CONDITIONS TO THE MERGER. Under the Merger Agreement, the respective
obligations of each party to effect the Merger are subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) the Merger Agreement and the transactions contemplated thereby shall
have been approved and adopted by the affirmative vote of the stockholders
of the Company to the extent required by the DGCL; (b) no United States or
Canadian federal, state or provincial governmental authority or other
agency or commission or United States or Canadian federal, state or
provincial court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any law, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is then in effect and has the effect of prohibiting
consummation of the Merger; and (c) either (i) Purchaser or its permitted
assignee shall have purchased all Shares validly tendered and not withdrawn
pursuant to the Offer, provided, however, that this condition is not
applicable to the obligations of Parent or Purchaser if, in breach of the
Merger Agreement or the terms of the Offer, Purchaser fails to purchase any
Shares validly tendered and not withdrawn pursuant to the Offer or (ii) the
conditions to the Offer (other than Minimum Condition) shall have been
satisfied.
ACQUISITION PROPOSALS. The Merger Agreement provides that neither the
Company nor any of its subsidiaries nor any of their officers, directors or
agents shall, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with any person relating to an Acquisition Proposal (as defined
below); provided, however, that nothing contained in the Merger Agreement
shall prevent the Company or the Board of Directors of the Company (the
"Board") from engaging in any negotiations or discussions with any person
who has made an unsolicited bona fide written Acquisition Proposal or
recommending such an Acquisition Proposal to the stockholders of the
Company (or withdrawing or modifying, in any manner adverse to Parent and
Purchaser, its approval or recommendation of the Offer, the Merger
Agreement or the Merger), if and only to the extent that (i) the Board
determines in good faith, after consultation with outside legal counsel
that such action is necessary in order for its directors to comply with
their fiduciary duties under applicable law and (ii) the Board determines
in good faith (after consultation with its financial advisor) that such
Acquisition Proposal, if accepted, is reasonably likely to be consummated,
taking into account all legal, financial and regulatory aspects of the
proposal and the financial capacity and any other relevant characteristics
of the Person making the proposal and would, if consummated, result in a
transaction more favorable to the Company's stockholders from a financial
point of view than the transactions contemplated by the Merger Agreement.
The Company agreed that it would immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. The
Merger Agreement defines "Acquisition Proposal" as any proposal or offer
from any person relating to any direct or indirect acquisition or purchase
of all or a substantial part of the assets of the Company, or more than 15%
of the voting securities of the Company or any tender offer or exchange
offer that if consummated would result in any person beneficially owning
15% or more of the voting securities of the Company; or any merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company other than the
transactions contemplated by the Merger Agreement.
The Merger Agreement provides that the Company must notify Parent and
Purchaser immediately if any inquiries, proposals or offers are received
by, any such information is requested from, or any such discussion or
negotiations are sought to be initiated or continued with any of its
officers, directors or agents, indicating, in connection with such notice,
the name of such person and the material terms and conditions of any
proposals or offers and thereafter shall keep Parent and Purchaser
informed, on a
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current basis, on the status and material terms of any such proposals or
offers and the status of any such negotiations or discussions.
COSTS AND EXPENSES. The Merger Agreement provides that, except as
provided below, all fees and expenses incurred in connection with the
Offer, the Merger, the Merger Agreement and the transactions contemplated
by the Merger Agreement will be paid by the party incurring such costs or
expenses, except that the expenses incurred in connection with printing and
mailing the tender offer documents and the Proxy Statement, as well as any
filing fees relating thereto, will be shared equally by Parent and the
Company. The Merger Agreement also provides that the Company has estimated
that it will incur approximately $8,500,000 of costs and expenses in
connection with the Offer and the Merger (including fees and expenses
payable to attorneys and accountants, investment banks and financial
advisors in connection therewith) and has agreed that it shall not incur
costs and expenses in excess of such amount without obtaining the prior
approval of Parent. The Merger Agreement further provides that in the event
that (i) the Merger Agreement is terminated prior to the purchase of Shares
pursuant to the Offer because the Board shall have withdrawn or modified in
a manner adverse to Purchaser or Parent its approval or recommendation of
the Offer, the Merger Agreement, the Merger or any other transaction
contemplated by the Merger Agreement in order to approve or recommend any
other Acquisition Proposal or shall have resolved to do any of the
foregoing and (ii) at the time of such termination a third party shall have
made an Acquisition Proposal and such Acquisition Proposal shall have not
been rejected by the Company and withdrawn by such third party, then the
Company shall pay Parent promptly, in cash, a termination fee of
$12,500,000.
CONDUCT OF BUSINESS PENDING THE MERGER. The Merger Agreement provides
that, between the date of the Merger Agreement and Effective Time, the
Company will use its reasonable best efforts to preserve substantially
intact the business organization of the Company and its subsidiaries and to
preserve the current relationships of the Company and its subsidiaries with
customers, suppliers, regulators, creditors, lessors, employees, agents or
other persons with which the Company or any of its subsidiaries has
significant business relations. The Merger Agreement further provides that,
except as contemplated therein, neither the Company nor any subsidiary of
the Company shall, between the date of the Merger Agreement and the
Effective Time, directly or indirectly do, or propose to do, any of the
following, without the prior written consent of Parent: (a) amend or
otherwise change its certificate of incorporation or by-laws or equivalent
organizational documents; (b) issue, sell, pledge, dispose of, grant,
encumber or authorize the issuance, sale, pledge, disposition, grant or
encumbrance of (i) any shares of capital stock of any class of the Company
or any subsidiary, or any options, warrants, convertible securities or
other rights of any kind to acquire any shares of such capital stock, or
any other ownership interest (including, without limitation, any phantom
interest), of the Company or any subsidiary (except for the issuance of
Shares issuable pursuant to stock options outstanding on the date of the
Merger Agreement) or (ii) any assets of the Company or any subsidiary for
consideration in excess of $1,000,000 in the aggregate except in the
ordinary course of business consistent with past practice or in connection
with the divestiture of certain specified properties; (c) declare, set
aside, make or pay any dividend or other distribution, payable in cash,
stock, property or otherwise, with respect to any of its capital stock; (d)
reclassify, combine, split, subdivide or redeem, purchase or otherwise
acquire, directly or indirectly, any of its capital stock; (e) (i) acquire
(including, without limitation, by merger, consolidation or acquisition of
stock or assets) any corporation, partnership, other business organization
or any division thereof; (ii) except for borrowings under existing credit
facilities not to exceed $100,000 in the aggregate and excepting
transactions between the Company and any Subsidiary, incur any indebtedness
for borrowed money or issue any debt securities or assume, guarantee or
endorse, or otherwise as an accommodation become responsible for, the
obligations of any person; except for transactions between the Company and
any subsidiary, make any loans or advances for an amount in excess of
$250,000 in the aggregate; (iv) except for certain specified commitments
and funding obligations, authorize capital expenditures in excess of
$250,000; (v) except for certain specified commitments and funding
obligations, acquire any asset for consideration in excess of $250,000; or
(vi) enter into or amend any contract, agreement, commitment or arrangement
with respect to any matter set forth therein; (f) other than as set forth
in the Merger Agreement, increase the compensation payable or to become
payable to its officers or employees, except for increases in
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accordance with past practices in salaries or wages of employees of the
Company or any subsidiary who are not officers of the Company, or, other
than in accordance with existing policies and arrangements, grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or other employee of the Company or
any subsidiary, or establish, adopt, enter into or amend any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of than as required by generally accepted
accounting principles, make any material change to its accounting policies
or procedures; (h) settle or compromise any materials claims or litigation
or, except in the ordinary and usual course of business, modify, amend or
terminate any of its material contracts or waive, release or assign any
material rights or claims; or (i) willfully take any action or omit to take
action that would cause any representation or warranty of the Company under
the Merger Agreement to become untrue in any material respect.
TERMINATION OF MERGER AGREEMENT. The Merger Agreement provides that
it may be terminated at any time prior to the Effective Time, whether
before or after approval by the stockholders of the Company:
(a) by mutual written consent duly authorized by the boards of
directors of Parent, Purchaser and the Company;
(b) by either Parent, Purchaser or the Company if (i) the Effective
Time shall not have occurred on or before December 31, 1998; provided,
however, that such right to terminate the Merger Agreement will not be
available to any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of, or resulted in, the failure of
the Effective Time to occur on or before such date; or (ii) any United
States or Canadian federal, state or provincial governmental authority
shall have issued an order, decree, ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Offer or Merger or
making the acquisition of Shares by Parent or Purchaser, or any
Affiliate thereof, illegal, and such law, rule, regulation and such
order, decree, ruling or other action shall remain in effect or have
become final and nonappealable;
(c) by Parent if (i) due to an occurrence or circumstance that
would result in a failure to satisfy any condition (other than the
Minimum Condition and other than the condition relating to the
occurrence of events described in clause (g) of Annex A to the Merger
Agreement which relate, among other things, to a material adverse effect
in financial markets) to the Offer, Purchaser shall have (A) terminated
the Offer without having accepted any Shares for payment thereunder or
(B) failed to pay for Shares pursuant to the Offer within 75 calendar
days following the commencement of the Offer, unless such failure to pay
for Shares shall have been caused by or resulted from the failure of
Parent or Purchaser to perform in any material respect any material
covenant or agreement of either of them contained in the Merger
Agreement or the material breach by Parent or the Purchaser of any
material representation or warranty of either of them contained in the
Merger Agreement; or (ii) prior to the purchase of Shares pursuant to
the Offer, the Board of Directors of the Company or any committee
thereof shall have withdrawn or modified in a manner adverse to the
Purchaser or Parent its approval or recommendation of the Offer, the
Merger Agreement or any other transaction contemplated by Merger
Agreement in order to approve or recommend any Acquisition Proposal or
shall have resolved to do any of the foregoing;
(d) by the Company, upon approval of the Board, if (i) Purchaser
shall have (A) failed to commence the Offer within five business days
after the initial public announcement of Purchaser's intent to commence
the Offer (B) terminated the Offer without having accepted any Shares
for payment thereunder or (C) failed to pay for Shares pursuant to the
Offer within 75 calendar days following the commencement of the Offer,
unless such failure to pay for Shares shall have been caused by or
resulted from the failure of the Company to perform in any material
respect any material covenant or agreement of it contained in the Merger
Agreement or the material breach by the Company of any representation or
warranty of it contained in the Merger Agreement; or (ii) prior to the
purchase of Shares pursuant to the Offer, the Board shall have withdrawn
or
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modified in a manner adverse to Purchaser or Parent its approval or
recommendation of the Offer, the Merger Agreement or the Merger or any
other transaction contemplated by the Merger Agreement in order to
approve or recommend any other Acquisition Proposal, or shall have
resolved to do any of the foregoing; or
(e) if the vote of the stockholders of the Company is required by
applicable law, by either Parent, Purchaser or the Company if the Merger
Agreement and the Merger shall not have been approved by the required
vote of the Company's stockholders at the Stockholders' Meeting or any
adjournment thereof.
BOARD OF DIRECTORS. The Merger Agreement provides that, upon
Purchaser's acceptance for payment and payment for Shares pursuant to the
Offer, the Purchaser will be entitled to designate a number of directors
(rounded up to the nearest whole number) on the Company's Board of
Directors that is equal to the product of the total number of directors on
the Company's Board multiplied by the percentage that the aggregate number
of Shares beneficially owned by Purchaser and its affiliates bears to the
number of Shares outstanding. The Company will promptly, at the request of
Parent, either increase the size of the Company's Board of Directors and/or
obtain the resignations of such number of its current directors as is
necessary to enable the Purchaser's designees to be elected to the
Company's Board of Directors as provided above.
STOCK OPTIONS. The Merger Agreement also provides that each option to
purchase Shares (an "Option") outstanding at the time of the purchase of
Shares pursuant to the Offer or, if the Offer is terminated, at the
Effective Time, whether or not exercisable or vested, shall be canceled by
the Company immediately following (a) the purchase of Shares pursuant to
the Offer or (b) if the Offer is terminated, at the Effective Time, and
each holder of a canceled Option shall be entitled to receive immediately
thereafter from the Company in consideration for the cancellation of such
Option an amount in cash equal to the product of (i) the number of shares
of Company common stock previously subject to such Option, and (ii) the
excess, if any, of the Offer Price over the exercise price per Share
previously subject to such Option.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various
customary representations and warranties of the parties thereto, including,
without limitation, representations by the Company as to the organization
and qualification, capitalization, authority to enter into the transactions
contemplated by the Merger Agreement, no conflicts, required filings and
consents, compliance with law, SEC filings, financial statements, absence
of certain changes or events concerning the Company's business, absence of
litigation, employee benefit plans, labor matters, offer documents, taxes,
brokers, real property and leases, trademarks, patents, copyrights and
intellectual property, environmental matters, state takeover statutes,
insurance and agents. The Merger Agreement also contains customary
representations and warranties of Purchaser and Parent as to corporate
organization, authority relative to the Merger Agreement, no conflict,
required filings and consents, financing, offer documents, brokers,
financial statements and absence of certain changes or events concerning
the Parent's business. The representations and warranties in the Merger
Agreement shall terminate at the Effective Time or upon the termination of
the Merger Agreement pursuant to the terms thereof.
Stockholder Agreement. Chester C. Davenport, Rockspring Management, Inc.,
The Chester Corporation, Kane Partners, L.P., Richard L. Gelfond, TSG Ventures,
L.P., Richard L. Gelfond 1998 GRAT and Cheviot Capital Advisors Inc.
(collectively, the "Insider Selling Stockholders") are each parties (solely in
their capacities as stockholders) to a Stockholders' Agreement dated August 12,
1998 with the Purchaser and Parent (the "Insider Stockholders' Agreement"). In
addition, Chemical Equity Associates ("Chemical") has also entered into a
Stockholder Agreement dated August 12, 1998 with the Purchaser and Parent (the
"Chemical Agreement"), the terms of which are substantially similar to the terms
of the Insider Stockholders' Agreement. The Insider Stockholders' Agreement and
the Chemical Agreement are collectively referred to herein as the "Stockholder
Agreements" and the Insider Selling Stockholders and Chemical are collectively
referred to herein as the "Selling Stockholders." The Stockholder Agreements
provide that each of the Selling Stockholders will tender their Shares into the
Offer so long as the per Share amount is not less than $17.25 in
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cash (net to the seller). Additionally, subject to certain exceptions, each
Selling Stockholder has agreed to sell, and the Purchaser has agreed to
purchase, in each case pursuant to, and in accordance with the terms of the
Offer, such Selling Stockholder's Shares at a price per Share equal to $17.25,
or such higher price per share as may be offered by the Purchaser in the Offer,
provided that such obligations to purchase and sell are both subject to (i)
Purchaser having accepted Shares for payment under the Offer, and (ii) the
conditions of the Offer having been satisfied or waived in accordance with the
terms of the Merger Agreement. In addition, certain Selling Stockholders have
agreed to convert approximately 49% of the outstanding Class B Shares and 100%
of the outstanding Class C Shares into Shares prior to the expiration of the
Offer and to tender such Shares into the Offer under the conditions described
above.
The Stockholder Agreements also provide that at any stockholders' meeting
called with respect to any of the following, and at every adjournment thereof,
each Selling Stockholder, severally and not jointly, agrees that it shall vote,
with respect to, as appropriate, all of such Selling Stockholder's Shares as to
which it has power to vote in any such vote or consent: (a) in favor of the
Merger, the adoption of and execution and delivery of the Merger Agreement and
the approval of the terms thereof and each of the other transactions
contemplated by the Merger Agreement and (b) against the following actions
(other than the Merger and the transactions contemplated by the Merger
Agreement); (i) any extraordinary corporate transaction, including, but not
limited to, a merger, consolidation or other business combination involving the
Company or any of its subsidiaries; (ii) a sale, lease or transfer of a material
amount of assets of the Company or any of its subsidiaries or a reorganization,
recapitalization, dissolution or liquidation of the Company or any of its
subsidiaries; (iii) (A) any change in the majority of the Board of Directors of
the Company except as contemplated by the Merger Agreement; (B) any material
change in the present capitalization of the Company or any amendment of the
Company's Certificate of Incorporation; (C) any other material change in the
Company's corporate structure or business; or (D) any other action, which, in
the case of each of the matters referred to in clauses (A), (B), (C) or (D)
above, is intended, or could reasonably be expected, to impede, interfere with,
delay, postpone, discourage or materially adversely affect the consummation of
the Merger or the transactions contemplated by the Merger Agreement or the
Stockholders Agreement. Pursuant to the terms of the Stockholder Agreements,
each Selling Stockholder grants to, and appoints officers of the Purchaser, such
Selling Stockholder's proxy and attorney-in-fact to vote such Selling
Stockholder's Shares.
Each of the Selling Stockholders has also agreed not to transfer or agree
to transfer their Shares, directly or indirectly solicit or respond to any
inquiries or the making of any proposal by any person or entity (other than
Purchaser, Parent or any of their affiliates) with respect to the Company that
constitutes or could reasonably be expected to lead to an Acquisition Proposal,
grant a proxy (other than to Purchaser and its officers) for their Shares or
enter in a voting agreement respecting them, or take any other action that would
in any way restrict, limit or interfere with the performance of their
obligations under the Stockholder Agreement or the transactions contemplated
thereby.
Pursuant to the terms of the Insider Stockholders' Agreement, in the event
that Purchaser purchases an Insider Selling Stockholder's Shares and, subsequent
to such purchase, such Insider Selling Stockholder continues to hold any shares
of Common Stock of the Company (the "Remaining Shares"), such Insider Selling
Stockholder agrees that for a period of three years from the date of the Insider
Stockholders' Agreement that, (a) neither such Insider Selling Stockholder nor
any of such Insider Selling Stockholder's affiliates or associates (as such
terms are defined in Rule 12b-2 under the Exchange Act) will, and neither such
Insider Selling Stockholder nor such affiliates or associates will assist or
encourage others to, directly or indirectly, (i) acquire or offer to acquire,
seek, propose or agree to acquire, by means of a purchase or otherwise,
ownership (including but not limited to beneficial ownership (as defined in Rule
13d-3 under the Exchange Act)) of (A) any securities (voting or otherwise) or
direct or indirect rights or options to acquire any securities of the Company or
any subsidiary thereof, or of any successor to or person in control of the
Company or (B) any of the assets or business of the Company, (ii) make, or in
any way participate in, any "solicitation" of "proxies" (as such terms are used
in the proxy rules promulgated under the Exchange Act, including any exempt
solicitation pursuant to Rule 14a-2(b)(1) or (2) thereof) to vote, or seek to
advise or influence any person or entity with respect to the voting of, any
voting securities of the Company or seek to nominate or to elect any directors
of the Company or to influence the management of the Company,
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<PAGE> 12
(iii) enter into any discussions, negotiations, agreements, arrangements or
understandings with any third party with respect to any of the foregoing or
form, join or in any way participate in a "group" (as defined in Section
13(d)(3) of the 1934 Exchange Act) in connection with any of the foregoing, or
(iv) request the Company to amend or waive any of the foregoing provisions
(including this clause (iv)), and (b) such Insider Selling Stockholder will not
sell, transfer or assign or seek, propose or agree to sell, transfer or assign
to any person or entity (including any permitted transferee under any governing
documents of the Company or any contract, agreement or arrangement to which such
Insider Selling Stockholder is or may become a party) other than Purchaser or
any of its affiliates, ownership (including but not limited to beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act)) of any Remaining
Shares.
The Stockholder Agreements terminate upon the earlier of (i) the Merger
Agreement being terminated by the Company, Parent or the Purchaser, in
accordance with its terms or (ii) the date that Purchaser or Parent shall have
purchased and paid for the Shares of each Selling Stockholders as described
above. The foregoing summary of the Stockholder Agreements is qualified in its
entirety by the text of the Insider Stockholders' Agreement and the Chemical
Agreement, copies of which are filed as Exhibits 99(c)(2) and 99(c)(3),
respectively to the Schedule 14D-1 and is incorporated herein by reference.
Non-Compete Agreement. In connection with the execution and delivery of
the Merger Agreement, Parent and Chester C. Davenport, the Chairman of the Board
of the Company, entered into a Non-Compete Agreement, dated as of August 12,
1998. Pursuant to the terms of his employment agreement with the Company, Mr.
Davenport is subject to certain non-competition obligations for up to two years
after his termination of employment. However, such obligations do not extend to
the manufacture, sale or leasing of emissions testing equipment. Mr. Davenport
has decided to exercise his unilateral right to terminate his employment with
the Company upon consummation of the Merger. The Non-Compete Agreement provides
for the extension and expansion of Mr. Davenport's existing non-compete
obligations in consideration for the payment of $2,000,000.
Pursuant to the Non-Compete Agreement, subject to certain exceptions, Mr.
Davenport agreed for a period of five years following consummation of the
Merger, not to (i) own, manage, operate, control, participate in, perform
services for, or otherwise engage in, a business in competition with the
business of vehicle emissions testing, the manufacture of equipment for such
testing, or the sale or leasing of such equipment anywhere within the United
States; (ii) directly or indirectly, induce or attempt to persuade any customers
or prospective customers of the Company to curtail, cancel or otherwise
terminate their business with the Company; (iii) employ, offer to employ or
permit to post for any position of employment and employee of the Company; or
(iv) otherwise interfere with the employment by the Company of its affiliates
of, any individual who becomes or would otherwise become an employee of the
Company. In consideration for such extended non-compete obligations, pursuant to
the Non-Compete Agreement, Parent agreed to compensate Mr. Davenport as follows:
(i) $1,000,000 upon the earlier to occur of (a) the acceptance of Shares for
payment pursuant to the Offer and (b) consummation of the Merger and the closing
of the related transactions; and (ii) $333,333.33 payable over a period of three
years, payable in equal monthly installments of $27,777.78 on the first day of
each month, commencing the first month following consummation of the Merger. The
foregoing summary of the Non-Compete Agreement is qualified in its entirety by
the text of the Non-Compete Agreement, a copy of which is filed as Exhibit
99(c)(5) to the Schedule 14D-1 and is incorporated herein be reference.
Confidentiality Agreement. On May 8, 1998, Parent entered into a
Confidentiality Agreement with the Company, pursuant to which Parent agreed to
treat all information supplied by the Company or its representatives as
confidential and to use such information solely in connection with the
evaluation of a possible transaction with the Company. In the event that the
transactions contemplated by the Merger Agreement are not consummated, Purchaser
and Parent will (i) upon the Company's request, return to the Company all
information furnished by the Company or its representatives, and (ii) without
the prior approval of the Board, for a period of two years from the date of the
Confidentiality Agreement, refrain from (a) acquiring or making any proposal to
acquire any securities or property of the Company, (b) propose to enter into any
merger or business combination involving the Company or purchase a material
portion of the assets of the Company, (c) make or participate in any
solicitation of proxies to vote, or seek to advise or
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<PAGE> 13
influence any person with respect to the voting of any securities of the
Company, (d) form, join or participate in a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act), with respect to any voting securities of
the Company, (e) otherwise act or seek to control or influence the management or
policies of the Company, (f) disclose any intention, plan or arrangement
inconsistent with the foregoing, or (g) take any action which might require the
Company to make a public announcement regarding the possibility of a business
combination or merger.
Appraisal Rights. Holders of Shares do not have appraisal rights as a
result of the Offer. However, if the Merger is consummated, holders of Shares
will have certain rights pursuant to the provisions of Sections 262 of the DGCL
to dissent and demand appraisal of and to receive payment in cash of the fair
market value of, their Shares. If the statutory procedures are complied with,
such rights could lead to a judicial determination of the fair value required to
be paid in cash to such dissenting holders for their Shares. Any such judicial
determination of the fair value of Shares could be based upon factors other
than, or in addition to, the price per Share to be paid in the Merger or the
market value of the Shares, including asset values and the investment value of
the Shares. The value so determined could be more or less than the Offer Price.
If any holder of Shares who demands appraisal under Section 262 of the DGCL
fails to perfect, or effectively withdraws or loses his right to appraisal, as
provided in the DGCL, the Shares of such holder will be converted into the
Merger Consideration in accordance with the terms of the Merger Agreement. A
stockholder may withdraw his demand for appraisal by delivery to the Purchaser
of a written withdrawal of his demand for appraisal and acceptance of the
Merger.
The foregoing discussion is not a complete statement of law pertaining to
appraisal rights under the DGCL and is qualified in its entirety by reference to
the full text of Section 262 of the DGCL. FAILURE TO FOLLOW THE STEPS REQUIRED
BY SECTION 262 OF THE DGCL FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE
LOSS OF SUCH RIGHTS.
Going Private Transactions. The SEC has adopted Rule 13e-3 under the
Exchange Act which is applicable to certain "going private" transactions and
which may under certain circumstances be applicable to the Merger. However, Rule
13e-3 would be inapplicable if (a) the Shares are deregistered under the
Exchange Act prior to the Merger or (b) the Merger is consummated within one
year after the purchase of the Shares pursuant to the Offer and the Merger
provided for stockholders to receive cash for their Shares in an amount at least
equal to the Offer Price. If applicable, Rule 13e-3 requires, among other
things, that certain financial information concerning the fairness of the
proposed transaction and the consideration offered to minority stockholders in
such transaction to be filed with the SEC and disclosed to stockholders prior to
the consummation of the Merger.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) RECOMMENDATION OF THE BOARD OF DIRECTORS
At a special meeting held on August 12, 1998, the Board unanimously
approved the Merger Agreement, the Offer and the Merger (as these terms are
defined herein) and determined that the Offer and the Merger are fair to and in
the best interests of the stockholders of the Company.
THE BOARD UNANIMOUSLY RECOMMENDS ACCEPTANCE OF THE OFFER AND APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE MERGER BY THE STOCKHOLDERS OF THE
COMPANY.
Copies of a letter to the Company's stockholders and a joint press release
communicating such approval and recommendation are filed as Exhibits 2 and 3,
respectively, to this Statement and are incorporated herein by reference.
(b) BACKGROUND TO THE MERGER AND THE OFFER; REASONS FOR THE RECOMMENDATION
Background to the Merger. In the normal process of formulating the
Company's business and financial plans, members of the Company's senior
management and the Board regularly review the Company's long-term prospects in
light of anticipated general economic and business conditions and management's
forecasts
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for the business of the Company. In recent years, senior management and the
Board have considered a number of alternatives designed to maximize stockholder
value. These alternatives have included repurchases of Shares in the open market
or through a tender offer, a potential sale, merger or recapitalization of the
Company, as well as the possibility of strategic acquisitions of new businesses.
From time to time, at its regular meetings, the Board has discussed some of
these alternatives. On September 22, 1997, the Company purchased 4,388,091
shares of its common stock at a price of $4.50 per share pursuant to a tender
offer completed September 17, 1997 (the "Share Repurchase").
In the process of considering the alternatives referred to above, on
October 13, 1997, the Board established a Capital Market Strategy Committee (the
"Strategy Committee"), consisting of Chester Davenport, Richard Gelfond and
Cleveland Christophe, to advise the Board on matters relating to the enhancement
of stockholder value.
On February 11, 1998, Mr. Davenport met with Mark Thomas, formerly Senior
Vice President and Director of Development of ITT Corporation, to discuss the
possibility of employing Mr. Thomas to assist the Company in exploring
strategies to improve the business potential of the Company and, in turn, the
Company's value to stockholders. Shortly thereafter, Mr. Davenport and Mr.
Thomas met with several potential financial advisors in connection with such
strategies. On March 1, 1998, the Company hired Mr. Thomas as Chief Development
Officer and Executive Vice President. On March 12, 1998, the Company retained
Credit Suisse First Boston Corporation (the "Financial Advisor"), as its
financial advisor, to assist the Company in exploring its alternatives.
At a special meeting of the Board held on April 21, 1998, Mr. Thomas,
assisted by Raj Modi, the Chief Financial Officer, reported on the status of the
activities of the Company and the Financial Advisor in connection with a
possible transaction. At the meeting, Shearman & Sterling, the Company's legal
advisor, reviewed the responsibilities of the members of the Board and the
relevant legal principles applicable to actions taken by the Board with respect
to the exploration of strategic alternatives.
Beginning in late April, 1998, the Financial Advisor began contacting 120
potential acquirors of the Company. Based upon initial expressions of interest,
the Financial Advisor entered into confidentiality agreements and distributed
Confidential Offering Memoranda to 65 potential acquirors.
On May 7, 1998, the Company issued a press release stating that it was
exploring all strategic alternatives available to the Company and that it had
retained the Financial Advisor in connection with that effort. At the annual
meeting of the stockholders on May 12, 1998 (the "Stockholder Meeting"), Mr.
Davenport discussed the Company's exploration of strategic alternatives to
enhance stockholder value and confirmed that such alternatives could include a
possible sale or merger of the Company. At the annual meeting of the Board held
immediately following the Stockholder Meeting, the Board discussed the status of
the exploration of strategic alternatives.
Beginning on May 15, 1998, potential acquirors were invited to submit
preliminary indications of interest by May 28, 1998. A total of 14 preliminary
indications of interest were received on May 28 and May 29, 1998. These
preliminary indications were reviewed at a meeting of the Strategy Committee
held on May 29, 1998. From May 30 to June 4, 1998, 2 additional preliminary
indications of interest were received. The Strategy Committee, with the
assistance of the Financial Advisor, subsequently determined that 12 of such
potential buyers could proceed with a further in-depth review of the Company
with a view toward making a definitive acquisition proposal.
On June 30, 1998, the Company received a written proposal from another
party to acquire the Company at a higher price than the offer price.
Representatives of the Company and the potential purchaser began meetings to
discuss the proposal. The Company also received a written proposal from Alchemy
Partners ("Alchemy") as a majority shareholder of Parent. Alchemy indicated that
Parent and it were willing to make a cash tender offer to acquire all of the
outstanding shares of the Company's common stock for $17 per share. Alchemy's
proposal was subject to due diligence and was accompanied by a letter from
Bankers Trust ("BT") indicating that BT was highly confident that it could
arrange the financing for a portion of the funds required by Parent to acquire
shares of Company common stock. Representatives of the Financial Advisor
communi-
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cated to Alchemy the Company's concerns as to the adequacy of Alchemy's price
and the terms of its due diligence and financing conditions and the Company
began negotiations with the other party.
On July 9, 1998, the Company received another letter from Alchemy, together
with a marked up Agreement and Plan of Merger and a set of draft commitment
letters from a separate financing team at Credit Suisse First Boston ("CSFB"),
outlining the terms by which CSFB would finance a portion of the funds required
by Parent to acquire shares of Company Common Stock. Alchemy reiterated in its
letter that its proposed price was for $17 per share and was subject to due
diligence. In addition, during telephone conversations, representatives of
Parent indicated that Parent would need an enhanced non-competition agreement
with Mr. Davenport in order to proceed.
On July 7, 1998, a representative of the other party indicated that it
would require another week to perform additional due diligence on the Company
prior to entering into a definitive agreement. On July 13, 1998, the other party
indicated that it was no longer interested in pursuing an acquisition of the
Company at the previously indicated price, but would be interested in pursuing
an acquisition of the Company at a price less than the $17 per share price
offered by Alchemy on behalf of Parent.
In light of developments in the sales process, senior management of the
Company and the Strategy Committee began on July 15, 1998 to review other
strategic alternatives available to the Company, including a potential
recapitalization. Senior management began discussions concerning such a
potential recapitalization with representatives of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), who had been the Company's financial advisor in
connection with the Share Repurchase. At the same time, representatives of the
Financial Advisor and the Company continued to explore a possible transaction
with Alchemy and Parent. Representatives of Parent indicated that it was not
prepared to offer more than $17 per share. Representatives of the Financial
Advisor and the Company had discussions with certain other parties who
previously had expressed some interest in acquiring the Company about the
possibility of such parties acting as an equity partner of Parent.
On July 20, 1998, the Company publicly announced that it and WorldCom had
entered into a point of sale marketing agreement whereby the Company will
receive a commission on revenues that WorldCom generates from each eligible
Company-originated customer. The Company also confirmed publicly on such date
that, consistent with its commitment to enhance its business potential and value
to stockholders, it was moving forward with its previously reported review of
strategic alternatives, including a potential sale, merger, or recapitalization
of the Company, as well as the possibility of strategic acquisitions.
Representatives of the Company continued to have discussions with
representatives of DLJ regarding the process and preparation required in
connection with a potential recapitalization.
On July 29, 1998, Alchemy and Parent communicated a renewed interest in
exploring a tender offer for the Company's shares at $17 per share and
representatives of the Company indicated that the Company might be interested in
discussing a transaction. On July 30, 1998, Parent's legal advisors began a due
diligence review of the Company. Representatives of the Company continued
discussions with representatives of Parent and Alchemy as to the adequacy of
price and the certainty of their offer and also began to negotiate the terms of
a definitive agreement.
From July 31, 1998 until August 11, 1998, representatives of the Company,
Parent and Alchemy continued to negotiate the terms of a definitive agreement
and address the Company's concerns as to price and the terms of Parent's due
diligence and financing conditions. On August 4, 1998, the board of directors of
Parent and representatives of Alchemy met to discuss the status of negotiations
with respect to a definitive agreement with the Company, the financing
arrangements with CSFB and the due diligence investigation of the Company being
conducted by representatives of Parent. Shortly thereafter, representatives of
Parent and Alchemy also requested that certain stockholders of the Company enter
into agreements requiring them to tender their shares and vote in favor of the
merger. Representatives of the Company also continued to have discussions with
DLJ regarding a potential recapitalization during such time.
On August 11, 1998, Parent and Alchemy raised their proposal to $17.25 per
share.
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On August 12, 1998, the Strategy Committee held a special meeting to
review, with the advice and assistance of the Company's financial and legal
advisors, the terms and conditions of the proposed transactions. All members of
the Strategy Committee participated in person. At such meeting, the Financial
Advisor provided an oral opinion that, as of such date, the cash consideration
to be received by holders of shares in the Offer and the Merger was fair from a
financial point of view to such holders. Shearman & Sterling reviewed the
fiduciary duties of members of the Board to stockholders and outlined the
principal terms of the Offer and the Merger. The Strategy Committee then
unanimously recommended that the Board approve the Merger Agreement and the
transactions contemplated thereby.
Immediately following the Strategy Committee meeting, the full Board held a
special meeting to review, with the advice and assistance of the Company's
financial and legal advisors, the terms and conditions of the proposed
transactions. All members of the Board participated either in person or by
telephone. At such meeting, the Financial Advisor reiterated for the full Board
its oral opinion that, as of such date, the cash consideration to be received by
holders of shares in the Offer and the Merger was fair from a financial point of
view to such holders. Shearman & Sterling reviewed for the full Board the
fiduciary duties of the Board to stockholders and outlined the principal terms
of the Offer and the Merger. The Board then unanimously determined that the
Merger Agreement and the transactions contemplated thereby, including the Offer
and the Merger are fair to, and in the best interests of, the Company and its
stockholders, and authorized the execution and delivery of the Merger Agreement,
recommended that the Company's stockholders accept the Offer and tender their
Shares pursuant to the Offer, and recommended that the Company's stockholders
approve and adopt the Merger Agreement.
On August 12, 1998, the shareholders of Newmall met to consider and approve
the subscription of $80 million of new shares of Newmall, the proceeds of which
will be used by Newmall to provide the $80 million Equity Contribution
(described and defined in Section 9 of the Offer to Purchase). The members of
the board of directors of each Parent and the Purchaser approved the Offer, the
Merger, the Merger Agreement and the other transactions contemplated by the
Merger Agreement by unanimous written consent on August 12, 1998 and authorized
the execution and delivery of the Merger Agreement and related documents.
Following approval by the boards of directors of the Company, Parent and
Purchaser, the Merger Agreement was executed and delivered on August 12, 1998. A
non-competition agreement with Mr. Davenport and agreements with certain
stockholders were also executed and delivered at such time. The transaction was
publicly announced through a joint press release before the opening of the
financial markets in the United States on August 13, 1998.
Reasons for the Board's Recommendation. In approving the Merger Agreement
and the transactions contemplated thereby, and recommending that holders of
Shares accept the Offer and tender their shares pursuant to the Offer, the Board
considered a number of factors, including, but not limited to, the following:
(i) the views expressed by management of the Company (at the Board
meeting on August 12, 1998 and at previous Board meetings) and the Board's
knowledge regarding: (a) the financial condition, results of operations,
business and prospects of the Company, including the prospects of the
Company if the Company were to remain independent and (b) the strategic
alternatives available to the Company;
(ii) the results of the process designed and executed by the Company
and the Financial Advisor to identify and solicit proposals from third
parties to enter into a strategic transaction with the Company;
specifically, the fact that the Financial Advisor had contacted 120 parties
as potential purchasers, Confidential Offering Memoranda were sent to 65
potential purchasers, 16 preliminary indications of interest were received
by the Financial Advisor, 12 potential purchasers were invited by the
Company to participate in second round due diligence and that none of these
potential purchasers had proposed a transaction that was more favorable to
the Company and its stockholders and the Board's conclusion that it was not
likely that any other party would propose an acquisition transaction that
was more favorable to the Company and its stockholders;
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(iii) the views of management regarding the potential values that
could be realized through a recapitalization transaction and the Board's
conclusion that a sale of the Company pursuant to the Merger Agreement
would be more attractive to the Company and its stockholders;
(iv) the trading price of the shares of common stock both prior to and
immediately following the Company's public announcement on May 7, 1998 of
its intention to explore strategic alternatives; in particular, the Board
acknowledged that the Shares had briefly traded as high as $22 per Share on
the American Stock Exchange ("AMEX") on July 20, 1998 but noted that the
$17.25 per Share to be paid in the Offer and in the Merger represents a
premium of approximately 60.5% over the $10.75 closing sale price for the
Shares on the AMEX on May 6, 1998, the last trading day prior to the public
announcement that the Company would explore strategic alternatives, a
premium of approximately 59.4% over the $10.82 average closing sale price
for the shares on the AMEX one month prior to May 6, 1998 and a premium of
approximately 205.3% over the average closing price for the Shares of $5.65
during the 12 months prior to May 6, 1998;
(v) the analyses conducted by the Financial Advisor, oral and written
presentations by the Financial Advisor at the August 12, 1998 Board meeting
and the written opinion of the Financial Advisor delivered to the Board
following the August 12, 1998 Board meeting that, as of such date, and
subject to the assumptions made, matters considered and limitations set
forth in such opinion, the consideration to be received by the holders of
the Common Stock pursuant to the Merger Agreement is fair from a financial
point of view to such stockholders (a copy of the opinion of the Financial
Advisor which sets forth the assumptions made, matters considered and
limitations on the review undertaken is attached hereto as Annex II to this
Schedule 14D-9 and is incorporated herein by reference). STOCKHOLDERS ARE
URGED TO READ THE OPINION OF THE FINANCIAL ADVISOR CAREFULLY AND IN ITS
ENTIRETY;
(vi) the fact that the transactions contemplated by the Merger
Agreement provided for an all cash payment to stockholders, with no
financing condition; that Purchaser had received commitments for all
required financing of the transaction and the views of management of the
Company that there did not appear to be a significant risk of regulatory
impediments to the consummation of the Merger;
(vii) the fact that the Merger Agreement provides that if the Board
determines in good faith, after receipt of advice from its outside counsel,
that it is necessary to do so in order to comply with fiduciary duties
under applicable law, it may furnish nonpublic information and data and
enter into discussions and negotiations in connection with an alternative
Acquisition Proposal and the fact that the Merger Agreement permits the
Board, in the exercise of its fiduciary duties, to terminate the Merger
Agreement in favor of another Acquisition Proposal (upon such termination,
the Company would pay Parent a fee of $12,500,000); and
(viii) while the Board recognized that the Merger Agreement includes a
condition requiring the tender of at least 90% of the Company's outstanding
Shares prior to the expiration of the Offer, the Board noted that certain
shareholders had indicated an intention to enter into agreements requiring
them to tender Shares representing approximately 50% of the currently
outstanding Shares, and that certain directors and officers of the Company
had indicated their intention of tendering Shares representing
approximately an additional 7% of the Company's outstanding Shares; the
Board further noted that, in the event that the Minimum Condition is not
satisfied, Parent and Purchaser are required under the Merger Agreement to
assist the Company in obtaining the stockholder approval required to effect
a long-form merger, thereby increasing the likelihood of consummation of
the transaction. Finally, the Board noted that the likelihood of obtaining
stockholder approval for a long-form merger is increased by the fact that
shares representing approximately 41% of the currently outstanding voting
shares would be voted in favor of such a merger pursuant to a voting
agreement entered into by certain of the Company's stockholders, and that
certain directors and officers of the Company had indicated their intention
of voting shares representing approximately an additional 12% of the voting
shares in favor of such merger.
The Board did not assign relative weights to the above factors or determine
that any factor was of particular importance. Rather, the Board viewed its
position and recommendations as being based on the totality of the information
presented to and considered by it.
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The Board recognized that, while the consummation of the Offer gives the
Company's stockholders the opportunity to realize a premium, over the price at
which the Shares were traded prior to the public announcement of the Company's
exploration of strategic alternatives, tendering in the Offer would eliminate
the opportunity for such stockholders to participate in the future growth and
profits of the Company. The Board believes that the loss of the opportunity to
participate in the growth and profits of the Surviving Corporation was reflected
in the Offer price of $17.25 per Share. The Board also recognized that there can
be no assurance as to the level of growth or profits to be attained by the
Surviving Corporation in the future.
It is expected that, if the Shares are not purchased by Parent in
accordance with the terms of the Offer or if the Merger is not consummated, the
Company's current management, under the general direction of the Board, will
continue to manage the Company as an ongoing business.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Except as described below, neither the Company nor any person acting on its
behalf has or currently intends to employ, retain or compensate any person to
make solicitations or recommendations to the stockholders on its behalf
concerning the Offer.
The Financial Advisor has been retained by the Company to act as financial
advisor to the Company with respect to an acquisition transaction, such as the
Offer, the Merger and matters arising in connection therewith. Pursuant to a
letter agreement dated March 12, 1998 between the Company and the Financial
Advisor, the Financial Advisor was paid a financial advisory fee of $250,000 and
an opinion fee of $500,000, both of which are creditable toward a transaction
fee of approximately $3,260,000 to which the Financial Advisor will become
entitled upon consummation of the Offer or, in the event that the Offer is not
consummated, upon consummation of the Merger. The Company also has agreed to
reimburse the Financial Advisor for its reasonable out-of-pocket expenses,
including reasonable fees and expenses of its counsel. The Company has further
agreed to indemnify and hold harmless the Financial Advisor and each of its
directors, officers, agents, employees and controlling persons against losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
related to or arising out of its rendering of services under its engagement as
financial advisor, and will reimburse the Financial Advisor and each other
person indemnified for all legal and other expenses as incurred in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) No transactions in the Shares have been effected during the past 60
days by the Company or, to the best of the Company's knowledge, by any executive
officer, director, affiliate or subsidiary of the Company.
(b) To the best of the Company's knowledge, all of the Company's executive
officers, directors, affiliates and subsidiaries currently intend to tender
pursuant to the Offer all Shares held of record or beneficially owned by such
persons, subject to and consistent with applicable securities laws and any
fiduciary obligations of such person.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as described in Items 3 and 4 above, the Company is not engaged
in any negotiation in response to the Offer which relates to or would result in
(i) an extraordinary transaction, such as a merger or reorganization, involving
the Company; (ii) a purchase, sale or transfer of a material amount of assets by
the Company; (iii) a tender offer for or other acquisition of securities by or
of the Company, or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as described in Items 3 or 4 above, there are no transactions,
board resolutions, agreements in principle or signed contracts in response to
the Offer that relate to or would result in one or more of the events referred
to in Item 7(a) above.
14
<PAGE> 19
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
BOARD OF DIRECTORS
The Information Statement attached hereto as Annex I is being furnished in
connection with the contemplated designation by Purchaser, pursuant to the
Merger Agreement, of certain persons to be appointed to the Board other than at
a meeting of the Company's stockholders, following the purchase by Purchaser of
the number of Shares pursuant to the Offer necessary to satisfy the Minimum
Condition.
REGULATORY APPROVALS
The Company generally conducts its business pursuant to long-term contracts
with each of the states in which it operates or the state agencies responsible
for emissions testing programs. None of the state contracts to which the Company
is currently a party require any notice or consent to be obtained by the
Company, Purchaser or Parent prior to the consummation of the Offer or the
Merger. Licenses obtained by the Company from the Bureau of Automotive Repair
(the "Bureau") in connection with the business carried on pursuant to the
Company's agreement with Atlantic Richfield Company must be reissued by the
Bureau upon a change of company ownership. To obtain a valid license
registration, the new owner must submit a new application, accompanied by the
license application fee.
With respect to matters relating to antitrust, the information set forth in
Section 14 of the Offer to Purchase entitled "Certain Legal Matters" filed by
Parent and Purchaser with the Securities and Exchange Commission on August 19,
1998 is hereby incorporated by reference.
CERTAIN LITIGATION
Other than as disclosed in the Company's most recently filed annual report
on Form 10-K and its most recently filed report on Form 10-Q, the Company is not
currently subject to any material litigation. No such litigation involves the
proposed acquisition of the Company by Parent and Purchaser.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
Exhibit 1 Agreement and Plan of Merger dated as of August 12, 1998
among the Parent, the Purchaser and the Company, to be filed
as Exhibit 99(a)(1) to the Purchaser's Tender Offer
Statement on Schedule 14D-1 filed with the SEC on August 19,
1998.
Exhibit 2 Letter dated August 19, 1998, from the Chairman of the Board
and Chief Executive Officer to the stockholders of the
Company.*
Exhibit 3 Joint Press release issued by Parent and the Company dated
August 13, 1998, to be filed as Exhibit 99(a)(8) to the
Purchaser's Tender Offer Statement on Schedule 14D-1 filed
with the SEC on August 19, 1998.
Exhibit 4 Opinion of Credit Suisse First Boston Corporation dated
August 12, 1998 (included as Annex II to this Statement).*
Exhibit 5 Confidentiality Agreement between Parent and the Company
dated May 8, 1998, to be filed as Exhibit 99(c)(4) to the
Purchaser's Tender Offer Statement on Schedule 14D-1 filed
with the SEC on August 19, 1998.
Exhibit 6 1993 Company Stock Option Plan.
</TABLE>
- ---------------
* Included with Schedule 14D-9 mailed to stockholders of the Company.
15
<PAGE> 20
SIGNATURE
After reasonable 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.
ENVIROTEST SYSTEMS CORP., INC.
By: /s/ C. MICHAEL ALSTON
----------------------------------
Name: C. Michael Alston
Title: General Counsel and Secretary
Dated: August 19, 1998
16
<PAGE> 21
ANNEX I
ENVIROTEST SYSTEMS CORP.
246 SOBRANTE WAY
SUNNYVALE, CALIFORNIA 94086
(301) 530-8110
------------------------
INFORMATION STATEMENT PURSUANT
TO SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
------------------------
NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS
IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT.
NO PROXIES ARE BEING SOLICITED AND
YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
------------------------
This information statement (the "Information Statement"), which is being
mailed on or about August 19, 1998 to the holders of shares of the Company's
Class A Common Stock, par value $.01 per share ("Shares" or "Class A Shares"),
of Envirotest Systems Corp., a Delaware corporation (the "Company"), is being
furnished in connection with the designation by Stone Rivet, Inc., a Delaware
corporation ("Purchaser") and a wholly owned subsidiary of Environmental Systems
Products, Inc., a Delaware corporation ("Parent"), of persons (the "Purchaser
Designees") to the Board of Directors of the Company (the "Board"). Such
designation is to be made pursuant to an Agreement and Plan of Merger dated as
of August 12, 1998 (the "Merger Agreement") among the Company, Parent and
Purchaser. Terms not defined in this Information Statement shall have the
meaning ascribed to them in the Merger Agreement.
Pursuant to the Merger Agreement, among other things, Purchaser commenced a
cash tender offer on August 19, 1998 to purchase all of the issued and
outstanding Shares at a price of $17.25 per Share, net to the seller in cash, as
described in Purchaser's Offer to Purchase dated August 19, 1998 and the related
Letter of Transmittal (which Offer to Purchase and related Letter of Transmittal
together constitute the "Offer"). The Offer is scheduled to expire at 12:00
Midnight, New York City time, on September 30, 1998, unless extended. The Offer
is subject to, among other things, the condition that a number of Shares
representing (i) not less than 90% of all outstanding Shares on a primary basis
(assuming conversion of all shares of Class B Common Stock, par value $.01 per
share ("Class B Shares"), and shares of Class C Common Stock, par value $.01 per
share ("Class C Shares"), into Shares), and (ii) 100% of the Shares that are
issuable upon conversion (and assuming conversion thereof of all outstanding
Class B Shares and Class C Shares being validly tendered prior to the expiration
of the Offer and not withdrawn (the "Minimum Condition"). The Merger Agreement
also provides for the merger (the "Merger") of Purchaser with and into the
Company as soon as practicable after consummation of the Offer. Following the
consummation of the Merger (the "Effective Time"), the Company will be the
surviving corporation (the "Surviving Corporation") and a wholly owned
subsidiary of Parent. In the Merger each Share and each Class B Share and Class
C Share issued and outstanding immediately prior to the Effective Time (other
than Shares held in the treasury of the Company or by Parent, Purchaser, or any
indirect or direct wholly owned subsidiary of the Parent or the Company, all of
which will be canceled, and other than Shares, if any, held by stockholders who
have perfected rights as dissenting stockholders under the Delaware General
Corporation Law (the "Delaware Law")) will be converted into the right to
receive cash in an amount of $17.25 per Share.
<PAGE> 22
RIGHT TO DESIGNATE DIRECTORS; THE PURCHASER DESIGNEES
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of Shares pursuant to the Offer and from time to time thereafter, Purchaser
shall be entitled to designate up to such number of directors, rounded up to the
next whole number, on the Board to give Purchaser representation on the Board
that equals the product of (i) the total number of directors on the Board
(giving effect to the election of any additional directors pursuant to the
Merger Agreement) and (ii) the percentage that the aggregate number of Shares
beneficially owned by Purchaser and its affiliates (including any Shares
purchased pursuant to the Offer) bears to the total number of outstanding
Shares. The Company shall, upon request by Purchaser, promptly either increase
the size of the Board (and shall if necessary, amend the Company's By-Laws to
permit such an increase) or use its reasonable best efforts to secure the
resignation of such number of directors as is necessary to enable Purchaser's
Designees to be elected to the Board and shall cause Purchases Designees to be
so elected. The Merger Agreement also provides that, promptly upon request by
Purchaser, the Company will use its reasonable best efforts to cause persons
designated by Purchaser to constitute the same percentage as the number of
Purchaser's Designees to the Board to the total number of directors on the Board
on (i) each committee of the Board, (ii) each board of directors or similar
governing body or bodies of each subsidiary of the Company designated by
Purchaser and (iii) each committee of each such board or body.
Following the election or appointment of the Purchaser Designees and prior
to the Effective Time, any amendment of the Merger Agreement or the Certificate
of Incorporation or By-laws of the Company, any termination of the Merger
Agreement by the Company, any extension by the Company of the time for the
performance of any obligations or other acts of Parent or Purchaser or any
waiver of any of the Company's rights thereunder shall require the concurrence
of a majority of the Directors of the Company present at the meeting who are not
designees of Purchaser or employees of the Company.
The terms of the Merger Agreement, a summary of the events leading up to
the Offer and the execution of the Merger Agreement and other information
concerning the Offer and the Merger are contained in the Offer to Purchase and
in the Solicitation/Recommendation Statement on Schedule 14D-9 of the Company
(the "Schedule 14D-9") with respect to the Offer, copies of which are being
delivered to stockholders of the Company contemporaneously herewith. Certain
other documents (including the Merger Agreement) were filed with the Securities
and Exchange Commission (the "SEC") as exhibits to the Schedule 14D-9 and as
exhibits to the Tender Offer Statement on Schedule 14D-1 of the Purchaser and
Parent (the "Schedule 14D-1"). The exhibits to the Schedule 14D-9 and the
Schedule 14D-1 may be examined at, and copies thereof may be obtained from, the
regional offices of and public and reference facilities maintained by the SEC
(except that the exhibits thereto cannot be obtained from the regional offices
of the SEC) in the manner set forth in Sections 7 and 8 of the Offer to
Purchase. The Company has been informed that the Parent intends to finance the
purchase of Shares in the Offer and the Merger by making capital contributions
to Purchaser from available cash and from some combination of borrowings.
Environmental Systems Products Holdings, Inc., a Delaware corporation that will
wholly own and control Parent ("Holdings") will advance funds, directly or
indirectly, to Purchaser through Parent, through capital contributions and/or
loans, in such amounts as are necessary to fund Purchaser's obligations with
respect to the Offer and the Merger (including the refinancing of certain
obligations of the Company and the Parent). The approximately $57.3 million
required to pay the net consideration in respect of outstanding options to
purchase 4,319,135 Shares is expected to be funded from the Company's then
existing cash on hand and up to $10.5 million from the Purchaser.
Holdings plans to obtain all funds needed to make such capital
contributions and/or loans to Purchaser (a) from an equity contribution in the
amount of approximately $80 million from the stockholders of Newmall (the
"Equity Contribution"), (b) from existing cash on hand of approximately $92.5
million from the Company, (c) from borrowings of approximately $395 million
under a new senior secured term credit facility (the "Term Loan Facility"), and
up to $l0.6 million under a new revolving credit facility (the "Revolving Loan
Facility", and together with the Term Loan Facility, the "Credit Facilities"),
(d) from the issuance by Holdings of senior subordinated notes in the principal
amount of $225 million (the "Senior Subordinated
2
<PAGE> 23
Notes") or, in lieu thereof, from borrowings by Holdings under a bridge loan
facility (the "Bridge Loan Facility")
No action is required by the stockholders of the Company in connection with
the election or appointment of the Purchaser Designees to the Board. However,
Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the mailing to the Company's stockholders of the information set
forth in this Information Statement prior to a change in a majority of the
Company's directors otherwise than at a meeting of the Company's stockholders.
The information contained in this Information Statement concerning Parent,
Purchaser and the Purchaser Designees, has been furnished to the Company by such
persons, and the Company assumes no responsibility for the accuracy or
completeness of such information. The Schedule 14D-1 indicates that the
principal executive offices of Parent and Purchaser are located at 7 Kripes
Road, East Granby, Connecticut 06026.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
GENERAL
Although the Company's authorized capital stock consists of three classes
of shares with voting and other privileges varying according to each, only
shares of Class A Common Stock may be tendered pursuant to the Offer. Each such
share of Class A Common Stock is entitled to one vote. As of July 31, 1998,
there were 12,118,108 shares of Common Stock outstanding which were eligible, on
conversion of Class B Shares and Class C Shares into Class A Shares, to be
tendered pursuant to the Offer. The Board currently consists of six members.
Each director holds office until his successor is elected and qualified or until
his earlier death, resignation or removal.
PRINCIPAL STOCKHOLDERS
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, based primarily on
information provided by the Company's transfer agent, as of the period
immediately prior to the filing of the Company's most recent proxy statement,
regarding beneficial ownership of all classes of the Company's voting common
stock by each person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) who is known by the Company to
own more than 5% of any class of the Company's voting common stock, each
3
<PAGE> 24
director, each "named" executive officer (as that term is used in Item 402 of
Regulation S-K) and all directors and executive officers as a group.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
---------------------------- ----------------------------
PERCENTAGE PERCENTAGE
NUMBER OF CLASS NUMBER OF CLASS
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED OWNED OWNED OWNED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Chester C. Davenport(a)....................... 3,454,253 30.7% 2,040,775 100%
Envirotest Systems Corp.
6903 Rockledge Drive, Suite 214
Bethesda, Maryland 20817
TSG Ventures, L.P............................. 2,246,818 25.4% -- --
1055 Washington Blvd.
Stamford, Connecticut 06901
Chemical Equity Associates (A California
Limited Partnership)(b)..................... 2,026,111 18.7% -- --
380 Madison Avenue, 12th Floor
New York, New York 10017
Appaloosa Management, L.P.(c)................. 1,224,800 13.9% -- --
David A. Tepper
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Kane Partners, L.P.(d)........................ 717,658 8.1% -- --
80 East Middle Patent Road
Bedford, New York 10506
Cleveland A. Christophe(d).................... 2,267,651 25.6% -- --
TSG Ventures L.P.
177 Broad Street
Stamford, Connecticut 06901
Edward Dugger, III(f)......................... 18,331 * -- --
Richard L. Gelfond(g)......................... 1,009,691 11.3% -- --
Cheviot Capital Advisors Inc.
P.O. Box 571
Southampton, New York 11969
R.W. Kasten, Jr.(h)........................... 15,333 * -- --
F. Robert Miller(i)........................... 266,640 2.9% -- --
Raj Modi(j)................................... 136,732 1.5% -- --
C. Michael Alston(k).......................... 76,216 * -- --
Lawrence Taylor(l)............................ 121,265 1.4% -- --
All directors and officers as a group (16
persons).................................... 6,866,111 57.0% 2,040,775 100%
</TABLE>
- ---------------
* Less than 1%
(a) Represents shares owned by Rockspring Management, Inc. and The Chester
Corporation, both of which are wholly owned corporations of Mr. Davenport,
and Mr. Davenport directly. Includes (i) 375,375 shares of Class A Common
Stock issuable upon the exercise of options to purchase Class A Common
Stock, which are exercisable at the option of the holder within sixty (60)
days; (ii) 1,249,749 shares of Class B Common Stock and options to purchase
791,026 shares of Class B Common Stock which are exercisable at the option
of the holder within sixty (60) days; and (iii) 717,658 shares of Class A
Common Stock owned by Kane Partners, L.P. Mr. Davenport, a Director of the
Company, controls the General Partner of Georgetown Partners Limited
Partnership ("Georgetown Partners"), which is a limited partner of Kane
Partners, L.P. Georgetown Partners shares voting and investment
4
<PAGE> 25
power with respect to shares held by Kane Partners, L.P. Shares of Class B
Common Stock are convertible at the option of the holder at any time into an
equal number of shares of Class A Common Stock.
(b) Represents shares of Class A Common Stock issuable upon the conversion of
Class C Common Stock, which are convertible at the option of Chase Banking
Corporation. The Class C Common Stock does not have ordinary voting rights
for the election of directors or other matters generally requiring a
stockholder vote.
(c) The information on Appaloosa Management, L.P. and David A. Tepper and their
beneficial ownership of Class A Common Stock is based on Schedule 13D filed
with the Securities and Exchange Commission on August 18, 1997.
(d) The information on Kane Partners, L.P. and its beneficial ownership of the
Class A Common Stock is based on Schedule 13G filed with the Securities and
Exchange Commission on February 17, 1994.
(e) Represents 2,246,818 shares owned by TSG Ventures L.P. Mr. Christophe, a
Director of the Company, is an officer, director, and shareholder of the
general partner of TSG Ventures L.P., and is a principal of an entity which
provides advisory services to TSG Ventures L.P. and may be deemed to share
voting and investment power with respect to such shares. Also includes 8,333
shares of Class A Common Stock issuable upon the exercise of options to
purchase Class A Common Stock, which are exercisable at the option of the
holder within sixty (60) days.
(f) Includes 8,333 shares of Class A Common Stock issuable upon the exercise of
options to purchase Class A Common Stock, which are exercisable at the
option of the holder within sixty (60) days.
(g) Represents (i) shares owned by Kane Partners, L.P.; (ii) 9,000 shares owned
by Cheviot Capital Advisors (Pension Plan); (iii) options to purchase
100,000 shares of Class A Common Stock held by Cheviot Capital Advisors Inc.
which are exercisable by the holder within sixty (60) days; (iv) 8,333
shares of Class A Common Stock issuable upon the exercise of options to
purchase Class A Common Stock, which are exercisable at the option of the
holder within sixty (60) days; (v) 137,000 shares held directly by Mr.
Gelfond; and (vi) 22,300 shares held by trusts for which Mr. Gelfond is the
trustee, for the benefit of Mr. Gelfond's children. Mr. Gelfond, a Director
of the Company, is the Vice President of the General Partner of Kane
Partners, L.P. and shares voting and investment power with respect to such
shares, and is the President and sole stockholder of Cheviot Capital
Advisors Inc.
(h) Includes 12,333 shares of Class A Common Stock issuable upon the exercise of
options to purchase Class A Common Stock, which are exercisable at the
option of the holder within sixty (60) days.
(i) Represents 133,320 shares of Class A Common Stock issuable upon the exercise
of options to purchase Class A Common Stock, which are exercisable at the
option of the holder within sixty (60) days.
(j) Includes 71,666 shares of Class A Common Stock issuable upon the exercise of
options to purchase Class A Common Stock, which are exercisable at the
option of the holder within sixty (60) days. Also includes 15,230 shares
owned by members of Mr. Modi's immediate family. Mr. Modi disclaims
beneficial ownership of such shares.
(k) Includes 75,666 shares of Class A Common Stock issuable upon the exercise of
options to purchase Class A Common Stock, which are exercisable at the
option of the holder within sixty (60) days.
(l) Includes 68,333 shares of Class A Common Stock issuable upon the exercise of
options to purchase Class A Common Stock, which are exercisable at the
option of the holder within sixty (60) days.
DIRECTORS AND EXECUTIVE OFFICERS
THE PURCHASER DESIGNEES
Purchaser has informed the Company that each of the Purchaser Designees
listed below has consented to act as a director.
None of the Purchaser Designees is a director of, or holds any position
with, the Company. To the best knowledge of the Company, none of the Purchaser
Designees or their associates beneficially owns any equity securities, or rights
to acquire any equity securities, of the Company or has been involved in any
transactions with the Company or any of its directors or executive officers that
are required to be disclosed pursuant to the rules and regulations of the SEC.
It is expected that the Purchaser Designees may assume office at any time
following the purchase by Purchaser of such number of Shares that satisfies the
Minimum Condition, which purchase cannot be earlier than October 1, 1998 and
that, upon assuming office, the Purchaser Designees will thereafter constitute
at least a majority of the Board.
5
<PAGE> 26
Biographical information concerning each of the Purchaser Designees,
directors and executive officers is presented on the following pages. The
Purchaser Designees are:
<TABLE>
<CAPTION>
POSITION WITH PARENT; PRINCIPAL OCCUPATION
NAME AND BUSINESS ADDRESS OR EMPLOYMENT; FIVE-YEAR EMPLOYMENT HISTORY
- ------------------------- -------------------------------------------
<S> <C>
Terrence P. McKenna President, Chief Executive Officer and
7 Kripes Road Director of Parent since its formation in
East Granby, CT 06026 1989. Age: 47.
Rinaldo R. Tedeschi Executive Vice President, Chief Operating
7 Kripes Road Officer and Director of Parent since its
East Granby, CT 06026 formation in 1989. Age: 49.
David J. Langevin Executive Vice President, Chief Financial
7 Kripes Road Officer and Director of Parent since April
East Granby, CT 06026 1998. From 1994 to 1998, Executive Vice
President of Terex Corporation and from
March 1993 to December 1993, Acting Chief
Financial Officer of Terex Corporation.
Age: 47.
Eric Walters Director of Parent since July 1998. Partner
c/o Alchemy Partners at Alchemy Partners since 1997. From 1987
20 Bedfordbury to 1997, Partner at Schroder Ventures. Age:
London 54
WC2N 4BL
England
Susan M. Woodman Counsel of Alchemy Partners since June
c/o Alchemy Partners 1998, Partner at Wedlake Saint solicitors
20 Bedfordbury from 1995 to 1998. From 1991 to 1995,
London Partner at Edge & Ellison solicitors. Age:
WC2N 4BL 45.
England
</TABLE>
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the executive
officers of the Company as of August 12, 1998.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION AND BUSINESS EXPERIENCE
- ---- --- ----------------------------------------
<S> <C> <C>
Chester C. Davenport........... 57 Chairman of the Board of Directors since September 1990;
Managing Director of Georgetown Partners Limited
Partnership, a merchant banking firm ("Georgetown
Partners"), since September 1988; Senior Partner in
Washington, D.C. law firm of Davenport and Seay from 1979 to
1987 and from 1973 to 1976; Managing General Partner of
First City Properties, an investment partnership, from 1979
to 1985; Assistant Secretary of Transportation for Policy
and International Affairs from 1977 to 1979.
F. Robert Miller............... 54 President, Chief Executive Officer and director since 1996;
President, Chief Executive Officer and director of SC and
its predecessors from 1987 to 1995.
</TABLE>
6
<PAGE> 27
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION AND BUSINESS EXPERIENCE
- ---- --- ----------------------------------------
<S> <C> <C>
Mark Thomas.................... 42 Executive Vice President and Chief Development Officer of
the Company since March 1998; Senior Vice President and
Director of Corporate Development of ITT Corporation from
June 1997 to February 28, 1998; Vice President and Director
of Corporate Development of ITT from October 1995 to June
1997; Senior Vice President and Director of Corporate
Development for ITT Sheraton Corporation from June 1994 to
October 1995; Senior Vice President and General Counsel of
Hilton Gaming Corporation from April 1994 to June 1994; Vice
President and General Counsel of Sheraton Gaming Corporation
from April 1993 to April 1994; Various positions in the Law
Department of Holiday Corporation and its successor
corporation, The Promus Companies Incorporated, the parent
company of Holiday Inns, Hampton Inns, Embassy Suites,
Homewood and Harrah's from May 1980 to April 1993.
Richard P. Webb................ 56 Executive Vice President, Chief Operating Officer since
April 1997; Independent Consultant from September 1996 to
April 1997; President & Chief Operating Officer, Shared
Technologies Cellular, Inc. December 1995 to September 1996;
Independent Consultant from September 1995 to December 1995;
Chief Executive Officer, Ambac BV (a Dutch company) from May
1987 to October 1995.
Raj Modi....................... 45 Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary since January 1993; Controller from July
1992 to January 1993; Controller of ETI from December 1986
to July 1992.
Michael Alston................. 40 Vice President and General Counsel of the Company June 4,
1998; Vice President, General Counsel and Secretary from
September 1992 to September 1997; Executive Vice President
and General Counsel of Horne Engineering Services, Inc. from
March 1992 to September 1992.
Lawrence H. Taylor............. 53 Vice President of Marketing since January 1994; divisional
Vice President of Marketing and Sales of the Company from
April 1992 to January 1994 and of ETI from 1989 to April
1992.
Laura E. Baker................. 43 Vice President of Corporate Communications since January
1996; Vice President of Corporate Communications of SC from
September 1994 to January 1996; Director of Corporate
Communications from April 1992 to September 1994; Manager of
Marketing Services of SC from 1985 to April 1992.
John Pachuta................... 48 Vice President of Engineering since June 1, 1998; Director
of Engineering since March 1994. Director, Bureau of Motor
Vehicles, Commonwealth of Pennsylvania from 1980 to 1993.
Perry J. Ludy.................. 46 Vice President of Operations since February 1996; Vice
President of SC from December 1994 to February 1996;
President of U.S. Auto Glass, Inc. from December 1990 to
December 1994.
Richard M. Tucker.............. 50 Vice President of Program Development since January 1996;
Vice President of Program Development of SC from March 1992
to January 1996; Director of International Marketing of SC
from August 1991 to March 1992.
</TABLE>
7
<PAGE> 28
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION AND BUSINESS EXPERIENCE
- ---- --- ----------------------------------------
<S> <C> <C>
James Burley................... 49 Vice President of Administration since July 1996; Human
Resources Manager for the Hughes Research Laboratories from
January 1992 to July 1996; Manager of Human Resources
Administration for the Electron Dynamics Division of Hughes
Electronics from July 1984 to January 1992.
</TABLE>
All officers are elected annually and serve at the discretion of the Board
of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a party to a Legislative Monitoring Consulting Services
Agreement with Kasten & Company. Mr. Kasten, a Class A director, is the sole
owner of Kasten & Company. See "Compensation Committee Interlocks and Insider
Participation".
During fiscal 1996, the Company made a bridge loan of $350,000 to Mr. Modi,
Vice President, Chief Financial Officer, Treasurer and Assistant Secretary, the
loan proceeds were used for relocation expenses and the purchase of a new
residence in the Sunnyvale, California area, the location of the Company's new
headquarters. The loan bore interest at the applicable treasury bill rate per
annum. Mr. Modi repaid the bridge loan in fiscal 1997. As of September 30, 1997,
the balance outstanding on a separate loan of $100,000 (with interest at 7.5%
per annum), which Mr. Modi has with the Company, is $72,755.73, and all payments
are current on such loan.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended September 30, 1997, there were four meetings
of the Board. All of the directors of the Company, with the exception of Mr.
Cogut who is no longer a member of the Board, attended 75% or more of the
meetings of the Board and the committees on which they served.
As of January 1998, the Audit Committee of the Board consists of Mr.
Dugger, Mr. Christophe and Mr. Gelfond. The Audit Committee monitors and
supervises the Company's relationship with its independent public accountants,
reviews the internal audit and control functions and procedures of the Company
and makes recommendations to the Board accordingly. As of May 12, 1997, the
Compensation Committee of the Board consists of Mr. Christophe and Mr. Dugger.
The Compensation Committee reviews and makes recommendations to the Board
regarding the compensation policies of the Company, administers the Company
Stock Option Plan, and makes recommendations to the Board regarding any
discretionary compensation to be paid to officers or key personnel of the
Company.
The Development Committee of the Board consists of Mr. Christophe, Mr.
Dugger and Mr. Kasten. This Committee is responsible for determining the
reasonableness and favorability of the terms of related party transactions
having an aggregate value in excess of $2,000,000. Members of this committee
must be disinterested as to the transaction in question.
The Management Committee consists of Mr. Christophe, Mr. Davenport and Mr.
Gelfond. This committee was formed to conduct a search for, and recommend, an
appropriate candidate to serve as President and Chief Executive Officer. This
committee is also responsible for consulting with the President of the Company.
During the fiscal year ended September 30, 1997, the Board established a
Director Plan Committee to determine the terms of grants to non-employee
directors. The members of the Director Plan Committee are Mr. Davenport and Mr.
Miller. During that year, the Board also established a Capital Market Strategy
Committee to advise the Board on matters relating to improvement of the
Company's stock value. The members of this Committee are Mr. Davenport, Mr.
Christophe and Mr. Gelfond.
During the fiscal year ended September 30, 1997, there were no meetings of
the Executive Committee, one meeting of the Audit Committee, no meetings of the
Development Committee, two meetings of the
8
<PAGE> 29
Compensation Committee, no meetings of the Management Committee and one meeting
of the Director Plan Committee. In 1997, one meeting of the Capital Market
Strategy Committee was held.
The Board does not have a nominating committee. The selection of nominees
for the Board is made by the entire Board.
DIRECTOR COMPENSATION
Members of the Board are reimbursed by the Company for their travel
expenses incurred in attending Board and Committee meetings. Members of the
Board who are not also officers of the Company or any of its subsidiaries and
who are not affiliated with a stockholder of the Company, receive compensation
of $1,000 for each Board meeting attended. Outside Directors are granted 5,000
options to purchase shares of Class A Common Stock of the Company upon election
to the Board and 3,000 such options on each succeeding January 1st.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid or awarded by the
Company to the Chief Executive Officer and the four most highly compensated
executive officers of the Company for services rendered in all capacities during
the fiscal years ended September 30, 1995, 1996 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ OTHER ANNUAL AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Chester C. Davenport.......... 1995 551,256 -- -- -- 38,388(a)
Chairman of the Board 1996 619,221 -- -- -- 131,170(a)
1997 602,766 -- 1,575(b) 145,000(o) 31,125(a)
-- -- -- -- 339,542(p) --
F. Robert Miller.............. 1996 187,500 -- -- 400,000(j) 6,337(k)
President and Chief Executive
Officer 1997 296,668 -- 5,000(b) -- 7,950(k)
C. Michael Alston............. 1995 189,950 -- 1,910(b) 10,000(f) 4,298(c)
Vice President, General
Counsel & Secretary -- -- -- -- 36,000(h) --
-- -- -- -- 40,000(g) --
1996 217,626 -- 3,481(b) -- 3,100(c)
1997 224,974 -- 615(b) 55,000(q) 3,200(c)
-- -- -- -- -- 12,111(n)
Raj Modi...................... 1995 175,000 -- 37,294(d) 50,000(h) 8,561(e)
Vice President, Chief
Financial Officer and
Assistant Secretary -- -- -- -- 10,000(f) --
-- -- -- -- 15,000(i) --
1996 204,340 -- 62,785(d) -- 32,813(e)
1997 242,104 35,000 42,456(d) 65,000(q) 7,950(e)
Lawrence H. Taylor............ 1995 165,000 -- 2,500(l) 10,000(f) 7,650(m)
Marketing Vice President -- -- -- -- 50,000(h) --
-- -- -- -- 15,000(i) --
</TABLE>
9
<PAGE> 30
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ OTHER ANNUAL AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1996 179,945 -- 90,323(l) -- 7,750(m)
1997 195,450 -- 88,349(l) 55,000(q) 7,777(m)
</TABLE>
- ---------------
(a) Represents contributions matching employees' deferred compensation of $4,823
in 1995, $4,750 in 1996 and $4,750 in 1997 and profit sharing contributions
made by the Company of $5,756 in 1995, $3,100 in 1996 and $3,200 in 1997, in
each case under the Company's 401(k) savings plan, and $27,809 in 1995,
$23,175 in 1996 and $23,175 in 1997 representing that part of the premiums
paid by the Company under Mr. Davenport's key man life insurance policy
attributable to the policy proceeds as to which Mr. Davenport may name the
beneficiary. Includes payment of accrued vacation of $100,145 in 1996.
(b) Represents reimbursements made under the Company's medical reimbursement
program.
(c) Represents profit sharing contributions made by the Company under the
Company's 401(k) savings plan.
(d) Represents relocation expense payments of $32,984 in 1995, $57,785 in 1996
and $39,247 in 1997 (including gross-up for taxes payable thereon of $11,716
in 1995 and $5,191 in 1996 which were paid in the subsequent fiscal years)
and reimbursements made under the Company's medical reimbursement program of
$4,310 in 1995, $5,000 in 1996 and $3,209 in 1997.
(e) Represents contributions matching employee's deferred compensation of $4,927
in 1995, $4,482 in 1996 and $4,750 in 1997 and profit sharing contributions
made by the Company of $3,634 in 1995, $3,100 in 1996 and $3,200 in 1997, in
each case under the Company's 401(k) savings plan. Also includes payment of
accrued vacation of $25,231 for 1996.
(f) Represents stock options previously granted at an exercise price of $20.00
per share which were canceled and reissued on June 8, 1994 under the
Company's Stock Option Plan at an exercise price of $6.125 per share.
(g) Represents stock options previously granted at an exercise price of $15.875
per share which were canceled and reissued on October 14, 1993 under the
Company's Stock Option Plan at an exercise price of $6.125 per share.
(h) Represents stock options previously granted at an exercise price of $16.00
per share which were canceled and reissued on March 30, 1993 under the
Company's Stock Option Plan at an exercise price of $6.125 per share.
(i) Represents stock options granted on July 27, 1995 under the Company's Stock
Option Plan at an exercise price of $6.125 per share.
(j) Represents options to purchase Class A Common Stock. 200,000 of such options
have an exercise price of $2.75 (closing price on the date of grant) and the
remaining 200,000 options have an exercise price of $2.8375 (the average
closing price for the 5 trading day period ending thirty days after the date
of such grant). Such options were granted under the Company's Stock Option
Plan.
(k) Represents contributions matching employees' deferred compensation of $3,237
in 1996 and $3,200 in 1997 and profit sharing contributions made by the
Company under the Company's 401(k) savings plan of $3,100 in 1996 and $4,750
in 1997.
(l) Represents relocation expense payments of $87,290 in 1996 and $79,999 in
1997, reimbursements under the Company's medical reimbursement program of
$2,500 in 1995, $3,033 in 1996 and $4,150 in 1997, and an automobile
allowance of $4,200 in 1997.
(m) Represents contributions matching employee's deferred compensation of $4,650
in 1995, $4,650 in 1996 and $4,750 in 1997 and profit sharing contributions
made by the Company of $3,000 in 1995, $3,100 in 1996 and $3,027 in 1997.
(n) Represents payment of accrued vacation of $12,111 in 1997.
(o) Represents options to purchase Class A Common Stock at an exercise price of
$3.375 per share granted under the Company's Stock Option Plan.
(p) Represents stock options previously granted at an exercise price of $16.00
per share or $20.00 which were canceled and reissued on October 31, 1996
under the Company's Stock Option Plan at an exercise price of $6.125 per
share.
(q) Represents options to purchase Class A Common Stock at an exercise price of
$3.375 per share granted under the Company's Stock Option Plan.
OPTION VALUE TABLE
The following table sets forth, as of September 30, 1997, the number of
options and the value of unexercised options held by the Company's Chief
Executive Officer and the four most highly compensated executive officers during
fiscal 1997:
10
<PAGE> 31
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
NAME AT SEPTEMBER 30, 1997 AT SEPTEMBER 30, 1997
- ---- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
791,026 (exercisable) $3,229,562 (exercisable)
Chester C. Davenport.................. 484,542 (unexercisable) 154,063 (unexercisable)
133,320 (exercisable) 223,988 (exercisable)
F. Robert Miller...................... 266,680 (unexercisable) 440,023 (unexercisable)
57,333 (exercisable) 0 (exercisable)
C. Michael Alston..................... 47,000 (unexercisable) 19,479 (unexercisable)
50,000 (exercisable) 0 (exercisable)
Raj Modi.............................. 90,000 (unexercisable) 69,063 (unexercisable)
50,000 (exercisable) 0 (exercisable)
Lawrence H. Taylor.................... 80,000 (unexercisable) 58,438 (unexercisable)
</TABLE>
MATERIAL CONTRACTS AND AGREEMENTS WITH EXECUTIVE OFFICERS
EMPLOYMENT AGREEMENTS
The Davenport Agreement. Mr. Davenport has an employment agreement with
the Company (the "Davenport Agreement") that provides for a three year
employment term, which is automatically renewed for subsequent two-year terms
unless notice of non-renewal is given (the initial term under such agreement
expired in January 1996 and it has been automatically renewed until January
2000). The Davenport Agreement provides for a base salary of $500,000 per year
(which is subject to an annual increase on April 1 of each year based upon the
change in the Consumer Price Index or 5%, whichever is greater). The Davenport
Agreement provides for the grant to Mr. Davenport of options under the Company's
Stock Option Plan for the purchase of 289,542 shares of the Company's Class A
Common Stock at an exercise price per share equal to $16.00, the initial public
offering price of the Class A Common Stock. Options to purchase 144,771 shares
vested on the date of grant (which was March 30, 1993) and the remaining options
vested on March 30, 1995. The options expire if not exercised on the tenth
anniversary of the date of grant. On October 31, 1996, the Compensation
Committee approved the cancellation of these options and issued the same number
of options at an exercise price of $6.125 per share, a price which was above the
fair market value of the Class A Common Stock on the date of the reissuance. The
Davenport Agreement stipulates that Mr. Davenport will devote to the Company
that amount of his time and energies necessary for the performance of his duties
as Chairman of the Board of the Company and will not, during the term of his
employment, engage in any business activity, or acquire an ownership interest in
any entity, that is competitive with any line of business in which the Company
is engaged. The Davenport Agreement also provides that for a period of
twenty-four months after termination of his employment with the Company other
than for "Cause" (as defined below) or because of Mr. Davenport's permanent
disability, Mr. Davenport will continue to receive payment of his base salary,
provided that he does not (without the written approval of the Board of
Directors of the Company) engage in any business in competition with the Company
or its subsidiaries, as such business is conducted on the date on which his
employment with the Company is terminated. In addition, if the Company
terminates the employment of Mr. Davenport other than for Cause, or as a result
of the sale of the Company to another entity which does not accept an assignment
of the Davenport Agreement, in each case prior to the expiration of the term of
the Davenport Agreement, then Mr. Davenport is entitled to receive, for the
remainder of the term, all base salary and bonus payments, and fifty percent
(50%) of his base salary and bonus payments for three years thereafter, plus
other benefits Mr. Davenport otherwise would have been entitled to receive for
such time period. Under the Davenport Agreement, such payments will not, in the
aggregate, result in Mr. Davenport being entitled to more than one hundred
percent of his salary and bonus during any period after his termination. The
Company has also agreed to cover Mr. Davenport during the term of the Davenport
11
<PAGE> 32
Agreement with a "key man" life insurance policy in an amount equal to $2.5
million, with the Company as the beneficiary of $1.0 million and a designee of
Mr. Davenport as the beneficiary of $1.5 million thereof.
In June, 1998, the Davenport Agreement was amended to provide that in the
event of a "Change in Control" (as defined below) of the Company, Mr. Davenport
will have the right to terminate his employment under the Davenport Agreement
for any reason on or within 60 days of the date on which the Change in Control
is consummated (a "Special Termination"). In the event of a Special Termination,
Mr. Davenport will have the right to (i) receive a cash lump sum equal to the
sum of (A) 100% of the base salary and bonus Mr. Davenport would have received
for a period of 24 months following the date of termination and (B) 50% of the
base salary and bonus for an additional period of (x) 36 months minus (y) the
difference between 24 months and the number of months that remain in the term of
the Davenport Agreement after the date of termination, (ii) receive all other
benefits which he would have been entitled to receive had he remained employed
for the remainder of the term of the Davenport Agreement plus 36 months
thereafter, (iii) sublease the Company's existing office space in Bethesda,
Maryland at the then applicable rate of rent for a period of one year after such
Special Termination, and (iv) buy, at the then fair market value, all computer
equipment, related hardware and furniture in use in the Bethesda facility. The
foregoing payments and benefits will be paid to Mr. Davenport in lieu of any
other salary, bonus or benefit continuation that otherwise would have been
applicable under the Davenport Agreement. In consideration of the benefits Mr.
Davenport will receive in the event of a Special Termination, the Davenport
Agreement, as amended, requires Mr. Davenport to comply with a twenty-four month
non-competition clause following such Special Termination.
The Davenport Agreement, as amended, also provides that if any amounts due
to Mr. Davenport thereunder (or under any other plan or program of the Company)
become subject to the "golden parachute" excise tax under Section 4999 of the
Code, then Mr. Davenport will be entitled to be grossed-up for such excise tax
on an after-tax basis.
For purposes of the Davenport Agreement, "Cause" means (i) willful
misconduct by Mr. Davenport in the performance of his duties to the Company or
his willful failure to follow the instructions of the Board which has not been
cured within thirty days; (ii) any act of fraud, theft or dishonesty by Mr.
Davenport against the Company; or (iii) Mr. Davenport's conviction of (or plead
of nolo contendere to) any felony, fraud or embezzlement charge. In addition,
for purposes of the Davenport Agreement, "Change in Control" means (i) any sale,
transfer or other conveyance (other than to the Company or a wholly owned
subsidiary of the Company), whether direct or indirect, of all or substantially
all of the assets of the Company, on a consolidated basis, in one transaction or
a series of related transactions, if, immediately after such transaction, any
"person" or "group" becomes the "beneficial owner," directly or indirectly, of
more than 50% of the total voting power entitled to vote in the election of
directors, managers, or trustees of the transferee, (ii) any "person" or "group"
is or becomes the "beneficial owner," directly or indirectly, of more than 50%
of the total voting power of the Company's voting stock then outstanding, or
(iii) during any period of 24 consecutive months, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of the Board of Directors then in office; provided, however, that for
purposes of the Davenport Agreement, such Change of Control must also result in
Mr. Davenport ceasing to be the beneficial owner of 10% of the Company's common
stock. For purposes of the Davenport Agreement, (i) the terms "person" and
"group" have the meanings used for purposes of Rules 13d and 13d-5 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
applicable, provided that no "Excluded Person"(as defined below) and no person
or group controlled by Excluded Persons shall be deemed to be a "person" or
"group" and (ii) the term "beneficial owner" has the meaning used in Rules 13d-3
and 13d-5 under the Exchange Act, whether or not applicable, except that a
person shall be deemed to have "beneficial ownership" of all such shares that
any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time or upon the occurrence of certain
events. For the purposes of the Davenport Agreement, "Excluded Person" means any
beneficial
12
<PAGE> 33
holder of 5% or more of any class of common stock of the Company outstanding
immediately prior to the consummation of the Company's initial public offering
in April 1993.
The Merger will result in a Change in Control for purposes of the Davenport
Agreement.
The Davenport Non-Competition Agreement. As a condition to execution and
delivery of the Merger Agreement, Parent required Chester C. Davenport, the
Chairman of the Board of the Company, to enter into a Non-Compete Agreement,
dated as of August 12, 1998. Pursuant to the terms of his employment agreement
with the Company, Mr. Davenport is subject to certain non-competition
obligations for up to two years after his termination of employment. However,
such obligations do not extend to the manufacture, sale or leasing of emissions
testing equipment. Mr. Davenport has decided to exercise his unilateral right to
terminate his employment with the Company upon consummation of the Merger. The
Non-Competition Agreement provides for the extension and expansion of Mr.
Davenport's existing non-compete obligations in consideration for the payment of
$2,000,000.
Pursuant to the Non-Competition Agreement, subject to certain exceptions,
Mr. Davenport agreed for a period of five years following consummation of the
Merger, not to (i) own, manage, operate, control, participate in, perform
services for, or otherwise engage in, a business in competition with the
business of vehicle emissions testing, the manufacture of equipment for such
testing, or the sale or leasing of such equipment anywhere within the United
States; (ii) directly or indirectly, induce or attempt to persuade any customers
or prospective customers of the Company to curtail, cancel or otherwise
terminate their business with the Company; (iii) employ, offer to employ or
permit to post for any position of employment and employee of the Company; or
(iv) otherwise interfere with the employment by the Company of its affiliates
of, any individual who becomes or would otherwise become an employee of the
Company. In consideration for such extended non-compete obligations, pursuant to
the Noncompetition Agreement, Parent agreed to compensate Mr. Davenport as
follows: (i) $1,000,000 upon the earlier to occur of (a) the acceptance of
shares for payment pursuant to the Offer and (b) consummation of the Merger and
the closing of the related transactions; and (ii) $333,333.33 per year for a
period of three years, payable in equal monthly installments of $27,777.78 on
the first day of each month, commencing the first month following consummation
of the Merger. The foregoing summary of the Noncompetition Agreement is
qualified in its entirety by the text of the Noncompetition Agreement, a copy of
which is filed as Exhibit 99(c)(5) to the Schedule 14D-1 and is incorporated
herein by reference.
The Thomas Agreement. Mr. Thomas has an employment agreement with the
Company (the "Thomas Agreement") that provides for a term which expires on April
30, 2000, but which continues for an indefinite period unless either party gives
notice of expiration of the term. The Thomas Agreement provides for a base
salary of $250,000 per year (which is subject to annual increase in the
discretion of the Compensation Committee). The Thomas Agreement provides for the
grant to Mr. Thomas of an option for the purchase of 100,000 shares of the
Company's Class A Common Stock at an exercise price per share equal to the fair
market value of the Class A Common Stock on the date of grant. The option will
vest and become immediately exercisable on the first anniversary of the date of
grant. The option will expire if not exercised on the tenth anniversary of the
date of grant. The Thomas Agreement provides that if (i) Mr. Thomas' employment
is terminated for any reason other than by the Company for "Cause" (as defined
below) or by Mr. Thomas without "Good Reason" (as defined below), the option
granted under the Thomas Agreement shall vest and become immediately
exercisable. The Thomas Agreement stipulates that Mr. Thomas will not, during
the term of his employment and a period of one year thereafter, engage in any
business activity, or acquire an ownership interest in any entity, that is
competitive with any line of business in which the Company is engaged. Under the
Thomas Agreement, upon the consummation of a sale of the Company which
constitutes a Change in Control (as defined below), Mr. Thomas will receive a
special bonus in an amount equal to $550,000 plus the product of $100,000
multiplied by the amount, if any, by which the exercise price of the option
granted to Mr. Thomas under the Thomas Agreement exceeds $7. The Thomas
Agreement also provides that in the event of Mr. Thomas' termination of
employment for any reason other than by the Company for Cause or by Mr. Thomas
without "Good Reason" (as defined below), Mr. Thomas is entitled to receive a
lump sum payment equal to the greater of (x) one times annual base salary or (y)
base salary for the remainder of the initial term. In addition, Mr. Thomas is
entitled to continued participation in all medical,
13
<PAGE> 34
dental, hospitalization, disability and life insurance coverage in which Mr.
Thomas was participating on the date of termination through the two-year
anniversary of the date of termination.
The Thomas Agreement also provides that if any amounts due to Mr. Thomas
thereunder (or under any other plan or program of the Company) become subject to
the "golden parachute" excise tax under Section 4999 of the Code, then Mr.
Thomas will be entitled to be grossed-up for such excise tax on an after-tax
basis.
For purposes of the Thomas Agreement, "Cause" means (i) the willful failure
or refusal in bad faith of Mr. Thomas to perform his duties for the Company, or
material specific resolutions and mandates of the Board of Directors and
directives of the Chairman of the Board of the Company which are consistent with
Mr. Thomas's duties and responsibilities as set forth in the Thomas Agreement
(other than by reason of his disability), (ii) the willful breach by Mr. Thomas
of the terms and conditions of the noncompetition and confidentiality clauses of
the Thomas Agreement; (iii) the willful engaging by Mr. Thomas in conduct that
is materially injurious to the Company, monetarily or otherwise, including, but
not limited to, the willful commission of any act of fraud, theft or dishonesty
against the Company, or (iv) the conviction of Mr. Thomas in a court of law or
the entering by Mr. Thomas of a plea of guilty or no contest to, any felony or
any crime involving moral turpitude, dishonesty or theft. In addition, for
purposes of the Thomas Agreement, "Good Reason" means (i) the occurrence of a
Change in Control; (ii) the failure by the Company to consummate a sale
transaction with a third party, which sale transaction constitutes a Change in
Control, prior to March 31, 1999; (iii) a decision by the Board to cease to
proceed with the Company's current strategy to enter into a sale transaction
with a third party, such decision to be deemed made if the Company fails, for
any period of 120 or more consecutive calendar days during the term of the
Thomas Agreement, to retain investment bankers in connection with the Company's
sale efforts; (iv) a default by the Company of a material term of the Thomas
Agreement; (v) a reduction in the base salary of Mr. Thomas or reduction of any
employee benefit or perquisite enjoyed by him; (vi) a failure by the Board to
grant Mr. Thomas the option described above; (vi) the failure to appoint or
re-appoint Mr. Thomas to the position of Executive Vice President and Chief
Development Officer or the removal of him from any such position; or (vii) a
diminution in Mr. Thomas' position, authority, duties or responsibilities or the
assignment to Mr. Thomas of duties which are inconsistent in any respect with
his position (including status, offices, titles and reporting requirements),
authority, duties or responsibilities.
For purposes of the Thomas Agreement, "Change in Control" means (i) any
sale, transfer or other conveyance (other than to the Company or a wholly-owned
subsidiary of the Company), whether direct or indirect, on a consolidated basis,
in one transaction or a series of related transactions, of (A) all or
substantially all of the assets of the Company if, immediately after such
transaction(s), any "person" or "group" (as such terms are defined below)
becomes the "beneficial owner" (as defined below), directly or indirectly, of
more than 33% of the voting stock entitled to vote in the election of directors,
managers, or trustees of the transferee; (ii) any "person" or "group" is or
becomes the "beneficial owner," directly or indirectly of more than 33% of the
voting stock then outstanding; or (iii) during any period of 24 consecutive
months, individuals who at the beginning of such period constituted the Board
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in the office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of the Board then in office. For purposes of the Thomas Agreement, (i)
the terms "person" or "group" shall have the meanings used for purposes of Rules
13d and 13d-5 of the Exchange Act, whether or not applicable, provided that no
"Excluded Person" (as defined below) and no person or group controlled by any
Excluded Person shall be deemed to be a "person" or "group" and (ii) the term
"beneficial owner" shall have the meaning used in Rules 13d-3 and 13d-5 under
the Exchange Act, whether or not applicable, except that a person shall be
deemed to have "beneficial ownership" of all shares that any such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time or upon the occurrence of certain events. For purposes of
the Thomas Agreement, "Excluded Person" means any beneficial holder of 5% or
more of any class of common stock of the Company outstanding immediately
14
<PAGE> 35
prior to the consummation of the initial underwritten public offering by the
Company of 3,400,000 shares of the Company's Class A Common Stock in April 1993.
The Merger will result in a Change in Control for purposes of the Thomas
Agreement.
The Miller Agreement. Mr. Miller has an employment agreement with the
Company (the "Miller Agreement") that provides for a three year employment term,
which is automatically extended for two additional years, unless not later than
one year prior to the termination date, the Company or Mr. Miller gives written
notice not to extend the employment agreement (the initial term under such
agreement will expire January 26, 1999). The Miller Agreement provides for a
base salary of $300,000 per year (which is subject to an annual increase of the
lesser of 5% or the aggregate monthly percentage increase in the Consumer Price
Index for all Urban Consumers). The Miller Agreement also provides for Mr.
Miller to earn an annual target bonus equal to 100% of his base salary, measured
against objective financial criteria to be determined by the Board after
consultation with Mr. Miller. The Miller Agreement provides for the grant to Mr.
Miller of options under the Company's Stock Option Plan for the purchase of
400,000 shares of the Company's Class A Common Stock. The exercise price with
respect to 200,000 of such options is the closing NASDAQ National Market
quotation on the date of the grant or the most recent trading date prior to the
date of grant and the exercise price with respect to the remaining 200,000 such
options is the average closing market price for the five trading day period
ending thirty days after the date of the initial grant. Such options vest pro
rata 10% on the six month anniversary of the date of the grant, an additional
23.33% on the twelve month anniversary of the date of the grant, an additional
33.33% on the 24 month anniversary of the date of the grant and the final 33.33%
on the thirty-six month anniversary of the date of the grant. The options expire
if not exercised on the tenth anniversary of the date of the grant. The Miller
Agreement states that if (i) Mr. Miller is terminated by the Company other than
for "Cause" (as defined below), (ii) Mr. Miller terminates his employment for
"Good Reason" (as defined below), (iii) the employment is terminated by reason
of Mr. Miller's death or permanent disability, or (iv) there occurs a "Change of
Control" (as defined below), all options granted prior to that date shall vest
and become immediately exercisable. In addition, the agreement provides for the
grant of an additional 100,000 options at the discretion of the Board of
Directors. The Miller Agreement states that during the term, Mr. Miller shall
devote his full business time, energy and skill to the performance of his duties
as the President and Chief Executive Officer of the Company, and shall be
nominated for membership on the Board of Directors. The Miller Agreement also
provides for a lump sum payment of Mr. Miller's base salary and bonus, based on
the remainder of the term of the Miller Agreement, to Mr. Miller, if Mr.
Miller's employment is terminated by the Company without Cause or by Mr. Miller
for Good Reason.
Mr. Miller is also entitled to be grossed-up for any excise taxes imposed
under Section 4999 of the Code under terms substantially the same as described
above under the Davenport Agreement.
For purposes of the Miller Agreement, "Cause" means (i) the willful failure
by Mr. Miller to materially perform his duties with the Company or to follow the
instructions of the Board of Directors (other than any such failure resulting
from his incapacity due to physical or mental illness), (ii) the willful
engaging by Mr. Miller in conduct that is materially injurious to the Company,
monetarily or otherwise, (iii) the commission of any act of fraud, theft or
dishonesty by Mr. Miller against the Company, (iv) the conviction of Mr. Miller
of (or the pleading by Mr. Miller of nolo contendere to) any felony, fraud or
embezzlement or (v) any willful material breach by Mr. Miller of the terms of
the Miller Agreement. In addition, for purposes of the Miller Agreement, "Good
Reason" means (i) any material adverse alteration, reduction or diminution in
titles or positions or duties or responsibilities with the Company; (ii) any
reduction in base salary; (iii) the Company requiring Mr. Miller to change the
location of his employment or office to a location more than 25 miles outside of
Sunnyvale, California; (iv) a material breach by the Company of any provision of
the Miller Agreement; (v) the failure for any reason of the Company to grant the
options described in the Miller Agreement (exclusive of discretionary options)
on the terms set forth in the Miller Agreement; and (vi) the occurrence of a
"Change in Control."
For purposes of the Miller Agreement, the definition of "Change in Control"
is substantially the same as the definition of "Change in Control" used under
the Davenport Agreement.
The Merger will result in a Change in Control for purposes of the Miller
Agreement.
15
<PAGE> 36
The Modi Agreement. Mr. Modi has an employment agreement (the "Modi
Agreement") with the Company that provides for a four year employment term. The
Modi Agreement provides for a base salary of $210,000 per year (which is subject
to an annual increase based upon the change in the Consumer Price Index or 5%,
whichever is greater). The Modi Agreement stipulates that Mr. Modi will serve as
Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of
the Company and will not, during the term of his employment or Consulting Period
(as defined below), engage in any business activity, or acquire an ownership
interest in any entity, that is competitive with any line of business in which
the Company is engaged without the written approval of the Board of Directors.
The Modi Agreement also provides that for a period of twelve months after
termination of his employment with the Company, Mr. Modi may, at the election of
the Company, serve as a consultant to the Company and continue to receive
payment of his base salary and be subject to the non-competition clause. Under
the Modi Agreement, if (i) the Company terminates the employment of Mr. Modi
without "Cause" (as defined below), or (ii) during the term there is a "Change
in Control" (as defined below) of the Company and the successor entity or
purchaser does not accept an assignment of the Modi Agreement, or (iii) the
terms of Mr. Modi's employment are materially adversely changed or diminished,
following a Change in Control or otherwise, or (iv) a Change in Control occurs,
as a result of which the Company ceases to have any publicly-traded securities,
whereupon in the cases of clauses (ii), (iii), and (iv), Mr. Modi has the right
to consider his employment under the Modi Agreement terminated. In addition, in
such a case, the Company will retain Mr. Modi as a consultant for the longer of
the remainder of the term of the Modi Agreement and twenty-four months (the
"Consulting Period"), and Mr. Modi is entitled to receive (a) his base salary
and all other benefits during the Consulting Period and (b) the pro rata portion
of any bonus earned by Mr. Modi for the final year in which the termination
occurred. Moreover, all of Mr. Modi's outstanding options will vest and become
exercisable for a period of ninety days after a Change in Control of the
Company. The Company has also agreed to provide Mr. Modi during the term of the
Modi Agreement with a life insurance policy in an amount equal to $1 million,
with a designee of Mr. Modi as the beneficiary thereof. Mr. Modi is entitled to
receive (i) reimbursement for relocation to California in accordance with the
Company's relocation policy, including a one-time moving bonus of $35,000 and
(ii) payment of reasonable relocation expenses if his agreement is not renewed
and his future employer does not pay relocation costs. The Modi Agreement
provides for participation of Mr. Modi in the Company's bonus plans, fringe
benefits, perquisites, benefit programs and other compensation plans.
For the purposes of the Modi Agreement, "Cause" is defined as termination
upon (i) the willful failure of Mr. Modi to materially perform his duties with
the Company or to follow the instructions of the Board of Directors (other than
any such failure resulting from his incapacity due to physical or mental
illness), (2) the willful engaging by Mr. Modi in conduct that is materially
injurious to the Company, monetarily or otherwise, (3) the commission of any act
of fraud, theft or dishonesty against the Company, (4) the conviction of (or the
pleading of nolo contendere to) any felony, fraud or embezzlement or (5) any
willful breach by Mr. Modi of the terms of the Modi Agreement, unless any such
breach is corrected in all material respects within thirty days.
For purposes of the Modi Agreement, the definition of "Change in Control"
is substantially the same as the definition of "Change in Control" under the
Davenport Agreement.
The Merger will result in a Change in Control for purposes of the Modi
Agreement.
The Webb Agreement. Mr. Webb has an employment agreement with the Company
(the "Webb Agreement") that provides for a two year employment term. The Webb
Agreement provides for a base salary of $275,000 per year (which is subject to
an annual increase of the lesser of 5% or the aggregate monthly percentage
increase in the Consumer Price Index for all Urban Consumers). The Webb
Agreement also provides for Mr. Webb to earn an annual target bonus equal to
100% of base salary, measured against objective financial criteria to be
determined by the Board. The Webb Agreement provides for the grant to Mr. Webb
of options under the Company's Stock Option Plan for the purchase of 200,000
shares of the Company's Class A Common Stock. The exercise price per share is
the closing NASDAQ National Market quotation on the date of the grant or the
most recent trading date prior to the date of grant. Such options vest pro rata
50% on the first year anniversary of the date of the grant and the remaining 50%
on the second anniversary of the date of the grant. The options expire if not
exercised on the tenth anniversary of the date of
16
<PAGE> 37
the grant. The Webb Agreement states that in the event of a "Change in Control"
(as defined below), all options granted to Mr. Webb prior to the date of the
Change in Control will immediately vest and will be exercisable for the ninety
day period following such Change in Control. Under the Webb Agreement, if (i)
the Company terminates the employment of Mr. Webb without "Cause" (as defined
below), or (ii) during the term there is a Change in Control of the Company and
the successor entity or purchaser does not accept an assignment of the Webb
Agreement, or (iii) the terms of Mr. Webb's employment are materially adversely
changed or diminished, following a Change in Control or otherwise, whereupon in
the cases of clause (iii), Mr. Webb has the right to consider his employment
under the Webb Agreement terminated. In addition, in such a case, the Company
will retain Mr. Webb as a consultant for the longer of the remainder of the term
of the Webb Agreement and six months (the "Consulting Period"), and Mr. Webb is
entitled to receive (a) his base salary and all other benefits during the
Consulting Period and (b) the pro rata portion of any bonus earned by Mr. Webb
for the final year in which the termination occurred. The Webb Agreement
provides for participation of Mr. Webb in the Company's bonus plans, fringe
benefits, perquisites, benefit programs and other compensation plans.
For the purposes of the Webb Agreement, the definition of "Cause" is
substantially the same as the definition of "Cause" under the Modi Agreement,
and the definition of "Change in Control" is substantially the same as the
definition of "Change in Control" under the Davenport Agreement.
The Merger will result in a Change in Control for the purposes of the Webb
Agreement.
The Taylor Agreement. Mr. Taylor has an employment agreement (the "Taylor
Agreement") with the Company that provides for a three year employment term,
which is automatically renewed for subsequent two-year terms unless notice of
non-renewal is given by either party (the initial term under such agreement will
expire January 1, 1999). The Taylor Agreement provides for a base salary of
$182,000 per year (which is subject to an annual increase based upon the change
in the Consumer Price Index or 5%, whichever is greater). The Taylor Agreement
stipulates that Mr. Taylor will serve as Vice President-Marketing of the Company
and will not, during the term of his employment or the Consulting Period (as
defined in the Taylor Agreement), engage in any business activity, or acquire an
ownership interest in any entity, that is competitive with any line of business
in which the Company is engaged without the written approval of the Board of
Directors. The agreement also provides that for a period of twelve months after
termination of his employment with the Company, Mr. Taylor may, at the election
of the Company, serve as a consultant to the Company and continue to receive
payment of his base salary and be subject to the non-competition clause. If (i)
Mr. Taylor is terminated other than for "Cause" (as defined below) or (ii)
during the term there is a "Change in Control" (as defined below) and the
successor entity does not accept an assignment of the agreement, or (iii) the
terms of Mr. Taylor's employment are materially adversely changed or his duties
and responsibilities are materially diminished, following a Change in Control or
otherwise, then (A) the Company must retain Mr. Taylor as a consultant for the
remainder of the term or 18 months, whichever is longer, (B) Mr. Taylor will be
entitled to continue to receive payment of his base salary and all other
benefits during his consulting period and the pro rata portion of any bonus
earned by him for the fiscal year in which the termination of employment
occurred. Additionally, all of Mr. Taylor's outstanding options will vest and
become exercisable for a period of ninety days after a Change in Control of the
Company. The Company has also agreed to provide Mr. Taylor during the term of
the Taylor Agreement with a life insurance policy in an amount equal to $1
million, with a designee of Mr. Taylor as the beneficiary thereof. Mr. Taylor is
entitled to receive reimbursement for relocation to California in the form of a
relocation grant in the estimated amount of $124,680 to be disbursed in three
equal annual installments. The Taylor Agreement provides for participation of
Mr. Taylor in the Company's bonus plans, fringe benefits, perquisites, benefit
programs and other compensation plans.
For purposes of the Taylor Agreement, the definition of "Cause" is
substantially the same as the definition of "Cause" under the Modi Agreement. In
addition, for purposes of the Taylor Agreement, the definition of "Change in
Control" is substantially the same as the definition of "Change in Control"
under the Davenport Agreement.
The Merger will result in a Change in Control for purposes of the Taylor
Agreement.
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<PAGE> 38
The Alston Agreement. Effective September 30, 1997, the Company entered
into an agreement which was amended June 4, 1998 (as amended, the "Alston
Agreement") with C. Michael Alston which provides that Mr. Alston will serve as
Vice President, General Counsel and Secretary of the Company. The Alston
Agreement provides for the Company to pay to Mr. Alston his salary at the rate
of $220,000, payable in accordance with the Company's payroll practices until
his employment terminates ("Separation Date"). The Alston Agreement provides for
the Company to pay certain medical, dental and other insurance coverage as well
as other executive benefits for Mr. Alston until the Separation Date. Under the
Alston Agreement, for a period of one year after the Separation Date, Mr. Alston
shall not, without the prior written approval from the Company, directly or
indirectly compete with any business operations in which the Company is engaged.
The Company granted Mr. Alston an option to purchase 36,667 shares of Class
A common stock, $0.01 at the exercise price of $6.750 per share pursuant to a
grant letter dated February 12, 1998 (the "Alston Grant Letter"). The option
will vest one-half on October 24, 1998 and one-half on October 24, 1999. The
Alston Grant Letter provides that in the event of a "Change in Control" (as
defined below) of the Company, the option will vest and become exercisable. The
option will expire if not exercised ten years after the date of grant.
The Alston Agreement further provides that in the event of a Change of
Control of the Company, or, if earlier, upon the termination of Mr. Alston's
employment for any reason (alternatively, the "Trigger Date"), Mr. Alston will
be entitled to (i) a cash lump sum in the amount of $123,751.13 and (ii) a
continuation of his salary and benefits for the twelve-month period commencing
on the Trigger Date.
For purposes of the Alston Grant Letter and the Alston Agreement, the
definition of "Change in Control" is substantially the same as the definition of
"Change in Control" under the Davenport Agreement.
The Merger will result in a Change in Control for purposes of the Alston
Grant Letter and the Alston Agreement.
EXECUTIVE INCENTIVE COMPENSATION PLAN
The Company has an Executive Incentive Compensation Plan (the "Compensation
Plan"). The purpose of the Compensation Plan is to facilitate the hiring,
retaining, motivating of Company executives and key management personnel. The
Compensation Plan is administered by the Compensation Committee, which
recommends to the Board of Directors a discretionary bonus for eligible
employees based on their contributions during the applicable year to the
successful management of the Company. The Compensation Plan also provides for
payment of certain discretionary bonuses to eligible employees who are not
officers of the Company, based on certain specified performance standards and
the employee's base compensation for that fiscal year. For fiscal year 1995 no
bonuses were paid. For fiscal year 1996 and 1997, the bonuses were paid on a
discretionary basis and were not funded based upon any formulae.
STOCK OPTION PLAN
In January 1993, the Company adopted a Stock Option Plan (the "Stock Option
Plan" or the "Plan") providing for the grant, from time to time, of options
("Options") to purchase up to 1,930,285 shares of Class A Common Stock, to
employees of the Company and its subsidiaries (including employees who are
officers or directors, but excluding directors who are not employees) that have
substantial responsibility in the direction and management of the Company or its
subsidiaries, and to Outside Directors (as defined) on an annual,
non-discretionary basis. In September 1996, the stockholders of the Company
approved an amendment to the Plan to increase the shares of Class A Common Stock
reserved for issuance thereunder to 2,330,285. Outside Directors are directors
who are not employees of the Company, and were not employees for the year prior
to the first grant of an Option under the Plan, and who, when elected to the
Board, did not directly or indirectly own or control more than 5% of the
outstanding Common Stock of the Company (collectively, the "Participating
Persons"). As of September 30, 1997, Options granted under the Plan were
outstanding for the purchase of 2,255,625 shares of Class A Common Stock.
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<PAGE> 39
The Stock Option Plan provides for the grant of (i) Options intended to
qualify as Incentive Stock Options ("ISOs") as defined in Section 422 of the
Code, and (ii) Options that do not qualify as ISOs ("NQSOs"). To the extent that
the aggregate fair market value (determined at the time the ISO was granted) of
the shares subject to ISOs granted to a Participating Person under the Plan
(combined with all incentive stock option plans of the Company and any parent or
subsidiary) which becomes exercisable for the first time in any calendar year
exceeds $100,000, such Option shall be treated as an NQSO. The Committee may
provide that in lieu of purchasing the entire number of shares subject to an
Option, the Optionee can relinquish all or any part of the unexercised portion
of the Option for a number of shares of Common Stock equal to the product of (1)
the number of shares of Common Stock subject to the relinquished Option and (2)
a fraction, (i) the numerator of which is the excess of (A) the current fair
market value per share of Common Stock subject to the relinquished Option over
(B) the option price of such relinquished Option, and (ii) the denominator of
which is the then current fair market value per share of such Common Stock.
The Stock Option Plan is administered by the Compensation Committee (the
"Committee"), which must have at least two members at all times. Members of the
Committee must be "disinterested persons" as that term is defined under Rule
16b-3 under the Exchange Act. Generally, prior to November 1, 1996, a
disinterested person was a director who, during the one-year period prior to his
or her service on the Committee, was not granted a stock option or other equity
security of the Company or any of its affiliates, except as expressly permitted
under Rule 16b-3. Rule 16b-3 has been revised effective November 1, 1996.
Subject to the provisions of the Plan, the Committee is empowered to, among
other things, grant Options under the Plan; determine which employees may be
granted Options under the Plan, the type of Option granted (ISO or NQSO), the
number of shares subject to each Option, the time or times at which Options may
be granted and exercised and the exercise price thereof; construe and interpret
the Plan; determine the terms of any option agreement pursuant to which Options
are granted (an "Option Agreement"); and amend any Option Agreement with the
consent of the recipient of Options (the "Optionee"). The Board of Directors may
at any time suspend or terminate the Stock Option Plan or amend the Stock Option
Plan to conform to changes in the law or as the Board determines to be in the
Company's best interest, except that stockholder approval is required for any
amendment for which stockholder approval is required of the Company by (a) Rule
16b-3, promulgated under the Exchange Act; (b) the Code or regulatory provisions
dealing with Incentive Stock Options; (c) any rules for listed companies
promulgated by any national stock exchange on which the Company's stock is
traded; or (d) any other applicable rule or law. No amendment, suspension, or
termination of the Stock Option Plan may be made that would impair or negate any
of the rights or obligations of any Participating Person under any Option
theretofore granted without the consent of such Participating Person.
Pursuant to the terms of each Option Agreement that was in effect on
September 30, 1997, either 25% of the Options covered by each Option Agreement
become exercisable on each anniversary of the date of grant thereof, on a
cumulative basis, or 33% of the Options covered by each Option Agreement become
exercisable on each anniversary of the date of grant thereof, on a cumulative
basis. The Options granted to Mr. Davenport and Mr. Miller are subject to a
different vesting schedule. See "Employment Agreements and Compensation
Arrangements." Options granted to Outside Directors (5,000 NQSOs upon election
to the Board and 3,000 NQSOs on each succeeding January 1) vest 50% on the first
and 50% on the second anniversary of the date of grant thereof, on a cumulative
basis. All Options vest and become exercisable upon a change of control of the
Company.
The exercise price per share for all ISOs may not be less than 100% of the
fair market value of a share of Class A Common Stock on the date on which the
Option is granted (or 110% of the fair market value on the date of grant of an
ISO if the Optionee owns more than 10% of the total combined voting power of all
classes of voting stock of the Company or any of its affiliates (a "10%
Holder")). The exercise price per share for NQSOs may be less than, equal to or
greater than the fair market value of a share of Class A Common Stock on the
date such NQSO is granted, but not less than par value; provided, however, that
the exercise price for NQSOs granted to Outside Directors shall be the fair
market value of a share of Class A Common Stock on the date of grant. To the
extent determined by the Committee in granting any Option, upon exercise of such
Option, the option price may be paid in cash or in shares of Class A Common
Stock and, if approved by the
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<PAGE> 40
Board, the Company, or any parent or subsidiary, may make or guarantee a loan to
an Optionee to finance the exercise of any Option. Options are not assignable or
transferable other than by will or the laws of descent and distribution. Each
Option is exercisable, during the Optionee's lifetime, only by the Optionee.
Unless earlier terminated by the Board of Directors, the Plan will
terminate in January 2003, 10 years after its effective date. Unless otherwise
specifically provided in an Optionee's Option Agreement, each Option granted
under the Plan expires no later than 10 years after the date such Option is
granted (five years for ISOs granted to 10% Holders). Options may be exercised
only during the period that the Optionee is an employee (or member of the Board,
for Outside Directors) of the Company and (i) for a period of 30 days after
termination of employment (or membership on the Board, for Outside Directors)
other than for cause, without the Company's consent or due to the death of the
Optionee, (ii) for a period of three months after retirement by the Optionee
with the consent of the Company, or (iii) for a period of 12 months after the
death or disability of the Optionee, in each case to the extent the Options are
then exercisable.
In addition to Options granted pursuant to the Plan, the Company also
grants stock options to directors and employees which are not granted pursuant
to the Plan ("Non-Plan Options"). As of September 30, 1997, the Company had
issued 509,937 Non-Plan Options. As of January 30, 1998, the Company had issued
additional 866,667 Non-Plan Options.
SUPPLEMENTAL RETIREMENT PLAN AGREEMENTS
Effective September 1, 1991, in connection with the acquisition of Hamilton
Test Systems, Inc. ("HTS"), Mr. Singleton and Ms. Edmonds, who were officers or
employees of HTS, each entered into a separate Supplemental Retirement Plan
Agreement (the "Retirement Plans") with the Company. The purpose of these
agreements was to induce such individuals to remain with HTS and to provide them
with retirement benefits similar to those to which they were then entitled.
Under the Retirement Plans, the Company is required to pay to the recipient
a fixed monthly benefit for a ten-year period beginning at the later of the date
on which the recipient reaches 65 years of age and the date on which the
recipient's employment is terminated. The Retirement Plans provide that, if the
recipient dies after terminating employment, the benefit continues for the
remainder of the ten-year term. If the recipient dies before terminating
employment, the recipient's designated beneficiaries will be entitled to a
reduced benefit payable quarterly and if the recipient becomes totally disabled
while employed by the Company, the recipient will be entitled to the full
monthly benefit for ten years starting at 65 years of age.
Although the benefits vested upon inception, the benefits may be terminated
by the Company if the recipient engaged in a business that is competitive with
HTS after the termination of his or her employment, whether before or during the
period that he or she is otherwise entitled to receive the benefit. The benefit
is an unsecured obligation of the Company, which is payable from its general
assets.
The annual payment to which each recipient may be entitled at age 65 is
$100,000. The benefits under the Retirement Plans were determined as a result of
negotiations between the Company and the respective beneficiaries thereof. The
Company is the owner and beneficiary of life insurance policies or annuities,
obtained in order to fund the Retirement Plans, the annual premiums/deposits for
which are $17,000 for Mr. Singleton and $15,000 for Ms. Edmonds.
MEDICAL REIMBURSEMENT PROGRAM
Executives of the Company are eligible to participate in a medical
reimbursement program. The program provides direct payment to participating
employees for non-reimbursed expenses that constitute "covered" medical and
dental expenses incurred under the Company's health insurance program. The
health services costs include any deductibles, co-payments, and payments above
reasonable and customary levels that are incurred by a participating employee.
Payments are limited to $5,000 per year per employee.
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<PAGE> 41
REPORT OF THE COMPENSATION COMMITTEE
Executive Compensation
The Company's compensation policies are designed to align executive
compensation with the short- and long-term profitability of the Company. A
significant part of management compensation is comprised of stock options under
the Company's Stock Option Plan. While the Company has previously relied upon a
combination of cash bonuses and stock options to incentivize its employees, the
Company has relied exclusively on the award of stock options during the previous
three fiscal years.
Salaries for Chester C. Davenport, the Chairman of the Board of the
Company, and the other most highly compensated executives are governed by
employment contracts approved by the Board of Directors. The Board of Directors
approved employment contracts of Mr. Davenport in January 1993, Mr. Miller in
December 1995 and Messrs. Modi, Alston and Taylor in November 1996. The general
level of Mr. Davenport's salary is based upon compensation arrangements that
were negotiated in the context of the acquisition of Hamilton Test Systems, Inc.
in 1990 and ETI in 1992. These negotiated compensation arrangements reflected
the Board's evaluation of the experience and value of the executive of the
Company, the then-existing compensation of the executive, prevailing salary
levels at similarly capitalized companies, and a recognition of the efforts
required to complete the acquisition. Accordingly, the salaries fixed by these
contracts are not directly tied to corporate performance (although, as described
herein, the aggregate cash bonus amount available under the Company's Executive
Incentive Compensation Plan is tied to earnings results).
The salary of Mr. Davenport reflects the critical role Mr. Davenport has
played in the affairs of the Company, including the founding of the Company in
1990, the arrangement and successful completion of the Company's acquisitions in
1990 and 1992, and the expansion of the Company through private and public
financings, new contract awards, and the securing and retention of key
management personnel and achievement of significant corporate objectives.
The Committee's awards of options under the Stock Option Plan have been
based upon the overall contribution of the recipient to the development of
corporate policy and the operations and performance of the Company, and the
expected contribution of the recipient to the future success of the Company.
In fiscal 1997, the Compensation Committee reviewed the existing stock
options of all Company executives and employees. In light of the fact that the
outstanding options granted to employees by the Company had exercise prices well
above the recent historical trading prices for the Company's Common Stock, the
Compensation Committee concluded that such stock options were not providing the
desired incentive to those employees whom the Committee believed were making and
would continue to make substantial contributions to the successful growth of the
Company. The Committee believed this action was needed to help retain key
employees at a time of intense competition for experienced personnel. Certain of
the executive officers of the Company were among those employees who had stock
options repriced.
Option Repricing
The following table provides information concerning the repricing of stock
options held by executive officers of the Company from the Company's initial
public offering on April 7, 1993 through September 30, 1997.
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<PAGE> 42
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES LENGTH OF
UNDERLYING MARKET PRICE ORIGINAL OPTION
OPTIONS/SARS OF STOCK AT EXERCISE PRICE TERM REMAINING
REPRICED TIME OF AT TIME OF NEW AT DATE OF
OR AMENDED REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE (#) AMENDMENT ($) AMENDMENT ($) PRICE ($) AMENDMENT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chester C. Davenport.. 10/31/95 289,542 $3.2500 $16.0000 $6.1250 6 years, 149 days
10/31/95 50,000 $3.2500 $20.0000 $6.1250 7 years, 215 days
- -----------------------------------------------------------------------------------------------------------------------------
C. Michael Alston.... 5/9/95 10,000 $5.8750 $20.0000 $6.1250 9 years, 30 days
7/26/95 36,000 $5.8750 $16.0000 $6.1250 7 years, 247 days
7/26/95 40,000 $5.8750 $15.8750 $6.1250 8 years, 70 days
- -----------------------------------------------------------------------------------------------------------------------------
Raj Modi............. 5/9/95 10,000 $5.8750 $20.0000 $6.1250 9 years, 30 days
7/26/95 50,000 $5.8750 $16.0000 $6.1250 7 years, 247 days
- -----------------------------------------------------------------------------------------------------------------------------
Larry Taylor......... 5/9/95 10,000 $5.8750 $20.0000 $6.1250 9 years, 30 days
7/26/95 50,000 $5.8750 $16.0000 $6.1250 7 years, 247 days
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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STOCK PRICE PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
stockholder return on the Class A Common Stock against the cumulative total
return on the Amex Stock Market (CRSP Index) and a peer group for the period
from April 1, 1993 to September 30, 1997.
The Company's most recent Proxy Statement, dated August 26, 1996, included
a comparison of the percentage change in the cumulative total stockholder return
on the Class A Common Stock against the cumulative total return on the NASDAQ
Stock Market Index. From April 1, 1993 through August 8, 1997, the Class A
Common Stock was listed on the NASDAQ National Market System. Because the
Company's Class A Common Stock is traded, as of August 11, 1997, on the American
Stock Exchange, the Company no longer compares the Class A Common Stock to the
NASDAQ Stock Market Index. Assuming an initial investment of $100 on April 1,
1993, the date of the Company's initial public offering, the cumulative total
return on the NASDAQ Stock Market Index was $111.1, $112.0, $154.7, $183.6, and
$252.1 as of September 30, 1993, 1994, 1995, 1996 and 1997, respectively.
[GRAPH]
For the foregoing graph the Company has used a group of issuers with
similar market capitalization since the Company cannot reasonably identify a
"peer group" as it is not aware of any other companies in its line of business
whose stock is publicly traded. The issuers comprising the group, all of which
have market capitalizations from $80.8 million to $82.9 million, are as follows:
Autocam Corp., Bull Run Corp., Continental Can/De, Dense-Pac Microsystems Inc.,
DRS Technologies Inc., First Banks Amer Inc., First Home Bancorp Inc./NJ, Gencor
Industries Inc., Gold Reserve Corp., Golden Enterprises, Granite St. Bankshares
Inc., Guest Supply Inc., Gundle/SLT Environmental Inc., Hallwood Energy Partners
LP, Rex Stores Corp., Scott & Stringfellow FINL, Southwest Bancshares Inc./De,
Synthetech Inc., U.S. Home & Garden Inc., and Uniroyal Technology Corp.
23
<PAGE> 44
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
Mr. Dugger and Mr. Christophe serve as the members of the Compensation
Committee of the Board of Directors. Mr. Dugger has served as a member of this
Committee since April 12, 1994 and Mr. Christophe has served as a member since
May 12, 1997. Mr. Kasten served as a member of the Committee from September 24,
1996 to May 12, 1997. The Company is party to a Legislative Monitoring
Consulting Services Agreement with Kasten & Company. The agreement originally
provided for a consulting fee of $10,000 per month plus expenses which decreased
to $5,000 per month plus expenses in August 1997. For fiscal 1997 the Company
made payments under this agreement of $135,000 for fees and $688 for expenses.
This agreement is in effect through the current fiscal year. Ms. Kasten is the
sole owner of Kasten & Company.
SECTION 16(A) REPORTING
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and Executive Officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Executive officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended September 30, 1997, officers,
directors and greater than ten percent beneficial owners timely filed all
required reports under Section 16(a), with the exception of Mr. Richard P. Webb,
Executive Vice President and Chief Operating Officer of the Company, who failed
to file a Form 3 on a timely basis.
24
<PAGE> 45
ANNEX II
[CREDIT SUISSE FIRST BOSTON LETTERHEAD]
Board of Directors
Envirotest Systems Corp.
246 Sobrante Way
Sunnyvale, CA 94086-4807
August 12, 1998
Dear Members of the Board:
You have asked us to advise you with respect to the fairness to the
stockholders of Envirotest Systems Corp., a Delaware corporation (the
"Company"), from a financial point of view, of the consideration to be received
by such stockholders pursuant to the terms of the Agreement and Plan of Merger,
dated as of August 12, 1998 (the "Merger Agreement"), between the Company,
Environmental Systems Products, Inc. ("ESP") and Stone Rivet, Inc., a Delaware
corporation and a wholly-owned subsidiary of ESP (the "Acquiror"). Pursuant to
the merger (the "Merger") of Acquiror with and into the Company as set forth in
the Merger Agreement, each issued and outstanding share of Class A Common Stock,
par value $.01 per share, Class B Common Stock, par value $.01 per share, and
Class C Common Stock, par value $.01 per share, of the Company (collectively,
the "Common Shares") will be converted into the right to receive $17.25 in cash.
The terms and conditions of the Merger are set forth in the Merger Agreement.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company, as well as the
Merger Agreement. We have also reviewed certain other information, including
financial forecasts, provided to us by the management of the Company and have
met with the Company's management to discuss the business and prospects of the
Company.
We have also considered certain financial and stock market data of the
Company, and we have compared those data with similar data for other publicly
held companies in businesses most comparable to the business of the Company and
we have considered the financial terms of certain other business combinations
and other transactions which have recently been effected. We also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts provided by the Company's management, we have assumed that
such forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of the Company as
to the future financial performance of the Company. In addition, we have not
been requested to make, and have not made, an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company,
nor have we been furnished with any such evaluations or appraisals. Our opinion
is necessarily based upon financial, economic, market, regulatory and other
conditions as they exist and can be evaluated on the date hereof. In connection
with our engagement, we approached third parties to solicit indications of
interest in a possible acquisition of the Company and held discussions with
certain of these parties prior to the date hereof.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of a business combination, which would
include the Merger. We will also receive a fee for rendering this opinion. In
addition, as set forth in our letter to you dated June 18, 1998, a separate
financing team at Credit Suisse First Boston and its affiliate have agreed to
act as Arranger, Administrative Agent and Underwriter with respect to the debt
financing being provided to the Acquiror in connection with the Merger.
<PAGE> 46
Envirotest Systems Corp.
August 12, 1998
Page 2
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of the Company for our and such affiliates'
own accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors in connection with its consideration of the Merger, does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the proposed Merger, whether such stockholder should tender shares in
the tender offer contemplated by the Merger Agreement, and is not to be quoted
or referred to, in whole or in part, in any registration statement, prospectus
or proxy statement, or in any other document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent. Our opinion is limited to a
determination of the fairness, from a financial point of view, of the
consideration to be received in the Merger and does not express an opinion as to
the merits of the Merger in any other respect or the relative merits of the
Merger as compared to any other transaction or business strategy of the Company.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by the stockholders of the Company
in the Merger is fair to such stockholders, from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /S/ KEN MILLER
-------------------------------------------------
Name: Ken Miller
Title: Vice Chairman
<PAGE> 1
[ENVIROTEST SYSTEMS LOGO] ENVIROTEST SYSTEMS CORP.
6903 Rockledge Drive
Bethesda, Maryland 20817
301/530-8110
FAX: 301/530-9538
August 19, 1998
Dear Stockholder:
I am pleased to report that, on August 12, 1998, Envirotest Systems Corp.
(the "Company"), entered into a merger agreement with Stone Rivet, Inc.
("Purchaser"), a Delaware corporation and a wholly owned subsidiary of
Environmental Systems Products, Inc. ("Parent"), a Delaware corporation, that
provides for the acquisition of the Company by Purchaser at a price of $17.25
per share in cash. Under the terms of the proposed transaction, Purchaser is
today commencing a cash tender offer (the "tender offer") for all outstanding
shares of the Company common stock at $17.25 per share. Following the successful
completion of the tender offer, Purchaser will be merged into the Company and
all shares not purchased in the tender offer will be converted into the right to
receive $17.25 per share in cash in the merger. Parent is an indirect wholly
owned subsidiary of Newmall Limited, a private limited company organized under
the laws of the United Kingdom. Newmall Limited is controlled by the Alchemy
Investment Plan, an investment consortium that is advised by Alchemy Partners.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TENDER OFFER AND
DETERMINED THAT THE TERMS OF EACH OF THE TENDER OFFER AND THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ALL THE COMPANY STOCKHOLDERS
ACCEPT THE TENDER OFFER AND TENDER THEIR SHARES TO PURCHASER.
As previously announced in May of this year, the Company has been actively
exploring strategic alternatives aimed at enhancing stockholder value. In
evaluating the range of options open to the Company as a result of this process,
the Board of Directors has determined that the tender offer and the merger
represent the best alternative for the Company and its stockholders. In arriving
at its recommendations, the Board of Directors gave careful consideration to a
number of factors, each of which is described in the attached Schedule 14D-9
that is being filed today with the Securities and Exchange Commission. These
factors included the opinion of Credit Suisse First Boston Corporation,
financial advisor to the Company, that, as of the date of such opinion and
subject to the assumptions made, matters considered and limitations set forth in
its opinion, the cash consideration of $17.25 per share to be received by the
Company stockholders pursuant to the tender offer and the merger is fair from a
financial point of view to such stockholders.
Stockholders should note that the merger agreement includes a condition
requiring the tender of at least 90% of the Company's outstanding shares prior
to the expiration of the Offer. Stockholders should also note that the
likelihood that this condition will be satisfied is increased by the fact that
certain stockholders have agreed with Purchaser to tender shares representing
approximately 50% of the currently outstanding shares and that certain directors
and officers of the Company have indicated their intention to tender shares
representing approximately an additional 7% of the currently outstanding shares.
In the event that this condition is not satisfied, the merger agreement requires
the Company to seek stockholder approval for the merger at a duly held
stockholders' meeting. The affirmative vote of a majority of the currently
outstanding shares entitled to vote would result in approval of the merger.
Certain stockholders of the Company have agreed to vote shares representing
approximately 41% of the voting shares in favor of the merger, and certain
directors and officers of the Company have indicated their intention of voting
shares representing approximately an additional 12% of the voting shares in
favor of the merger.
While a vote in favor of the merger by way of stockholder approval is
virtually assured by the factors set out above, the Board of Directors
recommends that stockholders tender their shares pursuant to the tender offer.
Stockholders are further reminded that they will receive the cash consideration
of $17.25 per share on an earlier date if shares are tendered pursuant to the
tender offer than the date on which such consideration would be received in the
event that the merger is effected by way of stockholder approval.
Enclosed is the Company's Solicitation/Recommendation Statement on Schedule
14D-9 and Purchaser's Offer to Purchase and related materials, including a
Letter of Transmittal for use in tendering shares. We urge you to carefully read
the enclosed materials, including Credit Suisse First Boston Corporation's
fairness opinion which is attached to the Schedule 14D-9.
The management and directors of the Company thank you for the support you
have given the Company.
Sincerely,
/s/ CHESTER D. DAVENPORT
------------------------
Chester D. Davenport
Chairman of the Board
<PAGE> 1
ANNEX II
[CREDIT SUISSE FIRST BOSTON LETTERHEAD]
Board of Directors
Envirotest Systems Corp.
246 Sobrante Way
Sunnyvale, CA 94086-4807
August 12, 1998
Dear Members of the Board:
You have asked us to advise you with respect to the fairness to the
stockholders of Envirotest Systems Corp., a Delaware corporation (the
"Company"), from a financial point of view, of the consideration to be received
by such stockholders pursuant to the terms of the Agreement and Plan of Merger,
dated as of August 12, 1998 (the "Merger Agreement"), between the Company,
Environmental Systems Products, Inc. ("ESP") and Stone Rivet, Inc., a Delaware
corporation and a wholly-owned subsidiary of ESP (the "Acquiror"). Pursuant to
the merger (the "Merger") of Acquiror with and into the Company as set forth in
the Merger Agreement, each issued and outstanding share of Class A Common Stock,
par value $.01 per share, Class B Common Stock, par value $.01 per share, and
Class C Common Stock, par value $.01 per share, of the Company (collectively,
the "Common Shares") will be converted into the right to receive $17.25 in cash.
The terms and conditions of the Merger are set forth in the Merger Agreement.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company, as well as the
Merger Agreement. We have also reviewed certain other information, including
financial forecasts, provided to us by the management of the Company and have
met with the Company's management to discuss the business and prospects of the
Company.
We have also considered certain financial and stock market data of the
Company, and we have compared those data with similar data for other publicly
held companies in businesses most comparable to the business of the Company and
we have considered the financial terms of certain other business combinations
and other transactions which have recently been effected. We also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts provided by the Company's management, we have assumed that
such forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of the Company as
to the future financial performance of the Company. In addition, we have not
been requested to make, and have not made, an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company,
nor have we been furnished with any such evaluations or appraisals. Our opinion
is necessarily based upon financial, economic, market, regulatory and other
conditions as they exist and can be evaluated on the date hereof. In connection
with our engagement, we approached third parties to solicit indications of
interest in a possible acquisition of the Company and held discussions with
certain of these parties prior to the date hereof.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of a business combination, which would
include the Merger. We will also receive a fee for rendering this opinion. In
addition, as set forth in our letter to you dated June 18, 1998, a separate
financing team at Credit Suisse First Boston and its affiliate have agreed to
act as Arranger, Administrative Agent and Underwriter with respect to the debt
financing being provided to the Acquiror in connection with the Merger.
<PAGE> 2
Envirotest Systems Corp.
August 12, 1998
Page 2
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of the Company for our and such affiliates'
own accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors in connection with its consideration of the Merger, does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the proposed Merger, whether such stockholder should tender shares in
the tender offer contemplated by the Merger Agreement, and is not to be quoted
or referred to, in whole or in part, in any registration statement, prospectus
or proxy statement, or in any other document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent. Our opinion is limited to a
determination of the fairness, from a financial point of view, of the
consideration to be received in the Merger and does not express an opinion as to
the merits of the Merger in any other respect or the relative merits of the
Merger as compared to any other transaction or business strategy of the Company.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by the stockholders of the Company
in the Merger is fair to such stockholders, from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /S/ KEN MILLER
-------------------------------------------------
Name: Ken Miller
Title: Vice Chairman
<PAGE> 1
ENVIROTEST SYSTEMS CORP.
STOCK OPTION PLAN
(January 21, 1993)
1. PURPOSE. The purpose of this Envirotest Systems Corp. Stock Option
Plan (hereinafter referred to as the "Plan") is to further the success of
Envirotest Systems Corp., a Delaware corporation (the "Company"), and certain of
its affiliates by making available Common Stock of the Company for purchase by
(i) certain key employees of the Company or any of its Subsidiaries (including
employees who are officers or directors, but excluding directors who are not
employees) that have substantial responsibility in the direction of the Company
or its Subsidiaries ("Key Employees"), and (ii) certain Outside Directors (as
defined below), and thus to provide an additional incentive to such persons to
continue in the service of or to the Company or its affiliates and to give them
a greater interest as shareholders in the success of the Company. Accordingly,
the Committee is hereby authorized to designate those Key Employees who are to
receive Options under this Plan, and upon the due execution of an Option
Agreement, to grant Options to such Key Employees. Moreover, automatic annual
grants of options shall be made to Outside Directors under the terms set forth
herein.
2. DEFINITIONS. As used in this Plan, the terms set forth below shall
have the following meanings:
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Committee administering the Plan described
in Paragraph 3 hereof.
"COMMON STOCK" means the Company's Class A Common Stock, par
value $.01 per share.
"COMPANY" means Envirotest Systems Corp., a Delaware corporation,
and any successor in interest.
"DATE OF GRANT" means the date on which an Option is granted as
evidenced by a written Option Agreement executed by the Company and a
Participant pursuant to the Plan.
"DISINTERESTED PERSON" means a "disinterested person" as defined
in Rule 16b-3 promulgated under the Exchange Act or any successor
provision. In general, and
<PAGE> 2
subject to Rule 16b-3, a "disinterested person" is a director who,
during the one-year period prior to his or her service on the Committee,
was not granted a stock option or other equity security of the Company
or any of its affiliates, except as expressly permitted under the Rule.
"EFFECTIVE DATE" means the effective date of this Plan specified
in Paragraph 15 hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as it
may be amended from time to time.
"INCENTIVE STOCK OPTION" means an option qualifying under Section
422 of the Code.
"KEY EMPLOYEE" means a person who is an employee of the Company,
a Subsidiary, or, if applicable, the Parent, who has substantial
responsibility in the direction and management of the Company or its
Subsidiaries (or, if applicable, the Parent), including employees who
are officers or directors, but excluding directors who
are not employees.
"NON-QUALIFIED STOCK OPTION" means an Option that is not an
Incentive Stock Option.
"OPTION" means an Option granted pursuant to this Plan and may be
either an Incentive Stock Option or a Non-qualified Stock Option.
"OPTION AGREEMENT" means a written agreement between the Company
and a Participant pursuant to which Options are granted to a Participant
under this Plan.
"OPTION PRICE" means the price per share of Common Stock,
determined under Paragraph 8(a) hereof, for which an Option may be
exercised.
"OPTIONEE" means the person who is entitled to exercise an
Option.
"OUTSIDE DIRECTOR" means a director of the Company who (a) at the
time such person became a director, did not own or control, directly or
indirectly, more than 5% of the outstanding shares of Common Stock, and
(b) is not otherwise an employee of the Company or any Subsidiary and
was not an employee of the Company or Subsidiary for a period of at
least one year before the date of the grant of an Option under the Plan.
"PARENT" means a parent corporation of the Company as defined in
Section 424(e) of the Code.
<PAGE> 3
"PARTICIPANTS" means the Key Employees who are granted Options
under this Plan.
"RELINQUISHED OPTIONS" means Options relinquished pursuant to
Paragraph 10 hereof.
"RULE" means Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Exchange Act.
"SUBSIDIARY" means a subsidiary corporation of the Company as
defined in Section 424(f) of the Code.
3. ADMINISTRATION OF PLAN. The Board of Directors of the Company shall
appoint a committee (the "Committee") composed of not less than two persons to
administer the Plan. Only Disinterested Persons shall be eligible to serve as
members of the Committee. The Committee shall report all action taken by it to
the Board, which shall review and ratify or approve those actions that are by
law required to be so reviewed and ratified or approved by the Board. The
Committee shall have full and final authority in its discretion, subject to the
provisions of the Plan, to determine the Participants to whom, and the time or
times at which, Options shall be granted and the number of shares and purchase
price of Common Stock covered by each Option; to construe and interpret the Plan
and any agreements made pursuant to the Plan; to determine the terms and
provisions (which need not be identical or consistent with respect to each
Participant) of the respective Option Agreements and any agreements ancillary
thereto, including, without limitation, terms covering the payment of the Option
Price; and to make all other determinations and take all other actions deemed
necessary or advisable for the proper administration of this Plan. All such
actions and determinations shall be conclusively binding for all purposes and
upon all persons.
4. OPTIONS AUTHORIZED. The Options granted under this Plan may be
Incentive Stock Options or Non-qualified Stock Options, provided that any Option
granted to an Outside Director shall be a Non-qualified Stock Option. The
Committee shall have the full power and authority to determine which Options
shall be Non-qualified Stock Options and which shall be Incentive Stock
Options; to grant only Incentive Stock Options or only Non-qualified Stock
Options or any combination thereof; and, in its sole discretion, to grant to an
Optionee, in exchange for the surrender and cancellation of an Option, a new
Option having a purchase price lower than that provided in the Option so
surrendered and cancelled and containing such other terms and conditions as the
Committee may prescribe in accordance with the provisions of this Plan. Under
no circumstances may Non-qualified Stock Options be granted where the exercise
of such Non-qualified Stock Options may affect the exercise of Incentive Stock
Options granted pursuant to the Plan. No Options may be granted under the Plan
prior to the Effective Date. In addition to any other limitations set forth
herein, the aggregate fair market value (determined in accordance with
Paragraph 8(a) of the Plan as of the time the option is
<PAGE> 4
granted) of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by a Participant in any calendar year (under all
plans of the Company and of any Parent or Subsidiary) shall not exceed $100,000.
5. COMMON STOCK SUBJECT TO OPTIONS. The aggregate number of shares of
the Company's Common Stock that may be issued upon the exercise of Options
granted under the Plan shall not exceed 1,930,285 shares, subject to adjustment
under the provisions of Paragraph 9. The shares of Common Stock to be issued
upon the exercise of Options may be authorized but unissued shares, or shares
issued and reacquired by the Company. In the event any Option shall, for any
reason, terminate or expire or be surrendered without having been exercised in
full, the shares subject to such Option shall again be available for Options to
be granted under the Plan, except that shares for which Relinquished Options (or
portions thereof) are exercisable shall not again be available for Options under
the Plan.
6. PARTICIPANTS. Except as hereinafter provided, Options may be granted
under the Plan to any Participant. In determining the Participants to whom
Options shall be granted and the number of shares to be covered by such Option,
the Committee may take into account the nature of the services rendered by the
respective Participants, their present and potential contributions to the
Company's success, and such other factors as the Committee in its discretion
shall deem relevant. A Participant who has been granted an Option under the Plan
may be granted an additional Option or Options under the Plan, in the
Committee's discretion.
7. OPTIONS GRANTED TO OUTSIDE DIRECTORS.
(a) Each Outside Director shall automatically receive a
Non-qualified Stock Option to purchase 5,000 shares of the Common Stock
upon the later of (i) his appointment as a director, or (ii) the date
that a registration statement for the Company under the Securities Act
of 1933 becomes effective. In addition, each succeeding January 1, each
Outside Director shall be granted a Non-qualified Stock Option to
acquire an additional 3,000 shares of the Common Stock.
(b) The exercise price of the Non-qualified Stock Option granted
to an Outside Director shall be the Fair Market Value of the shares of
Common Stock subject to such Option on the date preceding the Grant.
(c) One-half of the shares of Common Stock covered by an Option
granted to an Outside Director shall be exercisable on the first
anniversary of the Date of Grant, with an additional one-half of such
shares of Common Stock exercisable on the second anniversary of the Date
of Grant of the Option.
(d) The expiration of each Option granted to an Outside Director
shall be ten (10) years from the Date of Grant.
<PAGE> 5
(e) Other conditions applicable to Non-qualified Stock Options
granted to Participants under this Plan, including but not limited to
the terms of exercise, adjustments, and the period within which an
Option may be exercised following termination of employment shall apply
to Options granted to Outside Directors (substituting service or
termination as a member of the Board for service or termination of
employment).
8. TERMS AND CONDITIONS OF OPTIONS. The grant of an Option under the
Plan shall be evidenced by an Option Agreement executed by the Company and the
applicable Participant and shall contain such terms and be in such form as the
Committee may from time to time approve, subject to the following limitations
and conditions:
(a) OPTION PRICE. The Option Price per share with respect to each
Option granted to a Key Employee shall be determined by the Committee,
but shall in no instance be less than the par value of the shares
subject to the Option. In addition and subject to Paragraph 8(g) below,
the Option Price per share with respect to Incentive Stock Options
granted hereunder shall in no instance be less than the fair market
value of the shares subject to the Option as of the Date of Grant. The
Committee may permit the Option Price to be payable in Common Stock
owned by the holder of an Option. For purposes of this Paragraph 8(a),
fair market value shall be, where applicable, the closing price on the
last trading date prior to the Date of Grant as reported on either the
New York or American Stock Exchange or in the NASDAQ/National Market
System. If the Common Stock was not traded on the day preceding the Date
of Grant, the nearest present date shall be substituted in the preceding
sentence. If the Common Stock cannot be valued as set forth in the two
preceding sentences, the Committee shall, in good faith, determine the
fair market value of the Common Stock on the date the Option is granted,
and the fair market value may be more or less than the book value of the
Common Stock. Notwithstanding the foregoing, however, fair market value
shall be determined consistent with Code Section 422(b)(4) or any
successor provisions.
(b) PERIOD OF OPTION. The expiration date of each Option shall be
filed by the Committee, but, notwithstanding any provision of the Plan
to the contrary, such expiration date shall not be more than 10 years
from the Date of Grant.
(c) VESTING OF SHAREHOLDER RIGHTS. Neither an Optionee nor his
successor in interest shall have any of the rights of a shareholder of
the Company solely by virtue of the ownership of such Option until the
Option is exercised and the shares relating to the Option are properly
delivered to such Optionee or successor.
(d) EXERCISE OF OPTION. Each Option shall be exercisable from
time to time (but not sooner than permitted by Rule 16b-3 of the
Exchange Act, if applicable) over such period and upon such terms and
conditions as the Committee shall determine. After the death of the
Optionee, an Option may be exercised as provided in Paragraph
<PAGE> 6
17 hereof.
(e) NONTRANSFERABILITY OF OPTION. No Option shall be transferable
or assignable by an Optionee, other than by will or the laws of descent
and distribution, and each Option shall be exercisable, during the
Optionee's lifetime, only by him or her or, during periods of legal
disability, by his or her legal representative. No Option shall be
subject to execution, attachment, or similar process.
(f) DISQUALIFYING DISPOSITION. The Option Agreement evidencing
any Incentive Stock Options granted under this Plan shall provide that
if the Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any share
or shares of Common Stock issued to him or her pursuant to exercise of
the Option within the two-year period commencing on the day after the
Date of Grant of such Option or within the one-year period commencing on
the day after the date of issuance of the share or shares to him or her
pursuant to the exercise of such Option, he or she shall, within 10 days
of such disposition date, notify the Company of the sales price or other
value ascribed to or used to measure the disposition of the share or
shares thereof and immediately deliver to the Company any amount of
federal income tax withholding required by law.
(g) LIMITATION ON GRANTS TO CERTAIN SHAREHOLDERS. An Incentive
Stock Option may be granted to a Participant only if such Participant,
at the time the Option is granted, does not own, after application of
the attribution rules of Section 424(d) of the Code, stock possessing
more than 10% of the total combined voting power of all classes of
Common Stock of the Company or of its Parent or Subsidiary. The
preceding restriction shall not apply if at the time the Option is
granted the Option Price is at least 110% of the fair market value (as
defined in Paragraph 7(a) above) of the Common Stock subject to the
Option and such Option by its terms is not exercisable after the
expiration of five years from the Date of Grant.
(b) CONSISTENCY WITH CODE. Notwithstanding any other provision in
this Plan to the contrary, the provisions of all Option Agreements shall
not violate the requirements of the Code applicable to the Incentive
Stock Options authorized hereunder (e.g., Incentive Stock Options may
only be granted to employees of the Company and certain of its
affiliates).
9. ADJUSTMENTS. The existence of outstanding Options shall not affect in
any way the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of
<PAGE> 7
a similar character or otherwise.
Except as otherwise expressly provided in this Section 9, the issuance
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property, or for labor or services
either upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, shall not affect or necessitate any
adjustment to the number, class or price of shares of stock then subject to
outstanding Options.
The Committee shall make such adjustments in the Option Price and the
number of shares covered by outstanding Options if such adjustments are required
to prevent any dilution or enlargement of the rights of the holders of such
Options that would otherwise result from any reorganization, recapitalization,
stock split, stock dividend, combination of shares, merger, consolidation,
issuance of rights, or other change in the capital structure of the Company. The
Committee shall also make such adjustments in the aggregate number of shares
that may be subject to the future grant of Options if such adjustments are
appropriate to reflect any transaction or event described in the preceding
sentence.
10. RELINQUISHMENT OF OPTIONS.
(a) The Committee, in granting Options hereunder, shall have
discretion to provide that an Optionee, or his heirs or other legal
representatives (to the extent entitled to exercise the Option under the
terms of this Plan), in lieu of purchasing the entire number of shares
subject to purchase pursuant to such Option, shall have the right to
relinquish all or any part of the unexercised portion of the Option
(such portion of the Option relinquished being hereinafter referred to
as the "Relinquished Option") for a number of whole shares of Common
Stock equal to the product of (i) the number of shares of Common Stock
subject to the Relinquished Option and (ii) a fraction, the numerator of
which is the excess of (A) the current fair market value per share of
Common Stock covered by the Relinquished Option over (B) the Option
Price of such Relinquished Option, and the denominator of which is the
then current fair market value per share of such Common Stock. No
fractional shares of Common Stock will be issued pursuant to the
exercise of Relinquished Options. Rather, cash equal to the fractional
amount of such share multiplied by the fair market value per share will
be paid to the Optionee, subject to the federal income and other tax
withholding requirements of Paragraph 14 hereof.
(b) The Committee, in granting Options hereunder, shall have
discretion to determine the terms upon which such Options shall be
relinquishable, subject to the applicable provisions of the Plan, and
including such provisions as deemed advisable to permit the exemption
from the operation of Section 16b of the Exchange Act, in whole or in
part, of any such transaction involving such relinquishment. Outstanding
Option Agreements may be amended, if necessary, to permit such
exemption.
<PAGE> 8
11. RESTRICTIONS ON ISSUING SHARES. The exercise of each Option shall be
subject to the condition that if at any time the Company shall determine in its
discretion that the satisfaction of withholding tax or other withholding
liabilities, or that the listing, registration, or qualification of any shares
otherwise deliverable upon such exercise upon any securities exchange or under
any state or federal law, or that the consent or approval of any regulatory
body, is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares pursuant thereto, then in any
such event, such exercise shall not be effective unless such withholding,
listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
12. USE OF PROCEEDS. The proceeds received by the Company from the sale
of Common Stock pursuant to the exercise of Options granted under the Plan shall
be added to the Company's general funds and used for such purposes as the
Company deems appropriate.
13. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Board may at any
time suspend or terminate the Plan or may amend it from time to time in such
respects as the Board may deem advisable in order that the Options granted
thereunder may conform to any changes in the law or in any other respect which
the Board may deem to be in the best interests of the Company, provided,
however, that without approval by a majority (or such other proportion as may be
required by state law or the Certificate of Incorporation of the Company) of the
outstanding voting shares of stock of the Company, voted either in person or by
proxy, at a duly held stockholders meeting, no such amendment shall make any
change in the Plan for which shareholder approval is required of the Company by
(a) Rule 16b-3, promulgated under the Exchange Act; (b) the Code or regulatory
provisions dealing with Incentive Stock Options; (c) any rules for listed
companies promulgated by any national stock exchange on which the Company's
stock is traded; or (d) any other applicable rule or law. Unless sooner
terminated hereunder, the Plan shall terminate 10 years after the Effective
Date. No Option may be granted during any suspension or after the termination of
the Plan. Except as provided in Paragraph 14, no amendment, suspension, or
termination of the Plan shall, without an Optionee's consent, impair or negate
any of the rights or obligations under any Option theretofore granted to such
Optionee under the Plan. Notwithstanding the foregoing, the provisions affecting
grants to a Disinterested Person hereunder (including the timing and terms
thereof) may not be amended more than once every six months, other than to
comport with changes in the Code, the Employee Retirement Income Security Act,
or the rules thereunder.
14. TAX WITHHOLDING. The Committee may, in its sole discretion, (a)
require an Optionee to remit to the Company a cash amount sufficient to satisfy,
in whole or in part, any federal, state, and local withholding tax requirements
prior to the delivery of any certificate for shares pursuant to the exercise of
an Option hereunder; (b) grant to an Optionee the right to satisfy, in whole or
in part, any such withholding tax requirements by electing to require that the
Company, upon any exercise of the Option, withhold from the shares of Common
Stock issuable to the Optionee upon the exercise of the Option; that number of
full shares of
<PAGE> 9
Common Stock having a fair market value equal to the amount or portion of the
amount required to be withheld; or (c) satisfy such withholding requirements
through another lawful method, including through additional withholdings against
the Optionee's other wages with or payments from the Company.
15. EFFECTIVE DATE OF PLAN. This Plan shall become effective on the date
(the "Effective Date") of the adoption of the Plan by the Board; provided that
the approval by a majority (or such other proportion as may be required by state
law or the Certificate of Incorporation of the Company) of the outstanding
voting shares of stock of the Company, voted either in person or by proxy, at a
duly held stockholders meeting or by written consent is obtained within 12
months of such adoption. Otherwise, the Plan will be effective upon its approval
by such stockholders after being adopted by the Board.
16. TERMINATION OF EMPLOYMENT. In the event of the termination of the
employment of a Participant to whom an Option has been granted under the Plan,
other than (a) a termination that is either (i) for cause or (ii) voluntary on
the part of the employee and without the written consent of the Company; or (b)
a termination by reason of death, the employee may (unless otherwise provided in
his Option Agreement) exercise his Option at any time within thirty (30) days
after such retirement or other termination of employment (or within three months
after retirement with the written consent of the Company or within one year
after termination of employment due to disability within the meaning of Code
Section 422(c)(6)), or within such shorter time as the Committee shall
authorize, but in no event after 10 years from the date of granting thereof (or
such lesser period as may be specified in the Option Agreement), but only to the
extent of the number of shares for which his Options were exercisable by him at
the date of the termination of his employment. In the event of the termination
of the employment of an Optionee to whom an Option has been granted under the
Plan that is either (i) for cause or (ii) voluntary on the part of the employee
and without the written consent of the Company, any Option held by him under the
Plan, to the extent not previously exercised, shall forthwith terminate on the
date of such termination of employment. Options granted under the Plan shall not
be affected by any change of employment so long as the holder continues to be an
employee of the Company, a Subsidiary, or a Parent. The Option Agreement may
contain such provisions as the Committee shall approve with respect to the
effect of approved leaves of absence. Nothing in the Plan or in any Option
granted pursuant to the Plan shall confer on any individual any right to
continue in the employ of the Company or any of its Subsidiaries or Parents or
interfere in any way with the right of the Company or any of its Subsidiaries or
Parents to terminate his employment at any time.
17. DEATH OF HOLDER OF OPTION. In the event a Participant to whom an
Option has been granted under the Plan dies during, or within the period during
which he could have exercised an Option (had he then been living) after the
termination of, his employment by the Company or a Subsidiary or Parent, such
Option (unless it shall have been previously terminated pursuant to the
provisions of the Plan or unless otherwise provided in his Option Agreement) may
be exercised (to the extent of the entire number of shares covered by the
<PAGE> 10
Option whether or not purchasable by the employee at the date of his death) by
the executor or administrator of the Optionee's estate or by the person or
persons to whom the Optionee shall have transferred such Option by will or by
the laws of descent and distribution, at any time within a period of 12 months
after his death, but not after the exercise termination date set forth in the
relevant Option Agreement.
18. LOANS TO ASSIST IN EXERCISE OF OPTIONS. If approved by the Board,
the Company or any Parent or Subsidiary may lend money or guarantee loans by
third parties to an individual to finance the exercise of any Option granted
under the Plan to carry Common Stock thereby acquired. No such loan to finance
the exercise of an Incentive Stock Option shall have an interest rate or other
terms that would cause any part of the principal amount to be characterized as
interest for purposes of the Code.
