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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
ORCHARD SUPPLY HARDWARE STORES CORPORATION
(NAME OF SUBJECT COMPANY)
ORCHARD SUPPLY HARDWARE STORES CORPORATION
(NAME OF PERSON FILING STATEMENT)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
685691107
(CUSIP NUMBER OF CLASS OF SECURITIES)
STEPHEN M. HILBERG
ORCHARD SUPPLY HARDWARE STORES CORPORATION
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
(408) 281-3500
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED
TO RECEIVE NOTICES AND COMMUNICATIONS
ON BEHALF OF THE PERSON FILING THIS STATEMENT)
COPIES TO:
RICHARD J. WELCH, ESQ.
RIORDAN & MCKINZIE
300 SOUTH GRAND AVENUE
29TH FLOOR
LOS ANGELES, CALIFORNIA 90071
(213) 629-4824
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is Orchard Supply Hardware Stores
Corporation, a Delaware corporation (the "Company" or "Orchard"). The
principal executive offices of the Company are located at 6450 Via Del Oro,
San Jose, California. The title of the class of equity securities to which
this Solicitation/Recommendation Statement on Schedule 14D-9 ("Schedule
14D-9") relates is the common stock, par value $.01 per share (the "Common
Stock"), of the Company.
ITEM 2. TENDER OFFER OF THE BIDDER.
This Statement relates to the tender offer disclosed in the Tender Offer
Statement on Schedule 14D-1, dated August 21, 1996 (the "Schedule 14D-1"),
filed by Grove Acquisition Corp., a Delaware corporation (the "Purchaser"), a
wholly-owned subsidiary of Sears, Roebuck and Co., a New York corporation (the
"Parent" or "Sears"), to purchase all outstanding shares of Common Stock (the
"Shares") at $35.00 per share, net to the seller in cash, without interest,
upon the terms and subject to the conditions set forth in the Schedule 14D-1
and related letter of transmittal (which, as amended and extended from time to
time, together constitute the "Offer"). The Offer is made pursuant to that
certain Agreement and Plan of Merger, dated August 14, 1996 (the "Merger
Agreement"), by and among the Company, the Purchaser and the Parent.
The principal executive offices of the Purchaser and the Parent are located
at 3333 Beverly Road, Hoffman Estates, Illinois.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and business address of the Company, which is the person filing
this statement, are set forth in Item 1 above.
(b)(1) 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 Proxy Statement, dated April 10,
1996, relating to the Company's Annual Meeting of Stockholders held on May 23,
1996, which is incorporated herein by this reference (the "Proxy Statement"),
under the headings "Security Ownership of Certain Beneficial Owners and
Management," "Information Concerning Incumbent Directors and Nominees to Board
of Directors," "The Board of Directors," "Executive Officers, Compensation and
Other Information," "Summary Compensation Table," "Option Grants Table,"
"Option Exercises and Year End Value Table" and "Report of the Compensation
Committee of the Board of Directors" on pages 2 through 11 of the Proxy
Statement.
Ward Agreement. Dale D. Ward, Executive Vice President and Chief Operating
Officer of the Company, has an employment agreement renewable annually
providing for a base salary of $220,000 per year and a bonus of up to 30% of
such base salary under the Company's Executive Incentive Compensation Plan.
Pursuant to this agreement, on April 8, 1996, Mr. Ward was granted the option
to purchase 10,000 shares of the Company's Common Stock at an exercise price
of $24.15 per share. During the first full year of employment or after the
first full year of employment, in the event Mr. Ward is terminated without
cause the Company shall pay Mr. Ward's base salary (but not fringe benefits or
perquisites or other compensation) for a period of twelve months from the date
of termination.
Jenkins Agreement. Pursuant to a Letter Agreement, dated August 14, 1996, by
and between Orchard Supply Hardware Corporation and Maynard Jenkins, in the
event a "person" or a "group" acquires "beneficial ownership" (within the
meanings given such terms under Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of greater than 51% of (a) the capital stock of Orchard
Supply Hardware Stores Corporation or (b) the capital stock or assets of
Orchard Supply Hardware Corporation, on or before December 30, 1996, through
one or a series of transactions (a "Change of Control"), Mr. Jenkins is
entitled to payment of a special bonus in cash in an amount equal to the
lesser of (x) $800,000 or (y) $1,475,000 less any amounts attributable to any
options to purchase the Company's Common Stock held by him that are treated as
"parachute payments" under Section 280G of the Internal Revenue Code of 1986,
as amended ("Section 280G"), on the Payment Date
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(as defined below), payable on January 15, 1997 provided there has been a
Change of Control (the "Payment Date"). Mr. Jenkins is entitled to such
payment provided that he is employed by the Company on the date of the Change
of Control and that he (i) is employed by the Company or, if applicable, the
surviving or successor corporation, on the Payment Date or (ii) after the
Change of Control but prior to the Payment Date, his employment has been
terminated without "cause" by the Company or the surviving or successor
corporation or (iii) after the Change of Control but prior to the Payment
Date, his employment has been terminated due to his death or total disability
for any consecutive six-month period.
In addition, in the event that after a Change of Control Mr. Jenkins'
employment is terminated by the Company or, if applicable, the surviving or
successor corporation (including termination of that certain Employment
Agreement between the Company and Mr. Jenkins, as amended (the "Employment
Agreement") under Section 6(a) thereof by the Company or the surviving or
successor corporation), other than termination for "cause" or due to his death
or total disability for any consecutive six-month period, Mr. Jenkins shall be
entitled to the following additional amounts: (a) such amount, if any, in cash
which would otherwise be payable to Mr. Jenkins under Section 6(c) of the
Employment Agreement but for the limitation contained in such section with
respect to Section 280G; and (b) payment of an amount intended to cover the
additional taxes incurred by Mr. Jenkins as a result of the application of
Section 280G to the special bonus, the amount otherwise payable under Section
6(c) of the Employment Agreement and the amount attributable under any options
to purchase Common Stock held by Mr. Jenkins.
Parent Discussions with Jenkins. The Parent and Mr. Jenkins have had
preliminary discussions regarding the compensation and benefits that Mr.
Jenkins may receive after the Effective Time. Mr. Jenkins may become eligible
to participate in the Parent's Annual Incentive and Long-Term Incentive Plans,
and may receive common shares of the Parent, stock options and other rights
with respect to common shares of the Parent. Also, Mr. Jenkins may become
eligible to receive performance incentives, bonuses and other compensation and
benefits under other programs of the Parent. The Parent and Mr. Jenkins have
not entered into an agreement or made any commitment with respect to the
nature or amount of such compensation and benefits.
Option Payment Agreements. The Company has advised the Parent that pursuant
to the Merger Agreement the Company has entered into separate option payment
agreements (collectively, the "Payment Agreements") with holders of
outstanding options to purchase shares of Common Stock ("Company Options")
under the Company's Amended 1989 Nonqualified Stock Option Plan, the Company's
1993 Stock Option Plan, the Company's 1993 Non-Employee Directors Stock Option
Plan and the Company's 1996 Non-Employee Directors Stock Option Plan
(collectively, the "Stock Option Plans"). The Payment Agreements describe, as
applicable, the various termination and acceleration provisions of the Stock
Option Plans that are triggered by the Offer or the Merger, the Board's
determination to accelerate the vesting provisions of all outstanding Company
Options to the date of consummation of the Offer and provide for the surrender
to the Company of all Company Options for an amount in cash equal to the
Merger Consideration less the applicable exercise price per share of the
Company Options and less all taxes required to be withheld from such payment
(the "Option Consideration"). The Payment Agreements further provide that
payment of the Option Consideration will be made after the acceptance of the
Shares for payment and purchase pursuant to the Offer and the surrender by the
optionholder of the Company Options. Directors Morton Godlas, William A. Hall
and Mac Allen Culver will also be paid $10,000 each after consummation of the
Offer to relinquish option rights under the 1996 Non-Employee Directors Stock
Option Plan with respect to the option each elected in lieu of receiving an
annual retainer of $10,000.
Severance and Other Arrangements. The Parent has agreed that certain senior
executives of the Company (other than Mr. Jenkins) will be eligible for a cash
severance payment if they are involuntarily terminated by the Company (other
than for cause). In the case of each of Messrs. Ward and Hilberg, payment
would equal 100% of his annual base salary, plus 100% of his annual target
bonus for the year of termination. Other senior executives will be eligible to
receive a severance payment in cash in an amount determined by Mr. Jenkins
consistent with past practice but not to exceed an amount equal to 100% of
annual base salary plus 100% of annual target bonus for the year of
termination. In consideration of such severance arrangements, the senior
executives will agree to customary non-compete arrangements in the event of
voluntary termination of employment with the Company.
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The Parent has also agreed that certain senior executives of the Company
(other than Mr. Jenkins) will be eligible for a retention bonus if they
continue in employment with the Company until the first anniversary of the
Effective Time. Mr. Jenkins will determine the amount of each executive's
bonus, but it will not be less than 50% of such executive's annual base
salary. The aggregate of all such retention bonuses will not exceed
$1,400,000.
(b)(2) Merger Agreement.
The following is a summary of certain provisions of the Merger Agreement, a
copy of which is attached hereto as Exhibit 1 and is incorporated herein by
reference and a copy of which has been filed as an exhibit to this Schedule
14D-9. Such summary is qualified in its entirety by reference to the Merger
Agreement. Capitalized terms not otherwise defined herein shall have the
meanings set forth in the Merger Agreement.
The Offer. The Merger Agreement provides for the making of the Offer by the
Purchaser. The obligation of Purchaser to accept for payment and pay for
Shares tendered pursuant to the Offer is subject to the satisfaction of the
Minimum Condition and certain other conditions that are described in Annex A
to the Merger Agreement ("Annex A"). These conditions include the absence of
(i) a change, occurrence or circumstance in the Company's business having a
Material Adverse Effect, (ii) any breach in the Company's representations,
warranties or agreements which has a Material Adverse Effect, (iii) any action
or proceeding by any government or governmental authority or agency seeking to
restrain or prohibit the making or consummation of the Offer or the Merger
which could reasonably be expected to have a Material Adverse Effect or which
seeks damages which, if assessed against the Company, would have a Material
Adverse Effect, provided there is a reasonable likelihood such damages would
be assessed, (iv) any statute, rule, regulation, judgment, order or injunction
that has a substantial likelihood of resulting in any of the consequences
referred to in clause (iii), (v) any general suspension of trading on the New
York Stock Exchange, Inc., any other national securities exchange, or NASDAQ
for one full trading day, the declaration of a banking moratorium and certain
wars or armed hostilities. The Purchaser has agreed that, without the written
consent of the Company, no change in the Offer may be made which changes the
form of consideration to be paid or decreases the price per Share payable in
the Offer, which imposes conditions to the Offer in addition to the Minimum
Condition and those other conditions described in Annex A, which increases the
minimum number of Shares that must be tendered as a condition to the
acceptance for payment and payment for the Shares, which waives the Minimum
Condition if such waiver would result in less than a majority of the
outstanding Shares on a fully diluted basis, assuming the exercise of all
outstanding options to purchase shares of Common Stock and the conversion of
all outstanding Preferred Shares in accordance with their terms (the "Fully
Diluted Shares") being accepted for payment or paid for pursuant to the Offer,
or which otherwise amends the terms of the Offer (including any of the
conditions set forth in Annex A) in a manner that is materially adverse to the
holders of Shares. The Purchaser may, without the consent of the Company,
extend the Offer if, at the scheduled expiration date of the Offer, any of the
conditions to the Purchaser's obligation to purchase Shares have not been
satisfied until such time as such conditions are satisfied. In the event that
at any scheduled expiration date of the Offer, either of the conditions
described in paragraphs (ii) (which relates to expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act")) and (iii)(a) or (b) (which generally relate to
government proceedings, but only in the event that clause (b) is not satisfied
due to the entry of an appealable judgment, order or injunction) of Annex A is
not satisfied, the Purchaser shall extend the Offer from time to time until no
later than December 31, 1996 (any such extension, an "Extension Period").
During any Extension Period, the parties shall consult with each other and use
their respective best efforts to cause paragraph (ii) or (iii)(a) or (b) (but
only in the event that clause (b) is not satisfied due to the entry of an
appealable judgment, order or injunction), as the case may be, of Annex A to
be satisfied. Except as set forth in the two immediately preceding sentences,
the conditions described in Annex A are for the sole benefit of the Parent and
the Purchaser and may be asserted by the Parent or the Purchaser regardless of
the circumstances giving rise to any such condition (including any action or
inaction by the Purchaser, unless any such action or inaction by the Purchaser
would constitute a breach by the Purchaser of any of its covenants under the
Merger Agreement) or may be waived by the Parent or the Purchaser, in whole or
in part, at any time and from time to time, in its sole discretion. The Parent
will make available sufficient funds sufficiently in advance of the Effective
Time (as defined below) to consummate the Offer in accordance with the
provisions of the Merger Agreement.
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The Merger. The Merger Agreement provides that, following the purchase of
Shares pursuant to the Offer, the approval of the Merger Agreement by the
stockholders of the Company (if required) and the satisfaction or waiver of
the other conditions to the Merger, the Purchaser will be merged with and into
the Company (the "Surviving Corporation"). The Merger shall become effective
at such time as a Certificate of Merger or, if applicable, a Certificate of
Ownership and Merger is filed with the Secretary of State of the State of
Delaware, or at such later time as is specified therein (the "Effective
Time"). As a result of the Merger, all of the properties, rights, privileges
and franchises of the Company and the Purchaser shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and the
Purchaser shall become the debts, liabilities and duties of the Surviving
Corporation.
At the Effective Time, by virtue of the Merger (i) each issued and
outstanding Share held in the treasury of the Company, or by the Parent or any
wholly owned subsidiary of the Parent shall be cancelled, and no payment shall
be made with respect thereto; (ii) each share of common stock of the Purchaser
then outstanding shall be converted into and become one share of common stock
of the Surviving Corporation; (iii) each Share outstanding immediately prior
to the Effective Time shall, except as otherwise provided in (i) above and
except for Shares held by stockholders exercising appraisal rights pursuant to
Section 262 of the General Corporation Law of the State of Delaware ("DGCL"),
be converted into the right to receive $35.00 in cash or any higher price per
share that may be paid pursuant to the Offer, without interest (the "Merger
Consideration") and (iv) each Preferred Share outstanding immediately prior to
the Effective Time shall be converted into the right to receive cash in an
amount equal to the product of $35.00 (or such higher price per share that may
be paid pursuant to the Offer) and the number of Shares into which such
Preferred Share is convertible immediately prior to the Effective Time plus
accrued and unpaid dividends with respect thereto in accordance with the terms
of the Preferred Shares, without interest.
The Merger Agreement provides that the Certificate of Incorporation of the
Company will be amended at the Effective Time to read as set forth in Exhibit
A to the Merger Agreement, and the By-Laws of the Purchaser at the Effective
Time will be the By-Laws of the Surviving Corporation, subject to the
obligation of the Purchaser and the Parent to continue in force and effect
certain indemnification provisions of the Company's By-Laws. The Merger
Agreement also provides that the directors of the Purchaser at the Effective
Time will be the directors of the Surviving Corporation and the officers of
the Company at the Effective Time will be the officers of the Surviving
Corporation.
Appraisal Rights. No appraisal rights are available in connection with the
Offer. However, if the Merger is consummated, stockholders of the Company will
have certain rights under the DGCL to dissent and demand appraisal of, and to
receive payment in cash of the fair value of, their Shares. Such rights to
dissent, if the statutory procedures are complied with, could lead to a
judicial determination of the fair value of the Shares (excluding any element
of value arising from the accomplishment or expectation of the Merger),
required to be paid in cash to such dissenting holders for their Shares. In
addition, such dissenting stockholders would be entitled to receive payment of
a fair rate of interest from the date of consummation of the Merger on the
amount determined to be the fair value of their Shares. In determining the
fair value of the Shares, a Delaware court would be required to take into
account all relevant factors. Accordingly, such determination could be based
upon considerations other than, or in addition to, the market value of the
Shares, including, among other things, asset values and earning capacity. In
Weinberger v. UOP, Inc., the Delaware Supreme Court stated, among other
things, that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in an appraisal proceeding. Therefore, the value
so determined in any appraisal proceeding could be different from the price
being paid in the Offer. The Delaware Supreme Court stated in Weinberger and
Rabkin v. Philip A. Hunt Chemical Corp. that although the remedy ordinarily
available to minority stockholders in a cash-out merger is the right to
appraisal described above, a damages remedy or injunctive relief may be
available if a merger is found to be the product of procedural unfairness,
including fraud, misrepresentation or other misconduct.
Termination of Stock Options and Stock Option Plans. The Company has entered
into agreements in respect of Company Options pursuant to the Company's Stock
Option Plans and any other Company Options the
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Company has granted that are identified in the Merger Agreement, providing for
the payment upon surrender of such Company Options upon consummation of the
Offer or at the Effective Time of an amount of cash per share subject to each
such Company Option equal to the difference between the exercise price of such
Company Option and the Merger Consideration, less an amount equal to all taxes
required to be withheld from such payment. Any Company Options not so
surrendered or exercised one day prior to the Effective Time, or 10 days prior
to the Effective Time in the case of the Company's Amended 1989 Nonqualified
Stock Option Plan, shall terminate in accordance with the terms of the
applicable Stock Option Plan or option agreement pursuant to which such
Company Options were granted. The Company has advised the Parent that it has
accelerated all Company Options and pursuant to the Merger Agreement has
entered into separate Option Payment Agreements with respect to all Optionees.
Directors Godlas, Hall and Culver will also be paid $10,000 each to relinquish
option rights under the 1996 Non-Employee Directors Stock Option Plan with
respect to the option each elected in lieu of receiving an annual retainer of
$10,000.
Recommendation. The Company represents and warrants in the Merger Agreement
that the Board has (i) 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 stockholders of the Company, (ii)
approved and adopted the Merger Agreement and the transactions contemplated
thereby, including the Offer, the Merger and the Stockholder Agreement and the
transactions contemplated thereby and (iii) resolved to recommend acceptance
of the Offer, the tender of the Shares thereunder and approval and adoption of
the Merger Agreement and the Merger by the Company's stockholders. This
recommendation of the Board may be withdrawn, modified or amended if the Board
determines in its good faith judgment, based as to legal matters on the
written advice of outside legal counsel, that the exercise of the directors'
fiduciary duties requires such withdrawal, amendment or modification. Any such
withdrawal, modification or amendment may give rise to certain termination
rights on the part of the Parent and the Purchaser, as described below.
Interim Agreements of the Parent, the Purchaser and the Company. Pursuant to
the Merger Agreement, the Company has covenanted and agreed that, during the
period from the date of the Merger Agreement to the Effective Time, the
Company will conduct its business and operations only in the ordinary and
usual course of business consistent with past practice. The Merger Agreement
provides that the Company and its subsidiaries will use their reasonable best
efforts to preserve intact the business organization of the Company and its
subsidiaries, to keep available the services of their operating personnel and
to preserve the goodwill of suppliers and others having business relationships
with them; provided, however, that any inability of the Company or its
subsidiaries to keep available the services of such operating personnel or to
maintain any such business relationships (including with suppliers) despite
its aforesaid reasonable best efforts to do so shall not constitute a breach
of the Merger Agreement. Pursuant to the Merger Agreement, without limiting
the generality of the foregoing, and except as otherwise expressly provided in
the Merger Agreement, prior to the Effective Time, neither the Company nor any
of its subsidiaries will, without the prior written consent of the Parent: (i)
amend its Certificate of Incorporation or By-Laws; (ii)(a) create, incur or
assume any indebtedness for money borrowed, including obligations in respect
of capital leases, except (A) purchase money mortgages granted in a manner
consistent with past practice, and (B) indebtedness for borrowed money
incurred in the ordinary course of business, provided, however, that the
Company and its subsidiaries may incur (x) indebtedness for borrowed money
under credit facilities existing as of April 28, 1996 and (y) indebtedness
which refinances indebtedness which is declared due and payable or tendered to
the Company or any subsidiary in accordance with the terms thereof as a result
of the consummation of the Offer, provided, that (1) Purchaser shall not have
designated a majority of directors to serve on the Board pursuant to Section
2.08 of the Merger Agreement and (2) the Company shall have consulted with the
Parent and the Parent shall have approved the terms of such refinancing
indebtedness (which consent may not be unreasonably withheld) or (b) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person;
provided, however, that the Company may endorse negotiable instruments in the
ordinary course of business consistent with past practice; (iii) declare, set
aside or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of the Common Stock and
Preferred Shares (except for regular dividends on the Preferred Shares in
accordance with their terms) or any other capital stock of any subsidiary;
(iv) issue, sell, grant, purchase or redeem, or issue, whether by dividend or
otherwise, or sell any
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securities convertible into or exercisable for, or options with respect to, or
warrants to purchase or rights to subscribe to or otherwise purchase, or
subdivide or in any way reclassify, any shares of capital stock or other
securities of the Company, except for the issuance of Shares issuable upon
conversion of the Preferred Shares in accordance with their terms or the
exercise of Company Options outstanding on the date of the Merger Agreement;
(v)(a) increase the aggregate amount of compensation payable or to become
payable by the Company or any subsidiary to its directors, officers or
employees whether by salary or bonus or (b) increase the rate or term of, or
otherwise alter, any bonus, insurance, pension, severance or other employee
benefit plan, payment or arrangement made to, for or with any such directors,
officers or employees; (vi) enter into any agreement, commitment or
transaction, except agreements, commitments or transactions in the ordinary
course of business consistent with past practice or settlements with the
Internal Revenue Service or other similar authority as permitted by the Merger
Agreement; (vii) sell, transfer, mortgage, pledge or grant any security
interest, lien or other encumbrance on any asset other than in the ordinary
course of business consistent with past practice and except (a) pursuant to
the Credit Agreement, dated as of August 8, 1995, between the Company and the
Bank of America National Trust and Savings Association or (b) in connection
with any permitted purchase money mortgages permitted by Section 6.01(b)(i)(A)
of the Merger Agreement; (viii) waive any right under any contract or other
agreement identified in the Company Disclosure Letter; (ix) other than as and
when required by any change in generally accepted accounting principles, make
any material change in its accounting or tax methods or practices or make any
material change in depreciation or amortization policies or rates adopted by
it for accounting or tax purposes or, other than normal writedowns or
writeoffs consistent with past practices, make any writedowns of inventory or
writeoffs of notes or accounts receivable; (x) make any loan or advance to any
of its stockholders, officers, directors, employees (other than advances to
field sales personnel, vacation advances, relocation advances and travel
advances in each case made in the ordinary course of business in a manner
consistent with past practice), or make any other loan or advance to any other
person or group otherwise than in the ordinary course of business consistent
with past practice; (xi) terminate or fail to renew, where such renewal is at
the Company's or subsidiary's option, any contract or other agreement other
than in the ordinary course of business, the termination or failure of which
to renew would have a Material Adverse Effect (as defined below); (xii) enter
into any collective bargaining agreement or employment agreement; (xiii) make
any addition to or modification of the Company's existing employee benefits
plans or adopt any new employee benefit plan; (xiv) take, agree to take or do,
or with respect to anything within the Company's or subsidiary's control,
knowingly permit to be done or to be taken any action in the conduct of its
business which (a) would cause any of the representations of the Company to be
or become untrue in any material respect, and (b) would reasonably be expected
to have a Material Adverse Effect; (xv) fail to comply with all applicable
filing, payment, withholding, collection and record retention obligations
under all applicable federal, state, local and foreign tax laws; or (xvi)
agree to do any of the foregoing.
When used in the Merger Agreement, the term "Material Adverse Effect" means
a material adverse effect on the business, assets, financial condition or
results of operations of the Company and its subsidiary considered on a
consolidated basis or on the ability of the Company, the Parent or the
Purchaser to consummate the transactions contemplated by the Merger Agreement,
or any event or events which, individually or in the aggregate, constitute or,
with the passage of time, would constitute a "Material Adverse Effect."
Other Agreements of the Parent, the Purchaser and the Company. In the Merger
Agreement, the Company, its present affiliates and their respective officers,
directors, employees, investment bankers, attorneys and other representatives
and agents have agreed that they shall immediately cease any existing
discussions or negotiations, if any, with any parties conducted heretofore
with respect to any acquisition of all or any material portion of the assets
of, or any equity interest in, the Company or any business combination with
the Company, subject to certain exceptions. The Company may, directly or
indirectly, furnish information and access, in each case only in response to
unsolicited written requests therefor, to any corporation, partnership, person
or other entity or group pursuant to confidentiality agreements in customary
form that (i) do not prohibit or restrict disclosure of any matter to the
Parent other than confidential information regarding any such corporation,
partnership, person or other entity or group and (ii) contain terms not more
favorable to such corporation, partnership, person or other entity or group
than the terms contained in the Confidentiality Agreement, and may participate
in discussions and negotiate with such corporation, partnership, person or
other entity or group
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concerning any proposed merger, sale of assets, sale of shares of capital
stock, acquisition of Shares other than pursuant to the Offer or the Merger or
similar transaction involving the Company or any division or subsidiary of the
Company (an "Acquisition Proposal"), only if the Board determines in its good
faith judgment, based as to legal matters on the written advice of outside
legal counsel, (i) that the exercise of the fiduciary duties of the directors
requires the taking of such action, and, after consultation with all its
principal advisors in connection with the transactions contemplated in the
Merger Agreement and (ii) that such Acquisition Proposal is a bona fide written
Acquisition Proposal that would, upon consummation thereof, result in a
transaction more favorable to the stockholders of the Company than the
transactions contemplated in the Merger Agreement and in the good faith
reasonable judgment of the Board (based upon the advice of all of its principal
advisors in connection with the transactions contemplated in the Merger
Agreement), is proposed by a corporation, partnership, person or other entity
or group with sufficient financial resources available to it or available from
third parties to consummate such transaction and is probable to be consummated
(a "Superior Proposal"). Except as set forth above, neither the Company or any
of its present affiliates, nor any of its or their respective officers,
directors, employees, representatives or agents shall, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations
with, or provide any information to, any corporation, partnership, person or
other entity or group (other than the Parent and the Purchaser, any affiliate
or associate of the Parent and the Purchaser or any designees of the Parent and
the Purchaser) concerning any Acquisition Proposal or take any other action to
facilitate the making of a proposal that constitutes or could reasonably be
expected to lead to an Acquisition Proposal. The Company shall advise the
Parent orally and in writing of any Acquisition Proposal and any inquiry or
contact with any person with respect to the acquisition of a substantial equity
interest in or substantial assets of the Company or its subsidiaries (including
without limitation, successive Acquisition Proposals, inquiries or contacts)
and will, in such notice, indicate the identity of the offeror and the material
terms and conditions of any such Acquisition Proposal, including without
limitation, price. The Company shall give the Parent one business day's advance
notice of any agreement to be entered into or any information to be supplied to
the person making such Acquisition Proposal. Except in accordance with the
terms of the Merger Agreement, neither the Board nor any committee thereof
shall (i) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to the Parent or the Purchaser the approval or recommendation by the
Board of the Offer, the Merger or the Merger Agreement, or (ii) approve or
recommend, or propose to approve or recommend, any Acquisition Proposal.
Notwithstanding the foregoing, nothing in the Merger Agreement shall prevent
the Board from approving or recommending to the Company's stockholders any
unsolicited Acquisition Proposal by a third party as contemplated by Rules 14d-
9 and 14e-2 promulgated under the Exchange Act (and, in connection therewith,
withdrawing or modifying the approval or recommendation by the Board of the
Offer, the Merger or the Merger Agreement) in the event any unsolicited
Acquisition Proposal shall have been made by a third party, if, in the good
faith judgment of the Board, based as to legal matters on the written advice of
outside legal counsel, that withdrawing or modifying such approval or
recommendation is required under applicable law in the proper discharge of the
directors' fiduciary duties.
Pursuant to the Merger Agreement, between the date of the Merger Agreement
and the Effective Time, the Company will give the Parent and the Purchaser and
their authorized representatives reasonable access to all personnel, books,
records, stores, offices, and other facilities and properties of the Company
and its subsidiaries, will permit the Parent and the Purchaser to make such
inspections (other than environmental investigations) as the Parent and the
Purchaser may reasonably request and will cause the Company's officers to
furnish Purchaser with such financial and operating data and other information
with respect to the business and properties of the Company and its subsidiaries
as Purchaser may from time to time reasonably request.
The Merger Agreement provides that promptly upon the purchase by Purchaser of
the Shares pursuant to the Offer, and from time to time thereafter, the
Purchaser shall be entitled to designate such number of directors, rounded up
to the next whole number, on the Company's Board that equals the product of (i)
the total number of directors on the Board (giving effect to the election of
directors pursuant to this paragraph) and (ii) the percentage that the
aggregate number of shares of Common Stock owned by the Purchaser or any
affiliate of Purchaser bears to the total number of shares of Common Stock then
outstanding, and the Company shall, at such time, promptly take all actions
necessary to cause the Purchaser's designees to be elected as directors of the
Company, including
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increasing the size of the Board or securing the resignations of incumbent
directors, or both. The Company shall cause persons designated by the
Purchaser to constitute the same percentage as persons designated by the
Purchaser shall constitute of the Board to be appointed to (i) each committee
of the Board, (ii) the board of directors of each subsidiary and (iii) each
committee of each such board, in each case only to the extent permitted by
applicable law. Notwithstanding the foregoing, until the earlier of (i) the
time the Purchaser acquires a majority of the Fully Diluted Shares, and (ii)
the Effective Time, the Company shall use its best efforts to ensure that all
the members of the Board and each committee of the Board and such boards and
committees of each subsidiary as of the date of the Merger Agreement who are
not employees of the Company shall remain members of the Board and of such
boards and committees. If the Purchaser exercises its right to designate
directors of the Company, it expects to nominate the directors of Purchaser
identified on Annex I to the Schedule 14D-1 and, if additional directors are
necessary to comprise a majority of the Board, to select from among such of
Parent's executive officers identified in the Schedule 14D-1 who agree to be
nominated and to serve as directors of the Company as further described on
Schedule I hereto.
Pursuant to the Merger Agreement, the Company shall cause a meeting of its
stockholders (the "Company Stockholder Meeting") to be duly called and held as
soon as practicable (provided the Purchaser shall have accepted for payment
Shares tendered pursuant to the Offer) for the purposes of voting on the
approval and adoption of the Merger Agreement, the Merger and the transactions
contemplated thereby, except as set forth below.
The Merger Agreement provides that, at the Parent's request, the Company
will promptly prepare and file with the Commission under the Exchange Act a
proxy statement relating to the Company Stockholder Meeting (the "Proxy
Statement") and cause the Proxy Statement to be mailed to its stockholders at
the earliest practicable time and obtain the necessary approvals by its
stockholders of the Merger Agreement. The Parent has agreed to vote and to
cause its affiliates (including without limitation, the Purchaser) to vote all
Shares owned by them and to exercise all voting rights or proxies held by them
in favor of adoption of the Merger Agreement. Notwithstanding the foregoing,
in the event that Purchaser acquires at least 90% of the outstanding Shares
(assuming conversion of all outstanding Preferred Shares in accordance with
their terms) and the Purchaser so requests, the Parent, the Purchaser and the
Company will take all actions necessary and appropriate to cause the Merger to
become effective without a meeting of the stockholders of the Company in
accordance with Section 253 of the DGCL.
The Parent has agreed that all rights to indemnification now existing in
favor of present and former directors, officers and employees of the Company
and its subsidiaries ("Indemnified Parties") as provided in the Company's By-
Laws or limitations of liability in the Company's Certificate of Incorporation
as of the date of the Merger Agreement shall survive the Merger and shall
continue in full force and effect for a period of at least five years. The
Parent has agreed to cause to remain in full force and effect and cause the
Surviving Corporation to fully perform all indemnity agreements with
Indemnified Parties in effect on the date of the Merger Agreement. For a
period of at least five years after the Effective Time, the Parent and the
Surviving Corporation will indemnify and hold harmless, to the maximum extent
permitted by applicable law, each Indemnified Party and advance expenses in
connection with such indemnification. In addition, the Parent has agreed that
for five years after the Effective Time, the Parent will cause the Surviving
Corporation to use reasonable efforts to maintain, if available for an annual
premium not in excess of $60,000, officers' and directors' liability insurance
with respect to acts or omissions occurring prior to the Effective Time
covering each such person currently covered by the Company's officers' and
directors' liability insurance policy on terms no less favorable than those of
such policy in effect on the date of the Merger Agreement or at the Effective
Time, or if such insurance coverage is not available for an annual premium not
in excess of $60,000, to obtain the amount of coverage that is available for
an annual premium of $60,000.
The Merger Agreement provides that the Company, the Purchaser and the Parent
will each use their best efforts to consummate the transactions contemplated
by the Merger Agreement.
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 corporate
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existence and good standing, subsidiaries, capital structure, corporate
authorization, consents and approvals, taxes, brokers and finders, undisclosed
liabilities, certain changes or events concerning its businesses, compliance
with applicable law, employee benefit plans, litigation and environmental
liabilities. In addition, the Company represented to the Parent and the
Purchaser that the Board, at a meeting duly called and held, has (i)
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 stockholders of the Company, and (ii) approved and adopted
the Merger Agreement and the transactions contemplated thereby, including the
Offer, the Merger, and the Stockholder Agreement and the transactions
contemplated thereby in all respects and that such approval constitutes
approval of the Offer, the Merger Agreement, the Merger and the Stockholder
Agreement and the transactions contemplated thereby for purposes of Section
203 of the DGCL.
Conditions to the Merger. The obligations of each of the Parent, the
Purchaser and the Company to effect the Merger are subject to the satisfaction
of certain conditions, which have not been waived at or prior to the Closing
of the Merger, including (i) the Merger Agreement shall have been adopted by
the requisite vote, if any is required, of the stockholders of the Company in
accordance with applicable law; (ii) no order, statute, rule, regulation,
executive order, stay, decree, judgment or injunction shall have been enacted,
entered, issued, promulgated or enforced by any court or governmental
authority which prohibits or restricts the consummation of the Merger; and
(iii) any waiting period (and any extension thereof) applicable to the Merger
under the HSR Act shall have terminated or expired. The obligation of the
Purchaser and the Parent to effect the Merger is further subject to
satisfaction of the conditions, unless waived by the Parent, that (i) the
Purchaser shall have accepted for payment Shares tendered pursuant to the
Offer, provided that this condition will be deemed satisfied with respect to
the Purchaser and the Parent if the Purchaser shall have failed to purchase
Shares pursuant to the Offer in violation of the terms of the Offer, (ii) the
Company shall have performed and complied in all material respects with the
agreements and obligations contained in the Merger Agreement required to be
performed and complied with by it at or prior to the Effective Time, provided
that this clause (ii) shall not apply after the Purchaser has designated a
majority of directors to serve on the Board as provided in the Merger
Agreement and Purchaser's Designees constitute a majority of the Board and
(iii) there shall have been no change in the Board's recommendation that the
stockholders of the Company accept the Offer. The obligation of the Company to
effect the Merger is further subject, unless waived by the Company, to the
Parent and the Purchaser having performed and complied in all material
respects with the agreements and obligations contained in the Merger Agreement
required to be performed and complied with by each of them at or prior to the
Effective Time.
Termination. The Merger Agreement may be terminated and the Offer (if the
Purchaser has not accepted Shares for payment) and the Merger may be abandoned
at any time prior to the Effective Time: (i) by mutual written consent of the
Parent, the Purchaser and the Company; (ii) by the Parent and the Purchaser or
by the Company if Shares have not been purchased pursuant to the Offer on or
before December 31, 1996 or the Closing of the Merger shall not have occurred
on or prior to June 30, 1997; (iii) by the Parent and the Purchaser or the
Company if any court of competent jurisdiction in the United States or other
United States governmental body shall have issued an order, decree or ruling
or taken any other final action restraining, enjoining or otherwise
prohibiting the Merger or the acceptance for payment of and payment for the
Shares and such order, decree, ruling or other action shall have become
nonappealable; (iv) by the Parent and the Purchaser if, due to an occurrence
or circumstance which would result in a failure to satisfy any of the
conditions set forth in Annex A, but subject to the Purchaser's obligation to
extend the Offer in certain circumstances set forth in the Merger Agreement,
the Purchaser shall have (a) failed to commence the Offer within five business
days of the public announcement of the Offer and the Merger or (b) terminated
the Offer or allowed the Offer to expire without the purchase of any Shares
thereunder; (v) by the Company if (a) there shall not have been a material
breach of any representation, warranty, covenant or agreement on the part of
the Company which would entitle the Parent or the Purchaser to terminate the
Merger Agreement pursuant to clause (vi) of this paragraph and, due to an
occurrence or circumstance which would result in a failure to satisfy any of
the conditions set forth in Annex A, the Purchaser shall have (A) failed to
commence the Offer within five business days of the public announcement of the
Offer and the Merger or (B) terminated the Offer or allowed the Offer to
expire without the purchase of any Shares thereunder, or (b) prior to the
purchase of Shares pursuant to the Offer, a corporation, partnership, person
or other entity or group shall have made a Superior Proposal and based as to
legal matters on the written
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advice of outside legal counsel, the Board in its good faith judgment has
determined that the exercise of the directors' fiduciary duties requires the
Company to terminate the Merger Agreement, provided that such termination
under this clause (b) shall not be effective until payment of the Termination
Fee (as defined below); (vi) by the Parent and the Purchaser prior to the
purchase of Shares pursuant to the Offer if (a) there shall have been a breach
of any representation or warranty on the part of the Company having a Material
Adverse Effect, (b) there shall have been a breach of any covenant or
agreement on the part of the Company resulting in a Material Adverse Effect or
(c) the Board shall have withdrawn or modified (including by amendment of the
Schedule 14D-9) in a manner adverse to the Purchaser its approval or
recommendation of the Offer, the Merger Agreement or the Merger or shall have
recommended another offer, or shall have adopted any resolution to effect any
of the foregoing, provided that the Parent and the Purchaser may not terminate
the Merger Agreement pursuant to this clause (c) if, as a result of the
Company's receipt of an Acquisition Proposal from a third party, (A) the
Company issues to its stockholders a communication that contains only the
statements permitted by Rule 14d-9(e) under the Exchange Act (and does not
otherwise withdraw, modify or amend its approval of recommendation of the
transactions contemplated by the Merger Agreement) and (B) within five
business days of issuing such communications the Company publicly reconfirms
its approval and recommendation of the transactions contemplated by the Offer,
the Merger Agreement and the Merger; or (vii) by the Company if (a) there
shall have been a breach of any representation or warranty on the part of the
Parent or the Purchaser which materially adversely affects the consummation of
the Offer or the Merger, or (b) there shall have been a material breach of any
covenant or agreement on the part of the Parent or the Purchaser and which
materially adversely affects the consummation of the Offer or the Merger.
Termination Fee and Expenses. In the event that (i) the Parent and the
Purchaser terminate the Merger Agreement pursuant to clause (vi)(a) or (vi)(b)
of the preceding paragraph, (ii) the Merger Agreement is terminated in the
manner described in clause (v)(b) or (vi)(c) of the preceding paragraph, or
(iii) an entity or group (other than the Parent or the Purchaser) shall have
made and not withdrawn a proposal with respect to a Third Party Acquisition
(as defined below) and (x) the Offer shall have remained open until December
31, 1996, (y) the Minimum Condition shall not have been satisfied at such
date, and (z) within six months after December 31, 1996, a Third Party
Acquisition shall be consummated, the Company shall reimburse the Parent, the
Purchaser and their affiliates (not later than one business day after
submission of statements therefor) for all actual documented out-of-pocket
fees and expenses actually and reasonably incurred by any of them or on their
behalf in connection with the Offer and the Merger and the consummation of all
transactions contemplated by the Merger Agreement (including, without
limitation, reasonable attorneys' fees, reasonable fees payable to financing
sources, investment bankers, counsel to any of the foregoing, and accountants
and filing fees and printing costs) up to the maximum sum of $1,500,000. In
the event that (i) the Company terminates the Merger Agreement pursuant to
clause (v)(b) of the preceding paragraph, (ii) the Parent and the Purchaser
terminate the Merger Agreement pursuant to clause (vi)(c) of the preceding
paragraph or (iii) the consummation of a Third Party Acquisition as described
in clause (iii) of the first sentence of this paragraph, the Company shall pay
to the Purchaser the amount of $14,000,000 (the "Termination Fee") as
liquidated damages immediately upon such termination or consummation of a
Third Party Acquisition, as well as all amounts to which the Parent and the
Purchaser would be entitled pursuant to the immediately preceding sentence.
"Third Party Acquisition" means the occurrence of any of the following
events: (i) the acquisition of the Company by merger or otherwise by any
person (which includes any partnership, limited partnership, syndicate or
other "group" (as such term is used in Section 13(d)(3) of the Exchange Act))
or entity other than the Parent, the Purchaser or any affiliate thereof (a
"Third Party"); (ii) the acquisition by a Third Party of more than 50% of the
total assets of the Company and its subsidiaries; (iii) the acquisition by a
Third Party of 50% or more of the Shares, assuming conversion of outstanding
Preferred Shares in accordance with their terms; or (iv) the adoption by the
Company of a plan of liquidation or the declaration or payment of an
extraordinary dividend.
Pursuant to the Merger Agreement, in the event of the termination of the
Merger Agreement and abandonment of the Offer and the Merger, the Merger
Agreement will become void and have no effect, without any liability on the
part of any party or its affiliates, directors, officers or stockholders,
provided that a party will not be relieved from liability for any damages
arising out of any wilful or intentional breach of the Merger
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Agreement or from their obligations with respect to brokers and finders, the
Termination Fee, expenses of the parties and confidentiality of information.
Costs and Expenses. Except as discussed above, the Merger Agreement provides
that all costs and expenses incurred in connection with the transactions
contemplated by the Merger Agreement shall be paid by the party incurring such
costs and expenses.
Amendments and Modifications. Subject to applicable law, at any time prior
to the Effective Time, the Merger Agreement may be amended, modified or
supplemented by a written agreement of the Parent, the Purchaser and the
Company executed by duly authorized officers of the respective parties except
that after the earlier of (i) the purchase by the Purchaser of a majority of
the Fully Diluted Shares and (ii) the meeting of the stockholders of the
Company to approve the Merger, the price per share to be paid pursuant to the
Merger Agreement to the holders of the Shares may not be decreased and the
form of consideration to be received by the holders of the Shares in the
Merger may not be altered, and no other amendment which would adversely affect
the holders of Shares or Preferred Shares may be made, without approval of the
applicable holders.
The Stockholder Agreement. Concurrently with the execution of the Merger
Agreement, the Purchaser and the Parent entered into a Stockholder Tender and
Option Agreement (the "Stockholder Agreement") with FS Equity Partners II,
L.P., FS Equity Partners III, L.P. and FS Equity Partners International, L.P.
(collectively, the "Stockholders") and the Company. The Stockholders own an
aggregate of 1,604,043 Shares assuming full conversion of 800,000 Preferred
Shares held by the Stockholders (representing approximately 18.2% of the
Shares outstanding on August 1, 1996 on a fully diluted basis, assuming no
exercise of outstanding Company Options, and 17.5% assuming the exercise of
all outstanding Company Options). Pursuant to the Stockholder Agreement, each
Stockholder has agreed to convert all of the Preferred Shares owned by it into
Shares, and to tender and sell all Shares owned by it (including any Shares
acquired upon conversion of Preferred Shares) to the Purchaser pursuant to and
in accordance with the terms of the Offer. On the date the Shares are accepted
for payment and purchased by Purchaser pursuant to the Offer, the Purchaser
will make payment by wire transfer to each Stockholder of the purchase price
for such Shares, which shall be the same purchase price per share received by
other stockholders of the Company in the Offer. In the event that the Offer is
consummated (i) on or after September 1, 1996 but not later than September 15,
1996 or (ii) on or after December 1, 1996 but not later than December 15,
1996, the Parent shall pay to each Stockholder cash equal to the amount of the
dividend which otherwise would be paid on September 15, 1996 or December 15,
1996, as the case may be, on any Preferred Shares owned of record by such
Stockholder on the preceding September 1 or December 1, as the case may be.
Pursuant to the Stockholder Agreement, each Stockholder has granted to
Parent an irrevocable option (the "Stock Option") to purchase the Shares and
Preferred Shares owned by it (the "Option Shares") at a purchase price per
share of $35.00 and $56.00, respectively. The option price for the Preferred
Shares equals the Offer Price multiplied by the number of Shares into which
the Preferred Shares are convertible. In the event that (i) the Company
terminates the Merger Agreement for the reason that, prior to the purchase of
Shares pursuant to the Offer, a third party shall have made a Superior
Proposal and, based as to legal matters on the written advice of outside legal
counsel, the failure to terminate the Merger Agreement and accept such offer
would constitute a breach of the fiduciary duties of the directors under
applicable law, (ii) the Parent and the Purchaser terminate the Merger
Agreement for the reason that the Board shall have withdrawn or modified
(including by amendment of the Schedule 14D-9) in a manner adverse to the
Purchaser its approval or recommendation of the Offer, the Merger Agreement or
the Merger or shall have recommended another offer, or shall have adopted any
resolution to effect any of the foregoing or (iii) the Offer is consummated,
the Stock Option will become immediately exercisable upon the first to occur
of any such events and remain exercisable until the date which is 60 days
after the occurrence of such event (except in the case of clause (iii) above,
in which case the Stock Option shall be exercised in full by the Parent
immediately with the purchase price per share paid in the Offer (with the
purchase price for the Preferred Shares adjusted to an as converted basis, if
appropriate) to be paid on the same business day to the Stockholders by wire
transfer), but shall not be exercisable in each case unless: (x) all waiting
periods under the HSR Act, required for the purchase of Shares and Preferred
Shares upon such exercise shall have expired or been waived, with Parent
hereby agreeing to use its best efforts to promptly cause such waiting
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period to be terminated, and with the HSR Act filing for the Offer and Merger
also covering full exercise of the Stock Option and (y) there shall not then
be in effect any preliminary or final injunction or other order issued by any
court or governmental, administrative or regulatory agency or authority
prohibiting the exercise of the Stock Option pursuant to the Stockholder
Agreement, provided that if such injunction or other order has become final
and nonappealable, the Stock Option shall terminate; and provided further,
that if the Stock Option is not exercisable because the circumstances
described in clauses (x) and (y) do not exist, then the Stock Option shall be
exercisable for the 10-day period commencing on the date that the
circumstances set forth in clauses (x) and (y) do exist.
Pursuant to the Stockholder Agreement, if the Parent exercises the Stock
Option pursuant to clause (i) or (ii) of the preceding paragraph and, within
one year following the termination of the Merger Agreement in accordance with
its terms, the Parent (i) transfers, sells or otherwise disposes of any or all
of the Option Shares, including without limitation, by means of a tender or
exchange of any or all of the Option Shares pursuant to a tender or exchange
offer involving the capital stock of the Company (a "Disposition"), provided
that any conversion of the Preferred Shares into Common Stock in accordance
with their terms shall not constitute a Disposition, (ii) converts the Option
Shares into or receives cash, capital stock, other securities or any other
consideration in or as a result of a Third Party Acquisition (as such term is
defined in the Merger Agreement), or (iii) alone or as part of a syndicate or
group, other than pursuant to the Merger Agreement, (x) acquires the Company
by merger or otherwise, (y) acquires more than 50% of the assets of the
Company and its subsidiary, taken as a whole, or (z) acquires 50% or more of
the Shares (assuming conversion of all outstanding Preferred Shares in
accordance with their terms), Parent shall pay to the Stockholders within five
days thereafter the amount equal to the Profit (as defined below) Parent shall
receive, if any, pursuant to a Disposition or Third Party Acquisition or the
Spread (as defined below) in the case of a transaction described in clause
(iii) above. "Profit," for purposes of the Stockholder Agreement, means (i)
the product of (a) the number of Option Shares Parent transfers, sells,
tenders, exchanges or otherwise disposes of pursuant to a Disposition or Third
Party Acquisition times (b) the amount of the per share consideration received
by Parent pursuant to such Disposition or Third Party Acquisition in excess of
the purchase price of such Option Shares set forth in the preceding paragraph
(adjusted to reflect the conversion of the Preferred Shares, if appropriate).
"Spread," for purposes of the Stockholder Agreement, means the product of (a)
the aggregate number of Option Shares times (b) the amount of the highest per
share price paid by the Parent to other stockholders of the Company in a
transaction described in clause (iii) above (valuing any non-cash
consideration at its fair market value on the date of such consummation) in
excess of the purchase price of such Option Shares set forth in the preceding
paragraph (adjusted to reflect the conversion of the Preferred Shares, if
appropriate).
Pursuant to the Stockholder Agreement, the Company and certain of the
Stockholders have amended the Registration Rights Agreement between the
Company and two of the Stockholders (the "Registration Rights Agreement"). The
amendment provides for, among other things, demand and "piggyback"
registration rights for all of the Shares (including Shares issued upon
conversion of Preferred Shares) owned by the Stockholders and limits the
holder of such shares to two demand registration requests. The Stockholders
have agreed to assign all of their rights under the Registration Rights
Agreement to the Parent, such assignment to be effective upon exercise of the
Stock Option.
The Stockholder Agreement remains in effect until the earliest to occur of
(i) the date the Merger Agreement is terminated in accordance with its terms,
provided that the provisions regarding the Stock Option described above and
the restrictions on transfer described in the next succeeding paragraph shall
not terminate until 60 days thereafter (or such later time as permitted by the
Stockholder Agreement) if the Merger Agreement was terminated pursuant to
clause (i) or (ii) of the third preceding paragraph, (ii) the purchase of all
the Shares pursuant to the Offer and (iii) February 15, 1997; provided that if
the Stock Option is exercised, the provisions regarding registration rights
shall survive termination of the Stockholder Agreement.
During the term of the Stockholder Agreement, no Stockholder will, except
pursuant to the terms of the Offer, (i) offer to sell, sell, pledge or
otherwise dispose of or transfer (except by operation of law in a merger or
business combination of the Company with or into any other entity or entities)
any interest in or encumber with
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any lien any of the Shares or Preferred Shares, (ii) acquire any shares of
Common Stock, Preferred Stock or other securities (except for additional
shares of Common Stock or securities issued upon conversion of the Preferred
Shares in accordance with their terms or as a result of a stock dividend,
stock split, recapitalization or similar event and any such additional shares
of Common Stock or securities will be deemed to constitute Shares for purposes
of the Stockholder Agreement), (iii) deposit the Shares into a voting trust or
arrangement with respect to the Shares or grant any proxy or power of attorney
with respect to the Shares or (iv) enter into any contract, option or other
arrangement or undertaking with respect to the sale, assignment or other
disposition of or transfer of any interest in or the voting of any Shares or
any other securities of the Company. In addition, each Stockholder has agreed
not to initiate, solicit (including by way of furnishing information),
encourage or respond to or take any other action knowingly to facilitate, any
inquiries or the making of any proposal by any person or entity (other than
Parent or an affiliate of Parent) with respect to the Company that constitutes
or reasonably may be expected to lead to, an Acquisition Proposal, or enter
into or maintain or continue discussions or negotiate with any person or
entity in furtherance of such inquiries or to obtain any Acquisition Proposal,
or agree to or endorse any Acquisition Proposal, or authorize or permit any
person or entity acting on behalf of such Stockholder to do any of the
foregoing.
Pursuant to the Stockholder Agreement, beginning on the date thereof and
ending on the earlier of the termination of the Stockholder Agreement or the
last date the Stock Option is exercisable, each Stockholder has agreed to vote
each Share owned by it at any annual, special or adjourned meeting of the
stockholders of the Company or execute a written consent in lieu thereof: (i)
in favor of the Merger, the execution and delivery by the Company of the
Merger Agreement and the approval and adoption of the terms thereof; (ii)
against any action or agreement that would result in a breach in any respect
of any covenant, agreement, representation or warranty of the Company under
the Merger Agreement; and (iii) against the following actions (other than the
Merger and the other transactions contemplated by the Merger Agreement): (a)
any extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving the Company; (b) a sale, lease or
transfer of a material amount of assets of the Company or its subsidiaries, or
a reorganization, recapitalization, dissolution or liquidation of the Company
or its subsidiaries; and (c)(A) any change in a majority of the persons who
constitute the Board as of the date of the Stockholder Agreement, except as
contemplated by the Merger Agreement; (B) any change in the present
capitalization of the Company or any amendment of the Company's Certificate of
Incorporation or By-Laws, as amended to the date of the Stockholder Agreement;
(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 (c)(A), (B), (C) and (D), is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone, or
adversely affect the Merger and the other transactions contemplated by the
Merger Agreement and the Stockholder Agreement.
The Confidentiality Agreement. The Confidentiality Agreement contains
customary provisions pursuant to which, among other matters, Parent agreed to
keep confidential all information concerning the Company furnished to it by
the Company (the "Evaluation Material"), to use the Evaluation Material solely
for the purpose of evaluating and negotiating a possible business combination
or acquisition transaction (a "Transaction") involving the Company and, except
in connection with the Offer and the Merger, not to, without the prior written
consent of the Board, until May 31, 1998, acquire or offer to acquire any
securities or assets of the Company or enter into or propose to enter into any
business combination involving the Company or seek to influence the management
of the Company or interfere with the Company's employment relationship with
any person who becomes known to the Parent in connection with the Transaction.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Board Action. At a meeting held on August 12, 1996, the Board reviewed
the Offer, the Merger, the Merger Agreement and the Stockholder Agreement, and
also reviewed the Company's second quarter financial results and other matters
pertaining to the Offer and the Merger. At this meeting, the Board also
received a presentation from Montgomery Securities ("Montgomery") and from the
Company's legal counsel. At a meeting held on August 14, 1996, the Board, by
the unanimous vote of its directors, determined that the Offer, the Merger,
the Merger Agreement and the Stockholder Agreement are fair to, and in the
best interests of, the
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Company's stockholders. The Board 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.
Additionally, at such meeting, Montgomery delivered its fairness opinion to
the Board, dated August 14, 1996 (the "Fairness Opinion") that, as of the date
of such opinion, the consideration to be received by the stockholders of the
Company in the Offer and the Merger was fair to such stockholders from a
financial point of view. A copy of the Fairness Opinion is attached as Exhibit
5 hereto and is incorporated herein by reference. The Fairness Opinion is
described in more detail below.
(b) Background. On April 8, 1996, representatives of Montgomery, co-
underwriter of the Company's March 1996 public offering, attended a meeting
with representatives of Sears to review with Sears possible acquisition
candidates, including Orchard. In late April 1996, representatives of
Montgomery mentioned to representatives of Freeman Spogli & Co. Incorporated
("FS&Co.") that Sears might be interested in pursuing acquisition discussions
with Orchard. Also in late April, John Berg, Managing Director of Montgomery,
the Company's financial advisor, telephoned Alan Lacy, Executive Vice
President and Chief Financial Officer of Sears, to discuss the possibility of
a transaction involving the Company and Sears. On May 21, 1996,
representatives of FS&Co. discussed with Orchard's management authorizing
Montgomery to continue discussions with Sears concerning the possible
acquisition of the Company by Sears. At a May 23, 1996 meeting of the Board of
Orchard, the Board determined to pursue preliminary discussions with Sears
concerning Sears' possible acquisition of the Company.
On May 31, 1996, the Company and Sears entered into the Confidentiality
Agreement. On the same date, representatives of the Parent met in San Jose,
California with Maynard Jenkins, President and Chief Executive Officer of the
Company, J. Frederick Simmons of FS&Co., a director of the Company, and Mr.
Berg to discuss Sears and the Company's business and operations. During the
week of June 3, 1996, general financial and other operational information was
provided to Sears as part of its due diligence review of the Company.
On June 24, 1996, representatives of Sears met with representatives of the
Company, including Mr. Jenkins and FS&Co. in San Jose, California to further
discuss a possible transaction between Sears and the Company. The parties
agreed to a two-stage due diligence process in which Sears would initially
review nonpublic information which the Company considered to be less
competitively sensitive, after which Sears would state the approximate value
it would consider paying in an acquisition, subject to due diligence, Board
approval and other conditions, the type of consideration to be paid, and the
process Sears would be willing to follow in proceeding with due diligence and
potential acquisition discussions. Later that week, additional information was
provided to Sears.
On June 28, 1996, the Board of the Company held a telephonic meeting and
reviewed the status of discussions with Sears and the information, including
operating projections prepared by management, that had been provided to Sears.
The Board did not, and had not previously, analyzed or approved these
projections and the assumptions underlying the projections. The Board
authorized and directed Mr. Simmons and Matt L. Figel of FS&Co., a director of
the Company, working with management, to engage in further discussions with
Sears in an effort to obtain an acquisition proposal to be presented to the
Board. The Board authorized and approved the retention of Montgomery as the
Board's independent financial advisor for a possible transaction with Sears.
On July 1, 1996, Susan Field, Managing Director Mergers & Acquisitions of
Merrill Lynch, the Parent's financial advisor in connection with the
transaction, had a telephone conversation with Mr. Berg. During this
conversation, the financial advisors of the two companies discussed the
Company's business generally and the possibility of a transaction between the
Company and the Parent.
On July 10, 1996, representatives of the Company, including Mr. Jenkins,
FS&Co. and Montgomery, met in Chicago, Illinois with representatives of Sears,
including Arthur Martinez, Chairman and Chief Executive Officer of Sears, and
Merrill Lynch, to exchange further information and further discuss and review
the Company and its business and Sears and its business.
On July 17, 1996, Ms. Field telephoned Mr. Berg to explain that Sears, based
on its due diligence review of the Company to date, and subject to further
extensive due diligence, negotiation of a satisfactory definitive
14
<PAGE>
agreement and approval by the Sears Board of Directors, was interested in
acquiring Orchard at a price of $34.00 per share. On July 23, 1996, Mr. Berg
telephoned Ms. Field to suggest that the Company expected the price per share
to be in the range of $37.00 per share. Berg also stated that if Sears
confirmed its interest at $37.00 per share, the Company was prepared to
provide the next level of confidential information to Sears, although the most
sensitive information would not be provided until later in the process after
the parties had reached general agreement on major definitive agreement
issues. Ms. Field telephoned Mr. Berg on July 24, 1996 to respond that Sears,
subject to further diligence, negotiation of a satisfactory definitive
agreement and Parent Board approval, was interested in acquiring Orchard at a
price of $35.00 per share. On July 24, 1996, Mr. Figel contacted members of
the Board to discuss the status of discussions to date, Sears' further due
diligence requirements and the agreed upon due diligence process, and the
schedule for continuing discussions and negotiation of a definitive agreement.
During the week of July 29, 1996, counsel to Sears furnished the Company and
FS&Co. with drafts of the Merger Agreement and Stockholder Agreement. On
August 2, 1996, representatives of Sears, Ms. Field and counsel for Sears met
in Los Angeles, California with representatives of Orchard, Montgomery and
counsel for Orchard and FS&Co. to negotiate the major issues under the Merger
Agreement and the Stockholder Agreement, including the provisions relating to
other potential bidders, termination fees, conditions to the tender offer, the
scope of the representations and warranties and general terms and conditions
of the option on Shares and Preferred Shares of the Company owned by the
Stockholders, which option Sears required as a condition to entering into the
Merger Agreement. During the week of August 5, 1996, counsel for the Company
and FS&Co. and counsel for Sears continued negotiations on the terms of the
Merger Agreement and the Stockholder Agreement.
During the weeks of July 29, August 5 and August 12, representatives of
Sears, counsel for Sears and Sears' accountants conducted an extensive due
diligence review of the Company, including reviewing store leases, accounting
and tax-related information, employee benefit plans and other matters.
Representatives of Sears also met with Mr. Jenkins and Mr. Figel to discuss
employee benefit arrangements for the Company's employees following the
consummation of the Offer, as well as retention bonuses and severance benefits
to be paid by Sears after completion of the Offer.
On August 12, 1996, the Board reviewed the terms of the Offer, the Merger
Agreement and the Stockholder Agreement and received presentations from
Montgomery and legal counsel. On August 14, 1996, the Board of Directors of
Sears determined to make an offer to acquire the Company at a price of $35.00
per Share in cash. Also on August 14, 1996, the Board of Directors of the
Company held a special meeting to review, with the assistance of the Board's
financial and legal advisors, the proposed Merger Agreement, Stockholder
Agreement and the transactions contemplated thereby, including the Offer and
the Merger. At such meeting, the Company's management and financial and legal
advisors discussed the transaction with the Board, and Montgomery provided the
Fairness Opinion to the effect that the consideration to be received by the
holders of Shares pursuant to the Offer and the Merger is fair from a
financial point of view to such holders. The Fairness Opinion is described in
more detail below and is attached to this Schedule 14D-9 as Exhibit 5.
Stockholders are urged to read the full text of that opinion. Following the
review of the transaction by the Board of Directors of the Company, the Board,
by unanimous vote, authorized the execution and delivery of the Merger
Agreement and the Stockholder Agreement, determined that the Offer and the
Merger are fair to and in the best interests of the stockholders of the
Company, recommended that stockholders of the Company accept the Offer and
tender their Shares pursuant to the Offer, and recommended that stockholders
of the Company approve and adopt the Merger Agreement. The Board of the
Company also approved, for purposes of Section 203 of the DGCL, the Merger
Agreement and the Stockholder Agreement. In the evening on August 14, 1996,
the Merger Agreement and the Stockholder Agreement were executed, and the
transactions were publicly announced on August 15, 1996.
Review of the Offer. In arriving at its decision to approve the transactions
contemplated by the Merger Agreement and to recommend acceptance of the Offer,
the Board considered, among other things, (i) the terms and conditions of the
Offer and the Merger Agreement, including the amount and form of the
consideration being offered to the Company's stockholders; (ii) the fact that
the $35.00 per share price in the Merger Agreement
15
<PAGE>
represents a premium of 17.6% over the closing sale price of $29.75 per share
as reported on the New York Stock Exchange on August 14, 1996, the date the
Board authorized and approved the Merger Agreement; (iii) the recent and
historical market prices and trading volume of the Common Stock, including
trading history during the current year and the Company's all-time trading
high; (iv) the Board's knowledge of the business, operations, prospects,
properties, assets and historical and projected earnings of the Company; (v)
the Company's projected performance for the third and fourth quarters of the
current fiscal year, including the difficulty of sustaining its rate of
comparable store sales growth; (vi) the requirement for considerable
additional resources to establish a meaningful presence in Southern California
and performance factors in that market; (vii) the financial condition and
business reputation of the Parent, and the ability of the Parent and the
Purchaser to complete the Offer and the Merger in a timely manner; (viii) the
high degree of certainty that the Offer will close, including the absence of
any financing condition or any other term or condition which in the Board's
view was unduly onerous or could materially impair the consummation of the
Offer or the Merger; (ix) the limited number of possible alternative buyers,
including government regulatory limitations and restrictions likely to be
imposed with respect to certain buyers, and the Board's conclusion that any
such alternative transaction was not reasonably likely to result in a more
favorable combination of price, form of consideration and likelihood of
consummation than the Offer and the Merger; and (x) the financial presentation
of Montgomery, including the receipt at the meeting of the Board held on
August 14, 1996, of the Fairness Opinion to the effect that, as of such date,
and on the basis of the various factors described to the Board at the August
12, 1996 and August 14, 1996 meetings, the $35.00 in cash per share to be
received by the holders of Shares pursuant to the Offer and the Merger is fair
from a financial point of view to such stockholders. A description of the
Fairness Opinion and the matters reviewed and analyzed by Montgomery is set
forth below.
Additionally, the Board considered its ability to provide information to
other interested parties and the importance of its right, in the exercise of
its fiduciary duties, to review other unsolicited acquisition proposals and to
terminate the Merger Agreement and accept such proposals if the Board
determined any such proposal was financially superior to the Offer. The Board
also considered and evaluated the possible impact of the Termination Fee and
the Stockholder Agreement on such proposals and received advice and analysis
from Montgomery with respect to the possible impact of the Termination Fee and
the Stockholder Agreement on alternative proposals. The Board also reviewed
and considered that approximately $131,500,000 in indebtedness may become due
or the Company will be required to offer to repurchase such indebtedness after
consummation of the Offer and considered the Company's ability, with Sears
approval, which will not be unreasonably withheld, to refinance such debt, if
necessary. In this connection, the Board also considered Sears investment in
the Company after consummation of the Offer and that Sears has and would in
all likelihood provide the resources to refinance such indebtedness.
In light of all the factors set forth above, the Board approved the Merger,
the Merger Agreement and the Stockholder Agreement. In view of the variety of
factors considered in connection with its evaluation of the Transactions, the
Board did not assign relative weights to the specific factors considered in
reaching its decision.
Fairness Opinion. Pursuant to an engagement letter dated July 31, 1996, the
Company retained Montgomery to act as its financial advisor in connection with
the consideration by the Company of the Offer and the Merger (the
"Transactions"). Montgomery is a nationally recognized firm and, as part of
its investment banking activities, is regularly engaged in the valuation of
businesses and their securities in connection with merger transactions and
other types of acquisitions, negotiated underwritings, secondary distributions
of listed and unlisted securities, private placements and valuations for
corporate and other purposes. The Company selected Montgomery as its financial
advisor on the basis of Montgomery's experience and expertise in transactions
similar to the Transactions, its reputation in the retail and investment
communities and its existing investment banking relationship with the Company.
On August 14, 1996, Montgomery delivered to the Board of the Company its
oral and written Fairness Opinion that the consideration to be received by the
Company's stockholders in the Transactions is fair to such stockholders, from
a financial point of view, as of that date. The amount of such consideration
was determined pursuant to negotiations between the Company and Sears and not
pursuant to recommendations of Montgomery.
16
<PAGE>
No limitations were imposed by the Company on Montgomery with respect to the
investigations made or procedures followed in rendering its opinion.
The full text of Montgomery's written opinion to the Board of the Company is
attached hereto as Exhibit 5 and is incorporated herein by reference. The
following summary of Montgomery's opinion is qualified in its entirety by
reference to the full text of the opinion. Montgomery's opinion is directed to
the Board of the Company and does not constitute a recommendation to any
stockholder of the Company as to whether such stockholder should tender shares
pursuant to the Offer or how such stockholder should vote with respect to the
Merger.
In connection with its opinion, Montgomery, among other things: (i) reviewed
publicly available financial and other data with respect to the Company,
including the consolidated financial statements for recent years and interim
periods to April 28, 1996 and a draft of the Company's August 15, 1996
earnings release for the quarter ended July 28, 1996, and certain other
relevant financial and operating data relating to the Company made available
to Montgomery from published sources and from the internal records of the
Company; (ii) reviewed the Merger Agreement; (iii) reviewed certain publicly
available information concerning the trading of, and the trading market for,
the Company's Common Stock; (iv) compared the Company from a financial point
of view with certain other companies in the retail industry which Montgomery
deemed to be relevant; (v) considered the financial terms, to the extent
publicly available, of selected recent business combinations of companies in
the retail industry which Montgomery deemed to be comparable, in whole or in
part, to the Transactions; (vi) reviewed and discussed with representatives of
the management of the Company certain information of a business and financial
nature regarding the Company, furnished to Montgomery by them, including
financial forecasts and related assumptions of the Company through 1997
prepared by the Company's management in consultation with Montgomery (which
forecasts reflected discussions with Montgomery and certain more conservative
assumptions than were utilized in the preparation of the operating projections
furnished to Sears in June 1996) plus extensions of those forecasts through
2000 prepared by Montgomery based on assumptions consistent with those
underlying the Company management forecasts; (vii) made inquiries regarding
and discussed the Offer to Purchase, the Transactions and the Merger Agreement
and other matters related thereto with the Company's counsel; and (viii)
performed such other analyses and examinations as Montgomery deemed
appropriate.
In connection with its review, Montgomery did not assume any obligation
independently to verify the foregoing information and relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for the Company provided to Montgomery by the Company's management
through 1997, upon management's advice and with the consent of the Board of
the Company, Montgomery assumed for purposes of its opinion that such
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of the Company's management at the time of preparation
as to the future financial performance of the Company and that they provide a
reasonable basis upon which Montgomery can form its opinion. Montgomery
prepared its own extensions of those forecasts through 2000 using assumptions
consistent with those underlying the Company management forecasts. The Company
does not publicly disclose internal management forecasts of the type provided
to Montgomery by its management in connection with Montgomery's review of the
Transactions. Such forecasts were not prepared with a view toward public
disclosure. In addition, such forecasts were based upon numerous variables and
assumptions that are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such
forecasts. Montgomery has assumed no liability for such forecasts. Montgomery
also assumed that there have been no material changes in the Company's assets,
financial condition, results of operations, business or prospects since the
date of its last financial statements made available to Montgomery (including
the Company's August 15, 1996 earnings release for the quarter ended July 28,
1996). Montgomery relied on advice of counsel and independent accountants to
the Company as to all legal and financial reporting matters with respect to
the Company, the Transactions and the Merger Agreement. Montgomery assumed
that the Transactions will be consummated in a manner that complies in all
respects with the applicable provisions of the Exchange Act and all other
applicable federal and state statutes, rules and regulations. In addition,
Montgomery did not assume responsibility for making an independent evaluation,
17
<PAGE>
appraisal or physical inspection of any of the assets or liabilities
(contingent or otherwise) of the Company, nor was Montgomery furnished with any
such appraisals. Finally, Montgomery's opinion is based on economic, monetary
and market and other conditions as in effect on, and the information made
available to Montgomery as of, August 14, 1996. Although subsequent
developments may affect that opinion, Montgomery did not assume any obligation
to update, revise or reaffirm the opinion.
Montgomery also assumed, with the consent of the Company's management, that
the Transactions will be consummated in accordance with the terms described in
the Merger Agreement without any amendments thereto, and without waiver by the
Company of any of the conditions to its obligations thereunder.
No other company or transaction used in the comparable transactions analysis
or the premiums paid analysis as a comparison is identical to the Company or
the Transactions. Accordingly, an analysis of the results of the following is
not mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading value of the
companies to which the Company and the Transactions are being compared.
Set forth below is a brief summary of the report presented by Montgomery to
the Company's Board on August 14, 1996 in connection with the Fairness Opinion.
Comparable Company Analysis. Using public and other available information,
Montgomery calculated the imputed per share value of the Company's Common Stock
based on the multiples of last twelve months' revenues ("LTM Revenues"), last
twelve months' earnings before interest, taxes, depreciation and amortization
("LTM EBITDA"), last twelve months' earnings before interest and taxes ("LTM
EBIT"), estimated 1996 earnings per share ("EPS") and estimated 1997 EPS at
which eight publicly traded building materials retailers (the "Building
Materials Retailers"), and sixteen publicly traded medium growth retailers (the
"Medium Growth Retailers") were trading on August 9, 1996. The August 9, 1996
stock prices of the Building Materials Retailers and the Medium Growth
Retailers reflected the following median multiples, respectively: 0.3x and 0.6x
LTM Revenues; 8.1x and 9.9x LTM EBITDA; 11.3x and 11.4x LTM EBIT; 15.6x and
17.4x estimated 1996 EPS, and 12.7x and 14.8x estimated 1997 EPS. Montgomery
applied the median multiples for Building Materials Retailers and the Medium
Growth Retailers to the applicable statistics for the Company, and made
applicable adjustments to reflect the Company's net debt (defined as debt minus
cash) at July 28, 1996 ($99.1 million). This analysis indicated an imputed
equity value (defined as aggregate value minus net debt) of the Company of
between $226.9 million and $281.8 million, or between $25.17 and $31.26 per
share.
Comparable Transactions Analysis. Montgomery reviewed the consideration paid
in eleven acquisitions of comparable specialty retailers that have been
announced since 1994. Montgomery analyzed the consideration paid in such
transactions as a multiple of the target companies' LTM Revenues and LTM
EBITDA. Such analysis yielded mean and median multiples of 0.3x and 0.6x LTM
Revenues and 7.7x and 8.1x LTM EBITDA. Montgomery then applied the foregoing
multiples to the Company's LTM Revenues and LTM EBITDA, subtracted the
Company's net debt as of July 28, 1996 ($99.1 million) and excluded valuations
that Montgomery deemed to be unrealistically low. This analysis indicated an
imputed equity value of the Company of between $244.0 million and $263.0
million, or between $27.07 and $29.18 per share.
Premiums Paid Analysis. Montgomery reviewed the consideration paid in
comparable U.S. acquisitions involving cash consideration of between $100
million and $500 million that have been announced since January 1, 1995.
Montgomery calculated the premiums paid in these transactions over the
applicable stock price of the target company one month, one week and one day
prior to the announcement of the acquisition offer, and then calculated the
mean and median of those premiums. Montgomery then applied the mean and median
premiums so derived to the Company's closing stock prices on July 12, 1996
($26.13), August 2, 1996 ($27.88) and August 9, 1996 ($29.00), and subtracted
the Company's net debt as of July 28, 1996 ($99.1 million). This analysis
indicated an imputed equity value of the Company of between $306.2 million and
$323.7 million, or between $33.96 and $35.90 per share.
18
<PAGE>
Discounted Cash Flow Analysis. Montgomery applied a discounted cash flow
analysis to the Company's financial forecasts for 1996 and 1997, prepared by
the Company's management in consultation with Montgomery, and for 1998 through
2000, prepared by Montgomery using assumptions consistent with those
underlying the 1996 and 1997 forecasts. The Company did not provide Montgomery
with any financial forecasts for periods beyond 1997. These forecasts were
prepared in August, 1996 and included certain more conservative assumptions as
to the improvement in gross profit margins, and reductions in selling expenses
and general and administrative expenses as a percentage of revenues, than
those used in preparing the operating projections furnished to Sears in June,
1996. Assumptions are inherently uncertain and are subject to significant
economic and competitive factors which are difficult or impossible to predict
with accuracy, and management agreed with Montgomery that the use of these
more conservative assumptions was appropriate. The use of these more
conservative assumptions reduced the Company's forecasted EBITDA for 1996 and
1997 by approximately 8.0% and 8.3%, respectively, from those reflected in the
operating projections furnished to Sears. Montgomery confirmed to management
of the Company that if Montgomery had utilized the projections furnished to
Sears in June, 1996 in its analysis it would not have reached a different
conclusion with respect to the fairness of the Transactions.
In conducting its discounted cash flow analysis, Montgomery first calculated
the estimated future streams of free cash flows that the Company would produce
through 2000. Second, Montgomery estimated the Company's aggregate value at
the end of 2000 by applying multiples of between 7.5x and 8.5x to the
Company's estimated EBITDA in 2000 and adding the Company's current net debt
($99.1 million). Such cash flow streams and aggregate values were discounted
to present values using a discount rate of approximately 16.0%, and such
present values were then reduced by the Company's net debt as of July 28, 1996
($99.1 million). This analysis indicated an imputed equity value of the
Company of between $264.7 million and $305.3 million, or between $29.36 and
$33.87 per share.
While the foregoing summary describes all analyses and examinations that
Montgomery deems material to its opinion, it is not a comprehensive
description of all analyses and examinations actually conducted by Montgomery.
The preparation of a fairness opinion necessarily is not susceptible to
partial analysis or summary description. Montgomery believes that its analyses
and the summary set forth above must be considered as a whole and that
selecting portions of its analyses and of the factors considered, without
considering all analyses and factors, would create an incomplete view of the
process underlying the analyses set forth in its presentation to the Board of
the Company. Accordingly, the ranges of valuations resulting from any
particular analysis described above should not be taken to be Montgomery's
view of the actual value of the Company.
In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company. The
analyses performed by Montgomery are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as part of Montgomery's analysis of the fairness of the Transactions to
the Company and were provided to the Board of the Company in connection with
the delivery of Montgomery's opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold
or the prices at which any securities may trade at any time in the future.
Montgomery used in its analyses various projections of future performance
prepared by the managements of the Company. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those set forth in such projections.
As described above, Montgomery's opinion and presentation to the Board of
the Company were among the many factors taken into consideration by the Board
of the Company in making its determination to approve, and to recommend that
its stockholders approve, the Transactions.
19
<PAGE>
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Pursuant to a letter agreement dated July 31, 1996 (the "Engagement
Letter"), the Company engaged Montgomery to act as its financial advisor in
connection with the Transactions. If the Transactions are effected, the
Engagement Letter provides for the Company to pay Montgomery a fee of
$3,000,000 in the event that the Company is acquired pursuant to the Offer or
other negotiated purchase during the term of the Engagement Letter or within
one year of termination of the Engagement Letter. The fee is not conditioned
on the outcome of Montgomery's opinion or whether or not such opinion was
deemed to be favorable for any party's purposes. The Company's obligation to
pay Montgomery's fee is contingent upon the consummation of the Transactions.
The Board of the Company was aware of this fee and took it into account in
considering Montgomery's opinion and in approving the Merger Agreement and the
transactions contemplated thereby. The Engagement Letter also calls for the
Company to reimburse Montgomery for its reasonable out-of-pocket expenses.
Pursuant to a separate letter agreement, the Company has agreed to indemnify
Montgomery, its affiliates, and their respective partners, directors,
officers, agents, consultants, employees and controlling persons against
certain liabilities, including liabilities under the federal securities laws.
In the ordinary course of its business, Montgomery actively trades the
equity securities of the Company and Sears for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. Montgomery also has acted as an underwriter in
connection with offerings of securities of the Company and performed various
investment banking services for the Company, for which it has received
customary fees.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Except pursuant to the Company's Stock Option Plans and for the
transactions contemplated by the Offer, the Merger, the Merger Agreement, the
Stockholder Agreement and the Payment Agreements, no transactions in the
Shares have been effected during the past sixty (60) days by the Company or,
to the best knowledge of the Company, by any executive officer, director or
affiliate of the Company. In connection with the Merger, the Board has
accelerated the vesting of outstanding stock options and will offer to pay to
employees the difference between the option exercise price and $35.00, after
consummation of the Offer.
(b) To the best of the Company's knowledge, all of the Company's executive
officers, directors and affiliates presently intend to tender all Shares which
are held of record or beneficially owned by such persons pursuant to the
Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as described in Items 3(b) and 4(b) above, no negotiation is
being undertaken or is underway by the Company in response to the Offer, the
Merger, the Merger Agreement or the Stockholder Agreement that relates to or
would result in (i) an extraordinary transaction, such as a merger or
reorganization, involving the Company or any of its subsidiaries, (ii) a
purchase, sale or transfer of a material amount of assets by the Company or
its subsidiaries, (iii) a tender offer for or acquisition of securities by or
of the Company or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) None.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
The Information Statement attached as Schedule I hereto is being furnished
in connection with the possible designation by the 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.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
1. Agreement and Plan of Merger, dated August 14, 1996, by and among the
Company, the Purchaser and the Parent.*
2. Stockholder Tender and Option Agreement, dated August 14, 1996, by and
among the Purchaser, the Parent, the Company, FS Equity Partners II,
L.P., FS Equity Partners III, L.P. and FS Equity Partners International,
L.P.*
3. Pages 2 through 11 of the Company's Proxy Statement, dated April 10,
1996.*
4. Press release issued by the Company and the Parent on August 15, 1996.*
5. Fairness Opinion of Montgomery, dated August 14, 1996.
6. Letter to Stockholders, dated August 21, 1996, from Maynard Jenkins,
President and Chief Executive Officer of the Company.
7. Letter Agreement, dated August 14, 1996, between the Company and Maynard
Jenkins.*
8. Confidentiality Agreement, dated May 31, 1996, between the Company and
Sears, Roebuck and Co.*
9. Form of Letter Agreement between the Company and Holders of Options
under the Company's Amended 1989 Nonqualified Stock Option Plan, the
Company's 1993 Non-Employee Directors Stock Option Plan, the Company's
1993 Stock Option Plan and the Company's 1996 Non-Employee Directors
Stock Option Plan.*
10. Notice and Agreement Regarding Conversion and Tender, dated as of
August 14, 1996, by and among the Company, the Parent, FS Equity
Partners III, L.P., FS Equity Partners International, L.P. and
ChaseMellon Shareholder Services, L.L.C.*
11. Employment Agreement, dated as of March 22, 1996, by and between the
Company and Dale D. Ward.*
- --------
*Not included in copies mailed to stockholders.
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
accurate.
Dated: August 21, 1996 Orchard Supply Hardware Stores
Corporation
By /s/ Stephen M. Hilberg
----------------------------------
Name: Stephen M. Hilberg
Title: Chief Financial Officer
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SCHEDULE I
ORCHARD SUPPLY HARDWARE STORES CORPORATION
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES EXCHANGE
ACT OF 1934 AND RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about August 21, 1996, as a
part of the Company's Solicitation/Recommendation Statement on Schedule 14D-9
("Schedule 14D-9") to the holders of record of the Common Stock at the close
of business on or about August 13, 1996. Capitalized terms used herein and not
otherwise defined shall have the meanings set forth in the Schedule 14D-9 and
the Merger Agreement. You are receiving this Information Statement in
connection with the possible election of persons designated by Purchaser to a
majority of the seats on the Board. As further set forth below, the Merger
Agreement requires the Company to take all actions necessary to cause
Purchaser's Designees (as defined below) to be elected to the Board under the
circumstances described therein. This Information Statement is required by
Section 14(f) of the Exchange Act and Rule 14f-1 thereunder. You are urged to
read this Information Statement carefully. You are not, however, required to
take any action in connection with this Information Statement.
Pursuant to the Merger Agreement, the Purchaser commenced the Offer on
August 21, 1996. The Offer is scheduled to expire at 12:00 midnight, New York
City time, on Wednesday, September 18, 1996, unless the Offer is extended.
The information contained in this Information Statement concerning
Purchaser's Designees has been furnished to the Company by Purchaser, and the
Company assumes no responsibility for the accuracy or completeness of such
information.
S-1
<PAGE>
BOARD OF DIRECTORS
GENERAL
The Common Stock is the only class of voting securities of the Company
outstanding. Each share of Common Stock has one vote. As of August 1, 1996,
there were 7,542,323 shares of Common Stock outstanding (not including
1,280,000 shares of Common Stock issuable upon conversion of Preferred Stock).
The Board currently consists of eight members. Each director holds office
until such director's successor is elected and qualified or until such
director's earlier resignation or removal.
MEMBERS OF THE BOARD OF DIRECTORS OF THE COMPANY
The following sets forth certain information concerning the members of the
Board as of August 1, 1996.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
---- --- ------------------------- --------
<C> <C> <S> <C>
Maynard Jenkins..................... 54 President, Chief Executive 1989
Officer and Director
Stephen M. Hilberg.................. 52 Vice President-Finance, 1989
Chief Financial Officer
and Director
Matt L. Figel....................... 36 Director 1995
Morton Godlas*+..................... 73 Director 1993
William A. Hall+.................... 64 Director 1995
J. Frederick Simmons*............... 41 Director 1989
Ronald P. Spogli*................... 48 Director 1989
Mac Allen Culver.................... 54 Director 1996
</TABLE>
- --------
* Member of the Compensation Committee.
+ Member of the Audit Committee.
Mr. Jenkins has served as President of the Company and a Director since May
1989 and as Chief Executive Officer since 1986. Before joining the Company,
Mr. Jenkins served as the President and Chief Operating Officer of Pay 'n
Save, Inc., a retail drug store chain. Mr. Jenkins is also a member of the
Board of Directors of Ross Stores, Inc., an off-price retail apparel chain.
Mr. Hilberg has served as Chief Financial Officer and Vice President-Finance
of the Company since 1981. From 1978 to 1981, Mr. Hilberg served as the
Corporate Controller of Franklin Stores, a retail chain of discount department
and ladies' apparel stores.
Mr. Figel has been employed by an affiliate of FS&Co., a private investment
company, since 1986. Mr. Figel is also a member of the Board of Directors of
Buttrey Food and Drug Stores Company.
Mr. Godlas is a management consultant with more than 45 years of retail
experience. Since 1982, Mr. Godlas has been President and Chief Executive
Officer of M. Godlas, Inc., a retail consulting firm. From 1978 to 1982, Mr.
Godlas was Corporate Senior Vice President-General Merchandise at Lucky
Stores, Inc., a retail supermarket chain.
Mr. Hall founded Sight & Sound Distributing Company, a media and software
distribution company, in 1984 and has served as President and Chief Executive
Officer since that time.
Mr. Simmons joined FS&Co. in 1986 and became a general partner in January
1991. Mr. Simmons is also a member of the Board of Directors of Buttrey Food
and Drug Stores Company and EnviroSource, Inc.
Mr. Spogli is a founding partner of FS&Co., which was founded in 1983. Mr.
Spogli is the Chairman of the Board and a Director of EnviroSource, Inc. Mr.
Spogli also serves on the Board of Directors of Mac Frugal's Bargains . Close-
Outs Inc. and Buttrey Food and Drug Stores Company and on the Board of
Representatives of Brylane, L.P.
S-2
<PAGE>
Mr. Culver has served as President and Chief Operating Officer of St. Ives
Laboratories, Inc., a hair and skin care company, since 1987. Mr. Culver has
20 years of retail industry experience. He served as Chairman and Chief
Executive Officer of Pay 'n Save, Inc., a retail drug store chain, from 1985
to 1986 and as President and Chief Executive Officer of Gray DrugFair, another
retail drug store chain, from 1984 to 1985. Mr. Culver is also a member of the
Board of Directors of St. Ives Laboratories, Inc. and IVC Industries, Inc.
The Company, FS Equity Partners II, L.P. ("FSEP II"), FS Equity Partners
III, L.P. ("FSEP III") and FS Equity Partners International, L.P. ("FSEP
International") have entered into a Management Rights Agreement, effective as
of January 1, 1995, pursuant to which FSEP III can substantially participate
in, or substantially influence the conduct of, the management of the Company
and its business.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY
The standing committees of the Board are the Audit Committee (the "Audit
Committee") and the Compensation Committee (the "Compensation Committee"). The
Audit Committee, which presently consists of Messrs. Godlas and Hall, met once
during the fiscal year ended January 28, 1996 ("fiscal 1995"). The
Compensation Committee, which presently consists of Messrs. Godlas, Simmons
and Spogli, met twice during fiscal 1995.
The Audit Committee recommends to the Board the engagement or discharge of
the Company's independent auditors; reviews with the independent auditors the
scope, timing and plan for the annual audit, any non-audit services and the
fees for audit and other services; reviews outstanding accounting and auditing
issues with the independent auditors; and supervises or conducts such
additional projects as may be relevant to its duties. The Audit Committee is
also responsible for reviewing and making recommendations with respect to the
Company's financial condition, its financial controls and accounting practices
and procedures.
The Compensation Committee recommends to the Board compensation policies and
guidelines for the Company's executives and oversees the granting of incentive
compensation, if any, to such persons. The Compensation Committee also
administers the Company's bonus and stock option plans.
MEETINGS AND REMUNERATION
During fiscal 1995, the Board held four meetings and took various actions by
written consent. Each incumbent director attended at least 75% of the
aggregate of the total number of meetings held by the Board during fiscal 1995
and the total number of meetings held by all committees of the Board during
that period within which he was a director or member of such committee of the
Board.
Each director is elected to hold office until the next annual meeting of
stockholders and until his respective successor is elected and qualified.
Except for non-employee directors of the Company who are not affiliated with
FS&Co. ("Outside Directors"), directors do not receive compensation for
service on the Board or any committee of the Board. All directors are
reimbursed for their out-of-pocket expenses in serving on the Board and any
committee of the Board. Outside Directors receive an annual retainer of
$10,000 plus $1,500 for each regular Board meeting attended. The Company has
adopted two stock option plans for Outside Directors, the general terms of
which are set forth below.
1993 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Outside Directors of the Company are eligible to participate in the 1993
Non-Employee Directors Stock Option Plan (the "1993 Directors Plan").
Participants in the 1993 Directors Plan may be granted options to purchase
shares of the Company's Common Stock at a purchase price determined by the
Compensation Committee. Options granted under the 1993 Directors Plan are not
intended to qualify for treatment as incentive stock options under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). In no event
shall such purchase price be less than 85% of the fair market value of the
underlying shares at the time the option
S-3
<PAGE>
is granted, or less than 110% of the fair market value in the case of any
participant who owns capital stock possessing more than 10% of the total
combined voting power or value of all classes of capital stock of the Company
or its subsidiaries. Up to 10,000 shares of the Company's Common Stock may be
issued under the 1993 Directors Plan upon the exercise of options granted
thereunder, which options vest and become exercisable in annual installments
of 20% per year over five years. As of August 1, 1996, options covering 10,000
shares of Common Stock had been granted under the 1993 Directors Plan, 2,000
of which had been exercised. Upon consummation of the Offer, the Company
intends to pay the difference between the exercise price of such options and
the Offer Price to directors holding such options.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Outside Directors of the Company are eligible to participate in the 1996
Non-Employee Directors Stock Option Plan (the "1996 Directors Plan"). Under
the 1996 Directors Plan, on the date of the annual meeting at which an Outside
Director is initially elected, such Outside Director automatically will be
granted an option to purchase 5,000 shares of Common Stock at an exercise
price equal to the average closing price for the Common Stock for the five
trading days preceding the date of grant. These options vest and are
exercisable in five equal annual installments commencing on the first
anniversary of the grant. The 1996 Directors Plan also permits each Outside
Director to elect, on the date of each annual meeting at which he or she is
elected or re-elected, to receive an option to purchase shares of Common Stock
in lieu of being paid that part of the director's fee that is not dependent
upon attendance at meetings or services as a chairperson for the ensuing year
(the "Retainer Fee"). If the Outside Director makes such an election, on the
six-month anniversary of the date of the election (the "Date of Grant"), such
Outside Director will be granted an option exercisable for a number of shares
of Common Stock equal to the amount of the Outside Director's Retainer Fee
divided by 20% of the fair market value of a share of Common Stock at the
close of business on the Date of Grant. The exercise price for any such option
will be 80% of the fair market value of the Common Stock on the Date of Grant.
These options vest and are exercisable on the date of the annual meeting of
stockholders following the Date of Grant. The maximum number of shares of
Common Stock that may be issued under the 1996 Directors Plan is 75,000. As of
August 1, 1996, options covering 5,000 shares of Common Stock had been granted
under the 1996 Directors Plan, none of which had been exercised. Upon
consummation of the Offer, the Company intends to pay the difference between
the exercise price of this option and the Offer Price to director Mac Allen
Culver, the holder of this option. Directors Morton Godlas, William A. Hall
and Mac Allen Culver will be paid $10,000 each to relinquish option rights
under the 1996 Non-Employee Directors Stock Option Plan with respect to the
option each elected in lieu of receiving an annual retainer of $10,000.
RIGHT TO DESIGNATE DIRECTORS
Pursuant to the Merger Agreement, promptly upon the purchase by the
Purchaser of the Shares pursuant to the Offer, and from time to time
thereafter, the Purchaser shall be entitled to designate up to such number of
directors ("Purchaser's Designees"), rounded up to the next whole number, on
the Board as shall give the Purchaser representation on the Board equal to the
product of the total number of directors on the Board (giving effect to the
directors elected pursuant to this sentence) multiplied by the percentage,
expressed as a decimal, that the aggregate number of shares of Common Stock
beneficially owned by the Purchaser or any affiliate of the Purchaser
following such purchase bears to the total number of shares of Common Stock
then outstanding, and the Company shall, at such time and promptly take all
actions necessary to cause the Purchaser's Designees to be elected as
directors of the Company, including increasing the size of the Board or
securing the resignations of incumbent directors, or both. The Company shall
cause persons designated by the Purchaser to constitute the same percentage as
persons designated by the Purchaser shall constitute of the Board to be
appointed to (i) each committee of the Board, (ii) the board of directors of
each subsidiary of the Company and (iii) each committee of each such board, in
each case only to the extent permitted by applicable law. Notwithstanding
anything in this paragraph to the contrary, until the earlier of the time the
Purchaser acquires a majority of the Fully Diluted Shares and the Effective
Time the Company shall use its best efforts to ensure that all the members of
the Board and each committee of the Board and such boards and committees of
each subsidiary of the Company as of the
S-4
<PAGE>
date of the Merger Agreement who are not employees of the Company shall remain
members of the Board and of such boards and committees.
Purchaser has informed the Company that each of Purchaser's Designees has
consented to act as a director. It is expected that Purchaser's Designees may
assume office as described above and that, upon assuming office, Purchaser's
Designees will thereafter constitute at least a majority of the Board of the
Company.
Biographical information concerning each of the Purchaser's Designees and
directors and executive officers of the Company is presented below.
PURCHASER'S DESIGNEES
Purchaser will choose the Purchaser's Designees from among the directors and
officers of Purchaser listed in Schedule I of the Schedule 14D-1, a copy of
which is being mailed to stockholders of the Company together with this
Schedule 14D-9. Certain biographical information concerning such individuals
is set forth below. Purchaser has advised the Company that, if additional
Purchaser Designees are necessary to constitute a majority of the Board, such
Purchaser Designees will be selected from among Parent's executive officers
identified on Annex I to Schedule 14D-1 who agree to be nominated and to serve
as directors of the Company.
<TABLE>
<CAPTION>
PRESENT
PRINCIPAL
OCCUPATION OR
EMPLOYMENT AND
FIVE-YEAR
EMPLOYMENT
NAME HISTORY
---- --------------
<C> <S>
Arthur C. Martinez............... Director of Sears since 1995; Chairman of the Board,
President and Chief Executive Officer of Sears since
August 1995; Chairman and Chief Executive Officer of
the former Merchandise Group of Sears from September
1992 until August 1995; Vice Chairman and Director of
Saks Fifth Avenue from August 1990 to August 1992;
Director of Ameritech Corporation, the Federal Reserve
Bank of Chicago and Northwestern Memorial Hospital;
Trustee of Northwestern University, the Orchestral
Association of the Chicago Symphony Orchestra and the
Art Institute of Chicago; Chairman of the National
Minority Supplier Development Council, Inc.; Chairman
of the Board of Trustees of Polytechnic University.
Gary L. Crittenden............... Executive Vice President, Strategy and Business
Development of Sears since 1996; prior to joining the
Company he had been Senior Vice President and Chief
Financial Officer of Melville Corporation (a
diversified specialty retailer) since 1994 and
Executive Vice President and Chief Financial Officer of
Filene's Basement from 1991 to 1994.
Alan J. Lacy..................... Executive Vice President and Chief Financial Officer of
Sears since January 1, 1995; prior to joining Sears he
had been Vice President, Financial Services and Systems
of Philip Morris Companies, Inc. and President of
Philip Morris Capital Corporation since September 1993
and Senior Vice President of Kraft General Foods in
charge of finance, strategy and development matters
from September 1989 to September 1993.
Michael D. Levin................. Senior Vice President and General Counsel of Sears
since January 1996; Secretary of Sears since March 1,
1996; Partner in the law firm of Latham & Watkins from
1982 to 1996.
Anthony J. Rucci................. Executive Vice President, Administration of Sears since
October 1993; prior to joining Sears he had been Senior
Vice President, Strategy, Business Development and
External Affairs and Senior Vice President, Human
Resources, of Baxter International, Inc.
</TABLE>
S-5
<PAGE>
EXECUTIVE OFFICERS
Set forth in the table below are the names, ages and current offices held by
all executive officers of the Company.
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION WITH THE COMPANY SINCE
---- --- ------------------------- ---------
<S> <C> <C> <C>
Maynard Jenkins................ 54 President, Chief Executive Officer and Director 1986
Dale D. Ward................... 46 Executive Vice President and Chief Operating Officer 1996
Vice President-Finance, Chief Financial Officer
Stephen M. Hilberg............. 52 and Director 1981
William G. Collard............. 59 Vice President-Distribution 1986
Joseph A. DiRocco.............. 46 Vice President-Marketing 1986
Vice President-Merchandising and
Robert A. Lewis................ 50 General Merchandise Manager 1978
Carolyn J. McInnes............. 52 Vice President-Human Resources 1986
Lee Nemechek................... 62 Vice President-Stores 1990
Ronald R. Stahl................ 37 Vice President-Store Planning/Real Estate 1996
</TABLE>
Executive officers of the Company are elected by and serve at the discretion
of the Board. Other than Mr. Jenkins, no arrangement exists between any
executive officer and any other person or persons pursuant to which any
executive officer was or is to be selected as an executive officer. See
"Compensation--Employment Agreement." None of the executive officers has any
family relationship to any director or to any other executive officer of the
Company. Set forth below is a brief description of the business experience for
the previous five years of all executive officers except Messrs. Jenkins and
Hilberg. See "Members of the Board of Directors of the Company."
Mr. Ward has served as Executive Vice President and Chief Operating Officer
since April 1996. He has over 25 years of retail management experience. Mr.
Ward served as President and Chief Executive Officer of F&M Super Drug Stores,
Inc., a super drug store chain, from 1994 to 1995. He also served as President
and Chief Executive Officer of Ben Franklin Stores Inc., a variety and craft
store chain, from 1988 to 1993 and as Chairman of Ben Franklin Crafts Inc., a
craft store chain, from 1991 to 1993.
Mr. Collard has served as Vice President-Distribution of the Company since
1986. Mr. Collard joined the Company in 1979 and has over 30 years of
warehousing and distribution experience. Prior to joining the Company, Mr.
Collard served for seven years as the Operations Supervisor for Fleming Foods,
a wholesale grocery distribution company, and for nine years as the Warehouse
Foreman for Louis Stores, a retail grocery chain. Mr. Collard is currently
responsible for the Company's warehouse and distribution activities.
Mr. DiRocco has served as Vice President-Marketing of the Company since
1986. From 1983 to 1986 Mr. DiRocco worked in the marketing and advertising
departments of the Company. Mr. DiRocco joined the Company in 1983 and has
over 15 years of marketing experience in the retail industry.
Mr. Lewis has served as Vice President-Merchandising and General Merchandise
Manager of the Company since 1978. Mr. Lewis began his career at the Company
in 1961 and is responsible for all aspects of the Company's merchandising and
buying program.
Ms. McInnes has served as Vice President-Human Resources of the Company
since 1986. Ms. McInnes joined the Company in 1979 as Director of Training.
She is responsible for all of the Company's training, personnel, wage and
benefits related matters.
Mr. Nemechek joined the Company in March 1987 as a Regional Manager and was
promoted to Vice President-Stores in July 1990. Prior to joining the Company,
Mr. Nemechek had over 30 years of experience in grocery and general
merchandise retailing. Mr. Nemechek is responsible for all aspects of store
operations.
S-6
<PAGE>
Mr. Stahl joined the Company in February 1987 and has served as the Director
of Store Planning since 1992. Mr. Stahl was promoted to Vice President Store
Planning and Real Estate in 1996. Mr. Stahl has over 17 years of retail
construction experience and is responsible for all aspects of construction,
real estate and store facilities.
COMPENSATION
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company paid or
accrued by the Company for each of the fiscal years in the three year period
ended January 28, 1996 to the President and Chief Executive Officer and each
of the four other most highly compensated executive officers of the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- --------------------- -------
SECURITIES
UNDERLYING
OTHER ANNUAL RESTRICTED OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL SALARY(1) BONUS(1)(2) COMPENSATION STOCK SARS(4) PAYOUTS COMPENSATION(5)
POSITIONS YEAR ($) (3)($) ($) AWARDS ($) (#) ($) ($)
------------------ ---- --------- ----------- ------------ ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maynard Jenkins......... 1995 337,692 487,794 -- 0 20,000 0 18,730
President and Chief 1994 325,000 240,351 -- 0 -- 0 9,956
Executive Officer 1993 318,000 330,701 -- 0 7,500 0 18,795
Stephen M. Hilberg...... 1995 125,338 70,088 -- 0 8,000 0 18,766
Vice President-Finance
and 1994 123,031 21,752 -- 0 -- 0 10,028
Chief Financial Officer 1993 119,054 43,504 -- 0 4,500 0 13,353
Robert A. Lewis......... 1995 107,654 59,858 -- 0 5,000 0 17,281
Vice President- 1994 106,116 18,735 -- 0 -- 0 9,166
Merchandising and
General 1993 102,319 37,470 -- 0 3,000 0 10,577
Merchandise Manager
Joseph A. DiRocco....... 1995 96,804 52,567 -- 0 5,000 0 16,718
Vice President-
Marketing 1994 96,804 17,146 -- 0 -- 0 13,135
1993 93,692 34,292 -- 0 3,000 0 14,989
Robert J. Wittman(6).... 1995 240,000 155,269 -- 0 15,000 0 11,124
Executive Vice
President 1994 -- -- -- 0 -- 0 --
and Chief Operating
Officer 1993 -- -- -- 0 -- 0 --
</TABLE>
- --------
(1) Amounts shown include compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers.
(2) Represents payments made to executive officers pursuant to the Company's
Performance Bonus Plan (defined below) and bonuses paid to Maynard Jenkins
of $100,000 for fiscal 1993 and $125,000 for each of fiscal 1994 and 1995
pursuant to his employment agreement. See "Employment Agreement."
(3) The Company has instituted a bonus plan (the "Performance Bonus Plan")
covering senior management (the President and eight Vice Presidents) which
provides for annual bonus payments based upon the Company's performance
against annually established target levels. For fiscal 1993 and fiscal
1995, annual
S-7
<PAGE>
bonus payments were based on the targets in effect for that year. For
fiscal 1994, although no bonus was payable under the annually established
targets, the Compensation Committee concluded that senior management
merited bonuses based on its performance in managing the significant
expansion undertaken during the year.
(4) Represents options granted under the Company's 1993 Stock Option Plan (the
"1993 Plan"). The options granted under the 1993 Plan were granted at fair
market value on the date of the grant, were for a term of ten years and
vest in four equal annual installments, commencing on the date of grant.
The exercise price was $17.10 for fiscal 1993 grants and $7.75 for fiscal
1995 grants.
(5) For Mr. Jenkins, amount includes: (i) $2,250 matching contributions to the
Company's 401(k) plan, (ii) $5,358 profit-sharing payments, (iii) $10,000
matching savings bonus, (iv) $669 automobile allowance and (v) $453 in
payments toward group life insurance plan. For Mr. Hilberg, amount
includes: (i) $2,250 matching contributions to the Company's 401(k) plan,
(ii) $5,358 profit-sharing payments, (iii) $10,000 matching savings bonus,
(iv) $705 automobile allowance and (v) $453 in payments toward group life
insurance plan. For Mr. Lewis, amount includes: (i) $2,055 matching
contributions to the Company's 401(k) plan, (ii) $4,774 profit-sharing
payments, (iii) $10,000 matching savings bonus and (iv) $453 in payments
toward group life insurance plan. For Mr. DiRocco, amount includes: (i)
$1,870 matching contributions to the Company's 401(k) plan, (ii) $4,221
profit-sharing payments, (iii) $10,000 matching savings bonus, (iv) $183
automobile allowance and (v) $444 in payments toward group life insurance
plan. For Mr. Wittman, amount includes: (i) $10,000 matching savings
bonus, (ii) $702 automobile allowance and (iii) $422 in payments toward
group life insurance plan. Itemized disclosure of amounts of other
compensation in fiscal 1994 and fiscal 1993 is not required.
(6) Mr. Wittman resigned from the Company in March 1996.
EMPLOYMENT AGREEMENTS
Ward Agreement. Mr. Ward has an employment agreement renewable annually
providing for a base salary of $220,000 per year and a bonus of up to 30% of
such base salary under the Company's Executive Incentive Compensation Plan.
Pursuant to this agreement, on April 8, 1996, Mr. Ward was granted the option
to purchase 10,000 shares of the Company's Common Stock at an exercise price
of $24.15 per share. During the first full year of employment or after the
first full year of employment, in the event Mr. Ward is terminated without
cause the Company shall pay Mr. Ward's base salary (but not fringe benefits or
perquisites or other compensation) for a period of twelve months from the date
of termination.
Jenkins Employment Agreement. Mr. Jenkins is party to an employment
agreement which was amended in February 1996 to provide for a base annual
salary of not less than $525,000 per year and bonuses and fringe benefits
determined from time to time by the Company. The amendment eliminated an
additional $125,000 guaranteed bonus payable to Mr. Jenkins annually. Except
in the event of termination of employment for cause, death or disability, the
current term of Mr. Jenkins' employment agreement will expire on December 31,
1999. The employment agreement shall automatically renew for a two year term
on each expiration date until notice of termination is given by the Company.
Upon termination of employment for death or disability, Mr. Jenkins is
entitled to a severance payment equal to six months of his salary. Upon
termination of employment other than for cause, death or disability, Mr.
Jenkins is entitled to a severance payment consisting of three years' base
salary plus the target bonus applicable to the earning year in progress at the
date of termination.
Jenkins Agreement. Pursuant to a Letter Agreement, dated August 14, 1996, by
and between Orchard Supply Hardware Corporation and Maynard Jenkins, in the
event a "person" or a "group" acquires "beneficial ownership" (within the
meanings given such terms under Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of greater than 51% of (a) the capital stock of Orchard
Supply Hardware Stores Corporation or (b) the capital stock or assets of
Orchard Supply Hardware Corporation, on or before December 30, 1996, through
one or a series of transactions (a "Change of Control"), Mr. Jenkins is
entitled to payment of a special bonus in cash in an amount equal to the
lesser of (x) $800,000 or (y) $1,475,000 less any amounts attributable to any
options to purchase the Company's Common Stock held by him that are treated as
"parachute payments" under Section 280G, on the Payment Date (as defined
below), payable on January 15, 1997 provided there has been a Change of
Control (the "Payment
S-8
<PAGE>
Date"). Mr. Jenkins is entitled to such payment provided that he is employed by
the Company on the date of the Change of Control and that he (i) is employed by
the Company or, if applicable, the surviving or successor corporation, on the
Payment Date or (ii) after the Change of Control but prior to the Payment Date,
his employment has been terminated without "cause" by the Company or the
surviving or successor corporation or (iii) after the Change of Control but
prior to the Payment Date, his employment has been terminated due to his death
or total disability for any consecutive six-month period.
In addition, in the event that after a Change of Control Mr. Jenkins'
employment is terminated by the Company or, if applicable, the surviving or
successor corporation (including termination of the Employment Agreement under
Section 6(a) thereof by the Company or the surviving or successor corporation),
other than termination for "cause" or due to his death or total disability for
any consecutive six-month period, Mr. Jenkins shall be entitled to the
following additional amounts: (a) such amount, if any, in cash which would
otherwise be payable to Mr. Jenkins under Section 6(c) of the Employment
Agreement but for the limitation contained in such section with respect to
Section 280G; and (b) payment of an amount intended to cover the additional
taxes incurred by Mr. Jenkins as a result of the application of Section 280G to
the special bonus, the amount otherwise payable under Section 6(c) of the
Employment Agreement and the amount attributable under any options to purchase
Common Stock held by Mr. Jenkins.
Parent Discussions with Jenkins. The Parent and Mr. Jenkins have had
preliminary discussions regarding the compensation and benefits that
Mr. Jenkins may receive after the Effective Time. Mr. Jenkins may become
eligible to participate in the Parent's Annual Incentive and Long-Term
Incentive Plans, and may receive common shares of the Parent, stock options and
other rights with respect to common shares of the Parent. Also, Mr. Jenkins may
become eligible to receive performance incentives, bonuses and other
compensation and benefits under other programs of the Parent. The Parent and
Mr. Jenkins have not entered into an agreement or made any commitment with
respect to the nature or amount of such compensation and benefits.
Option Payment Agreements. The Company has advised the Parent that pursuant
to the Merger Agreement the Company has entered into separate option payment
agreements (collectively, the "Payment Agreements") with holders of outstanding
options to purchase shares of Common Stock ("Company Options") under the
Company's Amended 1989 Nonqualified Stock Option Plan, the Company's 1993 Stock
Option Plan, the Company's 1993 Non-Employee Directors Stock Option Plan and
the Company's 1996 Non-Employee Directors Stock Option Plan (collectively, the
"Stock Option Plans"). The Payment Agreements describe, as applicable, the
various termination and acceleration provisions of the Stock Option Plans that
are triggered by the Offer or the Merger, the Board's determination to
accelerate the vesting provisions of all outstanding Company Options to the
date of consummation of the Offer and provide for the surrender to the Company
of all Company Options for an amount in cash equal to the Merger Consideration
less the applicable exercise price per share of the Company Options and less
all taxes required to be withheld from such payment (the "Option
Consideration"). The Payment Agreements further provide that payment of the
Option Consideration will be made after the acceptance of the Shares for
payment and purchase pursuant to the Offer and the surrender by the
optionholder of the Company Options. Directors Morton Godlas, William A. Hall
and Mac Allen Culver will also be paid $10,000 each after consummation of the
Offer to relinquish option rights under the 1996 Non-Employee Directors Stock
Option Plan with respect to the option each elected in lieu of receiving an
annual retainer of $10,000.
Severance and Other Arrangements. The Parent has agreed that certain senior
executives of the Company (other than Mr. Jenkins) will be eligible for a cash
severance payment if they are involuntarily terminated by the Company (other
than for cause). In the case of each of Messrs. Ward and Hilberg, payment would
equal 100% of his annual base salary, plus 100% of his annual target bonus for
the year of termination. Other senior executives will be eligible to receive a
severance payment in cash in an amount determined by Mr. Jenkins consistent
with past practice but not to exceed an amount equal to 100% of annual base
salary plus 100% of annual target bonus for the year of termination. In
consideration of such severance arrangements, the senior executives will agree
to customary non-compete arrangements in the event of voluntary termination of
employment with the Company.
S-9
<PAGE>
The Parent has also agreed that certain senior executives of the Company
(other than Mr. Jenkins) will be eligible for a retention bonus if they
continue in employment with the Company until the first anniversary of the
Effective Time. Mr. Jenkins will determine the amount of each executive's
bonus, but it will not be less than 50% of such executive's annual base
salary. The aggregate of all such retention bonuses will not exceed
$1,400,000.
STOCK OPTIONS
Options covering 111,200 shares were granted by the Company during fiscal
1995.
The following table sets forth information concerning options granted to the
President and Chief Executive Officer and to each of the four other most
highly compensated executive officers of the Company during fiscal 1995.
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
POTENTIAL
REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS/SARS PRICE APPRECIATION
OPTIONS/SARS GRANTED TO EXERCISE OF FOR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ------------------
(1)(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
------------ ------------ ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Maynard Jenkins......... 20,000 18.0 7.75 03/03/05 97,479 247,030
Stephen M. Hilberg...... 8,000 7.2 7.75 03/03/05 38,991 98,812
Robert A. Lewis......... 5,000 4.5 7.75 03/03/05 24,370 61,758
Joseph A. DiRocco....... 5,000 4.5 7.75 03/03/05 24,370 61,758
Robert J. Wittman....... 15,000 13.5 7.75 03/03/05 73,109 185,273
</TABLE>
- --------
(1) All of the options set forth in the table above were granted pursuant to
the 1993 Plan.
The following table sets forth information concerning the aggregate number
of options exercised by each of the executive officers named in the "Summary
Compensation Table" during fiscal 1995 and outstanding options held by each
such officer as of January 28, 1996.
OPTION EXERCISES AND YEAR END VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/ SARS IN-THE-MONEY
AT OPTIONS/SARS AT
JANUARY 28, 1996(1)(#) JANUARY 28, 1996($)(2)
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Maynard Jenkins......... -- -- 21,147/16,875 314,018/279,890
Stephen M. Hilberg...... -- -- 10,637/ 7,125 152,868/115,059
Robert A. Lewis......... -- -- 8,762/ 4,500 130,339/ 72,299
Joseph A. DiRocco....... -- -- 4,552/ 4,500 58,580/ 72,299
Robert J. Wittman....... 3,750 37,500 -- /11,250 -- /198,281
</TABLE>
- --------
(1) Represents options granted under the 1993 Plan, under the Company's
Amended 1989 Nonqualified Stock Option Plan and to Maynard Jenkins
pursuant to a Nonqualified Stock Option Agreement. See "Summary
Compensation Table."
(2) Value is determined by subtracting the exercise price from the fair market
value (the closing price for the Company's Common Stock as reported on the
Nasdaq National Market as of January 26, 1996 ($25.375 per share)) and
multiplying the result by the number of underlying shares of Common Stock.
S-10
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's capital stock as of August 9, 1996 by (i) each
person who is known by the Company to be the beneficial owner of more than 5%
of any class of the Company's capital stock, (ii) each director and certain
executive officers of the Company, individually, and (iii) all directors and
executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
-------------- ------------------------ ------------ -------
<C> <S> <C> <C>
Common Stock FS&Co.(2)(3)....................... 1,604,043 18.2%
Ronald P. Spogli
J. Frederick Simmons
Matt L. Figel(4)
Husic Capital Management(5)........ 882,100 11.7%
FMR Corp.(6)....................... 731,200 9.7%
RCM General Corporation(7)......... 661,612 8.8%
AIM Capital Management, Inc.(8).... 580,500 7.7%
Dimensional Fund Advisors Inc.(9).. 370,000 4.9%
Maynard Jenkins(10)................ 135,987 1.8%
Stephen M. Hilberg(11)............. 36,722 *
Morton Godlas...................... 5,500 *
William A. Hall.................... 6,200 *
Mac Allen Culver................... 5,000 *
Joseph A. DiRocco(11).............. 21,052 *
Robert A. Lewis(11)................ 47,222 *
Dale D. Ward....................... 10,000 *
Directors and Executive Officers as
a Group (15 persons)(2)(3)(11).... 347,913 4.5%
6% Cumulative FS&Co.(3).......................... 800,000 100%
Convertible
Preferred Stock
</TABLE>
- --------
* Less than 1%
(1) Except as otherwise indicated below, the persons named have sole voting
power and investment power with respect to all shares of capital stock
shown as beneficially owned by them, subject to community property laws
where applicable. Shares issuable upon exercise of outstanding stock
options are reflected in the above table with respect to holders of
options because of the determination by the Board to accelerate the
vesting of options upon acceptance of Shares of Common Stock for purchase
and payment pursuant to the Offer.
(2) 324,043 shares of Common Stock are owned by FSEP II. As general partner
of FSEP II, FS&Co. has the sole power to vote and dispose of such shares.
Messrs. Simmons and Spogli and Bradford M. Freeman, William M. Wardlaw
and John M. Roth are general partners of FS&Co., and as such may be
deemed to be the beneficial owners of the shares of the Company's capital
stock indicated as beneficially owned by FS&Co. The business address of
FS&Co., its general partners and FSEP II is 11100 Santa Monica Boulevard,
Suite 1900, Los Angeles, California 90025.
(3) 772,135 shares and 27,865 shares of 6% Cumulative Convertible Preferred
Stock, $.01 par value per share ("Convertible Preferred Stock"), are
owned by FSEP III and FSEP International, respectively, and are
convertible into 1,235,416 shares and 44,584 shares of Common Stock,
respectively. As general partner of FS Capital Partners, L.P. ("FS
Capital"), which is general partner of FSEP III, FS Holdings, Inc.
("FSHI") has the sole power to vote and dispose of the shares owned by
FSEP III. As general partner of FS&Co. International, L.P. ("FS&Co.
International"), which is the general partner of FSEP International, FS
International Holdings Limited ("FS International Holdings") has the sole
power to vote and dispose
S-11
<PAGE>
of the shares owned by FSEP International. Messrs. Freeman, Simmons,
Spogli, Wardlaw and Roth and Charles P. Rullman are the sole directors,
officers and shareholders of FSHI and FS International Holdings, and as
such may be deemed to be the beneficial owners of the shares of the
Company's capital stock owned by FSEP III and FSEP International. The
business address of FSEP III, FS Capital, FSHI and its sole directors,
officers and shareholders is 11100 Santa Monica Boulevard, Suite 1900, Los
Angeles, California 90025 and the business address of FSEP International,
FS&Co. International and FS International Holdings is c/o Paget-Brown &
Company, Ltd., West Winds Building, Third Floor, Grand Cayman, Cayman
Islands, B.W.I.
(4) Mr. Figel is an employee of an affiliate of FS&Co.
(5) The business address of Husic Capital Management is 555 California Street,
Suite 2900, San Francisco, California 94104.
(6) The business address of FMR Corp. is 82 Devonshire Street, Boston,
Massachusetts 02109.
(7) As the general partner of RCM Limited L.P., which is the general partner
of RCM Capital Management ("RCM Capital"), which is the general partner of
RCM Capital, RCM General Corporation ("RCM General") may be deemed to be
the beneficial owner of such shares. RCM Capital is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940. The
business address of RCM General is Four Embarcadero Center, Suite 2900,
San Francisco, California 94111.
(8) The business address of AIM Capital Management, Inc. is 11 Greenway Plaza,
Suite 1919, Houston, Texas 77046.
(9) Dimensional Fund Advisors Inc. ("Dimensional") is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940. The
business address of Dimensional is 1299 Ocean Avenue, 11th Floor, Santa
Monica, California 90401.
(10) 35,920 shares of Common Stock are held by Maynard L. Jenkins, Jr. and
Susan M. Jenkins, Co-Trustees under the Living Trust dated November 10,
1988. The amount stated includes 100,067 shares of Common Stock covered by
options which are exercisable within 60 days following August 1, 1996.
(11) The amounts stated include 26,762, 19,262, 15,052 and 241,284 shares of
Common Stock covered by options which are exercisable within 60 days
following August 1, 1996 with respect to Messrs. Hilberg, Lewis and
DiRocco and all directors and executive officers as a group, respectively.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and certain of its officers, and persons who own more than 10% of a
registered class of the Company's equity securities (collectively, "Insiders"),
to file reports of ownership and changes in ownership with the Commission.
Insiders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for fiscal 1995, with the
exception of Messrs. Figel and Hall, each of whom filed a late Form 3 to report
his becoming a director of the Company. Messrs. Figel and Hall own no
securities of the Company and have had no other transactions to report.
S-12
<PAGE>
EXHIBIT INDEX
1. Agreement and Plan of Merger, dated August 14, 1996, by and among the
Company, the Purchaser and the Parent.*
2. Stockholder Tender and Option Agreement, dated August 14, 1996, by and
among the Purchaser, the Parent, the Company, FS Equity Partners II,
L.P., FS Equity Partners III, L.P. and FS Equity Partners International,
L.P.*
3. Pages 2 through 11 of the Company's Proxy Statement, dated April 10,
1996.*
4. Press release issued by the Company and the Parent on August 15, 1996.*
5. Fairness Opinion of Montgomery, dated August 14, 1996.
6. Letter to Stockholders, dated August 21, 1996, from Maynard Jenkins,
President and Chief Executive Officer of the Company.
7. Letter Agreement, dated August 14, 1996, between the Company and Maynard
Jenkins.*
8. Confidentiality Agreement, dated May 31, 1996, between the Company and
Sears, Roebuck and Co.*
9. Form of Letter Agreement between the Company and Holders of Options
under the Company's Amended 1989 Nonqualified Stock Option Plan, the
Company's 1993 Non-Employee Directors Stock Option Plan, the Company's
1993 Stock Option Plan and the Company's 1996 Non-Employee Directors
Stock Option Plan.*
10. Notice and Agreement Regarding Conversion and Tender, dated as of
August 14, 1996, by and among the Company, the Parent, FS Equity
Partners III, L.P., FS Equity Partners International, L.P. and
ChaseMellon Shareholder Services, L.L.C.*
11. Employment Agreement, dated as of March 22, 1996, by and between the
Company and Dale D. Ward.*
- --------
*Not included in copies mailed to stockholders.
<PAGE>
AGREEMENT AND PLAN OF MERGER
By and among
ORCHARD SUPPLY HARDWARE
STORES CORPORATION,
GROVE ACQUISITION CORP.,
and
SEARS, ROEBUCK AND CO.
Dated as of August 14, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I -- THE TENDER OFFER..................................... 3
1.01 The Offer.............................................. 3
1.02 Company Action......................................... 5
ARTICLE II -- THE MERGER.......................................... 6
2.01 The Merger............................................. 6
2.02 Effective Time......................................... 7
2.03 Certificate of Incorporation........................... 7
2.04 By-Laws................................................ 7
2.05 Directors and Officers................................. 7
2.06 Further Assurances..................................... 7
2.07 Stockholders' Meeting.................................. 8
2.08 Company Board Representation; Section 14(f)............ 9
ARTICLE III -- CONVERSION OR CANCELLATION OF SHARES; STOCK RIGHTS. 10
3.01 Conversion or Cancellation of Shares................... 10
3.02 Exchange of Certificates; Paying Agent................. 11
3.03 Dissenters' Rights..................................... 12
3.04 Transfer of Shares After the Effective Time............ 13
3.05 Company Stock Rights................................... 13
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY....... 13
4.01 Organization, Qualification............................ 14
4.02 Company Subsidiaries................................... 14
4.03 The Company's Capitalization........................... 14
4.04 Company Investments.................................... 15
4.05 Authority.............................................. 15
4.06 Consents and Approvals; No Violation................... 16
4.07 SEC Reports; Financial Statements...................... 16
4.08 Proxy Statement; Offer Documents....................... 17
4.09 Undisclosed Liabilities................................ 17
4.10 Absence of Certain Changes or Events................... 18
4.11 Title, Etc............................................. 18
4.12 Patents, Trademarks, Etc............................... 19
4.13 Insurance.............................................. 19
4.14 Employee Benefit Plans................................. 19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
4.15 Legal Proceedings, Etc................................ 21
4.16 Taxes................................................. 21
4.17 Material Agreements................................... 24
4.18 Compliance with Law................................... 24
4.19 Insider Interests..................................... 24
4.20 Environmental Protection.............................. 24
4.21 Labor Matters......................................... 26
4.22 Brokers and Finders................................... 26
ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF
THE PARENT AND THE PURCHASER................................ 27
5.01 Corporation Organization.............................. 27
5.02 Authorized Capital.................................... 27
5.03 Authority............................................. 27
5.04 No Prior Activities................................... 27
5.05 No Financing Contingency.............................. 28
5.06 Governmental Filings; No Violations................... 28
5.07 Brokers and Finders................................... 28
5.08 Offer Documents; Proxy Statement; Other Information... 28
ARTICLE VI -- COVENANTS OF THE PARTIES........................... 29
6.01 Conduct of Business of the Company.................... 29
6.02 Notification of Certain Matters....................... 31
6.03 Access to Information................................. 31
6.04 Further Information................................... 32
6.05 Further Assurances.................................... 32
6.06 Best Efforts.......................................... 32
6.07 Filings............................................... 33
6.08 Public Announcements.................................. 33
6.09 Indemnity; D&O Insurance.............................. 33
6.10 Other Potential Bidders............................... 35
6.11 Employee Benefits..................................... 36
ARTICLE VII -- CONDITIONS TO THE MERGER.......................... 37
7.01 Conditions to Each Party's Obligation
to Effect the Merger.................................. 37
7.02 Conditions to the Obligations of the
Parent and the Purchaser to Effect the Merger......... 37
7.03 Conditions to the Obligations of the
Company to Effect the Merger.......................... 37
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE VIII -- CLOSING.......................................... 38
8.01 Time and Place........................................ 38
8.02 Filings at the Closing................................ 38
ARTICLE IX -- TERMINATION; AMENDMENT; WAIVER..................... 38
9.01 Termination........................................... 38
9.02 Effect of Termination................................. 39
9.03 Fees and Expenses..................................... 40
ARTICLE X -- MISCELLANEOUS....................................... 41
10.01 Survival of Representations, Warranties,
Covenants and Agreements.............................. 41
10.02 Amendment and Modification............................ 41
10.03 Waiver of Compliance; Consents........................ 41
10.04 Counterparts.......................................... 41
10.05 Governing Law; Submission to Jurisdiction............. 41
10.06 Notices............................................... 42
10.07 Entire Agreement, Assignment Etc...................... 43
10.08 Validity.............................................. 43
10.09 Headings; Certain Definitions......................... 43
10.10 Specific Performance.................................. 43
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated
as of August 14, 1996, among Orchard Supply Hardware Stores Corporation, a
Delaware corporation (the "Company"), Grove Acquisition Corp., a Delaware
corporation (the "Purchaser"), and Sears, Roebuck and Co., a New York
corporation (the "Parent").
WHEREAS, the Board of Directors of the Company has determined that it is in
the best interests of its stockholders for the Purchaser to acquire the Company
upon the terms and subject to the conditions set forth herein;
WHEREAS, the Company, the Parent and the Purchaser desire to make certain
representations, warranties and agreements in connection with this Agreement;
WHEREAS, in furtherance of such acquisition, the Parent proposes to cause
the Purchaser to make the Offer (as defined in Section 1.01) to purchase all of
the issued and outstanding shares of common stock of the Company, par value $.01
per share (the "Common Stock"), upon the terms and subject to the conditions of
this Agreement, and the Board of Directors of the Company has approved the Offer
and determined to recommend that the Company's stockholders accept the Offer;
and
WHEREAS, to complete such acquisition, the respective Boards of Directors
of the Parent, the Purchaser and the Company, and the Parent acting as the sole
stockholder of the Purchaser, have approved the Offer and the merger of the
Purchaser with and into the Company upon the terms and subject to the conditions
of this Agreement, whereby each issued and outstanding share of Common Stock not
owned directly or indirectly by the Parent or the Company, except shares of
Common Stock held by persons who assert dissenters' rights of appraisal in
connection with such merger and demand payment of the value of their shares of
Common Stock, will be converted into the right to receive in cash the same price
per share of Common Stock paid pursuant to the Offer;
WHEREAS, in order to induce the Purchaser and the Parent to enter into this
Agreement, FS Equity Partners II, L.P., FS Equity Partners III, L.P. and FS
Equity Partners International, L.P., stockholders of the Company, and the
Company have entered into a Stockholder Tender and Option Agreement of even date
herewith (the "Stockholder Agreement"), pursuant to which such stockholders have
agreed to convert all of their Preferred Shares (as defined in Section 4.03)
into Common Stock and to tender such shares of Common Stock and all other shares
of Common Stock owned by them pursuant to and in accordance with the terms of
the Offer and have granted to the Parent an option to purchase all of the
Preferred Shares and shares of Common Stock owned by such Stockholders,
exercisable upon the terms and conditions set forth in such agreement; and
2
<PAGE>
NOW, THEREFORE, in consideration of the representations, warranties and
agreements herein contained, and subject to the terms and conditions herein
contained, the parties hereto hereby agree as follows:
ARTICLE I
THE TENDER OFFER
1.011 The Offer. (a) Provided that this Agreement shall not have been
terminated in accordance with Article IX and none of the events or conditions
set forth in Annex A shall have occurred and be existing, then, not later than
the first business day after execution of this Agreement, the Parent shall issue
a public announcement of the execution of this Agreement, and within five
business days of the date of the public announcement of the execution of this
Agreement, the Parent shall cause the Purchaser, subject to the provisions of
this Agreement, to commence a tender offer (the "Offer") for all of the
outstanding shares of Common Stock (the "Shares") at a price of $35.00 per
Share, net to the seller in cash. The Purchaser shall, and the Parent shall
cause the Purchaser to, accept for payment and pay for all Shares that have been
validly tendered and not withdrawn pursuant to the Offer at the earliest time
following expiration of the Offer that all conditions to the Offer set forth in
Annex A hereto shall have been satisfied or waived by the Purchaser. The
obligation of the Purchaser to accept for payment, purchase and pay for Shares
tendered pursuant to the Offer shall be subject to the conditions set forth in
Annex A hereto, including the condition that a number of Shares representing not
less than a majority of the outstanding Shares on a fully diluted basis,
assuming the conversion of all outstanding Preferred Shares in accordance with
their terms and the exercise of all outstanding Options (the "Fully Diluted
Shares"), shall have been validly tendered and not withdrawn prior to the
expiration date of the Offer (the "Minimum Condition"). Solely for purposes of
determining whether the Minimum Condition has been satisfied, any Shares owned
by Parent or Purchaser shall be deemed to have been validly tendered and not
withdrawn pursuant to the Offer. The Purchaser expressly reserves the right to
increase the price per Share payable in the Offer or to make any other changes
in the terms and conditions of the Offer; provided, however, that, unless
previously approved by the Company in writing, no change may be made that (i)
decreases the price per Share payable in the Offer, (ii) changes the form of
consideration to be paid in the Offer, (iii) imposes conditions to the Offer in
addition to those set forth in Annex A hereto, (iv) increases the minimum number
of Shares that must be tendered as a condition to the acceptance for payment and
payment for Shares in the Offer, (v) waives the Minimum Condition if such waiver
would result in less than a majority of Fully Diluted Shares being accepted for
payment or paid for pursuant to the Offer, or (vi) otherwise amends the terms of
the Offer (including any of the conditions set forth in Annex A) in a manner
that is materially adverse to holders of Shares. Notwithstanding the foregoing,
the Purchaser may, without the consent of the Company, extend the Offer if, at
the scheduled expiration date of the Offer, any of the conditions to the
Purchaser's obligation to purchase Shares are not satisfied until such time as
such conditions are satisfied. In the event that at any scheduled expiration
date of the Offer, either of the conditions set forth in paragraphs (ii) and
(iii)(a) or (b) (but only in the event that clause (b) is not satisfied due to
the entry of an appealable judgment, order or injunction) of Annex A shall not
have been satisfied, and the Purchaser and the Company shall reasonably believe
that such condition can be satisfied,
3
<PAGE>
the Purchaser shall extend the Offer from time to time until no later than
December 31, 1996 (any such extension, an "Extension Period"). During any
Extension Period, the parties shall consult with each other and use their
respective best efforts to cause paragraph (ii) or (iii)(a) or (b) (but only in
the event that clause (b) is not satisfied due to the entry of an appealable
judgment, order or injunction), as the case may be, of Annex A to be satisfied.
Except as set forth in the two immediately preceding sentences, it is agreed
that the conditions set forth in Annex A are for the sole benefit of the Parent
and the Purchaser and may be asserted by the Parent or the Purchaser regardless
of the circumstances giving rise to any such condition (including any action or
inaction by the Purchaser, unless any such action or inaction by the Purchaser
would constitute a breach by the Purchaser of any of its covenants under this
Agreement) or may be waived by the Parent or the Purchaser, in whole or in part
at any time and from time to time, in its sole discretion. The failure by the
Parent or the Purchaser at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
Any determination by the Parent or the Purchaser with respect to any of the
conditions set forth on Annex A (including, without limitation, the satisfaction
of such conditions) shall be final and binding on the parties, except with
respect to the Purchaser's extension obligation described above which shall be
subject to the determination to be made with the Company described above. The
Company agrees that no Shares held by the Company will be tendered in the Offer.
(b) As promptly as reasonably practicable following execution of this
Agreement, the Parent and the Purchaser shall file with the Securities and
Exchange Commission (the "SEC") a Tender Offer Statement on Schedule 14D-1 with
respect to the Offer, which shall contain an offer to purchase and related
letter of transmittal and summary advertisement (such Schedule 14D-1 and the
documents therein pursuant to which the Offer will be made, together with any
supplements or amendments thereto, the "Offer Documents"). The Offer Documents
shall comply as to form in all material respects with the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder and, on the date filed with the SEC and
on the date first published, sent or given to the holders of Shares, shall not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading, except that no representation is made by the Parent or the Purchaser
with respect to information supplied by the Company in writing specifically for
inclusion in the Offer Documents. Each of the Parent, the Purchaser and the
Company agrees promptly to correct any information supplied by it specifically
for inclusion in the Offer Documents if and to the extent that such information
shall have become false or misleading in any material respect, and each of the
Parent and the Purchaser further agrees to take all steps necessary to cause the
Offer Documents as so corrected to be filed with the SEC and to be disseminated
to holders of Shares, in each case as and to the extent required by applicable
federal securities laws. The Parent and the Purchaser agree to provide the
Company and its counsel in writing with any comments the Parent, the Purchaser
or their counsel may receive from the SEC or its Staff with respect to the Offer
Documents promptly after the receipt of such comments. The Company and its
counsel shall be given a reasonable opportunity to review and comment upon the
Offer Documents and all amendments
4
<PAGE>
and supplements thereto prior to their filing with the SEC or dissemination to
the stockholders of the Company.
(c) The Parent will make available to the Purchaser sufficient funds
sufficiently in advance of the Effective Time to consummate the Offer and the
Merger in accordance with the provisions of this Agreement.
1.012 Company Action. (a) The Company hereby approves of and consents to
the Offer and represents and warrants that the Board of Directors of the Company
(the "Board"), at a meeting duly called and held, has adopted resolutions (i)
determining that this Agreement and the transactions contemplated hereby,
including the Offer and the Merger (as defined in Section 2.01), are fair to,
and in the best interests of, the stockholders of the Company, (ii) approving
and adopting this Agreement and the transactions contemplated hereby, including
the Offer, the Merger and the Stockholder Agreement and the transactions
contemplated thereby, in all respects and that such approval constitutes
approval of the Offer, this Agreement, the Merger and the Stockholder Agreement
and the transactions contemplated hereby and thereby, for purposes of Section
203 of the General Corporation Law of the State of Delaware (the "DGCL") and
similar provisions of any other similar state statutes that might be deemed
applicable to the transactions contemplated hereby and (iii) recommending that
the stockholders of the Company accept the Offer, tender their Shares thereunder
to the Purchaser and approve and adopt this Agreement and the Merger; provided,
however, that such recommendation may be withdrawn, modified or amended to the
extent that the Board determines in its good faith judgment, based as to legal
matters on the written advice of outside legal counsel, that the directors are
required to do so for the proper discharge of their fiduciary duties under
applicable law.
(b) The Company has been advised by each of its executive officers and
each of its Directors, that each such person intends to tender pursuant to the
Offer all Shares owned or controlled by such person. The Company represents that
the Board has received the opinion of Montgomery Securities ("Montgomery") that
the consideration to be received by holders of Shares pursuant to the Offer and
the Merger is fair to such holders from a financial point of view, and the
Company has provided a copy of such opinion to the Parent.
(c) The Company shall use its best efforts to file with the SEC a
Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the
Offer (such Schedule 14D-9, as amended from time to time, the "Schedule 14D-9")
on the date the Offer Documents are filed with the SEC, and in any event shall
file with the SEC the Schedule 14D-9 not later than the date the Offer is
commenced, containing the recommendation described in Section 1.02(a) and shall
mail the Schedule 14D-9 to the stockholders of the Company. The Schedule 14D-9
shall comply in all material respects with the requirements of the Exchange Act
and the rules and regulations promulgated thereunder on the date filed with the
SEC and on the date first published, sent or given to the Company's
stockholders, and shall not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, except that no representation is made by the
Company with respect to information supplied in writing by the Parent or the
Purchaser specifically for inclusion or incorporation by reference in
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the Schedule 14D-9. Each of the Company, the Parent and the Purchaser agrees
promptly to correct any information provided by it for use in the Schedule 14D-9
if and to the extent that such information shall have become false or misleading
in any material respect, and the Company further agrees to take all steps
necessary to amend or supplement the Schedule 14D-9 and to cause the Schedule
14D-9 as so amended or supplemented to be filed with the SEC and disseminated to
the Company's stockholders, in each case as and to the extent required by
applicable federal securities laws. The Parent and its counsel shall be given a
reasonable opportunity to review and comment upon the Schedule 14D-9 and all
amendments and supplements thereto prior to their filing with the SEC or
dissemination to stockholders of the Company.
(d) In connection with the Offer, the Company will, and will cause its
transfer agent (the "Transfer Agent") to, furnish promptly to the Parent and the
Purchaser mailing labels containing the names and addresses of all record
holders of Shares as of the most recent practicable date and of those persons
becoming record holders after such date, together with copies of all lists of
stockholders and security position listing and computer files and all other
information in the Company's possession and control regarding the beneficial
ownership of Shares. The Company shall promptly furnish the Parent and the
Purchaser such additional information (including, but not limited to, updated
lists of holders of Shares and their addresses, mailing labels and security
position listings and computer files) and such other assistance as the Parent
and the Purchaser or their agents may reasonably request in communicating the
Offer to the record and beneficial holders of Shares. Subject to the
requirements of law, and except for such steps as are necessary or advisable to
disseminate the Offer and any other documents necessary to consummate the Merger
and to solicit tenders of Shares and the approval of the Merger, Parent and
Purchaser and each of their affiliates shall hold in confidence the information
contained in any of such labels, lists and additional information, shall use
such information only in connection with the Offer and the Merger, and, if this
Agreement shall be terminated, shall deliver to the Company all copies of such
information then in their possession or under their control.
ARTICLE II
THE MERGER
1.021 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 2.02), the Parent shall cause the
Purchaser to merge (the "Merger") with and into the Company and the separate
corporate existence of the Purchaser shall thereupon cease. The Company shall
be the surviving corporation in the Merger (the Purchaser and the Company are
sometimes hereinafter referred to as the "Constituent Corporations" and the
Company is sometimes hereinafter referred to as the "Surviving Corporation") and
shall, following the Merger, be governed by the laws of the State of Delaware,
and the separate corporate existence of the Company, with all its rights,
privileges, immunities, powers and
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franchises, of a public as well as of a private nature, shall continue
unaffected by the Merger. From and after the Effective Time, the Merger shall
have the effects specified in the DGCL.
1.022 Effective Time. At the Closing contemplated in Section 8.01, the
Company and the Parent will cause a Certificate of Merger (the "Delaware
Certificate of Merger") or, if applicable, a Certificate of Ownership and Merger
to be filed with the Secretary of State of the State of Delaware as provided in
the DGCL. The Merger shall become effective as of the date and at the time the
Delaware Certificate of Merger or, if applicable, a Certificate of Ownership and
Merger is duly filed with the Secretary of State of the State of Delaware (or
such later time as may be specified therein), and such time is hereinafter
referred to as the "Effective Time."
1.023 Certificate of Incorporation. Subject to the obligations of the
Parent and the Purchaser under Section 6.09 to continue in force and effect
certain provisions of the Company's Certificate of Incorporation, the
Certificate of Incorporation of the Company (the "Certificate of Incorporation")
shall be amended at the Effective Time to read as set forth in Exhibit A hereto,
until duly amended in accordance with the terms thereof and the DGCL.
1.024 By-Laws. Subject to the obligations of the Parent and the Purchaser
under Section 6.09 to continue in force and effect certain provisions of the
Company's By-Laws, the By-Laws of the Purchaser as in effect immediately prior
to the Effective Time shall be the By-Laws of the Surviving Corporation, until
duly amended in accordance with the terms thereof and the DGCL.
1.025 Directors and Officers. At the Effective Time, the directors of the
Purchaser immediately prior to the Effective Time shall be the directors of the
Surviving Corporation, each of such directors to hold office, subject to the
applicable provisions of the Certificate of Incorporation and By-Laws of the
Surviving Corporation, until their respective successors shall be duly elected
or appointed and qualified. The officers of the Company immediately prior to
the Effective Time shall be the initial officers of the Surviving Corporation,
in each case until their respective successors are duly elected or appointed and
qualified.
1.026 Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper: (a) to vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation, its right, title or interest in, to or under any
of the rights, privileges, powers, franchises, properties or assets of either of
the Constituent Corporations, or (b) otherwise to carry out the purposes of this
Agreement, the proper officers and directors of the Surviving Corporation are
hereby authorized on behalf of the respective Constituent Corporations to
execute and deliver, in the name and on behalf of the respective Constituent
Corporations, all such deeds, bills of sale, assignments and assurances and do,
in the name and on behalf of the Constituent Corporations, all such other acts
and things necessary, desirable or proper to vest, perfect or confirm its right,
title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of the Constituent Corporations and otherwise
to carry out the purposes of this Agreement.
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1.027 Stockholders' Meeting. (a) In the event that the Purchaser owns
less than 90 percent of the outstanding shares of each class of the capital
stock of the Company following expiration of the Offer, the Company shall take
all action to the extent necessary to consummate the Merger in accordance with
applicable law, including:
(i) duly call, give notice of, convene and hold an annual or special
meeting of its stockholders (the "Stockholders' Meeting"), to be held as soon as
practicable, for the purpose of approving and adopting this Agreement, the
Merger and the transactions contemplated hereby and thereby;
(ii) except as otherwise required by the fiduciary duties of the Board or
as permitted by this Agreement, include in the Proxy Statement (as defined in
Section 4.08) the recommendation of the Board that stockholders of the Company
vote in favor of the approval and adoption of this Agreement and the Merger and
the other transactions contemplated hereby and thereby and the determination of
the Board that this Agreement and the transactions contemplated hereby,
including the Offer and the Merger, are fair to, and in the best interests of,
the stockholders of the Company; and
(iii) as soon as practicable after the Parent's request, prepare and file
a preliminary Proxy Statement with the SEC and, after consultation with the
Parent and the Purchaser, respond promptly to any comments made by the SEC with
respect to the Proxy Statement and any preliminary version thereof and cause the
Proxy Statement to be mailed to its stockholders at the earliest practicable
time after responding to all such comments to the satisfaction of the Staff of
the SEC and to obtain the necessary approvals by its stockholders of this
Agreement. Without limiting the generality of the foregoing, other than as
specifically set forth in clause (ii) above, the Company agrees that its
obligations pursuant to this Section 2.07(a) shall not be affected by either the
commencement, public proposal, public disclosure or other communication to the
Company by any third party of any offer to acquire some or all of the Shares or
all or any substantial portion of the assets of the Company or any change in the
recommendation of the Board.
(b) The Company, the Parent and the Purchaser, as the case may be, shall
promptly prepare and file any other filings required under the Exchange Act or
any other Federal or state securities or corporate laws relating to the Merger
and the transactions contemplated herein (the "Other Filings"). Each of the
parties hereto shall notify the other parties hereto promptly of the receipt by
it of any comments from the SEC or its Staff and of any request of the SEC for
amendments or supplements to the Proxy Statement or by the SEC or any other
governmental officials with respect to any Other Filings or for additional
information and will supply the other parties hereto with copies of all
correspondence between it and its representatives, on the one hand, and the SEC
or the members of its Staff or any other governmental officials, on the other
hand, with respect to the Proxy Statement, any Other Filings or the Merger. The
Company, the Parent and the Purchaser each shall use its best efforts to obtain
and furnish the information required to be included in the Proxy Statement, any
Other Filings or the Merger. If at any time prior to the time of approval and
adoption of this Agreement by the Company's stockholders there shall occur any
event that should be set forth in an
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amendment or supplement to the Proxy Statement, the Company shall promptly
prepare and mail to its stockholders such amendment or supplement. The Company
shall not mail the Proxy Statement or, except as required by the Exchange Act or
the rules and regulations promulgated thereunder, any amendment or supplement
thereto, to the Company's stockholders unless the Company has first obtained the
consent of the Parent to such mailing. The date set forth in Section 9.01(b)
shall be extended by the number of days elapsed between the date such proposed
amendment or supplement is provided to the Parent and the date the Parent
consents to such mailing.
(c) At the Stockholders' Meeting, the Parent, the Purchaser and their
affiliates will vote all Shares owned by them and will exercise all voting
rights or proxies held by them in favor of approval and adoption of this
Agreement, the Merger, and the transactions contemplated hereby and thereby.
(d) Notwithstanding the foregoing, in the event that the Purchaser shall
acquire at least 90 percent of the outstanding Shares (assuming the conversion
of all outstanding Preferred Shares in accordance with their terms), the parties
hereto agree, at the request of the 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 and satisfaction or waiver of the conditions of Article VII, without
a meeting of the stockholders of the Company.
2.08 Company Board Representation; Section 14(f).
(a) Promptly upon the purchase by the Purchaser of the Shares pursuant to
the Offer, and from time to time thereafter, the Purchaser shall be entitled to
designate up to such number of directors, rounded up to the next whole number,
on the Board as shall give the Purchaser representation on the Board equal to
the product of the total number of directors on the Board (giving effect to the
directors elected pursuant to this sentence) multiplied by the percentage,
expressed as a decimal, that the aggregate number of shares of Common Stock
beneficially owned by the Purchaser or any affiliate of the Purchaser following
such purchase bears to the total number of shares of Common Stock then
outstanding, and the Company shall, at such time and promptly take all actions
necessary to cause the Purchaser's designees to be elected as directors of the
Company, including increasing the size of the Board or securing the resignations
of incumbent directors, or both. The Company shall cause persons designated by
the Purchaser to constitute the same percentage as persons designated by the
Purchaser shall constitute of the Board to be appointed to (i) each committee of
the Board, (ii) the board of directors of each subsidiary of the Company and
(iii) each committee of each such board, in each case only to the extent
permitted by applicable law. Notwithstanding the foregoing, until the earlier
of (i) the time the Purchaser acquires a majority of the Fully Diluted Shares,
and (ii) the Effective Time, the Company shall use its best efforts to ensure
that all the members of the Board and each committee of the Board and such
boards and committees of each subsidiary of the Company as of the date hereof
who are not employees of the Company shall remain members of the Board and of
such boards and committees.
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(b) The Company shall promptly take all actions required pursuant to
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order
to fulfill its obligations under this Section 2.08, and shall include in the
Schedule 14D-9 such information with respect to the Company and its officers and
directors as is required under Section 14(f) and Rule 14f-1 to fulfill such
obligations. The Parent and the Purchaser shall supply to the Company and be
solely responsible for any information with respect to either of them and their
nominees, officers, directors and affiliates required by such Section 14(f) and
Rule 14f-1.
(c) Following the election or appointment of designees of the Purchaser
pursuant to this Section 2.08, prior to the Effective Time, the Parent and the
Purchaser each specifically acknowledge and agree that any amendment of this
Agreement or, subject to the provisions of Section 6.09 of this Agreement, the
Certificate of Incorporation or Bylaws of the Company, any termination of this
Agreement by the Company, any extension by the Company of the time for the
performance of any of the obligations or other acts of the Company or the
Purchaser or waiver of any of the Company's rights hereunder, shall require the
concurrence of a majority of the directors of the Company then in office who
neither were designated by the Purchaser nor are employees of the Company.
ARTICLE III
CONVERSION OR CANCELLATION OF SHARES; STOCK RIGHTS
1.031 Conversion or Cancellation of Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of the holders thereof:
(a) Each Share issued and outstanding immediately prior to the Effective
Time (other than Shares owned by the Parent or any wholly-owned subsidiary of
the Parent (collectively, the "Parent Companies"), Shares held by stockholders
exercising appraisal rights pursuant to Section 262 of the DGCL (the "Dissenting
Stockholders"), and any shares held in the treasury of the Company) shall be
converted into and represent the right to receive, without interest, an amount
in cash equal to the greater of $35.00 net or the amount per share which may be
paid pursuant to the Offer as it may be amended (the "Merger Consideration")
upon surrender of the certificate or certificates that, immediately prior to the
Effective Time, represented issued and outstanding Shares (the "Certificates").
As of the Effective Time, all such Shares shall no longer be outstanding, shall
be automatically cancelled and shall cease to exist, and each holder of a
Certificate which formerly represented any such Shares shall thereafter cease to
have any rights with respect to such Shares, except the right to receive the
Merger Consideration without interest for such Shares upon the surrender of such
Certificate or Certificates in accordance with Section 3.02.
(b) Each Share issued and outstanding immediately prior to the Effective
Time and owned by any of the Parent Companies, and each Share issued and held in
the Company's treasury immediately prior to the Effective Time, shall no longer
be outstanding, shall
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be cancelled without payment of any consideration therefor and shall cease to
exist, and each holder of a Certificate representing any such Shares shall
thereafter cease to have any rights with respect to such Shares.
(c) Each share of Common Stock, par value $.01 per share, of the Purchaser
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully-paid and non-assessable share of Common
Stock, par value $.01 per share, of the Surviving Corporation.
(d) Each Preferred Share issued and outstanding immediately prior to the
Effective Time shall be converted into and represent the right to receive,
without interest, an amount in cash equal to the product of the Merger
Consideration and the number of shares of Common Stock into which such Preferred
Shares are convertible immediately prior to the Effective Time plus any accrued
and unpaid dividends with respect thereto in accordance with the certificate of
designation with respect to the Preferred Shares prior to the Effective Time,
upon surrender of the Certificates representing any such Preferred Shares.
1.032 Exchange of Certificates; Paying Agent. (a) Prior to the Closing,
the Parent shall select a bank or trust company to act as paying agent (the
"Paying Agent") for the payment of the cash consideration specified in Section
3.01 pursuant to irrevocable instructions from the Parent upon surrender of
Certificates converted into the right to receive cash pursuant to the Merger.
Prior to the Effective Time, the Parent shall make available, or cause the
Purchaser to make available, to the Paying Agent immediately available funds in
the amount of the Merger Consideration multiplied by the number of outstanding
Shares (assuming the conversion of all outstanding Preferred Shares in
accordance with their terms) (the "Funds") upon surrender of Certificates and
certificates for Preferred Shares pursuant to Section 3.01, it being understood
that any and all interest earned on the Funds shall be paid over by the Paying
Agent as the Parent shall direct. The Funds shall be held as a separate fund and
not used for any purpose except as provided herein. The Company shall have the
right to approve the Parent's agreement with the Paying Agent, which approval
shall not be unreasonably withheld and may not be withheld if such agreement
contains customary terms and conditions for such agreements and is not
inconsistent with this Agreement.
(b) Promptly after the Effective Time, the Paying Agent shall mail to each
person who was, at the Effective Time, a holder of record of a Certificate or
Certificates, other than the Company or any of the Parent Companies, a letter of
transmittal and instructions for use in effecting the surrender, in exchange for
payment in cash therefor, of the Certificates. The letter of transmittal shall
specify that delivery shall be effected, and risk of loss and title shall pass,
only upon proper delivery to and receipt of such Certificates by the Paying
Agent and shall be in such form and have such provisions as the Parent shall
reasonably specify. Upon surrender to the Paying Agent of such Certificates,
together with the letter of transmittal, duly executed and completed in
accordance with the instructions thereto and such other documents as may be
Paying Agent shall promptly pay to the persons entitled thereto, out of the
Funds, a check in the amount to which such persons are entitled pursuant to
Section 3.01(a), after giving effect to any required tax withholdings, and such
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Certificate shall forthwith be cancelled. No interest will be paid or will
accrue on the amount payable upon the surrender of any such Certificates. If
payment is to be made to a person other than the registered holder of the
Certificates surrendered, it shall be a condition of such payment that the
Certificates so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment to a person other than
the registered holder of the Certificates surrendered or establish to the
satisfaction of the Surviving Corporation or the Paying Agent that such tax has
been paid or is not applicable. Until surrendered as contemplated by this
Section 3.02, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the amount of
cash, without interest, into which the Shares theretofore represented by such
Certificate shall have been converted pursuant to Section 3.01. No interest
shall accrue or be paid on any portion of the Merger Consideration.
(c) One hundred eighty days following the Effective Time, the Surviving
Corporation shall be entitled to cause the Paying Agent to deliver to it any
Funds (including any interest, dividends, earnings or distributions received
with respect thereto which shall be paid as directed by the Parent) made
available to the Paying Agent by the Parent which have not been disbursed, and
thereafter holders of Certificates who have not theretofore complied with the
instructions for exchanging their Certificates shall be entitled to look only to
the Surviving Corporation for payment as general creditors thereof with respect
to the cash payable upon due surrender of their Certificates.
(d) Except as otherwise provided herein, the Parent shall pay all charges
and expenses, including those of the Paying Agent, in connection with the
exchange of the Merger Consideration for Certificates.
(e) Notwithstanding anything to the contrary in this Section 3.02, none of
the Paying Agent, the Parent, the Company, the Surviving Corporation or the
Purchaser shall be liable to a holder of a Certificate formerly representing
Shares for any amount properly delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If Certificates are not
surrendered prior to two years after the Effective Time (or immediately prior to
such earlier date on which any payment pursuant to this Article III would
otherwise escheat or become the property of any Federal, state or local
government agency or authority, court or commission), unclaimed funds payable
with respect to such Certificates shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation, free and clear of all
claims or interest of any person previously entitled thereto.
1.033 Dissenters' Rights. Notwithstanding the provisions of Section 3.01
or any other provision of this Agreement to the contrary, Shares that have not
been voted in favor of the approval and adoption of the Merger and with respect
to which appraisal rights shall have been demanded and perfected in accordance
with Section 262 of the DGCL (the "Dissenting Shares") and not withdrawn shall
not be converted into the right to receive cash at or after the Effective Time,
but such Shares shall become the right to receive such consideration as may be
determined to be due to holders of Dissenting Shares pursuant to the laws of the
State of Delaware unless and until the holder of such Dissenting Shares
withdraws his or her demand for such appraisal in
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accordance with the DGCL or becomes ineligible for such appraisal. If a holder
of Dissenting Shares shall withdraw his or her demand for such appraisal or
shall become ineligible for such appraisal (through failure to perfect or
otherwise), then, as of the Effective Time or the occurrence of such event,
whichever last occurs, such holder's Dissenting Shares shall automatically be
converted into and represent the right to receive the Merger Consideration,
without interest, as provided in Section 3.01(a) and in accordance with the
DGCL. The Company shall give the Parent (i) prompt notice of any demands for
appraisal of Shares received by the Company and (ii) the opportunity to
participate in and direct all negotiations and proceedings with respect to any
such demands. The Company shall not, without the prior written consent of the
Parent, make any payment with respect to, or settle, offer to settle or
otherwise negotiate, any such demands.
1.034 Transfer of Shares After the Effective Time. No transfers of Shares
shall be made in the stock transfer books of the Surviving Corporation at or
after the Effective Time. If, after the Effective Time, Certificates formerly
representing Shares are presented to the Surviving Corporation, they shall be
cancelled and exchanged for the Merger Consideration set forth in Section 3.01.
1.035 Company Stock Rights. Prior to consummation of either the Offer or
the Effective Time or both, the Company may enter into agreements in respect of
outstanding options to purchase shares of Common Stock of the Company (the
"Options") pursuant to the Company's 1989 Nonqualified Stock Option Plan (the
"1989 Plan"), its 1993 Non-Employee Directors Stock Option Plan, its 1993 Stock
Option Plan and its 1996 Non-Employee Directors Stock Option Plan (collectively,
the "Stock Option Plans") and any other Options set forth on Schedule 3.05,
providing for the payment upon surrender of the Option upon consummation of the
Offer or at the Effective Time of an amount of cash per share subject to each
such Option equal to the difference between the exercise price of such Option
and the Merger Consideration, less an amount equal to all taxes required to be
withheld from such payment. Any Options not so surrendered or exercised one day
prior to the Effective Time (or earlier in the case of the 1989 Plan) shall
terminate in accordance with the terms of the Stock Option Plans or agreements
with optionees. The Company may accelerate the vesting of any outstanding
Options in accordance with the terms thereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Parent and the Purchaser
that:
1.041 Organization, Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own, lease and
operate its properties and carry on its business as now being conducted. The
Company is duly qualified to do business and is in good standing in each
jurisdiction in which the nature of the Company's business or the location of
its properties
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makes such qualification necessary, except for any such failure to qualify or be
in good standing as shall not have a Material Adverse Effect (as defined in
Section 4.06) on the Company. The Company Disclosure Letter (as defined in
Section 4.06) identifies, and the Company has heretofore made available to the
Parent, complete and correct copies of the Certificate of Incorporation and By-
Laws of the Company, as currently in effect.
1.042 Company Subsidiaries. The Company Disclosure Letter lists all
subsidiaries of the Company. Except as indicated in the Company Disclosure
Letter, all of the outstanding shares of capital stock of each such subsidiary
are owned by the Company either directly or indirectly through another of its
subsidiaries. Except as set forth in the Company Disclosure Letter, no equity
securities of any subsidiary of the Company are or may be required to be issued
(other than to the Company or its other subsidiaries) by reason of any Equity
Rights (as defined in Section 4.03) for shares of the capital stock of any
subsidiary of the Company, and there are no contracts, commitments,
understandings or arrangements by which any subsidiary of the Company is bound
to issue (other than to the Company) additional shares of its capital stock or
options, warrants or rights to purchase or acquire any additional shares of its
capital stock. Except as set forth in the Company Disclosure Letter, there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may be obligated to transfer any shares of the
capital stock of any subsidiary of the Company. Except as set forth in the
Company Disclosure Letter, all of the shares of capital stock of each subsidiary
of the Company held by the Company or any subsidiary of the Company are fully
paid and nonassessable and are owned by the Company or such subsidiary of the
Company free and clear of any claim, lien or encumbrance other than restrictions
on transferability under federal and any applicable state securities laws. Each
subsidiary of the Company is duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated or
organized, has the corporate power and authority necessary for it to own or
lease its properties and assets and to carry on its business as it is now being
conducted, and is duly qualified to do business and in good standing in the
states of the United States in which the ownership of its property or the
conduct of its business requires it to be so qualified, except for such
jurisdictions in which the failure to be so qualified and in good standing would
not have a Material Adverse Effect. As used in this Agreement, the term
"subsidiary" shall mean, with respect to the Company, any corporation or other
legal entity of which the Company or any of its subsidiaries controls or owns,
directly or indirectly, 50% or more of the stock or other equity interest
entitled to vote on the election of members to the board of directors or similar
governing body.
1.043 The Company's Capitalization. The authorized capital stock of the
Company consists of (i) 16,000,000 Shares, and (ii) 2,000,000 shares of
Preferred Stock, $.01 par value ("Preferred Stock"). As of the close of business
on March 29, 1996, there were (i) 7,528,198 Shares issued and outstanding and no
Shares held in the Company's treasury and (ii) 800,000 shares of Preferred Stock
denominated the 6% Cumulative Preferred Stock Series 1 and 2 (collectively, the
"Preferred Shares") issued and outstanding. All outstanding Shares have been
duly authorized and validly issued, and are fully paid, nonassessable and free
of preemptive rights. Except for the Options described in Section 3.05 hereof
and except as set forth on the Company Disclosure Letter, there are not now, and
at the Effective Time there will not be, any subscriptions, options, warrants,
calls, rights, agreements or commitments relating to the
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issuance, sale, delivery or transfer by the Company (including any right of
conversion or exchange under any outstanding security or other instrument) of
its Shares (collectively, "Equity Rights"). There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
Shares. The Company Disclosure Letter contains a complete and accurate list of
all holders of Options and any other options or rights of any kind to purchase
or acquire shares of the Common Stock of the Company, together with the number
of such options and the terms of such options held by each such holder.
1.044 Company Investments. Except for interests in the Company's
subsidiaries and except as set forth in the Company Disclosure Letter, neither
the Company nor any of the Company's subsidiaries owns or has the right to
acquire, directly or indirectly, any interest or investment (whether equity or
debt) in any corporation, partnership, joint venture, business, trust or entity,
other than (i) non-controlling investments made in the ordinary course of
business and corporate partnering, development, cooperative marketing and
similar undertakings and arrangements entered into in the ordinary course of
business, and (ii) other investments of less than $250,000 in the aggregate.
1.045 Authority. The Company has full corporate power and authority to
execute, deliver and perform (subject to approval by the Company's stockholders)
this Agreement and the Stockholder Agreement and to consummate the transactions
contemplated hereby and thereby. This Agreement and the Stockholder Agreement
have been duly and validly approved by the Board, and the execution, delivery
and performance of this Agreement and the Stockholder Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by the Board and, except for the approval of the Merger
by the holders of at least a majority of the Shares in accordance with the DGCL,
no other corporate actions on the part of the Company are necessary to authorize
this Agreement and the Stockholder Agreement or to consummate the transactions
contemplated hereby and thereby, including the acquisition of Shares pursuant to
the Offer and the Merger. The Company has taken all actions necessary to render
the prohibitions of Section 203 of the DGCL to be inapplicable to the execution
and delivery of this Agreement and the Stockholder Agreement and the
transactions contemplated hereby and thereby , including the acquisition of the
Shares pursuant to the Offer and the Merger. To the knowledge of the Company, no
other "fair price," "merger moratorium," "control share acquisition" or other
anti-takeover statute or similar statute or regulation applies or purports to
apply to the Merger, this Agreement, the Stockholder Agreement or any of the
transactions contemplated hereby or thereby. This Agreement and the Stockholder
Agreement have been duly and validly executed and delivered by the Company and,
assuming due authorization, execution and delivery by the Parent and the
Purchaser, constitute valid and binding agreements of the Company, enforceable
against the Company in accordance with their terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of creditors'
rights generally and by general principles of equity, regardless of whether such
enforceability is considered in a proceeding in equity or at law.
1.046 Consents and Approvals; No Violation. Except as set forth on the
Company Disclosure Letter delivered to the Parent as of the date of this
Agreement (the
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"Company Disclosure Letter"), and except for any required approval of the Merger
by the stockholders of the Company and the filing of the Delaware Certificate of
Merger in accordance with the DGCL, neither the execution, delivery and
performance of this Agreement and the Stockholder Agreement by the Company nor
the consummation by it of the transactions contemplated hereby and thereby will
(i) conflict with or result in any breach of any provision of the Certificate of
Incorporation or By-Laws of the Company; (ii) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, except (A) in connection with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (B) in
connection with the Securities Act of 1933, as amended (the "Securities Act")
and the Exchange Act and (C) where the failure to obtain such consent, approval,
authorization or permit, or to make such filing or notification, would not have
a Material Adverse Effect; (iii) constitute a breach or result in a default
under, or give rise to any right of termination, amendment, cancellation or
acceleration under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation of any kind to which the Company is a party or by which the Company
or any of its assets may be bound, except for any such breach, default or right
as to which requisite waivers or consents have been obtained or which, in the
aggregate, would not have a Material Adverse Effect; or (iv) assuming compliance
with the DGCL and the HSR Act, violate any order, writ, injunction, judgment,
decree, law, statute, rule, regulation or governmental permit or license
applicable to the Company or any of its assets, which violation would have a
Material Adverse Effect.
For purposes of this Agreement, "Material Adverse Effect" means a material
adverse effect on the business, assets, financial condition or results of
operation of the Company and its subsidiaries considered on a consolidated basis
or on the ability of the Company, the Parent or the Purchaser to consummate the
transactions contemplated by this Agreement, or any event or events which,
individually or in the aggregate, constitute or, with the passage of time, would
constitute a "Material Adverse Effect."
1.047 SEC Reports; Financial Statements. The Company has filed all
required forms, reports and documents with the SEC since April 6, 1993
(collectively, the "SEC Reports"), each of which has complied in all material
respects with all applicable requirements of the Securities Act, and the
Exchange Act, each as in effect on the dates so filed. None of such forms,
reports or documents, including, without limitation, any financial statements or
schedules included or incorporated by reference therein, contained, when filed,
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The Company has heretofore made available or promptly
will make available to the Parent, a complete and correct copy of any amendment
to the SEC Reports. The Company has previously furnished to the Parent audited
consolidated balance sheets of the Company and its subsidiaries as of the end of
each fiscal year in the three-year period ended January 28, 1996, and the
related audited consolidated statements of income, statements of cash flow or
changes in financial position and changes in stockholders' equity of the Company
and its subsidiaries for the fiscal years then ended (collectively, the "Related
Statements"), together with the respective reports thereon of Arthur Andersen
LLP. The
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unaudited consolidated balance sheet of the Company and its subsidiaries as of
April 28, 1996 is hereinafter referred to as the "Company Balance Sheet." Each
of the balance sheets included in the financial statements referred to in this
Section 4.07 (including the related notes thereto) presents fairly the financial
position of the Company and its subsidiaries as of their respective dates, and
the Related Statements included therein (including the related notes thereto)
present fairly the consolidated results of operations, the cash flows or changes
in financial position, and changes in stockholders' equity for the periods then
ended, all in conformity with generally accepted accounting principles applied
on a consistent basis, except as otherwise noted therein.
1.048 Proxy Statement; Offer Documents. Any proxy or similar materials
distributed to the Company's stockholders in connection with the Merger,
including any amendments or supplements thereto (the "Proxy Statement"), will
comply in all material respects with applicable federal securities laws and will
not contain any untrue statements of a material fact required to be stated
therein or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representation is
made by the Company with respect to information supplied by the Parent or the
Purchaser in writing for inclusion in the Proxy Statement. None of the
information supplied by the Company in writing for inclusion in the Offer
Documents or provided by the Company in the Schedule 14D-9 will, at the
respective times that the Offer Documents and the Schedule 14D-9 or any
amendments or supplements thereto are filed with the SEC and are first published
or sent or given to holders of Shares, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
1.049 Undisclosed Liabilities. Except as set forth on the Company
Disclosure Letter or reflected in the financial statements referred to in
Section 4.07 or with respect to liabilities incurred in the ordinary course of
business since the date of the Company Balance Sheet, neither the Company nor
any of its subsidiaries has any material liability or obligation, secured or
unsecured (whether absolute, accrued, contingent or otherwise, and whether due
or to become due) which would be required to be disclosed in financial
statements prepared in accordance with generally accepted accounting principles.
Except as set forth in the Company Disclosure Letter, the Company has not
engaged, and prior to the Effective Time will not engage in any hedging
transactions or transactions in derivative securities.
4.10 Absence of Certain Changes or Events. Except as set forth on the
Company Disclosure Letter, since the date of the Company Balance Sheet (i) the
business of the Company and its subsidiaries has been conducted in the ordinary
course (except as otherwise contemplated by this Agreement) and (ii) there has
not been any change which has had a Material Adverse Effect.
4.11 Title, Etc. (a) The Company Disclosure Letter sets forth a list of
all of the real property (the "Real Property") which is owned in fee by the
Company and any of its subsidiaries. The Company or such subsidiary, as the
case may be, has, with respect to personal property, good, and, with respect to
Real Property, good, marketable and insurable, title to all of
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the properties and assets which it purports to own and which are material to the
business, operation or financial condition of the Company and its subsidiaries
free and clear of all mortgages, security interests, liens, claims, charges or
other encumbrances of any nature whatsoever, except for (i) any mortgages,
security interests, claims, charges, liens, encumbrances or defects reflected in
the Company Balance Sheet or disclosed in the notes thereto; (ii) any mortgages,
security interests, claims, charges, liens, encumbrances or defects which do not
materially detract from the aggregate fair market value (free of such liens,
encumbrances or defects) of the property or assets subject thereto or materially
interfere with the current use by the Company and its subsidiaries of the
property or assets subject thereto or affected thereby or otherwise have a
Material Adverse Effect; (iii) any liens or encumbrances for taxes not
delinquent or which are being contested in good faith, provided that adequate
reserves for the same have been established on the Company Balance Sheet to the
extent required by generally accepted accounting principles; (iv) any liens or
encumbrances for current taxes and assessments not yet past due; (v) any
inchoate mechanic's and materialmen's liens and encumbrances for construction in
progress; (vi) any workmen's, repairmen's, warehousemen's and carriers' liens
and encumbrances arising in the ordinary course of business, so long as such
liens have not been filed; (vii) any liens of the type referred to in (vi) above
that have been filed, so long as such liens do not aggregate in excess of
$100,000 (excluding any such liens that are being contested in good faith in
appropriate proceedings); (viii) liens securing obligations under the Credit
Agreement (as defined in Section 6.01); and (ix) with respect to Real Property,
any restrictions, licenses, "covenants, conditions and restrictions", liens,
encumbrances, defects, irregularities in title and other similar charges or
encumbrances, including but not limited to, easements, quasi-easements, rights
of way, land use ordinances and zoning plans, which do not materially interfere
with the current use by the Company and its subsidiaries of the Real Property.
(b) The Company Disclosure Letter sets forth a list of all of the material
leases and subleases (the "Real Property Leases") under which, as of the date
hereof, the Company or any subsidiary has the right to occupy space. The Company
has heretofore delivered to the Parent a true, correct and complete copy of all
of the Real Property Leases, including all amendments thereto. All Real Property
Leases and material leases pursuant to which the Company or any subsidiary
leases personal property from others are, in all material respects, valid,
binding and enforceable in accordance with their terms; neither the Company nor
any subsidiary has received notice of any default by the Company or any
subsidiary under any Real Property Lease which would have a Material Adverse
Effect; there are no existing defaults, or, to the knowledge of the Company, any
condition or event which with the giving of notice or lapse of time would
constitute a default, by the Company or any subsidiary thereunder which would
have a Material Adverse Effect; and, with respect to the Company's or any
subsidiary's obligations thereunder without qualification and with respect to
the obligations of all other parties thereto, to the knowledge of the Company,
no uncured default or event or condition on the part of any landlord exists
under any Real Property Lease which with the giving of notice or the lapse of
time would constitute a default thereunder which would have a Material Adverse
Effect.
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(c) Except as set forth in the Company Disclosure Letter, all of the land,
buildings, structures and other improvements occupied by the Company and its
subsidiaries in the conduct of its business are included in the Real Property or
the Real Property Leases.
(d) Except as set forth in the Company Disclosure Letter, neither the
Company or any subsidiary owns or holds, nor is obligated under or a party to,
any option, right of first refusal or other contractual right to purchase,
acquire, sell or dispose of the Real Property and the Real Property Leases or
any portion thereof or interest therein.
4.12 Patents, Trademarks, Etc. The Company Disclosure Letter identifies
all registered trademarks, copyrights and patents owned or licensed by the
Company and its subsidiaries as of the date hereof, other than trademarks, trade
names and other similar rights owned by third parties and licensed for use by
the Company in the sale of products in the ordinary course of its business. To
the Company's best knowledge, the Company or its subsidiaries own, or are
licensed or otherwise have adequate right to use, all patents, patent rights,
trademarks, trademark rights, service marks, service mark rights, trade names,
trade name rights, copyrights, know-how, technology, trade secrets and other
proprietary information (collectively, the "Intellectual Property") which are
material to the conduct of the business of the Company and its subsidiaries.
Except as set forth in the Company Disclosure Letter, subsequent to July 31,
1991, (i) no claims have been asserted by any person and (ii) neither the
Company nor any of its subsidiaries has asserted a claim against any person,
with respect to any of the Intellectual Property owned or used by the Company or
its subsidiaries or challenging or questioning the validity or effectiveness of
any license or agreement relating thereto to which the Company or any subsidiary
is a party.
4.13 Insurance. The Company Disclosure Letter identifies all material
property, general liability and casualty and workers' compensation insurance
policies which currently insure the Company and its subsidiaries and the Company
shall use its reasonable efforts to keep such policies in full force and effect
up to the Closing Date. Such policies are adequate in the view of the management
of the Company for the assets and operations of the Company and its
subsidiaries.
4.14 Employee Benefit Plans. (a) For purposes of this Section 4.14,
"Company Benefit Plans" means (i) all employee pension and welfare benefit
plans, agreements and arrangements described in section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including without
limitation, all qualified retirement plans and medical, dental, life insurance
and other similar plans, maintained by the Company or any subsidiary, to which
the Company or any subsidiary has contributed or been required to contribute, or
with respect to which the Company or any subsidiary of the Company has a
liability, whether direct or indirect, actual or contingent, (ii) all stock
option, change of control and similar plans, agreements and arrangements
maintained by the Company or any subsidiary of the Company, and (iii) all
material employment, bonus, incentive, and similar plans, agreements and
arrangements maintained by the Company or any subsidiary of the Company.
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(b) The Company Disclosure Letter sets forth a list of all Company Benefit
Plans and the Company has delivered or made available to the Parent, where
applicable, accurate and complete copies of all Company Benefit Plan texts and
related agreements and any summary plan descriptions with respect thereto.
(c) Except as set forth in the Company Disclosure Letter with respect to
each Company Benefit Plan: (i) such Plan has been administered and enforced in
all material respects in accordance with its terms and ERISA, the Code and other
applicable law; (ii) to the best knowledge of the Company and its subsidiaries,
no breach of fiduciary duty or non-exempt prohibited transaction that could
result in a material liability has occurred; (iii) no actions, suits, claims or
disputes with respect to material liabilities, are pending or, to the best
knowledge of the Company and its subsidiaries, threatened, other than routine
claims for benefits; (iv) all contributions and premiums due which are material
in amount have been made on a timely basis; (v) all contributions and all
distributions which are material in amount made or required to be made under
such Company Benefit Plan meet the requirements for deductibility under the
Internal Revenue Code of 1986, as amended (the "Code"); and (vi) such Company
Benefit Plan is not a multiemployer plan (as defined in ERISA section 3(37)), a
multiple employer plan within the meaning of the Code or ERISA, a defined
benefit plan within the meaning of ERISA section 3(35), a plan subject to
section 302 of ERISA, section 412 of the Code or Title IV of ERISA, or funded
through a "welfare benefit fund" (as defined in Section 419(e) of the Code).
(d) Except as set forth on the Company Disclosure Letter or as specifically
provided in Section 3.05, the consummation of the transactions contemplated by
this Agreement will not (i) entitle any individual to severance pay, or (ii)
accelerate the time of payment or vesting, or increase the amount, of
compensation due to any individual. The Company has delivered to the Parent
true, correct and complete copies of each Company Benefit Plan, relating to the
foregoing, including all amendments thereto.
(e) The Company Disclosure Letter sets forth a description of all
obligations of the Company and its subsidiaries with respect to retiree medical
and retiree life insurance and disability benefits under the Company Benefit
Plans. The Company has delivered to the Parent written material which is
representative in all material respects of communications of the Company and its
subsidiaries with respect to retiree medical and retiree life insurance and
disability benefits under the Company Benefit Plans, a list of which is set
forth on the Company Disclosure Letter.
(f) Each Company Benefit Plan intended to be qualified under section 401(a)
of the Code is so qualified, and each trust or other funding vehicle related
thereto is exempt from federal income tax under section 501(a) of the Code.
(g) With respect to any insurance policy providing funding for benefits
under any Company Benefit Plan, (i) there is no material liability of the
Company or any subsidiary of the Company in the nature of a retroactive or
retrospective rate adjustment, loss sharing arrangement, or other actual or
contingent liability, nor would there be any such material liability if such
insurance policy were terminated, and (ii) to the best knowledge of the Company
and its
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subsidiaries, no insurance company issuing any such policy is in receivership,
conservatorship, liquidation or similar proceeding and, to the best knowledge of
the Company and its subsidiaries, no such proceeding with respect to any insurer
is imminent.
(h) The Company Disclosure Letter sets forth the name and current
compensation of each officer, director or employee of the Company and its
subsidiaries whose current annual rate of compensation from the Company
(including bonuses but excluding commission-only compensation) exceeds $100,000.
4.15 Legal Proceedings, Etc. Except as set forth on the Company
Disclosure Letter and except for pending or threatened claims, actions,
proceedings or investigations seeking or which would seek, if instituted,
damages or injunctive relief with respect to the transactions contemplated by
this Agreement, (i) there is no claim, action, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or relating to
the Company or any subsidiary before any court or governmental or regulatory
authority or body which could have a Material Adverse Effect, and (ii) neither
the Company nor any subsidiary is subject to any outstanding order, writ,
judgment, injunction or decree of any court or governmental or regulatory
authority or body which could have a Material Adverse Effect.
4.16 Taxes.
(a) Filing of Tax Returns. The Company (including, for purposes of this
Section 4.16, each of its subsidiaries from time to time) has timely filed with
the proper taxing or other governmental authorities all returns (including,
without limitation, information returns, estimated Tax filings and other Tax-
related information) in respect of Taxes (as such term is defined in Section
4.16(f)) required to be filed through the date hereof. Such returns, filings
and information filed are complete, correct and accurate in all material
respects. The Company has delivered to Parent complete and accurate copies of
all of the Company's federal, state and local Tax returns filed for its taxable
years ended January, 1990, 1991, 1992, 1993, 1994 and 1995. The Company has not
filed any federal, state or local tax returns for its taxable years ended
January, 1996 and 1997, or has delivered to Parent complete and accurate copies
of all such returns that have been filed for such taxable years.
(b) Payment of Taxes. All Taxes for which the Company shown as owing on
any Tax return for any period or portion thereof ending on or before the Closing
Date, shall have been paid, or an adequate reserve (in conformity with generally
accepted accounting principles applied on a consistent basis and the Company's
past custom and practice) has been established therefor, and the Company has no
material liability for Taxes in excess of the amounts so paid or reserves so
established. All Taxes that the Company has been required to collect or
withhold have been duly collected or withheld and, to the extent required when
due, have been or will be duly paid to the proper taxing or other governmental
authority.
(c) Audit History. Except as set forth in the Company Disclosure Letter:
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(i) No deficiencies for Taxes of the Company have been claimed,
proposed or assessed by any taxing or other governmental authority.
(ii) There are no pending or, to the best of the Company's
knowledge, threatened audits, investigations or claims for or relating to any
liability in respect of Taxes of the Company, and there are no matters under
discussion with any taxing or other governmental authority with respect to Taxes
of the Company.
(iii) All audits of federal, state and local returns for Taxes by the
relevant taxing or other governmental authority have been completed for all
periods.
(iv) The Company has not been notified that any taxing or other
governmental authority intends to audit a return for any other period.
(v) No extension of a statute of limitations relating to Taxes is
in effect with respect to the Company.
(d) Tax Elections. Except as set forth in the Company Disclosure Letter:
(i) There are no material elections with respect to Taxes affecting
the Company.
(ii) The Company has not made an election, and is not required, to
treat any asset of the Company as owned by another person or as tax-exempt bond
financed property or tax-exempt use property within the meaning of Section 168
of the Internal Revenue Code of 1986, as amended (the "Code") or under any
comparable state or local income Tax or other Tax provision.
(iii) The Company is not a party to or bound by any binding tax
sharing, tax indemnity or tax allocation agreement or other similar arrangement
with any other person or entity.
(iv) The Company has not filed a consent pursuant to the collapsible
corporation provisions of Section 341(f) of the Code (or any corresponding
provision of state or local law) or agreed to have Section 341(f)(2) of the Code
(or any corresponding provision of state or local law) apply to any disposition
of any asset owned by it.
(e) Additional Representations. Except as set forth in the Company
Disclosure Letter:
(i) There are no liens for Taxes (other than for Taxes not yet
delinquent) upon the assets of the Company.
(ii) The Company has never been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code, nor has the Company
or any present
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or former Subsidiary, or any predecessor or affiliate of any of them, become
liable (whether by contract, as transferee or successor, by law or otherwise)
for the Taxes of any other person or entity under Treasury Regulation Section
1.1502-6 or any similar provision of state, local or foreign law.
(iii) The Company has not made, requested or agreed to make, nor is
it required to make, any adjustment under Section 481(a) of the Code by reason
of a change in accounting method or otherwise for any taxable year.
(iv) The Company is not a party to any agreement, contract,
arrangement or plan that has resulted or would result, separately or in the
aggregate, in the payment of any amount as to which a deduction may be denied
under Section 162(m) of the Code.
(v) The Company is not a party to any joint venture, partnership,
or other arrangement or contract which could be treated as a partnership for
federal, state, local or foreign Tax purposes.
(vi) The Company has prepared and made available to Parent all of
the Company's books and working papers that clearly demonstrate the income and
activities of the Company for the last full reporting period ending prior to the
date hereof.
(vii) The Company has not been a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii).
(viii) The Company has properly requested, received and retained all
necessary exemption certificates and other documentation supporting any claimed
exemption or waiver of Taxes on sales or other transactions as to which the
Company would have been obligated to collect or withhold Taxes except for any
failure to do so which would not be expected to have a Material Adverse Effect.
(f) Definition of Taxes. For purposes of this Agreement, the term "Taxes"
shall mean all federal, state, local, foreign and other taxes, assessments or
other governmental charges, including, without limitation, income, estimated
income, gross receipts, profits, occupation, franchise, capital stock, real or
personal property, sales, use, value added, transfer, license, commercial rent,
payroll, employment or unemployment, social security, disability, withholding,
alternative or add-on minimum, customs, excise, stamp or environmental taxes,
and further including all interest, penalties and additions in connection
therewith for which the Company may be liable.
4.17 Material Agreements. Except as set forth on the Company Disclosure
Letter and except for agreements made for the purpose of completing the
transactions contemplated by this Agreement, neither the Company nor any of its
subsidiaries is a party to, or bound by, any material agreement of any kind to
be performed in whole or in part after the Effective Time. Solely for the
purpose of this Section, the term "material agreement" shall mean any single
agreement which involves the payment or receipt by the Company or any
subsidiary, subsequent to the date of this Agreement, of more than $500,000,
other than (i) purchase orders in the ordinary course of business,
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(ii) leases described in Section 4.11 and (iii) Company Benefit Plans described
in Section 4.14. Except as set forth on the Company Disclosure Letter, to the
best knowledge of the Company, there is no breach or default and there are no
facts which with notice or the passage of time would constitute a breach or
default under, or give rise to any right of termination, amendment, cancellation
or acceleration under, whether as a result of the consummation of the
transactions contemplated hereby or otherwise, any obligation to be performed by
any party to a material agreement to which the Company or any subsidiary is a
party, which breach, default or right (assuming the exercise thereof) would have
a Material Adverse Effect.
4.18 Compliance with Law. Except as set forth on the Company Disclosure
Letter the business of the Company and its subsidiaries is not being conducted
and the properties and assets of the Company and its subsidiaries are not
currently owned or operated in violation of any law, ordinance, regulation,
order, judgment, injunction, award or decree of any governmental or regulatory
entity or court or arbitrator, except for possible violations which either
individually or in the aggregate do not, and so far as can be reasonably
foreseen will not, have a Material Adverse Effect.
4.19 Insider Interests. The Company Disclosure Letter sets forth all
material contracts, agreements with and other obligations to officers,
directors, employees or stockholders of the Company and its subsidiaries.
Except as set forth on the Company Disclosure Letter, no officer, director or
stockholder of the Company or any subsidiary, and no entity controlled by any
such officer, director or stockholder, and no relative or spouse who resides
with any such officer, director or stockholder (i) owns, directly or indirectly,
any material interest in any person that is or is engaged in business, other
than on an arm's-length basis, as a competitor, lessor, lessee, customer or
supplier of the Company or any subsidiary or (ii) owns, in whole or in part, any
tangible or intangible property that the Company or any subsidiary uses in the
conduct of the business of the Company and its subsidiaries.
4.20 Environmental Protection.
The following definitions shall apply to this section:
A. "Environmental Claims" shall mean all written allegations, notices
of violation, liens, claims, demands, suits, or causes of action for
any damage, including, without limitation, personal injury, property
damage, lost use of property or consequential damages, arising directly or
indirectly out of Environmental Conditions or Environmental Laws. By way of
example only, Environmental Claims include (i) violations of or obligations
under any contract related to Environmental Laws or Environmental
Conditions, (ii) actual or threatened damages to natural resources, (iii)
claims for nuisance or its statutory equivalent, (iv) claims for the
recovery of response costs, or administrative or judicial orders directing
the performance of investigations, responses or remedial actions under any
Environmental Laws, (v) requirements to implement "corrective action"
pursuant to any order or permit issued pursuant to Environmental Laws, (vi)
fines, penalties or liens of any kind against property related to
Environmental Laws or Environmental
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Conditions, and (vii) with regard to any present or former employees,
claims relating to exposure to or injury from Environmental
Conditions.
B. "Environmental Conditions" shall mean the state of the
environment, including natural resources, soil, surface water, ground
water, or ambient air, relating to or arising out of the use, storage,
treatment, transportation, release, disposal, dumping or threatened
release of Hazardous Substances.
C. "Environmental Laws" shall mean all applicable federal, state,
district, local and foreign laws, all rules or regulations promulgated
thereunder, and all orders, consent orders, judgments, notices,
permits or demand letters issued or entered pursuant thereto, relating
to pollution or protection of the environment (e.g., ambient air,
surface water, ground water, or soil). Environmental Laws shall
include, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, the Toxic
Substances Control Act, as amended, the Hazardous Materials
Transportation Act, as amended, the Resource Conservation and Recovery
Act, as amended, the Clean Water Act, as amended, the Safe Drinking
Water Act, as amended, the Clean Air Act, as amended, the Atomic
Energy Act of 1954, as amended, the Occupational Safety and Health
Act, as amended, and all analogous laws promulgated or issued by any
state or other governmental authority.
D. "Environmental Reports" shall mean any and all written analyses,
summaries or explanations, in the possession or control of the Company
or any subsidiary, of (a) any Environmental Conditions in, on or about
the Properties (defined below) of the Company or any subsidiary or (b)
the Company's or any Subsidiary's compliance with Environmental Laws.
E. "Hazardous Substances" shall mean all pollutants, contaminants,
chemicals, wastes, and any other carcinogenic, ignitable, corrosive,
reactive, toxic or otherwise hazardous substances or materials subject
to regulation, control or remediation under Environmental Laws,
including but not limited to petroleum, urea formaldehyde, flammable,
explosive and radioactive materials, PCBs, pesticides, herbicides,
asbestos, sludge, slag, acids, metals, and solvents.
Except as set forth on the Company Disclosure Letter, (i) the Company and each
of its subsidiaries are currently in compliance with all Environmental Laws,
including without limitation all permits or licenses required thereunder except
where any failure to comply would not reasonably be expected to have a Material
Adverse Effect; (ii) neither the Company nor any of its subsidiaries has
received any outstanding written notice that the Company or any Subsidiary is
not in compliance with, or that it is in violation of, any such Environmental
Laws which involves a matter that would reasonably be expected to have a
Material Adverse Effect; (iii) there are no Environmental Claims against the
Company or any subsidiary except for any Environmental Claims which would not
reasonably be expected to have a Material Adverse Effect; (iv) no underground
storage tank for Hazardous Substances, no PCBs, and no asbestos containing
material is currently located at or on the properties owned or leased by the
Company or any subsidiary (the "Properties") except where the occurrence
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of any of the foregoing would not reasonably be expected to have a Material
Adverse Effect; and (v) there have been no releases of Hazardous Substances in
quantities exceeding the reportable quantities as defined under Environmental
Laws on, upon or into the Properties other than those authorized by
Environmental Laws except for any such releases which would not reasonably be
expected to have a Material Adverse Effect. In addition, true and correct copies
of the Environmental Reports at any Property or any facility formerly owned or
operated by the Company or any Subsidiary have been made available to Purchaser,
and a list of all such Environmental Reports is set forth on the Company
Disclosure Letter.
4.21 Labor Matters. None of the employees of the Company and its
subsidiaries are covered by a collective bargaining agreement. As of the date
of this Agreement, neither the Company nor its Subsidiaries knows of any
activity or proceedings of any labor union (or representatives thereof) to
organize any unorganized employees employed by the Company or its Subsidiaries,
nor of any strikes, slowdowns, work stoppages, lockouts or threats thereof, by
or with respect to any of the employees of the Company or its Subsidiaries.
Except as set forth in the Company Disclosure Letter, as of the date of this
Agreement, neither the Company nor its Subsidiaries has received any notice of
any claim, or has knowledge of any facts which are likely to give rise to any
claim, that they have not complied in any respect with any laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, the payment of social security
and similar taxes, equal employment opportunity, employment discrimination or
employment safety, except such claims which, in the aggregate, would not have a
Material Adverse Effect.
4.22 Brokers and Finders. Neither the Company or its subsidiaries nor
any of their respective officers, directors or employees has employed any
broker, finder or investment banker or incurred any liability for any brokerage
fees, commissions, finders' fees or investment banking fees in connection with
the transactions contemplated herein, except that the Company has employed, and
will pay the fees and expenses of, Montgomery as its financial advisor pursuant
to a Letter Agreement dated August 14, 1996, a copy of which will be delivered
to the Parent prior to August 16, 1996.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE PARENT AND THE PURCHASER
The Parent and the Purchaser hereby represent and warrant to the
Company that:
1.051 Corporation Organization. The Parent is a corporation duly organized and
validly existing and in good standing under the laws of the State of New York
and the Purchaser is a corporation duly organized and validly existing and in
good standing under the laws of the State of Delaware. The Parent and the
Purchaser each has all requisite corporate power and authority to own its assets
and carry on its business as now being conducted or proposed to be conducted.
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1.052 Authorized Capital. The authorized capital stock of the Purchaser
consists of 1,000 shares of Common Stock, par value $.01 per share, of which
1,000 shares are outstanding as of the Effective Time and are owned,
beneficially or of record, by Parent. All of the issued and outstanding shares
of capital stock of the Purchaser are validly issued, fully paid, nonassessable
and free of preemptive rights and all liens.
1.053 Authority. Each of the Parent and the Purchaser has the necessary
corporate power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement by each of
the Parent and the Purchaser, the performance by the Parent and the Purchaser of
their respective obligations hereunder and the consummation by the Parent and
the Purchaser of the transactions contemplated hereby have been duly authorized
by its Board of Directors and approved by the Parent as sole stockholder of the
Purchaser, and no other corporate proceeding on the part of the Parent or the
Purchaser is necessary for the execution and delivery of this Agreement by the
Parent and the Purchaser and the performance by the Parent and the Purchaser of
their respective obligations hereunder and the consummation by the Parent and
the Purchaser of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by each of the Parent and the Purchaser and,
assuming the due authorization, execution and delivery hereof by the Company, is
a legal, valid and binding obligation of the Parent and the Purchaser,
enforceable against each of the Parent and the Purchaser in accordance with its
terms, except to the extent that its enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally or by general equitable principles,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
1.054 No Prior Activities. The Purchaser has not incurred nor will it
incur, directly or indirectly, any liabilities or obligations, except those
incurred in connection with its incorporation or with the negotiation of this
Agreement, the Stockholder Agreement, the Offer Documents and the consummation
of the transactions contemplated hereby and thereby. The Purchaser has not
engaged, directly or indirectly, in any business or activity of any type or
kind, or entered into any agreement or arrangement with any person or entity,
and is not subject to or bound by any obligation or undertaking, that is not
contemplated by or in connection with this Agreement, the Stockholder Agreement,
the Offer Documents and the transactions contemplated hereby and thereby.
1.055 No Financing Contingency. The Parent has sufficient funds to
consummate all of the transactions contemplated by this Agreement and will make
available to the Purchaser sufficient funds in sufficient time to consummate the
Offer and the Merger in accordance with the terms of this Agreement.
1.056 Governmental Filings; No Violations. (a) No notices, reports or other
filings are required to be made by the Parent or the Purchaser with, nor are any
consents, registrations, approvals, permits or authorizations required to be
obtained by the Parent or the Purchaser from, any governmental or regulatory
authorities of the United States, the several States or any foreign
jurisdictions in connection with the execution and delivery of this Agreement by
the Parent and the Purchaser and the consummation by the Parent and the
Purchaser of the transactions contemplated hereby, the failure to make or obtain
any or all of which could prevent, delay or burden the
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transactions contemplated by this Agreement, except (A) in connection with the
HSR Act, and (B) in connection with the Exchange Act.
(b) Neither the execution and delivery of this Agreement by the Parent or
the Purchaser nor the consummation by the Parent or the Purchaser of the
transactions contemplated hereby nor compliance by the Parent or the Purchaser
with any of the provisions hereof will: (i) conflict with or result in any
breach of any provision of its Certificate of Incorporation or By-Laws, (ii)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, or require any consent under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation to which the Parent or the
Purchaser is a party or by which it or any of its properties or assets may be
bound, (iii) require the creation or imposition of any lien upon or with respect
to the properties of the Parent or the Purchaser or (iv) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Parent
or the Purchaser or any of its properties or assets, excluding from the
foregoing clauses (iii) and (iv) violations, breaches or defaults which in the
aggregate, would neither have a material adverse effect on the business,
financial condition or operations of the Parent or the Purchaser nor prevent,
materially delay or materially burden the transactions contemplated by this
Agreement.
1.057 Brokers and Finders. Neither the Parent, the Purchaser nor any of its
officers, directors or employees has employed any broker, finder or investment
banker or incurred any liability for any brokerage fees, commissions, finders
fees or investment banking fees in connection with the transactions contemplated
herein, except that the Parent has employed and will pay the fees and expenses
of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
1.058 Offer Documents; Proxy Statement; Other Information. None of the
information included in the Offer Documents (including any amendments or
supplements thereto) or any schedules required to be filed with the SEC in
connection therewith and described therein as being supplied by the Parent or
the Purchaser will, at the respective times that the Offer Documents or any
amendments or supplements thereto or any such schedules are filed with the SEC,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the information supplied in writing by the Parent or the
Purchaser specifically for inclusion in the Proxy Statement, Schedule 14D-9 or
any statement required pursuant to Section 14(f) of the Exchange Act or any
other schedules or statements required to be filed with the SEC in connection
therewith will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading.
ARTICLE VI
COVENANTS OF THE PARTIES
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1.061 Conduct of Business of the Company. The Company and its subsidiaries
shall use their reasonable best efforts to preserve intact the business
organization of the Company and its subsidiaries, to keep available the services
of its operating personnel and to preserve the goodwill of those having business
relationship with each of them, including, without limitation, suppliers;
provided, however, that any inability of the Company or its subsidiaries to keep
available the services of such operating personnel or to maintain any such
business relationships (including with suppliers) despite its aforesaid
reasonable best efforts to do so shall not constitute a breach of this Section
6.01. Except as contemplated by this Agreement or as set forth on the Company
Disclosure Letter, during the period from the date of this Agreement to the
Effective Time, the Company and its subsidiaries will conduct their business and
operations only in the ordinary and usual course of business consistent with
past practice. Without limiting the generality of the foregoing, and, except as
contemplated in this Agreement or as set forth on the Company Disclosure Letter,
prior to the Effective Time, without the advance written consent of the Parent,
neither the Company nor any of its subsidiaries will:
(a) Amend its Certificate of Incorporation or By-Laws or similar governing
documents;
(b) (i) Create, incur or assume any indebtedness for money borrowed,
including obligations in respect of capital leases, except (A) purchase money
mortgages granted in a manner consistent with past practice, and (B)
indebtedness for borrowed money incurred in the ordinary course of business,
provided, however, that the Company and its subsidiaries may incur, (x)
indebtedness for borrowed money under credit facilities existing as of the date
of the Company Balance Sheet and (y) indebtedness which refinances indebtedness
which is declared due and payable or tendered to the Company or any subsidiary
in accordance with the terms thereof as a result of the consummation of the
Offer, provided, that (1) Purchaser shall not have designated a majority of
directors to serve on the Board pursuant to Section 2.08 and (2) the Company
shall have consulted with the Parent and the Parent shall have approved the
terms of such refinancing indebtedness (which consent may not be unreasonably
withheld) or (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person; provided, however, that the Company and its subsidiaries may
endorse negotiable instruments in the ordinary course of business consistent
with past practice;
(c) Declare, set aside or pay any dividend or other distribution (whether
in cash, stock or property or any combination thereof) in respect of the Common
Stock and Preferred Shares of the Company (except for regular dividends on the
Preferred Shares in accordance with their terms) or any capital stock of any
subsidiary;
(d) Issue, sell, grant, purchase or redeem, or issue, whether by dividend
or otherwise, or sell any securities convertible into or exercisable for, or
options with respect to, or warrants to purchase or rights to subscribe to or
otherwise purchase, or subdivide or in any way reclassify, any shares of capital
stock or other securities of the Company, except for the issuance of Shares
issuable upon conversion of the Preferred Shares in accordance with their terms
or the exercise of Options outstanding on the date hereof;
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(e) (i) Increase the aggregate amount of compensation payable or to become
payable by the Company or any subsidiary to its directors, officers or
employees, whether by salary or bonus, or (ii) increase the rate or term of, or
otherwise alter, any bonus, insurance, pension, severance or other employee
benefit plan, payment or arrangement made to, for or with any such directors,
officers or employees;
(f) Enter into any agreement, commitment or transaction, except agreements,
commitments or transactions in the ordinary course of business consistent with
past practice or Settlements permitted by Section 6.02(b);
(g) Sell, transfer, mortgage, pledge or grant any security interest, lien
or other encumbrance on any asset other than in the ordinary course of business
consistent with past practice and except (i) pursuant to the Credit Agreement
dated as of August 8, 1995 between the Company and Bank of America National
Trust and Savings Association (the "Credit Agreement") or (ii) in connection
with purchase money mortgages permitted by Section 6.01(b)(i);
(h) Waive any right under any contract or other agreement identified on the
Company Disclosure Letter;
(i) Other than as and when required by any change in generally accepted
accounting principles, make any material change in its accounting or tax methods
or practices or make any material change in depreciation or amortization
policies or rates adopted by it for accounting or tax purposes or, other than
normal writedowns or writeoffs consistent with past practices, make any
writedowns of inventory or writeoffs of notes or accounts receivable;
(j) Make any loan or advance to any of its stockholders, officers,
directors, employees (other than advances to field sales personnel, vacation
advances, relocation advances and travel advances in each case made in the
ordinary course of business in a manner consistent with past practice) or make
any other loan or advance to any other person or group otherwise than in the
ordinary course of business consistent with past practice;
(k) Terminate or fail to renew, where such renewal is at the Company's or a
subsidiary's option, any contract or other agreement other than in the ordinary
course of business, the termination or failure of which to renew would have a
Material Adverse Effect;
(l) Enter into any collective bargaining agreement or employment agreement;
(m) Make any addition to or modification of any existing Company Benefit
Plans or adopt any new Company Benefit Plan;
(n) Take, agree to take, or do, or with respect to anything within the
Company's or its subsidiaries control, knowingly permit to be done or to be
taken any action in the conduct of its business which (i) would cause any of the
representations of the Company to be or become untrue in any material respect,
and (ii) would reasonably be expected to have a Material Adverse Effect;
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(o) Fail to comply with all applicable filing, payment, withholding,
collection and record retention obligations under all applicable federal, state,
local and foreign Tax laws; or
(p) Agree to do any of the foregoing.
1.062 Notification of Certain Matters. (a) The Company shall give prompt
notice to the Parent of: (i) any notice or other communication from any third
party alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement; (ii) any notice
or other communication from any regulatory authority in connection with the
transactions contemplated by this Agreement; and (iii) the occurrence of any
event having, or which insofar as can be reasonably foreseen would have, a
Material Adverse Effect.
(b) Between the date of this Agreement and the Effective Time, the Company
shall give prompt notice to the Parent of: (i) the initiation of any audit or
other review by the Internal Revenue Service (the "IRS") or any other state,
local or foreign taxing or other governmental authority with respect to any Tax
return or that may result in any additional liability for Taxes, (ii) any
proposed adjustment or assessment by the IRS or any such authority that may
result in any material additional liability for Taxes, (iii) any proposed
settlement or similar agreement ("Settlement") with the IRS or any other such
authority. Between the date of this Agreement and the Effective Time, the
Company shall not enter into any Settlement with respect to Taxes without the
prior written consent of the Parent, which consent shall not be unreasonably
withheld.
1.063 Access to Information. (a) Between the date of this Agreement and the
Effective Time, the Company will during ordinary business hours and upon
reasonable advance notice, (i) give the Parent and the Parent's authorized
representatives all access the Parent shall reasonably request to all of its and
its subsidiaries' books, records (including, without limitation, the workpapers
of the Company's outside accountants), contracts, commitments, stores, offices
and other facilities and properties, and its and its subsidiaries' personnel,
representatives, accountants and agents; provided, however, that all such access
shall take place after appropriate prior consultation with the officers of the
Company, (ii) permit the Parent to make such inspections (except that Parent and
Purchaser may not conduct environmental investigations) thereof as it may
reasonably request (including, without limitation, observing the Company's or a
subsidiary's physical inventory of its assets), (iii) cause its and its
subsidiaries' officers and advisors to furnish to the Parent its financial and
operating data and such other existing information with respect to its business,
properties, assets, liabilities and personnel (including, without limitation,
title insurance reports, real property surveys and environmental reports, if
any), as the Parent may from time to time reasonably request, (iv) take such
actions as the Parent reasonably deems appropriate to verify the existence and
condition of equipment leased by the Company or any of its subsidiaries to its
customers, and (v) permit the Parent's accountants to conduct such confirmation
and testing procedures with respect to the inventory of the Company and its
subsidiaries as the Parent reasonably deems appropriate; provided, however, that
any such investigation shall be conducted in such a manner as not to interfere
unreasonably with the operation of the business of the Company.
(b) Any information provided pursuant to this Agreement shall be held by
the Parent in accordance with and shall be subject to the terms of the
Confidentiality Agreement dated May 31,
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1996 between the Company and the Parent (the "Confidentiality Agreement").
Notwithstanding anything herein or in the Confidentiality Agreement to the
contrary, the Parent, the Purchaser or the Company may disclose any information
required to be disclosed pursuant to the Exchange Act, or otherwise required or
requested to be disclosed by the SEC.
1.064 Further Information. The Company and the Parent shall give prompt
written notice to the other of (i) any representation or warranty made by it
contained in this Agreement becoming untrue or inaccurate in any material
respect or (ii) the failure by it to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it under this Agreement; provided, however, that no such notification shall
affect the representations, warranties, covenants or agreements of the parties
or the conditions to the obligations of the parties under this Agreement.
1.065 Further Assurances. Consistent with the terms and conditions hereof,
each party hereto will execute and deliver such instruments and take such other
action as the other parties hereto may reasonably require in order to carry out
this Agreement and the transactions contemplated hereby.
1.066 Best Efforts. Subject to the terms and conditions of this Agreement,
each of the parties hereto will use their best efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement and shall use its best
efforts to satisfy the conditions to the transactions contemplated hereby and to
obtain all waivers, permits, consents and approvals and to effect all
registrations, filings and notices with or to third parties or governmental or
public bodies or authorities which are necessary or desirable in connection with
the transactions contemplated by this Agreement, including, but not limited to,
filings to the extent required under the Exchange Act and HSR Act. If at any
time after the Effective Time any further action is necessary or desirable to
carry out the purposes of this Agreement, the proper officers or directors of
each of the parties hereto shall take such action. Without limiting the
generality of the foregoing, the Parent as the sole stockholder of the
Purchaser, and the Purchaser as a stockholder of the Company, will consent
and/or vote in favor of the transactions contemplated hereunder, and Company,
the Parent, and the Purchaser will vigorously defend against any lawsuit or
proceeding, whether judicial or administrative, challenging this Agreement or
the consummation of any of the transactions contemplated hereby. Subject to the
terms and conditions of this Agreement, from time to time after the date hereof,
without further consideration, the Company will, at its own expense, execute and
deliver such documents to the Parent as the Parent may reasonably request in
order to consummate the transactions contemplated by this Agreement. Subject to
the terms and conditions of this Agreement, from time to time after the date
hereof, without further consideration, each of the Parent and the Purchaser
will, at its own expense, execute and deliver such documents to the Company as
the Company may reasonably request in order to consummate the transactions
contemplated by this Agreement.
1.067 Filings. The Company and the Parent will file, or cause to be filed,
as promptly as possible and, in the case of the Parent in no event later than
five business days after the date hereof, with the United States Federal Trade
Commission (the "FTC") and the Antitrust
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Division of the United States Department of Justice (the "Department of
Justice") pursuant to the HSR Act the notification required by the HSR Act,
including all requisite documents, materials and information therefor, and
request early termination of the waiting period under the HSR Act. Each of the
Company and the Parent shall furnish to the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of any filing or submission which is necessary under the HSR Act.
The Company and the Parent shall each keep the other apprised of the status of
any inquiries or requests for additional information made by any governmental
authority and shall comply promptly with any such inquiry or request.
1.068 Public Announcements. The initial press release with respect to the
transactions contemplated hereby shall be a joint press release, and thereafter
the Company and the Parent shall consult with each other before issuing any
press release or otherwise making any public statements with respect to the
transactions contemplated hereby and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by law, fiduciary duty upon advice of outside legal counsel or any
listing agreement with a national securities exchange.
6.09 Indemnity; D&O Insurance. (a) The Parent shall cause (i) all rights to
indemnification by the Company now existing in favor of each present and former
director, officer or employee of the Company and its subsidiaries (hereinafter
referred to in this Section as the "Indemnified Parties") as provided in the
Company's By-Laws and (ii) limitations of liability in the Company's Certificate
of Incorporation to survive the Merger and to continue in full force and effect
as rights to indemnification and limitations on liability, respectively, by the
Surviving Corporation for a period of five years following the Effective Time,
and shall cause to remain in full force and effect and cause the Surviving
Corporation to fully perform all indemnity agreements with Indemnified Parties
in effect on the date hereof (the "Indemnity Agreements").
(b) Subject to the terms set forth herein, the Parent and the Surviving
Corporation shall indemnify and hold harmless, to the fullest extent permitted
under applicable law (and shall also advance expenses as incurred by an
Indemnified Party to the extent permitted under applicable law, provided the
person to whom expenses are advanced provides an undertaking to repay such
advances if it is ultimately determined that such person is not entitled to
indemnification), each Indemnified Party against any costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to any action, alleged action,
omission or alleged omission occurring on or prior to the Effective Time in
their capacity as director, officer or employee (including, without limitation,
any claims, actions, suits, proceedings and investigations which arise out of or
relate to the transactions contemplated by this Agreement) for a period of five
years after the Effective Time, provided that, in the event any claim or claims
are asserted or made within such five-year period, all rights to indemnification
in respect of any such claim or claims shall continue until final disposition of
any and all such claims.
(c) Any Indemnified Party wishing to claim indemnification under this
Section 6.09, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the
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Parent and the Surviving Corporation thereof, but the failure to so notify shall
not relieve the Parent and the Surviving Corporation of any obligation to
indemnify such Indemnified Party or of any other obligation imposed by this
Section 6.09 unless and to the extent that such failure prejudices the Parent or
the Surviving Corporation; it being understood that it shall be deemed to
materially prejudice the Parent or the Surviving Corporation, as the case may
be, if, as a result of such failure to notify, the Parent or the Surviving
Corporation is not given an opportunity to assume the defense of such claim,
action, suit, proceeding or investigation within a reasonably prompt time after
such claim, action, suit, proceeding or investigation is asserted or initiated.
In the event of any such claim, action, suit, proceeding or investigation, (i)
the Surviving Corporation or the Parent shall have the right to assume the
defense thereof and shall not be liable to such Indemnified Party for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Party in connection with the defense hereof, except that if the
Parent or Surviving Corporation elects not to assume such defense or counsel for
the Indemnified Party advises that there are issues which raise conflicts of
interest between the Parent or Surviving Corporation and the Indemnified Party,
the Indemnified Party may retain counsel satisfactory to it, and the Surviving
Corporation shall pay all reasonable fees and expenses of such counsel for the
Indemnified Party promptly as statements therefore are received; provided,
however, that in no event shall the Parent or Surviving Corporation be required
to pay fees and expenses, including disbursements and other charges, for more
than one firm of attorneys in any one legal action or group of related legal
actions unless (A) counsel for the Indemnified Party advises that there is a
conflict of interest that requires more than one firm of attorneys, or (B) local
counsel of record is needed in any jurisdiction in which any such action is
pending, (ii) the Parent and the Indemnified Party shall cooperate in the
defense of any such matter, and (iii) the Parent and the Surviving Corporation
shall not be liable for any settlement effected without the prior written
consent of one of them (which consent shall not be unreasonably withheld); and
provided, further, that the Parent and Surviving Corporation shall not have any
obligation hereunder to any Indemnified Party if and to the extent a court of
competent jurisdiction ultimately determines, and such determination shall have
become final, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law.
(d) For five years after the Effective Time, the Parent shall cause the
Surviving Corporation to use reasonable efforts to maintain, if available for an
annual premium not in excess of $60,000, the officers' and directors' liability
insurance covering the Indemnified Parties who are presently covered by the
Company's officers' and directors' liability insurance, with respect to acts or
omissions occurring at or prior to the Effective Time, on terms no less
favorable than those in effect on the date hereof or at the Effective Time, or
if such insurance coverage is not available for an annual premium not in excess
of $60,000, to obtain the amount of coverage that is available for an annual
premium of $60,000.
(e) In the event that any of the provisions of Section 6.09(a), (b) or (c)
above would conflict with any of the provisions of the Company's By-Laws,
Certificate of Incorporation or Indemnity Agreements in a manner that, if held
applicable, would limit or restrict, or impose conditions or obligations on the
exercise by any of the Indemnified Parties of, any of the indemnification rights
or limitations of liability granted to them under the Company's By-Laws,
Certificate of Incorporation or Indemnity
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Agreements shall control, as it is the intention of the parties that the
Indemnified Parties shall have indemnification rights or limitations of
liability no less favorable than those which they have under the Company's By-
Laws, Certificate of Incorporation or Indemnity Agreements, as in effect on the
date hereof.
(f) The covenants contained in this Section 6.09 shall survive the
Effective Time until fully discharged, are intended to benefit each of the
Indemnified Parties and shall be binding on all successors and assignees of the
Parent and the Surviving Corporation.
6.10 Other Potential Bidders. The Company, its present affiliates and
their respective officers, directors, employees, investment bankers, attorneys
and other representatives and agents shall immediately cease any existing
discussions or negotiations, if any, with any parties conducted heretofore with
respect to any acquisition of all or any material portion of the assets of, or
any equity interest in, the Company or any business combination with the
Company. Prior to the termination of this Agreement, the Company, directly or
indirectly, (a) may refer third parties to this Section 6.10, (b) may furnish
information and access, in each case only in response to unsolicited written
requests therefor, to any corporation, partnership, person or other entity or
group, provided that any information or access so furnished shall be provided
pursuant to a confidentiality agreement in customary form that (i) does not
prohibit or restrict disclosure to the Parent of any matter other than
confidential information regarding any such corporation, partnership, person or
other entity or group and (ii) contains terms not more favorable to such
corporation, partnership, person or other entity or group than the terms
contained in the Confidentiality Agreement (as defined in Section 6.03(b)) and
(c) may participate in discussions and negotiate with such corporation,
partnership, person or other entity or group concerning any proposed merger,
sale of assets, sale of shares of capital stock, acquisition of Shares other
than pursuant to the Offer or the Merger or similar transaction involving the
Company or any division or subsidiary of the Company (an "Acquisition
Proposal"), only if the Board has determined in its good faith judgment, based
as to legal matters on the written advice of outside legal counsel, (i) that the
exercise of the directors' fiduciary duties requires the taking of such action,
and, after consultation with all its principal advisors in connection with the
transactions contemplated herein, (ii) that such Acquisition Proposal is a bona
fide written Acquisition Proposal that would, upon consummation thereof, result
in a transaction more favorable to the stockholders of the Company than the
transactions contemplated herein and in the good faith reasonable judgment of
the Board (based upon the advice of all of its principal advisors in connection
with the transactions contemplated herein), is proposed by a corporation,
partnership, person or other entity or group with sufficient financial resources
available to it or available from third parties to consummate such transaction
and is probable to be consummated (a "Superior Proposal"). Except as set forth
above, neither the Company or any of its present affiliates, nor any of its or
their respective officers, directors, employees, representatives or agents,
shall, directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than the Parent
and the Purchaser, any affiliate or associate of the Parent and the Purchaser or
any designees of the Parent and the Purchaser) concerning any Acquisition
Proposal, or take any other action to facilitate the making of a proposal that
constitutes or could reasonably be expected to lead to an Acquisition Proposal.
The Company shall use its best efforts to ensure that the officers, directors
and employees of the Company and its subsidiaries and any investment banker or
other advisor or
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representatives retained by the Company are aware of the restrictions set forth
in the preceding sentences. The Company promptly shall advise the Parent orally
and in writing of any Acquisition Proposal and any inquiry or contact with any
person with respect to the acquisition of a substantial equity interest in or
substantial assets of the Company or its subsidiaries (including without
limitation, successive Acquisition Proposals, inquiries or contacts) and shall,
in such notice, indicate the identity of the offeror and the material terms and
conditions of any such Acquisition Proposal, including without limitation,
price. The Company shall give the Parent one business day's advance notice of
any agreement to be entered into or any information to be supplied to the person
making such Acquisition Proposal. Except in accordance with the terms of this
Agreement, neither the Board nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to the Parent or
the Purchaser the approval or recommendation by the Board of the Offer, the
Merger or this Agreement, or (ii) approve or recommend, or propose to approve or
recommend, any Acquisition Proposal. Notwithstanding the foregoing, nothing
contained in this Agreement shall prevent the Board from approving or
recommending to the Company stockholders any unsolicited Acquisition Proposal by
a third party as contemplated by Rules 14d-9 and 14e-2 promulgated under the
Exchange Act (and, in connection therewith, withdrawing or modifying the
approval or recommendation by the Board of the Offer, the Merger or this
Agreement) in the event any unsolicited Acquisition Proposal shall have been
made by a third party if, in the good faith judgment of the Board, based as to
legal matters on the written advice of outside legal counsel, withdrawing or
modifying such approval or recommendation is required under applicable law in
the proper discharge of its fiduciary duties.
6.11 Employee Benefits. For a period of two years following the
Effective Time, the Parent shall cause the Surviving Corporation to provide the
employees of the Company and its subsidiary with overall employee benefits that
are, on annualized basis, at least as favorable in the aggregate as those
currently provided by the Company and its subsidiaries. This Section 6.11 is not
intended and shall not be deemed to confer any right, benefit or obligation upon
any person (other than the parties to this Agreement) as a third party
beneficiary or otherwise.
ARTICLE VII
CONDITIONS TO THE MERGER
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to consummate the Merger
shall be subject to the following conditions, which have not been waived at or
prior to the Closing:
(a) This Agreement and the Merger shall have been approved and
adopted by the requisite vote or consent, if any is required, of the
stockholders of the Company required by the Company's Certificate of
Incorporation and the DGCL;
(b) Any waiting period (and any extension thereof) applicable to the
Merger under the HSR Act shall have expired or been terminated; and
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(c) No order, statute, rule, regulation, execution order, stay,
decree, judgment, or injunction shall have been enacted, entered, issued,
promulgated or enforced by any court or governmental authority which prohibits
or restricts the consummation of the Merger.
1.072 Conditions to the Obligations of the Parent and the Purchaser
to Effect the Merger. The obligation of the Purchaser and the Parent to effect
the Merger shall be further subject to satisfaction of the conditions, unless
waived by the Parent, that (i) the Purchaser shall have accepted for payment
Shares tendered pursuant to the Offer, provided that this condition will be
deemed satisfied with respect to the Purchaser and the Parent if the Purchaser
shall have failed to purchase Shares pursuant to the Offer in violation of the
terms of the Offer, (ii) the Company shall have performed and complied in all
material respects with the agreements and obligations contained in this
Agreement required to be performed and complied with by it at or prior to the
Effective Time, provided that this clause (ii) shall not apply after Purchaser
has designated a majority of directors to serve on the Board pursuant to Section
2.08 and Purchaser's designees constitute a majority of the Board and (iii)
there shall have been no change in the Board's recommendation that the
stockholders of the Company accept the Offer pursuant to Section 1.02(a).
1.073 Conditions to the Obligations of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be further
subject, unless waived by the Company, to the Parent and the Purchaser having
performed and complied in all material respects with the agreements and
obligations contained in this Agreement required to be performed and complied
with by each of them at or prior to the Effective Time.
ARTICLE VIII
CLOSING
1.081 Time and Place. The closing of the Merger (the "Closing") shall take
place at the offices of Latham & Watkins, Sears Tower, Suite 5800, Chicago,
Illinois at 9:00 a.m. local time on a date to be specified by the parties which
shall be no later than the third business day after the date on which the last
of the closing conditions set forth in Article VII is satisfied or waived (if
waivable) unless another time, date or place is agreed upon in writing by the
parties hereto. The date on which the Closing actually occurs is herein referred
to as the "Closing Date."
1.082 Filings at the Closing. At the Closing, the Purchaser shall
cause the Delaware Certificate of Merger or, if applicable, a Certificate of
Ownership and Merger to be filed and recorded with the Secretary of State of the
State of Delaware in accordance with the provisions of Section 103 of the DGCL
and/or Section 253 of the DGCL, if applicable, and shall take any and all other
lawful actions and do any and all other lawful things necessary to cause the
Merger to become effective.
ARTICLE IX
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TERMINATION; AMENDMENT; WAIVER
1.091 Termination. This Agreement may be terminated and the Offer (if Purchaser
has not accepted Shares for payment) and the Merger may be abandoned at any time
prior to the Effective Time:
(a) by mutual written consent of the Parent, the Purchaser and the
Company;
(b) by the Parent and the Purchaser or by the Company if Shares have
not been purchased pursuant to the Offer on or before December 31, 1996 or
the Closing shall not have occurred on or prior to June 30, 1997;
(c) by the Parent and the Purchaser or the Company if any court of
competent jurisdiction in the United States or other United States
governmental body shall have issued an order, decree or ruling or taken any
other final action restraining, enjoining or otherwise prohibiting the
Merger or the acceptance for payment and payment for the Shares in the
Offer and such order, decree, ruling or other action is or shall have
become nonappealable;
(d) by the Parent and the Purchaser if, due to an occurrence or
circumstance which would result in a failure to satisfy any of the
conditions set forth in Annex A hereto, but subject to Section 1.01(a) and
the Purchaser's obligation to extend the Offer thereunder, the Purchaser
shall have (A) failed to commence the Offer within five business days of
the public announcement of the Offer and the Merger or (B) terminated the
Offer or allowed the Offer to expire without the purchase of any Shares
thereunder;
(e) by the Company if (i) there shall not have been a material breach
of any representation, warranty, covenant or agreement on the part of the
Company which would entitle the Parent or the Purchaser to terminate this
Agreement pursuant to Section 9.01(f) and, due to an occurrence or
circumstance which would result in a failure to satisfy any of the
conditions set forth in Annex A hereto, the Purchaser shall have (A) failed
to commence the Offer within five business days of the public announcement
of the Offer and the Merger or (B) terminated the Offer or allowed the
Offer to expire without the purchase of any Shares thereunder, or (ii)
prior to the purchase of Shares pursuant to the Offer, a corporation,
partnership, person or other entity or group shall have made a Superior
Proposal and, based as to legal matters on the written advice of outside
legal counsel, the Board in its good faith judgment has determined that the
exercise of the directors' fiduciary duties requires the Company to
terminate this Agreement, provided that such termination under this clause
(ii) shall not be effective until payment of the fee required by Section
9.03(b) hereof;
(f) by the Parent and the Purchaser prior to the purchase of Shares
pursuant to the Offer, if (i) there shall have been a breach of any
representation or warranty on the part of the Company having a Material
Adverse Effect, (ii) there shall have been a breach of any covenant or
agreement on the part of the Company resulting in a Material Adverse Effect
or (iii) the Board shall have withdrawn or modified (including by amendment
of the Schedule
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14D-9) in a manner adverse to the Purchaser, its approval or recommendation
of the Offer, this Agreement or the Merger or shall have recommended
another offer, or shall have adopted any resolution to effect any of the
foregoing, provided, that the Parent and the Purchaser may not terminate
this Agreement pursuant to this clause (iii) if, as a result of the
Company's receipt of an Acquisition Proposal from a third party (A) the
Company issues to its stockholders a communication that contains only the
statements permitted by Rule 14d-9(e) under the Exchange Act (and does not
otherwise withdraw, modify or amend its approval of recommendation of the
transactions contemplated hereby) and (B) within five business days of
issuing such communications the Company publicly reconfirms its approval
and recommendation of the transactions contemplated by the Offer, this
Agreement and the Merger; or
(g) by the Company if (i) there shall have been a breach of any
representation or warranty on the part of the Parent or the Purchaser which
materially adversely affects the consummation of the Offer or the Merger or
(ii) there shall have been a material breach of any covenant or agreement
on the part of the Parent or the Purchaser and which materially adversely
affects the consummation of the Offer or the Merger.
1.092 Effect of Termination. In the event of the termination of this
Agreement and the abandonment of the Offer and the Merger pursuant to Section
9.01, this Agreement shall forthwith become void and have no effect, without any
liability on the part of any party hereto or its affiliates, directors, officers
or stockholders, provided that no such termination shall relieve any of the
Company, the Parent or the Purchaser from (a) liability for damages arising from
any willful or intentional breach of this Agreement or (b) their obligations
under Sections 4.22, 5.07, 6.03(b) and 9.03, this Section 9.02 and Article X.
Notwithstanding the termination of this Agreement as provided herein, the
provisions of the Confidentiality Agreement shall continue in full force and
effect.
1.093 Fees and Expenses. (a) In the event that (i) the Parent and the
Purchaser terminate this Agreement pursuant to Section 9.01(f)(i) or 9.01(f)(ii)
hereof, (ii) this Agreement is terminated pursuant to Section 9.01(e)(ii) or
9.01(f)(iii), or (iii) an entity or group (other than the Parent or the
Purchaser) shall have made and not withdrawn a proposal with respect to a Third
Party Acquisition (as defined below) and, with respect to this clause (iii), (x)
the Offer shall have remained open until December 31, 1996, (y) the Minimum
Condition shall not have been satisfied at such date, and (z) within six months
of December 31, 1996, a Third Party Acquisition shall be consummated, the
Company shall reimburse the Parent, the Purchaser and their affiliates (not
later than one business day after submission of statements therefor) for all
actual documented out-of-pocket fees and expenses actually and reasonably
incurred by any of them or on their behalf in connection with the Offer and the
Merger and the consummation of all transactions contemplated by this Agreement
(including, without limitation, reasonable attorneys' fees, reasonable fees
payable to financing sources, investment bankers, counsel to any of the
foregoing, and accountants and filing fees and printing costs) up to the maximum
sum of $1,500,000.
(b) In the event (i) the Company terminates this Agreement pursuant
to Section 9.01(e)(ii), (ii) the Parent and the Purchaser terminate this
Agreement pursuant to Section 9.01(f)(iii)
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or (iii) a Third Party Acquisition is consummated under the circumstances
described in Section 9.03(a)(iii), the Parent and the Purchaser would suffer
direct and substantial damages, which damages cannot be determined with
reasonable certainty. To compensate the Parent and the Purchaser for such
damages, and as the Parent's and the Purchaser's exclusive remedy, the Company
shall pay to the Purchaser the amount of $14,000,000 as liquidated damages
immediately upon such a termination, or consummation of a Third Party
Acquisition as described in Section 9.03(a)(iii), as well as all amounts to
which the Parent and the Purchaser would be entitled pursuant to Section
9.03(a). It is specifically agreed that the amount to be paid pursuant to this
Section 9.03 represents liquidated damages and not a penalty.
"Third Party Acquisition" means the occurrence of any of the following
events (i) the acquisition of the Company by merger or otherwise by any person
(which includes any partnership, limited partnership, syndicate or other "group"
(as such term is used in Section 13(d)(3) of the Exchange Act)) or entity other
than the Parent, the Purchaser or any affiliate thereof (a "Third Party"); (ii)
the acquisition by a Third Party of more than 50% of the total assets of the
Company and its subsidiaries, taken as a whole; (iii) the acquisition by a Third
Party of 50% or more of the Shares, assuming conversion of all outstanding
Preferred Shares in accordance with their terms; or (iv) the adoption by the
Company of a plan of liquidation or the declaration or payment of an
extraordinary dividend.
(c) Except as specifically provided in this Section 9.03 each party
shall bear its own expenses in connection with this Agreement and the
transactions contemplated hereby.
ARTICLE X
MISCELLANEOUS
1.101 Survival of Representations, Warranties, Covenants and Agreements. The
representations, warranties and agreements of the parties contained in Sections
2.06, 3.01, 3.02 (but only to the extent that such Section expressly relates to
actions to be taken after the Effective Time), 3.03, 3.04, 3.05, 6.05, 6.08,
6.09 and Article X hereof, shall survive the consummation of the Offer and the
Merger. The agreements of the parties contained in Sections 6.03(b), 9.02, 9.03
and Article X hereof and the representations and warranties in Sections 4.22 and
5.07 shall survive the termination of this Agreement without termination. All
other representations, warranties, agreements and covenants in this Agreement
shall not survive the consummation of the Offer and the Merger or the
termination of this Agreement.
1.102 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified or supplemented only by written agreement of
the Parent, the Purchaser and the Company at any time prior to the Effective
Time with respect to any of the terms contained herein executed by duly
authorized officers of the respective parties, except that after the earlier of
(a) the purchase by the Purchaser of a majority of the Fully Diluted Shares and
(b) the meeting of stockholders to approve the Merger contemplated by this
Agreement, the price per Share to be paid
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pursuant to this Agreement to the holders of Shares shall in no event be
decreased and the form of consideration to be received by the holders of the
Shares in the Merger shall in no event be altered, and no other amendment which
would adversely affect the holders of Shares or Preferred Shares shall be made,
without the approval of the applicable holders.
1.103 Waiver of Compliance; Consents. At any time prior to the
Effective Time, the parties hereto may extend the time for performance of any of
the obligations or other acts or waive any inaccuracies in the representations
and warranties contained herein or in the documents delivered pursuant hereto.
Any failure of the Parent (for itself and the Purchaser), on the one hand, or
the Company, on the other hand, to comply with any obligation, covenant,
agreement or condition herein may be waived in writing by the Parent (for itself
and the Purchaser) or the Company, respectively, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of or estoppel with respect to any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party hereto or any extensions, such consent or extension
shall be given in writing in a manner consistent with the requirements for a
waiver of compliance as set forth in this Section 10.03.
1.104 Counterparts. This Agreement may be executed in any number of
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument.
1.105 Governing Law; Submission to Jurisdiction. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Delaware without regard to its conflicts of laws rules. Each party hereto hereby
(i) irrevocably and unconditionally submits in any legal action or proceeding
relating to this Agreement, or for recognition and enforcement of any judgment
in respect thereof, to the exclusive general jurisdiction of the state and
federal courts in the state of Delaware, and appellate courts from any thereof
and (ii) consents that any action or proceeding may be brought in such courts
and waives any objection that it may now or hereafter have to the venue of any
such action or proceeding in any such court or that such action or proceeding
was brought in an inconvenient court and agrees not to plead or claim the same.
1.106 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) or by overnight courier
service to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
(a) If to the Company, to:
Prior to the Effective Time,
Orchard Supply Hardware Stores Corporation
6450 Via Del Oro
San Jose, California 95119
Attention: Maynard Jenkins,
President and Chief Executive Officer
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After the Effective Time,
Orchard Supply Hardware Stores Corporation
6450 Via Del Oro
San Jose, California 95119
Attention: Maynard Jenkins,
President and Chief Executive Officer
with copies to:
Riordan & McKinzie
300 South Grand Avenue
29th Floor
Los Angeles, California 90071
Attention: Richard Welch, Esq.
(b) if to the Parent or the Purchaser, to:
Sears, Roebuck and Co.
Grove Acquisition Corp.
3333 Beverly Road
Hoffman Estates, Illinois 60179
Attention: General Counsel
with copies to:
Latham & Watkins
Sears Tower, Suite 5800
233 South Wacker Drive
Chicago, Illinois 60606
Attention: Marc D. Bassewitz, Esq.
1.107 Entire Agreement, Assignment Etc. This Agreement, which hereby
incorporates the Company Disclosure Letter, the Parent Disclosure Letter, the
Confidentiality Agreement and the Stockholder Agreement, embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matter hereof and is not intended to confer upon any other person any rights or
remedies hereunder. This Agreement supersedes all prior agreements and
understanding of the parties with respect to the subject matter hereof other
than the Confidentiality Agreement. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, and (except for Indemnified
Parties as defined in Section 6.09) no other person shall have any right,
benefit or obligation under this Agreement as a third party beneficiary or
otherwise. Neither this Agreement nor any of the rights, interest or obligations
hereunder shall be assigned by any party hereto without the prior written
consent of the other parties hereto, except that the Parent shall have the right
to assign the rights of the Purchaser to any other (directly or indirectly)
wholly-owned subsidiary of the
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Parent without the prior written consent of the Company, provided that the
Parent shall remain fully responsible for and shall cause such subsidiary to
duly and timely perform, all obligations of the Purchaser hereunder.
1.108 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
1.109 Headings; Certain Definitions. The Articles and Section
headings contained in this Agreement are solely for the purpose of reference,
are not part of the agreement of the parties and shall not affect in any way the
meaning or interpretation of this Agreement. Every reference herein to the word
"days," if not preceded by the word "business," shall mean calendar days, and
every reference herein to the words "business days" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday that is not a day on which banking
institutions in the city of New York are authorized or obligated by law to
close.
10.10 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any state or federal court in
the state of Delaware, this being in addition to any other remedy to which they
are entitled at law or in equity.
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IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first above written.
ORCHARD SUPPLY HARDWARE
STORES CORPORATION
By:
--------------------------------
Name:
-----------------------------
Title:
----------------------------
GROVE ACQUISITION CORP.
By:
--------------------------------
Name:
-----------------------------
Title:
----------------------------
SEARS, ROEBUCK AND CO.
By:
--------------------------------
Name:
-----------------------------
Title:
----------------------------
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ANNEX A
The capitalized terms used herein have the meanings set forth in the
Agreement and Plan of Merger to which this Annex A is attached.
Notwithstanding any other provision of the Agreement and Plan of
Merger to which this ANNEX A is attached (the "MERGER AGREEMENT") or the Offer,
but subject to Section 1.01(a) of the Merger Agreement and the Purchaser's
obligation to extend the Offer thereunder, the Purchaser shall not be required
to accept for payment, purchase or pay for any Shares of the Company tendered,
and may terminate or, subject to the terms of the Merger Agreement, amend the
Offer and may postpone the acceptance for payment of and payment for any Shares,
if prior to the time of acceptance for payment of Shares tendered pursuant to
the Offer:
(i) at least a majority of the outstanding Fully Diluted Shares
shall not have been validly tendered and, if tendered, not withdrawn
immediately prior to the expiration of the Offer (the "MINIMUM CONDITION"),
provided that solely for purposes of determining whether the Minimum
Condition has been satisfied, any Shares owned by Parent or Purchaser shall
be deemed to have been validly tendered and not withdrawn pursuant to the
Offer;
(ii) any waiting period applicable to the Offer pursuant to the HSR
Act shall not have expired or been terminated, subject to Section 1.01(a)
of the Merger Agreement and the Purchaser's obligation to extend the Offer
thereunder;
(iii) at any time before the time of acceptance for payment for any
such Shares any of the following shall occur or exist:
(a) there shall have been instituted or be pending any action,
proceeding, application, claim or counterclaim by any government or
governmental authority or agency, domestic or foreign, before any
court or governmental regulatory or administrative agency, authority
or tribunal, domestic or foreign, challenging the acquisition by the
Parent or the Purchaser of the Shares, seeking to restrain or prohibit
the making or consummation of the Offer or the Merger which could
reasonably be expected to have a Material Adverse Effect, or seeking
to obtain from the Parent or the Purchaser any damages that would
result in a Material Adverse Effect if such were assessed against the
Company, provided that there is a reasonable likelihood that such
damages will be assessed; or
(b) there shall be any statute, rule, regulation, judgment, order
or injunction enacted, promulgated, entered, enforced or deemed
applicable to the Offer, the Merger or the Merger Agreement, or any
other action shall have been taken by any government, governmental
authority or court with respect to a proceeding described in paragraph
(a) above, domestic or foreign, other than the routine application to
the Offer or the Merger of waiting periods under the HSR Act, that
has,
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or has a substantial likelihood of resulting in, any of the
consequences referred to in paragraph (a) above; or
(c) the Company shall have breached or failed to perform in any
material respect any of its obligations, covenants or agreements
contained in the Merger Agreement resulting in a Material Adverse
Effect, or any of the representations and warranties of the Company
set forth in the Merger Agreement shall have been breached when made
and such breach has a Material Adverse Effect or, except for any
representations and warranties made as of a specific date, shall have
been breached on and as of the scheduled expiration of the Offer, as
it may be extended from time to time (the "EXPIRATION DATE") and such
breach has a Material Adverse Effect (or, in the case of
representations and warranties that are specifically qualified as to
Material Adverse Effect, shall not have been true and correct when
made, or except for any representations and warranties made as of a
specific date, shall have ceased to be true and correct on and as of
the Expiration Date); or
(d) there shall have occurred (i) any general suspension of
trading in, or limitation on prices for, securities on the New York
Stock Exchange, Inc., any other national securities exchange or NASDAQ
for one full trading day (ii) the declaration of a banking moratorium
or any suspension of payments in respect of banks in the United States
(whether or not mandatory), or (iii) the commencement of a war or
armed hostilities involving the United States and, with respect to
this clause (iii), having a Material Adverse Effect on or materially
adversely affecting (or materially delaying) the consummation of the
Offer; or
(e) the Merger Agreement shall have been terminated in accordance
with its terms; or
(f) prior to the purchase of Shares pursuant to the Offer, the
Company Board of Directors shall have withdrawn or modified (including
by amendment of the Schedule 14D-9) its approval or recommendation of
the Offer, the Merger Agreement or the Merger or shall have
recommended any other merger, sale of substantially all assets or
other similar transaction, which, in the sole judgment of the Parent
in any such case, and regardless of the circumstances (including any
action or omission by the Parent) giving rise to such condition, makes
it inadvisable to proceed with such acceptance for payment except
where as a result of the Company's receipt of an unsolicited
acquisition proposal from a third party (A) the Company issues to its
stockholders a communication that contains only the statements
permitted by Rule 14d-9(e) under the Securities Exchange Act of 1934
(and does not otherwise withdraw, modify or amend its approval or
recommendation of the transactions contemplated hereby) and (B) within
five business days of issuing such communication the Company publicly
reconfirms its approval and recommendation of the transactions
contemplated by the Offer and the Merger Agreement; or
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(g) There shall have occurred since April 28, 1996 a change,
occurrence or circumstance in the Company's business having a Material Adverse
Effect thereon.
47
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STOCKHOLDER TENDER AND OPTION AGREEMENT
by and among
GROVE ACQUISITION CORP.,
SEARS, ROEBUCK AND CO.,
ORCHARD SUPPLY HARDWARE STORES CORPORATION,
FS EQUITY PARTNERS II, L.P.,
FS EQUITY PARTNERS III, L.P.
and
FS EQUITY PARTNERS INTERNATIONAL, L.P.
Dated as of August 14, 1996
<PAGE>
STOCKHOLDER TENDER AND OPTION AGREEMENT
STOCKHOLDER TENDER AND OPTION AGREEMENT, dated as of August 14, 1996
(this "Agreement"), by and among Grove Acquisition Corp., a Delaware corporation
("Purchaser"), Sears, Roebuck and Co., a New York corporation ("Parent"),
Orchard Supply Hardware Stores Corporation, a Delaware corporation (the
"Company"), FS Equity Partners II, L.P., a California limited partnership ("FS
II"), FS Equity Partners III, L.P., a Delaware limited partnership ("FS III"),
and FS Equity Partners International, L.P., a Delaware limited partnership ("FS
International"). FS II, FS III and FS International are referred to herein
collectively as "Stockholders" and individually as a "Stockholder."
WHEREAS, each Stockholder is the owner of the number of shares of
Common Stock, par value $.01 per share (the "Common Stock"), of the Company set
forth opposite its name on Exhibit A hereto (the "Shares") and/or the number of
shares of the Company's 6% Cumulative Convertible Preferred Stock, $.01 par
value per share (the "Preferred Stock"), set forth opposite its name on Exhibit
A hereto (the "Preferred Shares"); and
WHEREAS, the Parent, the Purchaser and the Company, have entered into
an Agreement and Plan of Merger, dated as of the date hereof (as amended from
time to time, the "Merger Agreement"), which provides, among other things, that,
upon the terms and subject to the conditions therein, Purchaser will make a cash
tender offer (the "Offer") for all of the outstanding shares of Common Stock and
will merge with the Company (the "Merger"); and
WHEREAS, as a condition to the willingness of Parent and Purchaser to
enter into the Merger Agreement, Purchaser has requested that the Stockholders
agree, and in order to induce Parent and Purchaser to enter into the Merger
Agreement, the Stockholders have agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and subject to the terms and conditions set forth herein,
the parties hereto hereby agree as follows:
I. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each Stockholder
represents and warrants to the Purchaser and the Parent as follows:
(a) Such Stockholder is the sole record and beneficial owner (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which meaning will apply for all purposes of this Agreement)
of, and has good title to, all of the Shares and the Preferred Shares set forth
opposite its name on Exhibit A hereto, and there exist no liens, claims,
security interests, options, proxies, voting agreements, charges or encumbrances
of whatever nature, except for restrictions applicable thereto under federal and
state securities laws ("Liens") affecting the Shares and the Preferred Shares.
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<PAGE>
(b) Upon transfer to the Purchaser or the Parent, as the case may be,
by such Stockholder of the Shares hereunder, Purchaser will have good title to
the Shares, free and clear of all Liens.
(c) The Shares and the Preferred Shares constitute all of the
securities (as defined in Section 3(10) of the Exchange Act, which definition
will apply for all purposes of this Agreement) of the Company beneficially
owned, directly or indirectly, by such Stockholder (including any securities
beneficially owned by any of its affiliates or associates (as such terms are
defined in Rule 12b-2 under the Exchange Act, which definition will apply for
all purposes of this Agreement) as to which such Stockholder has voting or
investment power).
(d) Except for the Shares and the Preferred Shares, such Stockholder
does not, directly or indirectly, beneficially own or have any option, warrant
or other right to acquire any securities of the Company that are or may by their
terms become entitled to vote or any securities that are convertible or
exchangeable into or exercisable for any securities of the Company that are or
may by their terms become entitled to vote, nor is such Stockholder subject to
any contract, commitment, arrangement, understanding or relationship (whether or
not legally enforceable) that allows or obligates him to vote or acquire any
securities of the Company.
(e) The execution and delivery of this Agreement by such Stockholder
does not, and the performance by such Stockholder of its obligations hereunder
will not, constitute a violation of, conflict with, result in a default (or an
event which, with notice or lapse of time or both, would result in a default)
under, or result in the creation of any Lien on any Shares or the Preferred
Shares under, (i) any contract, commitment, agreement, understanding,
arrangement or restriction of any kind to which such Stockholder is a party or
by which such Stockholder is bound or (ii) any judgment, writ, decree, order or
ruling applicable to such Stockholder.
(f) Such Stockholder has full partnership power and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly and validly authorized by
such Stockholder, and the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized and no other actions on the part of such Stockholder are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by such Stockholder and, assuming due authorization, execution and
delivery by the Purchaser, constitutes a valid and binding agreement of such
Stockholder, enforceable against such Stockholder in accordance with its terms,
except to the extent that enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights generally and by general principles of equity,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
(g) Neither the execution and delivery of this Agreement nor the
performance by such Stockholder of its obligations hereunder will violate any
law, decree, statute, rule or regulation applicable to such Stockholder or
require any consent, authorization or
3
<PAGE>
approval of, filing with or notice to, any court, administrative agency or other
governmental body or authority, other than any required notices or filings
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder (the "HSR Act") or
the federal securities laws.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Purchaser and the Parent as follows:
(a) The Company is duly organized and validly existing and in good
standing under the laws of the State of Delaware, has the requisite corporate
power and authority to execute and deliver this Agreement and the Amended
Registration Rights Agreement (as defined below) and to consummate the
transactions contemplated hereby and thereby, and has taken all necessary
corporate action to authorize the execution, delivery and performance of this
Agreement and the Amended Registration Rights Agreement. Each of this Agreement
and the Amended Registration Rights Agreement has been duly and validly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except to the extent that enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights generally and by general principles of equity,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
(b) The execution and delivery of the Amended Registration Rights
Agreement by the Company does not, and the performance by the Company of its
obligations thereunder will not, constitute a violation of, conflict with, or
result in a default (or an event which, with notice or lapse of time or both,
would result in a default) under, its certificate of incorporation or bylaws or
any contract, commitment, agreement, understanding, arrangement or restriction
of any kind to which the Company is a party or by which the Company is bound or
any judgment, writ, decree, order or ruling applicable to the Company.
(c) Neither the execution and delivery of the Amended Registration
Rights Agreement nor the performance by the Company of its obligations
thereunder will violate any order, writ, injunction, judgment, law, decree,
statute, rule or regulation applicable to the Company or require any consent,
authorization or approval of, filing with, or notice to, any court,
administrative agency or other governmental body or authority, other than any
required notices or filings pursuant to the HSR Act or the federal securities
laws.
2. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents
and warrants to the Stockholders as follows:
(a) Purchaser is duly organized and validly existing and in good
standing under the laws of the State of Delaware, has the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, and has taken all necessary corporate action
to authorize the execution, delivery and performance of this Agreement. This
Agreement has been duly and validly executed and delivered by Purchaser and
constitutes the legal, valid and binding obligation of Purchaser, enforceable
4
<PAGE>
against Purchaser in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of creditors'
rights generally and by general principles of equity, regardless of whether such
enforceability is considered in a proceeding in equity or at law.
(b) The execution and delivery of this Agreement by Purchaser does
not, and the performance by Purchaser of its obligations hereunder will not,
constitute a violation of, conflict with, or result in a default (or an event
which, with notice or lapse of time or both, would result in a default) under,
its certificate of incorporation or bylaws or any contract, commitment,
agreement, understanding, arrangement or restriction of any kind to which
Purchaser is a party or by which Purchaser is bound or any judgment, writ,
decree, order or ruling applicable to Purchaser.
(c) Neither the execution and delivery of this Agreement nor the
performance by Purchaser of its obligations hereunder will violate any order,
writ, injunction, judgment, law, decree, statute, rule or regulation applicable
to Purchaser or require any consent, authorization or approval of, filing with,
or notice to, any court, administrative agency or other governmental body or
authority, other than any required notices or filings pursuant to the HSR Act or
the federal securities laws.
3. CONVERSION OF PREFERRED SHARES. In connection with the Offer,
each Stockholder will convert the Preferred Shares into shares of Common Stock
in accordance with the certificate of designation with respect to such Preferred
Shares. Such conversion may be effected by delivery of the certificates
representing such Preferred Shares to the Depository for the Offer, together
with an irrevocable notice or election directing that the Preferred Shares be
converted into Shares of Common Stock immediately prior to acceptance of the
Shares for purchase by Purchaser in the Offer or such other mechanism reasonably
acceptable to the Stockholders and the Parent. All shares of Common Stock
acquired by each Stockholder upon conversion of Preferred Shares shall be deemed
Shares and included in the Shares subject to this Agreement. In the event that
the Offer is consummated (i) on or after September 1, 1996 but not later than
September 15, 1996 or (ii) on or after December 1, 1996 but not later than
December 15, 1996, the Parent shall pay to each Stockholder cash equal to the
amount of the dividend which otherwise would be paid on September 15, 1996 or
December 15, 1996, as the case may be, on any Preferred Shares owned of record
by such Stockholder on the preceding September 1 or December 1, as the case may
be.
4. TENDER OF SHARES.
(a) Each Stockholder will tender and sell (and not withdraw) pursuant
to and in accordance with the terms of the Offer all of the Shares. Upon the
purchase of all the Shares pursuant to the Offer in accordance with this Section
5, this Agreement will terminate. Each Stockholder will receive the same price
per Share received by other stockholders of the Company in the Offer. In the
event that, notwithstanding the provisions of the first sentence of this Section
5, any Shares are for any reason withdrawn from the Offer or are not purchased
pursuant to the Offer, such Shares will remain subject to the terms of this
Agreement. Each
5
<PAGE>
Stockholder acknowledges that Purchaser's obligation to accept for payment and
pay for the Shares in the Offer is subject to all the terms and conditions of
the Offer. On the date the Shares are accepted for payment and purchased by
Purchaser pursuant to the Offer or on the date the Stock Option is exercised by
Parent, Purchaser or Parent, as the case may be, shall make payment by wire
transfer to each Stockholder of the purchase price for such Shares.
(b) Each Stockholder hereby agrees to permit Parent and Purchaser to
publish and disclose in the Offer Documents (as such term is defined in the
Merger Agreement) and, if approval of the stockholders of the Company is
required under applicable law, the Proxy Statement (as such term is defined in
the Merger Agreement, including all documents and schedules filed with the SEC),
its identity and ownership of Common Stock and Preferred Stock and the nature of
its commitments, arrangements and understandings under this Agreement.
5. OPTION TO PURCHASE.
(a) Each Stockholder hereby grants to Parent, subject to the terms and
conditions hereof, an irrevocable option (the "Stock Option") (a) to purchase
the Shares at a purchase price per share equal to $35.00 and (b) to purchase the
Preferred Shares at a purchase price per share equal to $56.00 (collectively,
the "Option Shares"). In the event that (i) the Company terminates the Merger
Agreement pursuant to Section 9.01(e)(ii) of the Merger Agreement or in the
event the Parent and the Purchaser terminate the Merger Agreement pursuant to
Section 9.01(f)(iii) of the Merger Agreement, or (ii) the Offer is consummated,
the Stock Option shall, in any such case, become immediately exercisable, in
whole only, upon the first to occur of any such event and remain exercisable, in
whole only, until the date which is 60 days after the date of the occurrence of
such event (except in the case of clause (ii) above, in which case the Stock
Option shall be exercised in full by Parent immediately with the purchase price
per Share paid in the Offer (with the purchase price for the Preferred Shares
adjusted to an as converted basis, if appropriate) to be paid on the same
business day to the Stockholders by wire transfer), but shall not be exercisable
in each case unless: (x) all waiting periods under the HSR Act required for the
purchase of Shares and Preferred Shares upon such exercise shall have expired or
been waived, with Parent hereby agreeing to use its best efforts to promptly
cause such waiting period to be terminated, and with the HSR Act filing for the
Offer and Merger also covering full exercise of this Stock Option and (y) there
shall not then be in effect any preliminary or final injunction or other order
issued by any court or governmental, administrative or regulatory agency or
authority prohibiting the exercise of the Stock Option pursuant to this
Agreement, provided that if such injunction or other order has become final and
nonappealable, the Stock Option shall terminate; and provided further, that if
the Stock Option is not exercisable because the circumstances described in
clauses (x) and (y) do not exist, then the Stock Option shall be exercisable for
the 10-day period commencing on the date that the circumstances set forth in
clauses (x) and (y) do exist. In the event that Parent wishes to exercise the
Stock Option, Parent shall send a written notice to the Stockholder identifying
the place for the closing of such purchase at least three business days prior to
such closing.
(b) If Parent exercises the Stock Option pursuant to clause (i) of
paragraph (a) of this Section 6 and, within one year following the termination
of the Merger
6
<PAGE>
Agreement in accordance with its terms, Parent shall (i) transfer, sell or
otherwise dispose of any or all of the Option Shares, including without
limitation, by means of tender or exchange of any or all of the Option Shares
pursuant to a tender or exchange offer involving the capital stock of the
Company (a "Disposition"), provided that any conversion of the Preferred Shares
into Common Stock in accordance with their terms shall not constitute a
Disposition, (ii) convert such Option Shares into or receive cash, capital
stock, other securities or any other consideration in or as a result of a Third
Party Acquisition (as such term is defined in the Merger Agreement) or (iii)
alone or as part of a syndicate or group, other than pursuant to the Merger
Agreement, (x) acquires the Company by merger or otherwise, (y) acquires more
than 50% of the assets of the Company and its subsidiaries, taken as a whole, or
(z) acquires 50% or more of the Shares (assuming the conversion of all
outstanding Preferred Shares in accordance with their terms), Parent shall pay
to the Stockholders within five days thereafter the amount equal to the Profit
(as defined below) Parent shall receive, if any, pursuant to a Disposition or
Third Party Acquisition or the Spread (as defined below) in the case of a
transaction described in clause (iii) above. "Profit", for purposes of this
Agreement, shall equal (i) the product of (a) the number of Option Shares Parent
transfers, sells, tenders, exchanges or otherwise disposes of pursuant to a
Disposition or a Third Party Acquisition times (b) the amount of the per share
consideration received by Parent pursuant to such Disposition or Third Party
Acquisition (valuing any non-cash consideration at its fair market value on the
date of such consummation) in excess of the purchase price of such Option Shares
set forth in paragraph (a) of this Section 6 (adjusted to reflect the conversion
of the Preferred Shares, if appropriate). "Spread", for purposes of this
Agreement, shall equal the product of (a) the aggregate number of Option Shares
times (b) the amount of the highest per share price paid by the Parent to other
stockholders of the Company in a transaction described in clause (iii) above
(valuing any non-cash consideration at its fair market value on the date of such
consummation) in excess of the purchase price of such Option Shares set forth in
paragraph (a) of this Section 6 (adjusted to reflect the conversion of the
Preferred Shares, if appropriate). For purposes hereof, the fair market value of
any non-cash consideration shall be the closing price or the last sale price,
or, in case no such sale takes place on the day of consummation of such
Disposition, Third Party Acquisition or other transaction described in clause
(iii) above, the average of the closing bid and asked prices, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the principal national securities
exchange on which such consideration is listed or admitted to trading or, if
such consideration is not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or such other system then in use, or, if not so determinable, the fair value of
such consideration on such date shall be determined in good faith by the Board
of Directors of Parent.
6. TRANSFER OF THE SHARES. During the term of this Agreement, except
as otherwise provided herein, no Stockholder will (a) offer to sell, sell,
pledge or otherwise dispose of or transfer (except by operation of law in a
merger or business combination of the Company with or into any other entity or
entities) any interest in or encumber with any Lien any of the Shares or
Preferred Shares, (b) acquire any shares of Common Stock, Preferred Stock or
other securities of the Company (otherwise than pursuant to Section 4 or 5 or in
connection with a
7
<PAGE>
transaction of the type described in Section 12 and any such additional shares
or securities will be deemed Shares and included in the Shares subject to this
Agreement), (c) deposit the Shares into a voting trust, enter into a voting
agreement or arrangement with respect to the Shares or grant any proxy or power
of attorney with respect to the Shares, or (d) enter into any contract, option
or other arrangement or undertaking with respect to the direct or indirect
acquisition or sale, assignment or other disposition of or transfer of any
interest in or the voting of any shares of Common Stock or any other securities
of the Company.
7. NO SOLICITATION. Beginning on the date hereof and ending on the
earlier of termination of this Agreement or the last date the Stock Option is
exercisable pursuant to Section 6(a) hereof, no Stockholder shall, in its
capacity as such, directly or indirectly, initiate, solicit (including by way of
furnishing information), encourage or respond to or take any other action
knowingly to facilitate, any inquiries or the making of any proposal by any
person or entity (other than Parent or any affiliate of Parent) with respect to
the Company that constitutes or reasonably may be expected to lead to, an
Acquisition Proposal (as such term is defined in the Merger Agreement), or enter
into or maintain or continue discussions or negotiate with any person or entity
in furtherance of such inquiries or to obtain any Acquisition Proposal, or agree
to or endorse any Acquisition Proposal, or authorize or permit any Person or
entity acting on behalf of such Stockholder to do any of the foregoing, provided
that the foregoing shall not be construed to limit or restrict a director of the
Company from performing his or her fiduciary duties as a director. If a
Stockholder receives any inquiry or proposal regarding any Acquisition Proposal,
such Stockholder shall promptly inform Parent of that inquiry or proposal and
the details thereof.
8. WAIVER OF APPRAISAL RIGHTS. Each Stockholder hereby irrevocably
waives any rights of appraisal or rights to dissent from the Merger that such
Stockholder may have.
9. VOTING OF SHARES. Beginning on the date hereof and ending on the
earlier of termination of this Agreement or the last date the Stock Option is
exercisable pursuant to Section 6(a) hereof, each Stockholder hereby agrees to
vote each Share at any annual, special or adjourned meeting of the stockholders
of the Company or execute a written consent in lieu thereof (a) in favor of the
Merger, the execution and delivery by the Company of the Merger Agreement and
the approval and adoption thereof; (b) against any action or agreement that
would result in a breach in any respect of any covenant, agreement,
representation or warranty of the Company under the Merger Agreement; and (c)
against the following actions (other than the Merger and the other transactions
contemplated by the Merger Agreement): (i) any extraordinary corporate
transaction, such as a merger, consolidation or other business combination
involving the Company or its subsidiaries; (ii) a sale, lease or transfer of a
material amount of assets of the Company or one of its subsidiaries, or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its subsidiaries; (iii) (A) any change in a majority of the persons who
constitute the board of directors of the Company as of the date hereof, except
as contemplated by the Merger Agreement; (B) any change in the present
capitalization of the Company or any amendment of the Company's Certificate of
Incorporation or By-Laws, as amended to date; (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 (iii)(A),
8
<PAGE>
(B), (C) and (D), is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, or adversely affect the Merger and the other
transactions contemplated by this Agreement and the Merger Agreement.
10. ENFORCEMENT OF THE AGREEMENT. Each Stockholder acknowledges that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that Purchaser will be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which it is entitled at law or in equity.
11. ADJUSTMENTS. The number and type of securities subject to this
Agreement will be appropriately adjusted in the event of any stock dividends,
stock splits, recapitalizations, combinations, exchanges of shares or the like
or any other action that would have the effect of changing the Stockholders'
ownership of the Company's capital stock or other securities.
12. TERMINATION. This Agreement will terminate on the earliest of (a)
the date the Merger Agreement is terminated in accordance with its terms;
provided, however, that the provisions of Sections 6 and 7 shall not terminate
until 60 days thereafter (or such later time as permitted by this Agreement) if
the Merger Agreement was terminated pursuant to Section 9.01(e)(ii) or
9.01(f)(iii), (b) the purchase of all the Shares pursuant to the Offer in
accordance with Section 5, and (c) February 15, 1997; provided, however, that if
the Stock Option is exercised, the provisions of Section 16 shall survive any
termination of this Agreement.
13. EFFECTIVENESS. This Agreement shall not be effective unless and
until it shall have been approved by the Company's Board of Directors.
14. BROKERAGE. Purchaser and each Stockholder represent and warrant
to the other that the negotiations relevant to this Agreement have been carried
on by Purchaser, on the one hand, and such Stockholder, on the other hand,
directly with the other, and that there are no claims for finder's fees or
brokerage commissions or other like payments in connection with this Agreement
or the transactions contemplated hereby. Purchaser, on the one hand, and each
Stockholder, on the other hand, will indemnify and hold harmless the other from
and against any and all claims or liabilities for finder's fees or brokerage
commissions or other like payments incurred by reason of action taken by him, it
or any of them, as the case may be.
15. REGISTRATION RIGHTS. The Company, FS III and FS International
hereby amend the Registration Rights Agreement dated as of December 29, 1993, as
supplemented or amended to the date of this Agreement, by and among the Company,
FS III and FS International, a copy of which is attached as Exhibit A hereto
(the "Registration Rights Agreement" and, as amended pursuant to this Section
16, the "Amended Registration Rights Agreement") as follows:
9
<PAGE>
(a) The definition of "Restricted Securities" on page 2 of the
Registration Rights Agreement is hereby amended effective upon exercise of the
Stock Option to include the shares of Common Stock of the Company owned by FS
II.
(b) FS II is added as an additional party to the Registration Rights
Agreement for purposes of making the assignment of its rights thereunder to
Parent pursuant to this Section 16.
(c) Section 3 of the Registration Rights Agreement is hereby amended
effective upon exercise of the Stock Option to provide that all holders of
Restricted Securities shall be limited to two requests for registration of
Restricted Securities pursuant to Section 3(a) of the Registration Rights
Agreement.
The Stockholders hereby assign all of their rights under the Amended
Registration Rights Agreement to the Parent, such assignment to be effective
upon the Parent's exercise of the Stock Option pursuant hereto.
16. MISCELLANEOUS.
(a) All representations and warranties contained herein will survive
for one year after the termination hereof.
(b) Any provision of this Agreement may be waived at any time by the
party that is entitled to the benefits thereof. No such waiver, amendment or
supplement will be effective unless in a writing and is signed by the party or
parties sought to be bound thereby. Any waiver by any party of a breach of any
provision of this Agreement will not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of a party to insist upon strict adherence to any
term of this Agreement or one or more sections hereof will not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement.
(c) This Agreement contains the entire agreement among the parties
with respect to the subject matter hereof, and supersedes all prior agreements
among the parties with respect to such matters. This Agreement may not be
amended, changed, supplemented, waived or otherwise modified, except upon the
delivery of a written agreement executed by the parties hereto.
(d) This Agreement will be governed by and construed in accordance
with the laws of the State of Delaware applicable to contracts made and
performed in that state. Each party hereto hereby (i) irrevocably and
unconditionally submits in any legal action or proceeding relating to this
Agreement, or for recognition and enforcement of any judgment in respect
thereof, to the exclusive general jurisdiction of the state and federal courts
in the state of Delaware, and appellate courts from any thereof and (ii)
consents that any action or proceeding may be brought in such courts and waives
any objection that it may now or hereafter have to the
10
<PAGE>
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same.
(e) The descriptive headings contained herein are for convenience and
reference only and will not affect in any way the meaning or interpretation of
this Agreement.
(f) All notices and other communications hereunder will be in writing
and will be given (and will be deemed to have been duly given upon receipt) by
delivery in person, by telecopy, or by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
If to a Stockholder to the address set forth beneath such
Stockholder's name on Exhibit A hereto.
If to the Purchaser or Parent to:
Grove Acquisition Corp.
Sears, Roebuck and Co.
3333 Beverly Road
Hoffman Estates, Illinois 60179
Attention: General Counsel
Telecopier: (847) 286-6544
with a copy to:
Latham & Watkins
Sears Tower, Suite 5800
233 South Wacker Drive
Chicago, Illinois 60606
Attention: Marc D. Bassewitz, Esq.
Telecopier: (312) 993-9767
If to the Company to:
Orchard Supply Hardware Stores Corporation
6450 Via Del Oro
San Jose, California 95119
Attention: Mayard Jenkins,
President and Chief Executive Officer
Telecopier: (408) 629-7174
with a copy to:
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
11
<PAGE>
Los Angeles, California 90071
Attention: Richard Welch, Esq.
Telecopier: (213) 229-8550
or to such other address as any party may have furnished to the other parties in
writing in accordance herewith.
(g) This Agreement may be executed in any number of counterparts, each
of which will be deemed to be an original, but all of which together will
constitute one agreement.
(h) This Agreement is binding upon and is solely for the benefit of
the parties hereto and their respective successors, legal representatives and
assigns. Neither this Agreement nor any of the rights, interests or obligations
under this Agreement will be assigned by any of the parties hereto without the
prior written consent of the other parties, except that (i) Purchaser will have
the right to assign to Parent or any other direct or indirect wholly owned
subsidiary of Parent any and all rights and obligations of Purchaser under this
Agreement, including the right to purchase Shares tendered by the Stockholders
pursuant to the terms hereof and the Offer, provided that any such assignment
will not relieve Purchaser from any of its obligations hereunder and (ii) Parent
will have the right to assign to Purchaser or any other direct or indirect
wholly owned subsidiary of Parent any and all rights and obligations of Parent
under this Agreement, including the right to purchase Shares and Preferred
Shares held by the Stockholders pursuant to the terms hereof, provided that any
such assignment will not relieve Parent from any of its obligations hereunder.
(i) If any term or other provision of this Agreement is determined to
be invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party hereto. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
(j) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity will be cumulative and
not alternative, and the exercise of any thereof by either party will not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date first above written.
GROVE ACQUISITION CORP. STOCKHOLDERS:
FS EQUITY PARTNERS II, L.P.
<TABLE>
<CAPTION>
<S> <C>
By: __________________________ By: Freeman, Spogli & Co.
Name: ________________________ Its: General Partner
Title: _______________________
By: ___________________________
Name: ___________________________
Title: __________________________
SEARS, ROEBUCK AND CO. FS EQUITY PARTNERS III, L.P.
By: FS Capital Partners, L.P.
Its: General Partner
By: _________________________
Name: ________________________ By: FS Holdings, Inc.
Title: _______________________ Its: General Partner
By: ________________________
Name: ______________________
Title:______________________
ORCHARD SUPPLY HARDWARE FS EQUITY PARTNERS INTERNATIONAL, L.P.
STORES CORPORATION
By: FS & Co. International, L.P.
Its: General Partner
By: _________________________ By: FS International Holdings Limited
Name: _______________________ Its: General Partner
Title: ______________________
By: ______________________
Name: ____________________
Title: ___________________
</TABLE>
13
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Stockholder of Common Stock Owned of Preferred Stock Owned
- ----------- --------------------- ------------------------
<S> <C> <C>
FS Equity Partners II, L.P. 324,043 0
1110 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
Attention: William Wardlaw
Telecopier: (310) 444-1870
FS Equity Partners, III, L.P. 0 772,135
1110 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
Attention: William Wardlaw
Telecopier: (310) 444-1870
FS Equity Partners International, L.P. 0 27,865
1110 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
Attention: William Wardlaw
Telecopier: (310) 444-1870
</TABLE>
14
<PAGE>
All proxies which are properly completed, signed and returned prior to the
1996 Annual Meeting will be voted. Any proxy given by a stockholder may be
revoked at any time before it is exercised, by filing with the Secretary of the
Company an instrument revoking it, by delivering a duly executed proxy bearing a
later date or by the stockholder attending the 1996 Annual Meeting and
expressing a desire to vote his or her shares in person.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's capital stock as of March 19, 1996 by (i) each person
who is known by the Company to be the beneficial owner of more than 5% of any
class of the Company's capital stock, (ii) each Director, nominee for Director
and certain executive officers of the Company, individually, and (iii) all
Directors and executive officers as a group:
<TABLE>
<CAPTION>
NAME OF AMOUNT
TITLE OF CLASS BENEFICIAL OWNER(1) BENEFICIALLY OWNED PERCENT OF CLASS
- -------------- --------------------------------------- ------------------ ----------------
<S> <C> <C> <C>
Common Stock Freeman Spogli & Co.(2)(3)............. 1,604,043 18.2%
Ronald P. Spogli
William M. Wardlaw
J. Frederick Simmons
Matt L. Figel(4)
RCM General Corporation(5)............. 490,000 6.5%
FMR Corp.(6)........................... 384,000 5.1%
Dimensional Fund Advisors Inc.(7)...... 370,000 4.9%
Maynard Jenkins(8)..................... 62,067 *
Stephen M. Hilberg(9).................. 22,597 *
Morton Godlas.......................... 2,500 *
William A. Hall........................ 1,200 *
Mac Allen Culver....................... -- --
Joseph A. DiRocco(9)................... 11,802 *
Robert A. Lewis(9)..................... 37,972 *
Robert J. Wittman...................... -- --
Directors and Executive Officers as a.. 177,493 2.3%
Group (15 persons)(2)(3)(9)...........
6% Cumulative Freeman Spogli & Co.(3)................ 800,000 100%
Convertible
Preferred Stock
</TABLE>
- --------------
* Less than 1%
(1) Except as otherwise indicated below, the persons named have sole voting
power and investment power with respect to all shares of capital stock shown
as beneficially owned by them, subject to community property laws where
applicable.
(2) 324,043 shares of Common Stock are owned by FS Equity Partners II, L.P.
("FSEP II"). As general partner of FSEP II, Freeman Spogli & Co. ("FS&Co.")
has the sole power to vote and dispose of such shares. Messrs. Simmons,
Spogli and Wardlaw and Bradford M. Freeman and John M. Roth are general
partners of FS&Co., and as such may be deemed to be the beneficial owners of
the shares of the Company's capital stock indicated as beneficially owned by
FS&Co. The business address of FS&Co., its general partners and FSEP II is
11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025.
(3) 772,135 shares and 27,865 shares of 6% Cumulative Convertible Preferred
Stock, $.01 par value per share ("Convertible Preferred Stock"), are owned
by FS Equity Partners III, L.P. ("FSEP III") and FS Equity Partners
International, L.P. ("FSEP International"), respectively, and are
convertible into 1,235,416 shares and 44,584 shares of Common Stock,
respectively. As general partner of FS Capital Partners, L.P. ("FS
Capital"), which is general partner of FSEP III, FS Holdings, Inc. ("FSHI")
has the sole power to vote and
2
<PAGE>
dispose of the shares owned by FSEP III. As general partner of FS&Co.
International, L.P. ("FS&Co. International"), which is the general partner
of FSEP International, FS International Holdings Limited ("FS International
Holdings") has the sole power to vote and dispose of the shares owned by
FSEP International. Messrs. Freeman, Simmons, Spogli, Wardlaw and Roth and
Charles P. Rullman are the sole Directors, officers and shareholders of FSHI
and FS International Holdings, and as such may be deemed to be the
beneficial owners of the shares of the Company's capital stock owned by FSEP
III and FSEP International. The business address of FSEP III, FS Capital,
FSHI and its sole Directors, officers and shareholders is 11100 Santa Monica
Boulevard, Suite 1900, Los Angeles, California 90025 and the business
address of FSEP International, FS&Co. International and FS International
Holdings is c/o Paget-Brown & Company, Ltd., West Winds Building, Third
Floor, Grand Cayman, Cayman Islands, B.W.I.
(4) Mr. Figel is an employee of an affiliate of FS&Co.
(5) As reported in a Schedule 13G dated February 7, 1996 filed jointly with the
Securities and Exchange Commission (the "Commission") by RCM Capital
Management ("RCM Capital"), RCM Limited L.P. ("RCM Limited") and RCM General
Corporation ("RCM General"), each has claimed sole voting power with respect
to 436,000 shares of Common Stock and sole dispositive power with respect to
491,000 shares. As the general partner of RCM Limited, which is the general
partner of RCM Capital, RCM General may be deemed to be the beneficial owner
of such shares. RCM Capital is an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940.
(6) As reported in a Schedule 13G dated February 14, 1996 filed jointly with the
Commission by FMR Corp. ("FMR"), Edward C. Johnson 3d and Abigail P.
Johnson, FMR has claimed sole voting power with respect to 35,000 shares and
each has claimed sole dispositive power with respect to 384,000 shares.
(7) As reported in a Schedule 13G dated February 7, 1996 filed with the
Commission by Dimensional Fund Advisors Inc. ("Dimensional"). Dimensional
has claimed sole voting power with respect to 258,000 shares of Common Stock
and sole dispositive power with respect to 370,000 shares. Dimensional is
an investment advisor registered under Section 203 of the Investment
Advisors Act of 1940.
(8) 35,920 shares of Common Stock are held by Maynard L. Jenkins, Jr. and Susan
M. Jenkins, Co-Trustees under the Living Trust dated November 10, 1988. The
amount stated includes 26,147 shares of Common Stock covered by options
which are exercisable within 60 days following March 19, 1996.
(9) The amounts stated include 12,637, 10,012, 5,802 and 79,314 shares of Common
Stock covered by options which are exercisable within 60 days following
March 19, 1996 with respect to Messrs. Hilberg, Lewis and DiRocco and all
Directors and executive officers as a group, respectively.
PROPOSAL 1--ELECTION OF DIRECTORS
Eight Directors are to be elected at the 1995 Annual Meeting to serve until
the next Annual Meeting of stockholders and until their respective successors
have been elected and qualified. In the absence of instructions to the
contrary, proxies covering shares of Common Stock will be voted in favor of the
election of the persons listed below. In the event that any nominee for
election as Director should become unavailable to serve, it is intended that
votes will be cast, pursuant to the enclosed proxy, for such substitute nominee
as may be nominated by the Company. Management has no present knowledge that
any of the persons named will be unavailable to serve.
No arrangement or understanding exists between any nominee and any other
person or persons pursuant to which any nominee was or is to be selected as a
Director or nominee. None of the nominees has any family relationship to any
other nominee or to any executive officer of the Company.
INFORMATION CONCERNING INCUMBENT DIRECTORS AND NOMINEES TO BOARD OF DIRECTORS.
Information is set forth below concerning the incumbent Directors, all of
whom are also nominees for election as Directors, except Mr. Wardlaw, who is not
standing for re-election, and the year in which each incumbent Director was
first elected as a Director of the Company. Information is also set forth
concerning Mr. Culver, the nominee to fill the position being vacated by Mr.
Wardlaw. Each nominee has furnished the information as to his beneficial
ownership of Common Stock and Convertible Preferred Stock as of March 19, 1996
and, if not employed by the Company, the nominee's principal occupation. Each
nominee has consented to being named in this Proxy Statement as a nominee for
Director and has agreed to serve as a Director if elected.
3
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
- ---- --- ------------------------- -----
<S> <C> <C> <C>
Maynard Jenkins 53 President, Chief Executive 1989
Officer and
Director
Stephen M. Hilberg 52 Vice President-Finance, 1989
Chief Financial
Officer and Director
Matt L. Figel 36 Director 1995
Morton Godlas*+ 72 Director 1993
William A. Hall+ 64 Director 1995
J. Frederick Simmons* 41 Director 1989
Ronald P. Spogli* 48 Director 1989
Mac Allen Culver 54 Nominee for Director --
</TABLE>
- ----------------
* Member of the Compensation Committee.
+ Member of the Audit Committee.
Mr. Jenkins has served as President of the Company and a Director since May
1989 and as Chief Executive Officer since 1986. Before joining the Company, Mr.
Jenkins served as the President and Chief Operating Officer of Pay 'n Save,
Inc., a retail drug store chain. Mr. Jenkins is also a member of the Board of
Directors of Ross Stores, Inc., an off-price retail apparel chain.
Mr. Hilberg has served as Chief Financial Officer and Vice President-
Finance of the Company since 1981. From 1978 to 1981, Mr. Hilberg served as the
Corporate Controller of Franklin Stores, a retail chain of discount department
and ladies' apparel stores.
Mr. Figel has been employed by an affiliate of FS&Co., a private investment
company, since 1986. Mr. Figel is also a member of the Board of Directors of
Buttrey Food and Drug Stores Company.
Mr. Godlas is a management consultant with more than 45 years of retail
experience. Since 1982, Mr. Godlas has been President and Chief Executive
Officer of M. Godlas, Inc., a retail consulting firm. From 1978 to 1982, Mr.
Godlas was Corporate Senior Vice President-General Merchandise at Lucky Stores,
Inc., a retail supermarket chain.
Mr. Hall founded Sight & Sound Distributing Company, a media and software
distribution company, in 1984 and has served as President and Chief Executive
Officer since that time.
Mr. Simmons joined FS&Co. in 1986 and became a general partner in January
1991. Mr. Simmons is also a member of the Board of Directors of Buttrey Food
and Drug Stores Company and EnviroSource, Inc.
Mr. Spogli is a founding partner of FS&Co., which was founded in 1983. Mr.
Spogli is the Chairman of the Board and a Director of EnviroSource, Inc. Mr.
Spogli also serves on the Board of Directors of Mac Frugal's Bargains . Close-
Outs Inc. and Buttrey Food and Drug Stores Company and on the Board of
Representatives of Brylane, L.P.
Mr. Culver has served as President and Chief Operating Officer of St. Ives
Laboratories, Inc., a hair and skin care company, since 1987. Mr. Culver has 20
years of retail industry experience. He served as Chairman and Chief Executive
Officer of Pay 'n Save, Inc., a retail drug store chain, from 1985 to 1986 and
President and Chief Executive Officer of Gray DrugFair, another retail drug
store chain, from 1984 to 1985. Mr. Culver is also a member of the Board of
Directors of St. Ives Laboratories, Inc. and IVC Industries, Inc.
The Company, FSEP II, FSEP III and FSEP International have entered into a
Management Rights Agreement, effective as of January 1, 1995, pursuant to which
FSEP III can substantially participate in, or substantially influence the
conduct of, the management of the Company and its business.
4
<PAGE>
THE BOARD OF DIRECTORS
COMMITTEES
The standing committees of the Board are the Audit Committee (the "Audit
Committee") and the Compensation Committee (the "Compensation Committee"). The
Audit Committee, which presently consists of Messrs. Godlas and Hall, met once
during the fiscal year ended January 28, 1996 ("fiscal 1995"). The Compensation
Committee, which presently consists of Messrs. Godlas, Simmons and Spogli, met
twice during fiscal 1995.
The Audit Committee recommends to the Board the engagement or discharge of
the Company's independent auditors; reviews with the independent auditors the
scope, timing and plan for the annual audit, any non-audit services and the fees
for audit and other services; reviews outstanding accounting and auditing issues
with the independent auditors; and supervises or conducts such additional
projects as may be relevant to its duties. The Audit Committee is also
responsible for reviewing and making recommendations with respect to the
Company's financial condition, its financial controls and accounting practices
and procedures.
The Compensation Committee recommends to the Board compensation policies
and guidelines for the Company's executives and oversees the granting of
incentive compensation, if any, to such persons. The Compensation Committee
also administers the Company's bonus and stock option plans. See "Report of the
Compensation Committee of the Board of Directors."
MEETINGS AND REMUNERATION
During fiscal 1995, the Board held four meetings and took various actions
by written consent. Each incumbent Director attended at least 75% of the
aggregate of (i) the total number of meetings held by the Board during fiscal
1995 and (ii) the total number of meetings held by all committees of the Board
during that period within which he was a Director or member of such committee of
the Board.
Each Director is elected to hold office until the next annual meeting of
stockholders and until his respective successor is elected and qualified.
Except for non-employee Directors of the Company who are not affiliated with
FS&Co. ("Outside Directors"), Directors do not receive compensation for service
on the Board or any committee of the Board. All Directors are reimbursed for
their out-of-pocket expenses in serving on the Board and any committee of the
Board. Outside Directors receive an annual retainer of $10,000 plus $1,500 for
each regular Board meeting attended. The Company has adopted a stock option
plan for Outside Directors and proposes to adopt a new stock option plan for
Outside Directors. See "1993 Non-Employee Directors Stock Option Plan" and
"Proposal 3."
1993 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Outside Directors of the Company are eligible to participate in the 1993
Non-Employee Directors Stock Option Plan (the "1993 Directors Plan").
Participants in the 1993 Directors Plan may be granted options to purchase
shares of the Company's Common Stock at a purchase price determined by the
Compensation Committee. Options granted under the 1993 Directors Plan are not
intended to qualify for treatment as incentive stock options under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). In no event
shall such purchase price be less than 85% of the fair market value of the
underlying shares at the time the option is granted, or less than 110% of the
fair market value in the case of any participant who owns capital stock
possessing more than 10% of the total combined voting power or value of all
classes of capital stock of the Company or its subsidiaries. Up to 10,000
shares of the Company's Common Stock may be issued under the 1993 Directors Plan
upon the exercise
5
<PAGE>
of options granted thereunder, which options vest and become exercisable in
annual installments of 20% per year over five years. As of March 19, 1996,
options covering 10,000 shares of Common Stock had been granted under the 1993
Directors Plan, 2,000 of which had been exercised.
EXECUTIVE OFFICERS, COMPENSATION AND OTHER INFORMATION
EXECUTIVE OFFICERS
Set forth in the table below are the names, ages and current offices held
by all executive officers of the Company.
<TABLE>
<CAPTION>
EXECUTIVE OFFICER
NAME AGE POSITION WITH THE COMPANY SINCE
- ---- --- ------------------------- -----
<S> <C> <C> <C>
Maynard Jenkins 53 President, Chief Executive Officer and Director 1986
Dale D. Ward 46 Executive Vice President and Chief Operating 1996
Officer
Stephen M. Hilberg 52 Vice President-Finance, Chief Financial 1981
Officer and Director
William G. Collard 58 Vice President-Distribution 1986
Joseph A. DiRocco 46 Vice President-Marketing 1986
Robert A. Lewis 50 Vice President-Purchasing and General 1986
Merchandise Manager
Carolyn J. McInnes 51 Vice President-Human Resources 1986
Lee Nemechek 62 Vice President-Stores 1990
Ronald R. Stahl 36 Vice President-Store Planning/Real Estate 1996
</TABLE>
Executive officers of the Company are elected by and serve at the
discretion of the Board. Other than Mr. Jenkins, no arrangement exists between
any executive officer and any other person or persons pursuant to which any
executive officer was or is to be selected as an executive officer. See
"Employment Agreement." None of the executive officers has any family
relationship to any nominee for Director or to any other executive officer of
the Company. Set forth below is a brief description of the business experience
for the previous five years of all executive officers except Messrs. Jenkins and
Hilberg. See "Information Concerning Incumbent Directors and Nominees to Board
of Directors."
Mr. Ward has served as Executive Vice President and Chief Operating Officer
since April 1996. He has over 25 years of retail management experience. Mr.
Ward served as President and Chief Executive Officer of F&M Super Drug Stores,
Inc., a super drug store chain, from 1994 to 1995 and as Chairman and Chief
Executive Officer of Ben Franklin Stores Inc., a variety and craft store chain,
from 1988 to 1993.
Mr. Collard has served as Vice President-Distribution of the Company since
1986. Mr. Collard joined the Company in 1979 and has over 30 years of
warehousing and distribution experience. Prior to joining the Company, Mr.
Collard served for seven years as the Operations Supervisor for Fleming Foods, a
wholesale grocery distribution company, and for nine years as the Warehouse
Foreman for Louis Stores, a retail grocery chain. Mr. Collard is currently
responsible for the Company's warehouse and distribution activities.
Mr. DiRocco has served as Vice President-Marketing of the Company since
1986. From 1983 to May 1986, Mr. DiRocco worked in the marketing and
advertising departments of the Company. Mr. DiRocco joined the Company in 1983
and has over 15 years of marketing experience in the retail industry.
6
<PAGE>
Mr. Lewis has served as Vice President-Purchasing and General Merchandise
Manager of the Company since 1986. Mr. Lewis began his career at the Company in
1961 and is responsible for all aspects of the Company's merchandising and
buying program.
Ms. McInnes has served as Vice President-Human Resources of the Company
since 1986. Ms. McInnes joined the Company in 1979 as Director of Training.
She is responsible for all of the Company's training, personnel, wage and
benefits related matters.
Mr. Nemechek joined the Company in March 1987 as a Regional Manager and was
promoted to Vice President-Stores in July 1990. Prior to joining the Company,
Mr. Nemechek had over 30 years of experience in grocery and general merchandise
retailing. Mr. Nemechek is responsible for all aspects of store operations.
Mr. Stahl joined the Company in February 1987 and has served as the
Director of Store Planning since January 1992. Mr. Stahl was promoted to Vice
President Store Planning and Real Estate in February 1996. Mr. Stahl has over
17 years of retail construction experience and is responsible for all aspects of
construction, real estate and store facilities.
COMPENSATION
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company paid or accrued
by the Company for each of the fiscal years in the three year period ended
January 28, 1996 to (i) the President and Chief Executive Officer and (ii) each
of the four other most highly compensated executive officers of the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------- ----------------------- -------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL YEAR SALARY(1) BONUS(1)(2) COMPENSATION AWARDS SARS(4) PAYOUTS ALL OTHER
POSITIONS ($) (3)(5) ($) ($) (#) ($) COMPENSATION(5)
- ------------------------------ ---- --------- ----------- ------------ ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maynard Jenkins .............. 1995 337,692 487,794 -- 0 20,000 0 18,730
President and Chief 1994 325,000 240,351 -- 0 -- 0 9,956
Executive Officer 1993 318,000 330,701 -- 0 7,500 0 18,795
Stephen M. Hilberg ........... 1995 125,338 70,088 -- 0 8,000 0 18,766
Vice President-Finance and 1994 123,031 21,752 -- 0 -- 0 10,028
Chief Financial Officer 1993 119,054 43,504 -- 0 4,500 0 13,353
Robert A. Lewis .............. 1995 107,654 59,858 -- 0 5,000 0 17,281
Vice President-Purchasing 1994 106,116 18,735 -- 0 -- 0 9,166
and General Merchandise 1993 102,319 37,470 -- 0 3,000 0 10,577
Manager
Joseph A. DiRocco ............ 1995 96,804 52,567 -- 0 5,000 0 16,718
Vice President-Marketing 1994 96,804 17,146 -- 0 -- 0 13,135
1993 93,692 34,292 -- 0 3,000 0 14,989
Robert J. Wittman(6) ......... 1995 240,000 155,269 -- 0 15,000 0 11,124
Executive Vice President 1994 -- -- -- 0 -- 0 --
and Chief Operating Officer 1993 -- -- -- 0 -- 0 --
</TABLE>
7
<PAGE>
- --------------
(1) Amounts shown include compensation earned and received by executive officers
as well as amounts earned but deferred at the election of those officers.
(2) Represents payments made to executive officers pursuant to the Company's
Performance Bonus Plan (defined below) and bonuses paid to Maynard Jenkins
of $100,000 for fiscal 1993 and $125,000 for each of fiscal 1994 and 1995
pursuant to his employment agreement. See "Employment Agreement."
(3) The Company has instituted a bonus plan (the "Performance Bonus Plan")
covering senior management (the President and eight Vice Presidents) which
provides for annual bonus payments based upon the Company's performance
against annually established target levels. For fiscal 1993 and fiscal
1995, annual bonus payments were based on the targets in effect for that
year. For fiscal 1994, although no bonus was payable under the annually
established targets, the Compensation Committee concluded that senior
management merited bonuses based on its performance in managing the
significant expansion undertaken during the year. See "Report of the
Compensation Committee of the Board of Directors."
(4) Represents options granted under the Company's 1993 Stock Option Plan (the
"1993 Plan"). The options granted under the 1993 Plan were granted at fair
market value on the date of the grant, were for a term of ten years and vest
in four equal annual installments, commencing on the date of grant. The
exercise price was $17.10 for fiscal 1993 grants and $7.75 for fiscal 1995
grants.
(5) For Mr. Jenkins, amount includes: (i) $2,250 matching contributions to the
Company's 401(k) plan, (ii) $5,358 profit-sharing payments, (iii) $10,000
matching savings bonus, (iv) $669 automobile allowance and (v) $453 in
payments toward group life insurance plan. For Mr. Hilberg, amount
includes: (i) $2,250 matching contributions to the Company's 401(k) plan,
(ii) $5,358 profit-sharing payments, (iii) $10,000 matching savings bonus,
(iv) $705 automobile allowance and (v) $453 in payments toward group life
insurance plan. For Mr. Lewis, amount includes: (i) $2,055 matching
contributions to the Company's 401(k) plan, (ii) $4,774 profit-sharing
payments, (iii) $10,000 matching savings bonus and (iv) $453 in payments
toward group life insurance plan. For Mr. DiRocco, amount includes: (i)
$1,870 matching contributions to the Company's 401(k) plan, (ii) $4,221
profit-sharing payments, (iii) $10,000 matching savings bonus, (iv) $183
automobile allowance and (v) $444 in payments toward group life insurance
plan. For Mr. Wittman, amount includes: (i) $10,000 matching savings bonus,
(ii) $702 automobile allowance and (iii) $422 in payments toward group life
insurance plan. Itemized disclosure of amounts of other compensation in
fiscal 1994 and fiscal 1993 is not required.
(6) Mr. Wittman resigned from the Company in March 1996.
EMPLOYMENT AGREEMENT
Mr. Jenkins is party to an employment agreement which was amended in February
1996 to provide for a base annual salary of not less than $525,000 per year and
bonuses and fringe benefits determined from time to time by the Company. The
amendment eliminated an additional $125,000 guaranteed bonus paid to Mr. Jenkins
annually. Except in the event of termination of employment for cause, death or
disability, the current term of Mr. Jenkins' employment agreement will expire on
December 31, 1999. The employment agreement shall automatically renew for a two
year term on each expiration date until notice of termination is given by the
Company. Upon termination of employment for death or disability, Mr. Jenkins is
entitled to a severance payment equal to six months of his salary. Upon
termination of employment other than for cause, death or disability, Mr. Jenkins
is entitled to a severance payment consisting of three years' base salary plus
the target bonus applicable to the earning year in progress at the date of
termination, provided, however, that such severance payment shall not exceed the
limits imposed by Section 280G of the Code.
STOCK OPTIONS
Options covering 111,200 shares were granted by the Company during fiscal
1995.
The following table sets forth information concerning options granted to the
President and Chief Executive Officer and to each of the four other most highly
compensated executive officers of the Company during fiscal 1995.
8
<PAGE>
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES % OF TOTAL AT ASSUMED ANNUAL RATES
UNDERLYING OPTIONS/SARS OF STOCK PRICE APPRECIATION
OPTIONS/SARS GRANTED TO EXERCISE OF FOR OPTION TERM
GRANTED (1) EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
(#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
------------ ------------ ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Maynard Jenkins..... 20,000 18.0 7.75 03/03/05 97,479 247,030
Stephen M. Hilberg.. 8,000 7.2 7.75 03/03/05 38,991 98,812
Robert A. Lewis..... 5,000 4.5 7.75 03/03/05 24,370 61,758
Joseph A. DiRocco... 5,000 4.5 7.75 03/03/05 24,370 61,758
Robert J. Wittman... 15,000 13.5 7.75 03/03/05 73,109 185,273
</TABLE>
______________
(1) All of the options set forth in the table above were granted pursuant to the
1993 Plan. For a discussion of the material terms of these options, see
"Proposal 2."
The following table sets forth information concerning the aggregate number of
options exercised by each of the executive officers named in the "Summary
Compensation Table" during fiscal 1995 and outstanding options held by each such
officer as of January 28, 1996.
OPTION EXERCISES AND YEAR END VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS/ VALUE OF UNEXERCISED
SARS AT IN-THE-MONEY
JANUARY 28, 1996(1)(#) OPTIONS/SARS AT
---------------------- JANUARY 28, 1996($)(2)
SHARES ACQUIRED VALUE EXERCISABLE/ ---------------------------
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- -------------------- --------------- ----------- ---------------------- ---------------------------
<S> <C> <C> <C> <C>
Maynard Jenkins..... -- -- 21,147 / 16,875 314,018 / 279,890
Stephen M. Hilberg.. -- -- 10,637 / 7,125 152,868 / 115,059
Robert A. Lewis..... -- -- 8,762 / 4,500 130,339 / 72,299
Joseph A. DiRocco... -- -- 4,552 / 4,500 58,580 / 72,299
Robert J. Wittman... 3,750 37,500 -- / 11,250 -- / 198,281
</TABLE>
- --------------
(1) Represents options granted under the 1993 Plan, under the Company's Amended
1989 Nonqualified Stock Option Plan (the "1989 Plan") and to Maynard Jenkins
pursuant to a Nonqualified Stock Option Agreement. See "Summary
Compensation Table."
(2) Value is determined by subtracting the exercise price from the fair market
value (the closing price for the Company's Common Stock as reported on the
Nasdaq National Market as of January 26, 1996, ($25.375 per share)) and
multiplying the resulting number by the number of underlying shares of
Common Stock.
9
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board is comprised of Messrs.
Godlas, Simmons and Spogli. The Compensation Committee establishes the general
compensation policies of the Company, establishes the compensation plans and
specific compensation levels for executive officers and administers the 1989
Plan, the Non-Employee Directors Plan and the 1993 Plan.
The following is the Compensation Committee's report submitted to the
Board addressing the compensation of the Company's executive officers for fiscal
1995.
COMPENSATION POLICY
The Company's executive compensation policy is designed to establish
an appropriate relationship between executive pay and the Company's annual
performance, its long term growth objectives and its ability to attract and
retain qualified executive officers. The Compensation Committee attempts to
achieve these goals by integrating competitive annual base salaries with (i)
bonuses based on corporate performance and on the achievement of specified
performance objectives through the Performance Bonus Plan and (ii) stock options
through the 1989 Plan and the 1993 Plan. The Compensation Committee believes
that cash compensation in the form of salary and performance-based bonuses
provides company executives with short term rewards for success in operations,
and that long term compensation through the award of stock options encourages
growth in management stock ownership which leads to expansion of management's
stake in the long term performance and success of the Company.
Base Salary. For fiscal 1995, the Compensation Committee approved the
base salaries of the executive officers based on (i) salaries paid to executive
officers with comparable responsibilities employed by companies with comparable
businesses, (ii) performance and profitability of the Company in fiscal 1994 and
(iii) individual performance reviews for fiscal 1994, which was the most
important factor. In its survey of comparable executive officer salaries, the
Compensation Committee relied on information regarding salaries paid to
executive officers in the Company's Peer Group Index, where such information was
available, and to a lesser extent, salaries paid to executive officers in the
retail industry in general. The Compensation Committee was able to obtain
salary information for five of the seven companies in the Peer Group Index. See
"Company Performance." The Compensation Committee adjusted the salary
information it collected to take into account varying sales volume and
geographic regions of the companies involved. For fiscal 1995, executive
officers generally received raises in their annual base salary, which raises
ranged from approximately 4% to 7% of annual base salary. The President and
Chief Executive Officer received the largest raise of $30,000, representing an
increase of approximately 6.7% in his annual guaranteed compensation.
Bonuses. Annual incentives under the Performance Bonus Plan for the
President and Chief Executive Officer and the other named executive officers are
intended to reflect the Company's belief that management's contribution to
stockholder returns (via increasing stock price) comes from maximizing earnings
and the quality of those earnings. Awards under the Performance Bonus Plan are
based largely on the Company's attainment of annually established performance
targets and each participant's target bonus is fixed as a percentage of his or
her base salary. For fiscal 1993 the Company's performance targets were based
on "EBDIT" (earnings before depreciation, amortization of deferred charges, LIFO
adjustment, interest and income taxes) and "Free Cash Flow" (EBDIT minus capital
expenditures and plus or minus the change in working capital). For fiscal 1994
and fiscal 1995, the Compensation Committee based the Company's targets on
operating income (earnings before interest, income taxes and extraordinary
items), reflecting the Compensation Committee's belief that an earnings-based
approach more appropriately reflects contributions to stockholder value for a
public company than a cashflow-based approach. Under the Performance Bonus
Plan, if the Company's performance targets are attained, participants will
receive their full target bonus. Bonus levels are reduced proportionately if
the Company's actual performance does
10
<PAGE>
not meet the targeted performance levels down to a floor of target performance
minus 25% of pre-tax income, below which point no bonus will be earned. If the
Company's performance targets are exceeded, additional bonuses equal to 10% of
the amount of the excess will also be payable under the Performance Bonus Plan,
allocated among participants proportionately based on their target bonus
amounts. For fiscal 1995, participants in the Performance Bonus Plan were
assigned target bonus amounts ranging from 20% to 30% of their base salaries.
The varying percentages reflect the Compensation Committee's belief that, as an
executive's duties and responsibilities increase, he or she will be increasingly
responsible for the performance of the Company. For fiscal 1995, the Company's
performance targets established by the Compensation Committee at the beginning
of the year were exceeded by 14.5%. See "Summary Compensation Table."
Stock Options. Options under the Company's 1993 Plan were granted to
the executive officers of the Company, including the President and Chief
Executive Officer, as well as 114 other employees of the Company, in March 1995.
The number of options that each executive officer or employee was granted was
based primarily on the executive's or employee's ability to influence the
Company's long term growth and profitability. The Compensation Committee
believes that option grants afford a desirable long term compensation method
because they closely ally the interests of management with stockholder value and
that grants of options are the best way to directly link the financial interests
of management with those of stockholders. The vesting provisions of options
granted under the 1993 Plan are designed to encourage longevity of employment
with the Company.
COMPENSATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
The Compensation Committee believes that Maynard Jenkins, the
Company's President and Chief Executive Officer, provides valuable services to
the Company and that his compensation should therefore be competitive with that
paid to executives at comparable companies. In addition, the Compensation
Committee believes that an important portion of his compensation should be based
on Company performance. Mr. Jenkins received an increase in his annual base
salary of $30,000 in September 1995, representing an increase of approximately
6.7% of his annual guaranteed compensation. The increase was determined to be
appropriate by the Compensation Committee based on (i) comparable chief
executive compensation within the Company's Peer Group Index, where such
information was available, and to a lesser extent, within the retail industry in
general, each as adjusted for varying sales volumes and geographic region, (ii)
improvements in the Company's performance and profitability in the first seven
months of fiscal 1995 and (iii) a review of his individual performance during
the first seven months of fiscal 1995. See "Company Performance." However, the
baseline target bonus payable to Mr. Jenkins under the Performance Bonus Plan
(30%) was not raised as a percentage of his base salary for fiscal 1995. In
addition, for fiscal 1995, Mr. Jenkins was eligible to receive an additional
performance bonus based upon the same Company performance targets applicable
under the Performance Bonus Plan. If the performance targets are achieved,
pursuant to this additional bonus program, Mr. Jenkins receives an additional
bonus equal to 25% of his base salary and if the targets are exceeded, he
receives a percentage of the excess amount up to a limit of an additional 12.5%
(37.5% total) of his base salary. As the Company's performance targets were
exceeded by 14.5% in fiscal 1995, Mr. Jenkins was paid a bonus of $487,794,
which included the $125,000 guaranteed bonus under his employment agreement, his
bonus under the Performance Bonus Plan and the maximum additional performance
bonus of 37.5% of his base salary.
INTERNAL REVENUE CODE SECTION 162(M)
Under Section 162 of the Code, the amount of compensation paid to
certain executives that is deductible with respect to the Company's corporate
taxes is limited to $1,000,000 annually. It is the current policy of the
Compensation Committee to maximize, to the extent reasonably possible, the
Company's ability to obtain a corporate tax deduction for compensation paid to
executive officers of the Company to the extent consistent with the best
interests of the Company and its stockholders.
The foregoing report has been furnished by Messrs. Godlas, Simmons and
Spogli.
11
<PAGE>
EXHIBIT 4
FOR IMMEDIATE RELEASE AUGUST 15, 1996
SEARS TO ACQUIRE ORCHARD SUPPLY HARDWARE
CHICAGO, Illinois and SAN JOSE, California--Sears, Roebuck and Co. [NYSE: S]
and Orchard Supply Hardware Stores Corporation [NYSE: ORH] today announced the
signing of a definitive agreement providing for the acquisition of Orchard by
Sears for $35.00 per share or a total transaction value of approximately $415
million. Orchard operates 61 hardware superstores in California.
"By combining the strengths of Orchard and Sears Hardware Stores, we will
accelerate the growth of our successful off-the-mall hardware business," said
Arthur C. Martinez, Sears Chairman and Chief Executive Officer. "Orchard is
one of the most successful convenience-oriented hardware retailers in the
country, with a well-deserved reputation for excellent assortment, service and
management. Adding Orchard's high-performance locations to Sears Hardware
business and, in turn, extending the power of Sears Craftsman and DieHard
brands to Orchard's merchandise mix, will give Sears a unique profile in the
important California market."
"We believe this transaction is attractive for our stockholders and creates
an exciting opportunity for Orchard and its employees," said Maynard Jenkins,
President and Chief Executive Officer of Orchard. "Joining with Sears will
help both companies by combining the best practices of each company and will
help Orchard to fulfill its expansion plans."
Under the agreement, Sears will begin a cash tender offer on or about August
21, 1996 for all of Orchard's approximately 8,800,000 outstanding common
shares (including 1,280,000 shares issuable upon conversion of outstanding
shares of preferred stock) at a price of $35.00 net per share. The Orchard
Board of Directors unanimously approved the agreement and recommended that
Orchard stockholders tender their shares pursuant to the offer. After
successful completion of the tender offer, remaining shares of Orchard will be
acquired at the tender offer price through a merger. Orchard's Board of
Directors has received the opinion of Montgomery Securities that the
consideration payable in the tender offer and merger is fair, from a financial
point of view, to Orchard stockholders.
In connection with the acquisition agreement, affiliates of Freeman Spogli &
Co. Incorporated, Orchard's largest stockholders, have agreed to tender their
1,604,043 shares of common stock (including shares issued upon conversion of
preferred stock), which represent approximately 18.2% of Orchard's current
outstanding stock, and have also granted Sears an option on such shares at
$35.00 per share of common stock, which can be exercised under certain
circumstances. The definitive agreement provides for payment to Sears under
certain circumstances of a termination fee and reimbursement of expenses if
the Orchard Board of Directors, in the exercise of its fiduciary
responsibilities, terminates the definitive agreement or withdraws or modifies
its recommendation that Orchard stockholders tender their shares pursuant to
the offer.
Merrill Lynch & Co. will act as Dealer Manager for the tender offer. The
consummation of the tender offer is subject to certain customary conditions,
including the tender of a majority of Orchard's outstanding shares (on a fully
diluted basis) and expiration of the waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act.
Orchard, through its 61 hardware superstores in California, specializes in
serving the needs of the "fix-it" homeowner focused on repair and maintenance
projects. Freeman Spogli & Co. Incorporated acquired Orchard in May 1989 and
the company completed its initial public offering in March 1993.
Sears, Roebuck and Co. owns and operates more than 2,300 department and
specialty stores in the U.S., including HomeLife furniture, Sears Hardware,
and automotive parts and tire outlets, which include 390 Western Auto stores.
Sears retail network also extends to 400 Sears-authorized dealer stores and
900 independently owned and operated Western Auto retail locations. Sears,
Roebuck and Co. is majority owner of Sears Canada and Sears Mexico. The
Hoffman Estates, Ill.-based company has annual revenue of more than $34
billion.
<PAGE>
For more information, please contact:
Sears, Roebuck and Co.
Janice R. Drummond
(847) 286-8316
Orchard Supply Hardware Stores Corporation
Stephen M. Hilberg, Vice President and Chief Financial Officer
(408) 365-2608
<PAGE>
EXHIBIT 5
LOGO August 14, 1996
Board of Directors
Orchard Supply Hardware Stores Corporation
6450 Via Del Oro
San Jose, California 95119
Gentlemen:
We understand that Orchard Supply Hardware Stores Corporation, a Delaware
corporation ("OSH"), Sears, Roebuck & Co., a New York corporation ("Parent"),
and a wholly-owned subsidiary of Parent ("MergerSub"), propose to enter into
an Agreement and Plan of Merger, to be dated on or about August 14, 1996 (the
"Merger Agreement") pursuant to which (a) MergerSub will commence a cash
tender offer (the "Offer") for all of the outstanding shares of common stock,
$.01 par value per share, of OSH ("OSH Common Stock") at a price of $35.00 per
share (the "Offer Price"), and (b) subject to consummation of the Offer,
MergerSub will be merged with and into OSH, which will be the surviving entity
(the "Merger").
Pursuant to the Merger, as more fully described in the Merger Agreement and
as further described to us by management of OSH, we understand that (a) each
outstanding share of OSH Common Stock (other than shares owned by Parent or
its wholly-owned subsidiaries, treasury shares and shares whose holders
perfect dissenters' rights) will be converted into cash equal to the higher of
(i) the Offer Price and (ii) the price at which the Offer is actually
consummated (such higher price, the "Merger Price"), and (b) each outstanding
share of preferred stock, $.01 par value per share, of OSH ("OSH Preferred
Stock") will be converted into the product of (i) the Merger Price multiplied
by (ii) the number of shares of OSH Common Stock into which a share of OSH
Preferred Stock is convertible immediately prior to the effective time of the
Merger (plus accrued but unpaid dividends on such preferred shares). The terms
and conditions of the Merger are set forth in more detail in the Offer to
Purchase and the Merger Agreement.
You have asked for our opinion as investment bankers as to whether the
consideration to be received by the stockholders of OSH pursuant to the Offer
and the Merger (collectively, the "Transactions") is fair to such stockholders
from a financial point of view, as of the date hereof. As you are aware, we
were not retained to nor did we advise OSH with respect to alternatives to the
Transactions or OSH's underlying decision to proceed with or effect the
Transactions. Further, we were not requested to nor did we solicit or assist
OSH in soliciting indications of interest from third parties for all or any
part of OSH.
In connection with our opinion, we have, among other things: (i) reviewed
publicly available financial and other data with respect to OSH, including the
consolidated financial statements for recent years and interim periods to
April 28, 1996 and certain other relevant financial and operating data
relating to OSH made available to us from published sources and from the
internal records of OSH (including preliminary financial statements for OSH's
fiscal quarter ended July 28, 1996); (ii) reviewed the Merger Agreement; (iii)
reviewed certain publicly available information concerning the trading of, and
the trading market for, OSH Common Stock and OSH Preferred Stock; (iv)
compared OSH from a financial point of view with certain other companies in
the retail industry which we deemed to be relevant; (v) considered the
financial terms, to the extent publicly available, of selected recent business
combinations of companies in the retail industry which we deemed to be
comparable, in whole or in part, to the Transactions; (vi) reviewed and
discussed with representatives of the management of OSH certain information of
a business and financial nature regarding OSH, furnished to us by them,
including financial forecasts and related assumptions of OSH through
LOGO
<PAGE>
Orchard Supply Hardware Stores Corporation
August 14, 1996
Page 2
1997 prepared by OSH's management, plus extensions of those forecasts through
2000 prepared by Montgomery based on assumptions consistent with those
underlying the OSH management forecasts; (vii) made inquiries regarding and
discussed the Offer to Purchase, the Transactions and the Merger Agreement and
other matters related thereto with OSH's counsel; and (viii) performed such
other analyses and examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for OSH provided to us by its management, upon management's advice
and with your consent we have assumed for purposes of our opinion that the
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of OSH's management at the time of preparation as to
the future financial performance of OSH and that they provide a reasonable
basis upon which we can form our opinion. We have also assumed that there have
been no material changes in OSH's assets, financial condition, results of
operations, business or prospects since the date of its last financial
statements made available to us. We have relied on advice of counsel and
independent accountants to OSH as to all legal and financial reporting matters
with respect to OSH, the Offer to Purchase, the Transactions and the Merger
Agreement. We have assumed that the Transactions will be consummated in a
manner that complies in all respects with the applicable provisions of the
Securities Exchange Act of 1934 and all other applicable federal and state
statutes, rules and regulations. In addition, we have not assumed
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
OSH, nor have we been furnished with any such appraisals. Finally, our opinion
is based on economic, monetary and market and other conditions as in effect on,
and the information made available to us as of, the date hereof. Accordingly,
although subsequent developments may affect this opinion, we have not assumed
any obligation to update, revise or reaffirm this opinion.
We have further assumed with your consent that the Transactions will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by OSH of any of the
conditions to its obligations thereunder.
We have acted as financial advisor to OSH in connection with the Transactions
and will receive a fee for our services, including rendering this opinion, all
of which is contingent upon the consummation of the Transactions. In the
ordinary course of our business, we actively trade the equity securities of OSH
and Parent for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
We have also acted as an underwriter in connection with offerings of securities
of OSH and performed various investment banking services for OSH.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the consideration to be received by the stockholders of
OSH pursuant to the Transactions is fair to such stockholders from a financial
point of view, as of the date hereof.
This opinion is directed to the Board of Directors of OSH in its
consideration of the Transactions and is not a recommendation to any
stockholder whether such stockholder should tender shares of OSH Common Stock
or as to how such stockholder should vote with respect to the Transactions.
This opinion may not be used or referred to by OSH, or quoted or disclosed to
any person in any manner, without our prior written consent, which consent is
hereby given to the inclusion of this opinion in any document filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 in connection with the Transactions.
Very truly yours,
/s/ Montgomery Securities
Montgomery Securities
<PAGE>
EXHIBIT 6
[LOGO OF ORCHARD SUPPLY HARDWARE]
August 21, 1996
To the Stockholders of Orchard Supply Hardware Stores Corporation:
I am pleased to inform you that on August 14, 1996, Orchard Supply Hardware
Stores Corporation (the "Company" or "Orchard"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"), providing for the acquisition of the
Company by Grove Acquisition Corp., a Delaware corporation (the "Purchaser"),
a wholly-owned subsidiary of Sears, Roebuck and Co., a New York corporation.
In accordance with the Merger Agreement, the Purchaser today has commenced a
cash tender offer (the "Offer") for all of the outstanding shares of common
stock, par value $.01 per share (collectively, the "Shares"), of the Company
at $35.00 per Share, net to the seller in cash, upon the terms and conditions
set forth in the Schedule 14D-1. The Merger Agreement contemplates that each
Share of the Company's common stock not acquired by the Purchaser in the Offer
will be exchanged for $35.00 per Share in cash, without interest, upon the
merger of the Purchaser with the Company (the "Merger").
YOUR BOARD OF DIRECTORS (THE "BOARD") HAS UNANIMOUSLY APPROVED THE OFFER,
THE MERGER, THE MERGER AGREEMENT, AND THE STOCKHOLDER AGREEMENT, AND THE
TRANSACTIONS CONTEMPLATED THEREBY, HAS DETERMINED THAT THE OFFER AND THE
MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND
RECOMMENDS THAT ORCHARD STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES
PURSUANT TO THE OFFER.
In arriving at its decision, the Board gave careful consideration to a
number of factors, including, among other matters, the opinion of Montgomery
Securities, Orchard's financial advisor, that the cash consideration to be
received by holders of Shares in the Offer and the Merger is fair to such
holders from a financial point of view. A more complete description of the
factors considered by the Board is set forth in the attached Solicitation/
Recommendation Statement on Schedule 14D-9.
Enclosed with this letter is a copy of the Solicitation/Recommendation
Statement on Schedule 14D-9 which was filed today by the Company with the
Securities and Exchange Commission. It contains detailed information regarding
the factors considered by the Board in its deliberations and certain other
information regarding the Offer and the Merger. Also enclosed is the
Purchaser's Schedule 14D-1 and related materials, including a Letter of
Transmittal to be used by you for tendering your Shares. I urge you to read
the enclosed documents carefully prior to making a decision with respect to
tendering your Shares in the Offer.
Sincerely,
/s/ Maynard Jenkins
Maynard Jenkins
President and Chief Executive
Officer
<PAGE>
EXHIBIT 7
August 14, 1996
Mr. Maynard Jenkins
6450 Via Del Oro
San Jose, California 95119
Dear Maynard:
As a material inducement for you to continue to provide valuable leadership,
management and guidance of Orchard Supply Hardware Corporation (the "Company")
during the transition period before and after a Change of Control (as defined
below) of the Company, the Board of Directors of the Company has authorized
the following special bonus, payable to you on the terms and conditions set
forth below:
1. In the event a "person" or a "group" acquires "beneficial ownership"
(within the meanings given such terms under Rule 13d-3 promulgated under the
Securities Exchange Act of 1934) of greater than 51% of (a) the capital stock
of Orchard Supply Hardware Stores Corporation or (b) the capital stock or
assets of the Company, on or before December 30, 1996, through one or a series
of transactions (a "Change of Control"), you shall be entitled to payment of a
special bonus in cash in an amount equal to the lesser of (x) $800,000 or (y)
$1,475,000 less any amounts attributable to any options to purchase the
Company's Common Stock held by you ("Stock Options") that are treated as
"parachute payments" under Section 280G of the Internal Revenue Code of 1986,
as amended ("Section 280G"), on the Payment Date (as defined below), payable
in full on January 15, 1997 (the "Payment Date"), provided that
(a) you were employed by the Company on the date of the Change of
Control; and
(b) (i) you are employed by the Company or, if applicable, the surviving
or successor corporation, on the Payment Date; or
(ii) after the Change of Control but prior to the Payment Date, your
employment has been terminated without "cause" by the Company or the
surviving or successor corporation; or
(iii) after the Change of Control but prior to the Payment Date, your
employment has been terminated due to your death or total disability
for any consecutive six month period.
For purposes of this Letter Agreement, "cause" shall have the meaning set
forth in that certain Employment Agreement by and between the Company and you,
as amended (the "Employment Agreement").
2. In the event that after a Change of Control your employment is terminated
by the Company or, if applicable, the surviving or successor corporation
(including termination of the Employment Agreement under Section 6(a) thereof
by the Company or the surviving or successor corporation), other than
termination by the Company for cause or due to your death or total disability
for any consecutive six month period, you shall be entitled to the following
additional amounts:
(a) such amount, if any, in cash which would otherwise be payable to you
under Section 6(c) of the Employment Agreement but for the limitation
contained in such section with respect to Section 280G; and
(b) payment of an amount intended to cover the additional taxes you incur
as a result of the application of Section 280G to the amounts described in
Paragraph (a) and Section 1 above, determined as follows:
(i) in the event the termination of your employment occurs within one
year of the Change in Control, (A) reimbursement of all taxes, interest
and penalties due by reason of the application of
<PAGE>
Section 280G to any compensation you might receive under Section 1 or
Section 2(a) above or attributable to any Stock Options and (B) an
amount necessary to satisfy the taxes (including those imposed by
reason of the application of Section 280G) imposed on the payments
described in this Subparagraph (i); provided, however, that the
payments under this Subparagraph (i) shall only apply in the event that
your income tax return filed for the year in which you receive the
payments described in Section 1 and Section 2(a) above treats the
appropriate portion of either of those payments as an excess parachute
payment under Section 280G, in which event you shall be paid the
amounts described in this Subparagraph (i) at the time you file such
income tax return; or
(ii) in the event the termination of your employment occurs one year
or more following the Change of Control, (A) reimbursement of all
taxes, interest and penalties due by reason of the application of
Section 280G to any compensation you might receive under Section 1 or
Section 2(a) above or attributable to any Stock Options and (B) an
amount necessary to satisfy the taxes (including those imposed by
reason of the application of Section 280G) imposed on the payments
described in this Subparagraph (ii). However, the payments under this
Subparagraph (ii) shall only apply in the event that your income tax
returns as originally filed for the years in which you receive the
payments described in Section 1 and Section 2(a) above do not treat any
portion of either of those payments as an excess parachute payment
under Section 280G unless the Company or the surviving or successor
corporation treats the same portion(s) of the payment(s) as an excess
parachute payment under Section 280G. In connection therewith, the
Company or the surviving or successor corporation shall timely advise
you if it intends to treat such payments as excess parachute payments
under Section 280G, and in the event you are not so advised, the income
tax return(s) that you file shall not treat such payments as excess
parachute payments under Section 280G. Furthermore, the Company or the
surviving or successor corporation has the right to select counsel and
to control the proceedings with the Internal Revenue Service regarding
the application of Section 280G to the payments described in this
Section 2. Subject to the provisions of this Subparagraph (ii), the
amounts described in this Subparagraph (ii) shall be paid to you at the
time the Company or the surviving or successor corporation advises you
that it intends to treat a portion of such payments as an excess
parachute payment under Section 280G or, in the event it does not so
notify you, promptly upon a final determination that a portion of
either of the payments described in Section 1 and Section 2(a) above
shall be treated as an excess parachute payment under Section 280G.
3. In connection with a Change of Control, in the event that the Company
does not survive, the Company shall require the Company's obligations under
this Letter Agreement to be assumed by the surviving or successor corporation.
4. This Letter Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devises and legatees. If you should die while any amounts
would still be payable to you hereunder if you had continued to live, all such
amounts shall be paid in accordance with the terms of this Letter Agreement to
your devisee, legatee or other designee or, if there be no such designee, to
your estate.
5. Except as expressly provided herein, this Letter Agreement is independent
of all other written agreements between you and the Company, and of any
employee benefit or stock option plan maintained by the Company, and no
provision of this Letter Agreement shall be construed to modify or limit any
provision of, or right or obligation of any party under any such other written
agreement or plan.
6. The validity and interpretation of this Letter Agreement shall be
governed by the laws of the State of California, without reference to the
conflict of law principles thereof.
7. All payments due hereunder shall be subject to all required withholdings
for income taxes, FICA and other applicable taxes.
2
<PAGE>
8. Payments made to you under this Letter Agreement are for valued services
to be performed by you, which services are of great benefit to the Company,
and are not for any past services performed by you.
If the terms of this Letter Agreement meet your approval, please return a
signed copy of this Letter Agreement to the undersigned.
Very truly yours,
Orchard Supply Hardware Corporation
/s/ Stephen M. Hilberg
By __________________________________
Stephen M. Hilberg,
President and Chief Financial
Officer
ACCEPTED AND AGREED TO:
/s/ Maynard Jenkins
_______________________________________
Maynard Jenkins
August 14, 1996
3
<PAGE>
EXHIBIT 8
May 31, 1996
Sears, Roebuck and Co.
3333 Beverly Road
Hoffman Estate, IL 60179
Attn: Gary Crittenden, Executive Vice President,
Business Planning and Strategy
Gentlemen:
In connection with your consideration of a possible business combination or
acquisition transaction (a "Transaction") with Orchard Supply Hardware Stores
Corporation (together with its subsidiary, Orchard Supply Hardware
Corporation, the "Company") certain financial, operational and other
information concerning the Company is being furnished to you. As a condition
to your receipt of such information, you agree, as set forth below, to treat
any information concerning the Company (irrespective of its source or form of
communication) that may be furnished to you by or on behalf of the Company
(collectively referred to as "Evaluation Material"), whether furnished before,
on or after the date of this Confidentiality Agreement ("Confidentiality
Agreement"), in accordance with the provisions hereof and you further agree to
abide by the other provisions contained in this Confidentiality Agreement. The
term Evaluation Material shall include any notes, analyses, compilations,
studies or other documents or records prepared by you or others, which contain
or reflect or are generated from information supplied by the Company or its
representatives. The term Evaluation Material shall not include information
which you can prove by documentary evidence (i) is now or becomes generally
available to the public other than as a result of a disclosure by you or your
representatives in violation of this Confidentiality Agreement, (ii) was
available to you on a non-confidential basis from a source other than the
Company or its representatives, prior to receipt in accordance with this
Confidentiality Agreement provided such information is not known by you to be
subject to another confidentiality agreement with or other obligation of
secrecy to the Company or another party, (iii) becomes available to you on a
non-confidential basis from sources other than the Company or its
representatives, provided that such source is not known by you or your
representatives to be prohibited from transmitting the information to you by a
contractual, legal or fiduciary obligation, or (iv) was or is independently
developed by you or on your behalf without the use of any Evaluation Material
and not otherwise in violation of clause (iii) of this paragraph.
You agree that the Evaluation Material will be used solely for the purpose
of evaluating and negotiating a possible Transaction involving the Company and
will not be used by you for any other purpose and that the Evaluation Material
will be kept confidential by you; provided, however, that any of such
information may be disclosed to your directors, officers, employees, potential
financing sources and professional service providers (collectively referred to
as "your representatives") who, in your reasonable judgment, need to know such
information for the purpose described above, it being understood that prior to
any disclosure of Evaluation Material, each of your representatives shall be
informed by you of the terms of this Confidentiality Agreement, that the
provisions hereof shall be deemed to be fully applicable to him or her, and of
the confidential nature of the Evaluation Material. You shall be responsible
for any breach of this Confidentiality Agreement by you or any of your
representatives.
Except as provided below, without the prior written consent of the other
party, neither you nor the Company will disclose, and each of you and the
Company will direct its respective representatives not to disclose, to any
person other than its respective representatives, the fact that the Evaluation
Material has been made available to you, the fact that you or we are
considering a Transaction, or any information with respect to the discussions
or
<PAGE>
Sears, Roebuck and Co.
May 31, 1996
Page 2
negotiations, including the status thereof. The term "person" as used in this
Confidentiality Agreement shall be broadly interpreted to include, without
limitation, any corporation, company, partnership or individual.
Disclosure of any portion of Evaluation Material by either party or its
respective representatives or of any matter covered in the preceding paragraph
by either party or its respective representatives shall not be precluded under
this Agreement, if such disclosure is, in the reasonable opinion of counsel to
the disclosing party: (i) required by law or the rules and regulations of any
stock exchange on which the securities of the disclosing party are traded or
of any other regulatory authority having jurisdiction over the disclosing
party, (ii) necessary to establish rights under this Agreement, (iii)
consented to in writing by the other party or (iv) in response to a valid
subpoena or order of a court or other governmental body or other valid legal
process; provided that (a) with respect to any such subpoena, order or legal
process, the disclosing party shall first give notice to the other party and
use reasonable efforts to cooperate with the other party so that such other
party may take legally available steps to resist or narrow such subpoena,
order or legal process and obtain an appropriate protective order or other
assurance that confidential treatment will be accorded such information and
(b) the disclosing party will furnish only such of the Evaluation Material
being sought as such party is advised by its counsel is legally required in
response to the subpoena, order or other legal process. Prior to making any
disclosure permitted by this paragraph, the disclosing party will, to the
extent practicable, consult with the other party with respect to the proposed
disclosure.
You and your representatives will upon the request of the Company at your
election either (1) promptly deliver to the Company all Evaluation Material in
or under your or your representatives' possession or control, without
retaining any copy, extract or reproduction thereof, or (2) promptly destroy
all Evaluation Material in or under your or your representatives' possession
or control, and such destruction shall be certified in writing to the Company
by one of your officers supervising such destruction. Notwithstanding the
return or destruction of the Evaluation Material, you and your representatives
will continue to be bound by the confidentiality and other obligations created
hereby.
You acknowledge that you are aware, and that you will advise, or have
advised, your representatives who are informed as to the matters which are the
subject of this Confidentiality Agreement, that the United States securities
laws prohibit any person who has received from an issuer material, nonpublic
information concerning the matters which are the subject of this
Confidentiality Agreement from purchasing or selling securities of such issuer
or from communicating such information to any other person under circumstances
in which it is reasonably foreseeable that such person is likely to purchase
or sell such securities while in possession of material nonpublic information.
You hereby further acknowledge that the Evaluation Material is being
furnished to you in further consideration of your agreement that except with
respect to the evaluation and negotiation of a Transaction as contemplated by
this Confidentiality Agreement (and, in such connection, only with or to the
Company, its Board of Directors and/or representatives), neither you nor any
of your subsidiaries will, for a period of two years from the date hereof,
directly or indirectly, alone or with others, (a) negotiate with or provide
any information to any party with respect to, or make any statement or
proposal to the Board of Directors of the Company, to any of its agents or to
any stockholder of the Company with respect to, or make any public
announcement or proposal or offer whatsoever (including, but not limited to
any "solicitation" of "proxies" as such terms are defined or used in
Regulation 14A of the Securities Exchange Act of 1934) with respect to, or
otherwise solicit, seek or offer to effect (i) any form of business
combination or transaction involving the Company or any affiliate thereof,
including, without limitation, a merger, tender or exchange offer or
liquidation of the Company's assets, (ii) any form of restructuring,
recapitalization or similar transaction with respect to the Company or any
affiliate thereof, (iii) any purchase of any securities or assets, or rights
to acquire any securities or assets, of the Company, or
<PAGE>
Sears, Roebuck and Co.
May 31, 1996
Page 3
(iv) any proposal to seek representation on the Board of Directors of the
Company or otherwise to seek to control or influence the management, Board of
Directors or policies of the Company, (v) any request or proposal to waive,
terminate or amend the provisions of this paragraph, or (vi) any proposal or
other statement inconsistent with the terms of this paragraph, (b) instigate,
encourage or assist any third party to do any of the foregoing, or (c) become
the beneficial owner of more than 1% of any class of securities of the
Company, unless and until you have received the prior written invitation or
approval of a majority of the Board of Directors of the Company to do any of
the foregoing; provided, however, that the foregoing shall not prohibit,
subject to the provisions of this Confidentiality Agreement, any of your
affiliates which is in the business of acquiring and maintaining investment
portfolios from acquiring or owning securities of the Company in the ordinary
course of its business for investment and not with an intention of obtaining
or exercising control of the Company.
You agree that without the prior consent of the Company, neither you nor any
of your representatives will contact any employee, supplier, customer or
representative of the Company concerning the Evaluation Material or the
Transaction, or except in the ordinary course of business, any aspect of the
Company's business, assets, prospects or finances. It is understood and agreed
that Maynard Jenkins, the Company's Chief Executive Officer, or J. Frederick
Simmons of Freeman Spogli & Company Incorporated ((310) 444-1832) shall
arrange for appropriate contacts at the Company. It is also understood that
all (a) communications regarding a possible transaction, (b) requests for
additional information, (c) requests for facility tours or management meetings
and (d) discussions or questions regarding procedures will be submitted or
directed through Mr. Jenkins or Mr. Simmons.
In the event that you decide to proceed with your review of the Evaluation
Material and consideration of a possible Transaction after the preliminary
meeting to be held on May 31, 1996, you agree that without the Company's prior
written consent, for a period of two years from the date hereof, you will not
directly or indirectly solicit for employment (other than through general
advertising) any management employee of the Company who become known to you in
the course of your (or your representatives') review of the Evaluation
Material or investigation and inquiries in connection with your evaluation of
the Company regard to a potential Transaction; and you will not initiate,
participate in, include or contribute to any interference with the Company's
employment relationship with any such person.
You acknowledge and agree that the Company would not have an adequate remedy
at law and would be irreparably harmed in the event that any of the provisions
of this Confidentiality Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
Company shall be entitled to injunctive relief to prevent breaches of this
Confidentiality Agreement and to specifically enforce the terms and provisions
hereof, in addition to any other remedy to which the Company may be entitled
at law or in equity. The prevailing party in any litigation shall, after a
final non-appealable judgment has been issued, be entitled to recover from the
other party its legal expenses, including reasonable legal fees, incurred in
connection therewith. It is further understood and agreed that no failure to
or delay in exercising any right, power or privilege hereunder shall operate
as a waiver thereof, and no single or partial exercise of any right, power or
privilege hereunder shall preclude any other or further exercise of any right,
power or privilege.
You understand that the Company does not make any representation or warranty
as to the accuracy or completeness of the Evaluation Material. Only those
representations and warranties contained in the final definitive agreement
covering the Transaction, when, as and if executed, and subject to such
limitations as may be specified therein, will have any legal effect. You agree
that unless and until a definitive agreement (expressly excluding any executed
letter of intent or other preliminary written agreement and any written or
oral acceptance of an offer or a bid) with respect to any Transaction has been
executed and delivered, neither the Company nor you will be under any legal
obligation of any kind whatsoever with respect to such a transaction by virtue
of this
<PAGE>
Sears, Roebuck and Co.
May 31, 1996
Page 4
letter agreement or any written or oral expression with respect to such a
Transaction by either party or any of its respective agents except, in the
case of this Confidentiality Agreement, for the matters specifically agreed to
herein.
You acknowledge and agree that we reserve the right, in our sole discretion,
to change the procedures relating to our consideration of a possible
Transaction at any time without prior notice to you, to reject any and all
proposals made by you or any of your representatives, and to terminate
discussions and negotiations with you at any time and for any reason. Unless
and until a written definitive agreement concerning the Transaction has been
executed, neither we nor any of our representatives will have any liability to
you with respect to the Transaction or the evaluation and the bidding process
and procedures, whether by virtue of this Confidentiality Agreement, any other
written or oral expression with respect to the Transaction or otherwise except
as expressly provided in this Agreement. Unless and until a written definitive
agreement concerning the Transaction has been executed, neither you nor any of
your representatives will have any liability to us with respect to a
Transaction, whether by virtue of this Confidentiality Agreement, any other
written or oral expression with respect to the Transaction or otherwise,
except as expressly provided in this Agreement. We understand that you reserve
the right to terminate discussions and negotiations with us at any time and
for any reason.
This Confidentiality Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and to be performed within such State. Each of the Company and you agrees
and consents to personal jurisdiction and venue in any action brought in any
court, federal or state, within the State of California having subject matter
jurisdiction in connection with any matter arising under this Confidentiality
Agreement and irrevocably waives any defense of inconvenient forum in respect
of any such action.
This Confidentiality Agreement shall remain in effect for a period of two
years from the date hereof and may be modified or waived only by a separate
writing by the Company and you that expressly so modifies or waives this
Confidentiality Agreement.
Please confirm your agreement with the foregoing by signing and returning
one copy of this letter agreement to the undersigned, whereupon this
Confidentiality Agreement shall become a binding agreement between you and the
undersigned.
Very truly yours,
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
By: /s/ Maynard Jenkins
----------------------------------
Maynard Jenkins,
President and Chief Executive
Officer
Agreed to and Accepted:
SEARS, ROEBUCK AND CO.
By: /s/ Gary Crittenden
---------------------------
Gary Crittenden,
Executive Vice President,
Business Planning and Strategy
Date:
<PAGE>
EXHIBIT 9
ORCHARD HARDWARE SUPPLY STORES CORPORATION
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
August 14, 1996
TO: Holders of Options to Purchase Common Stock of
Orchard Supply Hardware Stores Corporation Granted
Pursuant to Orchard Supply Hardware Stores Corporation's
Amended 1989 Nonqualified Stock Option Plan
Re: Offer of Cash in Settlement of Options
--------------------------------------
Dear Option Holder:
Orchard Supply Hardware Stores Corporation (the "Company") has
recently entered into an Agreement and Plan of Merger (the "Merger Agreement")
with Grove Acquisition Corp. ("Purchaser"), a wholly-owned subsidiary of Sears,
Roebuck and Co. ("Parent"), which provides for (i) the offer by Purchaser to
purchase all of the issued and outstanding shares of common stock, $.01 par
value (the "Common Stock"), of the Company for $35.00 in cash per share (the
"Offer Price") of Common Stock (the "Offer"), (ii) the merger of Purchaser with
and into the Company (the "Merger") after consummation of the Offer, and subject
to approval of the Company's stockholders, if necessary, and (iii) the Company's
becoming a wholly-owned subsidiary of Parent. In the Merger, each share of
Common Stock will be exchanged for $35.00 in cash, net of withholding of income
and other taxes.
As a holder of options to purchase shares of Common Stock ("Options")
pursuant to the Amended 1989 Nonqualified Stock Option Plan (the "1989 Plan"),
you of course have an interest in the Offer and the Merger. You were granted
Options to purchase that number of shares of Common Stock set forth in the Stock
Option Agreement between yourself and the Company (the "Option Agreement") at
the exercise price indicated therein.
In order to assist you in realizing the value of your Options, and to
avoid the necessity of exercising the Options and tendering the shares purchased
pursuant to the Offer, or receiving cash for such shares in the Merger, the
Board has agreed to offer to pay you an amount in cash equal to the Offer Price
or other price paid in the Offer less the exercise price per share of your
Options and less all taxes required to be withheld from such payment (the
"Option Consideration"). This is the same cash value that you would receive if
you exercised your Options and tendered the shares purchased pursuant to the
Offer. Please note that payment to you of the Option Consideration will occur
after acceptance of the Common Stock underlying the Options for payment and
purchase pursuant to the Offer.
If you accept the terms outlined in this letter, payment of the Option
Consideration will be made to you as promptly as practicable after consummation
of the Offer, without interest, and your Option will be cancelled upon your
receipt of the Option Consideration.
<PAGE>
August 14, 1996
Page 2
Please be advised that, upon consummation of the Offer and the
purchase by Sears of more than 80% of the Company's Common Stock and, if the
Offer closes with less than 80% of such shares, upon consummation of the Merger,
the 1989 Plan and all unexercised Options granted thereunder will terminate
pursuant to Section 14(b) of the 1989 Plan and Section 3 of the Option
Agreement. Whether or not you choose to accept payment of the Option
Consideration in accordance with this letter you are free to exercise, until 10
days prior to the Effective Time, all or any portion of your Options that are
then currently vested.
Please complete the attached form and return it in the enclosed
pre-addressed envelope. To be eligible to receive payment of the Option
Consideration after consummation of the Offer, the attached form must be
received by the Company on or before September 17, 1996.
The Company believes that accepting the Option Consideration in
accordance with this letter is the easiest way to realize the value of your
Options. Should you have any questions about the information included in this
letter, please call me at (408) 365-2608.
Very truly yours,
Orchard Supply Hardware Stores
Corporation
By: /s/ Stephen M. Hilberg
-------------------------------
Stephen M. Hilberg
Vice President-Finance and
Chief Financial Officer
<PAGE>
I, ________________ hereby ACCEPT the terms set forth in the letter from Orchard
Hardware Supply Stores Corporation to me dated August 14, 1996, to surrender my
Options under the Amended 1989 Nonqualified Stock Option Plan for cancellation
upon my receipt of the Option Consideration after acceptance of Common Stock for
payment and purchase by Sears pursuant to the Offer.
Signature:
---------------------------------
Name (please print):
-----------------------
Date:
---------------------------------
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
August 14, 1996
TO: Holders of Options to Purchase Common Stock of
Orchard Supply Hardware Stores Corporation Granted
Pursuant to Orchard Supply Hardware Stores Corporation's
1993 Non-Employee Directors Stock Option Plan
Re: Offer of Cash in Settlement of Options
--------------------------------------
Dear Option Holder:
Orchard Supply Hardware Stores Corporation (the "Company") has
recently entered into an Agreement and Plan of Merger (the "Merger Agreement")
with Grove Acquisition Corp. ("Purchaser"), a wholly-owned subsidiary of Sears,
Roebuck and Co. ("Parent"), which provides for (i) the offer by Purchaser to
purchase all of the issued and outstanding shares of common stock, $.01 par
value (the "Common Stock"), of the Company for $35.00 in cash per share (the
"Offer Price") of Common Stock (the "Offer"), (ii) the merger of Purchaser with
and into the Company (the "Merger") after consummation of the Offer, and subject
to approval of the Company's stockholders, if necessary, and (iii) the Company's
becoming a wholly-owned subsidiary of Parent. In the Merger, each share of
Common Stock will be exchanged for $35.00 in cash, net of withholding of income
and other taxes.
As a holder of options to purchase shares of Common Stock ("Options")
pursuant to the 1993 Non-Employee Directors Stock Option Plan (the "1993
Directors Plan"), you of course have an interest in the Offer and the Merger.
You were granted Options to purchase that number of shares of Common Stock set
forth in the Stock Option Agreement between yourself and the Company (the
"Option Agreement") at the exercise price indicated therein. In addition to the
acceleration provisions described in Section 11 of the 1993 Directors Plan,
pursuant to resolutions of the Board of Directors of the Company (the "Board")
adopted on August 14, 1996, the vesting schedule of all Options held by you
pursuant to the 1993 Directors Plan and the Option Agreement will accelerate
after acceptance of the shares of Common Stock (the "Shares") for payment and
purchase pursuant to the Offer.
In order to assist you in realizing the value of your Options, and to
avoid the necessity of exercising the Options and tendering the shares purchased
pursuant to the Offer, or receiving cash for such shares in the Merger, the
Board has agreed to offer to pay you an amount in cash equal to the Offer Price
or other price paid in the Offer less the exercise price per share of your
Options and less all taxes required to be withheld from such payment (the
"Option Consideration"). This is the same cash value that you would receive if
you exercised your Options and tendered the shares purchased pursuant to the
Offer. Please note that payment to you will occur after acceptance of the Shares
for payment and purchase pursuant to the Offer.
<PAGE>
August 14, 1996
Page 2
If you accept the terms outlined in this letter, payment of the Option
Consideration will be made to you as promptly as practicable after consummation
of the Offer, without interest, and your Option will be cancelled upon your
receipt of the Option Consideration.
Please be advised that, upon consummation of the Offer and the
purchase by Sears of more than 80% of the Company's Common Stock and, if the
Offer closes with less than 80% of such shares, upon consummation of the Merger,
the 1993 Directors Plan and all unexercised Options granted thereunder will
terminate pursuant to Section 11 of the 1993 Directors Plan and Section 7 of the
Option Agreement. Whether or not you choose to accept payment of the Option
Consideration in accordance with this letter you are free to exercise, until the
Effective Time, all or any portion of your Options that are then currently
vested, including such Options that vest pursuant to either Section 11 of the
1993 Directors Plan or the above-referenced resolutions upon consummation of the
Offer.
Please complete the attached form and return it in the enclosed pre-
addressed envelope. To be eligible to receive payment of the Option
Consideration after consummation of the Offer, the attached form must be
received by the Company on or before September 17, 1996.
The Company believes that accepting the Option Consideration in
accordance with this letter is the easiest way to realize the value of your
Options. Should you have any questions about the information included in this
letter, please call me at (408) 365-2608.
Very truly yours,
Orchard Supply Hardware Stores
Corporation
By: /s/ Stephen M. Hilberg
-------------------------------
Stephen M. Hilberg
Vice President-Finance and
Chief Financial Officer
<PAGE>
I, ________________ hereby ACCEPT the terms set forth in the letter from Orchard
Supply Hardware Stores Corporation to me dated August 14, 1996, to surrender my
Options under the 1993 Non-Employee Directors Stock Option Plan for cancellation
upon my receipt of the Option Consideration after acceptance of Common Stock for
payment and purchase by Sears pursuant to the Offer.
Signature:
--------------------------------------
Name (please print):
----------------------------
Date:
--------------------------------------
<PAGE>
ORCHARD HARDWARE SUPPLY STORES CORPORATION
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
August 14, 1996
TO: Holders of Options to Purchase Common Stock of
Orchard Hardware Supply Stores Corporation Granted
Pursuant to Orchard Hardware Supply Stores Corporation's
1993 Stock Option Plan
Re: Offer of Cash in Settlement of Options
--------------------------------------
Dear Option Holder:
Orchard Hardware Supply Stores Corporation (the "Company") has
recently entered into an Agreement and Plan of Merger (the "Merger Agreement")
with Grove Acquisition Corp. ("Purchaser"), a wholly-owned subsidiary of Sears,
Roebuck and Co. ("Parent"), which provides for (i) the offer by Purchaser to
purchase all of the issued and outstanding shares of common stock, $.01 par
value (the "Common Stock"), of the Company for $35.00 in cash per share (the
"Offer Price") of Common Stock (the "Offer"), (ii) the merger of Purchaser with
and into the Company (the "Merger") after consummation of the Offer, and subject
to approval of the Company's stockholders, if necessary, and (iii) the Company's
becoming a wholly-owned subsidiary of Parent. In the Merger, each share of
Common Stock will be exchanged for $35.00 in cash, net of withholding of income
and other taxes.
As a holder of options to purchase shares of Common Stock ("Options")
pursuant to the 1993 Stock Option Plan (the "1993 Plan"), you of course have an
interest in the Offer and the Merger. You were granted Options to purchase that
number of shares of Common Stock set forth in the Stock Option Agreement between
yourself and the Company (the "Option Agreement") at the exercise price
indicated therein. Pursuant to resolutions of the Board of Directors of the
Company (the "Board") adopted on August 14, 1996, the vesting schedule of all
Options held by you pursuant to the 1993 Plan and the Option Agreement will
accelerate after acceptance of the shares of Common Stock (the "Shares") for
payment and purchase pursuant to the Offer, or at such other date which will be
the earliest date at which such Options may be exercised pursuant to the terms
of the Plan.
In order to assist you in realizing the value of your Options, and to
avoid the necessity of exercising the Options and tendering the shares purchased
pursuant to the Offer, or receiving cash for such shares in the Merger, the
Board has agreed to offer to pay you an amount in cash equal to the Offer Price
or other price paid in the Offer less the exercise price per share of your
Options and less all taxes required to be withheld from such payment (the
"Option Consideration"). This is the same cash value that you would receive if
you exercised your Options and tendered the shares purchased pursuant to the
Offer. Please note
<PAGE>
August 14, 1996
Page 2
that payment to you of the Option Consideration will occur after acceptance of
the Shares for payment and purchase pursuant to the Offer.
If you accept the terms outlined in this letter, payment of the Option
Consideration will be made to you as promptly as practicable after consummation
of the Offer, without interest, and your Option will be cancelled upon your
receipt of the Option Consideration.
You are not obligated to surrender your Options to the Company.
However, upon consummation of the Merger, the 1993 Plan, and all unexercised
Options granted thereunder, will terminate pursuant to Section 15(b) of the 1993
Plan and Section 3 of the Option Agreement. Whether or not you choose to accept
payment of the Option Consideration in accordance with this letter you are free
to exercise, until one day prior to the Effective Time, all or any portion of
your Options that are then currently vested, including such Options that vest
pursuant to the above-referenced resolutions upon consummation of the Offer.
Please complete the attached form and return it in the enclosed pre-
addressed envelope. To be eligible to receive payment of the Option
Consideration after consummation of the Offer, the attached form must be
received by the Company on or before September 17, 1996.
The Company believes that accepting the Option Consideration in
accordance with this letter is the easiest way to realize the value of your
Options. Should you have any questions about the information included in this
letter, please call me at (408) 365-2608.
Very truly yours,
Orchard Hardware Supply Stores
Corporation
By: /s/ Stephen M. Hilberg
----------------------------
Stephen M. Hilberg
Vice President-Finance and
Chief Financial Officer
<PAGE>
I, ________________ hereby ACCEPT the terms set forth in the letter from Orchard
Hardware Supply Stores Corporation to me dated August 14, 1996, to surrender my
Options under the 1993 Stock Option Plan for cancellation upon my receipt of the
Option Consideration after acceptance of Common Stock for payment and purchase
by Sears pursuant to the Offer.
Signature:
-------------------------------------
Name (please print):
---------------------------
Date:
---------------------------------------
<PAGE>
ORCHARD HARDWARE SUPPLY STORES CORPORATION
6450 VIA DEL ORO
SAN JOSE, CALIFORNIA 95119
August 14, 1996
TO: Mac Allen Culver
Re: Option Granted under the 1996 Plan
----------------------------------
Dear Mr. Culver:
You were granted an option (the "Option") to purchase 5,000 shares of
the common stock, par value $.01 per share, of Orchard Supply Hardware Stores
Corporation (the "Company") under the Company's 1996 Non-Employee Directors
Stock Option Plan (the "1996 Plan").
In light of the tender offer (the "Offer") by Sears, Roebuck and Co.
("Sears"), the Board of Directors of the Company has determined to offer to pay
you an amount in cash equal to the price paid in the Offer less the exercise
price per share of the Option and less all taxes required to be withheld from
such payment (the "Option Consideration") after consummation of the Offer. In
consideration of, and upon your receipt of, this payment, any option rights you
may have with respect to the 1996 Plan (other than the Director's Retainer)
shall be cancelled. Please signify your agreement to accept such payment in
cancellation of the Option by signing and returning the enclosed to the
undersigned.
Should you have any questions about the information included in this
letter, please call me at (408) 365-2608.
Very truly yours,
Orchard Supply Hardware Stores Corporation
By: /s/ Stephen M. Hilberg
---------------------------
Stephen M. Hilberg
Vice President-Finance and
Chief Financial Officer
<PAGE>
I, Mac Allen Culver hereby ACCEPT the terms set forth in the letter from
Orchard Supply Hardware Stores Corporation to me dated August 14, 1996, to
receive the Option Consideration. I hereby agree that, in consideration
thereof, any option rights I may have with respect to the 1996 Plan (other
than the Director's Retainer) shall be cancelled.
Signature:
------------------------------
Name: Mac Allen Culver
Date:
------------------------------
<PAGE>
EXHIBIT 10
NOTICE AND AGREEMENT REGARDING CONVERSION AND TENDER
THIS NOTICE AND AGREEMENT (this "Agreement") is made as of August 14, 1996,
by and among ORCHARD SUPPLY HARDWARE STORES CORPORATION, a Delaware
corporation (the "Company"), GROVE ACQUISITION CORP., a Delaware corporation
(the "Purchaser"), SEARS, ROEBUCK AND CO., a New York corporation (the
"Parent"), FS EQUITY PARTNERS III, L.P., a Delaware limited partnership ("FSEP
III"), FS EQUITY PARTNERS INTERNATIONAL, L.P., a Delaware limited partnership
("FSEP International," and collectively with FSEP III, the "FS Entities"),
CHASEMELLON SHAREHOLDER SERVICES, L.L.C. (the "Transfer Agent" and the
"Depositary").
R E C I T A L S
---------------
WHEREAS, the Purchaser has agreed to file a tender offer on Schedule 14D-1
(the "Offer") to acquire any and all shares of common stock, $.01 par value
per share (the "Common Stock") of the Company upon the terms and subject to
the conditions of the Agreement and Plan of Merger dated as of August ,
1996, among the Parent, the Purchaser and the Company (the "Merger Plan");
WHEREAS, the FS Entities collectively own 800,000 shares of the Company's 6%
Cumulative Convertible Preferred Stock, par value $.01 per share (the
"Preferred Stock"); and
WHEREAS, the FS Entities are prepared to convert their Preferred Stock into
Common Stock and to tender such Common Stock into the Offer if, and only if,
such Common Stock is to be accepted for purchase and payment pursuant to the
Offer.
W I T N E S S E T H
-------------------
NOW, THEREFORE, in consideration of the covenants and agreements of the
parties contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Delivery. The FS Entities hereby give notice to the Company that the
FS Entities intend to effect the conversion of the FS Entities' Preferred
Stock in accordance with the terms of this Agreement and agree to deliver
the Preferred Stock certificates to the Transfer Agent and Depositary prior
to the expiration of the Offer. The FS Entities hereby agree to convert the
Preferred Stock into Common Stock, with such conversion to be effective as
of the close of business on the business day immediately prior to, and
subject to, the acceptance of such shares of Common Stock by Purchaser for
purchase and payment pursuant to the Offer, with such acceptance to be
evidenced by Purchaser's notification of acceptance to the Depositary and
to the Transfer Agent. The conversion of the Preferred Stock into Common
Stock and the issuance of certificates evidencing such shares of Common
Stock by the Transfer Agent is subject to and expressly conditioned upon
the acceptance by Purchaser of the Common Stock for purchase and payment
pursuant to the Offer. The Transfer Agent shall not convert such Preferred
Stock into Common Stock until the Depositary has received notice from the
Purchaser to accept Common Stock for payment.
2. Stock Certificates. Upon the conversion of the Preferred Stock into
Common Stock contemplated by Section 1 of this Agreement, the Transfer
Agent shall prepare stock certificates (the "FS Certificates") evidencing
the ownership of 1,235,416 shares of Common Stock by FS Equity Partners
III, L.P. (tax identification number 95-4437287) and 44,584 shares of
Common Stock by FS Equity Partners International, L.P. (tax identification
number 98-0151673) (collectively, the "FS Shares"). The address of record
for both FSEP III and FSEP International is 11100 Santa Monica Boulevard,
Los Angeles, California
1
<PAGE>
90025. The FS Shares shall be issued with such legend or legends as
presently are required with regard to the Preferred Stock.
3. Letters of Transmittal.
a. Delivery. Upon receipt of notice from the Purchaser that the
Common Stock is to be accepted for purchase and payment pursuant to the
Offer and this Agreement, the Transfer Agent hereby agrees to deliver
the FS Certificates to the Depositary as shares tendered by the FS
Entities and delivered to the Depositary pursuant to the Offer. The FS
Entities will complete letters of transmittal with respect to such
shares of Common Stock and deliver such letters of transmittal prior to
the expiration of the Offer (collectively, the "FS Letters of
Transmittal").
b. Effectiveness. Such FS Letters of Transmittal shall become
effective with respect to the shares of Common Stock evidenced by the
FS Certificates upon the issuance of such shares by the Transfer Agent.
4. Proceeds. Upon acceptance of shares of Common Stock for payment by the
Purchaser pursuant to the Offer, and subject to the terms and conditions
hereof, the Purchaser shall cause the Depositary to wire the proceeds of
the purchase price for the FS Shares in same day funds (the "FS Proceeds")
to each of the FS Entities to the accounts provided in the FS Letters of
Transmittal, or otherwise provided in writing by the FS Entities.
5. Purchaser's Acknowledgment. The Purchaser hereby acknowledges that it
consents to and agrees to the procedures contemplated by this Agreement.
The Purchaser hereby acknowledges that such procedures comply with the FS
Entities' obligations under Section 4 and 5 of that certain Stockholder
Tender and Option Agreement, dated as of August , 1996, by and among the
Purchaser, the Parent and the FS Entities.
6. Indemnification. The Purchaser and the Parent jointly and severally
covenant to indemnify and hold you and your officers, directors, employees,
agents, contractors, subsidiaries and affiliates harmless from and against
any loss, liability, damageor expense (including without limitation any
loss, liability, damage or expense incurred for submitting for transfer
Shares tendered without a signature guarantee pursuant to the Letter of
Transmittal, or in connection with any communication or message transmitted
or purported to be transmitted through electronic means to or from a book-
entry transfer facility, and the reasonable fees and expenses of counsel)
incurred (a) without gross negligence or bad faith or (b) as a result of
your acting upon the instruction of or failing to take an action if so
instructed by the Purchaser, Parent, any dealer-manager or information
agent, arising out of or in connection with the Offer, this Agreement or
the administration of your duties hereunder, including without limitation
the reasonable costs and expenses of defending and appealing against any
action, proceeding, suit or claim in the premises. In no case shall the
Purchaser or the Parent be liable under this indemnity with respect to any
action, proceeding, suit or claim against you unless the Purchaser or the
Parent shall be notified by you, by letter or by telex or facsimile
transmission confirmed by letter, of the written assertion of any action,
proceeding, suit or claim made or commenced against you, promptly after you
shall have been served with the summons or other first legal process or
have received the first written insertion giving information as to the
nature and basis of the action, proceeding, suit or claim, but failure so
to notify the Purchaser or the Parent shall not release the Purchaser or
the Parent of any liability which it may otherwise have on account of this
Agreement. The Purchaser or the Parent shall be entitled to participate at
its own expense in the defense of any such action, proceeding, suit or
claim. Anything in this agreement to the contrary notwithstanding, in no
event shall you be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits),
even if you have been advised of the likelihood of such loss or damage and
regardless of the form of action.
7. Parties in Interest. All of the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto.
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8. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
9. Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter
contained herein and therein and supersede all prior negotiations,
agreements and understandings among the parties with respect to such
subject matter.
10. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which, when taken together,
shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
August 14, 1996.
ORCHARD SUPPLY HARDWARE STORES
CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
GROVE ACQUISITION CORP.
By: _________________________________
Name: _______________________________
Title: ______________________________
SEARS, ROEBUCK AND CO.
By: _________________________________
Name: _______________________________
Title: ______________________________
FS EQUITY PARTNERS III, L.P.
By: FS Capital Partners, L.P.
Its: General Partner
By: FS Holdings, Inc.
Its: General Partner
By: _________________________________
Name: _______________________________
Title: ______________________________
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<PAGE>
FS EQUITY PARTNERS INTERNATIONAL,
L.P.
By: FS&Co. International, L.P.
Its: General Partner
By: FS International Holdings
Limited
Its: General Partner
By: _________________________________
Name: _______________________________
Title: ______________________________
CHASEMELLON SHAREHOLDER SERVICES,
L.L.C., as Transfer Agent and
Depositary
By: _________________________________
Name: _______________________________
Title: ______________________________
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<PAGE>
EXHIBIT 11
EMPLOYMENT AGREEMENT
This Agreement is made as of 3/22/96 by and between Orchard Supply Hardware
Stores Corporation and Dale D. Ward with reference to the following facts:
1. EMPLOYMENT
Effective 4/8/96 the Company employs Dale D. Ward as Executive Vice
President and Chief Operating Officer. He shall report to and perform such
duties and functions as shall be specified by the Chief Executive Officer
(President) of the Company.
2. COMPENSATION
a. Base Salary: Executive will be paid a base salary of Two Hundred
Twenty thousand dollars ($220,000) per year. Executive's base salary will
be reviewed at least annually and may be modified at the discretion of the
Board of Directors of the Company. The base salary can be reduced only in
the event of an across the board decrease in salary of the upper level
management of the Company.
b. Executive shall be eligible to participate in Orchard's Executive
Incentive Compensation Plan, subject to the terms and conditions of the
Plan, at a level of 30% of annual base compensation. 1996 (first year)
participation will be prorated reflecting number of months employed.
3. BENEFITS
a. Executive shall be entitled to such fringe benefits and perquisites as
are generally made available to executives of the Company or as may be
granted specifically to Executive. Present fringe benefits include:
Automobile or Allowance, Health Insurance, Group Life Insurance, Vacation,
Sick Leave.
b. Executive will be granted 10,000 stock options at the time the Orchard
Supply Hardware Board of Directors generally makes them available at the
market price on date of issuance.
c. The Company reserves the rights to change, modify or eliminate any
fringe benefits or perquisites, at its sole discretion, during the term of
this Agreement.
4. TERMINATION
a. FOR CAUSE. This Agreement may be terminated by the Company "for cause"
if the Company determines that Executive has committed a material violation
of the Company's policies.
In the event of a "for cause" termination, all obligations of the Company
under this Agreement shall cease as of the date of the Executive's
termination.
b. WITHOUT CAUSE. During the first full year of employment or after the
first full year of employment and in the event of a "without cause"
termination, the Company shall continue to pay Executive's base salary (but
not fringe benefits or perquisites or other compensation such as Executive
Incentive Compensation) for a period of twelve (12) months from the date of
termination. The Company shall pay Executive severance pay equal to twelve
(12) months base salary to be paid over a twelve (12) month period by
Company pay periods in equal installments.
5. TERM OF AGREEMENT
This agreement will renew automatically annually unless both Company and
Executive agree, in writing, to terminate it at least thirty (30) days
prior to its renewal date.
<PAGE>
6. MISCELLANEOUS
a. This Agreement sets forth the entire agreement between the parties
with respect to this subject matter. All agreements, covenants,
representations or warranties, express or implied, of the parties with
regard to this subject matter are contained in the Agreement, and in the
Documents referred to or implementing its provisions. No other agreements,
covenants, representations or warranties, express or implied, oral or
written, have been made outside of this Agreement. All prior and
contemporaneous conversations, negotiations, possible and alleged
agreements and representations, covenants and warranties with respect to
the subject matter are waived, merged and superseded by this Agreement.
b. This Agreement is executed and delivered in the State of California and
shall be construed and enforced in accordance with the laws and decisions
of said State.
7. VOLUNTARY AGREEMENT
The parties agree, represent and declare that they have carefully read this
Agreement, know the contents of this Agreement, and that they sign this
Agreement freely and voluntarily.
Signatures:
3-24-96 /s/ Dale D. Ward
_____________________________________ _____________________________________
Dated Dale D. Ward
3-28-96 /s/ Maynard Jenkins, CEO
_____________________________________ _____________________________________
Dated Maynard Jenkins, CEO
3/20/96 cmj
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