<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12.
</TABLE>
SHILOH INDUSTRIES, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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<PAGE> 2
SHILOH INDUSTRIES, INC.
Suite 202
103 Foulk Road
Wilmington, Delaware 19803
Telephone: (302) 998-0592
Dear Shiloh Stockholder:
I cordially invite you to attend a special meeting (the "Special Meeting")
of the stockholders of Shiloh Industries, Inc. ("Shiloh") to be held at Holiday
Inn Select, 15471 Royalton Road, Strongsville, Ohio 44136, on August 31, 1999,
at 10:00 a.m., local time.
At the Special Meeting, you will be asked to vote on a proposal to issue up
to an aggregate amount of 2,428,571 shares of common stock, par value $0.01 per
share, of Shiloh (the "Shiloh Common Stock") pursuant to the Asset Purchase
Agreement, dated as of June 21, 1999 (the "Purchase Agreement"), among Shiloh,
Shiloh Automotive, Inc., a wholly owned subsidiary of Shiloh ("Shiloh
Automotive"), and MTD Products Inc ("MTD"). Under the Purchase Agreement, Shiloh
Automotive will acquire substantially all of the assets of MTD Automotive (the
"Acquisition"), an unincorporated division of MTD (the "Division"), for
aggregate consideration of $40.0 million, consisting of $20.0 million in cash
and $20.0 million in Shiloh Common Stock (the "Closing Consideration"). The
number of shares of Shiloh Common Stock to be issued at the closing of the
transactions contemplated by the Purchase Agreement (the "Closing") will equal
$20.0 million divided by the greater of (a) $14.00 per share or (b) to the
extent the average closing price of Shiloh Common Stock for the most recent 15
trading days ending on the business day immediately preceding the date of the
Closing (the "Closing Date") exceeds $14.50, the average closing price. The
maximum aggregate number of shares of Shiloh Common Stock that Shiloh may be
required to issue at the Closing is 1,428,571 shares. In addition, the aggregate
consideration will be increased or decreased based on the performance of the
Division over the first twelve months after the Closing (the "Post-Closing
Consideration," and together with the Closing Consideration, the
"Consideration"). If the Division's earnings before interest, income taxes,
depreciation and amortization ("EBITDA") during such period exceeds $8.5
million, then Shiloh will pay to MTD an additional amount (one-half in cash,
one-half in Shiloh Common Stock) equal to four times the amount of such excess
up to $28.0 million (the "Earnout"). If the Division's EBITDA during such period
is less than $8.5 million, then MTD will pay to Shiloh an amount (one-half in
cash, one-half in Shiloh Common Stock) equal to four times the amount of such
shortfall up to $15.0 million. The maximum aggregate number of shares of Shiloh
Common Stock that Shiloh may be required to issue in connection with the Earnout
is 1,000,000 shares.
The Closing is subject to certain conditions, including approval by Shiloh
stockholders of the issuances of shares of Shiloh Common Stock described above
(the "Share Issuances"). I urge you to read carefully the information that
follows this letter as it provides details of the Purchase Agreement.
Shiloh's board of directors (the "Shiloh Board") excluding directors
employed or designated by MTD and certain other Shiloh directors with
relationships with MTD (collectively, the "Disinterested Directors") have
carefully reviewed and considered the terms of the Purchase Agreement and have
determined that the Purchase Agreement and the transactions contemplated
thereby, including the Acquisition and the Share Issuances (collectively, the
"Transactions"), are in the best interests of Shiloh and its stockholders. The
Shiloh Board has received a fairness opinion from Robert W. Baird & Co.
Incorporated ("Baird") to the effect that the Consideration is fair, from a
financial point of view, to Shiloh. Accordingly, the Disinterested Directors
have unanimously approved the Transactions and recommend that you vote in favor
of the Share Issuances at the Special Meeting. A copy of Baird's written opinion
is attached to the accompanying Proxy Statement as Appendix B. I urge you to
read carefully the opinion in its entirety.
Your participation in the Special Meeting, in person or by proxy, is
especially important, because the item to be voted on is very important to
Shiloh. Whether or not you plan to attend the Special Meeting in person, on
behalf of Shiloh and your fellow stockholders, I urge you to complete, date,
sign and promptly return the enclosed proxy card in the enclosed prepaid
envelope to ensure that your shares will be represented at the Special Meeting.
On behalf of the Shiloh Board, I thank you for your support and urge you to
vote FOR approval of the Share Issuances.
JOHN F. FALCON
President and Chief Executive Officer
<PAGE> 3
SHILOH INDUSTRIES, INC.
Suite 202
103 Foulk Road
Wilmington, Delaware 19803
Telephone: (302) 998-0592
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 31, 1999
A special meeting of stockholders (the "Special Meeting") of Shiloh
Industries, Inc., a Delaware corporation ("Shiloh"), will be held at Holiday Inn
Select, 15471 Royalton Road, Strongsville, Ohio 44136, on August 31, 1999, at
10:00 a.m., local time, or at any adjournment or postponement thereof, for the
following purposes:
(1) To consider and vote on a proposal to approve the issuance of up to an
aggregate of 2,428,571 shares of Shiloh common stock ("Share
Issuances") pursuant to an Asset Purchase Agreement (the "Purchase
Agreement"), dated as of June 21, 1999, among Shiloh, Shiloh
Automotive, Inc., a wholly owned subsidiary of Shiloh ("Shiloh
Automotive"), and MTD Products Inc ("MTD"), under which Shiloh
Automotive will acquire substantially all of the assets of MTD
Automotive ("Acquisition"), an unincorporated division of MTD.
(2) To act on any other matters as may arise relating to the conduct of the
Special Meeting and any adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF SHILOH (EXCLUDING DIRECTORS EMPLOYED OR
DESIGNATED BY MTD AND CERTAIN OTHER SHILOH DIRECTORS WITH RELATIONSHIPS WITH
MTD) HAS UNANIMOUSLY APPROVED THE PROPOSAL DESCRIBED ABOVE AND RECOMMENDS THAT
YOU VOTE FOR THIS PROPOSAL AT THE SPECIAL MEETING.
Stockholders of record at the close of business on July 22, 1999 are
entitled to receive notice of and to vote at the Special Meeting or any
adjournment or postponement thereof. A complete list of stockholders entitled to
vote will be available for inspection at the Special Meeting and for a period of
ten days prior to the Special Meeting at Shiloh's offices at 5569 Innovation
Drive, Valley City, Ohio 44280, during ordinary business hours.
The accompanying Proxy Statement describes the Purchase Agreement and the
proposed Acquisition and Share Issuances. To ensure that your vote will be
counted, please complete, date and sign the enclosed proxy card and return it
promptly in the enclosed postage-paid envelope, whether or not you plan to
attend the Special Meeting. You may revoke your proxy in the manner described in
the accompanying Proxy Statement at any time before the vote at the Special
Meeting. Executed proxies with no instructions indicated thereon will be voted
"FOR" approval of the Share Issuances.
By Order of the Board of Directors,
DAVID J. HESSLER
Secretary
August 3, 1999
YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE MARK, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
<PAGE> 4
SHILOH INDUSTRIES, INC.
Suite 202
103 Foulk Road
Wilmington, Delaware 19803
Telephone: (302) 998-0592
-----------------------
PROXY STATEMENT
-----------------------
For a Special Meeting of Stockholders
To be Held on Tuesday, August 31, 1999
This Proxy Statement is being furnished to holders of common stock, par
value $.01 per share (the "Shiloh Common Stock"), of Shiloh Industries, Inc., a
Delaware corporation ("Shiloh"), in connection with the solicitation of proxies
by and on behalf of Shiloh's Board of Directors (the "Shiloh Board") for use at
a special meeting of stockholders to be held at 10:00 a.m., local time, on
Tuesday, August 31, 1999, at Holiday Inn Select, 15471 Royalton Road,
Strongsville, Ohio 44136, and at any adjournment or postponement thereof (the
"Special Meeting"). This Proxy Statement and the accompanying Notice and Proxy
Card are first being mailed to holders of Shiloh Common Stock entitled to notice
of, and to vote at, the Special Meeting on or about August 3, 1999.
At the Special Meeting, holders of Shiloh Common Stock will be asked to
consider and vote on a proposal to approve the issuance of up to an aggregate
amount of 2,428,571 shares of Shiloh Common Stock (the "Share Issuances")
pursuant to the Asset Purchase Agreement, dated as of June 21, 1999 (the
"Purchase Agreement"), among Shiloh, Shiloh Automotive, Inc., a wholly owned
subsidiary of Shiloh ("Shiloh Automotive"), and MTD Products Inc ("MTD"). A copy
of the Purchase Agreement is attached to this Proxy Statement as Appendix A.
Under the Purchase Agreement, Shiloh Automotive will acquire substantially all
of the assets of MTD Automotive (the "Acquisition"), an unincorporated division
of MTD (the "Division"), for aggregate consideration of $40.0 million,
consisting of $20.0 million in cash and $20.0 million in Shiloh Common Stock
(the "Closing Consideration"). The number of shares of Shiloh Common Stock to be
issued at the closing of the Acquisition (the "Closing") will equal $20.0
million divided by the greater of (a) $14.00 per share or (b) to the extent the
average closing price of Shiloh Common Stock for the most recent 15 trading days
ending on the business day immediately preceding the date of the Closing (the
"Closing Date") exceeds $14.50, the average closing price. In addition, the
aggregate consideration will be increased or decreased based on the performance
of the Division over the first twelve months after the Closing (the
"Post-Closing Consideration," and together with the Closing Consideration, the
"Consideration"). The maximum aggregate number of shares of Shiloh Common Stock
that Shiloh may be required to issue at the Closing is 1,428,571 shares. If the
Division's earnings before interest, income taxes, depreciation and amortization
("EBITDA") during such period exceeds $8.5 million, then Shiloh will pay to MTD
an additional amount (one-half in cash, one-half in Shiloh Common Stock) equal
to four times the amount of such excess up to $28.0 million (the "Earnout"). If
the Division's EBITDA during such period is less than $8.5 million, then MTD
will pay to Shiloh an amount (one-half in cash, one-half in Shiloh Common Stock)
equal to four times the amount of such shortfall up to $15.0 million. The
maximum aggregate number of shares of Shiloh Common Stock that Shiloh may be
required to issue in connection with the Earnout is 1,000,000 shares.
The Closing is subject to certain conditions, including approval by Shiloh
stockholders of the Share Issuances. Under the rules of the National Association
of Securities Dealers ("NASD") governing corporations with securities listed on
the Nasdaq national market, stockholder approval by a majority of the total
votes cast in person or by proxy at the Special Meeting is required prior to the
issuance of the Shiloh Common Stock under the Purchase Agreement because (i) the
shares will be issued to MTD, which, without giving effect to the Transactions,
owns or controls approximately 51% of the outstanding shares of Shiloh Common
Stock, and (ii) such issuance will result in an increase in the number of
outstanding shares of Shiloh Common Stock of more
<PAGE> 5
than 5% (the "NASD Vote Requirement"). Because MTD owns or controls
approximately 51% of the outstanding shares of Shiloh Common Stock before giving
effect to the Transactions and has agreed under the Purchase Agreement to vote
these shares in favor of the Share Issuances, satisfaction of the NASD Vote
Requirement is assured. However, in order to ensure that holders of Shiloh
Common Stock other than interested stockholders, such as MTD, are in favor of
the Share Issuances, the Purchase Agreement provides that stockholder approval
by a majority of the total votes cast in person or by proxy at the Special
Meeting excluding the votes of MTD and any other interested stockholders is
required in order to approve the Share Issuances (the "Majority of the Minority
Vote Requirement").
Because certain members of the Shiloh Board are either employed or
designated by MTD or otherwise have a significant relationship with MTD and,
consequently, may be considered to have divided interests in considering the
Purchase Agreement and the transactions contemplated thereby, only members of
the Shiloh Board who are neither employed or designated by, nor affiliated with,
MTD or do not otherwise have a significant relationship with MTD considered and
evaluated the Purchase Agreement and the transactions contemplated thereby on
behalf of Shiloh (the "Disinterested Directors"). In addition, the Shiloh Board
received a fairness opinion of Robert W. Baird & Co. Incorporated ("Baird"),
dated June 17, 1999, to the effect that, as of such date, the Consideration is
fair, from a financial point of view, to Shiloh. A copy of Baird's written
opinion is attached to this Proxy Statement as Appendix B.
Based on their evaluation of the Purchase Agreement and the transactions
contemplated thereby, including the Acquisition and the Share Issuances
(collectively, the "Transactions"), and the fairness opinion provided by Baird,
the Disinterested Directors have unanimously approved the Transactions and
recommend that you vote FOR approval of the Share Issuances at the Special
Meeting.
All information contained in this Proxy Statement concerning MTD and its
subsidiaries, including MTD Automotive, has been supplied by MTD and has not
been independently verified by Shiloh. Except as otherwise indicated, all other
information contained in this Proxy Statement has been supplied or prepared by
Shiloh.
THE TRANSACTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF THE TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Proxy Statement is August 3, 1999.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS REGARDING THE TRANSACTIONS............ iii
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ iv
SUMMARY..................................................... 1
SPECIAL FACTORS TO CONSIDER WHEN DECIDING HOW TO VOTE....... 4
Dilution to Existing Stockholders; Impact on Market
Value of Shiloh Common Stock.......................... 4
Consequences If Share Issuances Are Not Approved....... 4
THE SPECIAL MEETING......................................... 4
Date, Time and Place; Purpose.......................... 4
Record Date............................................ 4
Solicitation of Proxies................................ 4
Required Vote; Quorum.................................. 4
THE TRANSACTIONS............................................ 5
Background of the Transactions......................... 5
Recommendation of the Disinterested Directors; Shiloh's
Reasons for the Transactions.......................... 8
MTD's Reasons for the Transactions..................... 9
Opinion of the Financial Advisor to Shiloh............. 9
Accounting Treatment................................... 15
Regulatory Matters..................................... 15
Tax Treatment.......................................... 15
No Appraisal or Preemptive Rights...................... 15
MATERIAL PROVISIONS OF THE PURCHASE AGREEMENT............... 15
Explanatory Description................................ 15
Representations and Warranties......................... 16
Covenants.............................................. 16
Conditions............................................. 17
Termination............................................ 18
SELECTED HISTORICAL FINANCIAL DATA OF SHILOH................ 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SHILOH....................... 20
General................................................ 20
Results of Operations.................................. 21
Six Months Ended April 30, 1999 Compared to Six Months
Ended April 30, 1998.................................. 21
Year Ended October 31, 1998 Compared to Year Ended
October 31, 1997...................................... 22
Year Ended October 31, 1997 Compared to Year Ended
October 31, 1996...................................... 23
Liquidity and Capital Resources........................ 23
Year 2000 Compliance................................... 24
Effect of Inflation.................................... 26
Quantitative and Qualitative Disclosures About Market
Risk.................................................. 26
COMPARATIVE PER SHARE DATA.................................. 27
SELECTED HISTORICAL FINANCIAL DATA OF THE DIVISION.......... 27
UNAUDITED SELECTED PRO FORMA FINANCIAL DATA................. 28
Unaudited Pro Forma Combined Condensed Balance Sheet at
April 30, 1999........................................ 29
Unaudited Pro Forma Combined Condensed Statement of
Income for the Year Ended
October 31, 1998..................................... 30
</TABLE>
i
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<TABLE>
<S> <C>
Unaudited Pro Forma Combined Condensed Statement of
Income for the Six Months Ended
April 30, 1999....................................... 31
INFORMATION ABOUT THE COMPANIES............................. 32
Shiloh................................................. 32
Shiloh Automotive...................................... 32
MTD.................................................... 32
MTD Automotive......................................... 33
MARKET PRICES OF SHILOH COMMON STOCK AND DIVIDEND DATA...... 35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SHILOH...................................... 36
FUTURE STOCKHOLDER PROPOSALS................................ 38
WHERE YOU CAN FIND MORE INFORMATION......................... 38
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........... 39
ACCOUNTANTS................................................. 39
OTHER BUSINESS.............................................. 39
</TABLE>
APPENDIX A -- Asset Purchase Agreement, dated as of June 21, 1999, Shiloh
Industries, Inc., Shiloh Automotive, Inc. and MTD Products Inc
APPENDIX B -- Opinion of Robert W. Baird & Co. Incorporated dated June 17, 1999
APPENDIX C -- Shiloh Industries, Inc.'s Annual Report on Form 10-K for the
fiscal year ended October 31, 1998
APPENDIX D -- Shiloh Industries, Inc.'s Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1999
APPENDIX E -- MTD Automotive (A Division of MTD Products, Inc.) Unaudited
Interim Financial Statements for the periods ended April 30, 1999
and 1998 and the Audited Financial Statements for the year ended
July 31, 1998
APPENDIX F -- Management's Discussion and Analysis of the Results of Operations
of the Division
ii
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
<TABLE>
<S> <C>
Q1: WHAT SHOULD I DO NOW?
A1: You should vote your shares by completing, signing and
dating your proxy card and mailing it to us in the enclosed
return envelope. You may also vote by attending the Special
Meeting and voting in person.
Q2: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A2: You may change your vote by:
- sending a written notice to the Secretary of Shiloh prior
to the Special Meeting;
- signing another proxy card and returning it by mail prior
to the Special Meeting; or
- attending the Special Meeting and voting in person.
Q3: WHEN DO YOU EXPECT THE TRANSACTIONS TO BE COMPLETED?
A3: We are working to complete the Transactions as soon as
possible. We hope to complete the Transactions on the day of
the Special Meeting or the first business day immediately
following the Special Meeting.
</TABLE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have additional questions about the transactions you should contact:
SHILOH INDUSTRIES, INC.
103 Foulk Road, Suite 202
Wilmington, Delaware 19803
Attention: Craig A. Stacy
Phone Number: 330-225-3999
If you would like additional copies of this Proxy Statement, or if you
have questions with respect to voting your shares, you should contact:
Morrow & Co., Inc.
445 Park Avenue, 5th Floor
New York, New York 10022
Phone Number: 1-800-566-9061
Banks & Brokerage Firms please call: 1-800-662-5200
iii
<PAGE> 9
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements, including,
without limitation, statements concerning possible or assumed future results of
operations of Shiloh set forth under "The Transactions -- Background of the
Transactions," "-- Recommendation of the Disinterested Directors; Shiloh's
Reasons for the Transactions," "-- Opinion of the Financial Advisor to the
Shiloh Board," " Description of the Companies -- Shiloh " and "-- MTD
Automotive" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Shiloh", and including those statements preceded by,
followed by or that include the words "intends," "believes," "expects,"
"anticipates" or similar expressions. These statements constitute
forward-looking statements for purposes of the safe harbor contained in the
Private Securities Litigation Reform Act of 1995. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, among other things:
- our dependence on the automotive and light truck industry, which is
highly cyclical;
- the dependence of the automotive and light truck industry on consumer
spending, which is subject to the impact of domestic and international
economic conditions and regulations and policies regarding international
trade;
- our ability to accomplish our strategic objectives with respect to
external expansion through selective acquisitions and internal expansion;
- increases in the price of, or limitations on the availability of, steel,
our primary raw material or decreases in the price of scrap steel;
- our ability to maintain existing and obtain new customer relationships;
- risks associated with integrating operations of acquired companies,
including the Division;
- disruptions or inefficiencies in operations due to or during facility
expansions;
- risks related to labor relations, labor expenses or work stoppages
involving us, our customers or suppliers;
- the inability to adequately address issues relating to the Year 2000
problems; and
- failure to satisfy the closing conditions of the Transactions or the
failure to consummate the Transactions.
Any or all of these risks and uncertainties could cause actual results to
differ materially from those reflected in the forward-looking statements. These
forward-looking statements reflect management's analysis only as of the date of
this Proxy Statement. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. In addition to the disclosure contained herein, readers should
carefully review risks and uncertainties contained in other documents we file
from time to time with the Securities and Exchange Commission ("SEC").
iv
<PAGE> 10
SUMMARY
This summary highlights selected information from this Proxy Statement and may
not contain all of the information that is important to you. To understand the
Transactions fully and for a more complete description of the legal terms of the
Transactions, you should read carefully this entire document. Except as
otherwise noted, all references to Shiloh include all subsidiaries of Shiloh,
and all references to MTD include all subsidiaries of MTD. See "CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS." Unless otherwise indicated,
all dollar amounts herein are in U.S. dollars.
THE COMPANIES
SHILOH INDUSTRIES, INC.
P.O. Box 2027
Mansfield, Ohio 44905
(302) 998-0592
Shiloh, a Delaware corporation incorporated in 1993, is a vertically integrated
steel processor that supplies high quality blanks, stampings and processed steel
to the automotive and other industries. Shiloh's products include steel blanks
used principally by domestic and foreign automotive manufacturers for automobile
fenders and hoods and heavy truck wheels and brake parts, as well as steel
stampings used principally by automobile component manufacturers. Shiloh also
designs, engineers and produces precision tools and dies for use in its own
blanking and stamping operations as well as for sale to other industrial
customers. In addition, Shiloh performs a variety of value-added intermediate
steel processing services, such as pickling hot-rolled steel and slitting, edge
trimming, roller leveling and cutting to length hot- and cold-rolled steel.
SHILOH AUTOMOTIVE, INC.
P.O. Box 2027
Mansfield, Ohio 44905
(302) 998-0592
Shiloh Automotive is an Ohio corporation and a wholly owned subsidiary of
Shiloh, newly formed for the purpose of effecting the Transactions.
MTD PRODUCTS INC
5965 Grafton Road
Valley City, Ohio 44280-9711
(330) 225-2600
MTD has three principal lines of business. The Consumer Products Division
primarily manufactures outdoor power equipment. The Mechanical Systems Group
Division primarily manufactures washing machine transmissions and transmissions
for certain types of outdoor power equipment. The Division is primarily a Tier I
supplier of engineered metal stampings, assemblies and compression molded
plastic parts for North American car, mini-van and light truck original
equipment manufacturers ("OEMs"). The Division's metal products include
structural and powertrain components. The Division operates from facilities
located at 5389 West 130th Street, Cleveland, Ohio, and 700 Liverpool Drive,
Valley City, Ohio. MTD also has an Affiliates and Joint Venture Division under
which certain investments of MTD are managed. This includes a 50% ownership in
Commercial Turf Products, Ltd. ("CTP"), of which Lesco, Inc. is the other 50%
owner. CTP is engaged in the manufacture of outdoor power equipment for
commercial landscapers.
1
<PAGE> 11
THE SPECIAL MEETING
Date, Time and Place; Purpose
A Special Meeting of Shiloh stockholders will be held at 10:00 a.m., local
time, on August 31, 1999 at Holiday Inn Select, 15471 Royalton Road,
Strongsville, Ohio 44136. At the Special Meeting, Shiloh stockholders will be
asked to consider and vote upon a proposal to approve the Share Issuances and to
transact such other matters as may arise relating to the conduct of the Special
Meeting. See "The Special Meeting -- Date, Time and Place; Purpose."
Record Date
The close of business on July 22, 1999 is the record date for the Special
Meeting (the "Record Date"). Only Shiloh stockholders of record on the Record
Date are entitled to receive notice of and to vote at the Special Meeting. As of
the Record Date, there were 13,080,563 issued and outstanding shares of Shiloh
Common Stock. MTD owns or controls 6,707,735 shares of Shiloh Common Stock, or
approximately 51% of such outstanding shares. See "The Special Meeting -- Record
Date."
Required Vote; Quorum
Approval by a majority of the total votes cast in person or by proxy at the
Special Meeting is required to satisfy the NASD Vote Requirement and approval by
a majority of the total votes cast in person or by proxy at the Special Meeting
excluding the votes of MTD and any other interested stockholders is required to
satisfy the Majority of the Minority Vote Requirement. Because MTD owns or
controls approximately 51% of the outstanding shares of Shiloh Common Stock
before giving effect to the Transactions, and has agreed under the Purchase
Agreement to vote such shares in favor of the Share Issuances, satisfaction of
the NASD Vote Requirement is assured. Shiloh will determine whether a
stockholder is interested for purposes of the Majority of the Minority Vote
Requirement at the time of the Special Meeting.
Each share of Shiloh Common Stock outstanding on the Record Date is
entitled to one vote. There are no other voting securities of Shiloh
outstanding. A majority of the shares of Shiloh Common Stock which are issued
and outstanding and entitled to vote, present in person or represented by proxy,
at the Special Meeting shall constitute a quorum. See "The Special
Meeting -- Required Vote; Quorum."
THE TRANSACTIONS
On June 21, 1999, Shiloh, Shiloh Automotive and MTD entered into the
Purchase Agreement. Under the Purchase Agreement, Shiloh Automotive will acquire
substantially all of the assets of MTD Automotive for aggregate consideration of
$40.0 million, consisting of $20.0 million in cash and $20.0 million in Shiloh
Common Stock. The number of shares of Shiloh Common Stock to be issued at the
Closing will equal $20.0 million divided by the greater of (a) $14.00 per share
or (b) to the extent the average closing price of Shiloh Common Stock for the
most recent 15 trading days ending on the business day immediately preceding the
Closing Date exceeds $14.50, the average closing price. The maximum aggregate
number of shares of Shiloh Common Stock that Shiloh may be required to issue at
the Closing is 1,428,571 shares. In addition, the aggregate consideration will
be increased or decreased based on the performance of the Division over the
first twelve months after the Closing. If the Division's EBITDA during such
period exceeds $8.5 million, then MTD will be paid by Shiloh an additional
amount (one-half in cash, one-half in Shiloh Common Stock) equal to four times
the amount of such excess up to $28.0 million. If the Division's EBITDA during
such period is less than $8.5 million, then MTD will pay to Shiloh an amount
(one-half in cash, one-half in Shiloh Common Stock) equal to four times the
amount of such shortfall up to $15.0 million. The maximum aggregate number of
shares of Shiloh Common Stock that Shiloh may be required to issue in connection
with the Earnout is 1,000,000 shares.
STOCKHOLDER APPROVAL REQUIREMENTS
The Closing is subject to certain conditions, including approval by Shiloh
stockholders of the Share Issuances. With respect to the NASD Vote Requirement,
stockholder approval by a majority of the total votes cast
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in person or by proxy at the Special Meeting is required prior to the issuance
of the Shiloh Common Stock under the Purchase Agreement because (i) the shares
will be issued to MTD, which, without giving effect to the Transactions, owns or
controls approximately 51% of the outstanding shares of Shiloh Common Stock, and
(ii) such issuance will result in an increase in the number of outstanding
shares of Shiloh Common Stock of more than 5%. With respect to the Majority of
the Minority Vote Requirement, the Purchase Agreement provides that stockholder
approval by a majority of the total votes cast in person or by proxy at the
Special Meeting excluding the votes of MTD and any interested stockholders is
required to approve the Share Issuances in order to ensure that holders of
Shiloh Common Stock other than MTD and any other interested stockholders are in
favor of the Share Issuances.
BACKGROUND OF THE TRANSACTIONS; REASONS FOR THE TRANSACTIONS
For a description of the events leading up to the execution of the Purchase
Agreement and the factors considered by the Disinterested Directors in
evaluating and approving the Transactions, see "The Transactions -- Background
of the Transactions" and "-- Recommendation of the Disinterested Directors;
Shiloh's Reasons for the Transactions."
RECOMMENDATION OF THE DISINTERESTED DIRECTORS
The Disinterested Directors have determined that the Transactions are in
the best interests of Shiloh and its stockholders. Accordingly, the
Disinterested Directors have approved the Transactions and recommend that the
Shiloh stockholders vote FOR approval of the Share Issuances. See "The
Transactions Recommendation of the Disinterested Directors; Shiloh's Reasons for
the Transactions."
OPINION OF FINANCIAL ADVISOR TO SHILOH
On June 17, 1999, Baird delivered its opinion to the Shiloh Board to the
effect that, as of the date of such opinion, the Consideration was fair, from a
financial point of view, to Shiloh. A copy of this opinion, setting forth the
assumptions made, matters considered, scope and limitations of the review
undertaken and the general procedures followed by Baird in rendering such
opinion, is attached hereto as Appendix B. Holders of Shiloh Common Stock are
urged to read this opinion carefully and in its entirety. See "The
Transactions -- Opinion of Financial Advisor to Shiloh."
TAX TREATMENT
For U.S. federal income tax purposes, no income, gain or loss will be
recognized by Shiloh or the Shiloh stockholders as a result of the Transactions.
See "The Transactions -- Tax Treatment."
ACCOUNTING TREATMENT
The Transactions will be accounted for by Shiloh under the "purchase"
method of accounting in accordance with U.S. generally accepted accounting
principles. See "The Transactions -- Accounting Treatment."
NO APPRAISAL OR PREEMPTIVE RIGHTS
Holders of Shiloh Common Stock are not entitled under Delaware law to seek
appraisal of their shares in connection with the Transactions. In addition,
holders of Shiloh Common Stock are not entitled to preemptive rights with
respect to the Share Issuances.
REGULATORY MATTERS
The Transactions are not reportable under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") pursuant to 16 C.F.R. sec.
802.30. MTD, by virtue of its majority ownership interest in Shiloh, is the
"ultimate parent entity" of both the seller and the purchaser in the
Transactions and, as such, the Transactions are exempt. See "The
Transactions -- Regulatory Matters."
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SPECIAL FACTORS TO CONSIDER WHEN DECIDING HOW TO VOTE
DILUTION TO EXISTING STOCKHOLDERS; IMPACT ON MARKET VALUE OF SHILOH COMMON STOCK
The issuance of the new shares of Shiloh Common Stock to MTD pursuant to
the Purchase Agreement will cause dilution of the voting power of current Shiloh
stockholders, although it is expected that the Transactions will be accretive to
Shiloh's earnings per share in fiscal 2000. In addition, the issuance of such
shares of Shiloh Common Stock to MTD could cause a decline in the market value
of the Shiloh Common Stock because of the increased concentration of ownership.
CONSEQUENCES IF SHARE ISSUANCES ARE NOT APPROVED
Satisfaction of the NASD Vote Requirement and the Majority of the Minority
Vote Requirement are conditions precedent to the consummation of the
Transactions. If these requirements are not satisfied, then Shiloh or MTD have
the right under the Purchase Agreement to terminate such agreement without
liability to the other party.
THE SPECIAL MEETING
DATE, TIME AND PLACE; PURPOSE
A Special Meeting of Shiloh stockholders will be held at 10:00 a.m., local
time, on August 31, 1999 at Holiday Inn Select, 15471 Royalton Road,
Strongsville, Ohio 44136. At the Special Meeting, Shiloh stockholders of record
will be asked to consider and vote upon a proposal to approve the Share
Issuances and to transact such other matters as may arise relating to the
conduct of the Special Meeting and any postponement or adjournment thereof.
RECORD DATE
The close of business on July 22, 1999 has been fixed as the Record Date
for the determination of Shiloh stockholders entitled to notice of, and to vote
at, the Special Meeting. Only Shiloh stockholders of record at the close of
business on the Record Date are entitled to receive notice of and to vote at the
Special Meeting. As of the Record Date, there were 13,080,563 shares of Shiloh
Common Stock outstanding. As of the Record Date, MTD and the directors and
executive officers of Shiloh and their affiliates owned approximately 51% and
64%, respectively, of the outstanding shares of Shiloh Common Stock. Under the
Purchase Agreement, MTD agreed to vote all of its shares of Shiloh Common Stock
in favor of the Share Issuances.
SOLICITATION OF PROXIES
Shiloh will bear the cost of the Special Meeting and soliciting proxies
therefor. Morrow & Co. will assist in the solicitation of proxies by Shiloh for
a base fee of $6,500 plus reasonable out-of-pocket expenses. Additionally,
officers and other Shiloh employees may solicit proxies by telephone, telegram,
telefax, other electronic means or in person. Such officers and employees will
not receive any fees for such solicitation.
REQUIRED VOTE; QUORUM
Approval by a majority of the total votes cast in person or by proxy at the
Special Meeting is required to satisfy the NASD Vote Requirement and the
approval by a majority of the total votes cast in person or by proxy at the
Special Meeting excluding the votes of MTD and any interested stockholders is
required to satisfy the Majority of the Minority Vote Requirement. Because MTD
owns or controls approximately 51% of the outstanding shares of Shiloh Common
Stock before giving effect to the Transactions, and has agreed under the
Purchase Agreement to vote such shares in favor of the Share Issuances,
satisfaction of the NASD Vote Requirement is assured. Shiloh will determine
whether a stockholder is interested for purposes of the Majority of the Minority
Vote Requirement at the time of the Special Meeting. Each share of Shiloh Common
Stock outstanding on the Record Date is entitled to one vote. There are no other
voting securities of Shiloh outstanding. A majority of the shares of Shiloh
Common Stock which are issued and outstanding and entitled to vote, present
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in person or represented by proxy, at the Special Meeting will constitute a
quorum. For purposes of the quorum and the discussion below regarding the vote
necessary to take stockholder action, stockholders of record who are present at
the meeting in person or by proxy and who abstain, including brokers holding
customers' shares of record who cause abstentions to be recorded at the meeting,
are considered stockholders who are present and entitled to vote and they count
toward the quorum.
Brokers holding shares of record for customers generally are not entitled
to vote on certain matters unless they receive voting instructions from their
customers. As used herein, "uninstructed shares" means shares held by a broker
who has not received instructions from its customers on such matters and the
broker has so notified Shiloh on a proxy form in accordance with industry
practice or has otherwise advised Shiloh that it lacks voting authority. As used
herein, "broker non-votes" means the votes that could have been cast on the
matter in question by brokers with respect to uninstructed shares if the brokers
had received their customers' instructions. To be adopted, the Share Issuances
must receive the affirmative vote of the majority of the votes cast at the
Special Meeting. Uninstructed shares are not entitled to vote on this matter,
and therefore broker non-votes do not affect the outcome. Abstentions have the
effect of negative votes.
THE DISINTERESTED DIRECTORS RECOMMEND THAT SHILOH STOCKHOLDERS VOTE FOR
APPROVAL OF THE SHARE ISSUANCES.
THE TRANSACTIONS
BACKGROUND OF THE TRANSACTIONS
From time to time in recent years, members of management of Shiloh and MTD
informally discussed the strategic benefits of combining the operations of the
Division and Shiloh. However, until the summer and fall of 1998, Shiloh and MTD
did not engage in any formal discussions regarding such a transaction. In July
1998, in light of certain trends affecting the automotive industry, Robert L.
Grissinger, Shiloh's Chairman of the Board, President and Chief Executive
Officer at the time, and David J. Hessler, a member of Shiloh's Board of
Directors, initiated discussions regarding the possibility of, and the strategic
benefits associated with, combining the operations of Shiloh and the Division.
Based on these initial discussions, Mr. Grissinger advised the Shiloh Board at
its August 13, 1998 meeting that Shiloh should consider pursuing an acquisition
of the Division. A brief discussion among the directors followed regarding the
strategic benefits of such a combination. Based on the directors' initial
reaction to the proposal, Mr. Grissinger recommended that Shiloh's management
make a formal presentation to the Shiloh Board regarding the Division at its
next meeting in order to provide the board with more information to evaluate the
desirability of pursuing such a transaction.
In September 1998, MTD retained PricewaterhouseCoopers Securities, LLC
("PWS") to assist MTD in the sale of the Division. MTD and PWS prepared an
offering memorandum describing the Division's business and providing certain
financial information regarding the Division. The offering memorandum was
provided to Shiloh in November 1998 for its review. MTD did not provide the
offering memorandum to any other party.
In December 1998, the Division's management made a presentation to members
of Shiloh's executive staff, including Craig A. Stacy, Chief Financial Officer
and Treasurer, William R. Burton, Senior Vice President, Corporate Planning, G.
Rodger Loesch, Executive Vice President of Engineered Products, David K. Frink,
Executive Vice President of Steel Processing and Director of Corporate
Purchasing, Robert Worley, General Manager of Marketing, and Nicholas L.
Blauwiekel, Corporate Vice President, Human Resources, regarding the Division.
The focus of this presentation was the potential strategic benefits that would
result from a combination of Shiloh and the Division. The Division's management
then made a similar presentation to the Shiloh Board at the Board's December 10,
1998 meeting. Based on this presentation, the Shiloh Board authorized Shiloh's
management to commence a due diligence review of the Division and to evaluate
the merits of acquiring the Division. To assist Shiloh in its due diligence and
evaluation of the Division, Shiloh engaged Robert W. Baird & Co. Incorporated to
act as its financial advisor, Jones, Day, Reavis & Pogue to act as its legal
advisor, and Ernst & Young LLP to perform certain due diligence with respect to
the Division's financial and accounting information.
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Between December 10, 1998 and February 18, 1999, members of Shiloh's due
diligence team and the management of the Division and MTD met on numerous
occasions to discuss various issues with respect to the Division, its business
and the impact of Shiloh's acquisition of the Division. In particular, the
parties focused on the Division's past, current and projected revenues, its
steel purchasing policies and programs, the tooling component of the Division's
business, the Division's relationship with its major customers and suppliers and
the Division's past history of losses and its potential for future earnings.
During this period, Shiloh personnel toured the Division's facilities and, with
respect to certain elements of the Division's operations, conducted extensive
"hands-on" testing and evaluation. Additionally, personnel of both MTD and
Shiloh met numerous times at off-site locations to address issues regarding the
proposed transaction as such issues arose.
On February 1, 1999, members of Shiloh's due diligence team met to discuss
the results of their efforts to date and to determine the next steps in the
diligence process. At this meeting, Shiloh determined that additional work was
needed in order to properly value the Division and its business. After this
meeting, Shiloh's financial personnel performed additional due diligence
regarding the Division's finances. As part of this review, certain members of
management of Shiloh and MTD, including Messrs. Burton and Stacy on behalf of
Shiloh and Ronald C. Houser and David Colburn, President of the Division, on
behalf of MTD, met on February 12, 1999 to discuss issues related to the value
of the Division.
On February 18, 1999, at Shiloh's regular board meeting, the Shiloh Board
discussed, among other things, the proposed acquisition of the Division. At this
meeting, Shiloh's management informed the Shiloh Board that it was still in the
process of completing its review of the Division. The Shiloh Board authorized
Shiloh's management to continue its work so that it would be in a position at
the Board of Directors meeting on March 25, 1999 to make a formal presentation
regarding the acquisition of the Division.
Between February 18, 1999 and March 25, 1999, Shiloh's management continued
its extensive due diligence review of the Division and prepared a presentation
regarding the Division and the merits of acquiring the Division. As a result of
this additional work and further discussions with management of the Division and
MTD, Shiloh's management began to arrive at a value for the Division. MTD
indicated during its discussions with Shiloh regarding valuation that it desired
to have the purchase price for the Division paid entirely in Shiloh Common
Stock.
At the Shiloh Board's March 25, 1999 meeting, Messrs. Burton and Stacy made
a formal presentation regarding the Division, outlining the economic terms of
the proposed transaction and detailing the strategic rationale for acquiring the
Division. Prior to this presentation, Shiloh's legal advisor reviewed the legal
duties and responsibilities of the directors in connection with the proposed
acquisition of the Division, particularly in light of MTD's significant
ownership interest in Shiloh. Based on the advice of Shiloh's counsel, the
members of the Shiloh Board employed or designated by MTD, Curtis E. Moll,
Dieter Kaesgen and Mr. Hessler, left the meeting because of their relationship
with MTD.
During his presentation, Mr. Burton indicated that the primary strategic
reason for pursuing the acquisition of the Division was to enhance Shiloh's Tier
I business and complement its Tier II business. Mr Burton then described how the
Division was the appropriate platform to achieve these objectives. In addition,
Mr. Burton described how the acquisition of the Division would enable Shiloh to
continue to grow and absorb overhead costs more effectively while providing
Shiloh with "deep draw" tooling and enhanced engineering capabilities. Mr. Stacy
then made a presentation regarding the financial results and condition of the
Division. Thereafter, Baird made a presentation to the Shiloh Board regarding
the proposed transaction. After these presentations, the remaining members of
the Shiloh Board deferred making any definitive decision with respect to
acquiring the Division and, instead, asked Shiloh's management and advisors to
continue its work and to address a number of specific questions and concerns
that the directors had about the Division and the proposed transaction. In
particular, the directors sought more information regarding the change in
Shiloh's strategy, the timing of this change in strategy, the appropriateness of
the Division as the vehicle for Shiloh to enhance its Tier I business, the
Division's historical operating performance and Shiloh's ability to integrate
the Division. Further, the Shiloh Board questioned whether any cost reduction
efforts had been undertaken by the Division and asked the Shiloh management team
to explore the possibility of effecting such cost reductions. In addition, the
Shiloh Board
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expressed concern regarding a change of control of Shiloh as a result of the use
of Shiloh Common Stock as acquisition currency.
Also, at the March 25, 1999 board meeting, the Shiloh Board named Mr. Moll
as the Chairman of the Board of Shiloh replacing Mr. Grissinger, who was
retiring, and agreed to extend an offer to Jack F. Falcon to become the new
President and Chief Executive Officer of Shiloh, replacing Mr. Grissinger. In
addition to its other questions and concerns, the Shiloh Board also indicated
that it desired to have the new President and Chief Executive Officer's input
with respect to the proposed transaction before making any final decision.
Mr. Falcon accepted Shiloh's offer and on April 12, 1999 commenced his
tenure as President and Chief Executive Officer of Shiloh.
After the March 25, 1999 board meeting, Shiloh's management, including Mr.
Falcon after commencement of his tenure, proceeded to gather the information
necessary to address the Shiloh Board's questions and concerns.
On April 9, 1999, trusts of Dominick C. Fanello and James C. Fanello, both
officers and directors of Shiloh, agreed to sell an aggregate of 1,000,000
shares of Shiloh Common Stock to Summit Insurance Company of America, a wholly
owned subsidiary of MTD, at a per share price of $14.50. This transaction closed
effective May 17, 1999. Through this acquisition of shares, MTD's beneficial
ownership interest in Shiloh increased to approximately 51%. As a result of this
transaction with MTD, Messrs. D. Fanello and J. Fanello no longer participated
as board members in the approval process with respect to the proposed
acquisition of the Division.
In early April 1999, MTD advised Shiloh that it had initiated a headcount
reduction at the Division totaling 167 employees, which MTD estimated would
result in significant annual cost savings for the Division. On April 28, 1999,
Shiloh and MTD personnel met to discuss a proposed purchase price for the
Division. At this meeting, MTD discussed its basis for valuation, which took
into account the cost savings provided by the headcount reduction. Shiloh
indicated to MTD that it needed to review the basis for this valuation and that
it would have the Shiloh due diligence team and Ernst & Young thoroughly
evaluate the basis for MTD's valuation of the Division. In addition, the Shiloh
management team indicated that it could not support the approval of the
Transactions unless the head count reductions were appropriately factored into
the valuation and sustainable. Thereafter, through May 7, 1999, Shiloh's due
diligence team reviewed the Division's operations, financial information and
headcount reduction in order to assess the valuation of the Division. During
this evaluation, Shiloh focused particularly on the ability of the Division to
operate at current levels after giving effect to the headcount reduction. After
conducting a thorough review, Shiloh's management concurred with MTD's findings
that the cost reductions associated with the Division's headcount reduction were
sustainable in the future.
On May 7, 1999, Shiloh and MTD personnel met again to discuss the value of
the Division based on Shiloh's due diligence review. The key participants in
this meeting were Messrs. Falcon and Stacy of Shiloh and Messrs. Houser and
Keith Vanderburg of MTD. Based on the work of its diligence team, Shiloh agreed
to support the proposed transaction at a valuation of $40.0 million, which was
based principally on the cost reductions implemented by MTD. After extensive
negotiations, Shiloh and MTD agreed, subject to the approval of the Shiloh
Board, to a purchase price for the Division of $40.0 million, payable one-half
in cash and one-half in Shiloh Common Stock. Because MTD believed that the
Division's performance, after giving effect to the headcount reductions, would
exceed the performance level upon which Shiloh's valuation of $40.0 million was
based, Shiloh agreed to provide MTD with an earnout covering the first 12 months
after the Closing. If, however, the Division's EBITDA for the first twelve
months following the Closing was less than $8.5 million, which was Shiloh's
basis for its $40.0 million valuation, then MTD could be required to pay to
Shiloh up to $15.0 million.
At the May 20, 1999 meeting of the Shiloh Board, the Shiloh Board accepted
Mr. Grissinger's resignation as a director and appointed Mr. Falcon as a
director of Shiloh. Mr. Falcon, at his first Shiloh Board meeting as the
President and Chief Executive Officer of Shiloh, then made a presentation
regarding the Division, outlining the economic terms discussed at Shiloh's and
MTD's May 7 meeting and his rationale for the proposed transaction. Prior to Mr.
Falcon's presentation, Messrs. Moll, Kaesgen, Hessler, J. Fanello and D. Fanello
left the meeting because of their relationship with MTD. During Mr. Falcon's
presentation, the remaining members of the Shiloh Board (the "Disinterested
Directors") focused on the terms of the proposed transaction. Mr. Falcon did not
ask
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for a vote of the Shiloh Board on the proposed transaction. After Mr. Falcon's
presentation, the Disinterested Directors asked Shiloh's management to address
some additional issues and concerns relating to the proposed transaction,
including the terms of the Earnout, the Division's operating performance and the
status of Baird's review of the proposed transaction.
Between April 1999 and June 17, 1999, MTD and Shiloh personnel negotiated
an asset purchase agreement relating to Shiloh's acquisition of the Division.
Among the key terms negotiated were various protections for Shiloh in the event
of, among other things, certain price concessions and capital expenditures for
the Division in excess of projected amounts. Also, MTD agreed to take
responsibility for all liabilities for environmental matters relating to the
Division's facilities arising on or prior to Closing.
During May 1999, Mr. Falcon met separately with Richard S. Gray, James A.
Karman and Theodore K. Zampetis, the other Disinterested Directors, to discuss
the acquisition of the Division and his vision of Shiloh in the future.
On June 17, 1999, the Shiloh Board held a special meeting to review the
proposed terms and conditions of Shiloh's acquisition of the Division. In order
to have a quorum for the special meeting, the meeting was initially attended by
the Disinterested Directors and Messrs. Moll and Hessler. Prior to commencing
discussions of the proposed transaction, however, Messrs. Moll and Hessler left
the meeting because of their relationship with MTD. During this meeting, Messrs.
Falcon and Stacy reviewed the status of Shiloh's negotiations with MTD. Shiloh's
legal advisor reviewed the terms and conditions of the asset purchase agreement
and the legal duties and responsibilities of the Shiloh Board in connection with
the proposed transaction. Baird presented an analysis of the financial terms of
the proposed transaction, including a discussion of the financial data and
analyses used in evaluating the transaction. Baird also provided a written
opinion to the effect that, on the date of its opinion and based upon and
subject to the various considerations set forth in its opinion, the
Consideration was fair, from a financial point of view, to Shiloh. Following
substantial discussion, the Disinterested Directors unanimously determined that
the Acquisition and the related Share Issuances were in the best interests of
Shiloh and its stockholders. The Disinterested Directors approved these matters
and the Share Issuances, subject to negotiation of the final terms of the
Purchase Agreement, and authorized its officers to take other steps necessary to
effect the Transactions.
Between June 17, 1999 and June 21, 1999, Shiloh and MTD representatives
negotiated the final terms of the Purchase Agreement. On the evening of June 21,
1999, the parties reached agreement on the final terms of the Purchase Agreement
and executed the Purchase Agreement. Prior to commencement of trading on June
22, 1999, Shiloh and MTD issued a joint press release announcing the execution
of the Purchase Agreement.
RECOMMENDATION OF THE DISINTERESTED DIRECTORS; SHILOH'S REASONS FOR THE
TRANSACTIONS
THE DISINTERESTED DIRECTORS BELIEVE THAT THE TRANSACTIONS ARE IN THE BEST
INTERESTS OF SHILOH AND ITS STOCKHOLDERS. THE DISINTERESTED DIRECTORS HAVE
UNANIMOUSLY APPROVED THE TRANSACTIONS, INCLUDING THE SHARE ISSUANCES AND
UNANIMOUSLY RECOMMENDS TO ITS STOCKHOLDERS THAT THEY VOTE FOR THE SHARE
ISSUANCES.
In reaching its decision to approve and recommend the Share Issuances, the
Disinterested Directors considered a number of factors, including those
described below:
- The views of Shiloh's management regarding the proposed Transactions and
the anticipated operating improvements at the Division;
- The strategic value of positioning Shiloh as a Tier I supplier and
providing Shiloh with a platform to enhance its Tier I capabilities while
providing Shiloh with "deep draw" tooling and enhanced engineering
capabilities;
- The benefits of enjoying certain economies of scale by combining the two
businesses and eliminating certain duplications in overhead, particularly
with respect to steel purchasing;
- Information concerning the business, assets, liabilities, financial
performance and condition and prospects of Shiloh and the Division;
- The impact of the continuing consolidation trend among automotive
suppliers;
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- The opinion of Baird to the Shiloh Board to the effect that, as of the
date of its opinion and based upon and subject to the various
considerations set forth in its opinion, the Consideration was fair, from
a financial point of view, to Shiloh;
- Current and historical market prices and trading information with respect
to the Shiloh Common Stock;
- The price for the Shiloh Common Stock payable under the Earnout and the
downside protection provided under the Purchase Agreement in the event
that the Division's projected EBITDA for the twelve months following the
Closing is not achieved;
- The expectation that the Transactions will be accretive to Shiloh's
earnings per share beginning in fiscal 2000;
- The financial terms and structure of the Transactions, including the
amount of the purchase price relative to the value of the assets acquired
from MTD, and the terms and conditions on the Purchase Agreement; and
- The Majority of the Minority Voting Requirement contained in the Purchase
Agreement.
The Disinterested Directors also considered certain countervailing factors
in its deliberations concerning the Transactions, including:
- The historical financial performance of the Division;
- The costs related to Shiloh enhancing its operations as a Tier I
supplier;
- The challenges of integrating the Division; and
- The risk that the Transactions would not be consummated.
In the view of the Disinterested Directors, these considerations were not
sufficient, individually or in the aggregate, to outweigh the advantages of the
Transactions.
The Disinterested Directors considered Baird's opinion and underlying
analyses as a whole and did not separately evaluate each analysis performed by
Baird. In particular, the Disinterested Directors did not make any judgment that
any analysis performed by Baird supported or did not support Baird's opinion.
The foregoing discussion of the information and factors considered by the
Disinterested Directors includes all material factors considered by the
Disinterested Directors. In light of the wide variety of factors considered in
its evaluation of the Transactions and the complexity of these matters, the
Disinterested Directors did not find it practicable to and did not attempt to
quantify, rank or otherwise assign relative weights to these factors. The
Disinterested Directors conducted an overall analysis of the factors described
above, including discussions with Shiloh's management and legal, financial and
accounting advisors. In considering the factors described above, individual
Disinterested Directors may have given different weight to different factors.
The Disinterested Directors considered all these factors as a whole and
considered the factors overall to be favorable to and to support its
determination. After considering all of the factors described above as of the
date of this Proxy Statement, the Disinterested Directors continue to believe
that the Transactions are in the best interests of Shiloh and its stockholders
and continue to recommend that Shiloh stockholders vote FOR the Share Issuances.
MTD'S REASONS FOR THE TRANSACTIONS
In light of the continuing consolidation trend among automotive suppliers,
MTD determined that the Division could not effectively compete as a standalone
business. As a result, MTD explored various alternatives for enhancing the
Division's business, including the sale of the Division. MTD believes that the
combination of the Division and Shiloh will provide both businesses with an
opportunity to grow that would not have been available if each remained a
separate business.
OPINION OF THE FINANCIAL ADVISOR TO SHILOH
Shiloh retained Baird to act as its financial advisor in connection with
the acquisition and to render Baird's opinion as to the fairness, from a
financial point of view, of the Consideration to Shiloh. On June 17, 1999, Baird
rendered its opinion to the Shiloh Board to the effect that, as of such date and
based upon and subject to the
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various considerations described in the opinion, the Consideration was fair,
from a financial point of view, to Shiloh.
THE FULL TEXT OF BAIRD'S OPINION, DATED JUNE 17, 1999, WHICH DESCRIBES THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS OPINION,
IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT AND IS INCORPORATED IN THIS
DOCUMENT BY REFERENCE. BAIRD'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, AS OF
THE DATE OF THE OPINION AND FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION
TO SHILOH. BAIRD'S OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF THE
ACQUISITION AND ANY OTHER POTENTIAL TRANSACTIONS OR BUSINESS STRATEGIES
CONSIDERED BY THE SHILOH BOARD, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHILOH STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE
SHARE ISSUANCES. THE SUMMARY OF BAIRD'S OPINION SET FORTH BELOW IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION ATTACHED AS APPENDIX
B. SHILOH STOCKHOLDERS ARE URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY.
In conducting its investigation and analysis and in arriving at its
opinion, Baird reviewed information and took into account financial and economic
factors it deemed relevant under the circumstances. In that connection, Baird,
among other things:
- reviewed certain internal information, primarily financial in nature,
including projections concerning the business and operations of the
Division and Shiloh, furnished to Baird for purposes of its analysis;
- reviewed publicly available information including but not limited to
Shiloh's recent filings with the SEC and equity analyst research reports
prepared by various investment banking firms, including Baird;
- reviewed the draft Purchase Agreement in the form presented to the Shiloh
Board;
- compared the historical market prices and trading activity of Shiloh
Common Stock with those of certain other publicly traded companies Baird
deemed relevant;
- compared the financial position and operating results of the Division and
Shiloh with those of certain other publicly traded companies Baird deemed
relevant;
- compared the proposed financial terms of the Acquisition with the
financial terms of certain other business combinations Baird deemed
relevant; and
- reviewed certain potential pro forma effects of the Acquisition.
Baird held discussions with members of MTD's and Shiloh's respective senior
managements concerning the Division's and Shiloh's historical and current
financial condition and operating results, as well as the future prospects of
Shiloh and the Division. Baird reviewed and relied upon, at the request and with
the consent of Shiloh, the MTD Automotive Due Diligence Report Prepared For
Shiloh Industries, Inc. dated March 19, 1999 (the "Due Diligence Report"),
prepared by Ernst & Young. Baird also considered other information, financial
studies, analysis and investigations and financial, economic and market criteria
which Baird deemed relevant for the preparation of its opinion. MTD and Shiloh
determined the Consideration in arms-length negotiations. Shiloh did not place
any limitation upon Baird with respect to the procedures followed or factors
considered by Baird in rendering its opinion.
In arriving at its opinion, Baird assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided to Baird by or on behalf of MTD, the Division and Shiloh.
Baird was not engaged to independently verify any of this information. Baird
assumed, with Shiloh's consent, that:
- all material assets and liabilities (contingent or otherwise, known or
unknown) of the Division and Shiloh are as set forth in their respective
financial statements;
- the Acquisition will be accounted for under the purchase method of
accounting;
- the indemnification provisions of the Purchase Agreement will be
sufficient to hold Shiloh harmless for the liabilities or losses relating
to the Division or the Purchase Agreement identified in such provisions;
- the Closing Net Working Capital (as defined in the Purchase Agreement)
will be at least $27.0 million;
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<PAGE> 20
- the cost savings and operating benefits currently contemplated by
Shiloh's management to result from the Division's restructuring and from
the Acquisition (including without limitation certain depreciation
expense reductions resulting from purchase accounting adjustments) will
be realized; and
- the Acquisition will be consummated in accordance with the terms of the
draft Purchase Agreement in the form presented to the Shiloh Board,
without any amendment and without waiver by any of the parties to their
respective obligations under the Agreement.
Baird also assumed that the projections and other financial forecasts
examined by it, including estimates of cost savings and operating benefits, were
reasonably prepared on bases reflecting the best available estimates and good
faith judgments of Shiloh's, MTD's and the Division's respective senior
managements as to future performance of Shiloh and the Division, respectively.
In conducting its review, Baird did not undertake nor obtain an independent
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of Shiloh or the Division nor did it make a physical inspection of
the properties or facilities of Shiloh or the Division. Baird's opinion
necessarily was based upon economic, monetary and market conditions as they
existed and could be evaluated on the date of its opinion, and did not predict
or take into account any changes which may occur, or information which may
become available, after the date of Baird's opinion. Baird's opinion relates to
the purchase of the Division as a going concern, and Baird was not engaged, nor
did it undertake, to analyze on a stand-alone basis any of the purchased assets,
assumed liabilities, assigned contracts or collateral agreements being entered
into in connection with the Acquisition. Furthermore, Baird expressed no opinion
as to the price or trading range at which any of Shiloh's securities, including,
but not limited to, Shiloh Common Stock, will trade at any time.
The following is a summary of the material financial analyses performed by
Baird in connection with rendering its opinion.
Analysis of Implied Division Acquisition Multiples. Baird calculated the
"Implied Enterprise Value" of the Division reflected by the terms of the
Acquisition to be $36,071,429. The Implied Enterprise Value was obtained by
calculating the sum of $20,000,000 in cash plus 1,428,571 shares to be issued by
Shiloh multiplied by the closing price per share of Shiloh Common Stock of
$11.25 on June 11, 1999. Because the Acquisition excludes any debt or cash
balances, "Implied Enterprise Value" and "Implied Equity Value" are equivalent.
In performing its analysis, Baird used, among other items, operating statistics
for the Division's latest twelve months ("LTM") ended April 30, 1999 and its
estimated pro forma results for the fiscal year ended July 31, 1999 ("1999EPF").
1999EPF results (i) exclude certain one time, non-recurring items as described
in the Due Diligence Report, (ii) reflect an annualized estimate of depreciation
expense reductions resulting from certain purchase accounting adjustments
expected by Shiloh's management, and (iii) reflect an annualized estimate of
cost savings and other operating benefits estimated by Shiloh's management to
result from certain restructuring activities of the Division. Baird calculated
multiples of the Implied Equity Value to the Division's LTM and 1999EPF net
income and book value. Baird also calculated multiples of the Division's Implied
Enterprise Value to its LTM and 1999EPF net sales, earnings before interest,
taxes, depreciation, amortization and non-recurring items ("EBITDA") and its
earnings before interest, taxes and non-recurring items ("EBIT"). The
calculations resulted in multiples of the Implied Total Equity Value to LTM and
1999EPF net income that were not meaningful ("N/M") due to a negative statistic
and 7.9x, respectively. The calculation of Implied Equity Value to book value
resulted in a multiple of 0.6x. The ratios of Implied Enterprise Value to the
Division's LTM and 1999EPF net sales, EBITDA and EBIT were 0.2x and 0.2x, 6.5x
and 4.2x, and N/M and 4.8x, respectively. Both the Implied Enterprise Value and
the Implied Equity Value were calculated without adding or subtracting an amount
for any earnout payment that might be made to or by Shiloh, based upon the
financial performance of the Division in the first year after the closing of the
Acquisition. Baird's analysis of the potential earnout payments is discussed
below under "Pro Forma Acquisition Analysis."
Analysis of Selected Publicly Traded Companies Comparable to the
Division. Baird reviewed certain publicly available financial information as of
the most recently reported period and stock market information as of June 11,
1999, for twelve publicly traded companies that Baird deemed relevant. These
comparable companies consisted of the following twelve automotive parts
suppliers:
- American Axle & Manufacturing Holdings, Inc. - Magna International Inc.
11
<PAGE> 21
- Arvin Industries, Inc. - Mascotech, Inc.
- Donnelly Corporation - Modine Manufacturing Company
- Dura Automotive Systems, Inc. - Noble International, Ltd.
- Hayes Lemmerz International, Inc. - Simpson Industries, Inc.
- Intermet Corporation - Tower Automotive, Inc.
For each comparable company, Baird calculated multiples as of June 11, 1999
of Enterprise Value (i.e., the total number of outstanding shares of common
stock on a diluted basis, multiplied by the market price of the common stock,
plus outstanding debt and minority interest, minus cash, cash equivalents and
net proceeds from the exercise of outstanding options) to LTM net sales, EBITDA
and EBIT. Baird then compared these multiples to the relevant Division multiples
based on the Implied Enterprise Value. An analysis of the multiples of
Enterprise Value to LTM net sales, EBITDA and EBIT yielded 0.2x, 6.5x and N/M,
respectively, for the Division. An analysis of the multiples of Enterprise Value
to 1999EPF net sales, EBITDA, and EBIT yielded 0.2x, 4.2x, and 4.8x ,
respectively, for the Division. Ranges of multiples of Enterprise Value to LTM
net sales, EBITDA and EBIT for comparable companies were 0.3x to 1.8x, 4.6x to
10.3x and 6.8x to 19.1x, respectively. For each comparable company, Baird also
calculated multiples of Equity Value as of June 11, 1999 (i.e., the total number
of outstanding shares on a diluted basis, multiplied by the market price of the
common stock) to LTM net income and book value. Baird then compared these
multiples to the relevant Division multiples based on the Implied Equity Value.
An analysis of the multiples of Equity Value to LTM net income and book value
yielded N/M and 0.6x, respectively, for the Division. An analysis of the
multiple of Equity Value to 1999EPF net income for the Division yielded 7.9x.
Ranges of multiples of Equity Value to LTM net income and book value for
comparable companies were 7.9x to 22.6x and 1.1x to 4.7x, respectively. The
table below summarizes the results of this analysis and is qualified in its
entirety by reference to the other disclosure contained in this section and
Appendix B of this Proxy Statement.
<TABLE>
<CAPTION>
DIVISION
IMPLIED ACQUISITION
MULTIPLES
-------------------- COMPARABLE COMPANY
LTM 1999EPF MULTIPLES RANGE
------ ---------- ------------------
<S> <C> <C> <C>
Enterprise Value to Net Sales................... 0.2x 0.2x 0.3x to 1.8x
Enterprise Value to EBITDA...................... 6.5x 4.2x 4.6x to 10.3x
Enterprise Value to EBIT........................ N/M 4.8x 6.8x to 19.1x
Equity Value to Net Income...................... N/M 7.9x 7.9x to 22.6x
Equity Value to Book Value...................... 0.6x 0.6x 1.1x to 4.7x
</TABLE>
Analysis of Selected Publicly Traded Companies Comparable to Shiloh. In
order to assess the relative public market valuation of Shiloh Common Stock to
be used by Shiloh in exchange for substantially all of the Division's assets,
Baird reviewed certain publicly available financial information as of the most
recently reported period and stock market information as of June 11, 1999, for
eleven publicly traded companies that Baird deemed relevant. These comparable
companies consisted of the following eleven steel service companies:
- A.M. Castle & Co. - Reliance Steel & Aluminum Co.
- Cold Metal Products, Inc. - Ryerson Tull, Inc.
- Gibraltar Steel Corporation - Schnitzer Steel Industries, Inc.
- Metals USA, Inc. - Steel Technologies Inc.
- Novamerican Steel Inc. - Worthington Industries, Inc.
- Olympic Steel, Inc.
For each comparable company, Baird calculated multiples as of June 11, 1999
of Enterprise Value to LTM net sales, EBITDA and EBIT. Baird then compared these
multiples to the relevant Shiloh multiples based on Shiloh's closing share price
of $11.25 on June 11, 1999, and Shiloh's LTM operating performance statistics
for the period ended April 30, 1999, as provided by publicly available
information. An analysis of the multiples of
12
<PAGE> 22
Enterprise Value to LTM net sales, EBITDA and EBIT yielded 0.9x, 7.5x and 12.4x,
respectively, for Shiloh compared to ranges of 0.3x to 1.0x, 5.3x to 12.0x and
6.2x to 12.6x, respectively, for the comparable companies. For Shiloh and each
comparable company, Baird also calculated multiples as of June 11, 1999 of
Equity Value to LTM net income and book value, and ratios of stock price as of
June 11, 1999 to projected earnings per share for calendar year 1999 and 2000
(based on First Call consensus estimates for Shiloh and the comparable
companies) ("P/E Ratios"). An analysis of multiples of Equity Value to LTM net
income and book value yielded 13.6 and 0.9x, respectively for Shiloh compared to
ranges of 7.6x to 24.1x and 0.6x to 2.0x, respectively, for comparable
companies. An analysis of the P/E Ratios based on Shiloh's earnings per share
for projected calendar year 1999 and 2000 yielded 8.8x and 6.4x, respectively,
compared to ranges of 8.2x to 16.7x and 4.8x to 21.1x, respectively, for the
comparable companies. The table below summarizes the results of this analysis
and is qualified in its entirety by reference to the other disclosure contained
in this section and Appendix B of this Proxy Statement.
<TABLE>
<CAPTION>
SHILOH COMPARABLE COMPANY
MULTIPLES MULTIPLES RANGE
--------- ------------------
<S> <C> <C>
Enterprise Value to LTM Net Sales...................... 0.9x 0.3x to 1.0x
Enterprise Value to LTM EBITDA......................... 7.5x 5.3x to 12.0x
Enterprise Value to LTM EBIT........................... 12.4x 6.2x to 12.6x
Equity Value to LTM Net Income......................... 13.6x 7.6x to 24.1x
Calendar Year 1999 P/E Ratio........................... 8.8x 8.2x to 16.7x
Calendar Year 2000 P/E Ratio........................... 6.4x 4.8x to 21.1x
Equity Value to Book Value............................. 0.9x 0.6x to 2.0x
</TABLE>
Analysis of Selected Comparable Acquisition Transactions. Baird reviewed
twelve completed acquisition transactions which Baird deemed relevant. These
transactions were chosen based on a review of acquired companies that possessed
general business, operating and financial characteristics representative of
companies which manufacture and sell automotive parts. The twelve transactions
reviewed (the "Comparable Transactions") were (acquiror/acquired company):
- Dura Automotive Systems, Inc./ Adwest Automotive
- Tomkins plc/Stant Corporation plc
- Rhone Capital LLC/ Bliss Manufacturing Company
- Tower Automotive, Inc./ Automotive Products Company
- Federal-Mogul Corporation/T&N plc
- The Mayflower Corporation plc/ South Charleston Stamping and
Manufacturing Company
- Dura Automotive Systems, Inc./ GT Automotive Systems, Inc.
- Dura Automotive Systems, Inc./ KPI Automotive Group
- Oxford Automotive, Inc./ Howell Industries, Inc.
- Magna International Inc./ Douglas & Lomason Company
- GKN plc/Sinter Metals, Inc.
- R.J. Tower Corporation/ MascoTech Stamping Technologies, Inc.
Baird noted that none of the Comparable Transactions was identical to the
acquisition. Accordingly, Baird noted that the analysis of comparable
transactions necessarily involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
Division and other factors that would affect the acquisition value of comparable
transactions including, among others, the general market conditions prevailing
in the equity capital markets at the time of that transaction. For each of the
Comparable Transactions, Baird calculated multiples of Enterprise Value to LTM
net sales, EBITDA and EBIT; and calculated multiples of Equity Value to LTM net
income and book value. Baird then compared those multiples and premiums to the
relevant Division LTM and 1999EPF multiples based on the Implied Enterprise
Value and Implied Equity Value. These calculations yielded multiples of
Enterprise Value to LTM net sales, EBITDA and EBIT of 0.2x, 6.5x and N/M,
respectively, for the Division. Multiples of Enterprise Value to 1999EPF net
sales, EBITDA, and EBIT
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<PAGE> 23
were 0.2x, 4.2x, and 4.8x respectively, for the Division. Ranges of multiples of
Enterprise Value to LTM net sales, EBITDA and EBIT were 0.2x to 1.5x, 5.7x to
9.2x and 7.8x to 15.1x, respectively, for the Comparable Transactions. An
analysis of the multiples of Equity Value to LTM net income and book value
yielded N/M and 0.6x, respectively, for the Division. An analysis of the
multiple of Equity Value to 1999EPF net income yielded 7.9x. Ranges of multiples
of Equity Value to LTM net income and book value for Comparable Transactions
were 11.7x to 28.7x and 0.8x to 7.8x, respectively. The table below summarizes
the results of this analysis and is qualified in its entirety by reference to
the other disclosure contained in this section and Appendix B of this Proxy
Statement.
<TABLE>
<CAPTION>
DIVISION
IMPLIED ACQUISITION
MULTIPLES
------------------- COMPARABLE TRANSACTIONS
LTM 1999EPF MULTIPLES RANGE
------ --------- -----------------------
<S> <C> <C> <C>
Enterprise Value to Net Sales................. 0.2x 0.2x 0.2x to 1.5x
Enterprise Value to EBITDA.................... 6.5x 4.2x 5.7x to 9.2x
Enterprise Value to EBIT...................... N/M 4.8x 7.8x to 15.1x
Equity Value to Net Income.................... N/M 7.9x 11.7x to 28.7x
Equity Value to Book Value.................... 0.6x 0.6x 0.8x to 7.8x
</TABLE>
Discounted Cash Flow Analysis. Baird performed a discounted cash flow
analysis of the Division using projections for fiscal years ended July 31, 2000
through 2003 developed by the Division's senior management, as adjusted by
Shiloh's senior management. In that analysis, Baird assumed terminal value
multiples of 4.0x to 6.0x EBITDA in fiscal year 2003 and discount rates of 11.0%
to 13.0%. That analysis produced Implied Enterprise Values of the Division
ranging from $64.0 million to $85.1 million.
Pro Forma Acquisition Analysis. Baird prepared an analysis of certain
potential pro forma financial effects of the Acquisition. The results of this
analysis suggested that the Acquisition would be accretive to Shiloh on an
earnings per share basis in fiscal years 1999, 2000 and 2001, assuming in each
year cost savings and operating benefits anticipated by the Division's and
Shiloh's managements to result from the Acquisition were achieved. For purposes
of this analysis, Baird calculated the earnout payment of Shiloh Common Stock
and cash that would be made pursuant to the Purchase Agreement assuming the
achievement of the projected fiscal year 2000 EBITDA for the Division, and
included in its analysis the pro forma effects of such payment. Baird also
performed a variance analysis of the pro forma effects of the earnout payment to
or by Shiloh (as the case may be) assuming a range of fiscal year 2000 EBITDA
that would result in the largest earnout payment by Shiloh to MTD, on the one
hand, and the largest earnout payment by MTD to Shiloh, on the other hand. Baird
calculated the multiples of Implied Enterprise Value (plus earnout payment) to
fiscal year 2000 EBITDA over this range of fiscal year 2000 EBITDA. Baird
calculated that this EBITDA multiple was 4.1x for the fiscal year 2000 EBITDA
resulting in the largest earnout payment by Shiloh to MTD, compared to 4.7x for
the fiscal year 2000 EBITDA resulting in the largest earnout payment by MTD to
Shiloh. The results of the pro forma acquisition analysis are not necessarily
indicative of future operating results or financial position. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
The foregoing summary does not purport to be a complete description of the
analyses performed by Baird. The preparation of a fairness opinion is a complex
process and is not susceptible to partial analyses or summary description. Baird
believes that its analyses must be considered as a whole, and that selecting
portions of those analyses without considering all analyses and factors, would
create an incomplete view of the processes underlying its opinion. Baird did not
attempt to assign specific weights to particular analyses. Any estimates
contained in Baird's analyses are not necessarily indicative of actual values,
which may be significantly more or less favorable than as set forth in Baird's
analysis. Estimates of values of companies do not purport to be appraisals or
necessarily to reflect the prices at which companies may actually be sold.
Because these estimates are inherently subject to uncertainty, Baird does not
assume responsibility for their accuracy.
Baird, as part of its investment banking business, is engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
14
<PAGE> 24
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. Shiloh retained Baird
because of its experience and expertise in the valuation of businesses and their
securities in connection with mergers and acquisitions. In the ordinary course
of business, Baird may from time to time trade equity securities of Shiloh for
its own account and for accounts of its customers and, accordingly, may at any
time hold a long or short position in these securities.
Pursuant to an engagement letter between Shiloh and Baird, Shiloh agreed to
pay Baird a fee of $150,000, payable upon delivery of its opinion, regardless of
the conclusions reached by Baird in its opinion. In addition, Shiloh has agreed
to pay to Baird a transaction fee, payable upon consummation of the Acquisition,
equal to $400,000, less the $150,000 fee paid to Baird in connection with the
rendering of its opinion. Shiloh has also agreed to reimburse Baird for its
reasonable out-of-pocket expenses. Shiloh has also agreed to indemnify Baird,
its affiliates and their respective directors, officers, partners, employees,
agents and controlling persons against certain liabilities relating to or
arising out of its engagement, including liabilities under the federal
securities laws. In the past, Baird has provided financial advisory services to
Shiloh and certain of its affiliates for which Baird received fees of $137,500.
Baird may provide investment banking services to Shiloh and certain of its
affiliates in the future.
ACCOUNTING TREATMENT
The Transactions will be accounted for by Shiloh under the "purchase"
method of accounting in accordance with U.S. generally accepted accounting
principles, and all of the assets acquired and specific liabilities assumed by
Shiloh pursuant to the Purchase Agreement will be recorded in Shiloh's
consolidated financial statements at their estimated relative fair value on the
Closing Date as adjusted to reflect the aggregate consideration paid by Shiloh
in connection with the Transactions.
REGULATORY MATTERS
The Transactions are not reportable under the HSR Act and the rules and
regulations promulgated thereunder by the Federal Trade Commission, based upon
an exemption under the HSR Act for transactions in which the "ultimate parent
entity" of the seller and the purchaser in a transaction is the same. MTD
Products, by virtue of its majority ownership interest in Shiloh, is the
"ultimate parent entity" of both the seller and the purchaser in the
Transactions, and therefore the Transactions are exempt under the HSR Act.
TAX TREATMENT
For U.S. federal income tax purposes, no income, gain or loss will be
recognized by Shiloh or the Shiloh stockholders as a result of the Transactions.
NO APPRAISAL OR PREEMPTIVE RIGHTS
Holders of Shiloh Common Stock are not entitled under Delaware law to seek
appraisal of their shares in connection with the Transactions. In addition,
holders of Shiloh Common Stock are not entitled to preemptive rights with
respect to the Share Issuances.
MATERIAL PROVISIONS OF THE PURCHASE AGREEMENT
The description of the Purchase Agreement set forth below is qualified by
reference to the complete text of the Purchase Agreement, a copy of which is
attached as Appendix A to this Proxy Statement and incorporated herein by this
reference.
EXPLANATORY DESCRIPTION
Under the Purchase Agreement, Shiloh Automotive will acquire substantially
all of the assets of MTD Automotive, an unincorporated division of MTD, for
aggregate consideration of $40.0 million, consisting of $20.0 million in cash
and $20.0 million in Shiloh Common Stock. The number of shares of Shiloh Common
Stock to be issued at the Closing will equal $20.0 million divided by the
greater of (a) $14.00 per share or (b) to
15
<PAGE> 25
the extent the average closing price (as hereafter defined) exceeds $14.50, the
average closing price. The maximum aggregate number of shares of Shiloh common
Stock that Shiloh may be required to issue is 1,428,571 shares. In addition, the
aggregate consideration will be increased or decreased based on the performance
of the Division over the first twelve months after Closing. If the Division's
EBITDA during such period exceeds $8.5 million, then MTD will be paid by Shiloh
an additional amount (one-half in cash, one-half in Shiloh Common Stock) equal
to four times the amount of such excess up to $28.0 million. If the Division's
EBITDA during such period is less than $8.5 million, then MTD will pay to Shiloh
an amount (one-half in cash, one-half in Shiloh common Stock) equal to four
times the amount of such shortfall up to $15.0 million. The maximum aggregate
number of shares of Shiloh Common Stock that Shiloh may be required to issue in
connection with the Earnout is 1,000,000 shares.
For purposes of calculating the number of shares of Shiloh Common Stock to
be issued under the Purchase Agreement, the "average closing price" shall mean,
with respect to the Closing, the average closing price for a share of Shiloh
Common Stock as quoted on the Nasdaq National Market during the period of the
fifteen most recent trading days ending on the first business day immediately
preceding the Closing Date, or, with respect to the payment of any post-Closing
Consideration, the sum of the average closing price for a share of Shiloh Common
Stock as quoted on the Nasdaq National Market during the period of the fifteen
most recent trading days ending on each of the three-month, six-month,
nine-month and one-year anniversaries of the Closing Date, divided by four.
Under the Purchase Agreement, "EBITDA" means earnings before all interest
expenses, income tax expenses, depreciation and amortization (including
depreciation/amortization on all fixed assets, tooling, special equipment,
intangible assets and reusable containers), in accordance with U.S. generally
accepted accounting principles consistent with the accounting policies utilized
in MTD's audited financial statements for the Division for its fiscal year ended
July 31, 1998. In addition, EBITDA will be computed on a historical accounting
basis, which excludes the impact of purchase accounting adjustments on future
earnings. EBITDA will also exclude all Shiloh transaction costs, legal fees,
advisory fees and corporate overhead/support charges.
REPRESENTATIONS AND WARRANTIES
The Purchase Agreement includes representations and warranties by MTD as
to: (a) authorization, (b) corporate status, (c) no conflicts, (d) financial
statements, (e) absence of undisclosed liabilities, (f) taxes, (g) absence of
changes, (h) litigation, (i) compliance with laws, governmental approvals and
consents, (j) operation of the business, (k) assets, (l) contracts, (m)
territorial restrictions, (n) inventories, (o) customers, (p) suppliers; raw
materials, (q) product warranties, (r) absence of certain business practices,
(s) intellectual property, (t) insurance, (u) real property, (v) environmental
matters, (w) employees; labor matters, (x) employee benefit plans and related
matters, (z) guarantees, (aa) records, (bb) brokers, (cc) disclosure, (dd)
receivables, (ee) year 2000 compliance, (ff) deep draw technology, (gg)
information in this Proxy Statement, and (hh) investment intent.
The Purchase Agreement includes representations and warranties of Shiloh
Automotive and Shiloh as to (a) corporate status and authorization, (b) no
conflicts, (c) litigation, (d) brokers, (e) information in this Proxy Statement,
and (f) Shiloh Common Stock.
COVENANTS
The Purchase Agreement contains covenants of MTD as to (a) conduct of
business, (b) no solicitation, (c) access and information, (d) public
announcements, (e) further actions, (f) further assurances, (g) liability for
transfer taxes, (h) certificates of tax authorities, (i) use of business name,
(j) environmental assessment, (k) automobile leases, (l) product liability
insurance, (m) audited financial statements, (n) fiscal 1999 bonuses, (o) Modern
Tool & Die Sales Corporation, a wholly owned subsidiary of MTD and (p) tools and
dies.
The Purchase Agreement contains covenants of Shiloh Automotive as to (a)
public announcements, (b) further actions, (c) further assurances, and (d) MTD's
facility at 6009 Plaza Drive.
The Purchase Agreement contains covenants of both MTD and Shiloh Automotive
as to (a) preparation and filing of this Proxy Statement, (b) the holding of a
meeting of Shiloh's stockholders to approve the Share
16
<PAGE> 26
Issuances, and (c) MTD's providing of information for this Proxy Statement and
MTD's voting of its shares of Shiloh Common Stock in favor of the Share
Issuances.
In addition to the foregoing, the parties to the Purchase Agreement are
obligated to perform certain undertakings in connection with the Acquisition,
including the following: (i) until October 31, 2001, MTD will sell to Shiloh
Automotive certain parts at prices previously charged by MTD to the Division;
(ii) until October 31, 2001, Shiloh Automotive will sell to MTD lawnmower blades
at agreed upon prices; (iii) until December 31, 2002, MTD will pay to Shiloh
Automotive, on an annual basis, an amount equal to any price concessions
required by Shiloh Automotive's customers with respect to the Division's
business existing at the Closing, subject to a cap of $500,000 per customer per
year; provided, however, that, with respect to calendar years 1999 and 2000, if
the Division's EBITDA for the first twelve months after Closing is less that
$8.5 million, then MTD will not be obligated to pay the portion of a price
concession that relates to such periods; (iv) MTD will pay to Shiloh Automotive
all amounts required to be paid to the Ford Motor Company in connection with the
delay associated with MTD's launch of its products for the Ford Windstar vehicle
model caused by the Division's inability to begin operation of its 2,500-ton
Verson press at its W. 130th Street facility; (v) MTD will transfer all assets
of Modern Tool & Die Sales Corporation to the Division at or prior to the
Closing; (vi) through fiscal year 2002, MTD will pay to Shiloh Automotive the
amount by which actual capital expenditures exceeded projected capital
expenditures as set forth in the Purchase Agreement; and (vii) after the
Closing, Shiloh Automotive will provide MTD with access to certain real property
to conduct onsite remedial action, if any.
CONDITIONS
The respective obligations of Shiloh, Shiloh Automotive and MTD are subject
to the satisfaction or waiver of the following conditions: (a) Shiloh shall have
obtained all required stockholder approvals, (b) no law or regulation or no
order, judgment, injunction or decree of a court of competent jurisdiction shall
prohibit consummation of the Acquisition, and (c) the waiting period applicable
to the Acquisition under the HSR Act, if any, and any other applicable
pre-merger notification, shall have been terminated or shall have expired.
The obligations of Shiloh and Shiloh Automotive to effect the Acquisition
are subject to the satisfaction or waiver of the following conditions: (a) each
of the representations and warranties of MTD in the Purchase Agreement shall be
true and correct in all material respects as of the Closing Date and Shiloh
shall have received a certificate of an executive officer of MTD to such effect,
(b) MTD shall have obtained all required governmental approvals and other
consents, (c) no event or development shall have occurred resulting in a
material adverse effect on the business of the Division, (d) the collateral
agreements shall have been entered into, (e) all required corporate proceedings
of MTD shall have been received in respect of the Purchase Agreement and the
collateral agreements and the transactions contemplated thereby, (f) MTD shall
have delivered to Shiloh Automotive all necessary transfer documents relating to
the assets to be transferred, (g) Shiloh Automotive shall have received a
satisfactory environmental assessment, (h) Shiloh Automotive shall have received
satisfactory title insurance policies with respect to certain properties to be
transferred, (i) Shiloh Automotive shall have received surveys with respect to
certain properties to be transferred, (j) Shiloh Automotive shall have received
certain estoppes and consents with respect to certain leases, (k) Shiloh
Automotive shall have received a FIRPTA certificate stating the MTD is not a
"foreign person" under applicable U.S. Treasury Regulations, (l) certain
collective bargaining agreements between MTD and its employees shall have been
amended to the reasonable satisfaction of Shiloh Automotive, and (m) MTD shall
have by the Closing consummated the transfer of the assets of Modern Tool & Die
Sales Corporation to the Division.
The obligations of MTD to effect the Acquisition are subject to the
satisfaction or waiver of the following conditions: (a) each of the
representations and warranties of Shiloh Automotive in the Purchase Agreement
shall be true and correct in all material respects as of the Closing Date and
MTD shall have received a certificate of an executive officer of Shiloh
Automotive to such effect, (b) MTD shall have received from Shiloh Automotive an
assumption agreement and the collateral agreements, including a transition
services agreement, (c) all corporate proceedings of Shiloh Automotive in
connection with the Purchase Agreement and the transactions contemplated
thereby, (d) MTD shall have obtained all necessary government approvals, and (e)
Shiloh Automotive shall have entered into the collateral agreements.
17
<PAGE> 27
Shiloh, Shiloh Automotive and MTD presently anticipate that the conditions
to the Acquisition set forth in the Purchase Agreement will be satisfied or
waived in time to permit the completion of the Acquisition before the end of
August 1999.
TERMINATION
The Purchase Agreement may be terminated, and the Acquisition abandoned,
only on the following bases: (a) Shiloh Automotive and MTD can mutually agree to
terminate the Purchase Agreement; (b) Shiloh Automotive or MTD can terminate the
Purchase Agreement, if the transactions contemplated by the Purchase Agreement
are not consummated by 5:00 p.m. Cleveland, Ohio time on September 1, 1999,
unless such date is extended by mutual consent of both parties; (c) each of
Shiloh Automotive or MTD , as the case may be, can terminate if the
representations or warranties of the other party set forth in the Purchase
Agreement are not true and correct when made, or if any of the conditions set
forth in the Purchase Agreement to its benefit have not been satisfied by the
Closing Date or become impossible to satisfy unless such failure is due to the
failure of the party seeking to terminate to perform its obligations under the
Purchase Agreement; and (d) each of Shiloh Automotive or MTD can terminate if
the stockholders of Shiloh do not approve the Share Issuances at the Special
Meeting.
If the Purchase Agreement is terminated, it will become void and of no
effect with no liability on the part of any party, except that: (a) no party
shall be relieved of any liability resulting from its willful or intentional
breach of the Purchase Agreement; and (b) each party will bear its respective
expenses, costs and fees in connection with the transactions contemplated by the
Purchase Agreement.
18
<PAGE> 28
SELECTED HISTORICAL FINANCIAL DATA OF SHILOH
The following table sets forth selected consolidated financial data of
Shiloh. The data for each of the five years in the period ended October 31,
1998, are derived from the consolidated financial statements of Shiloh, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
data for the six-month periods ended April 30, 1999 and 1998 have been derived
from unaudited consolidated financial statements of Shiloh, which include all
adjustments, consisting of normal recurring accruals that management considers
necessary for the fair presentation of the consolidated financial position and
results of operations for these periods. The data presented below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Shiloh" and the financial statements and the
related notes contained in Shiloh's Annual Report on Form 10-K for the fiscal
year ended October 31, 1998, attached hereto as Appendix C and Shiloh's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1999,
attached hereto as Appendix D.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
YEAR ENDED OCTOBER 31, --------------------
-------------------------------------------------------- (UNAUDITED)
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.......................... $194,766 $212,348 $219,466 $273,161 $299,350 $155,968 $171,166
Cost of sales..................... 164,013 173,734 173,836 214,343 242,499 123,782 142,488
-------- -------- -------- -------- -------- -------- --------
Gross profit.................... 30,753 38,614 45,630 58,818 56,851 32,186 28,678
Selling, general and
administrative expenses......... 13,962 14,341 17,086 25,557 26,832 12,922 15,803
-------- -------- -------- -------- -------- -------- --------
Operating income................ 16,791 24,273 28,544 33,261 30,019 19,264 12,875
Interest expense, net............. 836 402 111 2,161 5,130 2,017 3,406
Minority interest................. -- -- 123 394 342 130 335
Other income (expense), net....... (82) 64 (81) 274 (16) 95 24
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before taxes and effect of
change in accounting
principle....................... 15,873 23,935 28,475 31,768 25,215 17,472 9,828
Provision for income taxes...... 6,491 9,471 10,952 11,675 9,673 6,709 3,784
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before effect of change in
accounting principle............ 9,382 14,464 17,523 20,093 15,542 10,763 6,044
Loss from discontinued operations,
net income taxes................ (613) (289) (256) -- -- -- --
Loss on sale of discontinued
operations, net of income
taxes........................... -- -- (9,589) -- -- -- --
Effect of change in accounting
principle....................... (281) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income........................ $ 8,488 $ 14,175 $ 7,678 $ 20,093 $ 15,542 $ 10,763 $ 6,044
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30, 1999
--------------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 51,765
Total assets.............................................. 385,966
Total debt................................................ 152,205
Stockholders' equity...................................... 168,862
</TABLE>
19
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SHILOH
GENERAL
Shiloh is a vertically integrated steel processor that supplies blanks,
stampings and processed steel as well as designs and builds tools and dies for
the automotive and other industries. Shiloh currently provides a broad range of
intermediate steel processing services, which include: (i) blanking and
stamping; and (ii) other steel processing services (which include pickling hot
rolled steel, slitting, edge trimming, roller leveling and cutting to length of
both hot and cold rolled steel). Shiloh operates through ten subsidiaries,
Shiloh Corporation, Valley City Steel Company, The Sectional Die Company, Medina
Blanking, Inc., Sectional Stamping, Inc., Liverpool Coil Processing, Inc.,
Shiloh of Michigan L.L.C., Shiloh's joint venture with Rouge, Greenfield Die &
Manufacturing Company, C&H Design Company d.b.a C&H Die Technology and Jefferson
Blanking, Inc.
In 1995, Shiloh prepared a long-term, business plan which included a
strategic decision to concentrate on the core steel processing services. As a
result, Shiloh sought inquiries from prospective bidders for the sale of its
subsidiary, Shafer Valve Company ("Shafer Valve"). Effective April 30, 1996,
Shiloh accounted for Shafer Valve as a discontinued operation. In May 1996,
Shiloh entered into an agreement to sell the stock of Shafer Valve to Bettis
Corporation. The sale was completed on July 9, 1996.
Shiloh typically experiences decreased revenue and operating income during
the first fiscal quarter of each year, usually resulting from slower overall
automobile production during the winter months. The revenues and operating
income in the third fiscal quarter can also be affected by the typically lower
automobile production activities in July due to manufacturers' changeover in
production lines.
In analyzing the financial aspects of Shiloh's steel processing operations,
a number of factors must be considered. First, plant utilization levels are very
important to profitability because of the capital intensive nature of these
operations. Because Shiloh performs a number of different processing operations,
however, it is not meaningful to analyze simply the total tons of steel
processed. For example, blanking and stamping involve more operational
processes, from the design and manufacture of tools and dies to the production
and packaging of the final product, than Shiloh's other steel processing
services and therefore generally have higher margins. Second, a significant
portion of Shiloh's steel processing products and services is provided to
customers on a toll processing basis. Under these arrangements, Shiloh charges a
specified toll processing fee for the processing operations performed without
acquiring ownership of the steel and being burdened with the attendant costs of
ownership and risk of loss. Although the proportion of tons processed by Shiloh
that are directly owned and toll processed may fluctuate from quarter to quarter
primarily based on the customers for which Shiloh is providing services during
such period, Shiloh estimates that during the past three years approximately
87.4%, 87.2% and 85.9%, respectively, of total tons processed was done on a toll
processing basis. Revenues from operations involving directly owned steel
include a component of raw material cost whereas toll processing revenues do
not; consequently, toll processing generally results in lower gross profit, but
higher gross margin, than directly owned steel processing. Therefore, an
increase in the proportion of total revenues attributable to directly owned
steel processing may result in higher revenues and gross profits but lower gross
margins. Shiloh's blanking and stamping operations use more directly owned steel
than do its other steel processing operations. In addition, changes in the price
of steel can impact Shiloh's results of operations because raw material costs
are by far the largest component of cost of sales in processing directly owned
steel.
20
<PAGE> 30
RESULTS OF OPERATIONS
The following table sets forth income statement data of Shiloh expressed as
a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
----------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 79.2 78.5 81.0 79.4 83.2
----- ----- ----- ----- -----
Gross profit...................................... 20.8 21.5 19.0 20.6 16.8
Selling, general and administrative expenses...... 7.8 9.4 9.0 8.3 9.2
----- ----- ----- ----- -----
Operating income from continuing operations....... 13.0 12.1 10.0 12.3 7.6
Interest expense.................................. * 0.8 1.8 1.3 2.0
Interest income................................... * 0.1 .1 * *
Minority interest................................. * 0.2 .1 * *
Other income...................................... * 0.1 * * *
----- ----- ----- ----- -----
Income from continuing operations before taxes.... 13.0 11.7 8.4 11.2 5.7
Provision for income taxes........................ 5.0 4.3 3.2 4.3 2.2
----- ----- ----- ----- -----
Income from continuing operations before effect of
change in accounting principle.................. 8.0 7.4 5.2 6.9 3.5
Loss from discontinued operations, net of income
taxes........................................... 0.1 -- -- -- --
Loss on sale of discontinued operations, net of
tax............................................. 4.4 -- -- -- --
----- ----- ----- ----- -----
Net income........................................ 3.5% 7.4% 5.2% 6.9% 3.5%
===== ===== ===== ===== =====
</TABLE>
- ---------------
* Indicates that amounts are greater than 0.0 percent but less than 0.1 percent.
SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO SIX MONTHS ENDED APRIL 30, 1998
Revenues. Revenues increased by $15.2 million, or 9.7%, to $171.2 million
for the first six months of fiscal 1999 from $156.0 million for the comparable
period in fiscal 1998. Revenues from blanking and stamping increased 14.7% while
revenue from other steel processing operations decreased 6.1% for the first six
months of fiscal 1999 from the comparable period in fiscal 1998. The percentage
of revenues from directly owned steel decreased to 70.3% for the first six
months of fiscal 1999 from 71.7% for the comparable period in fiscal 1998.
Revenues from toll precessed steel increased to 29.7% for the first six months
of fiscal 1999 from 28.3% for the comparable period in fiscal 1998. The increase
in the percentage of revenues from toll processed steel was primarily due to the
increased toll processing revenue and tonnage at certain facilities during the
first quarter of fiscal 1999.
Gross Profit. Gross profit decreased by $3.5 million, or 10.9%, to $28.7
million for the first six months of fiscal 1999 from $32.2 million for the
comparable period in fiscal 1998. Gross margin decreased to 16.8% for the first
six months of fiscal 1999 from 20.6% for the comparable period in fiscal 1998.
The decline in gross margin is attributed to four primary factors: decreased
scrap sales resulting from an approximate 43% decrease in the scrap price per
gross ton from the first six months of fiscal 1998 to the comparable period in
fiscal 1999, increased depreciation resulting from increased capital
expenditures, start-up costs on several new programs and lower margin on certain
tool and die projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.9 million, or 22.3% to $15.8 million for
the first six months of fiscal 1999 from $12.9 million for the comparable period
in fiscal 1998. As a percentage of revenues, selling, general and administrative
expenses
21
<PAGE> 31
increased to 9.2% for the first six months of fiscal 1999 from 8.3% for the
comparable period in fiscal 1998. The increase was the result of additional
corporate staffing and related insurance, taxes and benefits and professional
fees associated with recruitment and negotiation of two union contracts. The
increase was also attributable to the inclusion of Jefferson Blanking during the
first six months of fiscal 1999 which was not operational during the comparable
period in fiscal 1998.
Other. Interest expense increased to $3.5 million for the first six months
of fiscal 1999 from $2.1 million for the comparable period in fiscal 1998 due
primarily to increased average borrowings during the first six months of fiscal
1999 that were primarily in connection with significant capital expenditures
made during fiscal 1998 and 1999. Interest expense of approximately $1.0 million
relating to expansion of several facilities was capitalized during the first six
months of fiscal 1999. The provision for income taxes was $3.8 million for the
first six months of fiscal 1999 compared with $6.7 million for the comparable
period in fiscal 1998 representing effective tax rates of 38.5% and 38.4%,
respectively.
Net Income. Net income from continuing operations for the first six months
of fiscal 1999 decreased by $4.7 million, or 43.8%, to $6.0 million from $10.8
million for the comparable period in fiscal 1998. This decrease was the result
of decreased scrap sales resulting from a lower market price for scrap steel,
lower margins on certain tool and die projects, higher interest expense
resulting form a higher average level of debt and increased depreciation
resulting from increased capital expenditures.
YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997
Revenues. Revenues increased by $26.2 million, or 9.6%, to $299.4 million
for the year ended October 31, 1998 from $273.2 million for the comparable
period in 1997. The increase in revenues is primarily due to the inclusion in
fiscal 1998 of $18.6 million in revenues from C&H and increased revenues
resulting from additional steel processing capabilities at Sectional Stamping.
In addition, revenues increased at Shiloh of Michigan and Liverpool Coil
Processing. Revenues from the blanking and stamping operations for fiscal 1998
increased approximately 7.6% from the comparable period due primarily to the
inclusion of C&H and increased revenue at Sectional Stamping, while revenue from
the other steel processing operations for fiscal 1998 increased approximately
14.7% from the comparable period in fiscal 1997 due primarily to increased
revenue at Shiloh of Michigan and Liverpool Coil Processing. The percentage of
revenues from directly owned steel processed was 70.3% for fiscal 1998 compared
to 71.7% for fiscal 1997. Revenues from the toll processed steel were 29.7% for
fiscal 1998 and 28.3% for the comparable period in fiscal 1997.
Gross Profit. Gross profit decreased by $2.0 million, or 3.3%, to $56.9
million for fiscal 1998 from $58.8 million for the comparable period in 1997.
Gross margin decreased to 19.0% in fiscal 1998 from 21.5% for the comparable
period in 1997. The decrease in gross margin is primarily attributable to lower
margins in the tool and die business, a decrease in outsourcing by major steel
producing customers that impacted one of our steel processing operations, a
lower price for scrap steel that is sold in the secondary steel industry, the
residual effects from the GM strike and Greenfield's continued challenges
associated with the integration of its operations as a result of the acquisition
and subsequent expansion of its facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.3 million, or 5.0%, to $26.8 million in
fiscal 1998 from $25.6 million for the comparable period in fiscal 1997. As a
percentage of revenues, these expenses decreased to 9.0% for fiscal 1998 from
9.4% for the comparable period in fiscal 1997. The largest component of the
increase, in dollars, arose principally from the inclusion of C&H. In addition,
the increase in dollars was attributable to pre-operating costs of Jefferson
Blanking.
Other. Interest expense increased to $5.3 million in fiscal 1998 from $2.2
million for the comparable period in fiscal 1997 due primarily to increased
average borrowings during fiscal 1998 that were primarily incurred in connection
with the acquisition of C&H and other capital expenditures. Interest expense of
approximately $2.2 million relating to expansion of several facilities was
capitalized in fiscal 1998. The provision for income taxes was $9.7 million in
fiscal 1998 compared with $11.7 million in fiscal 1997, representing effective
tax rates
22
<PAGE> 32
of 38.4% and 36.8%. The increase in the effective tax rate is primarily due to a
return to a more sustainable level of state incentives for capital investments.
Net Income. Income from continuing operations for fiscal 1998 decreased by
$4.6 million, or 22.7%, to $15.5 million from $20.1 million for the comparable
period in fiscal 1997. This decrease was substantially the result of lower
margins in the tool and die business, lower price for scrap steel that is sold
to the secondary steel industry and residual effects from the GM strike.
YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996
Revenues. Revenues increased by $53.7 million, or 24.5%, to $273.2 million
for the year ended October 31, 1997 from $219.5 million for the comparable
period in 1996. The increase in revenues is primarily due to the inclusion in
fiscal 1997 of $38.0 million in revenues from Greenfield. Revenues from the
blanking and stamping operations for fiscal 1997 increased approximately 32.8%
from the comparable period due to the inclusion of revenue from Greenfield,
while revenue from the other steel processing operations for fiscal 1997
increased approximately 5.2% from the comparable period in fiscal 1996. The
percentage of revenues from directly owned steel processed was 71.7% for fiscal
1997 and 71.2% for the comparable period in fiscal 1996. Revenues from the toll
processed steel were 28.3% for fiscal 1997 and 28.8% for the comparable period
in fiscal 1996. The increase in the percentage of revenues from directly owned
steel processed was primarily due to the inclusion of Greenfield which
predominantly processes directly owned steel.
Gross Profit. Gross profit increased by $13.2 million, or 28.9%, to $58.8
million for fiscal 1997 from $45.6 million for the comparable period in 1996.
Gross margin increased to 21.5% in fiscal 1997 from 20.8% for the comparable
period in 1996. The increase in gross margin is primarily attributable to higher
gross margins realized with the inclusion of Greenfield.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8.5 million, or 49.7%, to $25.6 million in
fiscal 1997 from $17.1 million for the comparable period in fiscal 1996. As a
percentage of revenues, these expenses increased to 9.4% for fiscal 1997 from
7.8% for the comparable period in fiscal 1996. The largest component of the
increase, both as a percentage of sales and in dollars, arose principally from
the inclusion of Greenfield. In addition, the increase was attributable to costs
associated with the adoption of a supplemental executive retirement plan, and to
a lesser extent, the addition of new personnel at Shiloh's corporate offices.
Other. Interest expense increased to $2.2 million in fiscal 1997 from
$165,948 for the comparable period in fiscal 1996 due primarily to increased
average borrowings during fiscal 1997 that were primarily incurred in connection
with the acquisition of Greenfield. Interest expense of approximately $1.9
million relating to expansion of several facilities was capitalized in fiscal
1997. The provision for income taxes was $11.7 million in fiscal 1997 compared
with $11.0 million in 1996, representing effective tax rates of 36.8% and 38.5%.
The reduction in the effective tax rate is primarily due to state incentive
programs for capital investments.
Discontinued Operations. On July 9, 1996, Shiloh sold the stock of Shafer
Valve and accordingly has accounted for this operation as a discontinued
operation. Prior year's statements of income and cash flows have been restated
to reflect the discontinuation of the valve actuator segment.
Net Income. Income from continuing operations for fiscal 1997 increased by
$2.6 million, or 14.7%, to $20.1 million from $17.5 million for the comparable
period in fiscal 1996. This increase was primarily the result of the inclusion
of Greenfield in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, Shiloh had $68.1 million of working capital,
representing a current ratio of 2.4 to 1 and debt-to-total capitalization of
47.4%. As a result of the financial condition of Shiloh, Shiloh will be able to
continue its planned investment in new equipment and facilities through fiscal
1999.
23
<PAGE> 33
Net cash provided by operating activities is primarily generated from net
income of Shiloh plus non-cash charges for depreciation and amortization, which
because of the capital intensive nature of Shiloh's business, are substantial.
Net cash provided by operating activities for the first six months of 1999 was
$7.9 million as compared to $20.7 million for the comparable period in fiscal
1998, primarily as a result of the increase in accounts receivable partially
offset by the increase in accounts payable and a decrease in net income. Net
cash provided by operating activities has historically been used by Shiloh to
fund a portion of its capital expenditures.
Capital expenditures were $30.6 million during the first six months of 1999
and $41.2 million during the comparable period in fiscal 1998. Approximately
$21.5 million of the capital expenditures during the second quarter of fiscal
1999 were for expansions of Shiloh's current blanking and stamping facilities as
well as new construction at Jefferson Blanking and Medina Blanking. These
additions are being constructed or obtained to support increased business and
anticipated new business. Shiloh's total capital budget for fiscal 1999,
including carryover from the previous year, amounts to approximately $50.0
million.
Prior to January 22, 1998, Shiloh had a $70.0 million unsecured revolving
credit facility ("Shiloh Facility") with KeyBank National Association
("KeyBank") and Shiloh of Michigan had a $28.0 million credit facility (the
"Shiloh of Michigan Facility") with KeyBank. On January 22, 1998, Shiloh
increased the Shiloh Facility to $135.0 million. The term of the Shiloh Facility
extends to January 31, 2003. Shiloh has the option to select the applicable
interest rate at KeyBank's prime rate or the LIBOR rate plus a factor determined
by a pricing matrix based on Shiloh's ratio of Funded Debt to EBITDA. As of
April 30, 1999, the factor as determined by the pricing matrix was 0.4%. The
terms of the agreement require an annual facility fee as determined by a pricing
matrix based on Shiloh's ratio of Funded Debt to EBITDA. This annual facility
fee is currently 0.225% of the outstanding loan balance. On January 22, 1998,
Shiloh used $28.0 million of the Shiloh facility to retire the outstanding
balance of the Shiloh of Michigan facility. On December 28, 1998 Shiloh amended
the existing facility with KeyBank to include an additional $35.0 million that
expired on April 30, 1999. The $35.0 million facility was increased to $45.0
million on April 30, 1999 and expires on September 15, 1999. Prior to September
15, 1999, Shiloh will enter into discussions for a new arrangement with its bank
group. There can be no assurance, however, that Shiloh will enter into any such
arrangement and, if entered, there can be no assurance that the terms of any
such arrangement will be satisfactory to Shiloh.
Shiloh executed a promissory note as of December 6, 1996 in favor of
Richland Bank in the aggregate principal amount of $4.0 million. Interest
accrues on the outstanding principal balance thereunder at LIBOR plus 0.75%.
In March 1995, Medina County, Ohio issued on behalf of Shiloh an aggregate
of $5.4 million in principal amount of variable rate industrial revenue bonds
due 2010, which are collateralized by Shiloh with a letter of credit. The funds
from these bonds were used to finance a portion of the expansion at Shiloh's
steel pickling operations in Valley City, Ohio. The $5.4 million of such
proceeds were outstanding as of April 30, 1999.
Shiloh believes that it currently has sufficient liquidity and available
capital resources to meet its existing needs, and the financial capability to
increase its long-term borrowing level if that becomes appropriate due to
changes in its capital requirements. Total availability under Shiloh's unsecured
lines of credit and revolving credit facilities is $184.0 million, $31.8 million
of which was unused April 30, 1999.
YEAR 2000 COMPLIANCE
The "Year 2000" problem relates to the computer systems and software that
may have a problem distinguishing the dates 1900 and 2000 because the calendar
year date is abbreviated by only two digits. As a result of this design
decision, systems could fail to operate or produce the correct results if the
"00" is interpreted to mean 1900 rather than 2000. If this occurs in a system
used by Shiloh or a third party dealing with Shiloh, the results could
conceivably have an adverse material effect on Shiloh.
As a key supplier to the automotive and other manufacturing industries,
Shiloh's major exposure for the Year 2000 problems is the effect of shutting
down production at one of its customer's facilities by failing to provide
materials or parts. While lost revenues from such an event are a concern for
Shiloh, the greater risks are the
24
<PAGE> 34
consequential damages for which Shiloh could be liable if it in fact is found
responsible for the shutdown of a customer's facility. Such a finding could have
an adverse material impact on Shiloh's operating results.
The most likely way in which Shiloh would shut down production at a
customer's facility is by being unable to supply material or parts to that
customer. The material supplied by Shiloh, in many cases is an integral
component of the end products that the customer produces, and the inability to
provide them may make the customer unable to manufacture and sell its products.
Breakdowns in any number of Shiloh's computer systems and applications could
prevent Shiloh from being able to manufacture and ship its products. Examples of
such potential failures include, without limitation, failure in Shiloh's
manufacturing application software, bar-coding system, embedded computer chips
in shop-floor equipment, and lack of supply of material from its suppliers, or
lack of heat, power or water from utilities servicing Shiloh's facilities.
Shiloh's products do not contain computer devices that require remediation to
meet the Year 2000 requirements.
For its information technology, Shiloh currently utilizes an IBM RS6000
computing environment that is complemented by a series of local-area networks
("LANs") that are connected nationwide via a wide-area network ("WAN"). Most of
the operating systems related to the RS6000s, LANs and WAN have been or are in
the process of being updated to comply with the Year 2000 requirements.
Additionally, upgraded and modified versions of Shiloh's financial,
manufacturing (including bar coding), payroll, human resources and other
software applications which are Year 2000 ready are available and are now in the
process of being integrated into Shiloh's information systems. Shiloh expects
that this integration will be substantially complete by the end of the third
calendar quarter of 1999.
Shiloh utilizes non-mainframe computers and software in its various
production facilities throughout the country. An initial internal review of
these systems have identified that only a few revisions are necessary to these
systems to make them Year 2000 ready. The majority of the revisions that have
been identified relate to old personal computers or memory chips that must be
replaced. Although there can be no assurances that Shiloh will identify and
correct every Year 2000 problem in the computer applications used in its
business or production processes, Shiloh believes that it has in place a
comprehensive program to identify and correct any such problem. The plan calls
for substantial completion of the remediation of these systems by the end of the
third calendar quarter of 1999. At this time, Shiloh does not believe that it
requires a contingency plan with respect to the information technology, business
and production processes and has therefore not developed one.
Shiloh is also reviewing its building and utility systems (heat,
electrical, water, phones, etc.) for the impact of Year 2000. Many of the
systems in this area are currently Year 2000 compliant. While Shiloh is
diligently working with the providers of these services and has no reason to
expect that they will not meet their requirements for Year 2000 compliance,
there can be no assurances that these suppliers will in fact meet Shiloh's
requirement. A failure by any of these suppliers to remediate their systems
could potentially cause a shutdown of one or more of Shiloh's facilities, which
could impact Shiloh's ability to meet its obligations to deliver products to its
customers. At this time, Shiloh has not developed a contingency plan in the
event of a failure caused by a supplier or third party, but would do so if a
specific problem is identified. In some cases, especially with respect to
utilities, there may not, however, be an alternative source available.
Shiloh has also started a program to determine the Year 2000 compliance of
their significant equipment and material suppliers. Shiloh has sent out a
comprehensive questionnaire to all of its suppliers regarding their Year 2000
compliance and is attempting to identify any potential problem areas with
respect to them. This program will be ongoing and Shiloh's efforts with respect
to specific problems identified will depend, in part on its assessment of the
risk that any such problem may cause the shutdown of a customer's plant or other
problem which Shiloh believes would have a material effect on operations. Shiloh
cannot, however, fully control the conduct of its suppliers and there can be no
guarantee that Year 2000 problems originating from a supplier will not occur. At
this time, Shiloh has not developed a contingency plan in the event of a failure
caused by a supplier or third party, but would do so if a specific problem is
identified. In some cases, especially with respect to utilities, there may not
be an alternative source available.
As a supplier to the automotive industry, Shiloh takes an active role in
many industry-sponsored organizations, including the American Iron and Steel
Institute ("AISI") and the Automotive Industry Action Group ("AIAG"). The AIAG
has been proactive in working with OEMs and Tier I, II and III suppliers to
ensure
25
<PAGE> 35
that the industry as a whole addresses the Year 2000 problem. The AIAG provides
tools to assist in achieving compliance including questionnaires, regular
meetings of members, follow-up by AIAG personnel regarding the answers to the
questionnaires, etc. Shiloh will continue to work with such organizations in
order to have access to the tools available to address the Year 2000 problem. To
date, Shiloh has not spent a material amount on specific Year 2000 issues. As of
April 30, 1999, Shiloh spent approximately $10.6 million on a new business
system; however, Shiloh cannot quantify the amount directly related to Year 2000
compliance. Similarly, Shiloh, at this time, cannot quantify the amount to be
spent on Year 2000 issues and compliance matters related thereto.
The information presented above sets forth the key steps taken by Shiloh to
address the Year 2000 problem. There can be no assurance that third parties will
convert their systems in a timely manner and in a way that is compatible with
Shiloh's systems. Shiloh believes that its actions with suppliers will minimize
these risks and that the costs of Year 2000 compliance for its information and
production systems will not be material in its consolidated and financial and
operational results.
EFFECT OF INFLATION
Inflation generally affects Shiloh by increasing the interest expense of
floating rate indebtedness and by increasing the cost of labor, equipment and
raw materials. The general level of inflation has not had a material effect on
Shiloh's financial results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Shiloh's major market risk exposure is primarily due to possible
fluctuations in interest rates as they relate to its variable rate debt. Shiloh
does not enter into derivative financial investments for trading or speculation
purposes. As a result, Shiloh believes that its market risk exposure is not
material to Shiloh's financial position, liquidity or results of operations.
26
<PAGE> 36
COMPARATIVE PER SHARE DATA
The following table sets forth certain per share data related to net
income, cash dividends declared and book value on a historical basis for Shiloh
based on the number of shares of Shiloh Common Stock outstanding at or during
these periods and on a pro forma basis giving effect to the Transactions. No
historical or pro forma per share data is included for MTD because MTD is a
privately held company and MTD Automotive is only a division of MTD which
represents less than 10% of MTD's consolidated revenues in fiscal 1998.
Accordingly, such data is not considered material to the Shiloh stockholders'
evaluation of the Transactions.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED OCTOBER 31, ENDED JUNE 30,
-------------------------- --------------------------
1998 1998 1999 1999
----------- ----------- ----------- -----------
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
Earnings per share:
Basic.................................... $1.27 $1.19 $ 56 $ .46
Diluted.................................. 1.27 1.19 .56 .46
Cash dividends declared per share.......... 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
----------- --------------------------
1998 1999 1999
----------- ----------- -----------
(PRO FORMA)
<S> <C> <C> <C>
Stockholders' equity per share.......................... 12.47 12.82 12.91
</TABLE>
SELECTED HISTORICAL FINANCIAL DATA OF THE DIVISION
(DOLLARS IN THOUSANDS)
The following table sets forth selected financial data for the Division.
The data for the year ended July 31, 1998 is derived from the financial
statements of the Division, which have been audited by PricewaterhouseCoopers
LLP, independent accountants. The data for the nine months ended April 30, 1999
have been derived from unaudited financial statements of the Division, which
include all adjustments, consisting of normal recurring accruals that management
considers necessary for the fair presentation of the financial position and
results of operations for this period. The data presented below should be read
in conjunction with the financial statements of the Division and related notes
contained therein for the fiscal year ended July 31, 1998, attached hereto as
Appendix E, and Management's Discussion and Analysis of the Results of
Operations of the Division, attached hereto as Appendix F.
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED APRIL 30, 1999 JULY 31, 1998
-------------------- -------------
(UNAUDITED)
<S> <C> <C>
Income Statement Data:
Revenues.................................................. $146,143 $173,771
Income (loss) from operations............................. (3,673) (7,842)
Net loss............................................... (2,268) (4,864)
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30, 1999
--------------------
(UNAUDITED)
<S> <C> <C>
Balance Sheet Data:
Working capital........................................... $ 32,354
Total assets.............................................. 77,893
Total debt................................................ 62
Division equity........................................... 63,345
</TABLE>
27
<PAGE> 37
UNAUDITED SELECTED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined, condensed financial statements
give effect to the proposed acquisition of the Division in a transaction to be
accounted for as a purchase. The unaudited pro forma combined, condensed balance
sheet is based on the individual balance sheets of Shiloh and the Division
appearing elsewhere in this Proxy Statement and has been prepared to reflect the
Acquisition as of April 30, 1999. All purchase price allocations for the
Acquisition are preliminary in nature and are subject to change within the
twelve months following the Acquisition based on refinements as actual data
becomes available. The unaudited pro forma combined, condensed statement of
income is based on the individual statements of income of Shiloh and the
Division appearing elsewhere in this Proxy Statement, and combines the results
of operation of Shiloh and the Division for the year ended October 31, 1998 as
if the Acquisition occurred on November 1, 1997 and for the six months ended
April 30, 1999 as if the Acquisition occurred on November 1, 1998. Because the
Division's fiscal year ends on July 31, the pro forma information relating to
the Division is for the year ended July 31, 1998 and for the six month period
ended April 30, 1999. These unaudited pro forma financial statements should be
read in conjunction with the historical financial statements and notes thereto
of Shiloh and the Division included elsewhere in this Proxy Statement, and are
not necessarily indicative of the results of operations that might have occurred
if the Acquisition had taken place on the dates indicated or which might occur
in any future period.
The unaudited pro forma combined, condensed statement of income for the
year ended October 31, 1998 and for the six months ended April 30, 1999 reflect
the work force reductions made at the Division in April, May and June 1999. The
work force reductions were made after negotiations between Shiloh and MTD
regarding the valuation of the Division in order to improve the prospective
operating performance of the Division and facilitate Shiloh's acquisition of the
Division. The work force reductions reflect the elimination of 167 employees in
both factory and general and administrative positions. The pro forma financial
statements included herein are believed to be more reflective of the combined
results of Shiloh and the Division than their combined historical results of
operation.
28
<PAGE> 38
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT APRIL 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
SHILOH MTD FOR THE FOR THE
INDUSTRIES, INC. AUTOMOTIVE ACQUISITION ACQUISITION
---------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash............................. $ 5,567,278 $ 36,014 $ (36,014)(a) $ 5,567,278
Accounts receivable.............. 65,165,388 25,656,744 -- 90,822,132
Inventory........................ 41,210,115 20,825,142 -- 62,035,257
Deferred income taxes............ 1,290,357 -- (4,745,936)(a) --
3,455,579 (a) --
Prepaid expenses and other
current assets................ 3,732,914 372,126 -- 4,105,040
------------ ----------- ------------ ------------
Total current assets.......... 116,966,052 46,890,026 (1,326,371) 162,529,707
Property, plant and equipment,
net.............................. 251,501,196 30,980,684 (24,642,825)(a) 257,839,055
Goodwill........................... 11,851,775 -- -- 11,851,775
Other assets....................... 5,646,753 23,228 (23,228)(a) 5,646,753
------------ ----------- ------------ ------------
Total assets.................. $385,965,776 $77,893,938 $(25,992,424) $437,867,290
============ =========== ============ ============
Liabilities and Equity
Accounts payable................. $ 25,674,192 $ 8,417,757 -- $ 34,091,949
Current portion of long-term
debt.......................... -- 48,736 -- 48,736
Short-term note payable.......... 16,230,000 -- -- 16,230,000
Deferred tax liability........... -- -- 3,455,579 (a) 3,455,579
Accrued and other current
liabilities................... 23,296,800 6,069,644 -- 29,366,444
------------ ----------- ------------ ------------
Total current liabilities..... 65,200,992 14,536,137 3,455,579 83,192,708
Long-term debt..................... 135,975,000 12,882 21,500,000 (a) 157,487,882
Deferred income taxes.............. 14,562,840 -- (4,745,936)(a) 9,816,904
Other liabilities.................. 1,364,973 -- -- 1,364,973
------------ ----------- ------------ ------------
Total Liabilities............. 217,103,805 14,549,019 20,209,643 251,862,467
------------ ----------- ------------ ------------
Equity
Common stock..................... 130,805 -- 142,857 (a) 273,662
Paid-in capital.................. 39,399,805 -- 16,999,995 (a) 56,399,800
Retained earnings................ 129,331,361 -- -- 129,331,361
Division equity.................. -- 63,344,919 (63,344,919)(a) --
------------ ----------- ------------ ------------
Total equity.................. 168,861,971 63,344,919 (46,202,067) 186,004,823
------------ ----------- ------------ ------------
Total liabilities and equity....... $385,965,776 $77,893,938 $(25,992,424) $437,867,290
============ =========== ============ ============
</TABLE>
- ---------------
(a) Opening balance sheet adjustments and allocation of $38.6 million purchase
price which consists of $20.0 million in cash, $17.1 million in common stock
(based on a closing price of $12.00 on July 19, 1999) and $1.5 million of
acquisition costs.
The accompanying Footnotes to the Unaudited Pro Forma Combined Condensed Balance
Sheet are an integral part of these financial statements.
29
<PAGE> 39
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED
OCTOBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
SHILOH MTD FOR THE FOR THE
INDUSTRIES, INC. AUTOMOTIVE ACQUISITION ACQUISITION
---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................................. $299,350 $173,771 $(4,581)(d) $468,540
Cost of sales............................. 242,500 173,591 (5,557)(a) 398,690
(7,263)(b)
(4,581)(d)
-------- -------- ------- --------
Gross profit.............................. 56,850 180 12,820 69,850
Selling, general and administrative
expenses................................ 26,832 8,022 (1,004)(a) 33,850
-------- -------- ------- --------
Operating income (loss)................... 30,018 (7,842) 13,824 36,000
Interest expense.......................... 5,303 67 1,299 (c) 6,669
Interest income........................... 174 -- 174
Minority interest......................... 342 -- 342
Other income (expense), net............... (16) -- (16)
-------- -------- ------- --------
Income (loss) before taxes................ 25,215 (7,909) 12,525 29,831
Provision (benefit) for income taxes...... 9,673 (3,045) 4,805 11,433
-------- -------- ------- --------
Net income (loss)......................... $ 15,542 $ (4,864) $ 7,720 $ 18,398
======== ======== ======= ========
Basic earnings per share:
Net income........................... $1.19 $1.27
Weighted average number of
common shares...................... 13,060,794 14,489,365
Diluted earnings per share:
Net income........................... $1.19 $1.27
Weighted average number of
common shares...................... 13,103,144 14,531,715
</TABLE>
- ---------------
(a) Represents the workforce reduction of 167 hourly and salaried employees at
the Division as a result of the Acquisition.
(b) Reflects the adjustment of book depreciation and amortization giving effect
to the Acquisition assuming a purchase price of $20.0 million of cash, $17.1
million of Shiloh Common Stock (based on a closing price of $12.00 on July
19, 1999) and $1.5 million of acquisition costs.
(c) Interest expense related to additional borrowings of $21.5 million, at an
assumed interest rate of 6.04%, to be used to complete the Acquisition.
(d) Intercompany eliminations.
The accompanying Footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Income are an integral part of these financial statements.
30
<PAGE> 40
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS
ENDED APRIL 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
SHILOH MTD FOR THE FOR THE
INDUSTRIES, INC. AUTOMOTIVE ACQUISITION ACQUISITION
---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................................. $171,166 $100,750 $(2,393)(d) $269,523
Cost of sales............................. 142,488 99,194 (2,733)(a) 232,925
(3,631)(b)
(2,393)(d)
-------- -------- ------- --------
Gross profit.............................. 28,678 1,556 6,364 36,598
Selling, general and administrative
expenses................................ 15,803 4,286 (466)(a) 19,623
-------- -------- ------- --------
Operating income (loss)................... 12,875 (2,730) 6,830 16,975
Interest expense.......................... 3,488 7 649 (c) 4,144
Interest income........................... 81 -- 81
Minority interest......................... 335 -- 335
Other income (expense), net............... 25 15 40
-------- -------- ------- --------
Income (loss) before taxes................ 9,828 (2,722) 6,181 13,287
Provision (benefit) for income taxes...... 3,784 (1,048) 2,380 5,116
-------- -------- ------- --------
Net income (loss)......................... $ 6,044 $ (1,674) $ 3,801 $ 8,171
======== ======== ======= ========
Basic earnings per share:
Net income........................... $.46 $.56
Weighted average number of
common shares...................... 13,080,563 14,509,134
Diluted earnings per share:
Net income........................... $.46 $.56
Weighted average number of
common shares...................... 13,086,863 14,515,434
</TABLE>
- ---------------
(a) Represents the workforce reduction of 167 hourly and salaried employees at
the Division as a result of the Acquisition.
(b) Reflects the adjustment of book depreciation and amortization giving effect
to the Acquisition assuming a purchase price of $20.0 million of cash, $17.1
million of Shiloh Common Stock (based on a closing price of $12.00 on July
19, 1999) and $1.5 million of acquisition costs.
(c) Interest expense related to additional borrowings of $21.5 million, at an
assumed interest rate of 6.04%, to be used to complete the Acquisition.
(d) Intercompany eliminations.
The accompanying Footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Income are an integral part of these financial statements.
31
<PAGE> 41
INFORMATION ABOUT THE COMPANIES
SHILOH
Shiloh is a vertically integrated steel processor that supplies high
quality blanks, stampings and processed steel to the automotive and other
industries. Shiloh's products include steel blanks used principally by domestic
and foreign automotive manufacturers for automobile fenders and hoods and heavy
truck wheels and brake parts, as well as steel stampings used principally by
automobile component manufacturers. Shiloh also designs, engineers and produces
precision tools and dies for use in its own blanking and stamping operations as
well as for sale to other industrial customers. In addition, Shiloh performs a
variety of value-added intermediate steel processing services, such as pickling
hot rolled steel and slitting, edge trimming, roller leveling and cutting to
length hot and cold rolled steel.
Shiloh's origins date back to 1950 when its predecessor, Shiloh Tool & Die
Mfg. Company, began to design and manufacture precision tools and dies. As an
outgrowth of its precision tool and die expertise, Shiloh expanded into blanking
and stamping operations in the early 1960's. In 1977, Shiloh formed a joint
venture with MTD, a privately held manufacturer of outdoor power equipment and
tools, dies and stampings for the automotive industry, to develop additional
steel processing capabilities.
In April 1993, Shiloh was organized as a Delaware corporation to serve as a
holding company for seven operating subsidiaries. In June 1993, Shiloh effected
a reorganization whereby these seven operating subsidiaries became direct or
indirect subsidiaries of Shiloh. In July 1993, Shiloh completed an initial
public offering of 3,782,500 shares of Shiloh Common Stock.
In November 1996, Shiloh acquired substantially all of the assets of
Greenfield Die & Manufacturing Corp. ("Greenfield"), which is headquartered in
Canton, Michigan, a suburb of Detroit, and serves the automotive industry by
providing a variety of value added processes, including tool and die design and
build, stamping, assembly, welding, prototyping operations and mold design and
build. In August 1997, Shiloh acquired C&H Design Company, d.b.a. C&H Die
Technology ("C&H"), which is headquartered in Utica, Michigan, and primarily
serves the automotive industry by providing tool and die design and build.
Shiloh commenced construction of Jefferson Blanking, Inc., a blanking and
stamping facility in Pendergrass, Georgia, in October 1997. This facility was
completed in May 1998 and became operational in July 1998.
For a more complete description of Shiloh and its business, see "Item 1.
Business" contained in Shiloh's Annual Report on Form 10-K for the fiscal year
ended October 31, 1998, attached hereto as Appendix C.
SHILOH AUTOMOTIVE
Shiloh Automotive is an Ohio corporation and a wholly owned subsidiary of
Shiloh, newly formed for the purpose of effecting the Transactions.
MTD
MTD has three principal lines of business. The Automotive Systems Division
primarily manufactures parts for automotive OEMs. The Consumer Products Division
primarily manufactures outdoor power equipment. The Mechanical Systems Group
Division primarily manufactures washing machine transmissions and transmissions
for certain types of outdoor power equipment. MTD also has an Affiliates and
Joint Venture Division under which certain investments of MTD are managed. This
includes a 50% ownership in CTP, of which Lesco, Inc. is the other 50% owner.
CTP is engaged in the manufacture of outdoor power equipment for commercial
landscapers.
The Division is primarily a Tier I supplier of engineered metal stampings,
assemblies and compression molded plastic parts for North American car, mini-van
and light truck OEMs. The Division's metal products include structural and
powertrain components. The Division operates from facilities located at 5389
West 130th Street, Cleveland, Ohio, and 700 Liverpool Drive, Valley City, Ohio.
MTD's Consumer Products Division is a leading manufacturer of outdoor power
equipment in North America, marketing a full line of power mowers, riding
mowers, lawn tractors, garden tractors, rotary tillers,
32
<PAGE> 42
power edger/trimmers, power shredders, power vacuums and snow throwers. MTD's
products are marketed under the brand names including Cub Cadet, White, Yard-Man
and MTD Yard Machines, as well as several private label brands. MTD distributes
Cub Cadet products through a network of dealers. MTD distributes White, Yard-Man
and MTD Yard Machines through various channels including dealer networks,
hardware stores, mass merchant retailers and specialty merchants.
MTD's Mechanical Systems Group began producing washing machine
transmissions for General Electric Corporation at a new plant in Leitchfield,
Kentucky in 1995. MTD produces outdoor power equipment transmissions at this
plant and at a plant in Valley City, Ohio.
MTD was formed on January 15, 1932, by the late Theo Moll, Emil Jochum and
the late Erwin Gerhard as a partnership to purchase the assets and goodwill of a
small tool and die shop which was located in downtown Cleveland, Ohio. The
partnership was called Modern Tool & Die Company and was later incorporated in
1946 under the laws of the State of Ohio as the M.T.&D. Company. In 1970 the
name was changed to MTD Products Inc. MTD remains a privately-owned entity.
MTD operates from several facilities located in the State of Ohio as well
as facilities located in Indiana, Mississippi, Tennessee, Ontario, Canada and
Germany.
MTD AUTOMOTIVE
General. The Division produces and supplies engineered metal stampings,
assemblies and compression molded thermoplastics components to the automotive
and light truck industries, primarily as a Tier I supplier to OEMs. The Division
is an unincorporated division of MTD, a privately-owned entity.
Market Overview. The Division is primarily a Tier I supplier of engineered
metal stampings, assemblies and compression molded plastics parts for
automotive, mini-van and light truck OEMs. The Division services the North
American market only and has no manufacturing capacity outside North America.
The Division's primary customers are Ford, General Motors, DaimlerChrysler and
Toyota.
The OEM industry is requesting their supply base to provide full-service
engineering, world class quality and global supply capability. These factors are
the primary reasons for the industry consolidation. Suppliers, such as the
Division, need to create a "critical mass" in terms of sales dollars to support
these additional requirements.
Automotive Stampings. The Division designs and produces stamped components
and modules, in addition to a limited supply of compression molded
thermoplastics components for the North American OEM's. Stamping is a process in
which steel is passed through dies in a stamping press in order to form the
steel into three dimensional parts. These parts are then welded together using
different methods, then painted and shipped to the customer in a "just-in-time"
fashion. The Division's manufacturing capabilities are extensive, as it produces
these stamped modules from various materials and grades of steel, including high
strength steel, cold-rolled steel, stainless steel and aluminum. The Division's
stamping presses range from 150 tons to 2,500 tons.
The market for the Division's modules and components are primarily focused
in the structural and powertrain area of vehicles. The structural modules
consist of bumper beams, chassis components and structural underbody modules.
The powertrain market consists of deep draw components such as oil pans,
transmission pans and valve covers. Further, the Division competes in the
thermal heat shielding marketplace with respect to components for underbody
exhaust systems.
The Division also designs, engineers and produces precision tools and dies.
The Division produces tools and dies for use in its own stamping operations as
well as for sale to MTD. Additionally, the Division designs, engineers and
produces a portion of the highly technical and sophisticated welding and
secondary equipment that is used to provide value-added services for its stamped
components. A focus of the Division is to provide value-added services for all
products delivered to the OEMs. An example of this is their DaimlerChrysler
mini-van valve cover modules which incorporate the gasket sealing system and the
fasteners into the stamped valve cover. This valve cover module is fully
assembled at the Division then shipped to DaimlerChrysler with the value-added
revenue being received by the Division.
33
<PAGE> 43
Lawnmower Blades. The Division also manufacturers a variety of heat-treated
lawnmower blades for the outdoor power equipment produced by MTD. The facility
located at West 130th Street in Parma, Ohio operates two automated lawnmower
blade production lines. The blades produced at this facility represented
approximately $7.0 million of inter-company sales in 1998, or 4.0% of the
Division's total revenues.
Sales and Marketing. The Division's products and services are marketed
directly by a sales force located in the Detroit, Michigan area. This sales
team, consisting of six account managers, has the direct responsibility of
representing the Division with the OEM customers. The Division supplements its
sales efforts with the technical support of its engineering staff, which, in
many cases, offers the customer technical assistance during the product
development stage or in some cases, is the direct responsible party for product
development. Certain of the Division's executive officers also actively
participate in the Division's marketing efforts.
Engineering. The Division staffs a fully qualified engineering team to
support its efforts in product development, product design, program management
and total launch support. These capabilities allow the Division to achieve
potential value-added revenues by assisting in the product design and
development stages.
Customers. The Division's primary customers are the OEM manufacturers, with
Ford representing approximately 56% of 1999 fiscal year sales. The Division's
other customers include General Motors at 12%, DaimlerChrysler at 13%, Toyota at
10% and MTD at 6% of 1999 fiscal year sales. All other customers represent the
remaining 3% of 1999 fiscal year sales.
The Division has the technical capabilities to fully interact with the
different customers through the use of electronic communications. These
capabilities range from computer aided design (CAD) to electronic data
interchange (EDI) and enables the Division to support its customers ever
increasing demands for data exchange.
Operations. The Division's two primary stamping facilities are located at
West 130th Street, Parma, Ohio and the Liverpool Industrial Park in Valley City,
Ohio. These two facilities represented approximately 91% of all the Division's
sales in fiscal 1998. Sales revenues for the Division also include stampings and
assemblies manufactured at MTD facilities located in Martin, Tennessee and
Kitchener Ontario, Canada, and compression molded plastics manufactured at
Industrial Plastics located in the Liverpool Industrial Park in Valley City,
Ohio. These facilities are not included in the Acquisition, but the products
they produce are subject to supply arrangements between Shiloh and MTD under the
Purchase Agreement.
The Division has achieved the certification of QS9000 at its two primary
manufacturing facilities. The QS9000 certification reflects that the Division's
business practices and quality programs meet or exceed the common requirements
of its customers. Additionally, these facilities are Ford Q1 approved and have
won the coveted DaimlerChrysler Gold Pentastar award in prior years.
Competition. Competition for sales of automotive stamped modules is
intense, coming from numerous other Tier I suppliers, as well to a lesser degree
the internal stamping divisions of the OEMs. The market size in North America
for products that the Division can manufacture is approximately $8.5 billion
annually. This market place is highly fragmented, with no single supplier
representing more than 12% market share. Furthermore, over 50% of the market
share resides with suppliers who individually represent less than 2% of the
market share.
The primary competitors in North America are Aetna/Sofedit, Cosma, a
division of Magna International, Oxford Automotive and Tower Automotive. The
significant areas of competition with these companies are price, product
quality, delivery and engineering capabilities.
Employees. As of July 1, 1999, the Division had approximately 1,098
employees. This consisted of 177 salary employees and 921 hourly employees
located at the two locations. The hourly employees at the Division's two
operating facilities are covered under separate Collective Bargaining Agreements
with UAW Local Nos. 2015 (W.130th Street) and 1610 (Liverpool). The agreements
are due to expire on May 10, 2000 and August 25, 2001, respectively.
Backlog. Because the Division conducts its manufacturing operations
generally on the basis of short term orders, backlog is not a meaningful
indicator of future performance.
34
<PAGE> 44
Seasonality. The Division typically experiences decreased revenues and
operating income during the months of July and August. This is usually the
result of generally reduced overall vehicle production around the July 4th
holiday and customer shut downs for changeovers of production lines in August.
Environmental Matters. The Division is subject to environmental laws and
regulations concerning emissions to the air, discharges to waterways, and
generation, handling, storage, transportation, treatment and disposal of waste
materials, and is also subject to other federal and state laws and regulations
regarding health and safety matters. Each of the Division's production
facilities has permits and licenses allowing the regulating air emissions and
water discharges. While the Division believes that at the present time it is in
substantial compliance with environmental laws and regulations, these laws and
regulations are constantly evolving and it is impossible to predict whether
compliance with these laws and regulations may have a material adverse effect on
the Division in the future.
Properties. The two manufacturing facilities utilized by the Division are
located in Ohio. The sales force of the Division maintains leased office space
in Southfield, Michigan. The Division believes that substantially all of its
property and equipment is in good condition and that it has sufficient capacity
to meet its current operational needs. The Division's two operating facilities
(both of which are owned), and leased sales office, are as follows:
<TABLE>
<CAPTION>
LOCATION SQ. FOOTAGE DATE OF OPERATION DESCRIPTION OF BUSINESS
-------- ----------- ----------------- -----------------------
<S> <C> <C> <C>
Parma, Ohio................ 395,000 1936 Stamping, welding, tool & die construction
Valley City, Ohio.......... 250,000 1968 Stampings, welding, painting
Southfield, Michigan....... 4,200 1984 Sales & Engineering offices (leased office
(Near Detroit, MI) space)
</TABLE>
Legal Proceedings. The Division is involved in various lawsuits in the
ordinary course of business. In management's opinion the outcome of these
matters will not have a material or adverse effect on the Division's financial
condition.
MARKET PRICES OF SHILOH COMMON STOCK AND DIVIDEND DATA
As of the close of business on July 19, 1999, there were approximately 173
stockholders of record for Shiloh Common Stock. Shiloh believes that the actual
number of holders of Shiloh Common Stock exceeds 300. Shiloh has not declared or
paid any cash dividends on shares of its equity securities, including Shiloh
Common Stock, since its incorporation in April 1993. Shiloh currently intends to
retain earnings to support its growth strategy and does not anticipate paying
dividends in the foreseeable future. Shiloh Common Stock is traded on the Nasdaq
National Market under the symbol "SHLO". Shiloh Common Stock commenced trading
on June 29, 1993. The table below sets forth the high and low bid prices for the
Shiloh Common Stock for its four quarters in fiscal 1997 and 1998, and for its
first two quarters in fiscal 1999.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1997
1st Quarter -- January 31, 1997........................... $18.25 $15.50
2nd Quarter -- April 30, 1997............................. $18.25 $14.00
3rd Quarter -- July 31, 1997.............................. $20.75 $15.50
4th Quarter -- October 31, 1997........................... $20.75 $16.25
FISCAL 1998
1st Quarter -- January 31, 1998........................... $19.50 $18.00
2nd Quarter -- April 30, 1998............................. $23.13 $19.00
3rd Quarter -- July 31, 1998.............................. $22.13 $17.25
4th Quarter -- October 31, 1998........................... $19.38 $14.25
FISCAL 1999
1st Quarter -- January 31, 1999........................... $16.38 $12.25
2nd Quarter -- April 30, 1999............................. $14.63 $ 7.75
</TABLE>
35
<PAGE> 45
On June 21, 1999, the last full day of trading before the announcement of
the Acquisition, the closing price of the Shiloh Common Stock was $11.00 per
share as reported on the Nasdaq National Market. You should obtain more recent
stock price quotes from other sources of financial information.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF SHILOH
Except as otherwise noted, the following table sets forth certain
information as of June 1, 1999 (without giving effect to the Transactions) as to
the security ownership of those persons owning of record or known to Shiloh to
be the beneficial owner of more than five percent of the voting securities of
Shiloh and the security ownership of equity securities of Shiloh by each of the
directors and executive officers of Shiloh, and all directors and executive
officers as a group. Unless otherwise indicated, all information with respect to
beneficial ownership has been furnished by the respective director, executive
officer or five percent beneficial owner, as the case may be. Unless otherwise
indicated, the persons named below have sole voting and investment power with
respect to the number of shares set forth opposite their names. Beneficial
ownership of the Shiloh Common Stock has been determined for this purpose in
accordance with the applicable rules and regulations promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act").
<TABLE>
<CAPTION>
AMOUNT AND
PERCENTAGE
OF BENEFICIAL
NAMES AND ADDRESSES OWNERSHIP
OF BENEFICIAL OWNERS OF COMMON STOCK
- -------------------- -----------------
<S> <C> <C>
Stockholders Agreement Group(1)
c/o Shiloh Corporation
402 Ninth Avenue
Mansfield, Ohio 44905..................................... 8,949,702 68.4%
Dominick C. Fanello(2)
402 Ninth Avenue
Mansfield, Ohio 44905..................................... 812,713 6.2%
James C. Fanello(3)(4)
402 Ninth Avenue
Mansfield, Ohio 44905..................................... 833,012 6.3%
MTD Products Inc.
5965 Grafton Road
Valley City, Ohio 44280(5)................................ 6,707,735 51.3%
Merrill Lynch & Co., Inc.
World Financial Center
250 Vesey Street
New York, New York 10381(6)............................... 1,691,000 12.9%
The Huntington National Bank(7)
41 South High Street
Columbus, Ohio 43215...................................... 1,124,400 8.6%
Dimensional Fund Advisers, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401(8)......................... 858,600 6.6%
John F. Falcon.............................................. 0 *
Richard S. Gray............................................. 4,000 *
David J. Hessler(9)......................................... 9,000 *
Dieter Kaesgen(10).......................................... 6,694,735 51.2%
James A. Karman............................................. 1,000 *
</TABLE>
36
<PAGE> 46
<TABLE>
<CAPTION>
AMOUNT AND
PERCENTAGE
OF BENEFICIAL
NAMES AND ADDRESSES OWNERSHIP
OF BENEFICIAL OWNERS OF COMMON STOCK
- -------------------- -----------------
<S> <C> <C>
Curtis E. Moll(11).......................................... 6,735,735 51.5%
Theodore K. Zampetis........................................ 2,000 *
G. Rodger Loesch(12)........................................ 57,963 *
David K. Frink(13).......................................... 27,582 *
William R. Burton(14)....................................... 57,500 *
All Directors and executive officers as a group (12
persons).................................................. 8,547,505 64.5%
</TABLE>
- ---------------
* Less than one percent
(1) Shiloh, MTD Products, Robert L. Grissinger, Robert E. Sutter and certain
trusts for the benefit of Dominick C. Fanello, James C. Fanello, Rose M.
Fanello and Kathleen M. Fanello have entered into a stockholders agreement,
as amended as of March 11, 1994 to release certain parties to the original
stockholders agreement, relating to the shares of Shiloh Common Stock owned
by each of the signatories (the "Stockholders Agreement"). As a result, the
parties to the Stockholders Agreement may be deemed to have acquired
beneficial ownership of all the shares of Shiloh Common Stock subject to
the Stockholders Agreement, an aggregate of 8,949,702 shares, as a "group"
as defined under the Exchange Act. Each of the parties to the Stockholders
Agreement disclaims any beneficial ownership with respect to shares of
Shiloh Common Stock held by the other parties to the Stockholders
Agreement. The number of shares of Shiloh Common Stock shown for each of
the parties to the Stockholders Agreement named separately in the table
does not include shares that may be deemed to be beneficially owned by such
individuals solely as a result of the Stockholders Agreement.
(2) Includes 637,007 shares owned of record by the Dominick C. Fanello Trust
and held by The Richland Bank, as trustee under a Trust Agreement, dated as
of January 28, 1988. Under the terms of the trust agreement, the trustee
has sole voting and dispositive power with respect to the shares held by
the trust. Mr. Fanello has the right to revoke such trust at any time upon
written notice to the trustee. Also includes 790 shares owned by Mr.
Fanello's spouse, 174,616 shares owned of record by the Rose Fanello Trust
and 300 shares held by Mr. Fanello as custodian for three minor
grandchildren. Mr. Fanello shares voting power with Rose Fanello with
respect to the shares held by Rose Fanello and the Rose Fanello Trust.
(3) Includes 637,007 shares owned of record by the James C. Fanello Trust and
held by Key Trust Company of Ohio, N.A., formerly known as Society Bank &
Trust ("Key Trust"), as trustee under a Trust Agreement, dated as of May
17, 1993, and includes 170,139 shares owned of record by the Kathleen
Fanello Trust. Mr. Fanello shares voting power with Kathleen Fanello with
respect to the shares held by the Kathleen Fanello Trust. Under the terms
of Mr. Fanello's trust agreement, Key Trust has sole voting power and
shared dispositive power with Mr. Fanello with respect to the shares held
by the trust. In addition, the trust agreement grants Mr. Fanello the right
to revoke such trust at any time upon notice to the trustee. As a result of
its capacity as trustee for Mr. J. Fanello and certain members of his
immediate family, Key Trust claimed to have, as reported on a Schedule 13G
filed on February 17, 1999, sole voting power and shared dispositive power
with respect to 1,307,146 shares of Shiloh Common Stock. The address of Key
Trust is 127 Public Square, Cleveland, Ohio 44114-1306.
(4) Also includes 25,000 shares of Shiloh Common Stock subject to stock options
granted under the Shiloh's 1993 Key Employee Stock Incentive Plan which are
currently exercisable.
(5) Includes 1,104,400 shares of Shiloh Common Stock held by the MTD Products
Pension Pooled Fund and 1,000,000 shares of Shiloh Common Stock held by
Summit Insurance Company of America, a wholly owned subsidiary of MTD. Also
includes 20,000 shares of Shiloh Common Stock held by the Jochum-Moll
Foundation, a charitable organization in which MTD is a major contributor.
37
<PAGE> 47
(6) Based on a Schedule 13G filed on February 18, 1999. Includes 672,800 shares
of Shiloh Common Stock owned by Merrill Lynch Special Value Fund, Inc. at
800 Scudders Mill Road, Plainsboro, New Jersey 08536.
(7) Based on a Schedule 13G filed on February 11, 1999.
(8) Based on a Schedule 13G filed on February 11, 1999.
(9) Includes 1,000 shares owned by Mr. Hessler's spouse and includes 6,000
shares held by trusts in which Mr. Hessler serves as co-trustee. Under the
terms of the trust agreements, Mr. Hessler has shared voting and investment
power with respect to these shares. Mr. Hessler disclaims beneficial
ownership of these 7,000 shares.
(10) Includes 5,583,335 shares which are owned of record by MTD and 1,104,400
shares of Shiloh Common Stock held by the MTD Products Pension Pooled Fund.
Mr. Kaesgen is President of the Consumers Products Group and a director of
MTD. Mr. Kaesgen's address is c/o MTD Products Inc, 5965 Grafton Road,
Valley City, Ohio 44280.
(11) Includes 5,583,335 shares which are owned of record by MTD and 1,104,400
shares of Shiloh Common Stock held by the MTD Products Pension Pooled Fund.
Mr. Moll is Chairman of the Board, Chief Executive Officer and a director
of MTD. Also includes 1000 shares held by Mr. Moll's spouse and 20,000
shares held by the Jochum-Moll Foundation, a charitable organization in
which Mr. Moll shares voting and investment power over all the foundation's
assets. Mr. Moll disclaims beneficial ownership of these shares. Mr. Moll's
address is c/o MTD Products Inc, 5965 Grafton Road, Valley City, Ohio
44280.
(12) Includes 57,000 shares of Shiloh Common Stock subject to stock options
granted under Shiloh's 1993 Key Employee Stock Incentive Plan which are
currently exercisable.
(13) Represents 27,000 shares of Shiloh Common Stock subject to stock options
granted under Shiloh's 1993 Key Employee Stock Incentive Plan which are
currently exercisable.
(14) Includes 57,000 shares of Shiloh Common Stock subject to stock options
granted under Shiloh's 1993 Key Employee Stock Incentive Plan which are
currently exercisable
FUTURE STOCKHOLDER PROPOSALS
Shiloh in the past has generally held an annual stockholders' meeting in
March of each year, in preparation for which an annual report and a proxy
statement were circulated (typically in late February). Shiloh will hold an
annual stockholders' meeting in March 2000 (the "2000 Annual Meeting").
Proposals of stockholders intended to be included in Shiloh's proxy statement
for the 2000 Annual meeting pursuant to Rule 14a-8 under the Exchange Act must
be received by Shiloh no later than October 20, 1999 to be considered for
inclusion in Shiloh's proxy statement and proxy for the 2000 Annual meeting.
Proposals of stockholders submitted outside the processes of Rule 14a-8 of the
Exchange Act in connection with the 2000 Annual Meeting ("Non-Rule 14a-8
Proposals") must be received by Shiloh by January 3, 2000 or such proposals will
be considered untimely. Shiloh's proxy will give discretionary authority to the
proxy holders to vote with respect to all Non-Rule 14a-8 Proposals received
after January 3, 2000 in connection with the 2000 Annual Meeting. Such proposals
and notices and requests should be addressed to the Secretary, Shiloh
Industries, Inc., Suite 202, 103 Foulk Road, Wilmington, Delaware 19803, and
should be so transmitted by certified mail, return receipt requested to
eliminate controversy as to the date of receipt by Shiloh.
WHERE YOU CAN FIND MORE INFORMATION
Shiloh files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that Shiloh files with the SEC at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
These SEC filings are also available to the public from commercial document
retrieval services and at the Internet web site maintained by the SEC at
"http://www.sec.gov."
38
<PAGE> 48
MTD has supplied all information contained in this Proxy Statement relating
to MTD and the Division, and Shiloh has supplied all such information relating
to Shiloh.
You should rely only on the information contained in this Proxy Statement.
We have not authorized anyone to provide you with information that is different
from what is contained in this Proxy Statement. This Proxy Statement is dated
August 3, 1999. You should not assume that the information contained in this
Proxy Statement is accurate as of any date other than that date. Neither the
mailing of this Proxy Statement to stockholders nor the issuance of Shiloh
Common Stock in the Acquisition creates any implication to the contrary.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, each of which was previously filed by Shiloh
(Commission File No. 0-21964) with the SEC pursuant to Section 13 of the
Exchange Act, are incorporated herein by reference:
(1) Annual Report on Form 10-K for the fiscal year ended October 31,
1998;
(2) Quarterly Report on Form 10-Q for the fiscal quarter ended January
31, 1999;
(3) Quarterly Report on Form 10-Q for the fiscal quarter ended April
30, 1999; and
(4) Form 8-K dated June 22, 1999.
Shiloh will provide without charge to each person to whom a Proxy Statement
is delivered upon written or oral request to such person, within one business
day of receipt of such request, a copy of any documents incorporated herein by
reference (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the documents that this Proxy
Statement incorporates). Requests for such copies should be directed to Shiloh's
Secretary, Shiloh Industries, Inc., Suite 202, 103 Foulk Road, Wilmington,
Delaware 19803.
ACCOUNTANTS
One or more representatives of PricewaterhouseCoopers LLP, the principal
accountants of Shiloh for the current year and for the most recently completed
fiscal year, (i) will attend the Special Meeting; (ii) will have the opportunity
to make a statement if they desire to do so; and (iii) will be available to
respond to appropriate questions.
OTHER BUSINESS
Shiloh does not intend to bring any business before the Special Meeting
other than matters referred to in the accompanying notice and at this date has
not been informed of any matters that may be presented to the Special Meeting by
others.
39
<PAGE> 49
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
------------------------
AMONG
SHILOH INDUSTRIES, INC.,
SHILOH AUTOMOTIVE, INC.
AND
MTD PRODUCTS INC
------------------------
DATED AS OF JUNE 21, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 50
TABLE OF CONTENTS
ASSET PURCHASE AGREEMENT
<TABLE>
<S> <C>
RECITALS.................................................... A-1
ARTICLE I - SALE AND PURCHASE OF THE ASSETS................. A-1
1.1 Assets....................................... A-1
1.2 Excluded Assets.............................. A-2
ARTICLE II - THE CLOSING.................................... A-2
2.1 Place and Date............................... A-2
2.2 Purchase Price............................... A-3
2.3 Purchase Price Adjustment.................... A-3
2.4 Allocation of Purchase Price................. A-4
2.5 Assumption of Liabilities.................... A-4
2.6 Excluded Liabilities......................... A-4
2.7 Consent of Third Parties..................... A-5
2.8 Earnout...................................... A-5
ARTICLE III - REPRESENTATIONS AND WARRANTIES................ A-6
3.1 Representations and Warranties of Seller..... A-6
3.2 Representations and Warranties of the Buyer
and Parent................................... A-19
ARTICLE IV - COVENANTS...................................... A-20
4.1 Covenants of Seller.......................... A-20
4.2 Covenants of the Buyer....................... A-23
4.3 Covenants of Buyer and Seller................ A-24
4.4 Additional Agreements........................ A-24
ARTICLE V - CONDITIONS PRECEDENT............................ A-27
5.1 Conditions to Obligations of Each Party...... A-27
5.2 Conditions to Obligations of the Buyer and
Parent....................................... A-27
5.3 Conditions to Obligations of Seller.......... A-29
ARTICLE VI - EMPLOYEE MATTERS............................... A-30
6.1 Employment of Seller's Employees............. A-30
6.2 Defined Benefit Plans........................ A-30
6.3 Employee Benefits............................ A-31
6.4 Retained Defined Contribution Plan
Transactions................................. A-31
ARTICLE VII - TERMINATION................................... A-31
7.1 Termination.................................. A-31
7.2 Effect of Termination........................ A-32
ARTICLE VIII - DEFINITIONS.................................. A-32
8.1 Definition of Certain Terms.................. A-32
ARTICLE IX - INDEMNIFICATION................................ A-39
9.1 Indemnification By Seller.................... A-39
9.2 Indemnification By the Buyer................. A-40
9.3 Indemnification Procedures................... A-40
9.4 Time Limitation.............................. A-40
9.5 Survival of Representations, Warranties,
Covenants and Agreements..................... A-40
</TABLE>
i
<PAGE> 51
<TABLE>
<S> <C>
ARTICLE X - MISCELLANEOUS................................... A-41
10.1 Expenses..................................... A-41
10.2 Severability................................. A-41
10.3 Notices...................................... A-41
10.4 Headings..................................... A-42
10.5 Entire Agreement............................. A-42
10.6 Counterparts................................. A-42
10.7 Governing Law, etc........................... A-42
10.8 Binding Effect............................... A-43
10.9 Assignment................................... A-43
10.10 No Third Party Beneficiaries................. A-43
10.11 Amendment; Waivers. etc...................... A-43
</TABLE>
ii
<PAGE> 52
SCHEDULES
<TABLE>
<S> <C>
SCHEDULE 1.1(a) Tangible Property
SCHEDULE 1.1(c) Assumed Contracts
SCHEDULE 1.1(h) Government Approvals
SCHEDULE 1.1(i) Licenses, Permits, etc.
SCHEDULE 1.1(j) Claims
SCHEDULE 1.2(a) Certain Excluded Assets
SCHEDULE 2.5(a) Certain Assumed Liabilities
SCHEDULE 3.1(b) Jurisdictions
SCHEDULE 3.1(c) No Conflicts, etc.
SCHEDULE 3.1(d) Financial Statements
SCHEDULE 3.1(e) Undisclosed Liabilities
SCHEDULE 3.1(f) Taxes
SCHEDULE 3.1(g) Absence of Certain Changes
SCHEDULE 3.1(h) Litigation
SCHEDULE 3.1(i) Compliance with Laws, etc.
SCHEDULE 3.1(j) Operation of Business
SCHEDULE 3.1(k) Assets
SCHEDULE 3.1(l) Contracts
SCHEDULE 3.1(m) Territorial Restrictions
SCHEDULE 3.1(n) Inventories
SCHEDULE 3.1(o) Customers
SCHEDULE 3.1(p) Suppliers
SCHEDULE 3.1(q) Product Warranties
SCHEDULE 3.1(s) Intellectual Property
SCHEDULE 3.1(t) Insurance
SCHEDULE 3.1(u) Real Property
SCHEDULE 3.1(v) Environmental Matters
SCHEDULE 3.1(w) Labor Matters
SCHEDULE 3.1(x) Employee Benefits
SCHEDULE 3.1(z) Guarantees
SCHEDULE 3.1(dd) Accounts Receivable
SCHEDULE 3.2(b) No Conflicts, etc.
SCHEDULE 4.4(a) Transfer Costs -- Automotive Products
SCHEDULE 4.4(b) Price Concessions
SCHEDULE 4.4(d) Capital Expenditures
SCHEDULE 4.4(e) Transfer Costs -- Lawnmower Blades
SCHEDULE 6.1 New Employees
</TABLE>
iii
<PAGE> 53
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of June 21, 1999, among Shiloh
Industries, Inc., a Delaware corporation (the "Parent"), Shiloh Automotive,
Inc., an Ohio corporation ("Buyer"), and MTD Products Inc, an Ohio corporation
("Seller").
RECITALS
WHEREAS, Seller is in the business of manufacturing and marketing
engineered stamped products for the automotive industry through an
unincorporated division (the "Division") of Seller; and
WHEREAS, the Buyer wishes to purchase or acquire from Seller, and Seller
wishes to sell, assign and transfer to the Buyer, substantially all of the
assets and properties held in connection with, necessary for, or material to the
business and operations of the Division (except for the Excluded Assets) (the
"Business"), and the Buyer has agreed to assume the Assumed Liabilities, all for
the purchase price and upon the terms and subject to the conditions hereinafter
set forth; and
WHEREAS, certain capitalized terms used herein shall have the meanings set
forth in Article VIII; and
NOW, THEREFORE, in consideration of the mutual covenants, representations
and warranties made herein, and of the mutual benefits to be derived hereby, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
SALE AND PURCHASE OF THE ASSETS
1.1 Assets. Subject to and upon the terms and conditions set forth in this
Agreement, at the Closing, Seller will sell, transfer, convey, assign and
deliver to the Buyer, and the Buyer will purchase or acquire from Seller, all
right, title and interest of Seller in and to the properties, assets and rights
of every nature, kind and description, tangible and intangible (including
goodwill), whether real, personal or mixed, whether accrued, contingent or
otherwise and whether now existing or hereinafter acquired (other than the
Excluded Assets) primarily relating to or used or held for use in connection
with the Business as the same may exist on the Closing Date (collectively, the
"Assets"), including, without limitation, all those items in the following
categories that conform to the definition of the term "Assets":
(a) All machinery, equipment, presses, computer hardware, computer
software, furniture, furnishings, automobiles, trucks, forklifts, vehicles,
tools, dies, jigs, molds and parts and similar property (including, but not
limited to, any of the foregoing purchased subject to any conditional sales
or title retention agreement in favor of any other Person), including those
items listed on Schedule 1.1(a);
(b) All inventories of raw materials, work in process, finished
products, goods, spare parts, replacement and component parts, and office
and other supplies (collectively, the "Inventories"), including Inventories
held at any location controlled by Seller and Inventories previously
purchased and in transit to Seller at such locations;
(c) All rights and incidents of interest of, and benefits accruing to,
Seller in and to the contracts or agreements listed or described on
Schedule 1.1(c) (collectively, the "Assumed Contracts");
(d) All credits, prepaid expenses, deferred charges, advance payments,
security deposits and prepaid items;
(e) All notes and accounts receivable held by Seller and all notes,
bonds and other evidences of indebtedness of and rights to receive payments
from any Person held by Seller;
(f) Other than the rights of Seller in and to the mark "MTD" and the
grass sprig trademark, all Intellectual Property and all rights thereunder
or in respect thereof primarily relating to or used or held for use in
connection with the Business, including, but not limited to, rights to sue
for and remedies against past, present and future infringements thereof,
and rights of priority and protection of interests therein under the
<PAGE> 54
laws of any jurisdiction worldwide and all tangible embodiments thereof
(together with all Intellectual Property rights included in the other
clauses of this Section 1.1, the "Intellectual Property Assets");
(g) All books, records, manuals and other materials (in any form or
medium), including, without limitation, all records and materials
maintained at the headquarters of Seller, advertising matter, catalogues,
price lists, correspondence, mailing lists, lists of customers,
distribution lists, photographs, production data, sales and promotional
materials and records, purchasing materials and records, personnel records,
manufacturing and quality control records and procedures, shop drawings,
specifications, tool drawings, engineering data, equipment manuals, test
data, blueprints, research and development files, records, data and
laboratory books, Intellectual Property disclosures, media materials,
accounting records, sales order files and litigation files (except for any
documents which the delivery to Buyer or Parent would negate a claim of
attorney-client privilege for Seller with respect to such documents);
(h) To the extent their transfer is permitted by Applicable Law, all
Governmental Approvals, including all applications therefor, including
those listed or described on Schedule 1.l(h);
(i) All Real Property and all licenses, permits, approvals and
qualifications relating to any Real Property issued to Seller by any
Governmental Authority, including, without limitation, those licenses,
permits, approvals and qualifications listed or described on Schedule
1.1(i);
(j) All rights to causes of action, lawsuits, judgments, claims and
demands of any nature available to or being pursued by Seller with respect
to the Business or the ownership, use, function or value of any Asset,
whether arising by way of counterclaim or otherwise, excluding those listed
or described on Schedule 1.1(j); and
(k) All guarantees, warranties, indemnities and similar rights in
favor of Seller with respect to any Asset.
Subject to the terms and conditions hereof, at the Closing, the Assets
shall be transferred or otherwise conveyed to the Buyer free and clear of all
liabilities, obligations, liens and encumbrances except for the Assumed
Liabilities and Permitted Liens.
1.2 Excluded Assets. Seller will retain and not transfer, and the Buyer
will not purchase or acquire, the following assets (collectively, the "Excluded
Assets"):
(a) The assets listed on Schedule 1.2(a);
(b) The rights of Seller under, and the funds and other property held
in trust or under any funding vehicle with respect to, any of the Plans;
(c) All cash and cash equivalents, other than petty cash, held on the
Closing Date;
(d) All of Seller's rights and incidents of interest in and to any
Actions and Orders of any nature whatsoever and whenever maturing or
asserted, to the extent that they relate to or arise out of the Excluded
Assets or the Excluded Liabilities;
(e) All rights and incidents of interest of, and benefits accruing to,
Seller in and to any contracts or agreements of Seller other than the
Assumed Contracts; and
(f) Any accounts receivable excluded from the Closing Net Working
Capital.
ARTICLE II
THE CLOSING
2.1 Place and Date. The closing of the sale and purchase of the Assets (the
"Closing") shall take place at the offices of Wegman, Hessler, Vanderburg &
O'Toole, Suite 200, 6055 Rockside Woods Boulevard, Cleveland, Ohio 44131-2302,
on the first Business Day following the satisfaction or waiver of each of the
conditions set forth in Article V (other than those conditions that are to be
satisfied at the Closing) or such other time and place
A-2
<PAGE> 55
upon which the parties may agree. The day on which the Closing actually occurs
is herein sometimes referred to as the "Closing Date".
2.2 Purchase Price. On the terms and subject to the conditions set forth in
this Agreement and subject to adjustment as provided in Section 2.3, the Buyer
agrees to (a) pay or cause to be paid to Seller an aggregate of $20,000,000.00
in cash and (b) assume the Assumed Liabilities. In addition, Parent agrees, on
behalf of Buyer, to issue or cause to be issued to Seller an aggregate number of
shares of common stock, par value $0.01 per share, of Parent ("Parent Common
Stock") equal to (1) $20,000,000.00 divided by (2) the greater of (i) $14.00 or
(ii) to the extent the Average Closing Price exceeds $14.50, the Average Closing
Price. The consideration payable by Buyer and Parent, on behalf of Buyer, to
Seller pursuant to clause (a) and the immediately preceding sentence is
hereinafter collectively referred to as the "Purchase Price". The cash portion
of the Purchase Price shall be payable at the Closing by wire transfer of
immediately available funds to such bank account or accounts as per written
instructions of Seller, given to Buyer at least five days prior to the Closing.
No fractional shares of Parent Common Stock shall be issued pursuant to this
Section 2.2. If Seller would be entitled to a fractional share of Parent Common
Stock pursuant to clause (b) above, Seller shall receive an amount in cash equal
to the product of (A) such fractional share multiplied by (B) the greater of (i)
$14.00 or (ii) to the extent the Average Closing Price exceeds $14.50, the
Average Closing Price.
2.3 Purchase Price Adjustment. (a) Subject to Section 2.3(d) below, the
Purchase Price shall be adjusted by an amount (the "Adjustment Amount") equal to
the absolute difference, if any, between the Initial Net Working Capital and the
Closing Net Working Capital.
(b)(i) Within 90 calendar days after the Closing Date, Buyer will
cause PricewaterhouseCoopers LLP to deliver (1) an audited balance sheet of
the Business as of the Closing Date (the "Audited Closing Date Balance
Sheet"), prepared in accordance with GAAP consistent with the Audited
Financial Statements and (2) a calculation of the Closing Net Working
Capital based on the Audited Closing Date Balance Sheet. Buyer's
accountants shall be given timely access to all books, records, other data,
personnel and representatives of Seller for purposes of preparing the
Audited Closing Date Balance Sheet within the time period set forth in this
Section 2.4(b)(i). In connection with the review by Seller's accountants of
the Audited Closing Date Balance Sheet and Buyer's calculation of the
Closing Net Working Capital, Buyer shall, promptly upon request, provide to
Seller and its agents access to the work papers of Buyer's accountants
relating to the Audited Closing Date Balance Sheet and Buyer's calculation
of the Closing Net Working Capital and any and all documentation related
thereto.
(ii) Unless Seller gives Buyer a notice of objection ("Notice of
Objection") to the Audited Closing Date Balance Sheet and/or Buyer's
calculation of the Closing Net Working Capital within 45 calendar days
after receiving the Audited Closing Date Balance Sheet (the "Objection
Period"), which notice shall specify in reasonable detail each specific
objection of Seller, the Audited Closing Date Balance Sheet and Buyer's
calculation of the Closing Net Working Capital shall be final, conclusive
and binding on the parties to this Agreement.
(iii) If Seller delivers a Notice of Objection within the Objection
Period, Buyer and Seller shall use reasonable efforts to resolve all
disputes regarding the objections of Seller set forth in the Notice of
Objection. If Buyer and Seller are not able to resolve all disputes
regarding the objections of Seller set forth in the Notice of Objection
within 14 calendar days after delivery by Seller of the Notice of
Objection, the remaining disputed items shall be submitted for final
resolution to Deloitte, Touche, LLP (the "Independent Accountants"). If
Deloitte, Touche, LLP is unwilling or unable to act in such capacity, the
Independent Accountants shall be KPMG Peat Marwick, LLP (or if both of such
firms are unable or unwilling to act in such capacity, the Independent
Accountants shall be such other Big Five accounting firm selected by
agreement of Seller and Buyer). After offering Seller and Seller's
representatives and Buyer and Buyer's representatives the opportunity to
present their positions as to the disputed items, which opportunity shall
not extend for more than 10 calendar days after submission of such disputed
items to the Independent Accountants, the Independent Accountants shall
deliver a written report resolving all disputed items and setting forth the
basis for such resolution within 30 calendar days after Seller and Buyer
have presented their positions as to the disputed items. The resolution of
the Independent Accountants shall be final, conclusive
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and binding upon the parties to this Agreement and shall be reflected in
any necessary revisions to the Audited Closing Date Balance Sheet and
Buyer's calculation of the Closing Net Working Capital. Notwithstanding
anything in this Agreement to the contrary, the scope of the Independent
Accountants' review of any dispute between Buyer and Seller regarding the
Audited Closing Date Balance Sheet and/or the calculation of Closing Net
Working Capital pursuant to this Section 2.3 shall be limited solely to the
resolution of the objections of Seller set forth in the Notice of Objection
and Buyer shall have no right to change, revise or otherwise modify the
Audited Closing Date Balance Sheet or its calculation of the Closing Net
Working Capital except as agreed to in writing by Seller or as required by
the Independent Accountants.
(c) One-half of the fees, costs and expenses of (i)
PricewaterhouseCoopers LLP to prepare the Audited Closing Date Balance
Sheet and (ii) the Independent Accountants for services rendered pursuant
to Section 2.3(b), shall be paid by Seller and one-half of such fees, costs
and expenses shall be paid by Buyer.
(d) If the Closing Net Working Capital (as finally determined pursuant
to this Section 2.3) is greater than the Initial Net Working Capital, no
adjustment shall be made to the Purchase Price. If the Closing Net Working
Capital (as finally determined pursuant to this Section 2.3) is less than
the Initial Net Working Capital, Seller shall pay or cause to be paid the
Adjustment Amount (plus interest as determined pursuant to Section 2.3(e))
to Buyer on the Payment Date, by wire transfer of immediately available
funds to an account designated by Buyer. "Payment Date" means (i) if no
Notice of Objection is timely delivered by Seller to Buyer, three Business
Days after the earlier of (A) the expiration of the Objection Period and
(B) the date of delivery by Seller to Buyer of a notice that Buyer's
calculation of the Closing Net Working Capital will be accepted by Seller
without objection; or (ii) if a Notice of Objection with respect to Audited
Closing Date Balance Sheet and/or Buyer's calculation of the Closing Net
Working Capital is timely delivered to Buyer, three Business Days after the
date all disputed items are finally resolved pursuant to Section 2.3(b).
(e) The Adjustment Amount shall bear interest compounded monthly from
the Closing Date until the date of payment at the prime rate publicly
announced from time to time by National City Bank, Cleveland, Ohio.
Interest shall be computed on the basis of a 365-day year and the actual
number of days elapsed.
2.4 Allocation of Purchase Price. (a) The parties agree to allocate the
aggregate of the Purchase Price (as adjusted pursuant to Section 2.3) and the
Assumed Liabilities (collectively, the "Aggregate Purchase Price") among the
Assets, in accordance with an allocation schedule to be prepared jointly by the
Buyer and Seller. Such allocation schedule shall be prepared in accordance with
section 1060 of the Code and shall be based on an appraisal or appraisals
conducted by an independent appraiser or appraisers chosen by the Buyer.
(b) In connection with the determination of the foregoing appraisal or
appraisals and allocation schedules, the parties shall cooperate with each
other and provide such information as any of them shall reasonably request.
The parties will each report the federal, state and local and other Tax
consequences of the purchase and sale contemplated hereby (including the
filing of Internal Revenue Service Form 8594) in a manner consistent with
such allocation schedules.
2.5 Assumption of Liabilities. (a) Subject to the terms and conditions set
forth herein, at the Closing the Buyer shall assume and agree to pay, honor and
discharge when due all of the following liabilities relating to the Assets and
existing at or arising on or after the Closing Date (collectively, the "Assumed
Liabilities"):
(i) any and all liabilities, obligations and commitments arising out
of the Assumed Contracts, but not including any obligation or liability for
any breach thereof occurring prior to the Closing Date; and
(ii) the liabilities set forth on Schedule 2.5(a).
(b) At the Closing, the Buyer shall assume the Assumed Liabilities relating
to the Business by executing and delivering to Seller an assumption agreement in
a form reasonably satisfactory to Seller (the "Assumption Agreement").
2.6 Excluded Liabilities. Notwithstanding the provisions of Section 2.5 or
any other provision hereof or any schedule or exhibit hereto and regardless of
any disclosure to the Buyer, the Buyer shall not assume any liabilities,
obligations or commitments of Seller relating to or arising out of the operation
of the Business or the ownership of the Assets prior to the Closing other than
the Assumed Liabilities (the "Excluded Liabilities").
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2.7 Consent of Third Parties. Notwithstanding anything to the contrary in
this Agreement, this Agreement shall not constitute an agreement to assign or
transfer any Governmental Approval, instrument, contract, lease, permit or other
agreement or arrangement or any claim, right or benefit arising thereunder or
resulting therefrom if an assignment or transfer or an attempt to make such an
assignment or transfer without the consent of a third party would constitute a
breach or violation thereof or affect adversely the rights of the Buyer or
Seller thereunder; and any transfer or assignment to the Buyer by Seller of any
interest under any such instrument, contract, lease, permit or other agreement
or arrangement that requires the consent of a third party shall be made subject
to such consent or approval being obtained. In the event any such consent or
approval is not obtained on or prior to the Closing Date, Seller shall continue
to use all reasonable efforts to obtain any such approval or consent after the
Closing Date until such time as such consent or approval has been obtained, and
Seller will reasonably cooperate with the Buyer in any lawful and commercially
reasonable arrangement to provide that the Buyer shall receive the interest of
Seller in the benefits under any such instrument, contract, lease or permit or
other agreement or arrangement, including performance by Seller as agent, if
commercially reasonable, provided that the Buyer shall undertake to pay in a
timely manner or satisfy the corresponding liabilities for the enjoyment of such
benefit to the extent the Buyer would have been responsible therefor hereunder
if such consent or approval had been obtained. Seller shall pay and discharge,
and shall indemnify and hold the Buyer harmless from and against, any and all
out-of-pocket costs of seeking to obtain or obtaining any such consent or
approval whether before or after the Closing Date. Nothing in this Section 2.7
shall be deemed a waiver by the Buyer of its right to have received on or before
the Closing an effective assignment of all of the Assets nor shall this Section
2.7 be deemed to constitute an agreement to exclude from the Assets any assets
described under Section 1.1.
2.8 Earnout. (a) If the First Year EBITDA exceeds $8,500,000, then the
Buyer shall pay, or cause to be paid, to Seller aggregate consideration equal to
the product of (i) the excess of the First Year EBITDA over $8,500,000
multiplied by (ii) four (the "Excess Earnout Amount"). If the First Year EBITDA
is less than $8,500,000, then the Seller shall pay, or cause to be paid, to
Buyer aggregate consideration equal to the product of (i) the excess of
$8,500,000 over the First Year EBITDA multiplied by (ii) four (the "Shortfall
Earnout Amount"). The Excess Earnout Amount and the Shortfall Earnout Amount
shall hereinafter be referred to, as the context requires, as the "Earnout
Amount". Notwithstanding the foregoing, in no event shall the Excess Earnout
Amount exceed $28,000,000 or the Shortfall Earnout Amount exceed $15,000,000.
(b) On the Earnout Payment Date:
(i) In the case of an Excess Earnout Amount, Buyer shall pay or cause
to be paid to Seller one-half of the Excess Earnout Amount in cash, and
Parent, on behalf of Buyer, shall issue or cause to be issued to Seller an
aggregate number of shares of Parent Common Stock equal to (1) one-half of
the Excess Earnout Amount divided by (2) the greater of (A) $14.00 or (B)
to the extent the Average Closing Price exceeds $14.50, the Average Closing
Price; provided, however, that in no event shall the number of shares of
Parent Common Stock issued pursuant to this clause (i) exceed 1,000,000
shares (the "Parent Common Stock Cap"). If the number of shares of Parent
Common Stock to be issued pursuant to this clause (i) exceeds the Parent
Common Stock Cap then the portion of the Excess Earnout Amount that would
have been payable in Parent Common Stock shall be paid in cash.
(ii) In the case of a Shortfall Earnout Amount, Seller shall pay or
cause to be paid to Buyer one-half of the Shortfall Earnout Amount in cash
and transfer or cause to be transferred to Buyer, an aggregate number of
shares of Parent Common Stock equal to (1) one-half of the Shortfall
Earnout Amount divided by (2) the greater of (i) $14.00 or (ii) to the
extent the Average Closing Price exceeds $14.50, the Average Closing Price.
(iii) The cash portion of any Earnout Amount shall be payable by wire
transfer of immediately available funds to such bank account or accounts as
per written instructions of Seller or Buyer, as the case may be, given to
the other party at least five days prior to the Earnout Payment Date. No
fractional shares of Parent Common Stock shall be issued or transferred
pursuant to clause (i) or (ii) above. If any party would be entitled to a
fractional share of Parent Common Stock pursuant to clause (i) or (ii)
above, such party shall
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receive an amount in cash equal to the product of (A) such fractional share
multiplied by (B) the greater of (i) $14.00 or (ii) to the extent the
Average Closing Price exceeds $14.50, the Average Closing Price.
(iv) Buyer shall have the right to withhold and set-off against any
Excess Earnout Amount the amount of any claim for indemnification or
payment of Losses provided for in Section 9.1 or any amounts payable by
Seller to Buyer pursuant to Section 4.4. The exercise by Buyer in good
faith of its right of set-off, whether or not ultimately determined to be
justified, shall not constitute a breach of Buyer's obligations under this
Section 2.8.
(c) The EBITDA Committee will review the Business's annualized EBITDA after
the Closing Date at the following intervals: (i) as soon as the audited
financial statements of Parent for the fiscal year ended October 31, 1999 become
available and (ii) as soon as the interim unaudited financial statements of the
Parent for the fiscal quarters ending January 31, 2000, April 30, 2000 and July
31, 2000, become available.
(d)(i) Within 30 calendar days after the first anniversary of the Closing
Date, Buyer shall deliver a certificate certifying as to the First Year EBITDA
and the determination of the Earnout Amount, if any (the "Earnout Certificate").
If Seller has any objections to the Earnout Certificate, then Seller shall
provide written notice of such objection(s) ("Earnout Objection Notice") within
30 calendar days after receiving the Earnout Certificate (the "Earnout Objection
Period"), which notice shall specify in reasonable detail each specific
objection of Seller. Unless an Earnout Objection Notice is received by Buyer
within the Earnout Objection Period, the determination of the Earnout Amount set
forth in the Earnout Certificate shall be final, conclusive and binding on the
parties to this Agreement.
(ii) If Seller delivers an Earnout Objection Notice within the Earnout
Objection Period, Buyer and Seller shall use reasonable efforts to resolve
all disputes regarding the objections of Seller set forth in the Earnout
Objection Notice. If Buyer and Seller are not able to resolve all disputes
regarding the objections of Seller set forth in the Earnout Objection
Notice within 14 calendar days after delivery by Seller of the Earnout
Objection Notice, the remaining disputed items shall be submitted for final
resolution to the Independent Accountants. After offering Seller and
Seller's representatives and Buyer and Buyer's representatives the
opportunity to present their positions as to the disputed items, which
opportunity shall not extend for more than 30 calendar days after
submission of such disputed items to the Independent Accountants, the
Independent Accountants shall deliver a written report resolving all
disputed items and setting forth the basis for such resolution within 30
calendar days after Seller and Buyer have presented their positions as to
the disputed items. The resolution of the Independent Accountants shall be
final, conclusive and binding upon the parties to this Agreement and shall
be reflected in any necessary revisions to the Earnout Certificate and/or
the Earnout Amount. Notwithstanding anything in this Agreement to the
contrary, the scope of the Independent Accountants' review of any dispute
between Buyer and Seller regarding the Earnout Certificate and/or the
Earnout Amount pursuant to this Section 2.8 shall be limited solely to the
resolution of the objections of Seller set forth in the Earnout Objection
Notice.
(e) One-half of the fees, costs and expenses of the Independent Accountants
for services rendered pursuant to Section 2.8(c) shall be paid by Seller and
one-half of such fees, costs and expenses shall be paid by Buyer.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Seller. Seller represents and
warrants to the Buyer and Parent as follows:
(a) Authorization, etc. Seller has the corporate power and authority
to execute and deliver this Agreement and each of the Collateral Agreements
to which it will be a party, to perform fully its obligations thereunder,
and to consummate the transactions contemplated thereby. The execution and
delivery by Seller of this Agreement, and the consummation of the
transactions contemplated hereby, have been, and on the Closing Date the
execution and delivery by Seller of each of the Collateral Agreements to
which it will be a party and the consummation of the transactions
contemplated thereby will have been, duly authorized by all requisite
corporate and shareholder action of the Seller. Seller has duly executed
and delivered this
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Agreement and on the Closing Date Seller will have duly executed and
delivered each of the Collateral Agreements to which it is a party. This
Agreement is, and on the Closing Date each of the Collateral Agreements to
which Seller is a party will be, legal, valid and binding obligations of
Seller, enforceable against it in accordance with their respective terms.
(b) Corporate Status. (i) Seller is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation, with full corporate power and authority to carry on the
Business and to own or lease and to operate its properties as and in the
places where the Business is conducted and such properties are owned,
leased or operated.
(ii) Seller is duly qualified or licensed to do business and is in
good standing in each of the jurisdictions specified opposite its name
in Schedule 3.1(b), which are the only jurisdictions in which the
operation of the Business or the character of the properties owned,
leased or operated by it in connection with the Business makes such
qualification or licensing necessary.
(iii) Seller has delivered to the Buyer complete and correct copies
of its articles of incorporation and code of regulations or other
organizational documents, in each case, as amended and in effect on the
date hereof. Seller is not in violation of any of the provisions of its
articles of incorporation or code of regulations or other organizational
documents.
(c) No Conflicts, etc. The execution, delivery and performance by
Seller of this Agreement and each of the Collateral Agreements to which it
is a party, and the consummation of the transactions contemplated thereby,
do not and will not conflict with or result in a violation of or a default
under (with or without the giving of notice or the lapse of time or both)
(i) any Applicable Law applicable to Seller or any Affiliate thereof or any
of the properties or assets of Seller (including but not limited to the
Assets), (ii) the articles of incorporation or code of regulations or other
organizational documents of Seller or (iii) except as set forth in Schedule
3.1(c), any Contract or other contract, agreement or other instrument to
which Seller or any Affiliate thereof is a party or by which Seller or any
of its properties or assets, including but not limited to the Assets, may
be bound or affected. Except as specified in Schedule 3.1(c), no
Governmental Approval or other Consent is required to be obtained or made
by Seller in connection with the execution and delivery of this Agreement
and the Collateral Agreements or the consummation of the transactions
contemplated hereby or thereby.
(d) Financial Statements. Seller has delivered to the Buyer (a)
audited consolidated financial statements of the Business as at and for the
period ended July 31, 1998 and the balance sheet of the Business as at July
31, 1997, together with a report thereon by Seller's Accountants (the
"Audited Financial Statements"), and (b) unaudited financial statements of
the Business for the trailing twelve-month period ended April 30, 1999 (the
"Unaudited Financial Statements"), including in each of clause (a) and (b)
a balance sheet, statements of income and retained earnings and a statement
of cash flows (the Audited Financial Statements and the Unaudited Financial
Statements, collectively, the "Financial Statements;" the Financial
Statements are attached hereto as Schedule 3.1(d)). The Audited Financial
Statements are complete and correct in all material respects and have been
prepared in accordance with GAAP applied throughout the periods indicated.
The Unaudited Financial Statements have been prepared consistent with
Seller's prior practices and in all material respects on a basis consistent
with the Audited Financial Statements, except that the Unaudited Financial
Statements do not contain notes and may be subject to normal audit
adjustments. Except for the Excluded Assets, the balance sheets included in
the Financial Statements do not include any material assets or liabilities
not intended to constitute a part of the Business or the Assets after
giving effect to the transactions contemplated hereby, and present fairly
the financial condition of the Business as at their respective dates. The
statements of income and retained earnings and statements of cash flows
included in the Financial Statements do not reflect the operations of any
entity or business not intended to constitute a part of the Business after
giving effect to all such transactions, reflect all material costs that
historically have been incurred by the Business (other than the Excluded
Liabilities) and present fairly the results of operations and cash flows of
the Business for the periods indicated.
(e) Absence of Undisclosed Liabilities. To the knowledge of Seller,
Seller has no liabilities or obligations of any nature, absolute, accrued,
contingent or otherwise and whether due or to become due,
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arising out of or relating to the Business, except (a) as set forth in
Schedule 3.1(e), (b) as and to the extent disclosed or reserved against in
the Audited Balance Sheet (excluding the notes thereto) and (c) for
liabilities and obligations that (i) were incurred after the Audited
Balance Sheet Date in the ordinary course of business consistent with prior
practice and (ii) individually and in the aggregate are not material to the
Business and have not had or resulted in, and will not have or result in,
individually or in the aggregate, a Material Adverse Effect.
(f) Taxes. (i) Seller has (or by the Closing will have) duly and
timely filed all Tax Returns relating to the Business for periods ending
after January 1, 1994 required to be filed on or before the Closing Date
("Covered Returns"). Except for Taxes set forth on Schedule 3.1(f), which
are being contested in good faith and by appropriate proceedings, all Taxes
owed by Seller and relating to the Business, whether or not shown on a
Covered Return ("Covered Taxes"), have (or by the Closing Date will have)
been duly and timely paid. All Taxes required to be withheld by or on
behalf of the Seller for periods ending after January 1, 1994 in connection
with amounts paid or owing to any employee, independent contractor,
creditor or other party with respect to the Business ("Withholding Taxes")
have been withheld and either duly and timely paid to the proper
Governmental Authorities or set aside in accounts for such purpose.
(ii) Except as set forth on Schedule 3.1(f), no agreement or other
document extending, or having the effect of extending, the period of
assessment or collection of any Covered Taxes or Withholding Taxes, and
no power of attorney with respect to any such Taxes, has been filed with
the IRS or any other Governmental Authority.
(iii) Except as set forth on Schedule 3.1(f), (i) there are no
Covered Taxes or Withholding Taxes asserted in writing by any
Governmental Authority to be due and (ii) no issue has been raised in
writing by any Governmental Authority in the course of any audit with
respect to Covered Taxes or Withholding Taxes. Except as set forth on
Schedule 3.1(f), no Covered Returns are currently under audit by any
Governmental Authority. Except as set forth on Schedule 3.1(f), neither
the IRS nor any other Governmental Authority is now asserting or, to the
knowledge of Seller, threatening to assert against Seller any deficiency
or claim for additional Covered Taxes or any adjustment of Covered Taxes
that would, if paid by the Buyer, have individually or in the aggregate
a Material Adverse Effect, and there is no reasonable basis for any such
assertion of which Seller is or reasonably should be aware.
(iv) Except as set forth on Schedule 3.1(f), there is no litigation
or administrative appeal pending or, to the knowledge of Seller,
threatened against or relating to Seller in connection with Covered
Taxes.
(g) Absence of Changes. Except as set forth in Schedule 3.1(g), since
the Audited Balance Sheet Date, the Seller has conducted the Business only
in the ordinary course consistent with prior practice and has not, on
behalf of, in connection with or relating to the Business or the Assets:
(i) suffered any Material Adverse Effect;
(ii) incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, except current
liabilities for trade or business obligations incurred in connection
with the purchase of goods or services in the ordinary course of
business consistent with prior practice, none of which liabilities,
individually or in the aggregate, could have a Material Adverse Effect;
(iii) discharged or satisfied any Lien other than those then
required to be discharged or satisfied, or paid any obligation or
liability, absolute, accrued, contingent or otherwise, whether due or to
become due, other than current liabilities shown on the Audited Balance
Sheet and current liabilities incurred since the date thereof in the
ordinary course of business consistent with prior practice;
(iv) mortgaged, pledged or subjected to Lien, any property,
business or assets, tangible or intangible, held in connection with the
Business;
(v) sold, transferred, leased to others or otherwise disposed of
any of the Assets, except for inventory sold in the ordinary course of
business, or canceled or compromised any debt or claim, or waived or
released any right of substantial value;
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(vi) received any notice of termination of any contract, lease or
other agreement or suffered any damage, destruction or loss (whether or
not covered by insurance) which, individually or in the aggregate, has
had a Material Adverse Effect;
(vii) transferred or granted any rights under, or entered into any
settlement regarding the breach or infringement of, any Intellectual
Property, or modified any existing rights with respect thereto;
(viii) made any change in the rate of compensation, commission,
bonus or other direct or indirect remuneration payable, or paid or
agreed or orally promised to pay, conditionally or otherwise, any bonus,
incentive, retention or other compensation, retirement, welfare, fringe
or severance benefit or vacation pay, to or in respect of any
shareholder, director, officer, employee, salesman, distributor or agent
of Seller relating to the Business;
(ix) encountered any labor union organizing activity, had any
actual or threatened employee strikes, work stoppages, slowdowns or
lockouts, or had any material change in its relations with its
employees, agents, customers or suppliers;
(x) failed to replenish the Division's inventories and supplies in
a normal and customary manner consistent with its prior practice and
prudent business practices prevailing in the industry, or made any
purchase commitment in excess of the normal, ordinary and usual
requirements of its business or at any price in excess of the then
current market price or upon terms and conditions more onerous than
those usual and customary in the industry, or made any change in its
selling, pricing, advertising or personnel practices inconsistent with
its prior practice and prudent business practices prevailing in the
industry;
(xi) made any capital expenditures or capital additions or
improvements in excess of an aggregate of $8,000,000;
(xii) instituted, settled or agreed to settle any litigation,
action or proceeding before any court or governmental body relating to
the Business or the Assets other than in the ordinary course of business
consistent with past practices but not in any case in which the
settlement would impose future affirmative obligations on the Business
other than the payment of money and not in any case involving amounts in
excess of $5,000;
(xiii) entered into any transaction, contract or commitment other
than in the ordinary course of business or paid or agreed to pay any
legal, accounting, brokerage, finder's fee, Taxes or other expenses in
connection with, or incurred any severance pay obligations by reason of,
this Agreement or the transactions contemplated hereby; or
(xiv) taken any action or omitted to take any action that would
result in the occurrence of any of the foregoing.
(h) Litigation. Except as set forth on Schedule 3.1(h), there is no
action, claim, demand, suit, proceeding, arbitration, grievance, citation,
notice of violation, notice of potential liability, summons, subpoena,
inquiry or investigation of any nature, civil, criminal, regulatory or
otherwise, in law or in equity (collectively, "Actions"), and there are no
Orders, pending or, to the knowledge of Seller, threatened against or
relating to Seller in connection with the Assets or the Business or against
or relating to the transactions contemplated by this Agreement, and Seller
does not know nor does Seller have any reason to be aware of any basis for
the same. Except as set forth in such Schedule 3.1(h), no citations, fines
or penalties have been asserted against Seller with respect to the Division
under any Environmental Law or any foreign, federal, state or local law
relating to occupational health or safety.
(i) Compliance with Laws; Governmental Approvals and Consents;
Governmental Contracts. (i) Except as disclosed in Schedule 3.1(i), since
January 1, 1994, Seller has complied in all material respects with all
Applicable Laws applicable to the Business or the Assets, and Seller has
not received any notice alleging any such conflict, violation, breach or
default.
(ii) Schedule 3.1(i) sets forth all Governmental Approvals and
other Consents necessary for, or otherwise material to, the conduct of
the Business. Except as set forth in Schedule 3.1(i), all such
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Governmental Approvals and Consents have been duly obtained or submitted
and are in full force and effect, and Seller is in compliance with each
of such Governmental Approvals and Consents held by it with respect to
the Assets and the Business.
(iii) Schedule 3.1(i) sets forth all Contracts with any
Governmental Authority.
(iv) To the knowledge of Seller, there are no proposed laws, rules,
regulations, ordinances, orders, judgments, decrees, governmental
takings, condemnations or other proceedings which would be applicable to
the business, operations or properties of the Division and which might
materially adversely affect the properties, assets, liabilities,
operations or prospects of the Division, either before or after the
Closing Date.
(j) Operation of the Business. Except as set forth in Schedule 3.1(j),
(a) Seller has conducted the Business only through Seller and not through
any other divisions or any direct or indirect subsidiary or affiliate of
Seller and (b) no part of the Business is operated by Seller through any
entity other than Seller.
(k) Assets. Except as disclosed in Schedule 3.1(k), the Seller has
good and valid title to all the Assets free and clear of any and all Liens
other than Permitted Liens. The Assets comprise all assets and services
required for the continued conduct of the Business by the Buyer as now
being conducted. The Assets, taken as a whole, constitute all the
properties and assets relating to or used or held for use in connection
with the Business during the past twelve months (except Inventory sold,
cash disposed of, accounts receivable collected, prepaid expenses realized,
Contracts fully performed, properties or assets replaced by equivalent or
superior properties or assets, in each case in the ordinary course of
business, employees not hired by the Buyer and the Excluded Assets). Except
for Excluded Assets, there are no assets or properties used in the
operation of the Business and owned by any Person other than the Seller
that will not be leased or licensed to the Buyer under valid, current
leases or license arrangements. Except as disclosed in Schedule 3.1(k), the
Assets are in all material respects adequate for the purposes for which
such assets are currently used or are held for use, and are in reasonably
good repair and operating condition (subject to normal wear and tear) and,
to the knowledge of the Seller, there are no facts or conditions affecting
the Assets which could, individually or in the aggregate, interfere in any
material respect with the use, occupancy or operation thereof as currently
used, occupied or operated, or their adequacy for such use.
(l) Contracts. (i) Schedule 3.1(l) contains a complete and correct
list of all agreements, contracts, commitments and other instruments and
arrangements (whether written or oral) of the types described below (x) by
which any of the Assets are bound or affected or (y) to which Seller is a
party or by which it is bound in connection with the Business or the Assets
(the "Contracts"):
(A) Leases, licenses, permits, franchises, insurance policies,
Governmental Approvals and other contracts concerning or relating to the
Real Property;
(B) Employment, consulting, agency, collective bargaining or other
similar contracts, agreements, and other instruments and arrangements
relating to or for the benefit of current, future or former employees,
officers, directors, sales representatives, distributors, dealers,
agents, independent contractors or consultants;
(C) Loan agreements, indentures, letters of credit, mortgages,
security agreements, pledge agreements, deeds of trust, bonds, notes,
guarantees and other agreements and instruments relating to the
borrowing of money or obtaining of or extension of credit;
(D) Licenses, licensing arrangements and other contracts providing
in whole or in part for the use of, or limiting the use of, any
Intellectual Property;
(E) Brokerage or finder's agreements;
(F) Joint venture, partnership and similar contracts involving a
sharing of profits or expenses (including, but not limited to, joint
research and development and joint marketing contracts);
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(G) Asset purchase agreements and other acquisition or divestiture
agreements, including but not limited to any agreements relating to the
sale, lease or disposal of any Assets (other than sales of inventory in
the ordinary course of business) or involving continuing indemnity or
other obligations;
(H) Orders and other contracts for the purchase or sale of
materials, supplies, products or services, each of which involves
aggregate payments in excess of $500,000 in the case of purchases or
$1,000,000 in the case of sales;
(I) Contracts with respect to which the aggregate amount that could
reasonably be expected to be paid or received thereunder in the future
exceeds $500,000 per annum or $1,000,000 in the aggregate;
(J) Sales agency, manufacturer's representative, marketing or
distributorship agreements;
(K) Contracts, agreements or arrangements with respect to the
representation of the Business in foreign countries;
(L) Master lease agreements providing for the leasing of both (A)
personal property primarily used in, or held for use primarily in
connection with, the Business and (B) other personal property;
(M) Contracts, agreements or commitments with any employee,
director, officer, stockholder or Affiliate of Seller; and
(N) Any other contracts, agreements or commitments that are
material to the Business.
(ii) The Seller has delivered to the Buyer complete and correct copies
of all written Contracts (other than Seller's Loan Agreement and insurance
documents), together with all amendments thereto, and accurate descriptions
of all material terms of all oral Contracts, set forth or required to be
set forth in Schedule 3.1(l).
(iii) All Contracts are in full force and effect and enforceable
against each party thereto. There does not exist under any Contract any
event of default or event or condition that, after notice or lapse of time
or both, would constitute a violation, breach or event of default
thereunder on the part of Seller or, to the knowledge of Seller, any other
party thereto except as set forth in Schedule 3.1(l) and except for such
events or conditions that, individually and in the aggregate, (i) has not
had or resulted in, and will not have or result in, a Material Adverse
Effect and (ii) has not and will not materially impair the ability of
Seller to perform its obligations under this Agreement and under the
Collateral Agreements. Except as set forth in Schedule 3.1(l), no consent
of any third party is required under any Contract as a result of or in
connection with, and the enforceability of any Contract will not be
affected in any manner by, the execution, delivery and performance of this
Agreement or any of the Collateral Agreements or the consummation of the
transactions contemplated hereby or thereby.
(iv) Seller does not have outstanding any power of attorney relating
to the Business.
(m) Territorial Restrictions. Except as set forth in Schedule 3.1(m),
the Seller is not restricted by any written agreement or understanding with
any other Person from carrying on the Business anywhere in the world. The
Buyer, solely as a result of its purchase of the Business from the Seller
pursuant hereto and the assumption of the Assumed Liabilities, will not
thereby become restricted in carrying on any business anywhere in the
world.
(n) Inventories. All Inventories consist of a quality and quantity
usable and salable in the ordinary course of business except for obsolete
items and items of below-standard quality, all of which have been written
off or written down to net realizable value in the Financial Statements or
on the accounting records of Seller, as the case may be. Except as set
forth on Schedule 3.1(n), (a) all Inventories are of such quality as to
meet the quality control standards of Seller and any applicable
governmental or customer quality control standards, (b) all Inventories
that are finished goods are saleable as current inventories at the current
prices thereof in the ordinary course of business, and (c) all Inventories
not written off are recorded on the books of the Business at the lower of
cost or market value determined in accordance with GAAP. Schedule 3.1(n)
lists the locations of all Inventories.
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(o) Customers. Schedule 3.1(o) sets forth with respect to the Division
(a) the names of all customers of Seller that ordered goods and services
from Seller with an aggregate value for each such customer of $1,000,000 or
more during the twelve-month period ended March 31, 1999 and (b) the amount
for which each such customer was invoiced during such period. Other than
matters of general economic or political nature which affect the Business
and the general economy, Seller has not received any written notice nor has
any knowledge that any significant customer of Seller (i) has ceased, or
will cause, to use the products, goods or services of the Division, (ii)
has substantially reduced or will substantially reduce, the use of
products, goods or services of the Division or (iii) has sought, or is
seeking, to reduce the price it will pay for products, goods or services of
the Division, including in each case after the consummation of the
transactions contemplated hereby. To the knowledge of the Seller, no
customer of the Division described in clause (a) of the first sentence of
this section has otherwise threatened to take any action described in the
preceding sentence as a result of the consummation of the transactions
contemplated by this Agreement and the Collateral Agreements.
(p) Suppliers; Raw Materials. Schedule 3.1(p) sets forth (a) the names
of all suppliers (including without limitation Seller and any Affiliates
thereof) from which the Division ordered raw materials, supplies,
merchandise and other goods and services with an aggregate purchase price
for each such supplier of $250,000 or more during the twelve-month period
ended March 31, 1999 and (b) the amount for which each such supplier
invoiced the Division during such period. Other than matters of general
economic or political nature which affect the Business and the general
economy, Seller has not received any written notice nor has any knowledge
that there has been any material adverse change in the price of such raw
materials, supplies, merchandise or other goods or services, or that any
such supplier will not sell raw materials, supplies, merchandise and other
goods to the Buyer at any time after the Closing Date on terms and
conditions similar to those used in its current sales to the Division,
subject to general and customary price increases. To the knowledge of the
Seller, no supplier of the Division described in clause (a) of the first
sentence of this section has otherwise threatened to take any action
described in the preceding sentence as a result of the consummation of the
transactions contemplated by this Agreement and the Collateral Agreements.
(q) Product Warranties. Except as set forth in Schedule 3.1(q) and for
warranties under Applicable Law, (a) there are no warranties express or
implied, written or oral, with respect to the products of the Business and
(b) there are no pending or threatened claims with respect to any such
warranty, and Seller has no liability with respect to any such warranty,
whether known or unknown, absolute, accrued, contingent or otherwise and
whether due or to become due.
(r) Absence of Certain Business Practices. None of the Seller, any
officer, employee or agent of Seller, or any other person acting on their
behalf, has, directly or indirectly, within the past five years given or
agreed to give any gift or similar benefit to any customer, supplier,
governmental employee or other person who is or may be in a position to
help or hinder the Business (or assist Seller in connection with any actual
or proposed transaction relating to the Business) (i) which subjected or
might have subjected Seller to any damage or penalty in any civil, criminal
or governmental litigation or proceeding, (ii) for any of the purposes
described in Section 162 (c) of the Code or (iii) for the purpose of
establishing or maintaining any concealed fund or concealed bank account.
(s) Intellectual Property. (i) Schedule 3.1(s) contains a complete and
correct list of all Intellectual Property that is owned by Seller and
primarily related to, used in, held for use in connection with, or
necessary for the conduct of, or otherwise material to the Business (the
"Owned Intellectual Property") other than (i) inventions, trade secrets,
processes, formulas, compositions, designs and confidential business and
technical information and (ii) Intellectual Property that is both not
registered or subject to application for registration and not material to
the Business. Except as set forth on Schedule 3.1(s), the Seller owns or
has the exclusive right to use pursuant to license, sublicense, agreement
or permission all Intellectual Property Assets, free from any Liens other
than Permitted Liens and free from any requirement of any past, present or
future royalty payments, license fees, charges or other payments, or
conditions or restrictions whatsoever. The Intellectual Property Assets
comprise all of the Intellectual Property materially necessary for the
Buyer to conduct and operate the Business as now being conducted by the
Seller.
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(ii) Subject to Section 4.1(i), immediately after the Closing,
Buyer will own all of the Owned Intellectual Property and will have a
right to use all other Intellectual Property Assets, free from any Liens
(other than Permitted Liens) and on the same terms and conditions as in
effect prior to the Closing.
(iii) To the knowledge of Seller, the conduct of the Business does
not infringe or otherwise conflict with any rights of any Person in
respect of any Intellectual Property. To the knowledge of the Seller,
none of the Intellectual Property Assets is being infringed or otherwise
used or available for use, by any other Person.
(iv) Schedule 3.1(s) sets forth all agreements or arrangements (i)
pursuant to which Seller has licensed Intellectual Property Assets to,
or the use of Intellectual Property Assets is otherwise permitted
(through non-assertion, settlement or similar agreements or otherwise)
by, any other Person and (ii) pursuant to which Seller has had
Intellectual Property licensed to it, or has otherwise been permitted to
use Intellectual Property (through non-assertion, settlement or similar
agreements or otherwise). All of the agreements or arrangements set
forth on Schedule 3.1(s) (x) are in full force and effect in accordance
with their terms and no default exists thereunder by Seller, or to the
knowledge of Seller, by any other party thereto, (y) are free and clear
of all Liens, and (z) except as set forth on Schedule 3.1(s), do not
contain any change in control or other terms or conditions that will
become applicable or inapplicable as a result of the consummation of the
transactions contemplated by this Agreement. Seller has delivered to the
Buyer true and complete copies of all licenses and arrangements
(including amendments) set forth on Schedule 3.1(s). All royalties,
license fees, charges and other amounts payable by, on behalf of, to, or
for the account of, the Seller in respect of any Intellectual Property
are disclosed in the Audited Financial Statements.
(v) No claim or demand of any Person has been made nor is there any
proceeding that is pending, or to the knowledge of the Seller,
threatened, nor is there a reasonable basis therefor, which (i)
challenges the rights of the Seller in respect of any Intellectual
Property Assets, (ii) asserts that Seller is infringing or otherwise in
conflict with, or is, except as set forth in Schedule 3.1(s), required
to pay any royalty, license fee, charge or other amount with regard to,
any Intellectual Property, or (iii) claims that any default exists under
any agreement or arrangement listed on Schedule 3.1(s). None of the
Intellectual Property Assets is subject to any outstanding order,
ruling, decree, judgment or stipulation by or with any court,
arbitrator, or administrative agency, or has been the subject of any
litigation within the last five years, whether or not resolved in favor
of the Seller.
(vi) If so identified on Schedule 3.1(s), the referenced Owned
Intellectual Property has been duly registered with, filed in or issued
by, as the case may be, the United States Patent and Trademark Office,
United States Copyright Office or such other filing offices, domestic or
foreign, and the Seller has taken such other actions, to ensure full
protection under any applicable laws or regulations, and such
registrations, filings, issuances and other actions remain in full force
and effect, in each case to the extent material to the Business.
(vii) Except as set forth in Schedule 3.1(s), there are, and
immediately after the Closing will be, no contractual restriction or
limitations pursuant to any orders, decisions, injunctions, judgments
pursuant to any orders, decisions, injunctions, judgments, awards or
decrees of any Governmental Authority on the Buyer's right to use the
name and mark "MTD Automotive" in the conduct of the business as
presently carried on by the Seller or as such Business may be extended
by the Buyer.
(t) Insurance. Schedule 3.1(t) contains a complete and correct list
and summary description of all insurance policies maintained by Seller for
the benefit of or in connection with the Assets or the Business, including,
without limitation, any occurrence-based liability policies in effect at
any time during Seller's operation of the Business. The Seller has made
available to the Buyer complete and correct copies of all such policies
together with all riders and amendments thereto. Such policies are in full
force and effect, and all premiums due thereon have been paid. The Seller
has complied in all material respects with the terms and provisions of such
policies. The insurance coverage provided by such policies is adequate and
customary for the Business. Schedule 3.1(t) sets out all claims made by the
Seller under any policy of insurance during the
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past two years with respect to the Business and to the knowledge of Seller,
there is no basis on which a claim should or could be made under any such
policy with respect to it.
(u) Real Property. (i) Schedule 3.1(u) contains a complete and correct
list of all Owned Real Property setting forth the address and owner of each
parcel of Owned Real Property and describing all improvements thereon
including, without limitation, the properties reflected as being so owned
on the Audited Financial Statements. Seller has, and on the Closing Date
will have, good, valid and marketable fee simple title to the Owned Real
Property indicated on Schedule 3.1.(u) as being owned by it, free and clear
of all Liens other than Permitted Liens. There are no outstanding options
or rights of first refusal to purchase the Owned Real Property, or any
portion thereof or interest therein.
(ii) Schedule 3.1(u) contains a complete and correct list of (i)
all Leases setting forth the address, landlord and tenant for each Lease
and (ii) all Other Leases, setting forth the address, landlord and
tenant for each Other Lease. Seller has delivered to the Buyer correct
and complete copies of the Leases and the Other Leases. Each Lease and
Other Lease is legal, valid, binding, enforceable, and in full force and
effect, except as may be limited by bankruptcy, insolvency,
reorganization and similar Applicable Laws affecting creditors generally
and by the availability of equitable remedies. To the knowledge of
Seller, neither Seller nor any other party is in default, violation or
breach in any respect under any Lease or Other Lease, and no event has
occurred and is continuing that constitutes or, with notice or the
passage of time or both, would constitute a default, violation or breach
in any respect under any Lease or Other Lease. Each Lease grants the
tenant under the Lease the exclusive right to use and occupy the demised
premises thereunder. The Seller has good and valid title to the
leasehold estate under each Lease free and clear of all Liens other than
Permitted Liens. Seller enjoys peaceful and undisturbed possession under
its respective Leases for the Leased Real Property.
(iii) Except for the Excluded Assets, the Real Property constitutes
all the fee and leasehold interests in real property held for use in
connection with, necessary for the conduct of, or otherwise material to,
the Business.
(iv) There are no eminent domain or other similar proceedings
pending or threatened affecting any portion of the Real Property. There
is no writ, injunction, decree, order or judgment outstanding, nor any
action, claim, suit or proceeding, pending or threatened, relating to
the ownership, lease, use, occupancy or operation by any Person of any
Real Property.
(v) Except as set forth on Schedule 3.1(u), the use and operation
of the Real Property in the conduct of the Business does not violate in
any material respect any instrument of record or agreement affecting the
Real Property. Except as set forth on Schedule 3.1(u), there is no
violation of any covenant, condition, restriction, easement or order of
any Governmental Authority having jurisdiction over such property or of
any other Person entitled to enforce the same affecting the Real
Property or the use or occupancy thereof. No damage or destruction has
occurred with respect to any of the Real Property since January 1, 1994
that would, individually or in the aggregate, have a Material Adverse
Effect.
(vi) Except as set forth on Schedule 3.1(u), the Real Property is
in full compliance with all applicable building, zoning, subdivision and
other land use and similar Applicable Laws affecting the Real Property
(collectively, the "Real Property Laws"), and Seller has not received
any notice of violation or claimed violation of any Real Property Law.
There is no pending or, to the knowledge of Seller, anticipated change
in any Real Property Law that will have or result in a material adverse
effect upon the ownership, alteration, use, occupancy or operation of
the Real Property or any portion thereof. Except as set forth on
Schedule 3.1(u), no current use by Seller of the Real Property is
dependent on a nonconforming use or other Governmental Approval the
absence of which would materially limit the use of such properties or
assets held for use in connection with, necessary for the conduct of, or
otherwise material to, the Business.
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(vii) Each parcel included in the Real Property is assessed for
real property tax purposes as a wholly independent tax lot, separate
from adjoining land or improvements not constituting a party of that
parcel.
(viii) No approvals are necessary to subdivide the Owned Real
Property from any Real Property included in the Excluded Assets.
(v) Environmental Matters. (i) All Environmental Permits shall be
validly transferred to the Buyer on the Closing Date. Seller has not been
notified by any relevant Governmental Authority that any Environmental
Permit will be modified, suspended, canceled or revoked, or cannot be
renewed in the ordinary course of business.
(ii) Except as set forth in Schedule 3.1(v), Seller and its
Affiliates have complied and are in compliance in all material respects
with all Environmental Permits and all applicable Environmental Laws
pertaining to the Real Property (and the use, ownership or
transferability thereof) and the Business. No Person has alleged any
violation by Seller or its Affiliates of any Environmental Permits or
any applicable Environmental Law relating to the conduct of the Business
or the use, ownership or transferability of the Real Property.
(iii) Except as set forth in Schedule 3.1(v), neither Seller nor
any of its Affiliates has caused or taken any action that has resulted
or may result in, or has been or is subject to, any liability or
obligation relating to (i) the environmental conditions on, under, or
about any Real Property, the Assets or other properties or assets owned,
leased or used by Seller held for use in connection with, necessary for
the conduct of, or otherwise material to, the Business, or (ii) the past
or present use, management, handling, transport, treatment, generation,
storage or Release of any Hazardous Substances at any location.
(iv) Except as set forth in Schedule 3.1(v):
(1) None of current or past operations, or any by-product
thereof, and none of the currently or formerly owned or operated
property or assets of Seller used in the business, including, without
limitation, the Assets and the Real Property, is or has been related
to or subject to any investigation or evaluation by any Governmental
Authority, as to whether any Remedial Action is needed to respond to
a Release or threatened Release of any Hazardous Substances, nor, to
the knowledge of Seller, are there any conditions with respect to
such property or assets which could give rise to such an
investigation or evaluation in the future.
(2) Seller is not subject to any outstanding order, judgment,
injunction, decree or writ from, or contractual or other obligation
to or with, any Governmental Authority or other Person in respect of
which the Buyer may be required to incur any Environmental
Liabilities and Costs arising from the Release or threatened Release
of a Hazardous Substance.
(3) None of the Real Property is, and neither Seller nor any of
its Affiliates has transported or arranged for transportation
(directly or indirectly) of any Hazardous Substances relating to the
Assets or the Real Property to any location that is, listed or
proposed for listing under CERCLA, or on any similar state list, or
the subject of federal, state or local enforcement actions or
investigations or Remedial Action regardless of whether such location
was listed or proposed for listing at the time of transportation.
(4) No work, repair, construction or capital expenditure is
required or planned in respect of the Assets pursuant to or to comply
with any Environmental Law, nor has Seller or its Affiliates received
any notice of any such requirement, except for such work, repair,
construction or capital expenditure which is not material to the
Business and is in the ordinary course of business.
(v) The Seller has disclosed and made available to the Buyer all
information, including without limitation all studies, analyses and test
results, in the possession, custody or control of Seller and its
Affiliates relating to (i) the environmental conditions on, under or
about the Real Property, and (ii) Hazardous Substances used, managed,
handled, transported, treated, generated, stored or Released
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by Seller or any other Person at any time on any Real Property, or
otherwise in connection with the use or operation of the properties or
assets used in or held for use in connection with the Business.
(w) Employees, Labor Matters, etc. Except as set forth in Schedule
3.1(w), Seller is not a party to or bound by any collective bargaining
agreement and there are no labor unions or other organizations
representing, purporting to represent or attempting to represent any
employees employed in the operation of the Business. Since January 1, 1994
there has not occurred or, to the knowledge of Seller, been threatened any
material strike, slowdown, picketing, work stoppage, concerted refusal to
work overtime or other similar labor activity with respect to any employees
employed in the operation of the Business. Except as set forth on Schedule
3.1(w), there are no labor disputes currently subject to any grievance
procedure, arbitration or litigation and there is no representation
petition pending or, to the knowledge of Seller, threatened with respect to
any employee employed in the operation of the Business. Seller has complied
with all provisions of Applicable Law pertaining to the employment of
employees, including, without limitation, all such Laws relating to labor
relations, equal employment, fair employment practices, entitlements,
prohibited discrimination or other similar employment practices or acts,
except for any failure so to comply that, individually or together with all
such other failures, has not and will not result in a material liability or
obligation on the part of the Buyer or the Business, and has not had or
resulted in, and will not have or result in, individually or in the
aggregate, a Material Adverse Effect.
(x) Employee Benefit Plans and Related Matters. (i) Schedule 3.1(x)
sets forth a true and complete list of each "employee benefit plan," as
such term is defined in section 3(3) of the ERISA, whether or not subject
to ERISA, and each bonus, incentive or deferred compensation, severance,
termination, retention, change of control, stock option, stock
appreciation, stock purchase, phantom stock or other equity-based,
performance or other employee or retiree benefit or compensation plan,
program, arrangement, agreement, policy or understanding, whether written
or unwritten, in each case, other than employee benefit plans that relate
exclusively to employees other than those employed in the Business, that
provides or may provide benefits or compensation in respect of any employee
or former employee employed or formerly employed in the operation of the
Business or the beneficiaries or dependents of any such employee or former
employee (such employees, former employees, beneficiaries and dependents
collectively, the "Employees") or under which any Employee is or may become
eligible to participate or derive a benefit and that is or has been
maintained or established by Seller or any other trade or business, whether
or not incorporated, which, together with Seller is or would have been at
any date of termination occurring within the preceding six years treated as
a single employer under section 414 of the Code (such other trades and
businesses collectively, the "Related Persons"), or to which Seller or any
Related Person contributes or is or has been obligated or required to
contribute or with respect to which Seller or the Business may have any
liability or obligation (collectively, the "Plans"). With respect to each
such Plan, Seller has provided the Buyer complete and correct copies of:
all written Plans; descriptions of all unwritten Plans; all trust
agreements, insurance contracts or other funding arrangements; the two most
recent actuarial and trust reports; the two most recent Forms 5500 and all
schedules thereto; the most recent IRS determination letter; current
summary plan descriptions; all material communications received from or
sent to the IRS, the Pension Benefit Guaranty Corporation or the Department
of Labor (including a written description of any oral communication); an
actuarial study of any post-employment life or medical benefits provided
under any such Plan, if any; statements or other communications regarding
withdrawal or other multiemployer plan liabilities, if any; and all
amendments and modifications to any such document. Seller has not
communicated to any Employee any intention or commitment to modify any Plan
or to establish or implement any other employee or retiree benefit or
compensation arrangement.
(ii) Each Plan intended to be qualified under section 401(a) of the
Code, and the trust (if any) forming a part thereof, has received a
favorable determination letter from the IRS as to its qualification
under the Code and to the effect that each such trust is exempt from
taxation under section 501(a) of the Code, and nothing has occurred
since the date of such determination letter that could adversely affect
such qualification or tax-exempt status.
(iii) The consummation of the transactions contemplated by this
Agreement or the Collateral Agreements will constitute "the disposition
by a corporation of substantially all of the assets (within
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the meaning of section 409(d)(2) of the Code used by such corporation in
a trade or business of such corporation" within the meaning of Section
401(k)(10)(A)(iii) of the Code. In addition, the defined contribution
plans of Seller with respect to the New Employees (the "Retained Defined
Contribution Plans") provide that such a disposition of assets within
the meaning of Section 401(k)(10)(A)(iii) of the Code is a distribution
event for purposes of the Retained Defined Contribution Plans.
(iv) No Plan has incurred an accumulated funding deficiency within
the meaning of Section 302 of ERISA or Section 412 of the Code, nor has
any waiver of the minimum funding standards of Section 302 of ERISA and
Section 412 of the Code been requested of or granted by the Internal
Revenue Service with respect to any Plan, nor has any lien in favor of
any Plan arisen under Section 412 of the Code or Section 302(f) of
ERISA.
(v) The Seller has not been required to provide security to any
defined benefit plan pursuant to Section 401(a)(29) of the Code.
(vi)(A) The Pension Benefit Guaranty Corporation ("PBGC") has not
instituted proceedings to terminate any Plan that is a "defined benefit
plan" within the meaning of Section 3(35) of ERISA of Seller or its
subsidiaries or members of their "controlled group" or to appoint a
trustee or administrator of such defined benefit plan, (B) no known
circumstances exist that constitute grounds under Section 4044 of ERISA
entitling the PBGC to institute any such proceedings, (C) no liability
to the PBGC or under Title IV of ERISA has been incurred or is expected
with respect to any such defined benefit plan that could result in
liability to any member of the "controlled group" or Seller other than
for premiums pursuant to Section 4007 which are not yet due and payable,
and (D) no such defined benefit plan has been terminated by Seller, its
subsidiaries or members of their "controlled group".
(vii) There has been no "reportable event" within the meaning of
Section 4043 of ERISA and the regulations and interpretations thereunder
which has not been fully and accurately reported in a timely fashion, as
required, or which, whether or not reported, would constitute grounds
for the PBGC to institute termination proceedings with respect to any
Plan.
(viii) As of the last valuation date for which a report has been
completed, the fair value of the assets of each Plan that is a defined
benefit plan exceeds the accumulated benefit obligation thereunder (all
determined in accordance with Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 87).
(ix) No liability has been or is expected to be incurred by Seller,
any Related Person or the Business (either directly or indirectly,
including as a result of an indemnification obligation) under or
pursuant to Title I or IV of ERISA or the penalty, excise tax or joint
and several liability provisions of the Code relating to employee
benefit plans that could, following the Closing, become or remain a
liability of the Business or become a liability of the Buyer or of any
employee benefit plan established or contributed to by the Buyer and, to
the knowledge of Seller, no event, transaction or condition has occurred
or exists that could result in any such liability to the business or,
following the Closing, the Buyer.
(x) Each of the Plans has been operated and administered in all
respects in compliance with all Applicable Laws, except for any failure
so to comply that, individually or together with all other such
failures, has not and will not result in a material liability or
obligation on the part of the Business, or, following the Closing, the
Buyer, and has not had or resulted in, and will not have or result in,
individually or in the aggregate, a Material Adverse Effect. There are
no material pending or, to the knowledge of Seller, threatened claims by
or on behalf of any of the Plans, by any Employee or otherwise involving
any such Plan or the assets of any Plan (other than routine claims for
benefits).
(xi) No Plan or any other benefit program sponsored by Seller or
any member of its controlled group is a "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA or is a "multiple employer plan"
within the meaning of section 4063 or 4064 of ERISA.
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(xii) All contributions required to have been made by Seller and
each related Person to any Plan under the terms of any such Plan or
pursuant to any applicable collective bargaining agreement or Applicable
Law have been made within the time prescribed by any such Plan,
agreement or Applicable Law.
(xiii) The consummation of the transactions contemplated by this
Agreement or the Collateral Agreements will not result in an increase in
the amount of compensation or benefits or the acceleration of the
vesting or timing of payment of any compensation or benefits payable to
or in respect of any Employee.
(xiv) There is no pending or threatened assessment, complaint,
proceeding, or investigation of any kind in any court or government
agency with respect to any Plan (other than routine claims for
benefits), nor is there any basis for one.
(y) [INTENTIONALLY OMITTED]
(z) No Guarantees. Except as set forth on Schedule 3.1(z), none of the
obligations or liabilities of the Business or of the Seller incurred in
connection with the operation of the Business is guaranteed by or subject
to a similar contingent obligation of any other Person. Seller has not
guaranteed or become subject to a similar contingent obligation in respect
of the obligations or liabilities of any other person. There are no
outstanding letters of credit, surety bonds or similar instruments of
Seller or any of its Affiliates in connection with the Business or the
Assets.
(aa) Records. The minute books of the Seller insofar as they relate to
or affect the Business and the Assets are substantially complete and
correct in all material respects. The books of account of the Seller,
insofar as they relate to or affect the Business and the Assets, are
sufficient to prepare the Financial Statements in accordance with GAAP.
(bb) Brokers, Finders, etc. All negotiations relating to this
Agreement, the Collateral Agreements, and the transactions contemplated
hereby and thereby, have been carried on without the participation of any
Person acting on behalf of Seller or its Affiliates in such manner as to
give rise to any valid claim against the Buyer or any of its Subsidiaries
for any brokerage or finder's commission, fee or similar compensation, or
for any bonus payable to any officer, director, employee, agent or sales
representative of or consultant to Seller or its Affiliates upon
consummation of the transactions contemplated hereby or thereby.
(cc) Disclosure. No representation or warranty by Seller contained in
this Agreement nor any statement or certificate furnished or to be
furnished by or on behalf of any Seller to the Buyer or its representatives
in connection herewith or pursuant hereto contains or will contain any
untrue statement of a material fact, or omits or will omit to state any
material fact required to make the statements contained herein or therein
not misleading. There is no fact (other than matters of a general economic
or political nature which affect the Business and the general economy)
known to Seller that has not been disclosed by Seller to the Buyer that
might reasonably be expected to have or result in a Material Adverse
Effect.
(dd) Receivables. All of the Seller's receivables (including accounts
receivable, loans receivable and advances) which have arisen in connection
with the Business and which are reflected in the Audited Financial
Statements, and all such receivables which will have arisen since the
Audited Balance Sheet Date and are reflected on the accounting records of
Seller (collectively, the "Accounts Receivable") represent or will
represent valid obligations arising from sales actually made or services
actually performed in the ordinary course of business. Unless paid prior to
the Closing Date, the Accounts Receivable are or will be as of the Closing
current and collectible. Each of the Accounts Receivable either has been or
will be collected in full, without any set-off, within 90 days after the
day on which it first becomes due and payable. There is no contest, claim
or right of set-off under any contract or agreement with any obligor of any
Accounts Receivable relating to the amount or validity of such Account
Receivable. Seller has no knowledge of any facts or circumstances generally
(other than general economic conditions) which would result in any material
increase in the uncollectability of such receivables as a class in excess
of the reserves therefor set forth on the Audited Financial Statements.
Schedule 3.1(dd) hereto accurately lists as of the most recent practicable
date prior to the date of this Agreement, all receivables arising out of or
relating to the Division,
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the amount owing and the aging of such receivable, the name and last known
address of the party from whom such receivable is owing, and any security
in favor of Seller for the repayment of such receivable which Seller
purports to have. Seller shall provide to Buyer an updated list of such
receivables as of the Closing Date.
(ee) Year 2000 Compliance. The systems and software used in the
business of the Business and included in the Assets on and after January 1,
2000 will be Year 2000 Compliant.
(ff) Deep Draw Technology. To the knowledge of Seller, there is no
technology currently available or expected to become available during the
next 12 months that would replace or materially reduce the need for or the
use of deep draw technology. Seller has not been advised, orally or in
writing, by Ford that its utilization of deep draw technology will be
materially reduced during the next 12 months.
(gg) Information in Proxy Statement. None of the information supplied
in writing by Seller specifically for inclusion in the Proxy Statement
will, at the date mailed to shareholders of Buyer and at the time of the
Shareholders Meeting, 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.
(hh) Investment Intent. The shares of Parent Common Stock being
acquired by Seller pursuant to this Agreement are being acquired for
Seller's own account and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act of 1933. Seller understands that the Parent Common Stock to
be issued pursuant to this Agreement will not be registered under the
Securities Act of 1933 by reason of its issuance in transactions exempt
from the registration and prospectus delivery requirements of the
Securities Act of 1933 pursuant to Section 4(2) thereof. The Seller has
made an independent investigation of the Parent and an independent
evaluation of the risks and merits of purchasing or acquiring the Parent
Common Stock. The Parent has afforded to Seller and its representatives
access to information (financial and other) concerning the Parent and its
business. The Parent has made available to Seller and its representatives
the officers, accountants and employees of the Company for the purpose of
discussing and responding to questions concerning the Parent and its
business. The Parent has furnished to Seller and its representatives copies
of all instruments, agreements, financial statements or other documents
pertaining to Parent and its business that Seller requested. The Seller
understands that the Parent Common Stock being acquired by Seller pursuant
to this Agreement has not been registered under the Securities Act of 1933
and, therefore, cannot be resold unless such common stock is registered
under the Securities Act of 1933 or unless an exemption from registration
is available.
3.2 Representations and Warranties of the Buyer and Parent. Each of the
Buyer and Parent represents and warrants to Seller as follows:
(a) Corporate Status; Authorization, etc. Each of Buyer and Parent is
a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation with full corporate power
and authority to execute and deliver this Agreement and the Collateral
Agreements to which it is a party, to perform its obligations thereunder
and to consummate the transactions contemplated thereby. The execution and
delivery by each of Buyer and Parent of this Agreement, and the
consummation of the transactions contemplated hereby, have been, and on the
Closing Date the execution and delivery by the Buyer and Parent of the
Collateral Agreements to which it is a party will have been, duly
authorized by all requisite corporate action of Buyer and Parent, as the
case may be, subject, in the case of the Share Issuance, to the Shareholder
Approval. Each of the Buyer and Parent has duly executed and delivered this
Agreement and on the Closing Date will have duly executed and delivered the
Collateral Agreements to which it is a party. This Agreement is, and on the
Closing Date each of the Collateral Agreements to which the Buyer and
Parent is a party will be, valid and legally binding obligations of the
Buyer and the Parent, as the case may be, enforceable against the Buyer and
the Parent, as the case may be, in accordance with their respective terms.
(b) No Conflicts, etc. The execution, delivery and performance by each
of Buyer and Parent of this Agreement and each of the Collateral Agreements
to which it is a party, and the consummation of the
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transactions contemplated hereby and thereby, do not and will not conflict
with or result in a violation of or under (with or without the giving of
notice or the lapse of time, or both) (i) the certificate or articles of
incorporation or by-laws or code of regulations or other organizational
documents of Buyer or Parent, as the case may be, (ii) any Applicable Law
applicable to Buyer or Parent, as the case may be, or any of their
respective Affiliates or any of their respective properties or assets or
(iii) any contract, agreement or other instrument applicable to Buyer or
Parent, as the case may be, or any of their respective Affiliates or any of
their respective properties or assets, except, in the case of clause (iii),
for violations and defaults that, individually and in the aggregate, have
not and will not materially impair the ability of Buyer or Parent, as the
case may be, to perform its obligations under this Agreement or under any
of the Collateral Agreements to which it is a party. Except as specified in
Schedule 3.2(b), no Governmental Approval or other Consent is required to
be obtained or made by Buyer or Parent, as the case may be, in connection
with the execution and delivery of this Agreement or the Collateral
Agreements or the consummation of the transactions contemplated hereby or
thereby.
(c) Litigation. There is no action, claim, suit or proceeding pending,
or to the Buyer's or Parent's knowledge, threatened, by or against or
affecting Buyer or Parent in connection with or relating to the
transactions contemplated by this Agreement or of any action taken or to be
taken in connection herewith or the consummation of the transactions
contemplated hereby.
(d) Brokers, Finders, etc. All negotiations relating to this
Agreement, the Collateral Agreements, and the transactions contemplated
hereby and thereby, have been carried on without the participation of any
Person (other than Robert W. Baird & Co. Incorporated) acting on behalf of
Buyer or Parent or their Affiliates in such manner as to give rise to any
valid claim against Seller for any brokerage or finder's commission, fee or
similar compensation and the fees of Robert W. Baird & Co. Incorporated
will be paid by Buyer and Parent.
(e) Proxy Statement. The Proxy Statement at the date mailed to
Parent's shareholders and at the time of the Shareholders Meeting will 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 and will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder;
except that no representation is made by Parent or Buyer with respect to
statements made in the Proxy Statement based on information supplied in
writing by Seller specifically for inclusion in the Proxy Statement.
(f) Parent Common Stock. The Parent Common Stock issued to Seller
pursuant to this Agreement will be validly issued, fully paid and
nonassessable and will be issued free of any Liens.
ARTICLE IV
COVENANTS
4.1 Covenants of Seller.
(a) Conduct of Business. From the date hereof to the Closing Date,
except as expressly permitted or required by this Agreement or as otherwise
consented to by the Buyer in writing, Seller will:
(i) carry on the Business in, and only in, the ordinary course, in
substantially the same manner as heretofore conducted, and use all
reasonable efforts to preserve intact its present business organization,
maintain its properties in good operating condition and repair, keep
available the services of its present officers and significant
employees, and preserve its relationship with customers, suppliers and
others having business dealings with it, to the end that its goodwill
and going business shall be in all material respects in the same
condition as on the date of this Agreement following the Closing;
(ii) pay accounts payable and other obligations of the Business
when they become due and payable in the ordinary course of business
consistent with prior practice;
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(iii) perform in all material respects all of its obligations under
all Contracts and other agreements and instruments relating to or
affecting the Business or the Assets, and comply in all material
respects with all Applicable Laws applicable to it, the Assets or the
Business;
(iv) not enter into or assume any agreement, contract or instrument
relating to the Business involving an amount in excess of $50,000, or
enter into or permit any material amendment, supplement, waiver or other
modification in respect thereof;
(v) not grant (or commit to grant) any increase in the compensation
(including incentive or bonus compensation) of any employee employed in
the operation of the Business or institute, adopt or amend (or commit to
institute, adopt or amend) any compensation or benefit plan, policy,
program or arrangement or collective bargaining agreement applicable to
any such employee; and
(vi) not take any action or omit to take any action, which action
or omission would result in a breach of any of the representations and
warranties set forth in Section 3.1(g).
(b) No Solicitation. During the term of this Agreement, none of the
Seller, any of its Affiliates or any Person acting on their behalf shall
(i) solicit or encourage any inquiries or proposals for, or enter into any
discussions with respect to, the acquisition of any properties and assets
held for use in connection with, necessary for the conduct of, or otherwise
material to, the Business or (ii) furnish or cause to be furnished any
non-public information concerning the Business to any Person (other than
the Buyer and its agents and representatives and Seller's agents and
advisors), other than in the ordinary course of business or pursuant to
Applicable Law and after prior written notice to the Buyer. Seller shall
not sell, transfer or otherwise dispose of, grant any option or proxy to
any Person with respect to, create any Lien upon, or transfer any interest
in, any Asset, other than in the ordinary course of business and consistent
with this Agreement.
(c) Access and Information. (i) So long as this Agreement remains in
effect, Seller will (and will cause each of its Affiliates and its and its
Affiliates' respective accountants, counsel, consultants, employees and
agents) after reasonable prior notice give the Buyer, the Buyer's lenders,
and their respective accountants, counsel, consultants, employees and
agents, full access during normal business hours to, and furnish them with
all documents, records, work papers and information with respect to, all of
such Person's properties, assets, books, contracts, commitments, reports
and records relating to the Division or the Business, as the Buyer shall
from time to time reasonably request. In addition, the Seller will permit
the Buyer, and its accountants, counsel, consultants, employees and agents,
reasonable access to such personnel of the Seller during normal business
hours after reasonable prior notice as may be necessary or useful to the
Buyer in its review of the properties, assets and business affairs of the
Division and the Business and the above-mentioned documents, records and
information. The Seller will keep the Buyer generally informed as to any
material developments pertaining to the Business.
(ii) Seller will retain all books and records relating to the
Division in accordance with Seller's record retention policies as
presently in effect. During the seven-year period beginning on the
Closing Date, Seller shall not dispose of or permit the disposal of any
such books and records not required to be retained under such policies
without first giving 60 days' prior written notice to the Buyer offering
to surrender the same to the Buyer at the Buyer's expense.
(d) Public Announcements. Except as required by Applicable Law, the
Seller shall not, and it shall not permit any Affiliate to, make any public
announcement in respect of this Agreement or the transactions contemplated
hereby without the prior written consent of the Buyer.
(e) Further Actions. (i) Seller agrees to use all reasonable good
faith efforts to take all actions and to do all things necessary, proper or
advisable to consummate the transactions contemplated hereby by the Closing
Date, including, without limitation, causing the release of any and all
Liens (other than Permitted Liens) on or affecting the Assets.
(ii) The Seller will, as promptly as practicable, file or supply,
or cause to be filed or supplied, all applications, notifications and
information required to be filed or supplied by any of them pursuant to
Applicable Law in connection with this Agreement, the Collateral
Agreements, the sale and transfer of
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the Assets pursuant to this Agreement and the consummation of the other
transactions contemplated thereby, including, but not limited to,
filings pursuant to the HSR Act.
(iii) Seller, as promptly as practicable, will use all reasonable
efforts to obtain, or cause to be obtained, all Consents (including,
without limitation, all Governmental Approvals and any Consents required
under any Contract) necessary to be obtained by it in order to
consummate the sale and transfer of the Assets pursuant to this
Agreement and the consummation of the other transactions contemplated
hereby.
(iv) Seller will, and will cause its Affiliates to, coordinate and
cooperate with the Buyer in exchanging such information and supplying
such assistance as may be reasonably requested by the Buyer in
connection with the filings and other actions contemplated by Section
4.2(b).
(v) At all times prior to the Closing, Seller shall promptly notify
the Buyer in writing of any fact, condition, event or occurrence that
will or may result in the failure of any of the conditions contained in
Sections 5.1 and 5.2 to be satisfied, promptly upon Seller becoming
aware of the same.
(f) Further Assurances. Following the Closing, the Seller shall, and
shall cause each of its Affiliates to, from time to time, execute and
deliver such additional instruments, documents, conveyances or assurances
and take such other actions as shall be necessary, or otherwise reasonably
requested by the Buyer, to confirm and assure the rights and obligations
provided for in this Agreement and in the Collateral Agreements and render
effective the consummation of the transactions contemplated hereby and
thereby.
(g) Liability for Transfer Taxes. The Sellers shall be responsible for
the timely payment of, and shall indemnify and hold harmless the Buyer
against, all sales (including, without limitation, bulk sales, if
applicable), use, value added, documentary, stamp, gross receipts,
registration, transfer, conveyance, excise, recording, license and other
similar Taxes and fees ("Transfer Taxes"), arising out of or in connection
with or attributable to the transactions effected pursuant to this
Agreement and the Collateral Agreements. The Seller shall prepare and
timely file all Tax Returns required to filed in respect of Transfer Taxes
(including, without limitation, all notices required to be given with
respect to bulk sales taxes), provided that the Buyer shall be permitted to
prepare any such Tax Returns that are the primary responsibility of the
Buyer under Applicable Law. The Buyer's preparation of any such Tax Returns
shall be subject to Seller's approval, which approval shall not be withheld
unreasonably.
(h) Certificates of Tax Authorities. On or before the Closing Date,
the Seller shall provide to the Buyer copies of certificates from the
appropriate taxing authority stating that no Taxes are due to any state or
other taxing authority for which the Buyer could have liability to withhold
or pay Taxes with respect to the transfer of the Assets or the Business,
provided that any failure to provide such certificates to the Buyer which
is not the fault of the Seller shall not relieve the Buyer of its
obligations to enter into and complete the Closing. If the Seller shall
fail to provide such certificates, the Buyer shall withhold or, where
appropriate, escrow such amount as necessary based upon the Buyer's
reasonable estimate of the amount of such potential liability, or as
determined by the appropriate taxing authority, to cover such Taxes until
such time as certificates are provided.
(i) Use of Business Name. After the Closing, Seller will not, directly
or indirectly, use or do business, or allow any Affiliate to use or do
business, or assist any third party in using or doing business, under the
name and marks "MTD Automotive" (or any other name confusingly similar to
such names and marks); provided, however, that Seller shall be entitled to
use the name and mark "MTD Automotive" for a period of 120 days after the
Closing in connection with its transition out of the Business and
thereafter with the prior written consent of Buyer. Buyer shall not receive
any right to use (a) the name "MTD" by itself or in combination with any
other words or letters other than "Automotive" or (b) the grass sprig
trademark.
(j) Environmental Assessment. Seller shall retain environmental
consultants and attorneys satisfactory to the Buyer to conduct an
environmental assessment of the Real Property and the other assets,
equipment and facilities owned, leased, operated or used by the Seller in
the Business (the "Environmental Assessment"), to include physical
inspections of the Real Property and such assets, equipment and facilities,
review of all relevant records in the possession or custody or under the
control of any Seller, review of
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relevant governmental agency records and contact with governmental agency
personnel, conduct of sampling activities and any other investigatory
activities of a scope satisfactory to the Buyer. The costs of the
Environmental Assessment shall be borne by the Seller.
(k) Automobile Leases. All leases related to automobiles used by
executives and other employees of Seller who become New Employees shall be
assumed by Buyer and remain in full force and effect until expiration or
earlier termination of such leases. After the expiration or earlier
termination of such leases any subsequent automobile leases for any New
Employees will be provided pursuant to Parent's automobile leasing program.
(l) Product Liability Insurance. Seller has maintained product
liability coverage with respect to products manufactured, delivered or sold
by Seller prior to the Closing Date for a period of 20 years. Such
insurance has provided and shall provide coverage of at least $1,250,000
per occurrence and $4,500,000 in the aggregate, without a deductible.
(m) Audited Financial Statements. Seller shall cause its accountants,
PriceWaterhouseCoopers LLP, at Seller's sole cost and expense, to prepare
for Buyer audited financial statements for the Business for its fiscal year
ended July 31, 1999 (the "1999 Audited Financial Statements"). Such
financial statements shall be prepared in accordance with GAAP consistent
with the Audited Financial Statements and shall include the unqualified
audit opinion of PriceWaterhouseCoopers LLP. Such audited financial
statements shall be delivered to Buyer promptly upon completion of the
audit but in no event later than October 31, 1999.
(n) Fiscal 1999 Bonuses. Seller shall determine the amount and pay to
each New Employee any bonuses and/or commissions which such New Employee is
entitled to receive for services rendered for Seller during Seller's fiscal
year 1999. Such payment shall be made at the time such payment would have
been made if such New Employee had remained an employee of Seller.
(o) Modern Tool & Die Sales Corporation. Seller shall transfer all of
the assets of Modern Tool & Die Sales Corporation to the Division at or
prior to the Closing Date (the "Subsidiary Asset Transfer") and cause such
assets to be conveyed to Buyer pursuant to this Agreement.
(p) Tools and Dies. All rights Seller may have in the tools and dies
currently or formerly used by Seller in the Business which are in the
possession of Seller as of the Closing but owned by other Persons shall,
effective on the Closing Date, be hereby transferred to Buyer. Seller shall
take any and all actions reasonably requested by Buyer to effect and/or
document such transfer. Buyer shall be entitled to use the tools and dies
utilized to manufacture lawnmower blades for so long as it manufactures
blades on behalf of Seller pursuant to Section 4.4(e) of this Agreement.
Buyer shall utilize such tools and dies in accordance with operating
practices and procedures consistent with past practices of the Division,
ordinary wear and tear excepted.
4.2. Covenants of the Buyer.
(a) Public Announcements. Prior to the Closing, except as required by
Applicable Law, the Buyer shall not, and shall not permit its Affiliates
to, make any public announcement in respect of this Agreement or the
transactions contemplated hereby without the prior written consent of
Seller.
(b) Further Actions. (i). The Buyer agrees to use all reasonable good
faith efforts to take all actions and to do all things necessary, proper or
advisable to consummate the transactions contemplated hereby by the Closing
Date.
(ii) The Buyer will, as promptly as practicable, file or supply, or
cause to be filed or supplied, all applications, notifications and
information required to be filed or supplied by Buyer pursuant to
Applicable Law in connection with this Agreement, the Collateral
Agreements, the Buyer's acquisition of the Assets pursuant to this
Agreement and the consummation of the other transactions contemplated
hereby and thereby, including, but not limited to, filings pursuant to
the HSR Act.
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(iii) The Buyer will coordinate and cooperate with the Seller in
exchanging such information and supplying such reasonable assistance as
may be reasonably requested by the Seller in connection with the filings
and other actions contemplated by Section 4.1(e).
(iv) At all times prior to the Closing, the Buyer shall promptly
notify Seller in writing of any fact, condition, event or occurrence
that will or may result in he failure of any of the conditions contained
in Sections 5.1 and 5.3 to be satisfied, promptly upon becoming aware of
the same.
(v) Buyer shall cooperate with Seller in the prosecution of the
lawsuits or claims set forth in Schedule 1.1(j), including making
available its personnel and providing such testimony and access to books
and records as shall be necessary, all at the sole cost and expense of
Seller.
(vi) Buyer will collect all amounts paid in respect of accounts
receivable which constitute Excluded Assets and shall remit such amounts
to Seller on a monthly basis.
(c) Further Assurances. Following the Closing, the Buyer shall, and
shall cause its Affiliates to, from time to time, execute and deliver such
additional instruments, documents, conveyances or assurances and take such
other actions as shall be necessary, or otherwise reasonably requested by
the Seller, to confirm and assure the rights and obligations provided for
in this Agreement and in the Collateral Agreements and render effective the
consummation of the transactions contemplated hereby and thereby.
(d) 6009 Plaza Drive. If, after the Closing Date, Seller sells its
warehouse facility located at 6009 Plaza Drive, Parma, Ohio to an
unaffiliated third party, Buyer shall remove all inventory owned by Buyer
and stored at such facility within 60 days of receipt of written notice
from Seller of the execution of a definitive agreement providing for such
sale.
4.3 Covenants of Buyer and Seller. (a) As soon as practicable following the
date of this Agreement, Parent and Buyer shall prepare and file with the
Securities and Exchange Commission ("SEC"), and Seller shall cooperate with
Parent and Buyer in such preparation and filing of, the Proxy Statement. Parent
shall cause the Proxy Statement to be mailed to its shareholders as promptly as
practicable after the Proxy Statement is cleared by the staff of the SEC for
mailing to Parent's shareholders.
(b) Parent shall, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of its
shareholders (the "Shareholders Meeting") in accordance with law, Parent's
Certificate of Incorporation and By-laws for the purpose of obtaining
Shareholder Approval and shall, through the Board of Directors of Parent,
recommend to its shareholders the approval of the issuance of the Parent
Common Stock pursuant to Sections 2.2 and 2.8 of this Agreement ("Share
Issuance").
(c) Seller agrees that (i) it will provide Parent with all information
concerning Seller necessary or reasonably appropriate to be included in the
Proxy Statement and (ii) at the Shareholders Meeting, if held, or any
postponement or adjournment thereof (or at any other meeting at which the
Share Issuance is considered by shareholders of Parent), it will vote, or
cause to be voted, all of the shares of Parent Common Stock then owned by
it or any of its other subsidiaries in favor of the approval of the Share
Issuance.
4.4 Additional Agreements.
(a) Transfer Costs -- Automotive Parts. Effective as of the Closing
Date through and including October 31, 2001, Seller shall sell to the Buyer
the parts listed on Schedule 4.4(a) at the respective unit cost set forth
opposite such parts on Schedule 4.4(a) in such quantities and at such times
as the Buyer shall request in writing. From and after October 31, 2001,
Seller and Buyer shall negotiate in good faith to continue the supply
arrangements set forth in the immediately preceding sentence on such terms
and conditions as the parties shall hereafter agree.
(b) Price Concessions. For the calendar years ended December 31, 1999,
2000, 2001 and 2002, any yearly price concession or concessions implemented
by a customer of the Buyer with respect to the Division's business as set
forth on Schedule 4.4(b)(i) shall be paid by Seller to the Buyer in cash
within 30 days of receipt of written notice from the Buyer of the amount of
such concession. Such written notice shall specify in detail, as available
to Buyer, the basis for such price concession or concessions. The Buyer
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shall conduct all negotiations regarding such price concessions and their
payment with its customers in good faith consistent with the Business's
past practices after a review of such price concessions by, and
consultation with, Seller. Attached as Exhibit 4.4(b)(ii) is a history of
the business's price concessions for fiscal years 1996, 1997 and 1998,
which shall be utilized by Buyer and Seller solely as evidence of the
Business's past practices. Notwithstanding the foregoing, in no event shall
Seller be liable for more than $500,000 of such price concessions per
customer per year. Notwithstanding anything in this Section 4.4(b) to the
contrary, for the calendar years ended December 31, 1999 and 2000, Seller
shall not be obligated to pay the portion of any price concession that
relates to the period commencing on the Closing Date and ending on the
first anniversary of the Closing Date if the First Year EBITDA is less than
8,500,000.
(c) Windstar Costs. Seller shall pay to the Buyer any and all amounts
requested to be paid to Ford Motor Company ("Ford") in connection with the
delay associated with Seller's launch of its products for the Ford Windstar
vehicle model ("Ford Costs") in December 1998 caused by the Seller's
inability to commence operation of its 2500-ton Verson press at its W.
130th facility. Such amounts shall be paid to the Buyer by Seller within 30
days of receipt of written notice from the Buyer detailing such amounts
owed to Ford. The Buyer shall conduct all negotiations with Ford regarding
such costs in good faith consistent with the Business's past practices for
costs of this type after review by, and consultation with, Seller.
(d) Capital Expenditures. The capital expenditures for the Business
set forth on Schedule 4.4(d) for fiscal years 1999 through 2002 (the
"Projected Capital Expenditures") are sufficient to achieve the
corresponding revenue projections for the Business for such fiscal years as
set forth on Schedule 4.4(d). If, in any fiscal year through 2002, the
Buyer must incur capital expenditures in excess of the amounts set forth in
Schedule 4.4(d) to achieve the corresponding revenue projections ("Actual
Capital Expenditures"), then Seller shall pay to the Buyer in cash an
amount equal to the excess of Actual Capital Expenditures over the
Projected Capital Expenditures for such fiscal year. Seller shall make such
payment to the Buyer in cash within 30 days after receipt of a written
notice detailing the capital expenditures required and the calculation of
the amount required to be paid by Seller. For purposes of this Section
4.4(d), (i) "Actual Capital Expenditures" shall exclude costs associated
with plant and facility rationalizations, and (ii) the revenue projections
set forth in Schedule 4.4(d) shall be reduced to the extent agreed to by
the parties in good faith in connection with any plant and facility
rationalizations.
(e) Transfer Costs -- Lawnmower Blades. Effective as of the Closing
Date through and including October 31, 2001, Buyer shall sell to Seller the
parts listed on Schedule 4.4(e) at the respective unit cost set forth
opposite such parts on Schedule 4.4(e) in such quantities and at such times
as Seller shall request in writing. Prior to the Closing, Seller and Buyer
shall negotiate in good faith to enter into an agreement regarding the
supply arrangements set forth in the immediately preceding sentence after
October 31, 2001 on such terms and conditions as the parties shall
hereafter agree and if no agreement can be reached prior to the Closing,
then from and after October 31, 2001, Seller and Buyer shall negotiate in
good faith to continue such supply arrangements on such terms and
conditions as the parties shall hereinafter agree; provided, however, if by
October 31, 2000, Seller and Buyer are not able to execute a written
agreement as to the terms and conditions of such continued supply
arrangements commencing after October 31, 2001, at any time following
October 31, 2000 through October 31, 2001 Seller shall have the right and
option to purchase the Blade Line Equipment as identified in Schedule
4.4(e)(ii), along with any additional enhancements, improvements and
upgrades of the Blade Line Equipment installed after the Closing Date which
are dedicated to the manufacture of the lawnmower blade parts. Seller may
also exercise this right and option to purchase at any time after October
31, 2001 regardless of whether the parties entered into a prior agreement
as to the supply arrangement on or before October 31, 2000 unless such an
agreement establishes a different time schedule for exercising the right
and option. The purchase price for the Blade Line Equipment and
improvements will be as set forth on Schedule 4.4(e)(ii), payable on the
date of transfer of title. Buyer will grant Seller a security interest in
said Blade Line Equipment (and improvements thereto) to secure Buyer's
performance of its obligations under this Section 4.4(e), and will
cooperate with Seller in the execution and filing of UCC financing
statements to record said security interest as of the Closing Date. Seller
shall coordinate with Buyer the removal of the equipment commencing at the
date as determined by Seller. Buyer shall allow Seller access to the
premises for Seller to remove such equipment at Seller's expense. Seller
shall
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cause the relevant portion of the premises to be left in a "broom clean"
condition (without removal of an foundations or filling of any pits).
Seller shall take reasonable efforts to minimize interruption of Buyer's
operations of its business. During the period which Buyer is manufacturing
such parts, Buyer shall manufacture the parts consistent with Seller's
quality assurance standards in effect at Closing. In addition, Buyer will
operate and maintain the Blade Line Equipment consistent with industry
standards and Seller's prior practices, ordinary wear and tear excepted.
Seller acknowledges and agrees that Seller owns (and is not transferring
ownership of) certain patents with regard to the manufacture of the parts
listed on Schedule 4.4(e)(i) and that Seller is hereby providing to Buyer a
royalty free, non-exclusive license to make, use and sell the products only
to the extent that such products are sold to Seller or its subsidiaries.
(f) Dispute Resolution Procedure. If a party has any objections as to
the determination of any matters set forth in Sections 4.4(a) through (e)
(each, a "Covenant Determination"), which determination shall be set forth
in writing, such party shall provide written notice of such objections
("Covenant Objection Notice") within 30 calendar days after receipt of such
determination (the "Covenant Objection Period"). Unless a Covenant
Objection Notice is received by the party making the Covenant Determination
within the Covenant Objection Period, such Covenant Determination shall be
final, conclusive and binding on the parties to this Agreement. If a party
delivers a Covenant Objection Notice within the Covenant Objection Period,
the parties shall use reasonable efforts to resolve all such objections. If
the parties are not able to resolve all the objections set forth in the
Covenant Objection Notice within 14 calendar days after delivery of the
Covenant Objection Notice, the remaining disputed items shall be submitted
for final resolution to the Independent Accountants. After offering Seller
and Seller's representatives and Buyer and Buyer's representatives the
opportunity to present their positions as to the disputed items, which
opportunity shall not extend for more than 30 calendar days after
submission of such disputed items to the Independent Accountants, the
Independent Accountants shall deliver a written report resolving all
disputed items and setting forth the basis for such resolution within 30
calendar days after Seller and Buyer have presented their positions as to
the disputed items. The resolution of the Independent Accountants shall be
final, conclusive and binding upon the parties to this Agreement.
Notwithstanding anything in this Agreement to the contrary, the scope of
the Independent Accountants' review of any dispute between Buyer and Seller
set forth in this Section 4.4 shall be limited solely to the resolution of
the objections set forth in the Covenant Objection Notice.
(g) Costs and Expenses. One-half of the fees, costs and expenses of
the Independent Accountants for services rendered pursuant to Section
4.4(f), shall be paid by Seller and one-half of such fees, costs and
expenses shall be paid by Buyer.
(h) Certain Environmental Matters. After the Closing, Buyer shall
provide Seller with such access to the real property located at 700
Liverpool Drive (the "Liverpool Facility") and 5389 W. 130th (the "West
130th Facility"), to the extent owned by Buyer after the Closing, as
reasonably necessary for Seller to conduct any Onsite Remedial Action.
Seller's use of the Liverpool Facility and/or the West 130th Facility with
respect to such Onsite Remedial Action shall, to the greatest extent
feasible, avoid (or if not feasibly avoidable, minimize) any material
Facility Impact and Seller's use of the Liverpool Facility and/or the West
130th Facility with respect to such Onsite Remedial Action shall not
violate any Environmental Law or contribute to or cause a violation of any
Environmental Law by Buyer. Seller shall, prior to any entry onto the
Liverpool Facility and/or the West 130th Facility, provide such advance
notice to Buyer (including the proposed date and time of such entry,
nature, location and scope of sampling, testing or other Response activity
to be conducted at such facilities during such entry) as is reasonably
sufficient to permit Buyer and Seller to coordinate such entry and actions
with plant operations so as to avoid, to the greatest extent commercially
feasible, disruption of or interference with, operations at the Liverpool
Facility and/or the West 130th Facility. Seller and its representatives may
enter only on the dates and times specified in such notices. Buyer and its
representatives shall have the right to accompany and observe Seller and
its representatives during the performance of all such work and activities
at the Liverpool Facility and/or West 130th Facility, but Buyer and its
representations will not unreasonably interfere with such work and
activities. If and to the extent that any Response activity interferes with
or disrupts Buyer's use of or operations at the Liverpool Facility and/or
the West 130th Facility, then Seller shall promptly attempt to
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minimize such interference or disruption (provided that Seller shall be
responsible for any of Buyer's incremental expenses including, without
limitation, costs of outsourcing production or maintain continuity of
supply to customers to the extent such expenses and costs constitute
Losses) or as a result of such interference or disruption making operations
at the Liverpool Facility and/or the West 130th Facility more costly or
less efficient. Buyer shall, in all events, be obligated to use
commercially reasonable efforts to mitigate the consequences of such
disruption or interference; provided, however, that Seller shall be
obligated to reimburse Buyer for any incremental costs and expenses
incurred by Buyer to mitigate such consequences to the extent such expenses
and costs constitute Losses. In addition, to the extent that such
disruption or interference results in a suspension of any operations at the
Liverpool Facility and/or the West 130th Facility, Seller shall be
obligated to pay to Buyer lost profits on products which Buyer may incur
from such disruption or interferences and despite Buyer's efforts to
mitigate, would have been produced and sold by Buyer to the extent such
lost profits constitute Losses.
ARTICLE V
CONDITIONS PRECEDENT
5.1 Conditions to Obligations of Each Party. The obligations of the parties
to consummate the transactions contemplated hereby shall be subject to the
fulfillment on or prior to the Closing Date of the following conditions:
(a) HSR Act Notification. In respect of the notifications of the Buyer
and Seller pursuant to the HSR Act, if any, the applicable waiting period
and any extensions thereof shall have expired or been terminated.
(b) No Injunction, etc. Consummation of the transactions contemplated
hereby shall not have been restrained, enjoined or otherwise prohibited by
any Applicable Law, including any order, injunction, decree or judgment of
any court or other Governmental Authority. No court or other Governmental
Authority shall have determined any Applicable Law to make illegal the
consummation of the transactions contemplated hereby or by the Collateral
Agreements, and no proceeding with respect to the application of any such
Applicable Law to such effect shall be pending.
(c) Shareholder Approval. The Shareholder Approval shall have been
obtained.
5.2. Conditions to Obligations of the Buyer and Parent. The obligations of
the Buyer and Parent to consummate the transactions contemplated hereby shall be
subject to the fulfillment (or waiver by the Buyer) on or prior to the Closing
Date of the following additional conditions, which Seller agrees to use
reasonable good faith efforts to cause to be fulfilled:
(a) Representations, Performance. The representations and warranties
of the Seller contained in this Agreement and in the Collateral Agreements
(i) shall be true and correct in all respects (in the case of any
representation or warranty containing any materiality qualification) or in
all material respects (in the case of any representation or warranty
without any materiality qualification) at and as of the date hereof, and
(ii) shall be repeated and shall be true and correct in all respects (in
the case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any
representation or warranty without any materiality qualification) on and as
of the Closing Date with the same effect as though made on and as of the
Closing Date. Seller shall have duly performed and complied in all material
respects with all covenants, agreements and conditions required by this
Agreement and each of the Collateral Agreements to be performed or complied
with by it prior to or on the Closing Date. Seller shall have delivered to
the Buyer a certificate, dated the Closing Date and signed by its duly
authorized officers, to the foregoing effect.
(b) Consents. Seller shall have obtained and shall have delivered to
the Buyer copies of (i) all Governmental Approvals required to be obtained
by Seller in connection with the execution and delivery of this Agreement
and the Collateral Agreements and the consummation of the transactions
contemplated hereby or thereby and (ii) all Consents (including, without
limitation, all Consents required under any Contract) necessary to be
obtained in order to consummate the sale and transfer of the Assets
pursuant to this Agreement and the consummation of the other transactions
contemplated hereby and by the Collateral
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Agreements, unless the failure to obtain such Consent would not,
individually or in the aggregate, have a Material Adverse Effect or if
waived by Buyer including under Section 2.7.
(c) No Material Adverse Effect. No event, occurrence, fact, condition,
change, development or effect shall have occurred, exist or come to exist
since the date of this Agreement that, individually or in the aggregate,
has constituted or resulted in, or could reasonably be expected to
constitute or result in, a Material Adverse Effect.
(d) Collateral Agreements. Seller or one of its Affiliates, as the
case may be, shall have entered (i) a transitional services agreement with
the Buyer (the "Transitional Services Agreement") and (ii) personal
property sublease or sublease with Buyer, in form and substance reasonably
satisfactory to Buyer (the "Personal Property Sublease).
(e) Corporate Proceedings. All corporate and other proceedings of the
Seller in connection with this Agreement and the Collateral Agreements and
the transactions contemplated hereby and thereby, and all documents and
instruments incident thereto, shall be reasonably satisfactory in substance
and form to the Buyer and its counsel, and the Buyer and its counsel shall
have received all such documents and instruments, or copies thereof,
certified if requested, as may be reasonably requested.
(f) Transfer Documents. Seller shall have delivered to the Buyer at
the Closing all documents, certificates and agreements necessary to
transfer to the Buyer good and valid or marketable, as the case may be,
title to the Assets, free and clear of any and all Liens thereon, other
than Permitted Liens, including without limitation:
(i) A bill of sale, assignment and general conveyance, in form and
substance reasonably satisfactory to the Buyer, dated the Closing Date,
with respect to the Assets, (other than any Asset to be transferred
pursuant to any of the instruments referred to in any other clause of
this Section 5.2(f));
(ii) Assignments of all Contracts, Intellectual Property and any
other agreements and instruments constituting Assets, dated the Closing
Date, assigning to the Buyer all of Seller's right, title and interest
therein and thereto, with any required Consent endorsed thereon;
(iii) A general warranty deed, dated as of the Closing Date, with
respect to each parcel of Owned Real Property that constitutes
Designated Property in the form and substance reasonably satisfactory to
Buyer and Seller, together with any necessary transfer declarations or
other filings;
(iv) An assignment of lease, dated as of the Closing Date, with
respect to each Lease and with respect to each Other Lease, together
with any necessary transfer declarations or other filings, each in form
and substance reasonably satisfactory to Buyer and Seller;
(v) Certificates of title to all motor vehicles included in the
Assets to be transferred to the Buyer hereunder, duly endorsed for
transfer to the Buyer as of the Closing Date; and
(vi) A lease, dated as of the Closing Date, with respect to the
West 130th Facility in the form and substance reasonably satisfactory to
Buyer and Seller.
(g) Environmental Assessment. The Buyer shall have received the
Environmental Assessment which shall be in form and substance reasonably
satisfactory to the Buyer.
(h) Title Policies. The Buyer shall have received from a nationally
recognized title insurance company (the "Title Company") satisfactory to
the Buyer, at Seller's expense, (a) a fee owner's title insurance policy
issued to the Buyer, and a mortgagee's policy issued to one or more lenders
designated by the Buyer, with respect to each Designated Property that is
an Owned Real Property, and (b) a leasehold title insurance policy issued
to the Buyer, and a mortgagee's policy issued to one or more lenders
designated by the Buyer, with respect to each Designated Property that is a
Leased Real Property, in each case in form and substance satisfactory to
the Buyer and the Buyer's lenders, together with endorsements reasonably
requested by the Buyer, including, without limitation, access, zoning,
comprehensive and contiguity endorsements, in an amount determined by the
Buyer, insuring the Buyer and the Buyer's lenders and issued as of the
Closing Date by the Title Company, showing the Buyer or one of the other
Buyer Parties to have a
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fee simple title to each Designated Property that is an Owned Real
Property, and a valid leasehold estate in each Designated Property that is
a Leased Real Property, in each case subject only to Permitted Liens.
Seller shall have delivered to the Title Company any affidavits or
indemnities required by the Title Company in connection with the delivery
of the owner's title policies, leasehold title policies and any mortgagee
title policies issued to the Buyer's lenders.
(i) Surveys. The Buyer shall have received, at Seller's expense, a
survey of each Designated Property, dated within 30 days of the Closing
Date, prepared by a certified or registered surveyor reasonably acceptable
to the Buyer and the Title Company and certified to the Buyer, the Title
Company and the Buyer's lenders, in form and substance satisfactory to the
Buyer, the Title Company and the Buyer's lenders, complying with the
current Minimum Standard Detail Requirements for ALTA/ACSM Land Title
Surveys, including Table A requirements 1-3, 6, 7(a) and (b), 8-11, 14 and
16 and (a) setting forth an accurate description of each parcel of
Designated Property, (b) locating all improvements, Liens (setting forth
the recording information of any recorded instruments), setback lines,
alleys, streets and roads, (c) showing any encroachments upon or by any
improvements on the Designated Property, and (d) showing all dedicated
public streets providing access to the Designated Property and the
municipal address of any improvements located on the Designated Property.
(j) Consents and Estoppels. The Buyer shall have received consents
from the lessor of each Lease listed on Schedule 3.1(u) to the assignment
of such Lease to the Buyer. The Buyer shall also have received estoppel
certificates addressed to the Buyer and the Buyer's lenders from the lessor
of each Lease, dated within 30 days of the Closing Date, identifying the
Lease documents and any amendments thereto, stating that the Lease is in
full force and effect and, to the best knowledge of the lessor, that the
tenant is not in default under the Lease and no event has occurred that,
with notice or lapse of time or both, would constitute a default by the
tenant under the Lease and containing any other information reasonably
requested by the Buyer or the Buyer's lenders.
(k) FIRPTA Certificate. The Buyer shall have received a certificate of
Seller, dated the Closing Date and sworn to under penalty of perjury,
setting forth the name, address and federal tax identification number of
Seller and stating that Seller is not a "foreign person" within the meaning
of section 1445 of the Code, such certificate to be in the form set forth
in the Treasury Regulations thereunder.
(l) Collective Bargaining Agreements. The Agreement, effective May 13,
1996, between Modern Tool & Die Company, a Division of MTD Products Inc.,
and International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America UAW, Local Union No. 2015, and the Agreement,
effective August 25, 1997, between Modern Tool & Die Company, Liverpool
Division of MTD Products Inc., and International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America UAW, Local Union
No. 1619, shall each be amended in form and substance reasonably
satisfactory to Buyer and Buyer shall otherwise be reasonably satisfied
with relations with such unions.
(m) Subsidiary Asset Transfer. At or prior to the Closing, Seller
shall have consummated the Subsidiary Asset Transfer.
5.3. Conditions to Obligations of Seller. The obligation of Seller to
consummate the transactions contemplated hereby shall be subject to the
fulfillment (or waiver by Seller), on or prior to the Closing Date, of the
following additional conditions, which the Buyer agrees to use reasonable good
faith efforts to cause to be fulfilled.
(a) Representations, Performance, etc. The representations and
warranties of the Buyer contained in this Agreement and the Collateral
Agreements (i) shall be true and correct in all respects (in the case of
any representation or warranty containing any materiality qualification) or
in all material respects (in the case of any representation or warranty
without any materiality qualification) at and as of the date hereof and
(ii) shall be repeated and shall be true and correct in all respects (in
the case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any
representation or warranty without any materiality qualification) on and as
of the Closing Date with the same effect as though made at and as of such
time. Buyer shall have duly performed and complied in all material respects
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with all agreements, covenants and conditions required by this Agreement
and the Collateral Agreements to be performed or complied with by it prior
to or on the Closing Date. Buyer shall have delivered to Seller a
certificate, dated the Closing Date and signed by its duly authorized
officer, to the foregoing effect.
(b) Assumption Agreement. Seller shall have received from the Buyer
the Assumption Agreement.
(c) Corporate Proceedings. All corporate proceedings of Buyer in
connection with this Agreement and the Collateral Agreements and the
transactions contemplated hereby and thereby, and all documents and
instruments incident thereto, shall be reasonably satisfactory in substance
and form to Seller, and its counsel, and Seller and its counsel shall have
received all such documents and instruments, or copies thereof, certified
if requested, as may be reasonably requested.
(d) Consents and Approvals. The Seller shall have obtained all
Governmental Approvals necessary to consummate the transactions
contemplated hereby.
(e) Collateral Agreements. The Buyer shall have entered into the
Transitional Services Agreement and the Personal Property Sublease.
ARTICLE VI
EMPLOYEE MATTERS
6.1 Employment of Seller's Employees. Seller will use all reasonable
efforts to cause the employees listed on Schedule 6.1 to make available their
employment services to the Buyer. For a period of three years from the Closing
Date, Seller will not, and will not permit any of its Affiliates to, solicit,
offer to employ or retain the services of or otherwise interfere with the
relationship of Buyer with any Person employed by or otherwise engaged to
perform services for Buyer in connection with the operation of the Business.
Effective as of the Closing Date, Buyer shall offer employment to each employee
of Seller listed on Schedule 6.1, which shall be delivered at least 5 business
days prior to Closing. Buyer shall be responsible for all future obligations to
such employees listed on Schedule 6.1 which obligations occur and result from
actions or events which occur after the Closing Date and relate to Buyer's
operation of the Business after the Closing Date. The term "New Employee" as
used in this Agreement shall mean each employee of Seller who becomes employed
with Buyer after the Closing Date. Notwithstanding the foregoing, Buyer
expressly reserves the right to evaluate its work force needs and the work force
needs of Buyer and to terminate with or without cause the employment of any New
Employee after the Closing Date at Buyer's sole cost and expense.
6.2. Defined Benefit Plans.
(a) As of the date of the Closing, Seller shall take all action
necessary and advisable to spin off from the Retirement Plan for Hourly
Employees (No. 312) of Modern Tool & Die Company Liverpool Division of MTD
Products Inc. (the "Liverpool Plan") a plan ("New Plan 1") that will
include assets and liabilities attributable to the Liverpool Transferred
Employees (as defined below) as of the Closing ( the "Transfer Date"). The
assets transferred from the Liverpool Plan to the New Plan 1 shall be equal
to 100% of the Transfer Plan Liabilities. For purposes of this Section
6.2(a), the "Transfer Plan Liabilities" shall be equal to the actuarial
present value of the accrued plan benefits with respect to the Liverpool
Transferred Employees who were participants in the Liverpool Plan
immediately prior to the Closing, calculated as of the Transfer Date and
using the actuarial assumptions pursuant to Section 414(1) of the Internal
Revenue Code and the regulations thereunder; provided, however, that for
purposes of determining the Transfer Plan Liabilities the interest rate
assumption shall be an interest rate mutually agreed to by the parties and
the mortality table assumption shall be the GAM-83 mortality table. For
purposes of this Agreement, "Liverpool Transferred Employees" shall mean
the active hourly employees of Seller covered by the applicable collective
bargaining agreement between the Seller and the International Union, United
Automobile, Aerospace, and Agricultural Workers of America, Local Union No.
1619 who are employed by the Buyer after the Closing but shall specifically
exclude those deferred vested participants and retirees currently receiving
benefits under the Liverpool Plan.
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(b) Seller shall take all action necessary and advisable to spin off
from the Retirement Plan for Hourly Employees (No. 313) of the Parma Plant
of the Modern Tool & Die Company (the "Parma Plan") a plan ("New Plan 2")
that will include assets and liabilities attributable to the Parma
Transferred Employees (as defined below) as of the Transfer Date. The
assets transferred from the Parma Plan to the New Plan 2 shall be equal to
100% of the "Transfer Plan Liabilities". For purposes of this Section
6.2(b), the Transfer Plan Liabilities shall be equal to the actuarial
present value of the accrued plan benefits with respect to the Parma
Transferred Employees who were participants in the Parma Plan immediately
prior to the Closing, calculated as of the Transfer Date and using the
actuarial assumptions pursuant to Section 414(1) of the Internal Revenue
Code and the regulations thereunder; provided, however, that for purposes
of determining the Transfer Plan Liabilities the interest rate assumption
shall be an interest rate mutually agreed to by the parties and the
mortality table assumption shall be the GAM-83 mortality table. For
purposes of this Agreement, "Parma Transferred Employees" shall mean the
active hourly employees of Seller covered by the applicable collective
bargaining agreement between the Seller and the International Union, United
Automobile, Agricultural Implement Workers of America, Local Union No. 2015
who are employed by the Buyer after the Closing but shall specifically
exclude those deferred vested participants and retirees currently receiving
benefits under the Parma Plan.
6.3 Employee Benefits. Except as provided in Section 6.2, Seller shall
retain all liabilities and obligations with respect to New Employees and any
other current or former employees of Seller under the Plans and any other
employee benefit plans of Seller, other than pursuant to Applicable Laws.
Without limiting the generality of the preceding sentence or of Section 2.6
hereof, except as provided in Section 6.2, Buyer shall have no liability or
obligation whatsoever under the Plans and any other employee benefit plans of
Seller, nor shall Buyer have any obligation to provide any employee benefits to
any New Employees.
6.4 Retained Defined Contribution Plan Transactions. Upon the consummation
of the transactions contemplated by this Agreement and the Collateral
Agreements, Seller shall cause the Retained Defined Contribution Plans to
provide that any New Employee who was a participant in the Retained Defined
Contribution Plans immediately prior to the date of Closing shall be entitled to
receive a "lump sum distribution" as defined in, and in accordance with, the
provisions of Section 401(k)(10) of the Code from the Retained Defined
Contribution Plans. Buyer shall cause a defined contribution plan or plans
sponsored by Buyer to accept direct rollovers (described in Section 402(c) of
the Code) of lump sum distributions to which New Employees are entitled under
the Retained Defined Contribution Plans.
ARTICLE VII
TERMINATION
7.1. Termination. This Agreement may be terminated at any time prior to the
Closing Date:
(a) by the written agreement of the Buyer and Seller;
(b) by either Seller or the Buyer by written notice to the other party
if the transactions contemplated hereby shall not have been consummated
pursuant hereto by 5:00 p.m. Cleveland, Ohio time on September 1, 1999,
unless such date shall be extended by the mutual written consent of Seller
and the Buyer;
(c) by the Buyer by written notice to Seller if (i) the
representations and warranties of Seller shall not have been true and
correct in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in
the case of any representation or warranty without any materiality
qualification) as of the date when made or (ii) any of the conditions set
forth in Sections 5.1 or 5.2 shall not have been satisfied as of the
Closing Date, or satisfaction of any such condition becomes impossible,
unless such failure shall be due to the failure of the Buyer to perform or
comply with any of the covenants, agreements or conditions hereof to be
performed or complied with by it prior to the Closing;
(d) by Seller by written notice to the Buyer if (i) the
representations and warranties of the Buyer shall not have been true and
correct in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in
the case of any representation or warranty without
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any materiality qualification) as of the date when made or (ii) any of the
conditions set forth in Section 5.1 or 5.3 shall not have been satisfied as
of the Closing Date, or satisfaction of any such condition becomes
impossible, unless such failure shall be due to the failure of Seller to
perform or comply with any of the covenants, agreements or conditions
hereof to be performed or complied with by it prior to the Closing; or
(e) by either Seller or Buyer if the Shareholders Meeting (including
any adjournment or postponement thereof) shall have concluded and the
Shareholder Approval shall not have been obtained.
7.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to the provisions of Section 7.1, this Agreement shall become
void and have no effect, without any liability to any Person in respect hereof
or of the transactions contemplated hereby on the part of any party hereto, or
any of its directors, officers, employees, agents, consultants, representatives,
advisers, stockholders or Affiliates, except as specified in Section 10.1 with
respect to Transaction Expenses and except for any liability resulting from such
party's willful or intentional breach of this Agreement.
ARTICLE VIII
DEFINITIONS
8.1. Definition of Certain Terms. The terms defined in this Section 8.1,
whenever used in this Agreement (including in the Schedules), shall have the
respective meanings indicated below for all purposes of this Agreement. All
references herein to a Section, Article or Schedule are to a Section, Article or
Schedule of or to this Agreement, unless otherwise indicated.
Accounts Receivable: as defined in Section 3.1(dd).
Actions: as defined in Section 3.1(h).
Actual Capital Expenditures: as defined in Section 4.4(d).
Adjustment Amount: as defined in Section 2.3(a).
Affiliate: of a Person means a Person that directly or indirectly through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first Person. "Control" (including the terms "controlled by"
and "under common control with") means the possession, directly or indirectly,
of the power to direct or cause the direction of the management policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, as trustee or executor, or otherwise.
Aggregate Purchase Price: as defined in Section 2.4(a).
Agreement: this Asset Purchase Agreement, including the Schedules hereto.
Applicable Law: all applicable provisions of all (i) constitutions,
treaties, statutes, laws (including the common law), rules, regulations,
ordinances, codes or orders of any Governmental Authority, (ii) Governmental
Approvals and (iii) orders, decisions, injunctions, judgments, awards and
decrees of or agreements with any Governmental Authority.
Assets: as defined in Section 1.1.
Assumed Contracts: as defined in Section 1.1(c).
Assumed Liabilities: as defined in Section 2.5(a).
Assumption Agreement: as defined in Section 2.5(b).
Audited Balance Sheet: the balance sheet contained in the Audited Financial
Statements.
Audited Balance Sheet Date: July 31, 1998.
Audited Closing Date Balance Sheet: as defined in Section 2.3(b)(i).
Audited Financial Statements: as defined in Section 3.1(d).
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Average Closing Price: means (i) with respect to Section 2.2, the average
closing price for a share of Parent Common Stock as quoted on the Nasdaq
National Market during the period of the fifteen most recent trading days ending
on the first Business Day immediately preceding the Closing Date or (ii) with
respect to Section 2.8, (A) the sum of the average closing price for a share of
Parent Common Stock as quoted on the Nasdaq National Market during the period of
the fifteen most recent trading days ending on each of the three-month,
six-month, nine-month and one-year anniversaries of the Closing Date divided by
(B) four.
Benefit Liabilities: all past, present and future obligations and
liabilities of Seller arising out of contract or law (i) with respect to each
Plan and (ii) with respect to all employees and former employees of Seller in
connection with any event commencing, occurring or failing to occur on or prior
to the Closing Date.
Business: as defined in the Recitals to this Agreement.
Business Day: shall mean a day other than a Saturday, Sunday or other day
on which commercial banks in Cleveland, Ohio are authorized or required to
close.
Buyer: as defined in the first paragraph of this Agreement.
Buyer Indemnities: as defined in Section 9.1.
CERCLA: the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 42 U.S.C. 9601 et seq.
Closing: as defined in Section 2.1.
Closing Date: as defined in Section 2.1.
Closing Net Working Capital: the difference between (a) the sum of the
aggregate (i) prepaid expenses, (ii) accounts receivable (excluding any
receivable outstanding over 90 calendar days and net of any reserves) and (iii)
inventory (excluding any finished goods held over 90 calendar days and any raw
materials held over 120 calendar days) of the Business as of the close of
business on the Closing Date reduced by (b) the sum of the aggregate (i)
accounts payable and (ii) accrued liabilities of the Business as of the close of
business on the Closing Date, in each case as reflected in the Audited Closing
Date Balance Sheet.
Code: the Internal Revenue Code of 1986, as amended.
Collateral Agreements: the agreements and other documents and instruments
described in Sections 5.2(d) and 5.3(e).
Consent: any consent, approval, authorization, waiver, permit, grant,
franchise, concession, agreement, license, exemption or order of, registration,
certificate, declaration, application or filing with, or report or notice to,
any Person, including, but not limited to, any Governmental Authority.
Contamination: means (i) any Hazardous Substances which, on or prior to the
Closing Date, is or was present in, on or under the Liverpool Facility and/or
the West 130th Facility and (ii) any Hazardous Substance which, on or prior to
the Closing Date is or was present, in, on or under the Liverpool Facility
and/or the West 130th Facility and which prior to the Closing Date Migrated or
after the Closing Date Migrates from the Liverpool Facility and/or the West
130th Facility.
Contract: as defined in Section 3.1(l).
Covenant Determination: as defined in Section 4.4(f).
Covenant Objection Notice: as defined in Section 4.4(f).
Covenant Objection Period: as defined in Section 4.4(f).
Covered Returns: as defined in Section 3.1(f).
Covered Taxes: as defined in Section 3.1(f).
Designated Properties: the real property located at 5389 West 130th, Parma,
Ohio.
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Division: as defined in the Recitals to this Agreement.
$ or dollars: lawful money of the United States.
Earnout Amount: as defined in Section 2.8(a).
Earnout Certificate: as defined in Section 2.8(d)(i).
Earnout Objection Notice: as defined in Section 2.8(d)(i).
Earnout Objection Period: as defined in Section 2.8(d)(i).
Earnout Payment Date: shall means (i) if no Earnout Objection Notice is
timely delivered by Seller to Buyer, three Business Days after the earlier of
(A) the expiration of the Earnout Objection Period and (B) the date of delivery
by Seller to Buyer of a notice that an Earnout Certificate will be accepted by
Seller without objection; or (ii) if an Earnout Objection Notice is timely
delivered to Buyer, three Business Days after the date all disputed items are
finally resolved pursuant to Section 2.8(d).
EBITDA: means earnings before all interest expenses, income tax expenses,
depreciation and amortization (including depreciation/amortization on all fixed
assets, tooling, special equipment, intangible assets and reusable containers),
in accordance with GAAP consistent with the accounting policies utilized in the
Audited Financial Statements. In addition, EBITDA shall be computed on a
historical accounting basis, which excludes the impact of purchase accounting
adjustments on future earnings. EBITDA shall also exclude all Buyer transaction
costs, legal fees, advisory fees and corporate overhead/support charges.
EBITDA Committee: a committee comprised of two designees of Seller and two
designees of Buyer, which designees may be changed at any time by Buyer or
Seller, as the case may be, formed to review the Business's EBITDA for a one
year period commencing the Closing Date.
Employees: as defined in Section 3.1(x).
Environmental Assessment: as defined in Section 4.1(j).
Environmental Laws: all Applicable Laws relating to the protection of the
environment, to human health and safety, or to any emission, discharge,
generation, processing, storage, holding, abatement, existence, Release,
threatened Release or transportation of any Hazardous Substances, including,
without limitation, (i) all requirements pertaining to reporting, licensing,
permitting, investigation or remediation of emissions, discharges, releases or
threatened releases of Hazardous Substances into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, sale, treatment, receipt, storage, disposal, transport or handling of
Hazardous Substances, and (ii) all other requirements pertaining to the
protection of the health and safety of employees or the public.
Environmental Liabilities and Costs: all Losses, whether direct or
indirect, known or unknown, current or potential, past, present or future,
imposed by, under or pursuant to Environmental Laws, including, without
limitation, all Losses and oversight costs of Governmental Authorities related
to Remedial Actions, and all fees, disbursements and expenses of counsel,
experts, personnel and consultants based on, arising out of or otherwise in
respect of: (i) the ownership or operation of the Business, Real Property or
Other Leases or any other real properties, assets, equipment or facilities, by
Seller, or any of its predecessors or Affiliates; (ii) the environmental
conditions existing on the Closing Date on, under, above, or about any Real
Property or property subject to Other Leases or any other real properties,
assets, equipment or facilities currently or previously owned, leased or
operated by Seller, or any of its predecessors or Affiliates; (iii) the
treatment, storage or disposal of Hazardous Substances generated by Seller or
any of its Affiliates; and (iv) expenditures necessary to cause any Real
Property or any aspect of the Business to be in compliance with any and all
requirements of Environmental Laws as of the Closing Date, including, without
limitation, all Environmental Permits issued under or pursuant to such
Environmental Laws, and reasonably necessary to make full economic use of any
Real Property.
Environmental Permits: any federal, state and local permit, license,
registration, consent, order, administrative consent order, certificate,
approval, application or other authorization necessary for the lawful conduct of
the Business as currently conducted or previously conducted under any
Environmental Law.
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ERISA: the Employee Retirement Income Security Act of 1974, as amended.
Excess Earnout Amount: as defined in Section 2.8(a).
Excluded Assets: as defined in Section 1.2.
Excluded Liabilities: as defined in Section 2.6.
Facility Impact: means (i) causing damage to or alteration of any part of
the Liverpool Facility and/or the West 130th Facility, including, without
limitation by the construction or installation of any remediation or monitoring
equipment, devices or systems, (ii) limiting or restricting any current or
future use, expansion, construction, renovation, improvement or closure of all
or any part of all the Liverpool Facility and/or the West 130th Facility, (iii)
limiting, restricting, interfering with or disrupting current or future use of
or operations at the Liverpool Facility and/or the West 130th Facility including
the present and future permit status of the Liverpool Facility and/or the West
130th Facility, or (iv) causing the Liverpool Facility and/or the West 130th
Facility or any use or operations at the Liverpool Facility and/or the West
130th Facility to be in violation of any Environmental Law.
Financial Statements: each of the financial statements required to be
provided by Section 3.1(d).
First Year EBITDA: the EBITDA of the Business for the twelve-month period
ending on the first anniversary of the Closing Date.
Ford: as defined in Section 4.4(c).
Ford Costs: as defined in Section 4.4(c).
GAAP: generally accepted accounting principles as in effect in the United
States.
Governmental Approval: any Consent of, with or to any Governmental
Authority, including, without limitation, any Environmental Permit.
Governmental Authority: any nation or government, any state or other
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
including, without limitation, any government authority, agency, department,
board, commission or instrumentality of the United States, any State of the
United States or any political subdivision thereof, and any tribunal or
arbitrator(s) of competent jurisdiction, and any self-regulatory organization.
Hazardous Substances: any substance that: (i) is or contains asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum or
petroleum-derived substances or wastes, radon gas or related materials, (ii)
requires investigation, removal or remediation under any Environmental Law, or
is defined, listed or identified as a "hazardous waste," "hazardous material,"
"toxic substance" or "hazardous substance" thereunder, or (iii) is toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is regulated by any Governmental Authority
or Environmental Law.
HSR Act: the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
Indemnified Party: as defined in Section 9.3.
Indemnifying Party: as defined in Section 9.3.
Independent Accountants: as defined in Section 2.3(b)(iii).
Initial Net Working Capital: means $27,000,000.
Intellectual Property: any and all United States and foreign: (a) patents
(including design patents, industrial designs and utility models) and patent
applications (including docketed patent disclosures awaiting filing, reissues,
divisions, continuations-in-part and extensions), patent disclosures awaiting
filing determination, inventions and improvements thereto, (b) trademarks,
service marks, trade names, trade dress, logos, business and product names,
slogans, and registrations and applications for registration thereof; (c)
copyrights (including software) and registrations thereof; (d) inventions,
processes, designs, formulae, trade secrets, know-how, industrial models,
confidential and technical information, manufacturing, engineering and technical
drawings,
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product specifications and confidential business information, including any such
matters under development and for which subsection (a) above is not applicable;
(e) mask work and other semiconductor chip rights and registrations thereof; (f)
intellectual property rights (including common law rights) similar to any of the
foregoing; and (g) copies and tangible embodiments thereof (in whatever form or
medium, including electronic media).
Intellectual Property Assets: as defined in Section 1.1(f).
Inventories: as defined in Section 1.1(b).
IRS: the Internal Revenue Service.
knowledge: actual knowledge after reasonable inquiry.
Leased Real Property: means all interests leased pursuant to the Leases.
Leases: means the real property leases, subleases, licenses and occupancy
agreements related to the Business and pursuant to which Seller is the lessee,
sublessee, licensee or occupant other than real property leases, subleases,
licenses and occupancy agreements included in Excluded Assets.
Lien: any mortgage, pledge, hypothecation, right of others, claim, security
interest, encumbrance, lease, sublease, license, occupancy agreement, adverse
claim or interest, easement, covenant, encroachment, burden, title defect, title
retention agreement, voting trust agreement, interest, equity, option, lien,
right of first refusal, charge or other restrictions or limitations of any
nature whatsoever, including, but not limited to, such as may arise under any
Contracts.
Liverpool Facility: as defined in Section 4.4(h).
Liverpool Plan: as defined in Section 6.2(a).
Liverpool Transferred Employees: as defined in Section 6.2(a).
Losses: as defined in Section 9.1.
Material Adverse Effect: any event, occurrence, fact, condition, change or
effect that is materially adverse to the business, operations, prospects,
results of operations, condition (financial or otherwise), properties (including
intangible properties), assets (including intangible assets) or liabilities of
the Business.
Migration: means seeping, leaching or other movement of Hazardous
Substances through the soil, land, surface or subsurface strata, sediments,
surface water or ground water.
New Employees: as defined in Section 6.1.
New Plan 1: as defined in Section 6.2(a).
New Plan 2: as defined in Section 6.2(b).
Notice of Objection: as defined in Section 2.3(b)(ii).
Objection Period: as defined in Section 2.3(b)(ii).
Onsite Remedial Action: means any investigatory, remedial, cleanup,
corrective or compliance action undertaken pursuant to Environmental Laws after
the Closing Date at, or, or with respect to conditions emanating or migrating
from, the Liverpool Facility and/or the West 130th Facility.
Orders: any order, judgment, injunction, award, decree, ruling, charge or
writ of any Governmental Authority.
Other Leases: the leases, subleases, licenses and occupancy agreements
pursuant to which Seller is a lessor, sublessor or licensor of any part of the
Real Property.
Owned Intellectual Property: as defined in Section 3.1(s).
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Owned Real Property: the real property owned by Seller and used in the
Business, together with all structures, facilities, improvements, fixtures,
systems, equipment and items of property located thereon, attached or
appurtenant thereto and all easements, licenses, rights and appurtenances
relating to the foregoing other than owned real property, if any, included in
Excluded Assets.
Parent: as defined in the first paragraph of this Agreement.
Parent Common Stock: as defined in Section 2.2.
Parent Common Stock Cap: as defined in Section 2.8(b)(i).
Parma Plan: as defined in Section 6.2(b).
Payment Date: as defined in Section 2.3(d).
PBGC: as defined in Section 3.1(x).
Permitted Liens: (i) Liens reserved against in the Audited Balance Sheet,
to the extent so reserved, (ii) Liens for Taxes not yet due and payable or which
are being contested in good faith and by appropriate proceedings if adequate
reserves with respect thereto are maintained on Seller's books in accordance
with GAAP, (iii) Liens that, individually and in the aggregate, do not and would
not materially detract from the value of any of the property or assets of the
Business or materially interfere with the use thereof as currently used or
contemplated to be used or otherwise; or (iv) Liens listed in the title policies
provided pursuant to Section 5.2(h).
Person: any natural person, firm, partnership, association, corporation,
limited liability company, trust, business trust, Governmental Authority or
other entity.
Personal Property Sublease: as defined in Section 5.2(d).
Plan: as defined in Section 3.1(x).
Projected Capital Expenditures: as defined in Section 4.4(d).
Purchase Price: as defined in Section 2.2.
Real Property: the Owned Real Property and the Leased Real Property.
Real Property Laws: as defined in Section 3.1(u).
Related Persons: as defined in Section 3.1(x).
Release: any releasing, disposing, discharging, injecting, spilling,
leaking, leaching, pumping, dumping, emitting, escaping, emptying, seeping,
dispersal, migration, transporting, placing and the like, including, without
limitation, the moving of any materials through, into or upon, any land, soil,
surface water, ground water or air, or otherwise entering into the environment.
Remedial Action: all actions required to (i) clean up, remove, treat or in
any other way remediate any Hazardous Substances; (ii) prevent the release or
migration of Hazardous Substances so that they do not endanger or threaten to
endanger public health or welfare or the environment; or (iii) perform studies,
investigations and care related to any such Hazardous Substances.
Response: means "response" as defined in 42 U.S.C. Section 9601(25), to the
extent necessary to comply with Environmental Law, and includes all ancillary
activities reasonably or necessarily required to investigate the nature and
extent of Contamination and to implement such response action, including but not
limited to: (i) obtaining access agreements, Governmental Authority approvals,
and permits required by federal, state or local law; (ii) preparing and
submitting reports required by any Governmental Authority order or requirement;
(iii) operation and maintenance activities associated with any treatment system;
(iv) monitoring activities; (v) oversight costs of a Governmental Authority; and
(vi) investigative, remedial and monitoring work in, on, under or about
properties as to which actual or suspected Migration of Hazardous Substances has
or may have occurred.
Retained Defined Contribution Plan: as defined in Section 3.1(x)(iii).
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SEC: as defined in Section 4.3(a).
Seller: as defined in the first paragraph of this Agreement.
Seller Indemnities: as defined in Section 9.2.
Share Issuance: as defined in Section 4.3(b).
Shareholder Approval: the approval of the Share Issuance by (i) a majority
of the total votes cast in person or by proxy at the Special Meeting and (ii) a
majority of the total votes cast in person or by proxy at the Special Meeting
excluding the votes of Seller and any other interested stockholder as determined
by Buyer prior to the Special Meeting.
Shareholder Meeting: as defined in Section 4.3(b).
Shortfall Earnout Amount: as defined in Section 2.8(a).
Subsidiaries: each corporation or other Person in which a Person owns or
controls, directly or indirectly, capital stock or other equity interests
representing at least 50% of the outstanding voting stock or other equity
interests.
Subsidiary Asset Transfer: as defined in Section 4.1(o).
Tax: any federal, state, provincial, local, foreign or other income,
alternative, minimum, accumulated earnings, personal holding company, franchise,
capital stock, net worth, capital, profits, windfall profits, gross receipts,
value added, sales, use, goods and services, excise, customs duties, transfer,
conveyance, mortgage, registration, stamp, documentary, recording, premium,
severance, environmental (including taxes under Section 59A of the Code), real
property, personal property, ad valorem, intangibles, rent, occupancy, license,
occupational, employment, unemployment insurance, social security, disability,
workers compensation, payroll, health care, withholding, estimated or other
similar tax, duty or other governmental charge or assessment or deficiencies
thereof (including all interest and penalties thereon and additions thereto
whether disputed or not).
Tax Return: any return, report, declaration, form, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
Title Company: as defined in Section 5.2(h).
Transaction Expenses: as defined in Section 10.1.
Transfer Date: as defined in Section 6.2(a).
Transfer Plan Liabilities: as defined in Section 6.2(b).
Transfer Taxes: as defined in Section 4.1(g).
Transitional Services Agreement: as defined in Section 5.2(d).
Treasury Regulations: the regulations prescribed pursuant to the Code.
Unaudited Financial Statements: as defined in Section 3.1(d).
West 130th Facility: as defined in Section 4.4(h).
Withholding Taxes: as defined in Section 3.1(f).
Year 2000 Compliant: the systems and software are able (i) to accurately
process date/time data (including, but not limited to, calculation, comparing
and sequencing) from, into and between the twentieth and twenty-first centuries
and during the years 1999 and 2000, including leap year calculations) and (ii)
to function accurately and without interruption before, during and after January
1, 2000 without any change in operations associated with the advent of the
twenty-first century.
1999 Audited Financial Statements: as defined in Section 4.1(u).
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ARTICLE IX
INDEMNIFICATION
9.1 Indemnification By Seller. Seller covenants and agrees to defend,
indemnify and hold harmless the Buyer and Parent and their respective officers,
directors, employees, agents, advisers, representatives and Affiliates
(collectively, the "Buyer Indemnitees") from and against, and pay or reimburse
the Buyer Indemnitees for, any and all claims, liabilities, obligations, losses,
fines, costs, royalties, proceedings, deficiencies or damages (whether absolute,
accrued, conditional or otherwise and whether or not resulting from third party
claims), including out-of-pocket expenses and reasonable attorneys' and
accountants' fees incurred in the investigation or defense of any of the same or
in asserting any of their respective rights hereunder (collectively, "Losses"),
resulting from or arising out of:
(i) any inaccuracy of any representation or warranty made by Seller
herein or under any Collateral Agreement or in connection herewith or
therewith;
(ii) any failure of Seller to perform any covenant or agreement
hereunder or under any Collateral Agreement or fulfill any other obligation
in respect hereof or thereof;
(iii) any Excluded Liabilities or Excluded Assets;
(iv) any and all Benefit Liabilities;
(v) all Environmental Liabilities and Costs arising out of the
operation of the Business prior to the Closing Date or relating to the
Excluded Assets;
(vi) any product liability claim with respect to products
manufactured, delivered or sold or events occurring prior to the Closing;
(vii) any failure of the Seller to comply with applicable bulk sales
laws, if any (in consideration of which indemnification obligation the
Buyer hereby waives compliance by the Seller with any applicable bulk sales
laws);
(viii) any Actions or Orders, whether commenced or asserted or
instituted before or after the Closing Date, against the Buyer or Parent or
any of their Subsidiaries (including, without limitation, the Actions and
Orders described on Schedule 3.1(h), Actions or Orders related to
environmental and health and safety matters and workers' compensation
matters) brought by any Person or Governmental Authority relating to or
resulting from events or occurrences on or before the Closing Date with
respect to the Business and/or the Assets;
(ix) any matters described or referred to in Schedule 3.1(v) or in any
documents or reports listed on Schedule 3.1(v); and
(x) the failure of the Assets or Business to be Year 2000 Compliant
(except to the extent such failure is the result of actions taken by Buyer
after the Closing Date).
Except for Losses based on any inaccuracy in any representation or warranty
made or contained in Sections 3.1(f), (k) (with respect to the first sentence
only), (v), (x) and (bb), which shall not be subject to the following
limitations, Seller shall not be obligated to indemnify the Buyer Indemnities
for any Losses pursuant to Section 9.1(i) unless and until the aggregate amount
of all such Losses in respect of any individual event or occurrence giving rise
to such Losses exceeds $15,000, in which event the Buyer Indemnities shall be
entitled to recover all Losses resulting from or arising out of such claim to
the extent such Losses exceed $15,000. Except for Losses based on any inaccuracy
in any representation or warranty made or contained in Sections 3.1(f), (k)
(with respect to the first sentence only), (v), (x) and (bb), which shall not be
subject to the following limitation, in no event shall the aggregate liability
of Seller for Losses pursuant to Section 9.1(i) exceed $10,000,000.
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9.2 Indemnification By the Buyer. The Buyer covenants and agrees to defend,
indemnify and hold harmless Seller and its officers, directors, employees,
agents, advisers, representatives and Affiliates (collectively, the "Seller
Indemnities") from and against any and all Losses resulting from or arising out
of:
(i) any inaccuracy in any representation or warranty by the Buyer or
Parent made or contained in this Agreement or any Collateral Agreement or
in connection herewith or therewith;
(ii) any failure of Buyer or Parent to perform any covenant or
agreement made or contained in this Agreement or any Collateral Agreement
or fulfill any other obligation in respect thereof;
(iii) the Assumed Liabilities; and
(iv) the operation of the Business by the Buyer or the Buyer's
ownership, operation or use of the Assets following the Closing Date,
except, in the case of clause (iv), to the extent such Losses result from
or arise out of the Excluded Liabilities or constitute Losses for which
Seller is required to indemnify the Buyer Indemnities under Section 9.1.
9.3 Indemnification Procedures. In the case of any claim asserted by a
third party against a party entitled to indemnification under this Agreement
(the "Indemnified Party"), notice shall be given by the Indemnified Party to the
party required to provide indemnification (the "Indemnifying Party") within ten
days after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and the Indemnified Party shall permit the Indemnifying
Party (at the expense of such Indemnifying Party) to assume the defense of any
claim or any litigation resulting therefrom, provided that (i) the counsel for
the Indemnifying Party who shall conduct the defense of such claim or litigation
shall be reasonably satisfactory to the Indemnified Party, (ii) the Indemnified
Party may participate in such defense at such Indemnified Party's expense, and
(iii) the omission by any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its indemnification obligation under
this Agreement except to the extent that such omission results in a failure of
actual notice to the Indemnifying Party and such Indemnifying Party is
materially damaged as a result of such failure to give notice. Except with the
prior written consent of the Indemnified Party, no Indemnifying Party, in the
defense of any such claim or litigation, shall consent to entry of any judgment
or enter into any settlement that provides for injunctive or other nonmonetary
relief affecting the Indemnified Party or that does not include as an
unconditional term thereof the giving by each claimant or plaintiff to such
Indemnified Party of a release from all liability with respect to such claim or
litigation. In the event that the Indemnified Party shall in good faith
reasonably determine that the conduct of the defense of any claim subject to
indemnification hereunder or any proposed settlement of any such claim by the
Indemnifying Party might be expected to affect adversely the Indemnified Party's
Tax liability or the ability of the Indemnified Party to conduct its business,
or that the Indemnified Party may have available to it one or more defenses or
counterclaims that are inconsistent with one or more of those that may be
available to the Indemnifying Party in respect of such claim or any litigation
relating thereto, the Indemnified Party shall have the right at all times to
take over and assume control over the defense, settlement, negotiations or
litigation relating to any such claim at the sole cost of the Indemnifying
Party, provided that if the Indemnified Party does so take over and assume
control, the Indemnified Party shall not settle such claim or litigation without
the written consent of the Indemnifying Party, such consent not to be
unreasonably withheld. In the event that the Indemnifying Party does not accept
the defense of any matter as above provided, the Indemnified Party shall have
the full right to defend against any such claim or demand and shall be entitled
to settle or agree to pay in full such claim or demand. In any event, the
Indemnifying Party and the Indemnified Party shall cooperate in the defense of
any claim or litigation subject to this Section 9.3 and the records of each
shall be available to the other with respect to such defense.
9.4 Time Limitation. All claims for indemnification under Section 9.1 or
Section 9.2 must be asserted prior to the termination of the respective survival
periods set forth in Section 9.5.
9.5 Survival of Representations, Warranties, Covenants and Agreements. (a)
The representations and warranties contained in this Agreement shall survive the
execution and delivery of this Agreement, any
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examination by or on behalf of the parties hereto and the completion of the
transactions contemplated herein, but only to the extent specified below:
(i) except as set forth in clauses (ii) and (iii) below, the
representations and warranties contained in Section 3.1 and Section 3.2
shall survive for a period of three years following the Closing Date;
(ii) the representations and warranties contained in Sections 3.1(a),
(b), (c), (k) (with respect to the first sentence only), (v) and (bb) and
Sections 3.2(a), (b) and (d) shall survive without limitation; and
(iii) the representations and warranties of Seller contained in
Section 3.1(f) and (x) shall survive for so long as any applicable statute
of limitations remains open, in whole or in part, including, without
limitation, by reason of waiver of such statute of limitations.
(b) The covenants and agreements of the parties hereby shall survive the
Closing in accordance with their terms or until the expiration of the applicable
statute of limitations. Notwithstanding the foregoing, Seller's and Buyer's
indemnification obligations pursuant to Section 9.1 and Section 9.2,
respectively, shall not terminate.
ARTICLE X
MISCELLANEOUS
10.1 Expenses. Seller, on the one hand, and the Buyer and Parent, on the
other hand, shall bear their respective expenses, costs and fees (including
attorneys' and auditors' fees) in connection with the transactions contemplated
hereby, including the preparation, execution and delivery of this Agreement and
compliance herewith (the "Transaction Expenses"), whether or not the
transactions contemplated hereby shall be consummated; provided, however, that
the filing fee with respect to any HSR Act filing shall be paid one-half by
Buyer and one-half by Seller.
10.2 Severability. If any provision of this Agreement, including any
phrase, sentence, clause, Section or subsection is inoperative or unenforceable
for any reason, such circumstances shall not have the effect of rendering the
provision in question inoperative or unenforceable in any other case or
circumstance, or of rendering any other provision or provisions herein contained
invalid, inoperative, or unenforceable to any extent whatsoever.
10.3 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if (a) delivered
personally, (b) mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or
delivery or (d) sent by telecopy or telegram.
(i) if to the Parent or Buyer to,
Shiloh Industries, Inc.
P. O. Box 2037
Mansfield, OH 44905
Attention: President
Fax Number: (419) 522-2275
with a copy to:
Jones, Day, Reavis & Pogue
901 Lakeside Avenue
Cleveland, OH 44114
Attention: Patrick J. Leddy, Esq.
Fax Number: (216) 579-0212
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(ii) if to Seller to:
MTD Products Inc
P.O. Box 368022
Cleveland, OH 44136
Attention: Chief Financial Officer
Fax Number: (330) 273-4617
with a copy to:
Wegman, Hessler, Vanderburg & O'Toole
6055 Rockside Woods Blvd.
Suite 200
Cleveland, OH 44131
Attention: David J. Hessler
Fax Number: (216) 642-8826
or, in each case, at such other address as may be specified in writing to the
other parties hereto.
All such notices, requests, demands, waivers and other communications shall
be deemed to have been received (w) if by personal delivery on the day after
such delivery, (x) if by certified or registered mail, on the seventh business
day after the mailing thereof, (y) if by next-day or overnight mail or delivery,
on the day delivered, (z) if by telecopy or telegram, on the next day following
the day on which such telecopy or telegram was sent, provided that a copy is
also sent by certified or registered mail.
10.4 Headings. The headings contained in this Agreement are for purposes of
convenience only and shall not affect the meaning or interpretation of this
Agreement.
10.5 Entire Agreement. This Agreement (including the Schedules and Exhibits
hereto), the Collateral Agreements (when executed and delivered) and any other
documents executed pursuant to this Agreement constitute the entire agreement
and supersede all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
10.6 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original and all of which shall together
constitute one and the same instrument.
10.7 Governing Law, etc. This Agreement shall be governed in all respects,
including as to validity, interpretation and effect, by the internal laws of the
State of Ohio, without giving effect to the conflict of laws rules thereof.
Except for the resolution of the Purchase Price Adjustment as set forth in
Section 2.3, the Earnout Amount as set forth in Section 2.8 and the Covenant
Determinations set forth in Section 4.4, any controversy arising under or out of
this Agreement shall be settled by arbitration in accordance with the governing
rules of the American Arbitration Association as administered through the
Cleveland, Ohio office. The commercial arbitration rules of the American
Arbitration Association shall apply and the controversy shall be governed by the
laws of the State of Ohio. The arbitrator shall be selected by the parties by
mutual agreement at the time a claim is submitted for arbitration. The award
rendered by the arbitrator shall be final and judgment may be entered upon it in
accordance with Applicable Law in any court having jurisdiction thereof,
including a federal district court, pursuant to the Federal Arbitration Act. In
preparation for the arbitration hearing, each party may utilize all methods of
discovery authorized by the Ohio Rules of Civil Procedure, and may enforce the
right to such discovery in the manner provided by said Rules and/or by the Ohio
Arbitration Law. The arbitrator may order a pre-hearing exchange of information
by the parties, including, without limitation, production of requested
documents, exchange of summaries of testimony of proposed witnesses and
examination by deposition of witnesses and parties. Unresolved discovery
disputes may be brought to the attention of the arbitrator and may be disposed
of by the arbitrator. The arbitration hearing shall be conducted in Cleveland,
Ohio. The arbitrator shall have the authority to award any remedy or relief a
court of the State of Ohio could order or grant, including, without limitation,
specific performance of any obligation created under this Agreement, the
awarding of the issuance of an injunction or the imposition of sanctions of
abuse or frustration of the arbitration process. Judgment upon the award of the
arbitrator may be entered in any court of competent jurisdiction and enforced
with full judicial effect thereafter. All fees and expenses of the arbitration
shall be borne by the parties equally.
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However, each party shall bear the expense of its own counsel, experts,
witnesses, and preparation and presentations. The arbitrator is authorized to
award any party such sums as shall be deemed proper for the time, expense and
inconvenience of arbitration, including arbitration fees and attorney fees.
10.8 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns.
10.9 Assignment. This Agreement shall not be assignable or otherwise
transferable by any party hereto without the prior written consent of the other
party hereto, provided that the Buyer may assign this Agreement to any
Subsidiary of the Buyer or Parent, provided, further, that no assignment shall
in any way affect the Buyer's obligations or liabilities under this Agreement.
10.10 No Third Party Beneficiaries. Nothing in this Agreement shall confer
any rights upon any person or entity other than the parties hereto and their
respective heirs, successors and permitted assigns.
10.11 Amendment; Waivers. etc. This Agreement may be amended by the parties
at any time before or after the Shareholder Approval; provided, however, that,
after such Shareholder Approval, there is not to be made any amendment that by
law requires further approval by the shareholders of Parent without further
approval of such shareholders. No amendment, modification or discharge of this
Agreement, and no waiver hereunder, shall be valid or binding unless set forth
in writing and duly executed by the party against whom enforcement of the
amendment, modification, discharge or waiver is sought. Any such waiver shall
constitute a waiver only with respect to the specific matter described in such
writing and shall in no way impair the rights of the party granting such waiver
in any other respect or at any other time. Neither the waiver by any of the
parties hereto of a breach of or a default under any of the provisions of this
Agreement, nor the failure by any of the parties, on one or more occasions, to
enforce any of the provisions of this Agreement or to exercise any right or
privilege hereunder, shall be construed as a waiver of any other breach or
default of a similar nature, or as a waiver of any of such provisions, rights or
privileges hereunder. The rights and remedies herein provided are cumulative and
are not exclusive of any rights or remedies that any party may otherwise have at
law or in equity. The rights and remedies of any party based upon, arising out
of or otherwise in respect of any inaccuracy or breach of any representation,
warranty, covenant or agreement or failure to fulfill any condition shall in no
way be limited by the fact that the act, omission, occurrence or other state of
facts upon which any claim of any such inaccuracy or breach is based may also be
the subject matter of any other representation, warranty, covenant or agreement
as to which there is no inaccuracy or breach. The representations and warranties
of Seller shall not be affected or deemed waived by reason of any investigation
made by or on behalf of the Buyer or Parent (including but not limited to by any
of its advisors, consultants or representatives).
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<PAGE> 96
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
SHILOH INDUSTRIES, INC.
By: /s/ JACK F. FALCON
------------------------------------
Name: Jack F. Falcon
Title: President and Chief
Executive Officer
SHILOH AUTOMOTIVE, INC.
By: /s/ JACK F. FALCON
------------------------------------
Name: Jack F. Falcon
Title: President
MTD PRODUCTS INC
By: /s/ RONALD C. HOUSER
------------------------------------
Name: Ronald C. Houser
Title: Chief Financial Officer
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<PAGE> 97
APPENDIX B
June 17, 1999
Board of Directors
Shiloh Industries, Inc.
P.O. Box 2037
Mansfield, Ohio 44905
Members of the Board:
Shiloh Industries, Inc. (the "Company") proposes to enter into an Asset
Purchase Agreement (the "Agreement") with MTD Products Inc. ("Seller"). Pursuant
to the Agreement, a wholly owned subsidiary of the Company ("Buyer") will
purchase (the "Acquisition") from Seller the Assets (as defined in the
Agreement) primarily relating to or used or held for use in connection with the
business and operations (the "Business") of Seller's engineered stamped products
manufacturing and marketing division (the "Division). In consideration for the
Assets, Buyer will pay or cause to be paid to Seller an aggregate of $20,000,000
in cash (the "Cash Payment") and assume the Assumed Liabilities (as defined in
the Agreement). In addition, the Company will, on behalf of Buyer, issue or
cause to be issued to Seller an aggregate number of shares (the "Stock Payment")
of common stock, par value $.01 per share (the "Company Common Stock"), of the
Company equal to (i) $20,000,000, divided by (ii) the greater of (A) $14.00 or
(B) to the extent the Average Closing Price (as defined in the Agreement)
exceeds $14.50, the Average Closing Price. In addition, after determination of
the First Year EBITDA (as defined in the Agreement), Seller or Buyer, as the
case may be, will be obligated to pay or cause to be paid to the other the
Earnout Amount (as defined in the Agreement). The Cash Payment, the Stock
Payment and the Earnout Amount are collectively referred to as the
"Consideration."
You have requested our opinion as to the fairness, from a financial point
of view, to the Company of the Consideration.
Robert W. Baird & Co. Incorporated ("Baird"), as part or its investment
banking business, is engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors as we have deemed relevant under the circumstances. In that
connection, we have, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of the Company and the Division furnished to us for
purposes of our analysis, as well as publicly available information including
but not limited to the Company's recent filings with the Securities and Exchange
Commission and equity analyst research reports prepared by various investment
banking firms including Baird; (ii) reviewed the draft Agreement dated June 8,
1999, in the form presented to the Company's Board of Directors; (iii) compared
the historical market prices and trading activity of the Company Common Stock
with those of certain other publicly traded companies we deemed relevant; (iv)
compared the financial position and operating results of the Company and the
Division with those of other publicly traded companies we deemed relevant; (v)
compared the proposed financial terms of the Acquisition with the financial
terms of certain other transactions we deemed relevant; and (vi) reviewed
certain potential pro forma effects of the Acquisition. We have held discussions
with members of the respective senior managements of the Company, seller and the
Division concerning the Company's and the Division's historical and current
financial condition and operating results, as well as the future prospects of
the Company and the Division, respectively. We have also reviewed and relied
upon, at the request and with the consent of the Company, the MTD Automotive Due
Diligence Report Prepared For Shiloh Industries, Inc., dated March 1999,
prepared by an independent accounting firm of international standing. We have
also considered such other information, financial studies, analysis and
investigations and financial, economic and market criteria which we deemed
relevant for the preparation of this opinion.
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In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of all of the financial and other information that was publicly
available or provided us by or on behalf of the Company or Seller, and have not
been engaged to independently verify any such information. We have assumed, with
your consent, that: (i) all material assets and liabilities (contingent or
otherwise, known or unknown) of the Company and the Division are as set forth in
their respective financial statements, (ii) the Acquisition will be accounted
for under the purchase method; (iii) the indemnification provisions of the
Agreement will be sufficient to hold the Company harmless for any liabilities or
losses relating to the Division or the Agreement; (iv) the Closing Net Working
Capital (as defined in the Agreement) will be at least $27,000,000; (v) the cost
savings and operating benefits currently contemplated by the Company's
management to result from the Division's restructuring and from the Acquisition
(including without limitation certain depreciation expense reductions resulting
from purchase accounting adjustments) will be realized; and (vi) the Acquisition
will be consummated in accordance with the terms of the draft Agreement reviewed
by us, without any amendment thereto and without waiver by any party of any
condition of their respective obligations. We have also assumed that the
financial forecasts examined by us (including estimates of cost savings and
operating benefits) were reasonably prepared on bases reflecting the best
available estimates and good faith judgments of the members of respective senior
managements of the Company, Seller and the Division, as to future performance of
the Company and the Division, respectively. In conducting our review, we have
not undertaken nor obtained an independent evaluation or appraisal of any of the
assets or liabilities (contingent or otherwise) of the Company or the Division,
nor have we made a physical inspection of the properties or facilities of the
Company or the Division. Our opinion necessarily is based upon economic,
monetary and market conditions as they exist and can be evaluated on the date
hereof, and does not predict or take into account any changes which may occur,
or information which may become available, after the date hereof. Our opinion
relates to the purchase of the Division and the Business as a going concern and
we have not been engaged nor undertaken to analyze on a standalone basis any of
the Assets, Assumed Liabilities, assigned contracts or collateral agreements
being entered into in connection with the Acquisition. We express no opinion as
to the price or trading ranges for any securities of the Company (including the
Company Common stock) at any time.
Our opinion has been prepared at the request and for the information of the
Board of Directors of the Company, and shall not be used for any other purpose
or disclosed to any other party without the prior written consent of Baird;
provided that this letter may be reproduced in full in the Company's Proxy
Statement relating to the issuance of Company Common Stock pursuant to the
Agreement. This opinion does not address the relative merits of the Acquisition
and any other potential transactions or business strategies considered by the
Company's Board of Directors, and does not constitute a recommendation to any
shareholder of the Company as to how any such shareholder should vote with
respect to the Acquisition or any related transaction (including without
limitation the issuance of Company Common Stock in connection with the
Acquisition). Baird will receive a fee for rendering this opinion. In the past,
we have provided investment banking services to the Company, for which we
received our customary compensation.
In the ordinary course of our business, we may from time to time trade the
securities of the Company or Seller for our own account or the accounts of our
customers and, accordingly, may at any time hold long or short positions in such
securities.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Consideration is fair, from a financial point of view, to
the Company.
Very truly yours,
/s/ ROBERT W. BAIRD & CO.
INCORPORATED
ROBERT W. BAIRD & CO. INCORPORATED
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APPENDIX C
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
COMMISSION FILE NO. 0-21964
SHILOH INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 51-0347683
(STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUITE 202, 103 FOULK ROAD, WILMINGTON, DELAWARE 19803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (302) 998-0592
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by non-affiliates of the
registrant as of January 22, 1999 at a closing price of $14.938 per share as
reported by the Nasdaq National Market was approximately $60,912,159 Shares of
Common Stock held by each officer and director, their respective spouses, and by
each person who owns or may be deemed to own 10% or more of the outstanding
Common Stock have been excluded since such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Number of shares of Common Stock outstanding as of January 22, 1999 was
13,080,563.
DOCUMENTS INCORPORATED BY REFERENCE
Part of the following document is incorporated by reference to Part III of
this Annual Report on Form 10-K: the Proxy Statement for the Registrant's 1999
Annual Meeting of Stockholders (the "Proxy Statement").
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SHILOH INDUSTRIES, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
<TABLE>
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PAGE
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<S> <C> <C>
PART I
Item 1 Business.................................................... C-3
Item 2 Properties.................................................. C-7
Item 3 Legal Proceedings........................................... C-8
Item 4 Submission of Matters to a Vote of Securityholders.......... C-8
Item 4A Executive Officers of The Company........................... C-8
PART II
Market for Company's Common Equity and Related Stockholder
Item 5 Matters..................................................... C-9
Item 6 Selected Financial Data..................................... C-10
Management's Discussion and Analysis of Financial Condition
Item 7 and Results of Operations................................... C-11
Quantitative and Qualitative Disclosures About Market
Item 7A Risk........................................................ C-17
Item 8 Financial Statements and Supplementary Data................. C-17
Changes in and Disagreements with Accountants on Accounting
Item 9 and Financial Disclosure.................................... C-34
PART III
Item 10 Directors and Executive Officers of the Company............. C-34
Item 11 Executive Compensation...................................... C-35
Security Ownership of Certain Beneficial Owners and
Item 12 Management.................................................. C-35
Item 13 Certain Relationships and Related Transactions.............. C-35
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
Item 14 8-K......................................................... C-35
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL
Shiloh Industries, Inc. (the "Company") is a vertically integrated steel
processor that supplies high quality blanks, stampings and processed steel to
the automotive and other industries. The Company's products include steel blanks
used principally by domestic and foreign automotive manufacturers for automobile
fenders and hoods and heavy truck wheels and brake parts, as well as steel
stampings used principally by automobile component manufacturers. The Company
also designs, engineers and produces precision tools and dies for use in its own
blanking and stamping operations as well as for sale to other industrial
customers. In addition, the Company performs a variety of value-added
intermediate steel processing services, such as pickling hot rolled steel and
slitting, edge trimming, roller leveling and cutting to length hot and cold
rolled steel.
The Company's origins date back to 1950 when its predecessor, Shiloh Tool &
Die Mfg. Company, began to design and manufacture precision tools and dies. As
an outgrowth of its precision tool and die expertise, the Company expanded into
blanking and stamping operations in the early 1960's. In 1977, the Company
formed a joint venture with MTD Products Inc, a privately-held manufacturer of
outdoor power equipment and tools, dies and stampings for the automotive
industry ("MTD Products"), to develop additional steel processing capabilities.
In April 1993, the Company was organized as a Delaware corporation to serve
as a holding company for seven operating subsidiaries. In June 1993, the Company
effected a reorganization whereby these seven operating subsidiaries became
direct or indirect subsidiaries of the Company. In July 1993, the Company
completed an initial public offering of 3,782,500 shares of its Common Stock.
In November 1996, the Company acquired substantially all of the assets of
Greenfield Die & Manufacturing Corp. ("Greenfield"), which is headquartered in
Canton, Michigan, a suburb of Detroit, and serves the automotive industry by
providing a variety of value added processes, including tool and die design and
build, stamping, assembly, welding, prototyping operations and mold design and
build. In August 1997, the Company acquired C&H Design Company, d.b.a. C&H Die
Technology ("C&H"), which is headquartered in Utica, Michigan, and primarily
serves the automotive industry by providing tool and die design and build. The
Company also entered into a joint venture with Bing Steel Management Inc.
("Bing") and Rouge Industries, Inc. ("Rouge") in November 1997, but in order to
more closely focus on its core business, the Company terminated its interest in
the joint venture on March 31, 1998 by mutual agreement. In addition, the
Company commenced construction of Jefferson Blanking, Inc. ("Jefferson
Blanking"), a blanking and stamping facility in Pendergrass, Georgia, in October
1997. This facility was completed in May 1998 and became operational in July
1998.
The Company's principal executive offices are located at Suite 202, 103
Foulk Road, Wilmington, Delaware 19803 and its telephone number is (302)
998-0592. Unless otherwise indicated, all references to the "Company" refer to
Shiloh Industries, Inc. and its direct and indirect subsidiaries.
MARKET OVERVIEW
The Company occupies the market niche between primary steel producers and
end-product manufacturers. Primary steel producers typically find it more cost
effective to focus on the sale of standard size and tolerance steel to large
volume purchasers and view the intermediate steel processor as part of their
customer base. End-product manufacturers seek to purchase steel free from
oxidation and scale, with closer tolerances, on shorter lead times and with more
reliable and more frequent delivery than the primary steel producers can provide
efficiently. Additionally, many end-product manufacturers are unwilling to
invest in the technology, equipment and labor required to further blank, stamp
or otherwise process steel for use in their manufacturing operations. By
outsourcing certain components, many end-product manufacturers are able to
significantly enhance the flexibility of their manufacturing operations in order
to accommodate the shorter production runs and changeover times required by
competitive pressures. These factors, together with the lower cost structure
typically found in the outside supplier, have caused many end-product
manufacturers to find it more beneficial, from a cost, quality and manufacturing
flexibility standpoint, to outsource to steel processors many of the component
parts which are utilized in the production of their end-products.
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Sales to the automotive and light truck and heavy truck industries have
historically represented a significant portion of the Company's sales. This is
expected to continue for the foreseeable future. Sales to automotive and light
truck and heavy truck manufacturers, and suppliers to those manufacturers,
constituted 79.7%, 76.5% and 64% of the Company's revenues for the fiscal years
ended October 31, 1998, 1997 and 1996, respectively.
STEEL PROCESSING PRODUCTS AND SERVICES
Blanking and Stamping. The Company produces precision stamped steel
components through its blanking and stamping operations. Blanking is a process
in which flat rolled steel is cut into precise two dimensional shapes by passing
steel through a press employing a blanking die. The Company's blanking presses
range in size from 200 tons to 3,000 tons, giving the Company the flexibility to
produce blanks from flat rolled steel ranging in thickness from .020 inches to
.500 inches. The Company's blanks are used principally by manufacturers in the
automobile, heavy truck, heating, ventilating and air conditioning and lawn and
garden industries to produce items such as automobile exterior parts including
fenders, hoods and side panels, and heavy truck wheel rims and brake components.
Stamping is a process in which steel is passed through dies in a stamping
press in order to form the steel into three dimensional parts. The Company's
stamping presses range in size from 150 tons to 1,500 tons, giving the Company
the flexibility to stamp flat rolled steel and steel blanks ranging in thickness
from .015 inches to .250 inches. The Company produces stamped parts using
precision single stage, progressive and transfer dies, which in most cases are
designed and manufactured by the Company. The Company produces stamped
components principally for use in the manufacture of seat components, window
assemblies and exhaust systems for automobiles and light trucks. In addition,
the Company's stamping and blanking operations provide value-added processes
such as welding, assembly, prototyping and mold design and build. These
processes are principally utilized in the automotive industry.
The Company also designs, engineers and produces precision tools and dies.
The Company produces tools and dies for use in its own blanking and stamping
operations as well as for sale to other industrial customers. The Company
maintains state-of-the-art technology to conduct its activities and improve its
tool and die production capabilities, and has computerized most of the design
and engineering portions of its tool and die production process to reduce
production time and cost. All of the Company's tool and die manufacturing
facilities are electronically connected to certain major customers to expedite
the delivery of tool and die specifications.
Other Steel Processing. The Company processes flat rolled steel principally
for primary steel producers and manufacturers that require processed steel for
end-product manufacturing purposes. In addition, the Company processes flat
rolled steel for its own blanking and stamping operations. The Company either
purchases or receives on a toll processing basis (i.e., the Company does not
acquire ownership of the steel) hot rolled and cold rolled steel from primary
steel producers located throughout the Midwest. See " -- Raw Materials." This
steel typically requires additional processing to meet the requirements of the
end-product manufacturers. The Company's intermediate processing operations
include pickling, slitting, edge trimming, roller leveling, cutting to length
and quality inspecting of flat rolled steel.
The first processing operation for hot rolled steel typically involves
pickling, a chemical process in which an acidic solution is applied to the steel
to remove the surface oxidation and scale which develops on the steel shortly
after it is hot rolled. During the pickling process, the steel is either coated
with oil to prevent oxidation or with a borax based solution to prevent
oxidation and facilitate the stamping process. The Company added a pickling
line, which became fully operational in 1996, thereby allowing the Company to
nearly double its capacity for cleaning, finishing and coating steel. After
pickling, the steel is ready for either delivery to the customer or additional
processing. Cold rolled steel does not require pickling.
Pickled steel and cold rolled steel often go through additional processing
operations by the Company to meet the requirements of end-product manufacturers.
Slitting is the cutting of coiled steel to precise widths. Edge trimming removes
a specified portion of the outside edges of the coiled steel to produce a
uniform width. Roller leveling flattens the steel by applying pressure across
the width of the steel to make the steel suitable for blanking and stamping.
Cutting to length produces steel cut to specified lengths ranging from 12 inches
to 168 inches. In
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addition to cleaning, leveling and cutting steel, the Company visually inspects
steel to detect production flaws and utilizes computers to provide both visual
displays and documented records of the thickness maintained throughout the
entire coil of steel. To achieve high quality and increased volume levels, and
to be responsive to manufacturers' just-in-time supply requirements, the Company
has computerized most of its steel processing operations and has combined
several complementary processing lines such as pickling, slitting and cutting to
length at single facilities. The Company also performs inspection and inventory
control services for certain customers.
FORMATION OF JOINT VENTURE; EXPANSION OUTSIDE OHIO INTO MICHIGAN AND GEORGIA
In January 1996, the Company and Rouge formed a limited liability company,
Shiloh of Michigan, L.L.C. ("Shiloh of Michigan"), to create a joint venture to
produce engineered steel blanks, with the Company as an eighty percent (80%)
equity owner. As of the end of fiscal 1998, the Company's investment in this
joint venture totaled approximately $28.0 million. Shiloh of Michigan commenced
construction of a new manufacturing facility in Romulus, Michigan in 1995.
Construction of this facility was completed in 1996 and the facility became
operational in 1997.
In November 1996, the Company completed its acquisition of Greenfield,
which is based in a suburb of Detroit, Michigan. In September 1997, the Company
completed its acquisition of C&H, which is based in Utica, Michigan. In
addition, the Company completed construction of Jefferson Blanking in
Pendergrass, Georgia, which became operational in July 1998. See " -- General."
Through Greenfield, C&H, Jefferson Blanking and its interest in Shiloh of
Michigan, the Company has expanded its geographic presence outside Ohio and into
Michigan and Georgia. This expansion is consistent with the Company's long-term
strategy of broadening its geographic scope.
SALES AND MARKETING
The Company's steel processing products and services are marketed directly
by a sales force consisting of 18 salesmen who cover 14 states. Two of the
Company's salesmen focus on the Company's relationships with primary steel
producers. Each of the Company's salesmen is trained to market the Company's
entire line of steel processing products and services. The Company supplements
its sales efforts with the technical support of its engineering staff, which, in
many cases, offers the customer technical assistance during the product
development stage. Certain of the Company's executive officers also actively
participate in the Company's marketing efforts.
CUSTOMERS
The Company produces blanked and stamped parts and processes flat rolled
steel for a variety of industrial customers. The Company supplies steel blanks
primarily to the Big Three automobile manufacturers (General Motors, Ford and
Chrysler) and manufacturers of heavy truck wheels and brake parts, such as
Hendrickson Trailer Suspension Systems, Navistar International Transportation
Corp. and Dana Corporation. In addition, the Company supplies stamped components
to other automobile parts producers such as AP Automotive Systems, Inc., Johnson
Controls, Inc., Excel Industries, Inc., Aetna Industries, Inc. and Tower
Automotive Inc. who in turn sell to the Big Three and other automobile
manufacturers. In addition, the Company also supplies blanks and stampings to
manufacturers in the heating, ventilating and air conditioning, lawn and garden,
home appliance and construction industries. The Company estimates that in fiscal
1998, sales to the automotive and light truck industry accounted for
approximately 69.2% of the Company's revenues. The Company processes flat rolled
steel for a number of primary steel producers such as US Steel Company, LTV
Steel Company ("LTV Steel"), AK Steel Corporation and Rouge Steel Company
("Rouge Steel"), and for end-product manufacturers in a variety of industries,
including the automotive and lawn and garden industries.
One of the Company's largest customers is the Parma, Ohio stamping facility
of the Metal Fabricating division of General Motors Corporation ("MFD Parma").
During fiscal 1998, MFD Parma accounted for approximately 6.0% of the Company's
revenues and, because these revenues relate to blanks that are produced on a
toll processing basis, approximately 14.3% of the total steel tonnage processed
by the Company. The Company is the exclusive supplier of blanks to MFD Parma and
has principally dedicated one of its blanking facilities to
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such production. MFD Parma produces stamped exterior body parts for use in many
General Motors automobiles. The Company is linked through an electronic data
interchange with MFD Parma and supplies blanks on a just-in-time basis.
LTV Steel, a primary steel producer with significant production facilities
located in close proximity to the Company, is another large customer of the
Company. During fiscal 1998, LTV Steel accounted for approximately 1.7% of the
Company's revenues and approximately 6.6% of the total steel tonnage processed
by the Company. The Company processes steel for LTV Steel on a toll processing
basis and typically ships the processed steel to end-product manufacturers after
completion of the necessary processing operations.
OPERATIONS AND ENGINEERING
The Company operates its steel processing facilities on an integrated
basis. A significant portion of the steel required by the Company in its
blanking and stamping operations is processed through its other steel processing
operations. With four tool and die facilities, the Company typically designs,
engineers and manufactures substantially all of the tools and dies used in its
blanking and stamping operations.
Seven of the Company's facilities were constructed by the Company and were
located and designed to facilitate the integrated flow of the Company's
processing operations. In addition, the Company has developed a just-in-time
delivery system that enables the Company to meet its customers' requirements for
deliveries on shorter lead times thereby minimizing their need to carry
significant inventory levels.
The Company has a highly qualified and trained work force supplemented,
where appropriate, with automation. In 1990, the Company established its own
Total Quality Management program, known as the Integrated Continuous Improvement
Program, which allows employees to take active roles in the improvement of their
manufacturing processes and environment. The employees meet regularly to
generate new ideas or projects relating to quality improvements, production
safety and cost reduction.
RAW MATERIALS
The basic materials required for the Company' steel processing operations
are hot and cold rolled steel. The Company obtains steel for processing from a
number of primary steel producers, including Rouge Steel, Wheeling-Pittsburgh
Steel, LTV Steel, Warren Consolidated Steel, North Star BHP Steel LTD, Gallatin
Steel and NUCOR Steel. A significant portion of the Company's steel processing
products and services are provided on a toll processing basis. Under these
arrangements, the Company charges a specified fee for processing steel without
acquiring ownership of the steel and being burdened with the attendant costs of
ownership and risk of loss. Through centralized purchasing, the Company attempts
to purchase its raw materials at the lowest competitive prices for the quantity
purchased. The amount of steel available for processing is a function of the
production levels of primary steel producers.
COMPETITION
Competition for sales of steel blanks and stampings is intense, coming from
numerous companies, including internal divisions of the Big Three automobile
manufacturers, which have blanking facilities and greater financial and other
resources than the Company. The market for the Company's other steel processing
operations is also highly competitive. The Company competes with a number of
steel processors in its region, such as Worthington Industries and Samuel Steel
Pickling Company, and primary steel producers, many of which also have
comparable facilities and greater financial and other resources than the
Company. The primary characteristics of competition encountered by the Company
in each of these markets are product quality, just-in-time delivery and price.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,845 employees. The
employees at two of the Company's operating facilities (an aggregate of
approximately 330 employees) are covered by collective bargaining agreements.
These agreements are due to expire on January 14, 2000 and June 4, 2001. In
addition,
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employees of Shiloh of Michigan and Liverpool Coil Processing, Inc. voted in
favor of unionizing on December 12, 1997 and June 17, 1998, respectively. The
Company has been meeting on a routine basis with the bargaining teams of both
organizations and expects these meetings to culminate in contracts acceptable to
the Company and its employees.
BACKLOG
Because the Company conducts its steel processing operations generally on
the basis of short-term orders, backlog is not a meaningful indicator of future
performance.
SEASONALITY
The Company typically experiences decreased revenue and operating income
during its first fiscal quarter of each year, usually resulting from generally
slower overall automobile production during the winter months. The Company's
revenues and operating income in its third fiscal quarter can also be affected
by the typically lower automobile production activities in July due to
manufacturers' changeover in production lines.
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to waterways, and generation, handling,
storage, transportation, treatment and disposal of waste materials, and is also
subject to other Federal and state laws and regulations regarding health and
safety matters. Each of the Company's production facilities has permits and
licenses allowing and regulating air emissions and water discharges. While the
Company believes that at the present time it is in substantial compliance with
environmental laws and regulations, these laws and regulations are constantly
evolving and it is impossible to predict whether compliance with these laws and
regulations may have a material adverse effect on the Company in the future.
ITEM 2. PROPERTIES.
The Company is a Delaware holding corporation that conducts its operations
through ten manufacturing plants, six located in north central Ohio, three
located in Michigan and one located in Georgia. The Company believes
substantially all of its property and equipment is in good condition and that it
has sufficient capacity to meet its current operational needs. The Company
considers full capacity of its steel processing facilities to be three eight
hour shifts for 5.5 days per week. At October 31, 1998, the Company's steel
processing operations were operating at near full capacity. The Company's ten
operating facilities, all of which are owned (except for its Utica and portions
of its Canton, Michigan facilities), are as follows:
<TABLE>
<CAPTION>
SQUARE DATE OF
LOCATION FOOTAGE OPERATION DESCRIPTION OF USE
-------- ------- --------- ------------------
<S> <C> <C> <C>
Mansfield, Ohio 285,055 1955 Blanking/Tool and Die Production
Valley City, Ohio 372,000(1) 1986 Blanking
Wellington, Ohio 85,667(2) 1998 Tool and Die Production
Wellington, Ohio 226,316 1987 Stamping
Valley City, Ohio 260,000 1977 Other Steel Processing
Valley City, Ohio 244,000(3) 1990 Other Steel Processing
Romulus, Michigan 170,600(4) 1996 Blanking
Canton, Michigan 280,370(5) 1996 Stamping/Tool and Die Production
Utica, Michigan 62,500(6) 1997 Tool and Die Production
Pendergrass, Georgia 171,000(7) 1998 Blanking
</TABLE>
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- ---------------
(1) Includes a 116,000 square foot addition to this facility, which is expected
to be completed in March 1999.
(2) In February 1998, the new facility became operational, which replaced the
previous facility of 70,000 square feet which had been operational since
1946.
(3) Includes an approximately 21,000 square foot addition relating to a coil
storage bay.
(4) This facility is owned by Shiloh of Michigan, the Company's joint venture
with Rouge. The Company is a 80% equity owner of Shiloh of Michigan.
(5) Includes an approximately 60,000 square foot addition to this facility,
which was completed in December 1998.
(6) The Company leases these facilities.
(7) Construction of this facility was completed in May 1998 and operations
commenced in July 1998. Also includes an approximately 81,000 square foot
addition, which is expected to be completed in May 1999.
The facilities in Valley City, Ohio are in close proximity to each other,
facilitating greater integration of operations and management. In addition, the
Company's operating facilities at Canton, Michigan consist of four separate
facilities (two of which are leased) located within a five mile radius of each
other.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits arising in the ordinary course
of business. In management's opinion, the outcome of these matters will not have
a material adverse effect on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of securityholders of the Company.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The information under this Item 4A is furnished pursuant to Instruction 3
to Item 401(b) of Regulation S-K.
Robert L. Grissinger, Chairman of the Board, President and Chief Executive
Officer. Mr. Grissinger was appointed Chairman of the Board in October 1996. In
addition, he was appointed Chief Executive Officer of the Company in January
1995 and has been President and a Director of the Company since its formation in
April 1993. Mr. Grissinger has also served as the Executive Vice President of
Shiloh Corporation since 1989, and has been employed by Shiloh Corporation since
1963 in various financial and operational capacities. Mr. Grissinger is 60 years
old.
Dominick C. Fanello, Vice Chairman of the Board. Mr. Fanello has been Vice
Chairman of the Board since October 1996 and a Director of the Company since its
formation in April 1993. Mr. Fanello served as Chairman of the Board of the
Company from April 1993 to October 1996. In January 1995, Mr. Fanello resigned
his position as the Chief Executive Officer of the Company, a position that he
had previously held since April 1993. Mr. Fanello has also served as the
Chairman and Chief Executive Officer of Shiloh Corporation since 1954, and was
one of the founders of Shiloh Corporation and its predecessor. Mr. Fanello also
serves as a director of Park National Bank (Newark, Ohio), Richland Trust
Company and Rouge. Mr. D. Fanello is 77 years old.
James C. Fanello, Executive Vice President. Mr. Fanello has been the
Executive Vice President and a Director of the Company since its formation in
April 1993. Mr. Fanello had been the President of Stamping and Blanking of the
Company from April 1993 through October 1996. Mr. Fanello has been employed by
Shiloh Corporation and its predecessor since 1951 during which time he has held
various positions, including President and Executive Vice President. Mr. J.
Fanello is 69 years old.
William R. Burton, Senior Vice President, Corporate Planning. Mr. Burton
joined the Company in October 1994 and served as President of Shafer Valve
Company ("Shafer Valve") until its sale in July 1996. Since January 1995, Mr.
Burton has served as Senior Vice President, Corporate Planning. From December
1990
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through September 1994, Mr. Burton was the President and General Manager of
Hartman Electrical Manufacturing, a division of Figgie International, Inc. that
manufactures electrical components principally for use in commercial and
military aircraft. Mr. Burton is 60 years old.
G. Rodger Loesch, Executive Vice President of Engineered Products. Mr.
Loesch was appointed Executive Vice President of Engineered Products of the
Company in July 1997. From October 1996 to July 1997, Mr. Loesch served as
Executive Vice President of Manufacturing and Sales. He also served as Treasurer
and Chief Financial Officer from 1993 to 1996. In addition, he served as the
Corporate Controller of Shiloh Corporation since 1986. Mr. Loesch is a Certified
Public Accountant. Prior to joining Shiloh Corporation, Mr. Loesch was employed
by Burroughs Corporation and Arthur Andersen & Co. Mr. Loesch is 44 years old.
Craig A. Stacy, Chief Financial Officer and Treasurer. Mr. Stacy was
appointed Chief Financial Officer and Treasurer in October 1996. Mr. Stacy had
been the Corporate Controller of the Company since 1994. Prior to joining the
Company, Mr. Stacy was employed by PricewaterhouseCoopers LLP and Ernst & Young
LLP. Mr. Stacy is a Certified Public Accountant. Mr. Stacy is 32 years old.
David K. Frink, Executive Vice President of Steel Processing and Director
of Corporate Purchasing. Mr. Frink was named Executive Vice President of Steel
Processing in July 1997 and Director of Corporate Purchasing in May 1996. Mr.
Frink was President of Steel Processing from August 1996 to July 1997. Prior to
August 1996, Mr. Frink had been the plant general manager at Liverpool Coil
Processing since June 1991. Mr. Frink is 51 years old.
Nickolas L. Blauwiekel, Corporate Vice-President of Human Resources. Mr.
Blauwiekel was named Corporate Vice President of Human Resources in November of
1998. Prior to November 1998, Mr. Blauwiekel had been the Vice President, Human
Resources for Cooper Automotive, a manufacturer and supplier of automotive
components and a Division of Federal Mogul Corporation. Mr. Blauwiekel is 43
years old.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of the close of business on January 22, 1999, there were approximately
170 stockholders of record for the Company's Common Stock. The Company believes
that the actual number of stockholders of the Company's Common Stock exceeds
300. The Company has not declared or paid any cash dividends on shares of its
equity securities, including Common Stock, since its incorporation in April
1993. The Company currently intends to retain earnings to support its growth
strategy and does not anticipate paying dividends in the foreseeable future. The
Common Stock is traded on the Nasdaq National Market under the symbol "SHLO".
The Company's Common Stock commenced trading on June 29, 1993. The table
below sets forth the high and low bid prices for the Company's Common Stock for
its four quarters in fiscal 1997 and 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1st Quarter
January 31, 1997.......................................... $18.25 $15.50
2nd Quarter
April 30, 1997............................................ $18.25 $14.00
3rd Quarter
July 31, 1997............................................. $20.75 $15.50
4th Quarter
October 31, 1997.......................................... $20.75 $16.25
1st Quarter
January 31, 1998.......................................... $19.50 $18.00
2nd Quarter
April 30, 1998............................................ $23.13 $19.00
</TABLE>
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<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
3rd Quarter
July 31, 1998............................................. $22.13 $17.25
4th Quarter
October 31, 1998.......................................... $19.38 $14.25
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data of the
Company. The data for each of the five years in the period ended October 31,
1998, are derived from the consolidated financial statements of the Company,
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the notes thereto included elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues....................... $299,350 $273,161 $219,466 $212,348 $194,766
Cost of sales.................. 242,499 214,343 173,836 173,734 164,013
-------- -------- -------- -------- --------
Gross profit................. 56,851 58,818 45,630 38,614 30,753
Selling, general and
administrative expenses...... 26,832 25,557 17,086 14,341 13,962
-------- -------- -------- -------- --------
Operating income............. 30,019 33,261 28,544 24,273 16,791
Interest expense, net.......... 5,130 2,161 111 402 836
Minority interest.............. 342 394 123 -- --
Other income (expense), net.... (16) 274 (81) 64 (82)
-------- -------- -------- -------- --------
Income from continuing
operations before taxes and
effect of change in
accounting principle......... 25,215 31,768 28,475 23,935 15,873
Provision for income taxes... 9,673 11,675 10,952 9,471 6,491
-------- -------- -------- -------- --------
Income from continuing
operations before effect of
change in accounting
principle.................... 15,542 20,093 17,523 14,464 9,382
Loss from discontinued
operations, net income
taxes........................ -- -- (256) (289) (613)
Loss on sale of discontinued
operations, net of income
taxes........................ -- -- (9,589) -- --
Effect of change in accounting
principle.................... -- -- -- -- (281)
-------- -------- -------- -------- --------
Net Income..................... $ 15,542 $ 20,093 $ 7,678 $ 14,175 $ 8,488
======== ======== ======== ======== ========
EARNINGS PER SHARE:
Basic and diluted earnings per
share:
Income from continuing
operations before effect of
change in accounting
principle per share.......... $ 1.19 $ 1.54 $ 1.35 $ 1.11 $ 0.72
Loss from discontinued
operations, net of income
taxes per share.............. -- -- (0.02) (0.02) (0.05)
Loss on sale of discontinued
operations, net of income
taxes per share.............. -- -- (0.74) -- --
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Effect of change in accounting
principle per share.......... -- -- -- -- (0.02)
-------- -------- -------- -------- --------
Net income per share........... $ 1.19 $ 1.54 $ 0.59 $ 1.09 $ 0.65
======== ======== ======== ======== ========
Basic weighted average number
of common shares............. 13,061 13,032 13,012 13,003 12,968
Diluted weighted average number
of common shares............. 13,103 13,066 13,032 13,0003 12,968
OTHER DATA:
(Excludes Shafer Valve and
acquisitions of businesses)
Capital expenditures......... $ 67,968 $ 63,164 $ 37,482 $ 25,519 $ 12,815
Depreciation and
amortization................. 15,270 11,012 7,166 6,467 6,063
BALANCE SHEET DATA:
Working capital................ $ 56,360 $ 45,483 $ 34,813
Total assets................... 354,829 289,626 207,009
Total debt..................... 135,865 96,400 52,933
Stockholders' equity........... 162,818 146,619 126,157
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company is a vertically integrated steel processor that supplies
blanks, stampings and processed steel as well as designs and builds tools and
dies for the automotive and other industries. The Company currently provides a
broad range of intermediate steel processing services, which include: (i)
blanking and stamping; and (ii) other steel processing services (which include
pickling hot rolled steel, slitting, edge trimming, roller leveling and cutting
to length of both hot and cold rolled steel). The Company operates through ten
subsidiaries, Shiloh Corporation, Valley City Steel Company, The Sectional Die
Company, Medina Blanking, Inc., Sectional Stamping, Inc., Liverpool Coil
Processing, Inc., Shiloh of Michigan, the Company's joint venture with Rouge,
Greenfield Die & Manufacturing Company, C&H Design Company and Jefferson
Blanking, Inc..
In 1995, the Company prepared a long-term, business plan which included a
strategic decision to concentrate on the core steel processing services. As a
result, the Company sought inquiries from prospective bidders for the sale of
its subsidiary, Shafer Valve Company ("Shafer Valve"). Effective April 30, 1996,
the Company accounted for Shafer Valve as a discontinued operation. In May 1996,
the Company entered into an agreement to sell the stock of Shafer Valve to
Bettis Corporation. The sale was completed on July 9, 1996.
The Company typically experiences decreased revenue and operating income
during the first fiscal quarter of each year, usually resulting from slower
overall automobile production during the winter months. The revenues and
operating income in the third fiscal quarter can also be affected by the
typically lower automobile production activities in July due to manufacturers'
changeover in production lines.
In analyzing the financial aspects of the Company's steel processing
operations, a number of factors must be considered. First, plant utilization
levels are very important to profitability because of the capital intensive
nature of these operations. Because the Company performs a number of different
processing operations, however, it is not meaningful to analyze simply the total
tons of steel processed. For example, blanking and stamping involve more
operational processes, from the design and manufacture of tools and dies to the
production and packaging of the final product, than the Company's other steel
processing services and therefore generally have higher margins. Second, a
significant portion of the Company's steel processing products and services is
provided to customers on a toll processing basis. Under these arrangements, the
Company charges a specified toll processing fee for the processing operations
performed without acquiring ownership of the steel and being burdened with the
attendant costs of ownership and risk of loss. Although the proportion of tons
processed by the Company that are
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directly owned and toll processed may fluctuate from quarter to quarter
primarily based on the customers for which the Company is providing services
during such period, the Company estimates that during the past three years
approximately 87.4%, 87.2% and 85.9%, respectively, of total tons processed was
done on a toll processing basis. Revenues from operations involving directly
owned steel include a component of raw material cost whereas toll processing
revenues do not; consequently, toll processing generally results in lower gross
profit, but higher gross margin, than directly owned steel processing.
Therefore, an increase in the proportion of total revenues attributable to
directly owned steel processing may result in higher revenues and gross profits
but lower gross margins. The Company's blanking and stamping operations use more
directly owned steel than do its other steel processing operations. In addition,
changes in the price of steel can impact the Company's results of operations
because raw material costs are by far the largest component of cost of sales in
processing directly owned steel.
In November 1997, the Company entered into a joint venture with Bing and
Rouge, but in order to more closely focus on its core business the Company
terminated its interest in the joint venture on March 31, 1998 by mutual
agreement.
RESULTS OF OPERATIONS
The following table sets forth income statement data of the Company
expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 81.0 78.5 79.2
----- ----- -----
Gross profit................................................ 19.0 21.5 20.8
Selling, general and administrative expenses................ 9.0 9.4 7.8
----- ----- -----
Operating income from continuing operations................. 10.0 12.1 13.0
Interest expense............................................ 1.8 .8 *
Interest income............................................. .1 .1 *
Minority interest........................................... .1 .2 *
Other income................................................ * .1 *
----- ----- -----
Income from continuing operations before taxes.............. 8.4 11.7 13.0
Provision for income taxes.................................. 3.2 4.3 5.0
----- ----- -----
Income from continuing operations before effect of change in
accounting principle...................................... 5.2 7.4 8.0
Loss from discontinued operations, net of income taxes...... -- -- .1
Loss on sale of discontinued operations, net of tax......... -- -- 4.4
----- ----- -----
Net income.................................................. 5.2% 7.4% 3.5%
===== ===== =====
</TABLE>
- ---------------
* Indicates that amounts are greater than 0.0 percent but less than 0.1 percent.
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997
Revenues. Revenues increased by $26.2 million, or 9.6%, to $299.4 million
for the year ended October 31, 1998 from $273.2 million for the comparable
period in 1997. The increase in revenues is primarily due to the inclusion in
fiscal 1998 of $18.6 million in revenues from C&H and increased revenues
resulting from additional steel processing capabilities at Sectional Stamping.
In addition, revenues increased at Shiloh of Michigan and Liverpool Coil
Processing. Revenues from the blanking and stamping operations for fiscal 1998
increased approximately 7.6% from the comparable period due primarily to the
inclusion of C&H and increased revenue at Sectional Stamping, while revenue from
the other steel processing operations for fiscal 1998 increased approximately
14.7% from the comparable period in fiscal 1997 due primarily to increased
revenue at Shiloh of
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<PAGE> 111
Michigan and Liverpool Coil Processing. The percentage of revenues from directly
owned steel processed was 70.3% for fiscal 1998 compared to 71.7% for fiscal
1997. Revenues from the toll processed steel were 29.7% for fiscal 1998 and
28.3% for the comparable period in fiscal 1997.
Gross Profit. Gross profit decreased by $2.0 million, or 3.3%, to $56.9
million for fiscal 1998 from $58.8 million for the comparable period in 1997.
Gross margin decreased to 19.0% in fiscal 1998 from 21.5% for the comparable
period in 1997. The decrease in gross margin is primarily attributable to lower
margins in the tool and die business, a decrease in outsourcing by major steel
producing customers that impacted one of our steel processing operations, a
lower price for scrap steel that is sold in the secondary steel industry, the
residual effects from the GM strike and Greenfield's continued challenges
associated with the integration of its operations as a result of the acquisition
and subsequent expansion of its facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.3 million, or 5.0%, to $26.8 million in
fiscal 1998 from $25.6 million for the comparable period in fiscal 1997. As a
percentage of revenues, these expenses decreased to 9.0% for fiscal 1998 from
9.4% for the comparable period in fiscal 1997. The largest component of the
increase, in dollars, arose principally from the inclusion of C&H. In addition,
the increase in dollars was attributable to pre-operating costs of Jefferson
Blanking.
Other. Interest expense increased to $5.3 million in fiscal 1998 from $2.2
million for the comparable period in fiscal 1997 due primarily to increased
average borrowings during fiscal 1998 that were primarily incurred in connection
with the acquisition of C&H and other capital expenditures. Interest expense of
approximately $2.2 million relating to expansion of several facilities was
capitalized in fiscal 1998. The provision for income taxes was $9.7 million in
fiscal 1998 compared with $11.7 million in fiscal 1997, representing effective
tax rates of 38.4% and 36.8%. The increase in the effective tax rate is
primarily due to a return to a more sustainable level of state incentives for
capital investments.
Net Income. Income from continuing operations for fiscal 1998 decreased by
$4.6 million, or 22.7%, to $15.5 million from $20.1 million for the comparable
period in fiscal 1997. This decrease was substantially the result of lower
margins in the tool and die business, lower price for scrap steel that is sold
to the secondary steel industry and residual effects from the GM strike.
Year Ended October 31, 1997 Compared to Year Ended October 31, 1996
Revenues. Revenues increased by $53.7 million, or 24.5%, to $273.2 million
for the year ended October 31, 1997 from $219.5 million for the comparable
period in 1996. The increase in revenues is primarily due to the inclusion in
fiscal 1997 of $38.0 million in revenues from Greenfield. Revenues from the
blanking and stamping operations for fiscal 1997 increased approximately 32.8%
from the comparable period due to the inclusion of revenue from Greenfield,
while revenue from the other steel processing operations for fiscal 1997
increased approximately 5.2% from the comparable period in fiscal 1996. The
percentage of revenues from directly owned steel processed was 71.7% for fiscal
1997 and 71.2% for the comparable period in fiscal 1996. Revenues from the toll
processed steel were 28.3% for fiscal 1997 and 28.8% for the comparable period
in fiscal 1996. The increase in the percentage of revenues from directly owned
steel processed was primarily due to the inclusion of Greenfield which
predominantly processes directly owned steel.
Gross Profit. Gross profit increased by $13.2 million, or 28.9%, to $58.8
million for fiscal 1997 from $45.6 million for the comparable period in 1996.
Gross margin increased to 21.5% in fiscal 1997 from 20.8% for the comparable
period in 1996. The increase in gross margin is primarily attributable to higher
gross margins realized with the inclusion of Greenfield.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8.5 million, or 49.7%, to $25.6 million in
fiscal 1997 from $17.1 million for the comparable period in fiscal 1996. As a
percentage of revenues, these expenses increased to 9.4% for fiscal 1997 from
7.8% for the comparable period in fiscal 1996. The largest component of the
increase, both as a percentage of sales and in dollars, arose principally from
the inclusion of Greenfield. In addition, the increase was attributable to costs
associated with the adoption of a supplemental executive retirement plan, and to
a lesser extent, the addition of new personnel at the Company's corporate
offices.
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Other. Interest expense increased to $2.2 million in fiscal 1997 from
$165,948 for the comparable period in fiscal 1996 due primarily to increased
average borrowings during fiscal 1997 that were primarily incurred in connection
with the acquisition of Greenfield. Interest expense of approximately $1.9
million relating to expansion of several facilities was capitalized in fiscal
1997. The provision for income taxes was $11.7 million in fiscal 1997 compared
with $11.0 million in 1996, representing effective tax rates of 36.8% and 38.5%.
The reduction in the effective tax rate is primarily due to state incentive
programs for capital investments.
Discontinued Operations. On July 9, 1996, the Company sold the stock of
Shafer Valve and accordingly has accounted for this operation as a discontinued
operation. Prior year's statements of income and cash flows have been restated
to reflect the discontinuation of the valve actuator segment.
Net Income. Income from continuing operations for fiscal 1997 increased by
$2.6 million, or 14.7%, to $20.1 million from $17.5 million for the comparable
period in fiscal 1996. This increase was primarily the result of the inclusion
of Greenfield in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had $56.4 million of working capital,
representing a current ratio of 2.4 to 1 and debt to total capitalization of
45.5%. As a result of the financial condition of the Company, the Company will
be able to continue its planned investment in new equipment and facilities
through the next fiscal year.
Net cash provided by operating activities is primarily generated from net
income of the Company plus non-cash charges for depreciation and amortization,
which because of the capital intensive nature of the Company's business, are
substantial. Net cash provided by operating activities for 1998 was $28.2
million as compared to $31.3 million for the comparable period in fiscal 1997.
Fluctuations in working capital were the primary factors causing the increase in
net cash provided by operations from fiscal 1997 to fiscal 1998. Net cash
provided by operating activities has historically been used by the Company to
fund a portion of its capital expenditures.
Capital expenditures, excluding acquisitions, were $68.0 million during the
year ended October 31, 1998 and $63.2 million during fiscal 1997. The capital
expenditures made during 1998 were primarily for expansions of current blanking
and stamping facilities of approximately $34.7 million, as well as $25.4 million
of new construction at Jefferson Blanking for the completion of their facility
expansion.
The Company's total projected capital expenditures for fiscal 1999 amounts
to approximately $46.0 million. The capital expenditures in fiscal 1998 and
fiscal 1999 are primarily for facility expansions and additions, which are being
made to support current business, anticipated new business and to enhance
productivity. In addition to using cash generated by operating activities to
fund the fiscal 1999 capital expenditures, the Company anticipates funding such
activities through additional bank financing.
Prior to January 22, 1998, the Company had a $70.0 million unsecured
revolving credit facility ("Shiloh Facility") with KeyBank National Association
("KeyBank") and Shiloh of Michigan had a $28.0 million credit facility (the
"Shiloh of Michigan Facility") with KeyBank. On January 22, 1998, the Company
increased the Shiloh Facility to $135.0 million. The term of the Shiloh Facility
extends to January 31, 2003. The Company has the option to select the applicable
interest rate at KeyBank's prime rate or the LIBOR rate plus a factor determined
by a pricing matrix based on the Company's ratio of Funded Debt to EBITDA. As of
October 31, 1998, the factor as determined by the pricing matrix was 0.200%. The
terms of the agreement also require an annual facility fee as determined by a
pricing matrix based on the Company's ratio of Funded Debt to EBITDA. This
annual facility fee is currently 0.35%. On January 22, 1998, the Company used
$28 million of the Shiloh Facility to retire the outstanding balance of the
Shiloh of Michigan facility. On October 31, 1998, the Company had an aggregate
of $2.9 million of availability remaining under such Shiloh Facility.
The Company believes that it currently has sufficient liquidity and
available capital resources to meet its existing needs, and the financial
capability to increase its long-term borrowing level if that becomes appropriate
due to changes in its capital requirements.
In March 1995, Medina County, Ohio issued on behalf of the Company an
aggregate of $5.4 million in principal amount of variable rate industrial
revenue bonds due 2010, all of which were drawn upon as of
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October 31, 1996. These bonds are secured by the Company with a letter of
credit. The funds from these bonds were used to finance a portion of the
expansion at the Company's steel pickling operations in Valley City, Ohio.
YEAR 2000 COMPLIANCE
The "Year 2000" problem relates to the computer systems and software that
may have a problem distinguishing the dates 1900 and 2000 because the calendar
year date is abbreviated by only two digits. As a result of this design
decision, systems could fail to operate or produce the correct results if the
"00" is interpreted to mean 1900 rather than 2000. If this occurs in a system
used by the Company or a third party dealing with the Company, the results could
conceivably have an adverse material effect on the Company.
As a key supplier to the automotive and other manufacturing industries, the
Company's major exposure for the Year 2000 problems is the effect of shutting
down production at one of its customer's facilities. While lost revenues from
such an event are a concern for the Company, the greater risks are the
consequential damages for which the Company could be liable if it in fact is
found responsible for the shutdown of a customer's facility. Such a finding
could have an adverse material impact on the Company's operating results.
The most likely way in which the Company would shut down production at a
customer's facility is by being unable to supply material or parts to that
customer. The material supplied by the Company, in many cases is an integral
component of the end products that the customer produces, and the inability to
provide them may make the customer unable to manufacture and sell its products.
Breakdowns in any number of the Company's computer systems and applications
could prevent the Company from being able to manufacture and ship its products.
Examples of such potential failures include, without limitation, failure in the
Company's manufacturing application software, bar-coding system, embedded
computer chips in shop-floor equipment, and lack of supply of material from its
suppliers, or lack of heat, power or water from utilities servicing the
Company's facilities. The Company's products do not contain computer devices
that require remediation to meet the Year 2000 requirements.
For its information technology, the Company currently utilizes an IBM
RS6000 computing environment that is complemented by a series of local-area
networks ("LANs") that are connected nationwide via a wide-area network ("WAN").
Most of the operating systems related to the RS6000s, LANs and WAN have been or
are in the process of being updated to comply with the Year 2000 requirements.
Additionally, upgraded and modified versions of the Company's financial,
manufacturing (including bar coding), payroll, human resources and other
software applications which are Year 2000 ready are available and are now in the
process of being integrated into the Company's information systems. The Company
expects that this integration will be substantially complete by the end of the
third calendar quarter of 1999.
The Company utilizes non-mainframe computers and software in its various
production facilities throughout the country. An initial internal review of
these systems have identified that only a few revisions are necessary to these
systems to make them Year 2000 ready. The majority of the revisions that have
been identified relate to old personal computers or memory chips that must be
replaced. Although there can be no assurances that the Company will identify and
correct every Year 2000 problem in the computer applications used in its
business or production processes, the Company believes that it has in place a
comprehensive program to identify and correct any such problem. The plan calls
for substantial completion of the remediation of these systems by the end of the
third calendar quarter of 1999. At this time, the Company does not believe that
it requires a contingency plan with respect to the information technology,
business and production processes and has therefore not developed one.
The Company is also reviewing its building and utility systems (heat,
electrical, water, phones, etc.) for the impact of Year 2000. Many of the
systems in this area are currently Year 2000 compliant. While the Company is
diligently working with the providers of these services and has no reason to
expect that they will not meet their requirements for Year 2000 compliance,
there can be no assurances that these suppliers will in fact meet the Company's
requirement. A failure by any of these suppliers to remediate their systems
could potentially cause a shutdown of one or more of the Company's facilities,
which could impact the Company's ability to meet its obligations to deliver
products to its customers. At this time, the Company has not developed a
contingency plan in the event of a failure caused by a supplier or third party,
but would do so if a specific problem is identified. In some cases, especially
with respect to utilities, there may not, however, be an alternative source
available.
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The Company has also started a program to determine the Year 2000
compliance of their significant equipment and material suppliers. The Company
has sent out a comprehensive questionnaire to all of its suppliers regarding
their Year 2000 compliance and is attempting to identify any potential problem
areas with respect to them. This program will be ongoing and the Company's
efforts with respect to specific problems identified will depend, in part on its
assessment of the risk that any such problem may cause the shutdown of a
customer's plant or other problem which the Company believes would have a
material effect on operations. The Company cannot, however, fully control the
conduct of its suppliers and there can be no guarantee that Year 2000 problems
originating from a supplier will not occur. At this time, the Company has not
developed a contingency plan in the event of a failure caused by a supplier or
third party, but would do so if a specific problem is identified. In some cases
there may not be an alternative source available.
As a supplier to the automotive industry, the Company takes an active role
in many industry-sponsored organizations, including the American Iron and Steel
Institute ("AISI") and the Automotive Industry Action Group ("AIAG"). The AIAG
has been proactive in working with OEMs and Tier 1, 2 and 3 suppliers to ensure
that the industry as a whole addresses the Year 2000 problem. The AIAG provides
tools to assist in achieving compliance including questionnaires, regular
meetings of members, follow-up by AIAG personnel regarding the answers to the
questionnaires, etc. The Company will continue to work with such organizations
in order to have access to the tools available to address the Year 2000 problem.
To date, the Company has not spent a material amount on specific Year 2000
issues. As of October 31, 1998, the Company spent approximately $8.4 million on
a new business system; however, the Company cannot quantify the amount directly
related to Year 2000 compliance. Similarly, the Company, at this time, cannot
quantify the amount to be spent on Year 2000 issues and compliance matters
related thereto.
The information presented above sets forth the key steps taken by the
Company to address the Year 2000 problem. There can be no assurance that third
parties will convert their systems in a timely manner and in a way that is
compatible with the Company's systems. The Company believes that its actions
with suppliers will minimize these risks and that the costs of Year 2000
compliance for its information and production systems will not be material in
its consolidated and financial and operational results.
OUTLOOK
The statements contained in this Annual Report of Form 10-K that are not
historical facts are forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties with respect to the
Company's operations in fiscal 1998 as well as over the long term such as,
without limitations, (i) a downturn in the automotive industry, which is highly
cyclical, dependent on consumer spending and subject to the impact of domestic
and international economic conditions and regulations and policies regarding
international trade, (ii) the ability of the Company to accomplish its strategic
objectives with respect to external expansion through selective acquisitions and
internal expansion, (iii) increases in the price of, or limitations on the
availability of steel, the Company's primary raw material, (iv) risks associated
with integrating operations of acquired companies, (v) potential disruptions in
operations due to or during facility expansions, (vi) a labor dispute involving
the Company, its customers or suppliers and (vii) the potential inability to
adequately address issues relating to the Year 2000 problems. Any or all of
these risks and uncertainties could cause actual results to differ materially
from those reflected in the forward-looking statements. These forward-looking
statements reflect management's analysis only as of the date of the filing of
this Report. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. In addition to the disclosure contained herein, readers should
carefully review risks and uncertainties contained in other documents the
Company files from time to time with the Securities and Exchange Commission.
EFFECT OF INFLATION
Inflation generally affects the Company by increasing the interest expense
of floating rate indebtedness and by increasing the cost of labor, equipment and
raw materials. The general level of inflation has not had a material effect on
the Company's financial results.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates as they relate to its variable rate debt. The
Company does not enter into derivative financial investments for trading or
speculation purposes. As a result, the Company believes that its market risk
exposure is not material to the Company's financial position, liquidity or
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheet at October 31, 1998 and 1997
Consolidated Statements of Income for three years ended October 31, 1998
Consolidated Statements of Cash Flows for the three years ended October 31,
1998
Consolidated Statements of Stockholders' Equity for the three years ended
October 31, 1998
Notes to Consolidated Financial Statements
Financial Statement Schedule for the three years ended October 31, 1998 is
located in Item 14(a) of the Annual Report on Form 10-K:
II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Shiloh Industries, Inc.
In our opinion, the consolidated financial statements listed on the
accompanying index, present fairly, in all material respects, the financial
position of Shiloh Industries, Inc. and its subsidiaries at October 31, 1998 and
1997 and the results of their operations and their cash flows for each of the
three years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the management of Shiloh Industries, Inc.; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
December 4, 1998
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SHILOH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 642,723 $ 191,688
Accounts receivable......................................... 46,802,379 50,151,099
Inventories................................................. 44,783,947 31,148,360
Deferred income taxes....................................... 1,290,357 370,467
Prepaid expenses............................................ 3,543,716 3,921,449
------------ ------------
Total current assets.............................. 97,063,122 85,783,063
------------ ------------
Property, plant and equipment, net.......................... 240,440,580 187,178,766
Goodwill.................................................... 12,056,054 12,643,610
Other assets................................................ 5,269,086 4,020,791
------------ ------------
Total assets...................................... $354,828,842 $289,626,230
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 23,863,107 $ 20,995,989
Short-term note payable..................................... -- 3,000,000
Accrued income taxes........................................ 1,020,204 1,916,333
Advanced billings........................................... 2,836,203 563,597
Other accrued expenses...................................... 12,983,892 13,823,922
------------ ------------
Total current liabilities......................... 40,703,406 40,299,841
------------ ------------
Long-term debt.............................................. 135,865,000 93,400,000
Deferred income taxes....................................... 14,562,840 9,307,241
Long-term pension liability................................. 879,800 --
------------ ------------
Total liabilities................................. 192,011,046 143,007,082
------------ ------------
Stockholders' equity
Preferred stock, $.01 per share; 5,000,000 shares
authorized and unissued................................ -- --
Common stock, par value $.01 per share; 25,000,000 shares
authorized; 13,080,563 and 13,038,763 shares issued and
outstanding at October 31, 1998 and 1997,
respectively........................................... 130,805 130,387
Paid-in capital........................................... 39,399,805 38,743,406
Retained earnings......................................... 123,287,186 107,745,355
------------ ------------
Total stockholders' equity........................ 162,817,796 146,619,148
------------ ------------
Total liabilities and stockholders' equity........ $354,828,842 $289,626,230
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues........................................ $299,350,361 $273,161,251 $219,465,925
Cost of sales................................... 242,499,691 214,343,391 173,835,459
------------ ------------ ------------
Gross Profit.................................... 56,850,670 58,817,860 45,630,466
Selling, general and administrative expenses.... 26,832,133 25,556,837 17,086,152
------------ ------------ ------------
Operating income................................ 30,018,537 33,261,023 28,544,314
Interest expense................................ 5,303,218 2,219,003 165,948
Interest income................................. 173,898 57,832 55,408
Minority interest............................... 341,638 394,207 123,162
Other income (expense), net..................... (16,086) 274,081 (81,215)
------------ ------------ ------------
Income from continuing operations before
taxes......................................... 25,214,769 31,768,140 28,475,721
Provision for income taxes...................... 9,672,938 11,674,793 10,952,269
------------ ------------ ------------
Income from continuing operations............... 15,541,831 20,093,347 17,523,452
Loss from discontinued operations, net of income
taxes......................................... -- -- (256,139)
Loss on sale of discontinued operations, net of
income taxes.................................. -- -- (9,589,213)
------------ ------------ ------------
Net income...................................... $ 15,541,831 $ 20,093,347 $ 7,678,100
============ ============ ============
Basic earnings per share:
Income from continuing operations.......... $ 1.19 $ 1.54 $ 1.35
Loss from discontinued operations.......... -- -- (.02)
Loss on sale of discontinued operations.... -- -- (.74)
------------ ------------ ------------
$ 1.19 $ 1.54 $ .59
============ ============ ============
Weighted average number of common shares...... 13,060,794 13,032,229 13,011,663
Diluted earnings per share:
Income from continuing operations.......... $ 1.19 $ 1.54 $ 1.34
Loss from discontinued operations.......... -- -- (.02)
Loss on sale of discontinued operations.... -- -- (.73)
------------ ------------ ------------
Net income................................. $ 1.19 $ 1.54 $ .59
============ ============ ============
Weighted average number of common shares... 13,103,144 13,065,950 13,031,621
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income........................................ $15,541,831 $20,093,347 $ 7,678,100
Adjustment to reconcile net income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization................ 15,270,408 11,012,383 7,165,910
Discontinued operations...................... -- -- 9,845,352
Minority interest............................ (341,638) (394,207) (103,162)
Deferred income taxes........................ 4,335,709 2,809,839 1,290,012
(Gain) on sale of assets..................... (46,074) (53,065) --
Changes in operating assets and liabilities,
net of working capital changes resulting
from acquisitions Accounts receivable...... 3,348,720 (8,846,145) (3,412,343)
Inventories................................ (13,635,587) (2,539,552) (2,527,297)
Prepaids and other assets.................. 350,877 (335,682) (1,415,075)
Payables and accruals...................... 4,299,695 9,086,189 3,492,744
Accrued income taxes....................... (896,129) 503,834 (1,226,016)
----------- ----------- ------------
Net cash provided by continuing operations...... 28,227,812 31,336,941 20,788,225
Discontinued operations -- non cash charges
and working capital changes................ -- -- (4,225,697)
----------- ----------- ------------
Net cash provided by operating activities....... 28,227,812 31,336,941 16,562,528
----------- ----------- ------------
Cash Flows From Investing Activities:
Capital expenditures......................... (67,967,994) (63,164,276) (37,482,394)
Proceeds from sale of assets................. 69,400 157,134 13,200,000
Acquisitions, net of cash.................... -- (13,694,436) (22,577,937)
----------- ----------- ------------
Net cash used in investing activities........... (67,898,594) (76,701,578) (46,860,331)
----------- ----------- ------------
Cash Flows From Financing Activities:
Proceeds from short-term borrowings.......... -- 29,700,000 16,500,000
Repayments of short-term borrowings.......... (3,000,000) (29,200,000) (14,000,000)
Proceeds from long-term borrowings........... 42,465,000 44,250,000 65,102,310
Repayments of long-term borrowings........... -- (1,283,352) (37,975,000)
Issuance of common stock..................... 656,817 368,525 --
----------- ----------- ------------
Net cash provided by financing activities....... 40,121,817 43,835,173 29,627,310
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents.................................. 451,035 (1,529,464) (670,493)
Cash and cash equivalents at beginning of
period....................................... 191,688 1,721,152 2,391,645
----------- ----------- ------------
Cash and cash equivalents at end of period...... $ 642,723 $ 191,688 $ 1,721,152
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
($.01 PAR PAID-IN RETAINED
VALUE) CAPITAL EARNINGS TOTAL
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
October 31, 1995...................... $130,116 $38,375,152 $ 79,973,908 $118,479,176
Net Income.......................... -- -- 7,678,100 7,678,100
-------- ----------- ------------ ------------
October 31, 1996...................... 130,116 38,375,152 87,652,008 126,157,276
Issuance of 27,100 common shares.... 271 368,254 -- 368,525
Net Income.......................... -- -- 20,093,347 20,093,347
-------- ----------- ------------ ------------
October 31, 1997...................... 130,387 38,743,406 107,745,355 146,619,148
Issuance of 41,800 common shares.... 418 656,399 -- 656,817
Net Income.......................... -- -- 15,541,831 15,541,831
-------- ----------- ------------ ------------
October 31, 1998...................... $130,805 $39,399,805 $123,287,186 $162,817,796
======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS:
Shiloh Industries, Inc. (the "Company") is a vertically integrated steel
processor that supplies high quality blanks, stampings and processed steel as
well as designs and builds tools for the automotive and other industries.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and majority-owned subsidiaries. All significant
intercompany transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment. Revenues include both
direct sales as well as toll processing revenue. Toll processing revenue is
generated as a result of the Company performing steel processing operations
without acquiring ownership of the material. Revenues include $88,792,119,
$77,383,879 and $63,171,827 of toll processing revenue for 1998, 1997 and 1996,
respectively.
EMPLOYEE BENEFIT PLANS
The Company accrues the cost of defined benefit pension plans which cover a
majority of the Company's employees in accordance with Statement of Financial
Accounting Standards ("SFAS") 87. The plans are funded based on the requirements
and limitations of the Employee Retirement Income Security Act of 1974. The
majority of employees of the Company participate in discretionary profit sharing
plans administered by the Company. The Company also provides postretirement
benefits to certain employees (Note 11).
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets of
acquired entities and is amortized on a straight-line basis over the expected
benefit period of 30 years. During 1998, 1997 and 1996, goodwill amortization
amounted to $408,558, $297,544 and $20,763, respectively. Accumulated
amortization was $784,103 and $375,545 at October 31, 1998 and 1997,
respectively.
The Company uses an undiscounted cash flow method to review the
recoverability of the carrying value of goodwill and other long-term assets.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include checking accounts and all highly liquid
investments with an original maturity of three months or less.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being
determined primarily by the last-in, first-out ("LIFO") method and the balance
determined by the first-in, first-out ("FIFO") method, which approximates
average cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for
maintenance, repairs and renewals are charged to expense as incurred, whereas
major improvements are capitalized. The cost of these improvements is
depreciated over their estimated useful lives. Useful lives range from five to
twelve years for furniture and fixtures and machinery and equipment, fifteen to
twenty years for land improvements and thirty to forty years for
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buildings and their related improvements. Depreciation is computed using
principally the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes.
INCOME TAXES
The Company utilizes the asset and liability method in accounting for
income taxes which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amount and tax basis of assets and liabilities.
CONCENTRATION OF CREDIT RISK
The Company sells products to customers primarily in the automotive, light
truck and heavy truck industries. The Company performs on-going credit
evaluations of its customers and generally does not require collateral when
extending credit. The Company maintains a reserve for potential credit losses.
Such losses have historically been within management's expectations. Currently,
the Company does not have financial instruments with off-balance sheet risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and investments, trade receivables and payables
approximates fair value because of the short maturity of those instruments. The
carrying value of the Company's long-term debt is considered to approximate the
fair value of these instruments based on the borrowing rates currently available
to the Company for loans with similar terms and maturities.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The Company continues to apply Accounting Principles Board Opinion No. 25 ("APB
25") in accounting for stock-based employee compensation; however, the impact of
the fair value based method described in SFAS No. 123 is presented in the notes
to the financial statements.
EARNINGS PER SHARE
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128") which requires companies
to present basic and diluted earnings per share ("EPS"), instead of primary and
fully diluted EPS previously required. The adoption of the new standard is
required for the year-ended October 31, 1998 and requires restatement of EPS of
all previous periods presented.
The outstanding stock options under the Company's Key Employee Stock
Incentive Plan (Note 12) are included in the diluted EPS calculation to the
extent they are dilutive. In accordance with SFAS 128, the following is a
reconciliation of the numerator and denominator of the basic and diluted EPS
computation for "Income from continuing operations".
C-24
<PAGE> 123
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income from continuing operations................... $15,541,831 $20,093,347 $17,523,752
Basic weighted average shares....................... 13,060,794 13,032,229 13,011,663
Effect of diluted shares:
Stock options..................................... 42,350 33,721 19,958
----------- ----------- -----------
Diluted weighted average shares..................... 13,103,144 13,065,950 13,031,621
----------- ----------- -----------
Basic earnings per share............................ $ 1.19 $ 1.54 $ 1.35
=========== =========== ===========
Diluted earnings per share.......................... $ 1.19 $ 1.54 $ 1.34
=========== =========== ===========
</TABLE>
NEW ACCOUNTING STANDARDS:
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has had no significant items
of other comprehensive income
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
effective for fiscal years beginning after December 15, 1997. This Statement
requires that public business enterprises report certain information about
operating segments in annual and interim financial statements. It also requires
that public business enterprises report certain information about their products
and services, the geographic areas in which they operate, and their major
customers. The Company is currently evaluating the provisions of this Standard.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
No. 132") was issued. This Statement establishes standards for disclosing
information about an entity's pensions and other postretirement benefits. The
Company will adopt SFAS 132 in the year ending October 31, 1999. Adoption of
SFAS 132 is not expected to have a material effect on the Company's disclosures.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
was issued effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company is currently evaluating the impact, if
any, of SFAS No. 133.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), issued in March 1998 and effective for fiscal years
beginning after December 15, 1998 with earlier application permitted, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The SOP is not expected to have a significant impact on the
financial statements of the Company
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"), issued in April
1998 and effective for fiscal years beginning after December 15, 1998 with
earlier application permitted, provides guidance on the financial reporting of
start-up costs and organization costs. The SOP is not expected to have a
significant impact on the financial statements of the Company.
NOTE 3 -- DISCONTINUED OPERATIONS
On July 9, 1996, the Company completed the sale of substantially all of the
issued and outstanding common stock of Shafer Valve for $13,200,000 in cash. The
disposition of this segment resulted in a $9,589,213 loss after tax and has been
accounted for as a discontinued operation.
C-25
<PAGE> 124
Summary operating data of the discontinued operation for the fiscal period
ending July 9, 1996 was as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Sales....................................................... $10,931,052
Gross profit................................................ 2,395,279
Loss before income taxes.................................... (756,391)
Income tax benefit.......................................... 244,238
Net loss from discontinued operations....................... $ (512,153)
</TABLE>
NOTE 4 -- ACQUISITIONS
During fiscal 1997, the Company acquired the entities described below,
which were accounted for by the purchase method of accounting:
On August 29, 1997, the Company acquired substantially all the assets of
C&H Design Company, d.b.a. C&H Die Technology ("C&H") for an aggregate cash
purchase of approximately $10.9 million, including acquisition costs. C&H,
headquartered in Utica, Michigan, provides tool design and build services for
the automotive industry.
On November 1, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of Greenfield Die and Manufacturing Corporation
("Greenfield") for approximately $25.3 million, including acquisition costs,
comprised of approximately $17.3 million of cash and approximately $7.6 million
of assumed liabilities. Greenfield, headquartered in Canton, Michigan, provides
the automotive industry a variety of processes including tool and die design and
build, stamping, assembly, welding, prototyping operations and mold design and
build.
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair value on the dates of acquisitions, as
follows:
<TABLE>
<CAPTION>
C&H GREENFIELD
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net working capital, other than cash........................ $ 3,364 $ 8,018
Property, plant and equipment............................... 2,764 9,801
Goodwill.................................................... 4,805 7,519
------- -------
Purchase price.............................................. $10,933 $25,338
======= =======
</TABLE>
The operating results of these acquired businesses have been included in
the consolidated statement of income from the dates of acquisition.
On the basis of a pro forma consolidation of the results of operations as
if the C&H acquisition had taken place at the beginning of fiscal 1997,
consolidated net sales, net income and earnings per share would have been $288.7
million, $20.2 million and $1.55 per share, respectively, for fiscal 1997. Such
pro forma amounts are not necessarily indicative of what the actual results
would have been if the acquisitions had been effective at the beginning of the
1997 fiscal year and are unaudited.
NOTE 5 -- ACCOUNTS RECEIVABLE:
Accounts receivable in the consolidated balance sheet are expected to be
collected within one year and are net of provisions for doubtful accounts, in
the amount of $919,704 and $849,554 at October 31, 1998 and 1997, respectively.
C-26
<PAGE> 125
NOTE 6 -- INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials............................................. $17,725,301 $14,009,471
Work-in-process........................................... 21,012,774 12,873,380
Finished goods............................................ 7,253,874 5,431,578
----------- -----------
Total at average cost........................... 45,991,949 32,314,429
LIFO reserve.............................................. (1,208,002) (1,166,069)
----------- -----------
Total........................................... $44,783,947 $31,148,360
=========== ===========
</TABLE>
Average cost inventory is net of reserves to reduce certain inventory from
cost to net realizable value. Such reserves aggregated $664,140 and $137,938 at
October 31, 1998 and 1997, respectively. Of the total inventory at average cost
at October 31, 1998 and 1997, $23,234,573 and $21,393,078, respectively, were
valued using the LIFO method.
NOTE 7 -- OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash surrender value of life insurance...................... $3,311,111 $3,242,679
Long-term pension assets.................................... 879,800 --
Other....................................................... 1,078,175 778,112
---------- ----------
Total............................................. $5,269,086 $4,020,791
========== ==========
</TABLE>
NOTE 8 -- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Land.................................................... $ 6,098,992 $ 4,307,018
Buildings and improvements.............................. 87,837,749 69,457,521
Machinery and equipment................................. 180,474,182 136,681,671
Furniture and fixtures.................................. 9,896,521 7,767,319
Construction in progress................................ 31,768,168 30,695,279
------------ ------------
Total, at cost................................ 316,075,612 248,908,808
Less: Accumulated depreciation.......................... (75,635,032) (61,730,042)
------------ ------------
Net property, plant and equipment....................... $240,440,580 $187,178,766
============ ============
</TABLE>
Depreciation expense was $14,861,850, $10,698,783 and $7,145,146 for 1998,
1997 and 1996, respectively.
During the three years ended October 31, 1998, interest costs of
$2,231,993, $1,886,464 and $650,629 were capitalized as part of property, plant
and equipment, respectively.
The Company had commitments for capital expenditures of approximately $24.2
million at October 31, 1998.
C-27
<PAGE> 126
NOTE 9 -- FINANCING ARRANGEMENTS:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Revolving credit loan -- interest at 6.16% at October 31,
1997...................................................... $ -- $3,000,000
---------- ----------
Total............................................. $ -- $3,000,000
========== ==========
</TABLE>
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Revolving credit loan -- interest at 5.85% at October 31,
1998................................................... $130,465,000 $63,000,000
Revolving credit loan -- interest at 6.875% at October
31, 1997............................................... -- 25,000,000
Variable rate industrial development bond, collateralized
by letter of credit, weighted average interest rate at
3.56% payable on February 1, 2010...................... 5,400,000 5,400,000
------------ -----------
$135,865,000 $93,400,000
Less: current portion.................................. -- --
------------ -----------
$135,865,000 $93,400,000
============ ===========
</TABLE>
Prior to January 22, 1998, the Company had a $70.0 million unsecured
revolving credit facility ("Shiloh Facility") with KeyBank National Association
("KeyBank") and Shiloh of Michigan had a $28.0 million credit facility ("Shiloh
of Michigan") with KeyBank. On January 22, 1998, the Company increased the
Shiloh Facility to $135.0 million. The term of the Shiloh Facility extends to
January 31, 2003. The Company has the option to select the applicable interest
rate at KeyBank's prime rate or the LIBOR rate plus a factor determined by a
pricing matrix based on the Company's ratio of Funded Debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"). As of October 31,
1998, the factor as determined by the pricing matrix was 0.35%. The terms of the
agreement also require an annual facility fee as determined by a pricing matrix
based on the Company's ratio of Funded Debt to EBITDA. This annual facility fee
is currently 0.200% of the outstanding loan balance. On January 22, 1998, the
Company used $28 million of the Shiloh Facility to retire the outstanding
balance of the Shiloh of Michigan Facility.
Under the Company's revolving credit facilities, $2,968,000 million was
unused at October 31, 1998.
At October 31, 1998, the scheduled maturities of all long-term debt during
the next five years is a follows:
<TABLE>
<S> <C>
1999........................................................ --
2000........................................................ --
2001........................................................ --
2002........................................................ --
2003 and thereafter......................................... $135,865,000
</TABLE>
In March 1995, Medina County, Ohio issued on the behalf of the Company an
aggregate of $5.4 million in principal amount of variable rate industrial bonds
due 2010, which are secured by the Company with a letter of credit. The funds
from these bonds, in the amount of $5.4 million, were used to finance a portion
of the expansion at the Company's steel pickling operations in Valley City, Ohio
in 1996. The entire $5.4 million of such proceeds was borrowed and outstanding
as of October 31, 1996.
Certain of the debt agreements described above contain various restrictive
covenants which require the Company's various operating subsidiaries to maintain
minimum net worth levels and financial ratios. The
C-28
<PAGE> 127
agreements also place certain restrictions on additional indebtedness and
capital expenditures. Interest paid amounted to $7,322,471, $4,006,614 and
$1,063,938 during 1998, 1997 and 1996, respectively.
NOTE 10 -- LEASES:
The Company leases certain equipment under operating leases. Rent expense
under operating leases for 1998, 1997 and 1996 was $1,154,806, $474,482 and
$274,441, respectively. Future minimum lease payments under operating leases are
as follows at October 31, 1998:
<TABLE>
<CAPTION>
OPERATING
----------
<S> <C>
1999..................................................... $ 834,808
2000..................................................... 521,860
2001..................................................... 421,152
2002..................................................... 184,048
2003..................................................... 56
----------
Total minimum lease payments..................... $1,961,924
==========
</TABLE>
NOTE 11 -- EMPLOYEE BENEFIT PLANS:
The Company maintains pension plans covering most employees. The assets of
the plans consist primarily of insurance and annuity contracts. The assumptions
used to develop net periodic pension cost were as follows: discount rate ranged
from 7.25% to 7.5% for all plans for the three years ended October 31, 1998;
expected long-term rate of return on plan assets ranged from 6.0% to 8.0% for
all plans for the three years ended October 31, 1998; rates of increase in
compensation levels of salaried plans ranged from 4.5% to 5.0% for all plans for
the three years ended October 31, 1998. For the valuation of pension obligations
at the end of 1998, the discount rate for all plans was decreased to 7.25% from
7.5% at the end of 1997.
The components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Service cost for the current period..... $1,120,899 $ 899,753 $ 863,168
Interest cost on projected benefit
obligation............................ 806,801 748,406 651,116
Actual return on assets................. (519,816) (1,141,290) (603,488)
Net amortization and deferrals.......... (168,623) 470,402 90,722
---------- ----------- ----------
$1,239,261 $ 977,271 $1,001,518
========== =========== ==========
</TABLE>
C-29
<PAGE> 128
Employee pension funded status was as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1998 OCTOBER 31, 1997
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested employees....................... $(5,554,617) $(3,077,066) $(6,869,940) $ --
Non-vested employees................... (126,923) (12,802) (197,640) --
----------- ----------- ----------- -----------
Accumulated benefit obligation....... (5,681,540) (3,089,868) (7,067,580) --
Additional benefits based on estimated
future salary levels................. (3,047,205) -- (3,689,779) --
----------- ----------- ----------- -----------
Projected benefit obligation........... (8,728,745) (3,089,868) (10,757,359) --
Plan assets at fair value.............. 8,096,796 2,210,068 10,191,992 --
----------- ----------- ----------- -----------
Funded status........................ (631,949) (879,800) (565,367) --
Unamortized net liability existing at
date of adoption of SFAS 87.......... 632,743 182,205 901,772 --
Unrecognized net experience (loss)
gain................................. 157,673 344,484 277,529 --
Minimum liability...................... -- (1,336,774) -- --
Unrecognized prior service cost........ 114,847 810,085 727,088 --
----------- ----------- ----------- -----------
Pension related asset (liability)...... $ 273,314 $ (879,800) $ 1,341,022 $ --
=========== =========== =========== ===========
</TABLE>
In addition to the defined benefit plans described above, the Company
recorded expense of $1,440,520, $1,292,320 and $1,118,322 during 1998, 1997 and
1996, respectively, with respect to its defined contribution plans.
During 1997, the Company initiated a Supplemental Executive Retirement Plan
("SERP") for key employees of the Corporation. The Corporation has agreed to pay
each covered employee a certain sum annually for ten (10) years upon retirement
or, in the event of death, to their designated beneficiary. A benefit is also
paid if the employee terminates employment (other than by discharge for cause).
Compensation expense relating to this plan was $216,028 and $1,359,000 in fiscal
1998 and 1997 respectively. Total benefits accrued under this plan were
$1,575,028 at October 31, 1998.
The Company provides postretirement health care benefits to certain
employees (and their dependents) who retire early, but coverage generally
continues only until age 65.
The Company's accumulated postretirement benefit obligation ("APBO") is
comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Retirees.................................................... $ (725,081) $ (671,455)
Fully eligible active plan participants..................... (186,938) (240,655)
Other active plan participants.............................. (1,564,324) (1,787,082)
----------- -----------
APBO........................................................ (2,476,343) (2,699,192)
Unrecognized transition liability........................... 401,840 428,450
Unrecognized net loss (gain)................................ 923,684 1,351,676
----------- -----------
Postretirement benefit related liability.................... $(1,150,819) $ (919,066)
=========== ===========
</TABLE>
C-30
<PAGE> 129
The net periodic postretirement benefit cost included the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Service cost of benefits earned............................. $121,174 $124,242
Interest cost on APBO....................................... 168,186 181,827
Amortization of transition liability........................ 26,610 26,610
Net amortization and deferrals.............................. 34,295 50,153
-------- --------
Total............................................. $350,265 $382,832
======== ========
</TABLE>
The assumed health care cost trend rate used in measuring the APBO at
October 31, 1998 was 8.0%, gradually declining to 4.5% in 2001 and remaining at
that level thereafter. A one-percentage point increase in the assumed health
care cost trend rate for each year would increase the APBO by approximately
$472,982 at October 31, 1998 and the postretirement benefit cost by
approximately $5,937 for the year then ended. The actuarial present value of
APBO was determined using a weighted average discount rate of 7.25% at October
31, 1998. The 1998 and 1997 net periodic postretirement benefit cost was
determined using a weighted average discount rate of 7.5% and 8.0%,
respectively.
NOTE 12 -- STOCK AND BONUS PLANS:
1993 KEY EMPLOYEE STOCK INCENTIVE PLAN
The Company maintains a Key Employee Stock Incentive Program (the
"Incentive Plan"), which authorizes grants to officers and other key employees
of the Company and its subsidiaries of (i) stock options that are intended to
qualify as "incentive stock options", (ii) nonqualified stock options and (iii)
restricted stock awards. An aggregate of 1,200,000 shares of common stock,
subject to adjustment upon occurrence of certain events to prevent dilution or
expansion of the rights of participants that might otherwise result from the
occurrence of such events, has been reserved for issuance upon the exercise of
stock options.
Only non-qualified stock options have been granted to date and all at
market price at the date of grant. Options expire over a period not to exceed
ten years from the date of grant. Options granted in 1996, 1997 and 1998 are
exercisable over five years. A summary of option activity under the plan
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES UNDER AVERAGE OPTION
OPTION PRICE
------------ --------------
<S> <C> <C>
Outstanding at November 1, 1995.......................... 91,400 $ 11.00
Granted................................................ 160,000 $ 16.50
Exercised.............................................. -- --
Canceled............................................... -- --
Outstanding at October 31, 1996.......................... 251,400 $ 14.50
Granted................................................ -- --
Exercised.............................................. (27,100) $ 11.00
Canceled............................................... (2,500) $ 16.50
Outstanding at October 31, 1997.......................... 221,800 $ 14.91
Granted................................................ 138,500 $18.625
Exercised.............................................. (41,800) $ 12.72
Canceled............................................... (4,000) $18.625
Outstanding at October 31, 1998.......................... 314,500 $ 16.78
</TABLE>
Exercise prices for options outstanding as of October 31, 1998 ranged from
$11.00 to $18.625, with 91% of options outstanding having exercise prices in the
range of $16.50 to $18.625 per share.
C-31
<PAGE> 130
In accordance with the provisions of SFAS No. 123, the Company has elected
to continue applying the intrinsic value approach under APB 25 in accounting for
its stock-based compensation plans. Accordingly, the Company does not recognize
compensation expense for stock options when the stock price at the grant date is
equal to or greater than the fair market value of the stock at that date.
SFAS No. 123 requires pro forma information on net income and earnings per
share as if the fair value method for valuing stocks options, as prescribed by
SFAS No. 123, had been applied. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net Income.................................................. $14,776 $19,273
Earnings per share:
Basic..................................................... 1.13 1.48
Diluted................................................... 1.13 1.48
</TABLE>
The fair value of these options was estimated at the date of grant using
the Black-Sholes option-pricing model with the following weighted average
assumptions for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Risk-free interest.......................................... 6.10% 6.10%
Dividend yield.............................................. 0.00% 0.00%
Volatility factor -- market................................. 26.00% 26.00%
Expected life of options -- years........................... 4.0 4.0
</TABLE>
EXECUTIVE INCENTIVE BONUS PLAN
In 1996, the Company replaced the Executive Bonus Plan with the Short-Term
Incentive Plan (the "Bonus Plan") which provides annual incentive bonuses to its
eligible employees. The Bonus Plan provides for an aggregate annual bonus pool
(the "Aggregate Amount") equal to 5% of the Company's operating earnings.
Incentives up to the Aggregate Amount may be paid to the individual
participants, in the case of the Chief Executive Officer, by the Board of
Directors upon recommendation by the Compensation Committee and the Board of
Directors. In determining the individual incentives, in the case of the Chief
Executive Officer, 75% of the incentive depends upon meeting the corporate goal
for return on equity and 25% of the incentive depends upon meeting specific,
project-oriented goals. These goals are established by the Board of Directors.
In the case of corporate executives eligible for the Bonus Plan, 65% of the
incentive depends upon meeting the goal for return on equity and 35% of the
incentive depends upon specific goals established by the Chief Executive
Officer. Finally, in the case of the remaining employees eligible for the Bonus
Plan, 50% of the incentive depends upon meeting the goal for operating return on
assets established by the Chief Executive Officer and 50% of the incentive
depends upon specific goals as established by the Chief Executive Officer.
During fiscal 1998, 1997 and 1996, amounts of $1,089,000, $750,038 and $516,600,
respectively, were paid under the existing bonus plan for performance during the
previous fiscal year.
C-32
<PAGE> 131
NOTE 13 -- INCOME TAXES:
The components of the provision for income taxes on income from continuing
operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.................................. $4,377,388 $ 7,276,000 $ 8,570,579
State and local.......................... 959,841 1,588,954 1,091,678
---------- ----------- -----------
5,337,229 8,864,954 9,662,257
Deferred................................... 4,335,709 2,809,839 1,290,012
---------- ----------- -----------
Total............................ $9,672,938 $11,674,793 $10,952,269
========== =========== ===========
</TABLE>
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:........................................ $ 310,158 $ 324,135
Bad debt reserves......................................... 902,904 306,828
Inventory reserves........................................ 1,238,766 1,173,166
State income and franchise taxes.......................... 313,902 224,668
Accrued group insurance Personal.......................... 76,812 561,996
property tax reserves..................................... 455,852 397,243
Accrued vacation reserves................................. 4,912,050 4,912,050
Capital loss carryforwards................................ 384,892 297,813
Post retirement benefits.................................. 321,194 --
Pension obligations....................................... 241,320 162,155
------------ ------------
Other reserves............................................ 9,157,850 8,360,054
------------ ------------
Less: Valuation allowance................................... (4,912,050) (4,912,050)
------------ ------------
Total deferred tax assets................................... 4,245,800 3,448,004
Deferred tax liabilities:
Fixed assets.............................................. (15,226,348) (11,295,229)
Pension asset............................................. -- (11,416)
Mark to market............................................ (610,509) (725,649)
Joint venture investment.................................. (1,266,234) (256,229)
Goodwill.................................................. (397,183) (96,255)
Other..................................................... (18,009) --
------------ ------------
Net deferred tax liability.................................. $(13,272,483) $ (8,936,774)
============ ============
</TABLE>
The valuation allowance relates to capital loss carryforwards which are not
expected to be utilized.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal income tax at statutory rate........................ 35.0% 35.0% 35.0%
State and local income taxes................................ 3.2 1.8 3.0
Nondeductible goodwill amortization......................... -- -- --
Other....................................................... 0.2 -- 0.5
---- ---- ----
Effective income tax rate................................. 38.4% 36.8% 38.5%
==== ==== ====
</TABLE>
C-33
<PAGE> 132
Income taxes paid amounted to $6,372,737, $8,757,066 and $10,942,558 for
the years 1998, 1997, and 1996, respectively.
At October 31, 1998, the Company had available a capital loss carryforward
of approximately $12,791,797, expiring in 2001, if not utilized. The capital
loss was incurred on the sale of Shafer Valve and a full valuation allowance has
been provided.
NOTE 14 -- RELATED PARTY TRANSACTIONS:
The Company had sales to a significant shareholder of $6,564,094,
$7,042,217 and $5,360,341 for the years 1998, 1997 and 1996, respectively. At
October 31, 1998 and 1997, the Company had receivable balances of $1,322,785 and
$1,091,495 respectively, due from this shareholder.
NOTE 15 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------------------
FIRST SECOND THIRD FOURTH
OCTOBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues............................................ $73,930 $82,038 $64,368 $79,015
Gross Profit........................................ 15,028 17,158 12,139 12,526
Operating Income.................................... 8,891 10,373 5,657 5,097
Net Income.......................................... 4,925 5,838 2,984 1,794
Net Income per Share (Basic/Diluted)................ .38 .45 .23 .14
------- ------- ------- -------
Weighted Average Number of Shares
Basic............................................. 13,039 13,045 13,078 13,081
Diluted........................................... 13,088 13,120 13,126 13,098
OCTOBER 31, 1997
- ----------------
Revenues............................................ $64,568 $70,689 $65,460 $72,444
Gross Profit........................................ 12,577 15,102 14,276 16,863
Operating Income.................................... 7,252 8,986 7,556 9,467
Net Income.......................................... 4,530 5,437 4,649 5,477
Net Income per Share (Basic/Diluted)................ .35 .42 .36 .42
------- ------- ------- -------
Weighted Average Number of Shares
Basic............................................. 13,013 13,039 13,039 13,039
Diluted........................................... 13,040 13,058 13,087 13,082
</TABLE>
NOTE 16 -- COMMITMENTS AND CONTINGENT LIABILITIES:
The Company is a party to several lawsuits and claims arising in the normal
course of its business. In the opinion of management, the Company's liability or
recovery, if any, under pending litigation and claims would not materially
affect its financial condition, results of operations or cash flows.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information with respect to Directors of the Company is set forth in the
Proxy Statement on pages 2 through 3 under the heading "Election of Directors,"
which information is incorporated herein by reference. Information
C-34
<PAGE> 133
regarding the executive officers of the Company is included as Item 4A of Part I
of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b)
of Regulation S-K. Information required by Item 405 of Regulation S-K is set
forth in the Proxy Statement on page 7 under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance," which information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the
Proxy Statement on pages 8 through 10 under the heading "Compensation of
Executive Officers" and on page 2 under the heading "Election of Directors,"
which information is incorporated herein by reference (except for the
Compensation Committee Report on Executive Compensation and the Comparative
Stock Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is set forth in the Proxy Statement on pages 5 through 7 under
the heading "Beneficial Ownership of Common Stock," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is set forth in the Proxy Statement on page 4 under the heading "Election of
Directors -- Compensation Committee Interlocks and Insider Participation and
Certain Relationships and Related Transactions," which information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Financial Statements.
Report of Independent Accountants.
Consolidated Balance Sheet at October 31, 1998 and 1997.
Consolidated Statements of Income for the three years ended October
31, 1998.
Consolidated Statements of Cash Flows for the three years ended
October 31, 1998.
Consolidated Statements of Stockholders' Equity for the three years
ended October 31, 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules. The following consolidated financial
statement schedules of the Company and its subsidiaries and the
report of independent accountants thereon are filed as part of this
Annual Report on Form 10-K and should be read in conjunction with
the consolidated financial statements of the Company and its
subsidiaries included in the Annual Report on Form 10-K:
SCHEDULES
Financial Statement Schedule II.
Valuation and Qualifying Accounts and Reserves.
C-35
<PAGE> 134
SCHEDULE II
SHILOH INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Valuation account for accounts receivable
Year ended October 31, 1998.............. $ 849,554 $ 106,549 $36,399 $ 919,704
Year ended October 31, 1997.............. 913,070 5,452 68,968 849,554
Year ended October 31, 1996.............. 1,105,068 34,600 226,598 913,070
Reserve for excess, slow moving and
potentially obsolete material Year ended
October 31, 1998......................... $ 137,938 $ 589,140 $62,938 $ 664,140
Year ended October 31, 1997.............. 82,181 137,938 82,181 137,938
Year ended October 31, 1996.............. 482,368 82,181 482,368 82,181
Valuation allowance for deferred tax assets
(a) Year ended October 31, 1998.......... $4,912,050 $ -- $ -- $4,912,050
Year ended October 31, 1997.............. 5,046,335 -- 134,285 4,912,050
Year ended October 31, 1996.............. 92,941 5,046,335 92,941 5,046,335
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
C-36
<PAGE> 135
3. EXHIBITS:
<TABLE>
<S> <C>
2.1 Stock Purchase Agreement, dated May 22, 1996, by and between
the Company and Bettis Corporation is incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K filed July 24, 1996 (Commission File No. 0-21964)
2.2 Asset Purchase Agreement, dated September 6, 1996, among
Greenfield Acquisition, Inc., Greenfield Die & Manufacturing
Corp. and 3-D Engineering, Inc. is incorporated herein by
reference to Exhibit 2.2 of the Company's Current Report on
Form 8-K filed July 24, 1996 (Commission File No. 0-21964)
3.1(i) Restated Certificate of Incorporation of the Company is
incorporated herein by reference to Exhibit 3.1(i) of the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1995 (Commission File No. 0-21964)
(ii) By-Laws of the Company are incorporated herein by reference
to Exhibit 3.1(ii) of the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995 (Commission
File No. 0-21964)
4.1 Specimen certificate for the Common Stock, par value $.01
per share, of the Company is incorporated herein by
reference to Exhibit 4.1 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995
(Commission File No. 0-21964)
4.2 Stockholders Agreement, dated June 22, 1993, by and among
the Company, MTD Products Inc. and the stockholders named
therein is incorporated herein by reference to Exhibit 4.2
of the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 (Commission File No. 0-21964)
4.3 Registration Rights Agreement, dated June 22, 1993, by and
among the Company, MTD Products Inc and the stockholders
named therein is incorporated herein by reference to Exhibit
4.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1995 (Commission File No.
0-21964)
4.4 First Amendment to Stockholders Agreement, dated March 11,
1994, by and among the Company, MTD Products Inc and the
stockholders named therein is incorporated herein by
reference to Exhibit 4.4 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995
(Commission File No. 0-21964)
10.1 Credit Agreement, dated as of January 22, 1998 by and among
Shiloh Industries, Inc., Shiloh of Michigan L.L.C., the
Banks listed on Annex A thereto and KeyBank National
Association, as Agent is incorporated herein by reference to
Exhibit 10 of the Company's Quarterly Report or Form 10-Q
for the fiscal quarter ended January 31, 1998 (Commission
File No. 0-21964)
10.2 Guaranty of Payment, dated April 16, 1996, by the Company in
favor of the Banks named therein (with an attached schedule
identifying the other subsidiaries of the Company that have
entered into an identical agreement) is incorporated herein
by reference to Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30,
1996 (Commission File No. 0-21964)
10.3 Loan Agreement, dated February 1, 1995, by and between
Medina County, Ohio and Valley City Steel Company is
incorporated herein by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended April 30, 1996 (Commission File No. 0-21964)
10.4 Operating Agreement for Shiloh of Michigan, L.L.C., dated
January 2, 1996, by and among Shiloh of Michigan, L.L.C.,
Rouge Steel Company and the Company is incorporated herein
by reference t o Exhibit 10.5 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30,
1996 (Commission File No. 0-21964)
10.5 Master Unsecured Demand Promissory Note of Shiloh
Corporation to The Richland Trust Company of Mansfield,
dated April 2, 1991, is incorporated herein by reference to
Exhibit 10.7 of the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1995 (Commission File No.
0-21964).
</TABLE>
C-37
<PAGE> 136
<TABLE>
<S> <C>
*10.6 1993 Key Employee Stock Incentive Plan, as amended, is
incorporated herein by reference to Exhibit A of the
Company's Proxy Statement on Schedule 14A for the fiscal
year ended October 31, 1997 (Commission File No. 0-21964).
*10.7 Executive Incentive Bonus Plan is incorporated herein by
reference to Exhibit 10.9 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995
(Commission File No. 0-21964).
*10.8 Indemnification Agreement, dated July 2, 1993, by and
between the Company and Robert L. Grissinger (with an
attached schedule identifying the directors and officers of
the Company that have entered into an identical agreement)
is incorporated herein by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (Commission File No. 0-21964).
*10.9 Option Agreement, dated May 28, 1993, by and between the
Company and Robert L. Grissinger (with an attached schedule
identifying the other optionees that have entered into
option agreements with the Company) is incorporated herein
by reference to Exhibit 10.15 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995
(Commission File No. 0-21964).
10.10 Master Unsecured Demand Promissory Note of Shiloh
Corporation to The Richland Trust Company of Mansfield,
dated December 6, 1996 is incorporated herein by reference
to Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q/A for the fiscal quarter ended January 1, 1997
(Commission File No. 0-21964).
*10.11 Supplemental Retirement Trust Agreement, dated June 1, 1997,
by and among the Company, First Union National Bank of North
Carolina and Robert L. Grissinger is incorporated herein by
reference to Exhibit 10.15 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1997
(Commission File No. 0-21964).
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
October 31, 1998.
- ---------------
* Reflects management contract or other compensatory arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this Report.
C-38
<PAGE> 137
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SHILOH INDUSTRIES, INC.
By: /s/ ROBERT L. GRISSINGER
------------------------------------
Robert L. Grissinger
Chairman, President and
Chief Executive Officer
DATE: JANUARY 29, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Vice Chairman and Director January 29, 1999
- ------------------------------------------------
Dominick C. Fanello
/s/ ROBERT L. GRISSINGER Chairman, President and Director January 29, 1999
- ------------------------------------------------ (Principal Executive Officer)
Robert L. Grissinger
* Treasurer and Chief Financial January 29, 1999
- ------------------------------------------------ Officer (Principal Accounting and
Craig A. Stacy Principal Financial Officer)
* Director January 29, 1999
- ------------------------------------------------
James C. Fanello
* Director January 29, 1999
- ------------------------------------------------
Curtis E. Moll
* Director January 29, 1999
- ------------------------------------------------
Dieter Kaesgen
* Director January 29, 1999
- ------------------------------------------------
David J. Hessler
* Director January 29, 1999
- ------------------------------------------------
Richard S. Gray
* Director January 29, 1999
- ------------------------------------------------
James A. Karman
* Director January 29, 1999
- ------------------------------------------------
Theodore K. Zampetis
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this Annual
Report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and Directors of the Company and filed with the
Securities and Exchange Commission on behalf of such officers and Directors.
By: /s/ ROBERT L. GRISSINGER
----------------------------------
Robert L. Grissinger
Attorney-in-Fact
C-39
<PAGE> 138
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <S>
2.1 Stock Purchase Agreement, dated May 22, 1996, by and between
the Company and Bettis Corporation is incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K filed July 24, 1996 (Commission File No. 0-21964).
2.2 Asset Purchase Agreement, dated September 6, 1996, among
Greenfield Acquisition, Inc., Greenfield Die & Manufacturing
Corp. and 3-D Engineering, Inc. is incorporated herein by
reference to Exhibit 2.2 of the Company's Current Report on
Form 8-K filed July 24, 1996 (Commission File No. 0-21964).
3.1(i) Restated Certificate of Incorporation of the Company is
incorporated herein by reference to Exhibit 3.1(i) of the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1995 (Commission File No. 0-21964).
(ii) By-Laws of the Company are incorporated herein by reference
to Exhibit 3.1(ii) of the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995 (Commission
File No. 0-21964).
4.1 Specimen certificate for the Common Stock, par value $.01
per share, of the Company is incorporated herein by
reference to Exhibit 4.1 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995
(Commission File No. 0-21964).
4.2 Stockholders Agreement, dated June 22, 1993, by and among
the Company, MTD Products Inc. and the stockholders named
therein is incorporated herein by reference to Exhibit 4.2
of the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 (Commission File No. 0-21964).
4.3 Registration Rights Agreement, dated June 22, 1993, by and
among the Company, MTD Products Inc and the stockholders
named therein is incorporated herein by reference to Exhibit
4.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1994 (Commission File No.
0-21964).
4.4 First Amendment to Stockholders Agreement, dated March 11,
1994, by and among the Company, MTD Products Inc and the
stockholders named therein is incorporated herein by
reference to Exhibit 4.4 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995
(Commission File No. 0-21964).
10.1 Credit Agreement, dated as of January 22, 1998 by and among
Shiloh Industries, Inc., Shiloh of Michigan L.L.C., the
Banks listed on Annex A thereto and KeyBank National
Association, as Agent is incorporated herein by reference to
Exhibit 10 of the Company's Quarterly Report or Form 10-Q
for the fiscal quarter ended January 31, 1998 (Commission
File No. 0-21964).
10.2 Guaranty of Payment, dated April 16, 1996, by the Company in
favor of the Banks named therein (with an attached schedule
identifying the other subsidiaries of the Company that have
entered into an identical agreement) is incorporated herein
by reference to Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30,
1996 (Commission File No. 0-21964).
10.3 Loan Agreement, dated February 1, 1995, by and between
Medina County, Ohio and Valley City Steel Company is
incorporated herein by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended April 30, 1996 (Commission File No. 0-21964).
10.4 Operating Agreement for Shiloh of Michigan, L.L.C., dated
January 2, 1996, by and among Shiloh of Michigan, L.L.C.,
Rouge Steel Company and the Company is incorporated herein
by reference to Exhibit 10.5 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30,
1996 (Commission File No. 0-21964).
</TABLE>
X-1
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <S>
10.5 Master Unsecured Demand Promissory Note of Shiloh
Corporation to The Richland Trust Company of Mansfield,
dated April 2, 1991, is incorporated herein by reference to
Exhibit 10.7 of the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1995 (Commission File No.
0-21964).
10.6 1993 Key Employee Stock Incentive Plan is incorporated
herein by reference to Exhibit A of the Company's Proxy
Statement on Schedule 14A for the fiscal year ended October
31, 1997 (Commission File No. 0-21964).
10.7 Executive Incentive Bonus Plan is incorporated herein by
reference to Exhibit 10.9 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995
(Commission File No. 0-21964).
10.8 Indemnification Agreement, dated July 2, 1993, by and
between the Company and Robert L. Grissinger (with an
attached schedule identifying the directors and officers of
the Company that have entered into an identical agreement)
is incorporated herein by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (Commission File No. 0-21964).
10.9 Option Agreement, dated May 28, 1993, by and between the
Company and Robert L. Grissinger (with an attached schedule
identifying the other optionees that have entered into
option agreements with the Company) is incorporated herein
by reference to Exhibit 10.15 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995
(Commission File No. 0-21964).
10.10 Master Unsecured Demand Promissory Note of Shiloh
Corporation to The Richland Trust Company of Mansfield,
dated December 6, 1996 is incorporated herein by reference
to Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q/A for the fiscal quarter ended January 1, 1997
(Commission File No. 0-21964).
10.11 Supplemental Retirement Trust Agreement, dated June 1, 1997,
by and among the Company, First Union National Bank of North
Carolina and Robert L. Grissinger is incorporated herein by
reference to Exhibit 10.15 of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1997
(Commission File No. 0-21964).
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
X-2
<PAGE> 140
APPENDIX D
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21964
SHILOH INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 51-0347683
(STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUITE 202, 103 FOULK ROAD, WILMINGTON, DELAWARE 19803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (302) 998-0592
(Former name, former address and former fiscal year, if changed since last
report) -- N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of June 11, 1999 was
13,080,563 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D-1
<PAGE> 141
SHILOH INDUSTRIES, INC.
INDEX
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets......................... D-3
Consolidated Statements of Income................... D-4
Consolidated Statements of Cash Flows............... D-5
Notes to Consolidated Financial Statements.......... D-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. D-8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... D-13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security-Holders.......................................... D-13
Item 6. Exhibits and Reports on Form 8-K.................... D-14
</TABLE>
D-2
<PAGE> 142
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SHILOH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
APRIL 30, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 5,567,278 $ 642,723
Accounts receivable......................................... 65,165,388 46,802,379
Inventories, net............................................ 41,210,115 44,783,947
Deferred income taxes....................................... 1,290,357 1,290,357
Prepaid expenses............................................ 3,732,914 3,543,716
------------ ------------
Total current assets.............................. 116,966,052 97,063,122
------------ ------------
Property, plant and equipment, net.......................... 251,501,196 240,440,580
Goodwill.................................................... 11,851,775 12,056,054
Other assets................................................ 5,646,753 5,269,086
------------ ------------
Total assets...................................... $385,965,776 $354,828,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 25,674,192 $ 23,863,107
Short-term debt............................................. 16,230,000 --
Accrued income taxes........................................ 3,867,945 1,020,204
Advanced billings........................................... 2,324,767 2,836,203
Other accrued expenses...................................... 17,104,088 12,983,892
------------ ------------
Total current liabilities......................... 65,200,992 40,703,406
------------ ------------
Long-term debt.............................................. 135,975,000 135,865,000
Deferred income taxes....................................... 14,562,840 14,562,840
Long-term pension liability................................. 879,800 879,800
Other liabilities........................................... 485,173 --
------------ ------------
Total liabilities................................. 217,103,805 192,011,046
Stockholders' equity Common stock........................... 130,805 130,805
Paid-in capital........................................... 39,399,805 39,399,805
Retained earnings......................................... 129,331,361 123,287,186
------------ ------------
Total stockholders' equity........................ 168,861,971 162,817,796
------------ ------------
Total liabilities and stockholders' equity........ $385,965,776 $354,828,842
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-3
<PAGE> 143
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, SIX MONTHS ENDED APRIL 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 89,564,775 $ 82,037,736 $171,165,878 $155,967,744
Cost of sales..................... 73,283,884 64,879,401 142,488,037 123,781,699
------------ ------------ ------------ ------------
Gross Profit...................... 16,280,891 17,158,335 28,677,841 32,186,045
Selling, general and
administrative expenses......... 8,088,631 6,785,455 15,802,562 12,922,242
Operating income.................. 8,192,260 10,372,880 12,875,279 19,263,803
------------ ------------ ------------ ------------
Interest expense.................. 1,790,382 1,080,071 3,487,806 2,075,146
Interest income................... 25,203 53,972 81,069 58,233
Minority interest................. 112,743 47,455 335,023 130,041
Other income (expense), net....... (13,671) 83,594 24,362 95,468
------------ ------------ ------------ ------------
Income before income taxes........ 6,526,153 9,477,830 9,827,927 17,472,399
Provision for income taxes........ 2,512,566 3,639,487 3,783,752 6,709,401
------------ ------------ ------------ ------------
Net income........................ $ 4,013,587 $ 5,838,343 $ 6,044,175 $ 10,762,998
============ ============ ============ ============
Basic earnings per share:
Net income...................... $ .31 $ .45 $ .46 $ .83
Weighted average number of
common shares:............... 13,080,563 13,045,579 13,080,563 13,042,115
Diluted earnings per share:
Net income...................... $ .31 $ .45 $ .46 $ .82
Weighted average number of
common shares:............... 13,085,317 13,122,257 13,086,868 13,100,819
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE> 144
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30,
---------------------------
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 6,044,175 $10,762,998
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................. 8,921,005 7,288,786
Minority interest......................................... (335,023) (130,041)
Loss (gain) on sale of assets............................. (472,016) 785
Changes in operating assets and liabilities:
Accounts receivable....................................... (18,363,009) (1,586,034)
Inventories............................................... 3,573,832 1,758,167
Prepaids and other assets................................. (231,841) 81,211
Payables and accruals..................................... 5,905,018 (91,529)
Accrued income taxes...................................... 2,847,741 2,658,310
------------ -----------
Net cash provided by operating activities................. 7,889,882 20,742,653
------------ -----------
Cash Flows From Investing Activities:
Capital expenditures...................................... (30,564,038) (41,226,119)
Proceeds from sale of assets.............................. 11,258,711 --
------------ -----------
Net cash used in investing activities..................... (19,305,327) (41,226,119)
------------ -----------
Cash Flows From Financing Activities:
Proceeds from short-term borrowings....................... 30,040,000 --
Repayments of short-term borrowings....................... (13,810,000) (3,000,000)
Proceeds from long-term borrowings........................ 4,110,000 24,000,000
Repayments of long-term borrowings........................ (4,000,000) --
Issuance of common stock.................................. -- 339,063
------------ -----------
Net cash provided by financing activities................. 16,340,000 21,339,063
------------ -----------
Net increase in cash and cash equivalents................... 4,924,555 855,597
Cash and cash equivalents at beginning of period............ 642,723 191,688
------------ -----------
Cash and cash equivalents at end of period.................. $ 5,567,278 $ 1,047,285
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION AND BUSINESS:
The condensed consolidated financial statements have been prepared by
Shiloh Industries, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. The information
furnished in the condensed consolidated financial statements includes normal
recurring adjustments and reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of such financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's 1998 Annual Report to
Stockholders.
Revenues and operating results for the six months ended April 30, 1999 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2 -- INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials............................................... $17,453,506 $17,725,301
Work-in-process............................................. 17,460,206 21,012,774
Finished goods.............................................. 7,564,405 7,253,874
----------- -----------
Total at average cost............................. 42,478,117 45,991,949
LIFO reserve................................................ (1,268,002) (1,208,002)
----------- -----------
Total............................................. $41,210,115 $44,783,947
=========== ===========
</TABLE>
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Land........................................................ $ 6,749,752 $ 6,098,992
Buildings and improvements.................................. 87,994,167 87,837,749
Machinery and equipment..................................... 173,103,870 180,474,182
Furniture and fixtures...................................... 10,287,709 9,896,521
Construction in progress.................................... 56,747,347 31,768,168
------------ ------------
Total, at cost.................................... 334,882,845 316,075,612
Less: Accumulated depreciation.............................. (83,381,649) (75,635,032)
------------ ------------
Net property, plant and equipment......................... $251,501,196 $240,440,580
============ ============
</TABLE>
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NOTE 4 -- FINANCING ARRANGEMENTS:
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Short-term debt consists of the following:
Revolving credit loan -- interest at 6.04% at April 30,
1999................................................... $ 16,230,000 --
------------ ------------
Long-term debt consists of the following:
Revolving credit loan -- interest at 5.28% at April 30,
1999................................................... 130,575,000 $130,465,000
Variable rate industrial development bond, secured by
letter of credit, weighted average interest rate at
3.10% payable on February 1, 2010...................... 5,400,000 5,400,000
------------ ------------
Total Long-term debt.............................. 135,975,000 135,865,000
------------ ------------
Total............................................. $152,205,000 $135,865,000
============ ============
</TABLE>
Prior to January 22, 1998, the Company had a $70.0 million unsecured
revolving credit facility ("Shiloh Facility") with KeyBank National Association
("KeyBank") and Shiloh of Michigan had a $28.0 million credit facility ("Shiloh
of Michigan Facility") with KeyBank. On January 22, 1998, the Company increased
the Shiloh Facility to $135.0 million. The term of the Shiloh Facility extends
to January 31, 2003. The Company has the option to select the applicable
interest rate at KeyBank's prime rate or the LIBOR rate plus a factor determined
by a pricing matrix based on the Company's ratio of Funded Debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). As of April
30, 1999, the factor as determined by the pricing matrix was 0.4%. The terms of
the agreement also require an annual facility fee as determined by a pricing
matrix based on the Company's ratio of Funded Debt to EBITDA. This annual
facility fee is currently 0.225% of the outstanding loan balance. On January 22,
1998, the Company used $28 million of the Shiloh Facility to retire the
outstanding balance of the Shiloh of Michigan Facility. On December 28, 1998 the
Company amended the existing facility with KeyBank to include an additional
$35.0 million that expired on April 30, 1999. The $35.0 million amendment was
increased to $45.0 million on April 30, 1999 and expires on July 31, 1999, at
which time the Company will enter into discussions for a new arrangement with
KeyBank. There can be no assurance that the Company will enter into any such
arrangement and, if entered, there can be no assurance that the terms of any
such arrangement will be satisfactory to the Company.
In March 1995, Medina County, Ohio issued on the behalf of the Company an
aggregate of $5.4 million in principal amount of variable rate interest bonds
due 2010, which are collateralized by the Company with a letter of credit. The
funds from these bonds, in the amount of $5.4 million, were used to finance a
portion of the expansion at the Company's steel pickling operations in Valley
City, Ohio in 1996. The entire $5.4 million of such proceeds was outstanding as
of April 30, 1999.
Certain of the debt agreements described above contain various restrictive
covenants which, among other things, require the Company's various operating
subsidiaries to maintain minimum net worth levels and financial ratios. The
agreements also place certain restrictions on additional indebtedness and
capital expenditures. As of April 30, 1999, the Company was in compliance with
the applicable covenants under its debt agreements.
Total availability under the Company's unsecured lines of credit and
revolving credit facilities is $184.0 million, $31.8 million of which was unused
at April 30, 1999.
NOTE 5 -- OTHER INFORMATION:
During the six months ended April 30, 1999 and 1998, cash payments for
interest amounted to $3.9 million and $2.1 million respectively, while cash
payments, net of refunds, for income taxes amounted to $0.7 and $4.1 million,
respectively. The provision for income taxes was $3.8 million for the first six
months of fiscal 1999 compared with $6.7 million for the comparable period in
fiscal 1998, representing effective tax rates of 38.5% and 38.4%, respectively.
The Company's non-qualified stock option plan, adopted in May 1993,
provides for granting officers and employees of the Company options to acquire
an aggregate of 1,200,000 shares at an exercise price equal to
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100% of market price on the date of grant. During the second quarter of fiscal
1999, no stock options were granted or exercised.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is an integrated steel processor that supplies blanks,
stampings and processed steel as well as designs and builds tools and dies for
the automotive and other industries. The Company currently provides a broad
range of intermediate steel processing services, which include: (i) blanking and
stamping; and (ii) other steel processing services (which include pickling hot
rolled steel, slitting, edge trimming, roller leveling and cutting to length of
both hot and cold rolled steel). The Company operates through ten subsidiaries,
Shiloh Corporation, Valley City Steel Company, The Sectional Die Company, Medina
Blanking, Inc. ("Medina Blanking"), Sectional Stamping, Inc.("Sectional
Stamping"), Liverpool Coil Processing, Inc., Shiloh of Michigan, L.L.C., the
Company's joint venture with Rouge Steel Company, Greenfield Die & Manufacturing
Company ("Greenfield"), C&H Design Company, d.b.a. C&H Die Technology and
Jefferson Blanking, Inc.("Jefferson Blanking").
The Company typically experiences decreased revenue and operating income
during the first fiscal quarter of each year, usually resulting from generally
slower overall automobile production during the winter months. The revenues and
operating income in the third fiscal quarter can also be affected by the
typically lower automobile production activities in July due to manufacturers'
changeover in production lines.
In analyzing the financial aspects of the Company's steel processing
operations, a number of factors must be considered. First, plant utilization
levels are very important to profitability because of the capital intensive
nature of these operations. Because the Company performs a number of different
processing operations, however, it is not meaningful to analyze simply the total
tons of steel processed. For example, blanking and stamping involve more
operational processes, from the design and manufacture of tools and dies to the
production and packaging of the final product, than the Company's other steel
processing services and therefore generally have higher margins. Second, a
significant portion of the Company's steel processing products and services is
provided to the customers on a toll processing basis. Under these arrangements,
the Company charges a specified toll processing fee for the processing
operations performed without acquiring ownership of the steel and being burdened
with the attendant costs of ownership and risk of loss. Although the proportion
of tons processed by the Company that are directly owned and toll processed may
fluctuate from quarter to quarter primarily based on the customers for which the
Company is providing services during the period, the Company estimates that
during the past three years approximately 87.4%, 87.2% and 85.9%, respectively,
of total tons processed were on a toll processing basis. Revenues from
operations involving directly owned steel include a component of raw material
cost whereas toll processing revenues do not, consequently, toll processing
generally results in lower gross profit, but higher gross margin, than directly
owned steel processing. Therefore, an increase in the proportion of total
revenues attributable to directly owned steel processing may result in higher
revenues and gross profits but lower gross margins. The Company's blanking and
stamping operations use more directly owned steel than do its other steel
processing operations. In addition, changes in the price of steel can impact the
Company's results of operations because raw material costs are by far the
largest component of cost of sales in processing directly owned steel.
RESULTS OF OPERATIONS
Three Months Ended April 30, 1999
Compared to Three Months Ended April 30, 1998
Revenues. Revenues increased by $7.5 million, or 9.2%, to $89.6 million for
the second quarter of fiscal 1999 from $82.0 million for the comparable period
in fiscal 1998. The increase in revenue is primarily due to Sectional Stamping's
increased volumes primarily as a result of increased production from three
customers, increased tailor welded blanking revenue at Medina Blanking,
increased tool and die sales at Greenfield and the inclusion of Jefferson
Blanking which was not operational during the second quarter of 1998. Revenues
from blanking and stamping increased 14.7% while revenue from other steel
processing operations decreased 8.3%, for the second quarter of fiscal 1999,
from the comparable period in fiscal 1998. The percentage of revenue from
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directly owned steel processed decreased to 70.6% for the second quarter of
fiscal 1999 from 72.0% for the comparable period in fiscal 1998. The percentage
of revenues from toll processed steel increased to 29.4% for the second quarter
of fiscal 1999 from 28.0% for the comparable period in fiscal 1998. This shift
in the mix of revenue from directly owned steel processing to more toll
processing resulted from a shift in customer orders for the quarter.
Gross Profit. Gross profit decreased by $0.9 million, or 5.1%, to $16.3
million for the second quarter of fiscal 1999 from $17.2 million for the
comparable period in fiscal 1998. Gross margin decreased to 18.2% for the second
quarter of fiscal 1999 from 20.9% for the comparable period in fiscal 1998. The
decline in gross margin is attributed to four primary factors: decreased scrap
sales resulting from an approximate 36% decrease in the scrap price per gross
ton from the second quarter of fiscal 1998 to the comparable period in fiscal
1999, increased depreciation resulting from increased capital expenditures,
start-up costs on several new programs and lower margin on certain tool and die
projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 19.2% to $8.1 million for the second quarter
of fiscal 1999 from $6.8 million for the comparable period in fiscal 1998. As a
percentage of revenues, selling, general and administrative expenses increased
to 9.0% for the second quarter of fiscal 1999 from 8.3% for the comparable
period in fiscal 1998. The increase, in dollars, was the result of increased
corporate staffing and professional fees associated with the negotiation of two
union contracts and inclusion of Jefferson Blanking which was not operational
during the second quarter of fiscal 1998.
Other. The Company incurred interest expense of $1.8 million in the second
quarter of fiscal 1999 compared to $1.1 million of interest expense in the
comparable period of fiscal 1998. This increase is due primarily to increased
average borrowings. Interest expense of approximately $0.5 million relating to
the expansion of several facilities was capitalized during the second quarter of
fiscal 1999. The provision for income taxes was $2.5 million in the second
quarter of fiscal 1999 compared with $3.6 million for the comparable period in
fiscal 1998, representing effective tax rates of 38.5% and 38.4%, respectively.
Net Income. Net income from continuing operations for the second quarter of
fiscal 1999 decreased by $1.8 million, or 31.3%, to $4.0 million from $5.8
million for the comparable period in fiscal 1998. This decrease was the result
of decreased scrap sales as a result of a lower market price for scrap steel,
lower margins on certain tool and die projects, higher interest expense
resulting from a higher average level of debt and increased depreciation
resulting from increased capital expenditures.
Six Months Ended April 30, 1999
Compared to Six Months Ended April 30, 1998
Revenues. Revenues increased by $15.2 million, or 9.7%, to $171.2 million
for the first six months of fiscal 1998 from $156.0 million for the comparable
period in fiscal 1998. Revenues from blanking and stamping increased 14.7% while
revenue from other steel processing operations decreased 6.1% for the first six
months of fiscal 1999 from the comparable period in fiscal 1998. The percentage
of revenues from directly owned steel decreased to 70.3% for the first six
months of fiscal 1999 from 71.7% for the comparable period in fiscal 1998.
Revenues from toll processed steel increased to 29.7% for the first six months
of fiscal 1999 from 28.3% for the comparable period in fiscal 1998. The increase
in the percentage of revenues from toll processed steel was primarily due to the
increased toll processing revenue and tonnage at certain facilities during the
first quarter of fiscal 1999.
Gross Profit. Gross profit decreased by $3.5 million, or 10.9%, to $28.7
million for the first six months of fiscal 1999 from $32.2 million for the
comparable period in fiscal 1998. Gross margin decreased to 16.8% for the first
six months of fiscal 1999 from 20.6% for the comparable period in fiscal 1998.
The decline in gross margin is attributed to four primary factors: decreased
scrap sales resulting from an approximate 43% decrease in the scrap price per
gross ton from the first six months of fiscal 1998 to the comparable period in
fiscal 1999, increased depreciation resulting from increased capital
expenditures, start-up costs on several new programs and lower margin on certain
tool and die projects.
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<PAGE> 149
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.9 million, or 22.3% to $15.8 million for
the first six months of fiscal 1999 from $12.9 million for the comparable period
in fiscal 1998. As a percentage of revenues, selling, general and administrative
expenses increased to 9.2% for the first six months of fiscal 1999 from 8.3% for
the comparable period in fiscal 1998. The increase was the result of additional
corporate staffing and related insurance, taxes and benefits and professional
fees associated with recruitment and negotiation of two union contracts. The
increase was also attributable to the inclusion of Jefferson Blanking during the
first six months of fiscal 1999 which was not operational during the comparable
period in fiscal 1998.
Other. Interest expense increased to $3.5 million for the first six months
of fiscal 1999 from $2.1 million for the comparable period in fiscal 1998 due
primarily to increased average borrowings during the first six months of fiscal
1999 that were primarily in connection with significant capital expenditures
made during fiscal 1998 and 1999. Interest expense of approximately $1.0 million
relating to expansion of several facilities was capitalized during the first six
months of fiscal 1999. The provision for income taxes was $3.8 million for the
first six months of fiscal 1999 compared with $6.7 million for the comparable
period in fiscal 1998 representing effective tax rates of 38.5% and 38.4%,
respectively.
Net Income. Net income from continuing operations for the first six months
of fiscal 1999 decreased by $4.7 million, or 43.8%, to $6.0 million from $10.8
million for the comparable period in fiscal 1998. This decrease was the result
of decreased scrap sales resulting from a lower market price for scrap steel,
lower margins on certain tool and die projects, higher interest expense
resulting from a higher average level of debt and increased depreciation
resulting from increased capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, the Company had $68.1 million of working capital,
representing a current ratio of 2.4 to 1 and a debt-to-capitalization ratio of
47.4%. As a result of the financial condition of the Company, the Company
believes that it will be able to continue its planned investment in new
equipment and facilities through fiscal 1999.
Net cash provided by operating activities is primarily generated from net
income of the Company plus non-cash charges for depreciation and amortization,
which, because of the capital intensive nature of the Company's business, are
substantial. Net cash provided by operating activities for the first six months
of fiscal 1999 was $7.9 million as compared to $20.7 million for the comparable
period of fiscal 1998, primarily as a result of the increase in accounts
receivable partially offset by the increase in accounts payable and a decrease
in net income. Net cash provided by operating activities has historically been
used by the Company to fund a portion of its capital expenditures.
Capital expenditures were $30.6 million during the first six months of
fiscal 1999 and $41.2 million for the comparable period in fiscal 1998.
Approximately $21.5 million of the capital expenditures during the second
quarter of fiscal 1999 were for expansions of the Company's current blanking and
stamping facilities as well as new construction at Jefferson Blanking and Medina
Blanking. These additions are being constructed or obtained to support increased
business and anticipated new business. The Company's total capital budget for
fiscal 1999, including carryover from the previous year, amounts to
approximately $50.0 million.
Prior to January 22, 1998, the Company had a $70.0 million unsecured
revolving credit facility ("Shiloh Facility") with KeyBank National Association
("KeyBank") and Shiloh of Michigan had a $28.0 million credit facility (the
"Shiloh of Michigan Facility") with KeyBank. On January 22, 1998, the Company
increased the Shiloh Facility to $135.0 million. The term of the Shiloh Facility
extends to January 31, 2003. The Company has the option to select the applicable
interest rate at KeyBank's prime rate or the LIBOR rate plus a factor determined
by a pricing matrix based on the Company's ratio of Funded Debt to EBITDA. As of
April 30, 1999, the factor as determined by the pricing matrix was 0.4%. The
terms of the agreement require an annual facility fee as determined by a pricing
matrix based on the Company's ratio of Funded Debt to EBITDA. This annual
facility fee is currently 0.225% of the outstanding loan balance. On January 22,
1998, the Company used $28.0 million of the Shiloh Facility to retire the
outstanding balance of the Shiloh of Michigan facility. On December 28, 1998 the
Company amended the existing facility with KeyBank to include an additional
$35.0 million that expired on April 30, 1999. The $35.0 million amendment was
increased to $45.0 million on
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<PAGE> 150
April 30, 1999 and expires on July 31, 1999, at which time the Company will
enter into discussions for a new arrangement with KeyBank. There can be no
assurance that the Company will enter into any such arrangement and, if entered,
there can be no assurance that the terms of any such arrangement will be
satisfactory to the Company.
The Company executed a promissory note as of December 6, 1996 in favor of
Richland Bank in the aggregate principal amount of $4.0 million. Interest
accrues on the outstanding principal balance thereunder at LIBOR plus 0.75%.
In March 1995, Medina County, Ohio issued on the behalf of the Company an
aggregate of $5.4 million in principal amount of variable rate industrial
revenue bonds due 2010, which are collateralized by the Company with a letter of
credit. The funds from these bonds were used to finance a portion of the
expansion at the Company's steel pickling operations in Valley City, Ohio. The
$5.4 million of such proceeds was outstanding as of April 30, 1999.
The Company believes that it currently has sufficient liquidity and
available capital resources to meet its existing needs, and the financial
capability to increase its long-term borrowing level if that becomes appropriate
due to changes in its capital requirements. Total availability under the
Company's unsecured lines of credit and revolving credit facilities is $184.0
million, $31.8 million of which was unused April 30, 1999.
YEAR 2000 COMPLIANCE
The "Year 2000" problem relates to the computer systems and software that
may have a problem distinguishing the dates 1900 and 2000 because the calendar
year date is abbreviated by only two digits. As a result of this design
decision, systems could fail to operate or produce the correct results if the
"00" is interpreted to mean 1900 rather than 2000. If this occurs in a system
used by the Company or a third party dealing with the Company, the results could
conceivably have an adverse material effect on the Company.
As a key supplier to the automotive and other manufacturing industries, the
Company's major exposure for the Year 2000 problems is the effect of shutting
down production at one of its customer's facilities by failing to provide
materials or parts. While lost revenues from such an event are a concern for the
Company, the greater risks are the consequential damages for which the Company
could be liable if it in fact is found responsible for the shutdown of a
customer's facility. Such a finding could have an adverse material impact on the
Company's operating results.
The most likely way in which the Company would shut down production at a
customer's facility is by being unable to supply material or parts to that
customer. The material supplied by the Company, in many cases is an integral
component of the end products that the customer produces, and the inability to
provide them may make the customer unable to manufacture and sell its products.
Breakdowns in any number of the Company's computer systems and applications
could prevent the Company from being able to manufacture and ship its products.
Examples of such potential failures include, without limitation, failure in the
Company's manufacturing application software, bar-coding system, embedded
computer chips in shop-floor equipment, and lack of supply of material from its
suppliers, or lack of heat, power or water from utilities servicing the
Company's facilities. The Company's products do not contain computer devices
that require remediation to meet the Year 2000 requirements.
For its information technology, the Company currently utilizes an IBM
RS6000 computing environment that is complemented by a series of local-area
networks ("LANs") that are connected nationwide via a wide-area network ("WAN").
Most of the operating systems related to the RS6000s, LANs and WAN have been or
are in the process of being updated to comply with the Year 2000 requirements.
Additionally, upgraded and modified versions of the Company's financial,
manufacturing (including bar coding), payroll, human resources and other
software applications which are Year 2000 ready are available and are now in the
process of being integrated into the Company's information systems. The Company
expects that this integration will be substantially complete by the end of the
third calendar quarter of 1999.
The Company utilizes non-mainframe computers and software in its various
production facilities throughout the country. An initial internal review of
these systems have identified that only a few revisions are necessary to
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<PAGE> 151
these systems to make them Year 2000 ready. The majority of the revisions that
have been identified relate to old personal computers or memory chips that must
be replaced. Although there can be no assurances that the Company will identify
and correct every Year 2000 problem in the computer applications used in its
business or production processes, the Company believes that it has in place a
comprehensive program to identify and correct any such problem. The plan calls
for substantial completion of the remediation of these systems by the end of the
third calendar quarter of 1999. At this time, the Company does not believe that
it requires a contingency plan with respect to the information technology,
business and production processes and has therefore not developed one.
The Company is also reviewing its building and utility systems (heat,
electrical, water, phones, etc.) for the impact of Year 2000. Many of the
systems in this area are currently Year 2000 compliant. While the Company is
diligently working with the providers of these services and has no reason to
expect that they will not meet their requirements for Year 2000 compliance,
there can be no assurances that these suppliers will in fact meet the Company's
requirement. A failure by any of these suppliers to remediate their systems
could potentially cause a shutdown of one or more of the Company's facilities,
which could impact the Company's ability to meet its obligations to deliver
products to its customers. At this time, the Company has not developed a
contingency plan in the event of a failure caused by a supplier or third party,
but would do so if a specific problem is identified. In some cases, especially
with respect to utilities, there may not, however, be an alternative source
available.
The Company has also started a program to determine the Year 2000
compliance of their significant equipment and material suppliers. The Company
has sent out a comprehensive questionnaire to all of its suppliers regarding
their Year 2000 compliance and is attempting to identify any potential problem
areas with respect to them. This program will be ongoing and the Company's
efforts with respect to specific problems identified will depend, in part on its
assessment of the risk that any such problem may cause the shutdown of a
customer's plant or other problem which the Company believes would have a
material effect on operations. The Company cannot, however, fully control the
conduct of its suppliers and there can be no guarantee that Year 2000 problems
originating from a supplier will not occur. At this time, the Company has not
developed a contingency plan in the event of a failure caused by a supplier or
third party, but would do so if a specific problem is identified. In some cases
there may not be an alternative source available.
As a supplier to the automotive industry, the Company takes an active role
in many industry-sponsored organizations, including the American Iron and Steel
Institute ("AISI") and the Automotive Industry Action Group ("AIAG"). The AIAG
has been proactive in working with OEMs and Tier I, II and III suppliers to
ensure that the industry as a whole addresses the Year 2000 problem. The AIAG
provides tools to assist in achieving compliance including questionnaires,
regular meetings of members, follow-up by AIAG personnel regarding the answers
to the questionnaires, etc. To date, the Company has not spent a material amount
on specific Year 2000 issues. As of April 30, 1999, the Company spent
approximately $10.6 million on a new business system; however, the Company
cannot quantify the amount directly related to Year 2000 compliance. Similarly,
the Company, at this time, cannot quantify the amount to be spent on Year 2000
issues and compliance matters related thereto.
The information presented above sets forth the key steps taken by the
Company to address the Year 2000 problem. There can be no assurance that third
parties will convert their systems in a timely manner and in a way that is
compatible with the Company's systems. The Company believes that its actions
with suppliers will minimize these risks and that the costs of Year 2000
compliance for its information and production systems will not be material in
its consolidated and financial and operational results.
FORWARD-LOOKING STATEMENTS
The statements contained in this Report that are not historical facts are
forward-looking statements. These forward- looking statements are subject to
certain risks and uncertainties with respect to the Company's operations in
fiscal 1999 as well as over the long term such as, without limitation, (i) a
downturn in the automotive industry, which is highly cyclical, dependent on
consumer spending and subject to the impact of domestic and international
economic conditions and regulations and policies regarding international trade,
(ii) the ability of the Company to accomplish its strategic objectives with
respect to external expansion through selective acquisitions and internal
expansion, (iii) increases in the price of, or limitations on the availability
of steel, the
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Company's primary raw material, (iv) risks associated with integrating
operations of acquired companies, (v) potential disruptions in operations due to
or during facility expansions, (vi) a labor dispute involving the Company, its
customers or suppliers, and (vii) the potential inability to adequately address
issues relating to the Year 2000 problems. Any or all of these risks and
uncertainties could cause actual results to differ materially from those
reflected in the forward-looking statements. These forward-looking statements
reflect management's analysis only as of the date of the filing of this report.
The Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
In addition to the disclosure contained herein, readers should carefully review
risks and uncertainties contained in other documents the Company files from time
to time with the Securities and Exchange Commission.
EFFECT OF INFLATION
Inflation generally affects the Company by increasing the interest expense
of floating rate indebtedness and by increasing the cost of labor, equipment and
raw material. The general level of inflation has not had a material effect on
the Company's financial results.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen countries (the "Participating
Countries") that are members of the European Union established a new uniform
currency known as the "Euro". The currency existing prior to such date in the
Participating Countries will be phased out during the transition period
commencing January 1, 1999 and ending January 1, 2002. During such transition
period both the Euro and the existing currency will be available in the
Participating Countries. Because the Company has no foreign operations and no
material foreign sales, the Company does not anticipate that the introduction
and use of the Euro will materially affect the Company's business, prospects,
results of operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates as they relate to its variable rate debt. The
Company does not enter into derivative financial investments for trading or
speculative purposes. As a result, the Company believes that its market risk
exposure is not material to the Company's financial position, liquidity or
results of operations.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On March 25, 1999, at the Annual Meeting of Stockholders of Shiloh
Industries, Inc., the stockholders took the following actions:
(1) Elected as Class I Directors all nominees designated in the Proxy
Statement dated February 17, 1999; and
(2) Approved the appointment of the independent certified public
accountants of the Company for the current fiscal year.
The Directors were elected pursuant to the following vote:
<TABLE>
<CAPTION>
BROKER
NOMINEE FOR WITHHELD NON-VOTE
- ------- ---------- -------- --------
<S> <C> <C> <C>
Robert L. Grissinger................................... 10,458,859 23,107 --
Curtis E. Moll......................................... 10,459,509 22,457 --
Theodore K. Zampetis................................... 10,459,509 22,457 --
</TABLE>
D-13
<PAGE> 153
The approval of appointment of PricewaterhouseCoopers as independent
certified public accountants to the Company for its current fiscal year was
approved by the following vote:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
- --- ------- ------- --------
<S> <C> <C> <C>
10,480,116................................................. 1,500 350 --
</TABLE>
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
a. Exhibits
Exhibit 10 Amendment to Credit Agreement, dated as of April 30, 1999,
by and between the Company and KeyBank National Association,
as agent for the Banks as parties thereto.
Exhibit 27 Financial Data Schedule.
b. Reports on Form 8-K: None.
</TABLE>
D-14
<PAGE> 154
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 14, 1999
SHILOH INDUSTRIES, INC.
By: /s/ JOHN F. FALCON
------------------------------------
John F. Falcon
President and Chief Executive
Officer
By: /s/ CRAIG A. STACY
------------------------------------
Craig A. Stacy
Chief Financial Officer and
Treasurer
D-15
<PAGE> 155
APPENDIX E
MTD AUTOMOTIVE
(A DIVISION OF MTD PRODUCTS INC)
FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 1999 AND 1998 AND
YEAR ENDED JULY 31, 1998
E-1
<PAGE> 156
REPORT OF INDEPENDENT ACCOUNTANTS
May 21, 1999
To the Shareholder of MTD Automotive
(a division of MTD PRODUCTS INC):
In our opinion, the accompanying balance sheet and the related statements
of operations, division equity, and cash flows present fairly, in all material
respects, the financial position of MTD Automotive (a division of MTD PRODUCTS
INC), (the "Company"), at July 31, 1998, and the results of its operations and
its cash flows for the year ended July 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
E-2
<PAGE> 157
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
BALANCE SHEETS
APRIL 30, 1999 AND JULY 31, 1998
<TABLE>
<CAPTION>
APRIL 30, 1999 JULY 31, 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 36,014 $ 37,827
Accounts receivable, less allowance for doubtful accounts
of $210,407 in 1999 and $178,886 in 1998............... 25,656,744 18,490,212
Inventories, net.......................................... 20,825,142 21,683,437
Prepaid expenses and other current assets................. 372,126 320,850
----------- -----------
Total current assets.............................. 46,890,026 40,532,326
Property, plant and equipment, net........................ 30,980,684 33,738,031
Other long-term assets, net............................... 23,228 20,316
----------- -----------
Total assets...................................... $77,893,938 $74,290,673
=========== ===========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Current portion of long term debt.................... $ 48,736 $ 296,764
Accounts payable..................................... 8,417,757 6,365,640
Accrued and other current liabilities................ 6,069,644 5,348,051
----------- -----------
Total current liabilities......................... 14,536,137 12,010,455
Long term debt............................................ 12,882 49,841
----------- -----------
Total liabilities................................. 14,549,019 12,060,296
Division equity........................................... 63,344,919 62,230,377
----------- -----------
Total liabilities and division equity............. $77,893,938 $74,290,673
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-3
<PAGE> 158
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
STATEMENTS OF OPERATIONS
NINE-MONTHS ENDED APRIL 30, 1999 AND 1998 AND YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
NINE-MONTHS NINE-MONTHS
ENDED ENDED YEAR ENDED
APRIL 30, 1999 APRIL 30, 1998 JULY 31, 1998
-------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales to third parties........................... $136,465,232 $128,577,057 $164,130,736
Sales to related parties......................... 9,677,713 7,564,684 9,639,793
------------ ------------ ------------
Total sales............................ 146,142,945 136,141,741 173,770,529
Cost of sales.................................... 143,701,493 134,606,351 173,590,742
------------ ------------ ------------
Gross profit................................... 2,441,452 1,535,390 179,787
Selling and administrative expenses.............. 6,114,251 6,141,534 8,022,003
------------ ------------ ------------
Operating loss................................. (3,672,799) (4,606,144) (7,842,216)
Interest expense................................. 15,371 55,386 67,360
------------ ------------ ------------
Loss before income taxes....................... (3,688,170) (4,661,530) (7,909,576)
Income tax benefit............................... 1,419,945 1,794,689 3,045,187
------------ ------------ ------------
Net loss......................................... $ (2,268,225) $ (2,866,841) $ (4,864,389)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-4
<PAGE> 159
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
STATEMENTS OF DIVISION EQUITY
NINE MONTHS ENDED APRIL 30, 1999 AND YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED APRIL 30, JULY 31,
1999 1998
--------------- -----------
(UNAUDITED)
<S> <C> <C>
Beginning Balance........................................... $62,230,377 $64,196,088
Net loss.................................................. (2,268,225) (4,864,389)
Division equity activity, net............................. 3,382,767 2,898,678
----------- -----------
Ending balance.............................................. $63,344,919 $62,230,377
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-5
<PAGE> 160
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1999 AND 1998 AND YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS YEAR ENDED
ENDED APRIL 30, ENDED APRIL 30, JULY 31,
1999 1998 1998
--------------- --------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(2,268,225) $(2,866,841) $(4,864,389)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation............................... 7,427,520 5,464,060 7,593,461
Changes in assets and liabilities:
Accounts receivable..................... (7,166,532) (17,394,747) (1,239,246)
Inventories............................. 858,295 5,477,266 5,007,030
Prepaid expenses and other assets....... (54,188) 231,865 67,755
Accounts payable........................ 2,052,117 434,756 236,111
Accrued expenses and other
liabilities........................... 721,593 1,670,094 (84,974)
----------- ----------- -----------
Net cash provided by (used in) operating
activities............................ 1,570,580 (6,983,547) 6,715,748
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment,
net.......................................... (4,670,173) (4,447,221) (9,067,195)
----------- ----------- -----------
Net cash used in investing activities... (4,670,173) (4,447,221) (9,067,195)
----------- ----------- -----------
Cash flows from financing activities:
Payment of debt................................. (284,987) (386,490) (518,108)
Division equity activity, net................... 3,382,767 11,846,500 2,898,678
----------- ----------- -----------
Net cash provided by financing
activities............................ 3,097,780 11,460,010 2,380,570
Net (decrease) increase in cash and cash
equivalents..................................... (1,813) 29,242 29,123
Cash and cash equivalents at beginning of
period.......................................... 37,827 8,704 8,704
----------- ----------- -----------
Cash and cash equivalents at end of period........ $ 36,014 $ 37,946 $ 37,827
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-6
<PAGE> 161
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
MTD Automotive (the "Division"), a division of MTD PRODUCTS INC (the
"Parent"), is a manufacturer of stamped parts and components for the automotive
industry. The products manufactured by the Division are sold primarily to
original equipment manufacturers located in the United States.
The business of the Division is significantly dependent upon several
automotive and truck manufacturers. In the event that a significant portion of
the automotive and truck business were to cease immediately, and the revenues
were not replaced with sales to other customers, whether existing or new, the
loss could have a material adverse effect on the Division. However, the Division
believes that its relationships with these customers is good and, although it
anticipates the loss of business in an event of a strike or for particular parts
from time to time as the products in which those parts are incorporated are
discontinued or substantially changed, the Division believes that it can, at
least in part, make up for such losses through existing or new customers.
The Company's three largest customers accounted for approximately 56%, 13%,
and 12% of net sales in fiscal year 1998, respectively.
Basis of Presentation
The accompanying financial statements include the accounts of the operating
entities of MTD Automotive. All material transactions and accounts related to
MTD Automotive have been included in the accompanying financial statements. All
significant intercompany transactions occurring within the Division have been
eliminated. Transactions with other divisions of MTD PRODUCTS INC have not been
eliminated from these financial statements (see Note 6 Related Party
Transactions). The Division purchases from and sells to other divisions of the
Parent on a regular basis. The policy within the Parent is to provide these
products at a transfer price based on standard cost, which approximates actual
cost, plus three percent.
The accompanying unaudited, financial statements as of and for the nine
month period ended April 30, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, these statements should be read in conjunction with the audited
financial statements as of and for the year ended July 31, 1998. In the opinion
of management, the accompanying unaudited, financial statements contain all
adjustments, all of which were of a normal recurring nature, necessary to
present fairly, in all material respects, the consolidated results of operations
and of cash flows for the nine month period ended April 30, 1999 and 1998, and
are not necessarily indicative of the results to be expected for the full year.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of less
than three months to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated using principally the declining-balance method. Buildings and
improvements are generally depreciated over 15 to 40 years, machinery and
equipment over 8 to 15 years, furniture, fixtures and computer equipment over 5
to 8 years and equipment under capital lease over the lease term or 5 years.
Tooling costs are capitalized and depreciated over their useful life, not to
exceed 4 years. Maintenance and repair costs are expensed as incurred. Costs of
renewals and betterments
E-7
<PAGE> 162
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
which substantially increase the useful lives of the operating assets are
capitalized. The cost and related accumulated depreciation of all plant and
equipment disposed of are removed from the accounts, and any gain or loss from
such disposal is included in the earnings for the current period. Depreciation
expense was $7,593,461 in 1998.
Revenue Recognition
Revenue is recognized when products are shipped.
Income Taxes
For income tax purposes, the Division is included in the consolidated tax
return of MTD PRODUCTS INC (the "Parent"). No tax allocation agreement exists
between the Parent and the Division. The Parent allocates income tax expense
(benefit) to the Division based upon an assumed federal and state tax rate of
35% and 3.5%, respectively. Income tax expense calculated on a stand-alone basis
would not be materially different than the allocation method noted above.
Fair Market Value of Financial Instruments
Cash, accounts receivable and accounts payable are, in management's
opinion, stated at amounts which approximate their fair value because of their
short maturity.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
the display of comprehensive income and its components in a full set of general-
purpose financial statements. The Division has no significant items of other
comprehensive income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
effective for fiscal years beginning after December 15, 1997. This statement
requires that public business enterprises report certain information about
operating segments in annual and interim financial statements. It also requires
that public business enterprises report certain information about their products
and services, the geographic areas in which they operate, and their major
customers. Adoption of this standard, will not have a material effect on the
Division's disclosures.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits". This statement establishes standards for disclosing
information about an entity's pensions and other postretirement benefits.
Adoption of this standard will not have a material effect on the Division's
disclosures.
In June, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement establishes accounting and reporting standards for certain
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
E-8
<PAGE> 163
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statement of financial position and measure those instruments at fair value.
Adoption of this standard will not have a material impact on the financial
statements of the Division.
The Accounting Standards Executive Committee issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1") in March 1998. This SOP is effective for fiscal years
beginning after December 15, 1998 and provides guidance on accounting for the
costs of computer software developed or obtained for internal use. This SOP is
not expected to have a significant impact on the Division's financial
statements.
The Accounting Standards Executive Committee issued Statement of Position
98-5, "Accounting for the Costs of Start-up Activities" ("SOP 98-5") in April
1998. This SOP is effective for fiscal years beginning after December 15, 1998
and provides guidance on the financial reporting of start-up costs and
organization costs. This SOP is not expected to have a significant impact on the
financial statements of the Division.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Raw materials............................................... $ 3,711,410 $ 5,314,901
Work-in-process............................................. 18,039,085 14,822,964
Finished goods.............................................. 1,024,913 3,098,275
----------- -----------
Total gross inventory....................................... 22,775,408 23,236,140
Reserve to reflect inventories at lower of cost or market... (1,950,266) (1,552,703)
----------- -----------
Total inventories, net...................................... $20,825,142 $21,683,437
=========== ===========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at July 31, 1998:
<TABLE>
<S> <C>
Land........................................................ $ 390,778
Buildings and improvements.................................. 13,510,418
Machinery and equipment..................................... 67,778,259
Furniture, fixtures and computer equipment.................. 2,969,264
Equipment under capital lease (Note 4)...................... 1,888,771
Leasehold improvement....................................... 15,649
Construction in process..................................... 3,623,445
-----------
90,176,584
Less accumulated depreciation and amortization.............. (56,438,553)
-----------
$33,738,031
===========
</TABLE>
Accumulated amortization associated with the equipment under capital lease
was $1,668,509 at July 31, 1998.
E-9
<PAGE> 164
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS:
MTD PRODUCTS INC (the "Parent") finances the operations of the Division.
The Parent does not charge interest expense on intercompany account balance
activity with the Division. All advances from the Parent, all intercompany
account balances with the Parent, and all pension-related assets and obligations
are reflected within the division equity section of the Balance Sheet. Other
than capital lease obligations, the Division does not have any outstanding debt
instruments owed to third parties. The Parent has pledged all assets, except for
transportation equipment, of the Division as collateral for the Parents'
external debt instruments.
The Division has entered into capital lease agreements for computer and
manufacturing equipment. Future minimum lease payments for noncancelable capital
lease obligations as of July 31, 1998 are $296,764 in 1999 and $49,841 in 2000.
Interest paid during the year ended July 31, 1998 was $67,360.
5. RENTAL EXPENSE
Rental or lease expense for warehouse space, sales office and machinery and
equipment was $809,091 in 1998. Rental commitments under noncancelable operating
leases approximate $513,310 in 1999, $513,180 in 2000 and $242,820 in 2001.
Commitments do not extend beyond the 2001 fiscal year.
6. RELATED PARTY TRANSACTIONS
Purchases from and sales to other divisions of the Parent amounted to
$16,007,456 and $9,639,793, respectively as of July 31, 1998. Reflected within
the selling and administrative expenses as of July 31, 1998 are $673,000 of
allocation charges for services performed by the Parent.
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS:
Pension Plans -- The Division has funded defined benefit pension plans
covering union employees.
The net periodic pension income for the union defined benefit pension plans
includes the following components as of July 31, 1998:
<TABLE>
<S> <C>
Service cost -- benefits earned during the period........... $ 580,688
Interest accrued on projected benefit obligation............ 1,577,375
Actual return on assets..................................... (2,581,625)
Net amortization and deferral............................... 245,079
-----------
Net periodic pension income for the year.................... $ (178,483)
-----------
</TABLE>
The funded status of the union defined benefit plans was as follows as of
July 31, 1998:
<TABLE>
<S> <C>
Projected benefit obligation................................ $(23,369,323)
Fair value of plan assets................................... 37,173,483
------------
Funded status............................................... 13,804,160
Unrecognized net experience gain............................ (8,674,840)
Unrecognized prior service cost............................. 3,364,628
Unrecognized asset existing at date of adoption of FAS No.
87........................................................ (2,764,088)
------------
Prepaid pension cost included in division equity............ $ 5,729,860
------------
</TABLE>
E-10
<PAGE> 165
MTD AUTOMOTIVE (A DIVISION OF MTD PRODUCTS INC)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average assumptions used to develop the net periodic pension
income and net pension asset/liability for the year ended July 31, 1998 were:
<TABLE>
<S> <C>
Pension income:
Discount rate............................................. 7.75%
Expected long-term rate of return on plan assets.......... 8.50%
Rates of increase in salaried compensation levels......... 4.50%
</TABLE>
Plan assets consist principally of common stocks, corporate obligations and
cash equivalents. The Parent's policy is to fund amounts pursuant to Internal
Revenue Code Rules and Regulations.
Salaried employees of the Division are covered by a defined benefit pension
plan of the Parent which is overfunded. The MTD Automotive portion of the net
periodic pension income associated with this plan is immaterial to the
Division's financial statements and accordingly has not been recorded in the
accompanying financial statements.
The Division has two defined contribution plans, principally 401(k) savings
plans, benefiting the union employees. Under the terms of such plans, eligible
employees are allowed to contribute up to 19% of their base pay. Eligible
salaried employees may participate in a Parent sponsored defined contribution
plan. The Parent contributes amounts equal to 25% of the employees'
contribution, up to a maximum 1% of the employee's pay, subject to statutory
limitations. The MTD Automotive portion of the employer contribution expense
related to these Plans is immaterial to the Division's financial statements and
accordingly has not been recorded in the accompanying financial statements.
The Parent has a tax exempt Health and Welfare Benefits Trust (the "Trust")
to provide sickness, accident, life and other welfare benefits for employees of
the Division.
8. CONTINGENCIES
Various claims arising in the ordinary course of business are pending
against the Division. In the opinion of management, none of the matters will
have a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Division.
E-11
<PAGE> 166
APPENDIX F
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS
OF THE DIVISION
Sales. Sales for the nine months ended April 30, 1999 increased by $10.0
million, or 7.3%, to $146.1 million compared to $136.1 million for the
comparable period in fiscal 1998. Sales to OEMs and MTD increased by $7.9
million and $2.1 million, or 6.1% and 27.9%, respectively, for the first nine
months of fiscal 1999 compared to the first nine months of fiscal 1998.
Gross Profit. Gross profit increased by $.9 million, or 59.0%, to $2.4
million for the first nine months of fiscal 1999 from $1.5 million for the
comparable period in fiscal 1998. Gross profit margin increased to 1.67% for the
first nine months of fiscal 1999 compared to 1.13% for the comparable period in
fiscal 1998. In 1999, the Division began four new major projects for its OEM
customers. In addition to the startup costs associated with these projects, the
Division incurred significant outsourcing costs resulting from a strike at an
equipment supplier. This strike delayed the delivery of new equipment needed for
production and forced the Division to utilize outside sources to complete
production of certain products, which resulted in higher costs. Combined, the
startup costs and the outsourcing costs exceeded $7.5 million, which offset a
significant portion of the gross margin improvement attributable to the
Division's new projects.
Selling and Administrative Expenses. Selling and administrative expenses
remained relatively unchanged at $6.1 million, or 4.2% and 4.5% of sales for the
nine-month periods ended April 30, 1999 and 1998, respectively.
Net Loss. Net loss for the nine months ended April 30, 1999 decreased by
$.6 million, to $2.3 million from $2.9 million for the comparable period in
fiscal 1998.
Management began to reduce the workforce, both administrative and factory
personnel, in early April 1999. Further reductions in administrative personnel
and a nearly 10% reduction in the indirect labor workforce were completed during
the fourth quarter of 1999. The full impact of the reduction will not be
reflected in the Division's results of operations until the first quarter of
fiscal 2000. The reductions are expected to increase operating profits by more
than $7 million annually.
Significant changes in working capital and capital expenditures impacted
the Division's cash flow for the nine months ended April 30, 1999 and 1998. The
fiscal 1998 period includes a large tooling project which was billed during the
third quarter of fiscal 1998 accounting for a major portion of the increase in
accounts receivable. In addition, the increase in accounts receivable is the
result of higher sales to OEM customers during the third quarter of fiscal 1999
compared to the fourth quarter of fiscal 1998. The increase in depreciation
expense is the result of the $9.0 million of equipment purchases during fiscal
1998.
See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS" in the
Proxy Statement.
F-1
<PAGE> 167
SHILOH INDUSTRIES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON TUESDAY, AUGUST 31, 1999
The undersigned hereby constitutes and appoints John F. Falcon, and
Richard S. Gray and each of them, his true and lawful agents and
proxies with full power of substitution in each, to represent the
P undersigned at the special meeting of stockholders of Shiloh
Industries, Inc. to be held at the Holiday Inn Select, 15471 Royalton
Road, Strongsville, Ohio 44136 on Tuesday, August 31, 1999, at 10:00
R a.m., and at any adjournments or postponements of the special
meeting, on the following proposal:
O The issuance of up to an aggregate of 2,428,571 shares of common
stock of Shiloh in connection with Shiloh's acquisition of MTD
Automotive, an unincorporated division of MTD Products, Inc (the
X "Share Issuance Proposal").
With respect to the other matters that properly come before the
Y special meeting or any adjournment or postponement of the special
meeting, which, as of July 22, 1999, the proxies named above do not
know are to be presented at the special meeting, those proxies are
authorized to vote upon those matters in their discretion.
You are encouraged to specify your choice by marking the appropriate
box, SEE REVERSE SIDE, but you need not mark any box if you wish to
vote in accordance with the Disinterested Directors' (as defined in
Proxy Statement) recommendation. Your shares cannot be voted unless
you sign, date and return this card.
(change of address)
------------------------------------
------------------------------------
------------------------------------
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(If you have written in the above
space, please mark the corresponding
box on the reverse side of this
card.)
WHEN THIS PROXY WHEN PROPERLY EXECUTED, THE SHARES TO WHICH IT RELATES WILL BE
VOTED IN THE MANNER DIRECTED HEREIN.
SEE REVERSE
SIDE
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DETACH CARD
<PAGE> 168
SHILOH INDUSTRIES, INC.
PLEASE MARK YOUR VOTE AS IN THIS EXAMPLE. [X]
When this proxy is properly executed, the shares to which it relates will be
voted in the manner directed herein.
THE DISINTERESTED DIRECTORS (AS DEFINED IN PROXY STATEMENT) RECOMMEND A VOTE FOR
THE SHARE ISSUANCE PROPOSAL
FOR AGAINST ABSTAIN
Approval of the Share Issuance Proposal [ ] [ ] [ ]
Address Change Requested [ ]
Date: , 1999
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Signature(s)
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NOTE: Please sign exactly as
name appears hereon. Joint
owners should each sign.
When signing as attorney,
executor, administrator, or
guardian, please give full
title as such.
The signer hereby revokes
all proxies heretofore given
by the signer to vote at
said meeting or any
adjournments thereof.
................................................................................
* FOLD AND DETACH HERE *
