United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 33-75154
J.B. POINDEXTER & CO., INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0312814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Louisiana
Suite 5400
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (713) 655-9800
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange where registered: None
Securities registered pursuant to Section 12(g) of the Act: None
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 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 Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $ 0 -------
The number of shares outstanding of each of the registrants' classes of common
stock as of March 19, 1999: 3059
Documents Incorporated by Reference: None
<PAGE>
J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES
PART I.
Item 1. Business
J.B. Poindexter & Co., Inc. ("JBPCO") operates primarily manufacturing
businesses. JBPCO's subsidiaries are Morgan Trailer Mfg Co., ("Morgan"), Truck
Accessories Group, Inc., ("TAG"), Lowy Group, Inc. ("Lowy" or "Lowy Group"), EFP
Corporation, ("EFP") and Magnetic Instruments Corp., ("MIC Group").
Unless the context otherwise requires, the "Company" refers to JBPCO
together with its consolidated subsidiaries. The Company is controlled by John
B. Poindexter. In May 1994, the Company completed an initial public offering of
$100.0 million, 12 1/2% Senior Notes due 2004 (sometimes referred to herein as
the "Note Offering"). Concurrent with the Note Offering, the Company acquired,
from John B. Poindexter and various minority interests, TAG, Lowy Group, EFP and
MIC Group. During 1998, the Company's management made the strategic decision to
concentrate resources on the Company's manufacturing operations. Consequently,
the retail and wholesale distribution operations of TAG and Lowy Group are being
held for sale and have been treated as discontinued operations in the
Consolidated Financial Statements of the Company. The Company manages its assets
on a decentralized basis, with a small corporate staff providing strategic
direction and support.
During 1998, the Company sold the carpet manufacturing and dyeing
operations (Blue Ridge/Courier) of Lowy Group. The plan to dispose of the
remaining operations of Lowy Group and the distribution operations of TAG (TAG
Distribution) are anticipated to be substantially complete by the end of the
second quarter of 1999. See Note 13 of Notes to the Consolidated Financial
Statements.
The Company considers each of its operating subsidiaries as an industry
segment. See Note 3 to the Consolidated Financial Statements of the Company.
Morgan
Morgan is the nation's largest manufacturer of commercial van bodies
("van bodies") for medium-duty trucks. Morgan products, which are mounted on
truck chassis manufactured and supplied by others, are used for general freight
and deliveries, moving and storage and distribution of refrigerated consumables.
Its 119 authorized distributors, seven manufacturing plants and two service
facilities are in strategic locations to provide nationwide service to its
customers, including rental companies, truck dealers and companies that operate
fleets of delivery vehicles. Formed in 1952, Morgan is headquartered in
Morgantown, Pennsylvania, and was acquired in 1990.
Morgan's van bodies are manufactured and installed on truck chassis,
which are classified by hauling capacity or gross vehicular weight rating
("GVWR"). There are eight classes of GVWR. Morgan generally manufactures
products for Classes 3 through 7, those having a GVWR of between 10,001 pounds
(light-duty dry freight vans) and 33,000 pounds (medium-duty trucks). It
generally does not manufacture products for Classes 1 or 2 (pickup trucks) or
Class 8. The principal products offered by Morgan are the following:
2
<PAGE>
Dry Freight Bodies (Classes 3-7). Dry freight bodies are typically
fabricated with pre-painted aluminum or fiberglass reinforced plywood ("FRP")
panels, aerodynamic front-end treatment, hardwood floors and various door
configurations to accommodate end-user loading and unloading requirements. These
products are used for diversified dry freight transportation and represent more
than one-half of Morgan's sales.
Refrigerated Van Bodies (Classes 3-7). Refrigerated vans are equipped
with insulated aluminum or FRP bodies that accommodate controlled temperature
and refrigeration needs of end-users. These products are used primarily on
trucks that transport dairy products, frozen foods and meats.
Cutaway Van Bodies (Classes 3-5). Aluminum or FRP cutaway van bodies
(which differ from conventional vans generally by having different floor
configurations and shorter lengths) are installed only on cutaway chassis, which
are available with or without access to the cargo area from the cab. Cutaway
bodies are used primarily for local delivery of parcels, freight and
perishables.
Stake Bodies and Flatbeds. Morgan also manufactures stake bodies, which
are flatbeds with various configurations of removable sides. Stake bodies are
used for the movement of a variety of materials for the agricultural and
construction industries, among others.
Gem Top Pickup Truck Caps. Pickup truck caps are fabricated enclosures
that fit over the beds of pickup trucks, converting the beds into weatherproof
storage areas. Effective June 30, 1997, Morgan acquired the operations of Gem
Top from TAG. Gem Top services primarily commercial customers. For a more
detailed discussion of the truck accessories business see TAG below.
Some of the components of Morgan's products, such as certain patented
methods for making curtained doors for vehicle bodies, are proprietary. Morgan
also offers certain products manufactured by others, including those distributed
by Morgan's Advanced Handling Systems Division that facilitate the loading and
unloading of cargo. Morgan distributes spare parts through and offers limited
service programs at some of its own facilities and through its 119 authorized
distributors.
Customers and Sales. The van body industry has two major categories of
customers: (1) customers operating their own fleets of vehicles or who lease
their vehicles to third parties (collectively, "fleet/leasing customers"); and
(2) truck dealers and distributors who sell vehicles to others (collectively,
"dealer/distributor customers"). Morgan's net sales constituted 55%, 54% and 49%
of the Company's total net sales in 1998, 1997 and 1996, respectively.
Morgan's revenue is generated by five sources: (1) sales to commercial
divisions of leasing companies, companies with fleets of delivery vehicles,
truck dealers and distributors ("Commercial Sales"); (2) sales to consumer
rental companies ("Consumer Rental Sales"); (3) parts; (4) service and (5) the
Advanced Handling Systems Division.
Consumer Rental Sales are composed of sales to companies that maintain
large fleets of one-way and local moving vehicles available for rent to the
general public. Procurement contracts for Consumer Rental Sales are negotiated
annually, usually in late summer to early fall and tend to be the most volatile
and price sensitive aspect of Morgan's business.
3
<PAGE>
Morgan's two largest customers, Ryder Truck Rental, Inc. and Penske
Truck Leasing L.P., have, together, historically represented approximately
40-50% of Morgan's total net sales. Each has been a customer of Morgan for
approximately 20 years and management considers relations with each to be good.
Sales to these customers represented 26%, 24% and 21% of the Company's
consolidated net sales during the years 1998, 1997, and 1996, respectively.
Morgan sells products through its own sales force and through
independent distributors. Most of the distributors sell a wide variety of truck
related equipment to truck dealers and end-users.
Manufacturing and Supplies. Morgan operates manufacturing, body mounting
and service facilities in Pennsylvania, Wisconsin, Georgia, Texas and Arizona.
It also has sales, service and body mounting facilities in Florida and
California. Its Gem Top division is located in Oregon.
Generally, all van bodies manufactured by Morgan are produced to order.
The shipment of a unit is dependent upon receipt of the chassis supplied by the
customer and the customer's arrangements for delivery of completed units.
Revenue is recognized and the customer is billed upon final body assembly and
quality inspection. Because contracts for Consumer Rental Sales are entered into
in the summer or fall but production does not begin until the following January,
Morgan generally has a significant backlog of Consumer Rental Sales orders at
the end of each year that is processed through May of the following year. In
addition, Morgan typically maintains a significant backlog of Commercial Sales.
At December 31, 1998 and 1997, Morgan's total backlog was approximately $73
million and $55 million, respectively. All of the products under the orders
outstanding at December 31, 1998 are expected to be shipped during 1999.
Morgan maintains an inventory of raw materials necessary to build van
bodies according to customers' orders. Raw materials are acquired from a variety
of sources and Morgan has not experienced significant shortages of materials in
recent years. Fiberglass reinforced plywood panels, which are important
components of Morgan's products, are acquired principally from two suppliers.
The loss of either of those suppliers could disrupt Morgan's operations until a
replacement source could be located. Morgan's customers purchase their truck
chassis from major truck manufacturing companies. The delivery of a chassis to
Morgan is dependent upon truck manufacturers' production schedules, which are
beyond Morgan's control. Delays in chassis deliveries can disrupt Morgan's
operations and can increase its working capital requirements.
Industry. Industry revenue and growth are dependent primarily on the
demand for delivery vehicles in the general freight, moving and storage, parcel
delivery and food distribution industries. Replacement of older vehicles in
fleets represents an important revenue source, with replacement cycles varying
from approximately four to six years, depending on vehicle types. During
economic downturns, replacement orders are often deferred or, in some cases,
older vehicles are retired without replacement.
Competition. The van body manufacturing industry is highly competitive.
Morgan competes with a limited number of large manufacturers and a large number
of smaller manufacturers. Some of Morgan's competitors operate from more than
one location. Certain competitors are publicly owned with substantial capital
resources. Competitive factors in the industry include product quality, delivery
4
<PAGE>
time, geographic proximity of manufacturing facilities to customers, warranty
terms, service and price.
TAG
TAG historically has had two operating divisions: TAG Manufacturing,
which consists of the Leer, 20th Century Fiberglass (Century) and Raider
Industries Inc., (Raider) operating divisions; and TAG Distribution, consisting
of retail (Leer Retail and Radco) and the wholesale distribution business
(National Truck Accessories, including Midwest Truck AfterMarket). During 1998,
the Company decided to dispose of the TAG Distribution business and has,
accordingly, treated it as discontinued in the Consolidated Financial
Statements. See Note 13 to the Consolidated Financial Statements of the Company.
TAG Manufacturing is the nation's largest manufacturer of pickup truck caps
and tonneau covers and its products are marketed under the brand names Leer,
Raider, LoRider and Century. Caps and tonneau covers are fabricated enclosures
that fit over the beds of pickup trucks, converting the beds into weatherproof
storage areas. TAG's eight manufacturing plants and network of over 600
independent dealers provide a national network through which its products are
marketed to individuals, small businesses and fleet operators. TAG's net sales
constituted 27%, 28% and 33% of the Company's total net sales during 1998, 1997
and 1996, respectively. Formed in 1971, TAG is headquartered in Elkhart, Indiana
and was acquired in 1987.
Customer and Sales. Most purchasers of TAG's products (purchased from
dealers) are individuals. TAG's products are sold through its national network
of independent dealers. TAG also sells its products in Canada and Europe. In
1998, foreign sales (primarily in Canada) represented approximately 8% of TAG's
total sales or less than 3% of the Company's total net sales. During 1998, 1997
and 1996, TAG Manufacturing had intercompany sales of $12.7 million, $13.7
million and $15.3 million, respectively, to TAG Distribution. Under the current
plan of disposal for TAG Distribution, a substantial portion of these sales may
not continue subsequent to the disposition.
Manufacturing and Supplies. TAG designs and manufactures caps and
tonneaus in seven manufacturing facilities located in California, Indiana,
Pennsylvania and Saskatchewan, Canada. Approximately 85% of the caps sold by TAG
are fiberglass, with aluminum representing the balance. TAG maintains an
inventory of raw materials necessary to manufacture its products. Raw materials
are obtained from a variety of sources and TAG has not experienced significant
shortages of materials in recent years. TAG purchases a substantial majority of
its windows for caps from a single supplier. Although the loss of that supplier
would disrupt TAG's production activities until a replacement supplier could be
located, management does not believe that such loss would have a material
adverse effect on the Company.
Industry. Sales of caps and tonneaus tend to correspond to the level of
new pickup truck sales. Cap sales are seasonal, with sales typically being
higher in the spring and fall than in the summer and winter.
Competition. The cap and tonneau cover industry is highly competitive.
Competitive factors include product availability, quality, price and
installation services.
5
<PAGE>
EFP
EFP molds and markets expandable foam plastics used primarily by the
automotive, electronics, furniture and appliance industries as packaging, shock
absorbing and materials handling products. Management believes that EFP is the
nation's third largest producer and marketer of custom-shaped, molded expandable
plastics. Management believes that EFP's competitive strengths include its
ability to manufacture high quality products for competitive prices while
providing excellent service to its customers, including timely delivery of
products. EFP's net sales made up approximately 10% of the Company's total net
sales during each of the last three years. Founded in 1954, EFP is headquartered
in Elkhart, Indiana and was acquired in 1985.
Products. EFP's products are manufactured from expandable polystyrene
("EPS"), expandable polypropylene ("EPP"), expanded polyethylene ("EPE"), a
copolymer of polyethylene and polystyrene ("Copolymer") and certain high heat
resistant resins ("Resins"). EPP, EPE, Copolymer and Resins are each tougher and
more resilient, or have higher temperature tolerances, than EPS. Products made
from expandable foams are lightweight and durable, capable of absorbing shocks
and impacts, provide thermal insulation and are chemically neutral.
EFP manufactures and markets the following products:
o Packaging and Shock Absorbing Products. EFP sells these products to
other manufacturers who use them to package and ship a wide
assortment of industrial and consumer products, such as computers,
television sets, toys, furniture, appliances and cameras. Virtually
all of these products are custom-made to fit the "footprint" of the
particular product or item for which EFP's product is being
manufactured. These products are manufactured from EPS and EPP,
with EPP being used for more fragile products. Sales of packaging
and shock absorbing products represent approximately 75% of EFP's
total sales.
o Material Handling Products. These products include reusable trays
or containers that are used for transporting components to or from
a customer's manufacturing facility. EFP also offers its
Thin-Wall(TM) products, which are used as parts positioning trays
for robotic or automatic product assembly (such as camera
manufacturing). Material handling products generally are produced
from EPS, EPP or Copolymer.
o Components. EFP provides materials manufactured from EPP, which are
used as energy absorbing components of automobile bumpers. EFP also
offers a line of its Styro-Cast(R) foam foundry patterns used by
foundries in the "lost foam" or "evaporative casting" metal pouring
process. During 1996, EFP began the production of door cores, with
a molded-in metal frame, for use in the mobile home manufacturing
industry.
Customers and Sales. EFP's products are sold to the automotive,
electronics, furniture, appliance and marine industries, among others. EFP has a
reasonably diversified customer base.
EFP utilizes an in-house sales force and engages independent
representatives, from time to time, to provide supplemental sales support in the
marketing of EFP's packaging and shock absorbing products. EFP also employs an
engineering staff that assists customers in the production, design and testing
6
<PAGE>
of products. Because expanded foams are very bulky, freight charges impose
geographical limitations on sales of those products. Generally, EFP considers
its target market to be limited to a 300-mile radius surrounding each
manufacturing facility. In certain circumstances, however, EFP has shipped its
products greater distances.
Manufacturing and Supplies. EFP manufactures its products at facilities
located in Indiana, Wisconsin, Alabama, Tennessee and Texas. The Texas and
Tennessee facilities manufacture products primarily for Compaq Computer
Corporation and Toshiba Corporation, respectively, although EFP utilizes both
facilities to manufacture products for other customers as well.
As is customary in the industry, EFP purchases its raw materials from a
variety of sources on a purchase order basis and not pursuant to long term
supply contracts. Raw material prices fluctuate and EFP historically has been
affected by price increases in the past but has not experienced significant
shortages of raw materials in recent years.
EFP is ISO 9001 certified. ISO 9001 is an internationally recognized
certification of production practices and techniques employed in manufacturing
processes.
Industry. Because most of EFP's products are manufactured for use by
other industries, economic conditions, which affect those other industries,
generally will affect EFP's operations. In particular, growth or a downturn in
the automotive, electronics, furniture or appliance industries generally would
be expected to have a corresponding effect on EFP's business, as those are the
principal industries served by its packaging and shock absorbing products. Sales
of EFP's products typically are not seasonal, other than during a slight
downturn during the latter part of December and early January.
Competition. EFP competes with other molded, expandable plastic producers
and with manufacturers of alternative packaging and handling materials,
including paper, corrugated boxes and other foam products (such as soft
urethane). Many of these competitors, particularly the paper companies, are
large companies having greater financial resources than EFP. Certain other
expandable plastic manufacturers have multiple facilities. EFP also competes
with other companies in the foundry patterns market. Competitive factors include
price, quality and timely delivery of products.
MIC Group
MIC Group is a manufacturer, caster and assembler of precision metal
parts used in the worldwide oil and gas, aerospace and general industries.
Formed in 1963, MIC Group is located in Brenham, Texas and was acquired in 1992.
MIC Group operates an electronic assembly facility in Houston, which operates
under the name ElectroSpec. MIC Group's net sales made up less than 10% of the
Company's net sales during each of the last three years.
Products. MIC Group manufactures various precision metal parts and
electro-mechanical devices that are utilized primarily in a variety of oilfield
applications and also in the aerospace and other industries. Most of the
precision parts currently manufactured by MIC Group are utilized in connection
with the exploration for oil and gas reserves. Parts produced by MIC Group are
utilized for complex functions, such as well bore logging, perforation and
fracturing. Its products are also applicable to many seismic and geophysical
7
<PAGE>
activities. ElectroSpec assembles electronic printed circuit boards and
instrumentation packages for the same or similar applications. Electronic
assembly provides additional sales opportunities by providing turnkey
value-added assemblies to its customers, who incorporate machined parts and
electronics in the manufacture of their products.
Customers. MIC Group sells its products to primarily international
oilfield services and aerospace companies. MIC Group has one customer that
represents approximately 57% of its total net sales during 1998. The customer
has purchased products and services from MIC Group for more than five years and
management considers relations with the customer to be good.
Manufacturing and Supplies. MIC Group manufactures its products in
Brenham, Texas. ElectroSpec is located in Houston, Texas. Management believes
that MIC Group's manufacturing capabilities are among the most sophisticated in
the industry. It performs a broad range of services including
computer-controlled precision machining and welding, electrostatic discharge
machining, electron beam welding, trepanning and gun drilling. MIC Group also
performs investment casting services.
MIC Group is ISO 9002 certified. ISO 9002 is an internationally
recognized certification of production practices and techniques employed in
manufacturing processes.
Products are manufactured primarily from non-magnetic stainless steel,
alloy steels, nickel-based alloys, titanium, brass and beryllium copper.
Materials are obtained from a variety of sources and MIC Group has not
experienced significant shortages in materials in recent years.
Industry. Because a significant amount of MIC Group's products are sold
to large, international oilfield service companies, MIC is not dependent solely
on the domestic oil and gas industry. Rather, demand for equipment and services
supplied by those oilfield service companies and, in turn, sales of related
parts manufactured by MIC Group and ElectroSpec, are directly related to the
level of worldwide oil and gas drilling activity. Aerospace companies make up
the second largest segment of business and that business activity is dependent
on world economics and defense spending.
Competition. MIC Group competes with other businesses engaged in the
machining, casting and manufacturing of parts and equipment utilized in the oil
and gas exploration industry, aerospace and general industry. Technological
know-how and production capacity are the primary competitive factors in MIC
Group's industry.
Discontinued Operation - TAG Distribution
TAG Distribution distributes accessories for light trucks, minivans and
sport utility vehicles; including caps and tonneaus manufactured by TAG
Manufacturing. At December 31, 1998, Leer Retail operated 35 retail stores and
National Truck Accessories operated six wholesale distribution centers,
including Midwest Truck AfterMarket. The Company has decided to exit the truck
automotive accessory distribution business and has committed to a plan to sell
or close the wholesale and retail businesses of TAG Distribution. As of March
19, 1999, the Company has sold 14 retail stores, one wholesale distribution
center and closed one distribution center. The disposition of TAG Distribution
is expected to be substantially complete by mid-1999. TAG Distribution has been
8
<PAGE>
treated as a discontinued operation in the Company's Consolidated Financial
Statements. See Note 13 to the Consolidated Financial Statements of the Company.
Discontinued Operation - Lowy
Lowy, which was acquired in 1991, operates in the floor covering
distribution business. The Company has decided to sell the Lowy distribution
business and, accordingly, has classified it as a discontinued operation in the
Company's Consolidated Financial Statements. Lowy included carpet manufacturing
and dyeing operations (Blue Ridge and Courier), which were sold, effective
August 31, 1998. See Note 13 to the Consolidated Financial Statements of the
Company.
Lowy is a leading wholesale floor-covering distributor, in the Midwest,
serving twelve Midwestern states. It operates seven facilities, located in Iowa,
Kansas, Minnesota, Nebraska and three locations in Missouri.
Products. Lowy offers two broad categories of products, each of which
includes multiple product lines and accessories:
o Hard Surface Products. Hard surface products include sheet vinyl,
vinyl, wood flooring, ceramic floor, wall tiles and accessories
and laminate flooring.
o Soft Surface Products. This product line consists of carpet,
padding substrate used in carpet installation, area rugs and
sundry items, such as carpet cleaners and installation
accessories. Most of Lowy's carpet sales are for residential
installation, with the balance being sales to the commercial
market. Its carpet line is anchored by carpet manufactured by
Barrett, the Beaulieu Group, Miliken, the Mohawk Group and the
Shaw Group. Lowy Distribution also offers private label carpeting
marketed under the "Americana" and "Essex House" names and
manufactured by various suppliers.
Customers and Sales. Lowy sells its products primarily to floor
covering retailers, most of which are privately owned, small to medium-sized
dealers located away from major metropolitan areas. These dealers rely on
wholesalers, such as Lowy, to provide a broad line of products with adequate
inventory ready for immediate delivery and to provide sales and marketing
support.
Inventory and Supplies. Lowy offers products manufactured by a variety
of suppliers. Its largest supplier is Congoleum Corporation ("Congoleum"), whose
products represent approximately 30% of Lowy's total revenue during each of the
last three years. Lowy has purchased products from Congoleum since 1967 and
management considers its relations with Congoleum to be good. Nonetheless,
Congoleum is entitled to terminate its relationship with Lowy at any time,
subject to notice requirements. Lowy is an exclusive distributor of Congoleum's
products in certain markets and competes with other Congoleum distributors in
other markets. Congoleum may appoint additional distributors of its products in
Lowy's markets at any time. The loss of Congoleum as a supplier, or the
introduction of other Congoleum distributors into Lowy's markets, could
adversely affect Lowy's operations.
9
<PAGE>
Industry. The wholesale distribution of floor covering is affected by
the level of new home and remodeling construction activity. The industry is
somewhat seasonal, with the second and third quarters generally having higher
sales than the other quarters.
Competition. The floor covering wholesale distribution business is
highly competitive. Lowy competes with other wholesale distributors, retail
building supply chains and large carpet and tile manufacturing companies, who
sell their products directly to their customers.
Trademarks and Patents
The Company owns rights to certain presentations of Leer's name (part
of TAG Manufacturing), which the Company believes is valuable insofar as
management believes that it is recognized as being a leading "brand name." The
Company also owns rights to certain other trademarks and tradenames, including
certain presentations of Morgan's name. Although these and other trademarks and
tradenames used by the Company help customers differentiate Company product
lines from those of competitors, the Company believes that the trademarks or
tradenames themselves are less important to customers than the quality of the
products and services.
Employees
At February 28, 1999, the Company had approximately 3,300
full-time employees. Personnel are unionized in: Lowy Distribution's Fridley,
Minnesota (contract expires May, 1999), St. Louis (contract expires February,
2001) and Ankeny, Iowa (contract expires December, 1999) warehouses (covering
10, 14, and 7 persons, respectively); EFP's Decatur, Alabama facility (covering
approximately 65 persons, with a contract expiring in August 2000); and TAG
Manufacturing's Raider Industries facility in Canada (covering approximately 160
persons, with a contract expiring in December 2000). The Company believes that
relations with its employees are good.
Environmental Matters
The Company's operations are subject to numerous environmental statutes
and regulations, including laws and regulations affecting its products and
addressing materials used in manufacturing the Company's products. In addition,
certain of the Company's operations are subject to federal, state and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the air and water. The Company also generates non-hazardous
wastes. The Company has received occasional notices of noncompliance, from time
to time, with respect to its operations, which are typically resolved by
correcting the conditions and the payment of minor fines, none of which
individually or in the aggregate has had a material adverse effect on the
Company. However, the Company expects that the nature of its operations will
continue to make it subject to increasingly stringent environmental regulatory
standards. Although the Company believes it has made sufficient capital
expenditures to maintain compliance with existing laws and regulations, future
expenditures may be necessary, as compliance standards and technology change.
Unforeseen significant expenditures required to maintain such future compliance,
including unforeseen liabilities, could limit expansion, or otherwise, have a
material adverse effect on the Company's business and financial condition.
10
<PAGE>
Morgan has been named as a potentially responsible party ("PRP") with
respect to the generation of hazardous materials alleged to have been handled or
disposed of at two Federal Superfund sites in Pennsylvania and one in Kansas.
Although a precise estimate of liability cannot currently be made with respect
to these sites, based upon information known to Morgan, the Company currently
believes that it's proportionate share, if any, of the ultimate costs related to
any necessary investigation and remedial work at those sites will not have a
material adverse effect on the Company.
Since the 1980s and early 1990s, products manufactured from expandable
polystyrene, such as some of the products manufactured by EFP, have been
criticized as being allegedly harmful to the environment. Although management
believes that more recent information suggests that expandable polystyrene is
not as harmful to the environment as reported earlier, negative publicity
relating to the material has had, and in the future could have, an adverse
effect on EFP's business, although this publicity has not had a material adverse
effect on EFP's results of operations.
Item 2. Properties
The Company owns or leases the following manufacturing, office and
sales facilities as of March 19, 1999:
Owned
Approximate or Lease
Location Principal Use Square Feet Leased Expir-
ation(a)
Morgan:
Ehrenberg, Arizona ........... Manufacturing 125,000 Owned --
Rydal, Georgia ............... Manufacturing 85,000 Leased 1999
Ephrata, Pennsylvania ........ Manufacturing 50,000 Owned --
Morgantown, Pennsylvania ..... Manufacturing 62,900 Leased 1999
Morgantown, Pennsylvania ..... Office & manufacturing 261,500 Owned --
Corsicana, Texas ............. Manufacturing 60,000 Owned --
Janesville, Wisconsin ........ Manufacturing 23,000 Leased 1999
Janesville, Wisconsin ........ Manufacturing 32,000 Owned --
Clackamas, Oregon ............ Manufacturing 78,000 Leased 2003
TAG Manufacturing:
Woodland, California ......... Manufacturing 92,000 Leased 2001
Elkhart, Indiana ............. Office & research 17,500 Owned --
Elkhart, Indiana ............. Manufacturing 139,000 Leased 2001
Milton, Pennsylvania ......... Manufacturing 102,000 Leased 2001
Elkhart, Indiana ............. Manufacturing 91,900 Owned --
Elkhart, Indiana ............. Office & manufacturing 18,400 Leased 1999
Drinkwater, Saskatchewan, Canada Office & manufacturing 72,000 Owned --
Moose Jaw, Saskatchewan, Canada Manufacturing 87,000 Leased 2005
EFP:
Decatur, Alabama ............. Manufacturing 175,000 Leased 1999
Elkhart, Indiana ............. Office & manufacturing 211,600 Owned --
Elkhart, Indiana ............. Manufacturing 24,900 Leased 1999
Gordonsville, Tennessee ...... Manufacturing 40,000 Leased 2001
Marlin, Texas ................ Manufacturing 73,000 Leased 2001
Waukesha, Wisconsin .......... Manufacturing 13,850 Leased 2000
MIC Group:
Brenham, Texas ............... Office & manufacturing 75,500 Owned --
Houston, Texas ............... Manufacturing 9,600 Leased 2000
(a) Including all renewal terms.
The Company utilizes principally all of its facilities and believes
that its facilities are adequate for its current needs and are capable of being
utilized at higher capacities to supply increased demand, if necessary.
11
<PAGE>
Item 3. Legal Proceedings
The Company is involved in various lawsuits, which arise in the
ordinary course of business. In the opinion of management, the ultimate outcome
of these lawsuits will not have a material adverse effect on the Company.
EFP is subject to a lawsuit concerning the supply of natural gas to one
of its manufacturing plants. The utility company has alleged that EFP was
under-billed by approximately $500,000 over a four-year period, as a result of
errors made by the utility company. The Company is aggressively defending the
suit and believes that its resolution will not have a material adverse effect on
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The registrant's common equity is privately held and not publicly
traded. As of March 19, 1999, one individual owned all of the registrant's
issued and outstanding common equity. During the last three fiscal years, JBPCO
paid no cash dividends.
The registrant's ability to pay dividends on its common equity is
restricted to the extent described in the Senior Note Indenture, dated of May
23, 1994, pertaining to the registrant's 12 1/2% Senior Notes due 2004 and the
Loan and Security Agreement, dated as of June 28, 1996, with Congress Financial
Corporation, as lender.
Item 6. Selected Financial Data
The historical financial data presented below, for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994, are derived from the audited
Consolidated Financial Statements of the Company. The data presented below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements of the Company and notes thereto. The historical financial
information presented below has been restated to reflect the discontinuation of
12
<PAGE>
TAG Distribution and Lowy. The financial information is not directly comparable
due to the acquisitions of Century and Raider in June 1995.
Year Ended December 31,
(Dollars in Millions, Except Per Share Amounts)
1998 1997 1996 1995 1994
Operating Data:
Net sales ........................ $ 365.3 $ 338.6 $ 310.9 $ 329.5 $ 278.9
Cost of sales .................... 310.1 280.2 257.1 283.6 229.0
Selling, general and
administrative expense ........ 47.6 48.4 44.7 43.9 34.3
Closed and excess facility costs . 0.3 1.4 1.0 -- --
Other (income) expense ........... (0.4) (0.4) 0.1 (1.0) --
----- ----- ----- ----- -----
Operating income ................. 7.7 9.0 8.0 3.0 15.6
Interest expense ................. 15.7 15.8 14.5 14.2 9.3
Income tax provision (benefit) ... 0.7 1.0 (1.0) (2.9) 3.0
----- ----- ----- ----- -----
Income (loss) before extraordinary
loss and discontinued operations .... (8.7) (7.8) (5.5) (8.3) 3.3
Income (loss) from discontinued
operations .......................... (3.4) 0.2 (0.6) (0.2) 2.2
Extraordinary loss ................... -- -- (0.3) -- (2.1)
--- --- --- --- ---
Net income (loss) ...................$(12.1) (7.6) $(6.4) $(8.5) $ 3.4
=== === === === ===
Earnings (loss) per share $(3,973) $(2,467) $(2,097) $ 2,790 $1,503
====== ====== ====== ====== ======
Cash dividends per share $ -- $ -- $ -- $ -- $2,910
===== ===== ====== ====== ======
Balance Sheet Data
(at period end):
Working capital ................. $ 15.0 $ 2.3 $ 1.4 $ 7.1 $ 36.8
Total assets .................... 133.9 161.2 162.9 169.0 159.8
Total long-term obligations ..... 102.9 103.3 103.7 105.6 109.0
Stockholder's equity (deficit) .. $ (17.2) $ (4.7) $ 3.0 $ 9.5 $ 17.8
Cash Flow Data:
Net cash provided by (used in)
operating activities ........ $ 11.7 $ (2.5) $ 10.7 $ (8.2)$ (1.7)
Capital expenditures ........... 6.3 7.3 8.1 11.9 9.2
Net cash provided by (used in)
investing activities ........ 10.3 (6.4) (7.5) (19.0) (14.5)
Net cash provided by (used in)
financing activities ....... (23.1) 9.5 (2.3) 19.8 23.5
Depreciation and amortization (a) 10.6 11.6 11.2 10.5 8.2
13
<PAGE>
Other Data:
EBITDA (b) ........................ $17.2 $20.9 $17.1 $10.5 $ 21.6
Consolidated EBITDA
Coverage Ratio (c) ......... 1.1x 1.3x 1.2x 0.7x 2.3x
(a) Depreciation and amortization excludes amortization of debt issuance
cost of $0.9 million, $0.8 million, $0.7 million, $0.7 million and
$0.4 million in 1998, 1997, 1996, 1995 and 1994, respectively.
(b) "EBITDA" from continuing operations is net income increased by the sum
of interest expense, income taxes, depreciation and amortization and
other non-cash items as defined in the Indenture pertaining to the
Senior Notes. EBITDA is not included herein as operating data and
should not be construed as an alternative to operating income
(determined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance. The
Company has included EBITDA from continuing operations because it is
relevant for determining compliance under the Indenture and because the
Company understands that it is one measure used by certain investors to
analyze the Company's operating cash flow and historical ability to
service its indebtedness.
(c) "Consolidated EBITDA Coverage Ratio" is the ratio of EBITDA from
continuing operations of JBPCO and its subsidiaries that guarantee the
Notes, to interest expense that is used in the Indenture to limit the
amount of indebtedness that the Company may incur. Certain of the
Company's subsidiaries are not guarantors of the Notes, see Note 8 of
Notes to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto.
Basis of Financial Statements
During 1998, the Company committed to plans for disposing of Lowy Group
and TAG Distribution. As of December 31, 1998, the Company has disposed of the
Blue Ridge/Courier operations of Lowy and certain portions of TAG Distribution.
The Company plans to dispose of the remaining portions of these business lines
in 1999. Accordingly, the remaining operations of Lowy and TAG Distribution are
being held for sale and the related operating results have been classified as
discontinued operations in the Consolidated Financial Statements for all periods
presented. As a result, the Company recorded a loss from discontinued operations
of $3.4 million, net of taxes in 1998. The components of this net loss are
discussed further under the captions "Discontinued Operations - TAG
Distribution" and "Discontinued Operations - Lowy Group" and in Note 13 to the
Consolidated Financial Statements.
14
<PAGE>
Overview
The Company operates in various industries and considers each of its
main operating subsidiaries a separate business segment. The businesses are
dependent on various factors reflecting general economic conditions including
corporate profitability, consumer spending patterns, sales of truck chassis and
new pickup trucks and the level of oil and gas exploration activity. Net sales
at Morgan and EFP increased 32% and 21%, respectively over the three-year period
ended December 31, 1998, as each segment experienced increased demand for its
products. Sales at TAG Manufacturing decreased 6% during 1997 compared to 1996
as manufacturing quality problems at the Leer operations and the closure of a
Leer manufacturing facility caused a reduction in sales. However, TAG
Manufacturing sales during 1998 recovered to 1996 levels. The MIC Group business
segment experienced a decline in activity during 1998 as a result of the decline
in the level of world-wide oil and gas exploration activity.
The following table represents the net sales, operating income and
operating margins for each business segment and on a consolidated basis.
Years Ended December 31,
1998 1997 1996
---- ---- ----
(Dollars in Millions)
Net Sales:
Morgan ...................... $201.1 $181.7 $152.1
TAG Manufacturing.............. 99.3 95.4 101.9
EFP............................ 38.0 33.0 31.4
MIC Group...................... 26.9 28.5 25.5
-------- -------- --------
Consolidated................... $365.3 $338.6 $310.9
======= ======= ========
Operating Income (Loss):
Morgan......................... $ 2.8 $ 8.6 $ 6.3
TAG Manufacturing.............. 2.2 (4.5) (3.3)
EFP............................ 4.0 3.0 2.7
MIC Group...................... 1.5 4.7 4.8
JBPCO.......................... (2.8) (2.8) (2.5)
------- ------- -------
Consolidated................... $ 7.7 $ 9.0 $ 8.0
====== ======= =======
Operating Margins:
Morgan......................... 1% 5% 4%
TAG Manufacturing.............. 2% (5)% (3)%
EFP............................ 10% 9% 9%
MIC Group...................... 6% 17% 19%
Consolidated................... 2% 3% 3%
Net sales include $14.5 million, $15.6 million and $17.0 million,
respectively, from intercompany sales to TAG Distribution, which has been
classified as a discontinued operation. As a result, operating income includes
approximately $2.9 million, $3.1 million and $3.4 million, respectively, related
15
<PAGE>
to profits on these sales. Since TAG Distribution's results of operations are
classified as discontinued, the intercompany sales do not eliminate on a line
item basis in the accompanying consolidated statement of operations. However, on
a consolidated basis, such intercompany transactions are eliminated in the
accompanying Consolidated Statement of Operations for each period presented.
Under the current plan of disposition for TAG Distribution, a substantial
portion of these sales may not continue subsequent to the disposition.
During 1998, MIC Group closed a facility and incurred charges of $0.3
million, which was included in operating income for the period. TAG
manufacturing operating income included $0.8 million and $1.0 million of charges
during the years ended December 31, 1997 and 1996, respectively, associated with
the closure or write-down in carrying value of certain excess facilities. During
1997, Morgan wrote down the carrying value of its facility in Mexico by $0.5
million.
Results of Operations
Consolidated Operating Results from Continuing Operations
Comparison of 1998 to 1997
Net sales increased 8% to $365.3 million in 1998 compared to $338.6
million in 1997. The increase was due primarily to Morgan, whose sales increased
11% or $19.4 million. EFP and TAG Manufacturing recorded sales increases of 15%
or $5.0 million and 6% or $5.0 million, respectively. Sales decreased 6% or $1.7
million at MIC Group.
Cost of sales increased 11% to $310.1 million in 1998 from $280.2
million in 1997. Gross profits decreased 5% to $55.2 million (15% of net sales)
in 1998 compared to $58.4 million (17% of net sales) in 1997. The decrease in
gross profits was due primarily to Morgan and MIC Group, whose gross profits
decreased 22% or $5.6 million and 34% or $2.7 million, respectively, partially
offset by increases at EFP of 22% or $1.5 million and at TAG Manufacturing of
20% or $3.7 million.
Selling, general and administrative expense decreased 2% to $47.6
million (13% of net sales) in 1998 compared to $48.4 million (14% of net sales)
in 1997. The decrease was due primarily to an 11% or $2.3 million decrease at
TAG Manufacturing.
Operating income decreased 14% to $7.7 million in 1998 compared to $9.0
million in 1997. TAG Manufacturing's operating income increased $6.8 million to
$2.2 million in 1998 compared to an operating loss of $4.6 million in 1997 and
EFP's operating income increased 31% or $1.0 million. Operating income decreased
67% or $5.8 million at Morgan and 67% or $3.2 million at MIC Group.
Interest expense decreased 1% to $15.7 million in 1998 compared to
$15.8 million in 1997 and weighted average total debt decreased approximately 5%
to $132.0 million during 1998 compared to $139.0 million during 1997.
16
<PAGE>
The Company recorded an income tax expense of $0.7 million for the year
ended December 31, 1998 compared to a $1.0 million expense during 1997. The
income tax expense of $0.7 million in 1998 represents state and foreign income
taxes payable. The Company's income tax provision differs from the federal
statutory rate principally due to a $3.6 million increase in the deferred tax
valuation allowance relating to net operating losses that may not be realizable.
See Note 10 of Notes to the Consolidated Financial Statements.
Comparison of 1997 to 1996
Net sales increased 9% to $338.6 million in 1997 compared to $310.9
million in 1996. The increase was due primarily to Morgan, whose sales increased
19% or $29.6 million and increases at MIC Group of 12% or $3.1 million and at
EFP of 5% or $1.5 million. TAG Manufacturing sales decreased $6.5 million or 6%.
Cost of sales increased 9% to $280.2 million in 1997 from $257.1
million in 1996, and gross profits increased 8% to $58.4 million (17% of net
sales) in 1997 compared to $53.8 million (17% of net sales) in 1996. Morgan, EFP
and MIC Group recorded 26%, 9% and 2% increases in gross profits, respectively.
Selling, general and administrative expense increased 8% to $48.4 million
(14% of net sales) in 1997 compared to $44.7 million (14% of net sales) in 1996.
The Company recorded Closed and Excess Facility Costs of $1.4 million
and $1.0 million during the years ended December 31, 1997 and 1996,
respectively. During 1997, Morgan considered selling its idle facility in
Mexico. Accordingly, Morgan began marketing the property and, based on an
estimate of the fair value less the cost to sell the property, wrote down the
carrying value by $0.6 million. In 1996, TAG Manufacturing closed two
manufacturing facilities, resulting in a charge of $1.0 million for the year
ended December 31,1996, and additional charges during the year ended December
31, 1997 of $0.8 million.
Operating income increased 12% to $9.0 million in 1997 compared to $8.0
million in 1996. Operating losses at TAG Manufacturing increased 39% to $4.6
million during 1997 compared to $3.3 million during 1996.
Interest expense increased 9% to $15.8 million in 1997 compared to
$14.5 million in 1996 and average total debt increased 5% to $139.0 million
during 1997 compared to $132.3 million in 1996.
The Company recorded an aggregate income tax expense for continuing
operations of $1.0 million for the year ended December 31, 1997 compared to a
$1.0 million benefit during 1996. See Note 11 of Notes to the Consolidated
Financial Statements.
17
<PAGE>
Business Segment Results
Morgan
During 1998, the Company appointed a new president of Morgan (See Part
III of the Company's Annual Report on Form 10-k). Subsequently, new key members
of management were appointed, including a Vice President of Operations, Chief
Financial Officer and a Vice President of Human Resources. Morgan acquired Gem
Top from TAG, effective June 30,1997. Gem Top manufactures pickup truck caps
primarily for commercial customers, which compliments the Morgan business.
Morgan's operating results have been restated to include Gem Top for all periods
presented.
Comparison of 1998 to 1997
Net sales increased 11% to $201.1 million in 1998 compared to $181.7
million in 1997. Shipments of van body units increased 13% to 26,600 units in
1998 compared to 23,600 units during 1997. Consumer Rental Sales (as defined
under Part I, Item I - Business) decreased 18% to $18.7 million and Commercial
Sales increased 22% to $158.1 million in 1998 compared to 1997. Backlog at
December 31, 1998 was $73.3 million compared to $55.2 million at the end of
1997. The increase in backlog reflects continued demand for Morgan products.
However, Morgan depends upon chassis manufacturers for timely delivery of its
customers' chassis. Approximately $13.2 million of backlog at December 31, 1998
is a result of delayed chassis deliveries.
Cost of sales increased 16% to $181.2 million in 1998 compared to
$156.1 million in 1997. Gross profits decreased 22% or $5.6 million to $20.0
million (10% of net sales) compared to $25.6 million (14% of net sales) in 1997.
The gross profit margin decreased as a result of the increased material and
overhead costs as a percentage of sales and less favorable pricing on certain of
Morgan's products. Corrective action taken by the new management team included
the re-negotiation of raw material supply arrangements and of certain product
pricing.
Selling, general and administrative expense increased 1% to $17.2
million (9% of net sales) in 1998 compared to $17.0 million (9% of net sales) in
1997. Selling expense increased 10% to $8.9 million primarily as a result of
increased sales commissions on higher sales. General and administrative expense
remained approximately the same in 1998 compared to 1997. An 18% reduction in
general and administrative personnel and the related cost reductions were offset
by severance payments and increased relocation costs associated with new
management personnel.
Morgan's operating income decreased 67% to $2.8 million (1% of net
sales) in 1998 compared to $8.6 million (5% of net sales) in 1997. The decline
in operating income was due primarily to the reasons cited above for the
reduction in gross profits.
Comparison of 1997 to 1996
Net sales increased 19% to $181.7 million in 1997 compared to $152.1
million in 1996. Shipments of van body units increased 26% to 23,600 units in
1997 compared to 18,700 units during 1996. Consumer Rental Sales increased 65%
to $22.9 million and Commercial Sales increased 10% to $131.3 million in 1997
18
<PAGE>
compared to 1996. Backlog at December 31, 1997 was $55.2 million compared to
$50.2 million at the end of 1996. The increase in backlog reflects an increase
in consumer rental orders following a downturn in that business during 1996.
Cost of sales increased 19% to $156.1 million in 1997 compared to
$131.7 million in 1996 as a result of the increase in units produced. Gross
profits increased 26% or $5.2 million to $25.6 million (14% of net sales)
compared to $20.4 million (13% of net sales) in 1996. Gross profit margin
increased slightly as a result of slightly lower raw material costs and the
implementation of selling price increases.
Selling, general and administrative expense increased 23% to $17.0
million (9% of net sales) in 1997 compared to $13.8 million (9% of net sales) in
1996. General and administrative expense increased 50% or $3.0 million due to
increased personnel and the related costs.
Due to increased net sales, Morgan's operating income increased 35% to $8.6
million in 1997 compared to $6.3 million in 1996. As a percentage of net sales,
operating income increased to 5% in 1997 compared to 4% in 1996.
TAG Manufacturing
TAG historically was comprised of two divisions: TAG Manufacturing and
TAG Distribution. As a result of continued losses from TAG Distribution. During
1998, management committed to a formal plan to dispose of those operations.
Therefore, the following discussion excludes TAG Distribution.
The following discussion also excludes the operations of Gem Top, which
was acquired by Morgan in June 1997. TAG Manufacturing's results have been
restated to exclude Gem Top for all periods presented.
Comparison of 1998 to 1997
Net sales for TAG Manufacturing increased 4% to $99.4 million in 1998
compared to $95.4 million in 1997. Net sales included intercompany sales to TAG
Distribution of $12.7 million in 1998 compared to $13.7 million in 1997. TAG
Manufacturing's net third party sales increased 6% to $86.7 million during 1998
compared to $81.7 million during 1997. Total shipments of caps and tonneaus,
including shipments to TAG Distribution were 175,000 units during 1998 compared
to 162,000 units in 1997. The increase in units shipped is primarily due to
improved quality, more favorable product mix and product pricing.
Cost of sales was $78.0 million in 1998 and 1997. Gross profits
increased 20% to $21.4 million (21% of net sales) during 1998 compared to $17.7
million (19% of net sales) during 1997. The increase in gross profits was due
primarily to a decrease in warranty costs as a result of improved quality at the
Leer division and a 3% decrease in material costs as a percentage of sales.
Selling, general and administrative expense decreased 11% to $19.6
million (20% of net sales) during 1998 compared to $21.9 million (23% of net
sales) during 1997. General and administrative expense decreased 18% or $1.4
19
<PAGE>
million, primarily as a result of a reduction in corporate overhead costs.
TAG Manufacturing incurred an operating profit for the year ended
December 31, 1998 of $2.2 million compared to an operating loss of $4.6 million
in 1997. The improvement in operating performance was primarily the result of
higher shipments and lower direct costs resulting in improved gross profits.
Comparison of 1997 to 1996
Net sales for TAG Manufacturing decreased 6% to $95.4 million in 1997
compared to $101.9 million in 1996. TAG Manufacturing sales included
intercompany sales to TAG Distribution of $13.7 million in 1997 and $15.3
million in 1996. Total shipments of caps and tonneaus, including shipments to
TAG Distribution, were 162,000 units during 1997 compared to 174,000 units in
1996. The decline in units shipped was primarily a result of the closing of the
Leer plant in the Southeastern United States and a decline in national market
share. Raider recorded an 8,900 unit or 44% increase in shipments and Century's
shipments were consistent with the prior year.
Cost of sales decreased $5.1 million (6%) to $77.7 million in 1997
compared to $82.7 million in 1996. Gross profits decreased 7% to $17.7 million
(19% of net sales) during 1997 compared to $19.2 million (19% of net sales)
during 1996. The decrease in gross profits was primarily due to a decrease of
$3.1 million or 29% at Leer Manufacturing as a result of increased material
costs arising from product quality problems.
Selling, general and administrative expense increased 2% to $21.9
million (23% of net sales) during 1997 compared to $21.6 million (21% of net
sales) during 1996. Selling expense increased 4% or $0.5 million, primarily as a
result of increased delivery costs.
TAG Manufacturing incurred an operating loss for the year ended December
31, 1997 of $4.6 million compared to an operating loss of $3.3 million in 1996.
The Leer Manufacturing plant in the Southeastern United States was
closed during the last quarter of 1996 due to inefficient operations. Production
was transferred to the remaining TAG Manufacturing plants with an associated
reduction in overhead costs. Including costs of closing another minor facility,
total closure costs of approximately $1.0 million were charged to expense during
1996 as Closed and Excess Facility Cost.
EFP
Comparison of 1998 to 1997
Net sales increased 15% to $38.0 million in 1998 compared to $33.0
million in 1997. EFP's Packaging and Shock Absorbing product (as defined under
Part I, Item I - Business) sales increased $4.0 million, on the strength of
increased shipments to customers in the consumer electronic industry.
20
<PAGE>
Cost of sales increased 14% to $29.4 million in 1998 from $25.9 million
in 1997. Accordingly, gross profits increased 22% to $8.6 million (23% of net
sales) in 1998 compared to $7.1 million (21% of net sales) in 1997. The increase
in gross profits was due to a decrease in material costs and improved overhead
absorption on higher sales volume.
Selling, general and administrative expense increased 14% to $4.6
million (12% of net sales) in 1998 compared to $4.0 million (12% of net sales)
in 1997, primarily due to increased general and administrative expenses,
including higher incentive based costs.
EFP's operating income increased 31% to $4.0 million (10% of net sales)
in 1998 compared to $3.0 million (9% of net sales) in 1997, primarily due to
increased gross profits on higher sales.
Comparison of 1997 to 1996
Net sales increased 5% to $33.0 million in 1997 compared to $31.5
million in 1996. EFP's Components (as defined under Part I, Item I - Business)
sales increased $1.9 million, on the strength of new business, including the
door core business started in 1996.
Cost of sales increased 4% to $25.9 million in 1997 from $25.0 million
in 1996. Accordingly, gross profits increased 9% to $7.1 million (21% of net
sales) in 1997 compared to $6.5 million (21% of net sales) in 1996. The increase
in gross profits was due to a decrease in material costs, which were partially
offset by higher labor costs resulting from changes in product mix.
Selling, general and administrative expense increased 6% to $4.0 million
(12% of net sales) in 1997 compared to $3.8 million (12% of net sales) in 1996.
EFP's operating income increased 11% to $3.0 million (9% of net sales) in
1997 compared to $2.7 million (9% of net sales) in 1996.
MIC Group
During 1998, the Company appointed a new President of MIC Group and
subsequently appointed a new Vice President of Sales and a Vice President of
Quality.
Comparison of 1998 to 1997
Net sales decreased 6% to $26.9 million in 1998 compared to $28.6
million in 1997. The decrease was attributable to reduced demand for MIC's
products and services caused by lower levels of activity in the energy
exploration and production business. The decline in levels of activity in the
energy business accelerated in the second half of 1998 and continued into 1999.
MIC Group is increasing efforts to diversify its revenue base outside the energy
business.
Cost of sales increased 5% to $21.6 million in 1998 compared to $20.6
million in 1997. Gross profits decreased 34% to $5.3 million (20% of net sales)
in 1998 compared to $8.0 million (28% of net sales) in 1997. During the fourth
21
<PAGE>
quarter of 1998, in response to a 33% decline in sales, measures were taken to
reduce direct costs, including a 25% reduction in labor personnel.
Further measures are being implemented.
Selling, general and administrative expense increased 6% to $3.5
million (13% of net sales) compared to $3.3 million (11% of net sales) in 1997,
primarily due to increased sales personnel and related costs associated with
efforts to diversify the customer base into the non-energy business.
During the year ended December 31, 1998, the Houston machine shop was
closed resulting in costs of $0.3 million included in Closed and Excess Facility
Costs.
Operating income decreased 67% to $1.5 million (6% of net sales) during
1998 compared to $4.7 million (17% of net sales) in 1997.
Comparison of 1997 to 1996
Net sales increased 12% to $28.6 million in 1997 compared to $25.5
million in 1996. The increase was attributable to greater demand for Magnetic's
products and services due to increased levels of activity in the energy
exploration and production business.
Cost of sales increased 17% to $20.6 million in 1997 compared to $17.6
million in 1996. Accordingly, gross profits increased 2% to $8.0 million (28% of
net sales) in 1997 compared to $7.8 million (31% of net sales) in 1996. Labor
costs increased $1.4 million or 18%, primarily due to increased training costs.
Selling, general and administrative expense increased 6% to $3.3
million (11% of net sales) compared to $3.0 million (12% of net sales) in 1996,
principally because of increased sales, personnel and related costs.
Operating income decreased 1% to $4.7 million (17% of net sales) during
1997 compared to $4.8 million (19% of net sales) in 1996.
Discontinued Operations - TAG Distribution
TAG Distribution incurred operating losses of $2.4 million, $5.4
million and $2.8 million during 1998, 1997 and 1996, respectively. As a result
of continued losses from TAG Distribution, on April 2, 1998, management
committed to a formal plan to dispose of TAG Distribution. Accordingly, the
results of operations of TAG Distribution have been classified as discontinued
operations in the accompanying financial statements for all periods presented.
The plan of disposal is expected to be substantially completed by the end of the
second quarter of 1999. In addition, the net assets and liabilities of TAG
Distribution, which are expected to be disposed of, have been segregated within
the accompanying consolidated balance sheets as "net assets of discontinued
operations." As of March 19, 1999, the Company has sold one wholesale location
and 14 retail locations. Two wholesale locations and two retail locations have
been closed.
As a result of this plan, the Company recorded a loss on TAG
Distribution's discontinued operations of $12.0 million, net of applicable
taxes, in 1998. This net loss is comprised of $1.2 million related to losses on
22
<PAGE>
operations prior to April 2, 1998, and $10.8 million related to the estimated
loss on disposal, each net of applicable taxes. The Company estimates that this
loss on disposal will include losses of $2.8 million for operations from April
2, 1998 through the disposal date and $8.0 million for the excess of the
carrying value of assets over estimated net realizable value, each net of
applicable taxes.
Effective January 29, 1999 in accordance with the plan of disposal, the
Company sold the business and assets of Radco, which were part of the retail
operations of TAG Distribution. Proceeds of approximately $1.2 million were used
to repay borrowings under the revolving credit agreement entered into by Radco
during 1997. Effective on the same date, Radco changed its name to Welshman
Industries, Inc.
Comparison of 1998 to 1997
TAG Distribution net sales increased 6% to $58.5 million during 1998
compared to $54.9 million in 1997. At Leer Retail, sales decreased 5% to $35.4
million and at National Truck Accessories, wholesale sales increased 30% or $5.3
million. Sales of Midwest Truck AfterMarket, Inc., acquired in October 1997,
increased $6.3 million during 1998 compared to the two months of 1997.
Cost of sales increased $3.4 million (9%) to $40.8 million in 1998
compared to $37.4 million in 1997. Gross profits increased 1% to $17.7 million
(30% of net sales) during 1998 compared to $17.5 million (32% of net sales)
during 1997.
Selling, general and administrative expense decreased 17% to $19.0
million (33% of net sales) during 1998 compared to $22.9 million (42% of net
sales) during 1997. General and administrative expense decreased 39% or $3.0
million, primarily as a result of eliminating the costs associated with the TAG
Distribution headquarters office in Houston.
TAG Distribution incurred an operating loss for the year ended December 31,
1998 of $2.4 million compared to an operating loss of $5.4 million in 1997.
Comparison of 1997 to 1996
TAG Distribution net sales decreased 18% to $55.0 million during 1997
compared to $67.1 million during 1996. At Leer Retail, sales decreased 13% to
$37.2 million as same store sales decreased approximately 6%, primarily due to
lower cap sales. Leer Retail closed six stores between July 1996 and December
1997, which reduced sales approximately $2.8 million during 1997 compared to
1996. Wholesale sales decreased 27% or $6.7 million, primarily due to softness
in regional markets and loss of customers resulting from a reorganization of
service areas late in 1996. Effective October 31, 1997, TAG acquired the assets
of Midwest Truck AfterMarket, Inc., a wholesale distributor of light truck
accessories based in Tulsa, Oklahoma, for approximately $2.7 million. The
acquisition provided the wholesale operations of TAG Distribution with a
presence in a geographical market not previously served.
23
<PAGE>
Cost of sales decreased $9.0 million (19%) to $37.4 million in 1997
compared to $46.4 million in 1996. Gross profits decreased 16% to $17.5 million
(32% of net sales) during 1997 compared to $20.8 million (31% of net sales)
during 1996. The decrease in gross profits was due primarily to the $12.1
million decline in sales.
Selling, general and administrative expense decreased 2% to $22.9
million (42% of net sales) during 1997 compared to $23.3 million (35% of net
sales) during 1996. Selling expense decreased 15% or $2.7 million primarily as a
result of a $1.7 million (13%) decrease in selling expense at Leer Retail,
resulting from the closure of six stores during 1997. General and administrative
expense increased 41% or $2.2 million primarily as a result of costs associated
with the headquarters office in Houston.
During the year ended December 31, 1997, TAG Distribution closed the
headquarters in Houston and eight unprofitable retail stores at a cost of $1.0
million.
TAG Distribution incurred an operating loss for the year ended December
31, 1997 of $5.4 million compared to an operating loss of $2.8 million in 1996.
The decline in operating performance was primarily the result of lower sales and
the costs associated with the closing and consolidation of various stores and
administrative activities.
Discontinued Operations - Lowy Group
The sale of the Blue Ridge/Courier division of Lowy was completed and
was effective on August 31, 1998, resulting in a gain of $6.5 million. Effective
September 8, 1998, the Company decided to pursue a plan to sell the Lowy
Distribution division of Lowy. Accordingly, the operations of Lowy Group have
been classified as discontinued in the Consolidated Financial Statements for all
periods presented. The net assets and liabilities of Lowy, which are expected to
be disposed of, have been segregated within the accompanying consolidated
balance sheets as "net assets of discontinued operations." Because the assets of
Blue Ridge/Courier were sold during the period, the following discussion is
related to the operations of Lowy Distribution only.
The Company expects to break even from the operations of Lowy through
the disposal date. The anticipated sales proceeds from the disposal of Lowy
Distribution's assets are expected to equal or exceed their carrying value at
December 31, 1998.
Comparison of 1998 to 1997
Net sales decreased 5% to $36.1 million in 1998 compared to $37.9
million in 1997, primarily due to poor sales of carpet and vinyl products
partially offset by increased wood flooring sales.
Cost of sales decreased 4% to $27.9 million in 1998 compared to $29.2
million in 1997. Gross profits decreased 6% to $8.2 million (23% of net sales)
in 1998 compared to $8.7 million (23% of net sales) in 1997.
24
<PAGE>
Selling, general and administrative expense decreased 7% to $8.0
million (22% of net sales) in 1998 compared to $8.5 million (22% of net sales)
in 1997, due primarily to a decrease in selling expense as a result of a
reduction in sales personnel and related costs.
Lowy sold two properties during 1997, recognizing a gain of $2.7
million, which was included in Other Income, for the year ended December 31,
1997. A warehouse facility near Minneapolis, Minnesota was sold, effective March
31, 1997, and the operations moved to a new location during the quarter ended
June 30, 1997. Effective June 30, 1997, Lowy Distribution sold and leased back a
warehouse facility in Ankeny, Iowa.
Lowy Group's operating income, excluding the gains from the sale of real
estate, was $0.3 million (1% of net sales) in 1998 and 1997.
Comparison of 1997 to 1996
Net sales decreased 9% to $37.9 million in 1997 compared to $41.5
million in 1996. Cost of sales decreased 9% to $29.2 million in 1997 from $32.1
million in 1996. Accordingly, gross profits decreased 7% to $8.7 million (23% of
net sales) in 1997 compared to $9.4 million (23% of net sales) in 1996.
Selling, general and administrative expense decreased 3% to $8.5 million
(22% of net sales) in 1997 compared to $8.8 million (21% of net sales) in 1996.
Lowy Group's operating income, excluding the gains on the sale of real
estate during 1997 of $2.7 million, decreased 50% to $0.3 million (1% of net
sales) in 1997 compared to $0.6 million (2% of net sales) in 1996.
Liquidity and Capital Resources
During 1998, net cash provided by operations was $11.7 million compared
to net cash used of $2.5 million during 1997. Overall changes in working capital
provided cash of $14.1 million during 1998 primarily due to a reduction in
working capital at Morgan of $4.4 million. Cash provided by operations was used
to pay down revolver borrowings and to fund capital expenditures of $6.3
million.
The Company's ability to borrow under its Revolving Loan Agreement
depends on the amount of eligible collateral, which is dependent on certain
advance rates applied to the value of accounts receivables and inventory. At
March 13, 1999, the Company had unused available borrowing capacity of $20.7
million under the terms of the Revolving Loan Agreement. At December 31, 1998,
the Company had total borrowing capacity of $43.3 million, of which, $3.7
million was used to secure letters of credit and foreign exchange
accommodations. At December 31, 1998, the Company had unused available borrowing
capacity of approximately $22.0 million. On August 31, 1998, the Company
completed the sale of the assets of Blue Ridge/Courier and proceeds from the
sale of approximately $15.3 million were used to repay borrowings under the
Revolving Loan Agreement.
25
<PAGE>
The initial term of the three-year Revolving Loan Agreement ends in June
1999, however, the agreement provides for borrowings on a year to year basis,
unless sooner terminated by the Company or lender, provided that the lender may
at its option extend the renewal date to a fourth year. On March 29, 1999, the
Company was notified by the lender, in writing, that it is exercising this
option thus extending the agreement to June 2000.
The Company's Radco subsidiary (part of TAG Distribution), which is a
non-guarantor subsidiary under the terms of the bond indenture, concurrently
with the acquisition of substantially all the assets of MTA, entered into a
three-year revolving credit agreement with the Company's revolving credit
lender. The agreement provided for borrowings of up to the lesser of $5,000,000
or an amount based on advance rates applied to the total amounts of eligible
accounts receivable and inventories of Radco. At December 31, 1998, Radco had
total borrowings of approximately $1.6 million under the revolving credit
agreement. Effective January 29, 1999, the business and assets of Radco were
sold to third parties. Net proceeds of approximately $1.2 million were used to
pay down borrowings under the Revolving Credit Agreement. At December 31, 1998,
accounts due under the facility are included in "Net Assets of Discontinued
Operations".
As discussed in Notes 7 and 8 to the Consolidated Financial Statements,
the Company's Revolving Loan Agreement and Senior Notes Indenture restrict the
ability of the Company to dispose of assets, incur debt, pay dividends and
restrict certain corporate activities.
The Company believes that it has adequate resources to meet its working
capital and capital expenditure requirements consistent with past trends and
practices. The Company also believes that its cash balances and the borrowing
availability under the Revolving Credit Agreement will satisfy the Company's
cash requirements for the foreseeable future, given its anticipated additional
capital expenditure and working capital requirements and its known obligations.
Year 2000
The Year 2000 (Y2K) issue is the result of computer programs being
written using two digits rather than four to define a specific year. Absent
corrective actions, a computer program that has date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations resulting in disruptions to
operations.
The Company's plan to resolve the Y2K issue involves the following four
phases: assessment, remediation, testing, and implementation. Based on the
recently completed assessment of continuing operations, the Company determined
that it will be required to modify or replace significant portions of its
software and certain hardware so that those systems will properly utilize dates
beyond December 31, 1999 at certain of the companies subsidiaries. The Company
expects to have all remediated systems fully tested and implemented by September
30, 1999. The Company believes that with modifications or replacements of
existing software and certain hardware, the Y2K issue can be mitigated.
The Company has queried its significant suppliers and subcontractors
that do not share information systems with the Company (external agents). To
date, the Company is not aware of any external agent with a Y2K issue that would
26
<PAGE>
materially impact the Company's results of operations, liquidity or capital
resources.
The Company has and will continue to utilize both internal and external
resources to reprogram or replace, test and implement software and operating
equipment for Y2K modifications. The total cost of the Y2K project is estimated
at $1.5 million and is being funded through operating cash flows. Approximately
20% of the cost is to replace equipment and the remainder is to upgrade or
reprogram software. The majority of these costs are being expended as incurred
and are not expected to have a material impact on the Company's results of
operations or financial position. To date, the Company has incurred
approximately $0.7 million related to all phases of the Y2K project.
The Company believes that the Y2K issue will not pose significant
operational problems for the Company. However, if all Y2K problems are not
identified and corrected in a timely manner, there can be no assurances that the
Y2K issue will not have a material adverse effect on the Company's results of
operations or adversely affect the Company's relationships with customers,
suppliers or other parties. In addition, there can be no assurance that outside
third parties, including customers, suppliers, utility and government entities,
will be in compliance with all Y2K issues. The Company believes that the most
likely worse case Y2K scenario, if one were to occur, would be the temporary
inability of third party suppliers, such as utility providers, telecommunication
companies and other critical suppliers to continue providing their products and
services. The failure of these third party suppliers to provide on-going
services could have a material adverse effect on the Company's results of
operations.
Management of the Company believes it has an effective program in place
to resolve the Y2K issue in a timely manner. However, the Company currently has
no contingency plans in place in the event it or any of its major suppliers do
not complete all phases of the Y2K program. The Company plans to evaluate the
status of the completion of its Y2K project and those of key suppliers in the
second quarter of 1999 and determine whether such a plan is necessary.
Other Matters
The Company is significantly leveraged and had a $17.2 million
stockholder's deficit at December 31, 1998. Through its floating rate debt, the
Company is subject to interest rate fluctuations. The Company operates in
cyclical businesses and the markets for its products are highly competitive. In
addition, the Company places significant reliance on a relatively small number
of customers, with two customers accounting for 26% of 1998 consolidated net
sales. The combination of these factors, which are outside the Company's
control, cause it to be subject to changes in economic trends and new business
developments.
The Company has net operating loss carryforwards of approximately $34.0
million for U.S. federal income tax purposes at December 31, 1998, which, if not
utilized, will begin to expire in 2002. The Company has recorded a valuation
allowance of $5.0 million and $2.1 million as of December 31,1998 and 1997,
respectively, against the net operating loss carryforwards as the Company
believes that the corresponding deferred tax asset may not be realizable. The
Company has considered prudent and feasible tax planning strategies in assessing
the need for the valuation allowance. The Company has assumed approximately $7.5
million of benefits attributable to such tax planning strategies. The Company
27
<PAGE>
believes that after consideration of its options concerning the operations of
TAG, which incurred significant losses during 1998, 1997 and 1996, and other tax
planning strategies, that sufficient future taxable income will be generated to
utilize the deferred tax asset. In the event the Company were to determine, in
the future, that any such tax planning strategies would not be implemented, an
adjustment to the deferred tax asset would be charged to income in the period
the determination was made.
Inflation historically has not materially affected the Company's
business, although raw materials and general operating expenses, such as
salaries and employee benefits, are subject to normal inflationary pressures.
The Company believes that, generally, it has been able to increase its selling
prices to offset increases in costs due to inflation.
Morgan has been named as a potentially responsible party ("PRP") with
respect to the generation of hazardous materials alleged to have been handled or
disposed of at two Federal Superfund sites in Pennsylvania and one in Kansas.
Although a precise estimate of liability cannot currently be made with respect
to these sites, based upon information known to Morgan, the Company currently
believes that it's proportionate share, if any, of the ultimate costs related to
any necessary investigation and remedial work at those sites will not have a
material adverse effect on the Company.
Certain of the Company's operations utilize paints and solvents in
their businesses. Also, raw materials used by EFP contain pentane, which is a
volatile organic compound subject to regulation under the Clean Air Act.
Although the Company believes that it has made sufficient capital expenditures
to maintain compliance with existing laws and regulations, future expenditures
may be necessary if and when compliance standards and technology change.
Although all of the Subsidiaries have reviewed the benefits of the
adoption of ISO 9000, an internationally recognized certification regarding
production practices and techniques employed in manufacturing processes, only
MIC Group and EFP, at its facility in Indiana, have obtained certification. The
implementation of this standard is in recognition of the international nature of
a number of MIC Group's customers as well as being reflective of the high
precision nature of the services of both companies. Morgan and the Raider
division of TAG have plans to implement the standard and EFP, at its other
locations, within the next two years. The Company believes that, except for MIC
Group and EFP, none of the customers of the Company have requested or expect the
adoption by the Company of ISO 9000.
The Company pays fees to a corporation, owned by Mr. Poindexter, for,
among other things, services provided by Messrs. Poindexter and Magee. The
Company charges the Subsidiaries for their use of funds and for stewardship
services provided to them by the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to certain market risks, including interest rate
risk and foreign currency risk. The adverse effects of potential changes in
these market risks are discussed below. The sensitivity analyses presented do
not consider the effects that such adverse changes may have on overall economic
28
<PAGE>
activity, nor do they consider additional actions management may take to
mitigate the Company's exposure to such changes. Actual results may differ. See
the Notes to the Consolidated Financial Statements for a description of the
Company's accounting policies and other information related to these financial
instruments.
Interest Rates
Variable-Rate Debt. As of December 31, 1998, the Company had
approximately $16.8 million outstanding under a $55.0 million, asset-based,
revolving credit facility. The interest rate on this revolving credit facility
is based upon a spread above either the Prime Interest Rate or London Interbank
Overnight Rate (LIBOR), which rate is determined at the Company's option. The
amount outstanding under this revolving credit facility will fluctuate
throughout the year based upon working capital requirements. Based upon the
$16.8 million outstanding under the revolving credit facility at December 31,
1998, a 1.0% change in the interest rate (from the December 31, 1998 rate) would
cause a change in interest expense of approximately $0.2 million on an annual
basis. The Company's objective in maintaining these variable rate borrowings is
the flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
Fixed-Rate Debt. As of December 31, 1998, the Company had approximately
$100.0 million of 12 1/2% Senior Notes, long-term debt, outstanding, with an
estimated fair value of approximately $94.0 million based upon their publicly
traded value at that date. Market risk, estimated as the potential increase in
fair value resulting from a hypothetical 1.0% decrease in interest rates, was
approximately $3.7 million as of December 31, 1998.
Foreign Currency
Raider Industries, a division of TAG Manufacturing, has a manufacturing
plant in Canada, which generated revenues of approximately $16.0 million during
the year ended December 31, 1998. The functional currency of Raider Industries
is the local currency (Canadian dollar). Management does not currently employ
risk management techniques to manage this potential exposure to foreign currency
fluctuations, however, the vast majority of goods manufactured in Canada are
imported and sold to customers in the United States. Therefore, a weakening of
the United States dollar in relation to the Canadian dollar may have the effect
of decreasing Raider Industries' gross margin, assuming that the United States
sales price remains unchanged.
In addition, Morgan purchases certain raw materials from a supplier in
the United Kingdom, which approximated $6.6 million during the year ended
December 31, 1998. The result of a uniform 25% weakening in the value of the
United States dollar from December 31, 1998 levels relative to the British
Sterling would result in an estimated increase in cost of goods sold of
approximately $1.3 million for the year ended December 31, 1999 before
considering any risk reduction instruments. However, Morgan manages its exposure
to changes in foreign currency exchange rates by entering into foreign currency
exchange contracts. Morgan's risk management objective is to reduce its exposure
to the effects of changes in exchange rates between the firm purchase commitment
date and the settlement of the purchased inventory item. As of December 31,
1998, the Company had foreign currency exchange contracts with a notional amount
of approximately $1.1 million outstanding and a fair value of less than $5,000.
29
<PAGE>
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Forward-looking statements in this report, including without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties, including without limitation, the following: (1) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (2) any sale of a business unit is
subject to many factors including terms considered satisfactory to the
management of the Company; and (3) other risks and uncertainties indicated from
time to time in the Company's filings with the Securities and Exchange
Commission.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements: Page
Report of Independent Auditors ................................ 31
Consolidated Balance Sheets as of December 31, 1998 and 1997... 32
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 34
Consolidated Statements of Stockholder's Deficit for the years ended
December 31, 1998, 1997 and 1996.......................... 35
Notes to Consolidated Financial Statements..................... 36
30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
J.B. Poindexter & Co., Inc.
We have audited the accompanying consolidated balance sheets of J.B. Poindexter
& Co., Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholder's deficit and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of J.B.
Poindexter & Co., Inc. and subsidiaries at December 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
March 29, 1999
31
<PAGE>
J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 31,
1998 1997
-------- ---------
Current assets
Restricted cash ..................................... $ 2,194 $ 3,191
Accounts receivable, net of allowance for doubtful
accounts of $710 and $1,426, respectively ......... 26,289 28,401
Inventories, net .................................... 31,094 29,960
Deferred income taxes ............................... 3,071 2,277
Prepaid expenses and other .......................... 559 1,048
-------- --------
Total current assets ....................... 63,207 64,877
Property, plant and equipment, net ....................... 38,198 41,085
Net assets of discontinued operations .................... 8,844 28,744
Goodwill, net ............................................ 14,517 15,405
Deferred income taxes .................................... 4,465 5,259
Other assets ............................................. 4,744 5,829
-------- --------
Total assets ............................................. $133,975 $161,199
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Short-term debt .................................. $ -- $ 428
Current portion of long-term debt ................ 1,019 1,173
Borrowings under the revolving credit facility ... 16,813 38,154
Accounts payable ................................. 17,771 9,948
Accrued compensation and benefits ................ 4,648 4,175
Accrued income taxes ............................. 483 --
Other accrued liabilities ........................ 7,471 8,718
-------- --------
Total current liabilities ............... 48,205 62,596
-------- --------
Noncurrent liabilities
Long-term debt, less current portion ............. 100,386 101,404
Employee benefit obligations and other ........... 2,583 1,940
-------- --------
Total noncurrent liabilities ............ 102,969 103,344
-------- --------
Commitments and contingencies
Stockholder's deficit
Common stock and paid-in capital ................. 16,486 16,486
Cumulative other comprehensive income ............ (491) (186)
Accumulated deficit .............................. (33,194) (21,041)
-------- --------
Total stockholder's deficit ............. (17,199) (4,741)
-------- --------
Total liabilities and stockholder's deficit $133,975 $161,199
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
32
<PAGE>
J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Net sales .................................. $365,327 $338,559 $310,924
Cost of sales .............................. 310,094 280,193 257,065
-------- -------- --------
Gross profit ............................... 55,233 58,366 53,859
Selling, general and administrative expense 47,651 48,455 44,833
Closed and excess facility costs ........... 335 1,364 1,001
Other (income) expense, net ................ (431) (405) 53
-------- -------- --------
Operating income ........................... 7,678 8,952 7,972
Interest expense ........................... 15,648 15,775 14,484
-------- -------- --------
Loss from continuing operations before income
taxes and extraordinary loss ............ (7,970) (6,823) (6,512)
Income tax provision (benefit) ............. 744 947 (991)
-------- -------- --------
Loss from continuing operations before
extraordinary loss ..................... (8,714) (7,770) (5,521)
Income (loss) from discontinued operations,
net of applicable taxes ........... (3,439) 224 (633)
Extraordinary loss on early extinguishment of
debt, net of income tax benefit of $135 -- -- (260)
-------- -------- --------
Net loss ................................... $(12,153) $ (7,546) $ (6,414)
======== ======== ========
Basic and diluted loss per share:
Loss from continuing operations before
extraordinary loss .................... $ (2,849) $ (2,540) $ (1,805)
Income (loss) from discontinued operations,
net of applicable taxes ............... (1,124) 73 (207)
Extraordinary loss, net of applicable taxes . -- -- (85)
-------- -------- --------
Net loss ................................... $ (3,973) $ (2,467) $ (2,097)
======== ======== ========
Weighted average shares outstanding ........... 3,059 3,059 3,059
======= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
33
<PAGE>
J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net loss ........................................................................... $(12,153) $ (7,546) $ (6,414)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization .................................................... 11,535 12,382 11,862
Provision for write-down of assets of
discontinued operations ..................................................... 5,505 -- --
Gain on sale of discontinued operations .......................................... (6,529) -- --
Extraordinary loss on early extinguishment of debt,
net of tax ................................................................... -- -- 260
Closed and excess facility costs ................................................. 47 1,834 --
(Gain) loss on sale of facilities and equipment .................................. 23 (2,545) 19
Deferred federal income tax provision (benefit) .................................. -- 226 (1,725)
Other ............................................................................ (801) 347 303
Increase (decrease) in assets and liabilities net
of the effect ofacquisitions:
Accounts receivable .............................................................. 2,093 (4,903) 2,590
Inventories ...................................................................... 1,206 (1,077) 3,325
Prepaid expenses and other ....................................................... -- 485 160
Accounts payable ................................................................. 7,765 (151) 798
Accrued income taxes ............................................................. 297 (378) 9
Other accrued liabilities ........................................................ 2,757 (1,189) (500)
-------- -------- --------
Net cash provided by (used in) operating activities .......................... 11,745 (2,515) 10,687
-------- -------- --------
Cash flows provided by (used in) investing activities:
Purchase of businesses, net of cash acquired ..................................... -- (2,700) --
Proceeds from disposition of business, facilities
and equipment ................................................................ 16,164 3,674 416
Acquisition of property, plant and equipment ..................................... (6,226) (7,262) (8,091)
Other ............................................................................ 397 (145) 178
-------- -------- --------
Net cash provided by (used in) investing activities .......................... 10,335 (6,433) (7,497)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Net (payments) proceeds of revolving lines of
credit and short term debt ................................................... (21,758) 11,037 683
Payments of long-term debt and capital leases .................................... (1,319) (1,298) (2,228)
Debt issuance costs .............................................................. -- (207) (752)
-------- -------- --------
Net cash provided (used in) financing activities ............................. (23,077) 9,532 (2,297)
-------- -------- --------
Increase (decrease) in restricted cash .................................. (997) 584 893
Restricted cash beginning of period ................................................ 3,191 2,607 1,714
-------- -------- --------
Restricted cash end of period ...................................................... $ 2,194 $ 3,191 $ 2,607
======== ======== ========
Supplemental information:
Cash paid for income taxes ....................................................... $ 633 $ 1,526 $ 1,010
======== ======== ========
Cash paid for interest cost ...................................................... $ 15,615 $ 15,029 $ 16,211
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
34
<PAGE>
J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 and 1998
(Dollars in thousands, except share amounts)
Shares of Common Retained Other
Common Stock and Earnings Comprehensive
Stock Paid-in (Deficit) Income Total
Capital
December 31, 1995 ......... 3,059 $ 16,486 $ (7,081) $ 46 $ 9,451
--------
Net loss .............. -- -- (6,414) -- (6,414)
Translation adjustment -- -- -- (7) (7)
--------
Comprehensive income . -- -- -- -- (6,421)
-------- -------- -------- -------- --------
December 31, 1996 ......... 3,059 16,486 (13,495) 39 3,030
-------- -------- -------- -------- --------
Net loss ............. -- -- (7,546) -- (7,546)
Translation adjustment -- -- -- (225) (225)
--------
Comprehensive income . -- -- -- -- (7,771)
-------- -------- -------- -------- --------
December 31, 1997 ......... 3,059 16,486 (21,041) (186) (4,741)
--------
Net loss ............. -- -- (12,153) -- (12,153)
Translation adjustment -- -- -- (305) (305)
--------
Comprehensive income . -- -- -- -- (12,458)
-------- -------- -------- -------- --------
December 31, 1998 ......... 3,059 $ 16,486 $(33,194) $ (491) $(17,199)
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
35
<PAGE>
J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization & Business:
J.B. Poindexter & Co., Inc. ("JBPCO") and its subsidiaries (the
"Subsidiaries", and together with JBPCO, the "Company") operate primarily
manufacturing and wholesale distribution businesses. JBPCO and the Subsidiaries
are controlled by John B. Poindexter.
Morgan Trailer Manufacturing Co. ("Morgan") Acquired January 12, 1990,
Morgan manufactures truck bodies for dry freight and refrigerated vans
(excluding those made for pickup trucks and tractor-trailer trucks). Its
customers include rental companies, truck dealers and companies that operate
fleets of delivery vehicles.
Effective July 1,1997, Morgan acquired the assets of Gem Top
Manufacturing, Inc. ("Gem Top") from the Truck Accessories Group, Inc. Gem Top
manufactures and distributes light truck caps primarily to commercial customers
and was originally acquired on March 16, 1993. Since both companies are under
common control the acquisition was accounted for in a manner similar to a
pooling of interests.
Truck Accessories Group, Inc. ("TAG") Acquired on August 14, 1987, TAG is
a manufacturer of pickup truck "caps" and tonneau covers, which are fabricated
enclosures that fit over the open beds of pickup trucks, converting the beds
into weatherproof storage areas. TAG operations are organized into two separate
and distinct operating divisions: TAG Manufacturing and TAG Distribution (See
Note 13).
TAG Manufacturing includes Leer, which was acquired on August 14, 1987,
20th Century Fiberglass (Century), which was acquired June 29, 1995, and Raider
Industries Inc. (Raider), a Saskatchewan, Canada corporation that acquired the
cap manufacturing businesses of Raider and LoRider on June 30, 1995.
EFP Corporation ("EFP") Acquired on August 2, 1985, EFP molds and markets
expandable foam products which are used as casting patterns, packaging, shock
absorbing and materials handling products primarily by the automotive,
electronics, furniture, appliance and other industries. It also manufactures
products used as thermal insulators. On August 31, 1992, EFP acquired Astro
Pattern Corporation's ("Astro") assets. Astro's assets are used to produce
machine tooling and wood patterns primarily for the foundry industry.
MIC Group ("MIC Group") Acquired on June 19, 1992, MIC Group is a
manufacturer, investment caster and assembler of precision metal parts for use
in the worldwide oil and gas exploration, aerospace and general industries.
Discontinued Operations
The following operations have been presented as discontinued in the
accompanying consolidated financial statements. See a further discussion at Note
13.
Truck Accessories Group Distribution Division Acquired on August 14,
1987, as part of the TAG acquisition, TAG Distribution operates as a retail and
wholesale distributor of products manufactured by TAG Manufacturing and other
suppliers. Management has committed to a plan to dispose of TAG Distribution.
36
<PAGE>
TAG Distribution includes Radco Industries, Inc., ("Radco") which was
acquired on December 28, 1994, Century Distributing which was acquired June 29,
1995, and Midwest Truck After Market ("MTA") which was acquired October 31,
1997.
Lowy Group, Inc. ("Lowy Group") Acquired August 30, 1991, Lowy Group
operates in the floor covering business serving all or a portion of twelve
Midwestern states through six company operated facilities. Management has
committed to a plan to dispose of Lowy. Lowy Group included the Blue
Ridge/Courier division, which was a carpet manufacturing and dyeing operation,
and was sold effective August 31, 1998.
2. Summary of Significant Accounting Policies:
Principles of Consolidation. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles. All
intercompany accounts and transactions have been eliminated in consolidation.
Restricted Cash. At December 31, 1998 and 1997, substantially all of the
Company's cash is restricted pursuant to the terms of the revolving credit
facility (See Note 7).
Cash and Cash Equivalents. For the purposes of the statement of cash
flows, the Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable. Accounts receivable are stated net of an allowance
for doubtful accounts. During the years ended December 31, 1998, 1997 and 1996,
the Company charged to expense, $242,000, $696,000, and $552,000, respectively,
as a provision for doubtful accounts and deducted from the allowance $958,000,
$694,000 and $1,124,000, respectively, for write-offs of bad debts.
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, including
property under capital leases, are stated at cost. The cost of property under
capital leases represents the present value of the future minimum lease payments
at the inception of the lease. Depreciation and amortization is computed by
using the straight-line method over the estimated useful lives of the applicable
assets for financial reporting purposes and accelerated methods for income tax
purposes. The cost of maintenance and repairs is charged to operating expense as
incurred and the cost of major replacements and significant improvements is
capitalized.
Warranty. Morgan provides product warranties for periods up to ten years.
TAG provides a warranty period, exclusive to the original truck owner, which is,
in general but with exclusions, one year for parts, five years for paint and
lifetime for structure. A provision for warranty costs is included in cost of
sales when goods are sold based on historical experience.
Income Taxes. The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109. Under SFAS No.
109, deferred tax assets and liabilities are computed based on the difference
37
<PAGE>
between the financial statement and income tax bases of assets and liabilities
using the enacted tax rates. Deferred income tax expenses or credits are based
on the changes in the deferred tax asset or liability from period to period.
Net Sales Recognition. Net sales are recognized upon shipment of the
product to customers, except for Morgan where revenue is recognized and the
customer is billed upon final body assembly and quality inspection.
Adjustments to arrive at net sales include allowances for discounts and returns.
Earnings per Share. Earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding during the period.
No common stock equivalents exist.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Foreign Exchange Currency Contracts. Morgan uses foreign exchange
currency contracts to hedge the foreign currency risk associated with British
Sterling inventory purchases. Any such gains or losses on these contracts, which
qualify as accounting hedges, are deferred and recognized when the underlying
inventory is sold.
Recently Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in fiscal
years beginning after June 15, 1999. Because of the Company's limited use of
derivatives to manage its exposure to fluctuations in foreign exchange rates,
management does not anticipate that the adoption of the new statement will have
a significant effect on earnings or the financial position of the Company.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement provides
guidance on accounting for the costs of software developed or obtained for
internal use and is effective for fiscal years beginning after December 15,
1998. The Company will adopt this standard in the first quarter of 1999.
Management does not believe its adoption will have a significant effect on the
Company's financial statements, as the Company's policies are consistent with
this standard.
3. Segment Data:
The Company operates and manages its subsidiaries individually and
considers each subsidiary a separate business segment. The Company evaluates
performance and allocates resources based on the operating income of each
subsidiary. The accounting policies of the reportable business segments are the
same as those described in the summary of significant accounting policies. Other
than sales between TAG Manufacturing and TAG Distribution, there are no
significant inter-segment sales. For a description of each business segment, see
Note 1. The following is a summary of the business segment data for the years
ended December 31, 1998, 1997 and 1996 (dollars in thousands):
38
<PAGE>
Net Sales ...................... 1998 1997 1996
Morgan ......................... $201,126 $181,652 $152,073
TAG Manufacturing .............. 99,357 95,391 101,927
EFP ............................ 37,986 32,954 31,444
MIC Group ...................... 26,858 28,562 25,480
-------- -------- --------
Net Sales ...................... $365,327 $338,559 $310,924
======== ======== ========
Operating Income (Loss)
Morgan ......................... $ 2,781 $ 8,531 $ 6,312
TAG Manufacturing .............. 2,165 (4,559) (3,340)
EFP ............................ 3,971 3,031 2,737
MIC Group ...................... 1,542 4,732 4,799
JBPCO (Corporate) .............. (2,781) (2,783) (2,536)
-------- -------- --------
Operating Income ............... $ 7,678 $ 8,952 $ 7,972
======== ======== ========
Depreciation and Amortization Expense
Morgan.......................... $ 2,326 $ 2,424 $ 2,335
TAG Manufacturing............... 4,312 4,279 3,674
EFP............................. 1,684 1,853 1,928
MIC Group....................... 944 1,230 1,440
JBPCO (Corporate)............... 1,039 945 675
Discontinued operations......... 1,230 1,651 1,810
--------- --------- -------
Depreciation and Amortization Expense $11,535 $12,382 $11,862
======= ======= =======
Total Assets
Morgan............................... $ 60,454 $ 65,205 $ 58,399
TAG Manufacturing.................... 35,656 37,142 37,680
EFP.................................. 16,233 14,253 14,930
MIC Group............................ 9,078 10,500 10,144
JBPCO (Corporate).................... 3,710 5,355 9,364
Net assets of discontinued operations 8,844 28,744 32,999
---------- ---------- ---------
Identifiable Assets.................. $133,975 $161,199 $163,516
======== ======== ========
Capital Expenditures
Morgan............................... $ 2,646 $ 3,071 $ 2,448
TAG Manufacturing.................... 1,820 2,392 3,283
EFP.................................. 510 478 523
MIC Group............................. 392 750 1,141
JBPCO (Corporate)..................... 27 101 32
Discontinued operations............... 831 470 664
--------- --------- ---------
Capital Expenditures.................. $ 6,226 $ 7,262 $ 8,091
======= ======= =======
Net sales include $14,497,000, $15,630,000 and $17,025,000, respectively,
from intercompany sales to TAG Distribution, which has been classified as a
discontinued operation. As a result, operating income included approximately
$2,900,000, $3,100,000 and $3,400,000, respectively, related to profits on these
39
<PAGE>
sales. Since TAG Distribution's results of operations are classified as
discontinued, the intercompany sales do not eliminate on a line item basis in
the accompanying consolidated statement of operations. However, on a
consolidated basis, such intercompany transactions are eliminated in the
accompanying consolidated statement of operations for each period presented.
Under the current plan of disposition for TAG Distribution, a substantial
portion of these sales may not continue subsequent to the disposition.
During 1998, MIC Group closed a facility and incurred charges of $335,000,
which was included in operating income for the period. TAG Manufacturing's
operating income included $805,000 and $1,001,000 of charges, during the years
ended December 31, 1997 and 1996, respectively, associated with the closure or
write-down in carrying value of certain excess facilities. During 1997, Morgan
wrote down the carrying value of its facility in Mexico by $559,000, which was
included in operating income for the period.
Morgan has two customers (truck leasing and rental companies) that
accounted for, on a combined basis, approximately 40-45% of Morgan's net sales
during 1998, 1997 and 1996, respectively. EFP has three customers in the
electronics industry that accounted for approximately 37%, 28% and 25% of EFP's
net sales in 1998, 1997 and 1996, respectively. MIC Group has an industry
concentration, pertaining to international oil field service companies, with one
customer in 1998, three customers in 1997 and four customers in 1996 that
accounted for approximately 57%, 53% and 69% of MIC Group's net sales,
respectively.
The Company's operations are located principally in the United States.
However, Raider Industries, Inc., a subsidiary of TAG manufacturing, is located
in Canada and Acero-Tec, S.A. de C.V., a subsidiary of Morgan, is located in
Mexico. The following information pertains to these foreign subsidiaries as of
December 31. (dollars in thousands):
1998 1997
---- ----
Long lived assets............ $5,296 $5,839
====== ======
Consolidated net sales include $11,118,000, $11,084,000 and $8,458,000
in 1998, 1997 and 1996, respectively, for sales to customers outside the United
States.
40
<PAGE>
4. Inventories:
Consolidated net inventories consist of the following (dollars in thousands):
December 31,
1998 1997
---------- ----------
FIFO Basis Inventory:
Raw Materials...................... $19,549 $14,398
Work in Process.................... 4,296 6,103
Finished Goods..................... 7,249 9,459
--------- ---------
Total Inventory............................ $31,094 $29,960
======= =======
Inventories are stated net of an allowance for excess and obsolete
inventory of $1,214,000 and $852,000 at December 31, 1998 and 1997,
respectively. During the years ended December 31, 1998, 1997 and 1996, the
Company charged to expense $1,176,000, $923,000 and $2,052,000, respectively, as
a provision for excess and obsolete inventory and deducted from the allowance
$814,000, $1,635,000 and $1,389,000, respectively, for write-offs of excess and
obsolete inventory.
5. Long Lived Assets
Property, plant and equipment, as of December 31, 1998 and 1997,
consisted of the following (dollars in thousands):
Range of Useful Lives 1998 1997
--------------------- ------- -------
Land................................ -- $ 3,598 $ 3,636
Buildings and improvements.......... 5-32 19,330 19,433
Machinery and equipment............. 3-10 51,516 50,037
Furniture and fixtures.............. 2-10 8,623 6,770
Transportation equipment............ 2-10 3,337 3,480
Leasehold improvements.............. 3-10 3,884 3,631
Construction in progress............ -- 2,541 2,795
-------- --------
92,829 89,782
-------- --------
Accumulated depreciation and amortization (54,631) (48,697)
Property, plant and equipment, net.. $ 38,198 $ 41,085
========= =========
Depreciation expense was $8,122,000, $8,550,000 and $8,000,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
41
<PAGE>
Other assets and goodwill as of December 31, 1998 and 1997, consist of
the following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------------- -------------------------------------
Amortization Accumulated Net Book Accumulated Net Book
Period Amortization Value Amortization Value
<S> <C> <C> <C> <C> <C>
Other Assets:
Cash surrender value of
life insurance............ - $ - $ 1,123 $ - $ 1,009
Agreements not-to-compete 3-6 1,244 531 888 888
Debt issuance costs and other 3-10 3,022 3,090 2,216 3,932
------- ------- ------- ----------
Total......................... $4,266 $ 4,744 $3,104 $ 5,829
======= ======== ======== =========
Goodwill...................... 25-40 $7,937 $14,517 $7,049 $15,405
======= ======== ======== =========
</TABLE>
Goodwill is being amortized on a straight-line basis over forty years for
Morgan and twenty-five years for TAG Manufacturing.
In accordance with FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets may be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. During the twelve months ended December 31, 1998, 1997
and 1996, the Leer division of TAG Manufacturing incurred operating losses of
approximately $1,036,000, $7,462,000 and $4,546,000, respectively. Even though
the operating performance of the Leer division of TAG Manufacturing indicated
that approximately $13,082,000 of assets of certain of its operations may be
impaired, an estimate of the future undiscounted cashflows from the Leer
division of TAG Manufacturing indicated that the carrying values of the assets
would be expected to be recovered over the useful life of the assets. However,
it is possible that the estimate of undiscounted future cashflows could change
in the future requiring recognition of an impairment loss.
During 1998, MIC Group closed its Houston machining facility resulting
in a charge of $335,000 included in Closed and Excess Facility Costs in the
accompanying consolidated statements of operations. Of these charges, $47,000
was non-cash expenses related to the write-down of assets. At December 31, 1998,
accrued expenses included $234,000 with respect to lease obligations that run
through December 1999.
During 1997, Morgan committed to a plan to dispose of its idle facility
in Mexico. Accordingly, Morgan began marketing the property and, based on an
estimate of the fair value less the cost to sell the property, wrote down the
carrying value by $559,000 which was included in Closed and Excess Facility
Costs in the accompanying consolidated statement of operations for the year
ended December 31, 1997. The Mexico facility has a net book value of
approximately $1,200,000 at December 31, 1998 and 1997, which is included in
Property, Plant and Equipment.
In 1996, TAG Manufacturing closed its plant in the Southwestern United
States, resulting in a charge of $1,001,000 for the year ended December 31,
1996. Additional expenses of $805,000 were incurred during 1997, with respect to
these facilities. Both such charges are included in Closed and Excess Facility
42
<PAGE>
Costs in the accompanying consolidated statements of operations. Of these
charges, $476,000 in 1997 and $453,000 in 1996 were non-cash expenses related to
the write-down or disposal of assets during those years. At December 31, 1998,
accrued expenses included $162,000 with respect to lease obligations, which run
through September 1999.
6. Short-term debt:
Short-term debt as of December 31, 1998 and 1997, consists of the following
(dollars in thousands): 1998 1997
---- ----
Morgan: Bankers' acceptances generally 180 day terms
with interest rates ranging from 4.9% to 7.7%... $ - $428
===== ====
7. Revolving Credit Agreements:
Amounts outstanding under the Revolving Credit Agreement as of December 31,
1998 and 1997 were (in thousands):
1998 1997
---- ----
Revolving loan due June 2000........................ $16,813 $ 38,154
======= ========
On June 28, 1996, the Company entered into a three-year senior secured
revolving loan agreement (Revolving Loan Agreement) providing for borrowing by
its Subsidiaries of up to $50,000,000, which was subsequently increased to
$55,000,000, effective May 13, 1998. At the conclusion of the initial three
years (June 1999), the agreement provides for borrowings on a year to year
basis, unless sooner terminated by the Company or lender provided that the
lender may, at its option, extend the renewal date of the agreement to four
years from the original inception of the agreement. On March 29, 1999, the
Company was notified by the lender, in writing, that it is exercising this
option and thus extending the agreement to June 2000.
The Revolving Loan Agreement allows the Company to borrow funds and
provides for the guarantee of letters of credit and certain foreign exchange
contracts, issued by the Company's banks, up to the lesser of $55,000,000 or an
amount based on advance rates applied to the total amounts of eligible accounts
receivable and inventories of the Subsidiaries. The advance rates vary by
subsidiary and range between 75% and 85% for receivables and between 40% and 60%
for inventory. The Revolving Loan Agreement provides for borrowing at variable
rates of interest, based on either LIBOR (London Interbank Offered Rate, 5.0% at
December 31, 1998) or U.S. prime rate (7.75% at December 31, 1998). Interest is
payable monthly including a fee of one-half of one percent on the amount of
unused borrowings. The Subsidiaries are guarantors of this indebtedness, and
inventory and receivables are pledged under the Revolving Loan Agreement. At
December 31, 1998, the Company had total borrowings of $16,813,000, and letters
of credit and foreign exchange accommodations of $3,742,000 outstanding pursuant
to the Revolving Loan Agreement. At December 31, 1998, the Company's unused
available borrowing under the Revolving Loan Agreement totaled approximately
$22,745,000.
During the year ended December 31, 1996, the Company wrote off certain
43
<PAGE>
capitalized financing costs and recorded an extraordinary loss of $260,000, net
of tax benefits, as a result of refinancing the revolver debt.
The Revolving Loan Agreement contains provisions allowing the lender to
accelerate debt repayment upon the occurrence of an event the lender determines
to represent a material adverse change. Accordingly, balances outstanding under
the Revolving Loan Agreement are classified as current liabilities. The
Revolving Loan Agreement also contains restrictive covenants, which, among other
things, restrict the ability of the Company to dispose of assets, incur debt and
restrict certain corporate activities. At December 31, 1998, the Company was in
compliance with all covenants of the Revolving Loan Agreement. At December 31,
1998, the Company was prohibited from paying dividends under the terms of the
Revolving Loan Agreement. Additionally, the Company's cash balance is restricted
under the terms of the Revolving Loan Agreement. Effective February 12, 1999,
the Company obtained a waiver from the lender permitting the Company to
repurchase up to $10,000,000 of its 12 1/2% Senior notes (See Note 8), subject
to certain conditions.
Radco is a non-guarantor of the Company's Senior Notes (See Note 8) and
is not a Subsidiary Guarantor under the terms of the Company's Revolving Loan
Agreement. Concurrent with the acquisition of substantially all the assets of
MTA, Radco entered into a three-year revolving credit agreement providing for
borrowings of up to the lesser of $5,000,000 or an amount based on advance rates
applied to the total amounts of eligible accounts receivable and inventories of
Radco and MTA. At December 31, 1998, Radco had total borrowings of $1,629,000,
and unused available borrowing capacity totaling approximately $0.2 million.
Radco is part of TAG Distribution and it is anticipated that the remaining
balance outstanding under the Radco facility will be repaid from proceeds
derived from the disposal of MTA. Accordingly, the borrowings, under the Radco
revolving loan agreement, are included in "Net Assets of Discontinued
Operations." Effective January 29, 1999, the assets and operations of Radco
(excluding MTA) were sold and proceeds of approximately $1,200,000 were used to
repay borrowings under the Radco facility.
8. Long-term debt and Note Offering:
Long-term debt as of December 31, 1998 and 1997 consists of the following
(dollars in the table in thousands):
1998 1997
JBPCO: ---- ----
12 1/2% Senior Notes due 2004.............. $100,000 $100,000
-------- --------
TAG Manufacturing:
Note payable, due June 15, 2000, monthly principal
payment of $26,666 plus interest at U.S. prime,
(7.75% at December 31, 1998)...................... 480 800
Obligations under various non-compete agreements.. 629 984
Obligations under capital leases.............. 82 196
--------- ---------
1,191 1,980
--------- ---------
Morgan:
Capital lease obligation due in monthly installments
of $17,704 including interest at 8.2%,
through May 10, 1998............................ - 90
--------- ---------
44
<PAGE>
EFP:
Various equipment notes, due in monthly or annual
installments, interest from 8.12% to 10%, with
maturities from May 1997 to September 1999,
each collateralized by specific assets........... 214 478
-------- ---------
MIC Group:
Covenant not-to-compete........................... - 29
--------- ---------
Total long-term debt.......................... 101,405 102,577
Less current portion ..................... 1,019 1,173
--------- ---------
Long-term debt, less current portion.......... $100,386 $101,404
========= =========
The Senior Notes Indenture contains restrictive covenants, which, among
other things, restrict the ability of the Company to dispose of assets, incur
debt and restrict certain corporate activities. At December 31, 1998, the
Company was in compliance with all covenants of the Senior Notes Indenture.
Under the terms of the Senior Notes Indenture, proceeds in excess of $2,000,000
from the sale of assets, including the stock of the Company's subsidiaries, are
required to be used to repay borrowings under the Revolving Loan Agreement.
Proceeds in excess of amounts outstanding under the Revolving Loan Agreement may
be re-invested in assets of the Company within one year of the asset sale. At
December 31, 1998, the Company was prohibited from paying dividends under the
terms of the Senior Notes Indenture.
The Company's obligations under the Senior Notes are guaranteed by each
directly wholly owned Subsidiary of JBPCO (the "Subsidiary Guarantors"). Each
guarantee is a senior unsecured obligation of the Subsidiary providing such
Guarantee and ranks pari passu with all other senior unsecured indebtedness of
such subsidiary. In addition, the Subsidiary Guarantors guarantee the
indebtedness outstanding under the Revolving Loan Agreement and have pledged
substantially all of their assets. Separate financial statements of the
Subsidiary Guarantors are not included because (a) all the Subsidiary Guarantors
provide the Guarantees, and (b) the Subsidiary Guarantors are jointly and
severally liable on a full and unconditional basis.
The Company's non-guarantor subsidiaries are Radco Industries (acquired
by TAG in December 1994 and include MTA acquired in October 1997), Tile by
Design (acquired by Lowy in November 1994), and Acero-Tec, S.A. de C.V.
(Morgan's Mexico subsidiary). The net assets and operating results of Radco and
Tile by Design are included in discontinued operations. Effective January 29,
1999, the assets and operations of Radco were sold. The Company believes that
separate financial statements or other disclosures of the guarantors are not
material to the investors. Acero-Tec, S.A. de C.V., is the only non-guarantor
subsidiary not classified as a discontinued operation and for which the net
assets and operating results have been segregated in the accompanying financial
statements. Acero-Tec, S.A. de C.V. has total assets of approximately $1,200,000
at December 31, 1998, and the results of its operations were not significant
during the three years then ended.
The Company estimates the fair value of the 12 1/2% Senior Notes at
December 31, 1998 to be $94,000,000 based on their publicly traded value at that
date compared to a recorded amount of $100,000,000 as of December 31, 1998.
45
<PAGE>
Subsequently to December 31, 1998, the Company purchased $8,000,000 of
its 2004 12 1/2% Senior Notes for an aggregate purchase price of approximately
$7,700,000. The Company will record an extraordinary gain on the purchase of the
Senior Notes of approximately $300,000 in 1999. The Company's decision to
purchase and hold the Senior Notes or to sell the Senior Notes will be dependent
upon the interest rate arbitrage between the Senior Notes and borrowings under
the Revolving Loan Agreement and market conditions. The purchases were made in
the open market, the company does not intend to cancel or redeem the Senior
Notes and may re-sell the Senior Notes in the open market at a future date.
Maturities. Aggregate principal payments on long-term debt for the next
five years subsequent to December 31, 1998, are as follows (dollars in
thousands):
1999 ................................................. $ 1,019
2000 ................................................. 386
2001 ................................................. --
2002 ................................................. --
2003 ................................................. --
2004 ................................................. 100,000
--------
$101,405
========
9. Operating Leases:
The Company leases certain manufacturing facilities and equipment under
noncancelable operating leases certain of which contain renewal options. The
future minimum lease payments for the next five years subsequent to December 31,
1998 are as follows (dollars in thousands):
1999 .................................................. $ 5,994
2000 .................................................. 4,514
2001 .................................................. 3,283
2002 .................................................. 1,754
2003 .................................................. 952
-------
$16,497
=======
Total rental expense included in continuing operations under all
operating leases was $4,852,000, $5,453,000 and $4,929,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
46
<PAGE>
10. Income Taxes:
The income tax provision (benefit) consists of the following for the years
ended December 31, 1998, 1997 and 1996 (dollars in thousands):
1998 1997 1996
---- ---- ----
Current:
Federal ........................... $-- $-- $--
State ............................. 248 721 734
Foreign ........................... 496 -- --
Deferred:
Federal ........................... - 525 (1,799)
State ............................. - (299) 74
Foreign ........................... - -- --
- ------ ------
Income tax provision (benefit)..... $ 744 $ 947 $(991)
======= ======= ======
The following table reconciles the differences between the statutory
Federal income tax rate and the effective tax rate for the years ended December
31, 1998, 1997 and 1996 (Dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ----------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Tax provision (benefit) at statutory
federal income tax rate........... $(2,710) 34% $ (2,320) 34% $ (2,214) 34%
Valuation allowance.................... 2,397 (30) 1,277 (19) -
Goodwill amortization.................. 234 (2) 239 (4) 335 (5)
Non deductible expenses................ 86 (1) 196 (3) -
Expiration of ITC...................... - 663 (10) -
State income taxes, net of federal
income tax benefit................ 167 (2) 268 (4) 301 (5)
Intangible asset write-down............ 317 (3) - -
Foreign income and withholding
taxes, net of federal benefit..... 346 (4) 173 (2) 368 (6)
Other.................................. (93) (1) 451 (6) 219 (3)
------- ----- ------- ----- ------- -----
Provision (benefit) for income
Taxes and effective tax rates..... $ 744 (9%) $ 947 (14%) $ (991) 15%
======= ===== ======= ===== ======= =====
</TABLE>
47
<PAGE>
Deferred taxes are based on the estimated future tax effects of
differences between the financial statements and tax basis of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
assets and liabilities as of December 31, 1998 and 1997 are comprised of the
following (dollars in thousands):
1998 1997
---- ----
Current deferred tax (assets):
Allowance for doubtful accounts .................... $ (579) $ (994)
Employee benefit accruals and reserves ............. (853) (1,031)
Warranty liabilities ............................... (215) --
Excess facility costs .............................. (1,242) (252)
Other .............................................. (182) --
------- -------
Total current deferred tax (assets).............. (3,071) (2,277)
------- --------
Long term deferred tax (assets):
Tax benefit carryforwards .................... (12,720) (10,635)
Warranty liabilities ......................... (1,109) (1,235)
Non-compete agreements ....................... -- (579)
Other ........................................ (670) (198)
Intangible write-off ......................... (1,181) --
Valuation allowance .......................... 5,236 2,312
------- -------
Total long term deferred tax (asset)....... (10,444) (10,335)
Long term deferred tax liabilities:
Depreciation and amortization................. 4,161 3,645
Other......................................... 1,818 1,431
--------- ---------
Total long term deferred tax liability........ 5,979 5,076
--------- ---------
Net long term deferred tax (asset)......... (4,465) (5,259)
---------- ----------
Net deferred tax assets............ $ (7,536) $ (7,536)
========== ==========
Tax Carryforwards. The Company has investment tax credit carryforwards of
approximately $189,000 for U.S. federal income tax purposes, which will expire
between 1999 and 2001 if not previously utilized. The company has recorded a
valuation allowance of $189,000 against the investment tax credit carryforward
as the Company believes that the corresponding deferred tax asset may not be
realizable. The Company has alternative minimum tax credit carryforwards of
approximately $817,000 for U.S. federal income tax purposes, which may be
carried forward indefinitely. The utilization of the alternative minimum tax
credit carryforward is restricted to the taxable income of one Subsidiary. In
addition, the Company has net operating loss carryforwards of approximately
$34.0 million for U.S. federal income tax purposes at December 31, 1998, which
if not utilized, will begin to expire in 2002. The Company has recorded a
valuation allowance of $5.0 million and $2.1 million, during the years ended
December 31, 1998 and 1997, respectively, against the net operating loss
carryforwards as the Company believes that the corresponding deferred tax asset
may not be realizable.
The Company has considered prudent and feasible tax planning strategies
in assessing the need for the valuation allowance. The Company has assumed
approximately $7.5 million of benefits attributable to such tax planning
48
<PAGE>
strategies. In the event the Company were to determine in the future that any
such tax planning strategies would not be implemented, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made.
11. Common Stock:
As of December 31, 1998 and 1997, there were 100,000 shares authorized
and 3,059 shares outstanding of JBPCO common stock with a par value of $.01 per
share. JBPCO was incorporated in Delaware. No other classes of common stock,
preferred stock or common stock equivalents exist.
12. Employee Benefit Plans:
Defined Contribution Plans
JBPCO 401(k) Plan. The JBPCO-sponsored 401(k) savings plan allows
participating employees to contribute through salary deductions up to 15% of
gross pay and provides for Company matching contributions up to two percent of
gross pay as well the opportunity for an annual discretionary contribution.
Vesting in the Company matching contribution is 20% per year over the first five
years. The Company incurred expenses of $1,250,000, $1,355,000 and $1,426,000
during the years ended December 31, 1998, 1997 and 1996, respectively, including
administrative fees of approximately $75,000 in each year.
Defined Benefit Plans
Morgan, EFP and Lowy had defined benefit plans as discussed below. The
other Subsidiaries do not have any defined benefit plans.
Morgan. Morgan assumed future sponsorship of the NSSC (Morgan was
merged into NSSC during 1993) pension plan and continues to make contributions
to the plan in accordance with the funding requirements of the Internal Revenue
Service. No further benefits have accrued subsequent to February 12, 1992. Plan
assets consist primarily of investments in two bank funds and the plan is
overfunded by approximately $193,000.
Gem Top, a division of Morgan, had a defined benefit plan covering
hourly employees working at least 1,000 hours per year. The plan was frozen
effective March 31, 1996, and at December 31, 1998 and 1997 plan assets
approximated projected benefit obligations.
EFP. EFP had a defined benefit plan covering substantially all
full-time employees of one of its divisions. This plan was terminated effective
April 15, 1996 and the assets distributed effective October 10, 1996. The
Company realized a gain, during the year ended December 31, 1996, of
approximately $200,000 upon termination of the plan.
Lowy Group. Lowy Group has an unfunded executive defined benefit plan
whereby deferred compensation agreements provide a fixed amount of retirement
benefits to key corporate and sales employees. The accumulated benefit
obligation related to this plan were approximately $926,000 and $1,800,000 at
December 31, 1998 and 1997, respectively. Lowy Group makes no contributions to
the plan and no assets are held in trust to secure benefits accumulating in the
plan. Lowy Group does, however, maintain life insurance policies to fund the
49
<PAGE>
plan obligations and accumulate cash surrender values. The cash surrender value
of life insurance policies, of which Lowy Group was beneficiary, totaled
$1,015,000 and $1,647,000 at December 31, 1998 and 1997, respectively, and is
included in "Net assets of discontinued operations" in the accompanying
consolidated balance sheets. Payments made to retired individuals in the plan
were $522,000, $142,000 and $136,000 in 1998, 1997 and 1996, respectively. The
benefits are based on the employee's age at retirement and the fixed monthly
benefit amount specified in each individual deferred compensation agreement.
Lowy Group sold the assets with Blue Ridge/Courier division effective August 31,
1998. The accumulated benefit obligation assumed by the acquirer of the assets
was $421,000 as of August 31, 1998.
The following table sets forth the funded status and amounts recognized
in the Company's consolidated balance sheets as of December 31, 1998 and 1997,
and the significant assumptions used in accounting for the defined benefit
plans. The Company's funding policy for all plans is to make the minimum annual
contributions required by applicable regulations. (dollars in thousands):
1998 1997
---- ----
Change in benefit obligation
Benefit obligation at beginning of year......... $5,284 $5,143
Service cost.................................... 147 235
Interest cost................................... 252 249
Actuarial losses................................ 288 80
Benefits paid................................... (773) (423)
Benefits assumed by acquirer.................... (421) -
--------- -----------
Benefit obligation at end of year............... $4,777 $5,284
------ ----------
Change in plan assets
Fair value of plan assets at beginning of year.. $3,943 $3,512
Actual return on plan assets.................... 800 699
Company contributions........................... 33 15
Expenses........................................ (30) (2)
Benefits paid................................... (251) (281)
--------- ----------
Fair value of plan assets at end of year........ 4,495 3,943
--------- ----------
Funded status of the plans (underfunded)........ (282) (1,341)
Unrecognized net gains.......................... (518) (359)
--------- ----------
Accrued benefit cost............................ $ (800) $(1,700)
========= ========
The Lowy Group plan is the only underfunded plan included in the above
table. Lowy Group maintains life insurance policies with cash surrender values
of $963,000 and $1,647,000 at December 31, 1998 and 1997, respectively, to fund
plan obligations of $968,000 and $1,766,000 as of December 31, 1998 and 1997,
respectively.
50
<PAGE>
1998 1997
-------- --------
Weighted-average assumptions
as of December 31:
Discount rate................................ 6.8% 7.5%
Expected return on plan assets............... 8.0% 8.0%
1998 1997 1996
------- ------- --------
Components of net periodic
benefit cost
Service cost............................ $ 66 $ 67 $ 75
Interest cost........................... 385 373 342
Expected return on plan assets.......... (274) (341) (338)
Recognized net actuarial (gains)/losses. (57) 44 (216)
------- ------ ------
Net periodic benefit cost............... $121 $143 $(137)
======= ====== ======
13. Discontinued Operations
Truck Accessories Group (TAG Distribution Division). TAG comprises two
operating divisions: TAG Manufacturing and TAG Distribution. Effective April 2,
1998, the Company committed to a formal plan to sell principally all the assets
less certain liabilities of TAG. However, based upon improved operating
performance, the Company decided, during the third quarter of 1998 to retain TAG
Manufacturing and continue with the disposal of TAG Distribution.
TAG Manufacturing produces pickup truck caps and tonneau covers, while
TAG Distribution distributes accessories and pickup truck caps for light trucks
through retail outlets and distribution centers. TAG Distribution's results of
operations have been reported as discontinued operations in the consolidated
financial statements for all periods presented. In addition, the net assets and
liabilities of TAG Distribution, which are expected to be disposed of, have been
segregated within the accompanying consolidated balance sheets as "net assets of
discontinued operations." The plan of disposal is expected to be substantially
complete by the end of the third quarter of 1999.
As of March 19, 1999, the Company has sold one wholesale location and
13 retail locations, including the eight stores, which were part of Radco. Two
wholesale locations and two retail locations have been closed. Effective January
29, 1999, the Company sold the business and assets of Radco, and realized
proceeds of approximately $1.2 million in line with the Company's estimate. The
proceeds were used to repay borrowings under the revolving credit agreement
entered into by Radco during 1997.
51
<PAGE>
Condensed financial information related to TAG Distribution at December 31,
1998 and 1997 is as follows (in thousands):
December 31, December 31,
1998 1997
---------------- --------------
Net assets of discontinued operations:
Current assets.................... $9,438 $11,809
Property, net..................... 2,137 2,394
Intangible assets................. 466 6,319
---------- ---------
Total Assets....................... 12,041 20,522
Less current liabilities........... 7,946 5,483
Less long-term liabilities......... 800 697
--------- ----------
Net Assets.............................. $ 3,295 $14,342
======= =======
TAG Distribution revenues were $58,446,000, $54,884,000 and $67,125,000 for
the twelve months ended December 31, 1998, 1997 and 1996, respectively. As of
December 31, 1998, the Company had recorded an estimated loss on disposal of TAG
Distribution of approximately $10,811,000, net of applicable income taxes, which
included a provision for estimated operating losses through the disposal date of
$2,849,000. The estimated loss on disposal of TAG Distribution included the
write-down of the related goodwill of $5,505,000. At December 31, 1998, accrued
expenses included $3,925,000 with respect to severance costs and lease
obligations, which run through October 2005. Substantially all of this accrual
will be paid in 1999. The income (loss) from discontinued operations related to
TAG Distribution, during the twelve months ended December 31, 1998, 1997 and
1996, were as follows (in thousands):
For the Twelve Months
Ended
1998 1997 1996
---- ---- ----
Loss from TAG Distribution's operations less
applicable income taxes of
$-0-, $-0- and $(1,060), respectively......$ (1,180) $(5,857) $ 2,373
Loss on disposal of TAG, including provision of
$2,849 for estimated operating losses through
disposal date, less applicable income
taxes of $-0-.............................. (10,811) - -
-------- -------- --------
$(11,991) $(5,857) $ 2,373
========= ======== ========
Losses from operations of TAG Distribution include interest expense of
$717,000, $495,000 and $603,000 related to the borrowings of TAG Distribution
under the Revolving Loan Agreement for the twelve months ended December 31,
1998, 1997 and 1996, respectively. The borrowings are anticipated to be repaid
using the proceeds from the sale of TAG Distribution.
In 1997, TAG Distribution closed eight unprofitable stores and its
administrative office. The closure of these excess facilities resulted in a
charge of $945,000 for the year ended December 31, 1997. In 1996, TAG
Distribution closed four unprofitable stores resulting in a charge of $298,000
for the year ended December 31, 1996. Of these charges, approximately $579,000
in 1997 and $182,000 in 1996 were non-cash expenses related to the write-down or
disposal of assets during those years. At December 31, 1997, accrued expenses
52
<PAGE>
included $100,000 with respect to severance costs and lease obligations, which
run through September 1999.
Lowy Group. Lowy comprised two operating divisions: Blue Ridge/Courier
and Lowy Distribution. Effective June 8, 1998, the Company signed a letter of
intent to sell certain assets and liabilities of Blue Ridge/Courier, which
transaction closed on August 31, 1998. The Company realized net cash proceeds of
approximately $15.8 million and recognized a pre-tax gain of approximately $6.5
million on the disposal. Additionally, the Company committed to a formal plan to
dispose of the remaining division of Lowy, Lowy Distribution, on August 24,
1998. The Company expects to realize proceeds from the planned sale of Lowy
Distribution equal to the related assets and liabilities carrying value, and
also has estimated that the division's results of operations will at least break
even through the disposal date.
Blue Ridge/Courier and Lowy Distribution divisions together constituted
the Company's Floor Covering segment, which designed, manufactured and marketed
commercial and residential floor covering. Accordingly, such results of
operations have been reported as discontinued operations in the consolidated
financial statements for the periods presented. In addition, the net assets and
liabilities, which are expected to be disposed of, have been segregated within
the consolidated balance sheets as "net assets of discontinued operations."
Condensed financial information related to Lowy at December 31, 1997
(consisting of both the Blue Ridge/Courier and Lowy Distribution divisions) and
Lowy Distribution at December 31, 1998, is as follows (in thousands):
December 31, December 31,
1998 1997
-------------- --------------
Current assets................... $ 7,517 $ 17,240
Property, net.................... 473 2,849
Long-term assets................. 1,498 2,748
--------- ----------
Total assets..................... 9,488 22,837
Less current liabilities......... 2,659 6,036
Less long-term liabilities....... 1,280 2,399
--------- ----------
Net assets........................ $ 5,549 $ 14,402
========= ==========
Lowy revenues were $56,891,000, $69,724,000 and $71,343,000 for the
twelve months ended December 31, 1998, 1997 and 1996, respectively. The income
from discontinued operations was as follows related to Lowy (in thousands):
For the Twelve Months
Ended
1998 1997 1996
---- ---- ----
Net income from operations of Lowy, less
applicable income taxes of $262,
$446 and $1,060, respectively............ $2,052 $6,081 $1,740
Gain on disposal of assets of the Blue Ridge/
Courier division, less applicable taxes
of $-0-.................................. 6,500 - -
------ ------ ------
$8,552 $6,081 $1,740
====== ====== ======
53
<PAGE>
Net income of Lowy includes interest expense of $218,000, $624,000 and
$1,127,000 related to the borrowings of Lowy under the Revolving Loan Agreement
for the twelve months ended December 31, 1998, 1997 and 1996, respectively. The
related borrowings were repaid using the proceeds from the sale of the Blue
Ridge/Courier division. Net income of Lowy for the twelve months ended December
31, 1997, includes a gain on the sale of certain real estate of $3,000,000.
14. Acquisitions:
Effective October 31, 1997 Radco, a subsidiary of TAG, acquired
substantially all of the assets of MTA in a purchase business combination. MTA,
based in Tulsa, Oklahoma, was a wholesale distributor of light truck and vehicle
accessories. Radco paid approximately $2.5 million of which $2.1 million was
paid in cash and $0.5 million evidenced by a 9% promissory note payable in 20
consecutive quarterly installments of principal and interest. Radco also assumed
$100,000 in closing costs.
Concurrently with the acquisition, Radco entered into a five year
non-compete agreement and a six month consulting agreement with the owner of MTA
pursuant to which the owner will be compensated for providing continuing
services to, and not competing with, Radco. Radco will pay the owner an
aggregate of $100,000 each year under the terms of the non-compete agreement.
During 1998, the company's management committed to a plan to dispose of
TAG Distribution, which includes MTA. Accordingly, the results of operations of
MTA, subsequent to the date of acquisition, are included in the Loss from
Discontinued Operations. The inclusion of the results of operations of MTA as
though MTA had been acquired January 1, 1996 for all periods presented, would
not materially change the Consolidated Results of Operations.
15. Commitments and Contingencies:
Claims and Lawsuits. The Company is involved in certain claims and
lawsuits arising in the normal course of business. In the opinion of management,
the ultimate resolution of these matters will not have a material adverse effect
on the financial position or results of operations of the Company.
EFP is subject to a lawsuit concerning the supply of natural gas to one
of its manufacturing plants. The utility company has alleged that EFP was
under-billed by approximately $500,000 over a four-year period as a result of
errors made by the utility company. The Company is aggressively defending the
suit and believes that it will not have a material adverse effect on the
Company.
Letters of Credit and Other Commitments. The Company had $3,541,000 and
$3,950,000 in standby letters of credit outstanding at December 31, 1998 and
1997, respectively, primarily securing the Company's insurance programs.
Foreign Currency Exchange Contracts. The Company purchases foreign
exchange currency contracts that enable it to hedge certain British Sterling
denomination inventory purchases. As of December 31, 1998 and 1997, Morgan had
outstanding foreign exchange currency contracts with a notional amount of
$1,078,000 and $2,100,000, respectively, and a fair value of less than $5,000
for each of the periods. The gains or losses on such activity during each of the
years ended December 31, 1998, 1997 and 1996 was not material.
54
<PAGE>
Environmental Matters. Morgan has been named as a potentially
responsible party ("PRP") with respect to the generation of hazardous materials
alleged to have been handled or disposed of at two Federal Superfund sites in
Pennsylvania and one in Kansas. Although a precise estimate of liability cannot
currently be made with respect to these sites, based upon information known to
Morgan, the Company currently believes that it's proportionate share, if any, of
the ultimate costs related to any necessary investigation and remedial work at
those sites will not have a material adverse effect on the Company.
Certain of the Company's operations utilize paints and solvents in their
businesses. Also, raw materials used by EFP contain pentane, which is a volatile
organic compound subject to regulation under the Clean Air Act. Although the
Company believes that it has made sufficient capital expenditures to maintain
compliance with existing laws and regulations, future expenditures may be
necessary if and when compliance standards and technology change.
Self-Insured Risks. The Subsidiaries utilize a combination of insurance
coverage and self-insurance programs for health care and workers compensation.
The Company has reserves recorded to cover the self-insured portion of these
risks based on known facts and historical trends and management believes that
such reserves are adequate and the ultimate resolution of these matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
16. Related Party Transactions:
Concurrently with the Note Offering on May 23, 1994, the Company entered
into a Management Services Agreement with Southwestern Holdings, Inc. a
corporation ("Southwestern") owned by Mr. Poindexter. Pursuant to the Management
Services Agreement, Southwestern provides services to the Company, including
those of Mr. Poindexter and Mr. Magee its Chief Financial Officer. The Company
pays to Southwestern approximately $600,000 per year for these services, subject
to annual automatic increases based upon the consumer price index. The Company
may also pay a discretionary annual bonus to Southwestern subject to certain
limitations, none was paid in 1998, 1997 or 1996. The Company and Subsidiaries
use certain facilities provided by Southwestern for meetings and conferences.
The Company did not use the facilities during 1998, 1997 or 1996. The Company
paid Southwestern approximately $619,000, $613,000 and $600,000 during 1998,
1997 and 1996, respectively. Radco, which is not a restricted subsidiary under
the terms of the Bond Indenture or a guarantor under the terms of the Company's
Revolving Loan Agreement, paid Southwestern Holdings $85,000 and $60,000 during
1998 and 1997, respectively, for certain services.
Mr. Poindexter and Mr. Magee are officers of JBPCO and are partners in a
partnership that leases to Morgan certain real property in Georgia. Morgan paid
$222,000 in rent to the partnership in 1998 and 1997 and $200,000 during 1996
pursuant to such lease.
TAG Manufacturing leases certain real estate in Canada from an entity
controlled by an executive vice president of TAG. Total lease expense for that
facility was $108,000, $117,000 and $114,000 in 1998, 1997and 1996,
respectively.
55
<PAGE>
J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure as discussed in Form
8K filed on October 11, 1996.
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are set forth
below. All directors hold office until the next annual meeting of stockholders
of the Company or until their successors are duly elected and qualified.
Executive officers of the Company are appointed by the Board of Directors
annually and serve at the discretion of the Board of Directors.
Name Age Position
John B. Poindexter 54 Chairman of the Board, President and
Chief Executive Officer
W.J. Bowen 77 Director
Stephen P. Magee 51 Director, Executive Vice President,
Chief Financial Officer and Treasurer
M. James Levine 44 Senior Vice President
R.S. Whatley 47 Vice President, Controller
L.T. Wolfe 50 Vice President Administration
John B. Poindexter has served as Chairman of the Board and Director of
the Company since 1988 and Chief Executive Officer since 1994. From 1985 through
1996, Mr. Poindexter was the majority limited partner of J.B. Poindexter & Co.,
L.P., a privately held, long-term equity investment and management firm formed
by Mr. Poindexter. From 1983 through 1985, he was co-managing partner of KD/P
Equities, a privately held equity investment firm that he co-founded. From 1976
through 1985, Mr. Poindexter worked for Smith Barney, Harris Upham & Co. While
with Smith Barney, he became a senior vice president for its Smith Barney
Venture Corporation and Smith Barney Capital Corporation ("SBCC") affiliates and
a partner in First Century Partnership II, an investment fund managed by SBCC.
Stephen P. Magee has served as Treasurer and a Director of the Company
since the Company was formed in 1988 and Chief Financial Officer since 1994.
M. James Levine has served as Senior Vice President since April 1998.
Previously, Mr. Levine held senior positions at Norton, a manufacturer of
engineered abrasive products.
W.J. Bowen retired in 1992 as the Chairman of the Board of Transco Energy
Company ("Transco"), a diversified energy company based in Houston, Texas. Mr.
Bowen served as Chief Executive Officer of Transco from 1974 until his
retirement from that position in 1987.
R.S. Whatley has served as Vice President, Controller since June 1994.
Previously Mr. Whatley held senior financial positions with Vinmar, Inc., a
chemical trading company and Weatherford International, an oilfield services
company.
Larry T. Wolfe has served as Vice President of Administration since May of
1995. Previously Mr. Wolfe was Vice President of Human Resources and
Administrative Services of Transco Energy Company.
56
<PAGE>
Directors who are officers or employees of the Company do not receive
fees for serving as directors. The Company pays $20,000 per year as director's
fees to each outside director.
Other Significant Persons
Although not an executive officer of the Company, each of the following
persons is an officer of the referenced Subsidiary or division thereof and is an
important contributor to the Company's operations:
Name Age Position
Martin Brown 43 President of TAG Manufacturing
Nelson Byman 52 President of MIC Group
James R. Chandler 63 President of EFP
Peter K. Hunt 52 President of Morgan
Martin Brown was named President of TAG Manufacturing in March 1998.
Mr. Brown was the previous owner of Raider and LoRider, acquired by the Company
in June 1995. He has served as President of Raider Industries since June 1995.
Nelson Byman has 24 years of engineering and management experience and
was most recently Vice President/General Manager of a domestic division of
Weatherford/Enterra, a manufacturer of oilfield related equipment.
James R. Chandler has served as President of EFP since 1978. Prior to
1978, Mr. Chandler worked in various marketing and executive positions with the
Ames Division of Miles Laboratories, Inc. and in the management consulting
section of Price Waterhouse & Co.
Peter K. Hunt has served as President of Morgan since April 1998. Mr.
Hunt has 28 years of engineering and management experience and was most recently
Senior Vice President and General Manager of the Industrial Products Group of
Greenfield Industries.
57
<PAGE>
Item 11. Executive Compensation
The following table sets forth certain information regarding the
compensation paid to the Company's Chief Executive Officer and the other
executive officers whose total annual salary and bonus are anticipated to exceed
$100,000 for the fiscal years ended December 31, 1998, 1997 and 1996:
Summary Compensation Table
Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
John B. Poindexter 1998 $ (a) $ - $ -
Chairman of the Board and 1997 (a)
Chief Executive Officer 1996 (a)
Stephen P. Magee 1998 $ (a) $ (b) $ -
Chief Financial Officer 1997 (a)
1996 (a)
M. James Levine 1998 $156,218 $77,393(c)
R.S. Whatley Controller 1998 $115,000 $ - $
1997 $105,000 $ - $ -
L.T. Wolfe Vice President
Administration 1998 $168,000 $ - $ -
1997 $165,000 $ - $ -
(a) Messrs. Poindexter and Magee do not receive salaries from the Company.
Rather, their services are provided to the Company pursuant to a Management
Services Agreement. See "Management Services Agreement."
(b) It is anticipated that Mr. Magee will be eligible to receive in the future
an annual bonus pursuant to the incentive plan described below.
(c) Other compensation includes moving expenses of $77,393 and the related tax
of $31,648.
The Company implemented an incentive plan covering certain of its
executive officers. Although the precise terms of that plan have not been
established, the Company anticipates that it will be similar to the Subsidiary
Incentive Plans described below. Messrs. Poindexter and Magee are covered by the
various insurance programs provided by Morgan to its employees.
Management Services Agreement
Concurrently with the Note Offering, the Company entered into a
Management Services Agreement with a corporation ("Southwestern") owned by Mr.
Poindexter. Pursuant to the Management Services Agreement, Southwestern provides
services to the Company, including those of Mr. Poindexter who serves as the
Company's Chairman of the Board and Chief Executive Officer and of Mr. Magee who
serves as its Chief Financial Officer. The Company pays to Southwestern
approximately $600,000 per year for these services, subject to annual automatic
increases based upon the consumer price index. The Company may pay a
58
<PAGE>
discretionary annual bonus to Southwestern for the provision of Mr. Poindexter's
and Mr. Magee's services and may increase the annual fee payable above the
automatic annual increase, in each case subject to certain limitations, if after
giving effect to such payment and/or increase the Company's Consolidated EBITDA
Coverage Ratio is 2.00 to 1 or higher.
Subsidiary Incentive Plans
The Company has adopted an incentive compensation plan for members of
upper management of each of its Subsidiaries (collectively the "Incentive
Plans") to provide for the payments of annual bonuses based upon the attainment
of performance-based goals. Eligible employees will be entitled to receive a
bonus if the Subsidiary attains or surpasses a stated percentage (which varies
by Subsidiary) of that Subsidiary's budgeted pre-tax profit, with the amount of
bonus being tied to the Subsidiary's actual pre-tax profits. Individual bonuses
are then allocated among the eligible employees based upon their individual
achievement of stated performance objectives. The Subsidiaries also maintain
certain other benefit plans for their respective officers and employees. See
Note 15 to the Consolidated Financial Statements for the Company.
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. Instead, executive
compensation review decisions are made by the entire board of directors.
Item 12. Security of Ownership of Certain Beneficial Owners and Management
Beneficial Ownership
Number Percent
Directors, Officers and 5% Stockholders of Shares of Class
- --------------------------------------- --------- --------
John B. Poindexter 3,059 100%
c/o J.B. Poindexter & Co., Inc.
1100 Louisiana, Suite 5400
Houston, Texas 77002
Stephen P. Magee -- --
c/o J.B. Poindexter & Co., Inc.
1100 Louisiana, Suite 5400
Houston, Texas 77002
W.J. Bowen -- --
c/o J.B. Poindexter & Co., Inc.
1100 Louisiana, Suite 5400
Houston, Texas 77002
All directors and officers as a
group (6 persons) 3,059 100%
Mr. Poindexter has sole voting and investment power with respect to
all shares that he beneficially owns.
59
<PAGE>
Item 13. Certain Relationships and Related Transactions
Messrs. Poindexter and Magee are members of a partnership ("Bartow")
that leases certain real property in Georgia to Morgan. During each of 1998,
1997 and 1996, Morgan paid approximately $200,000 as rent to Bartow, and it will
continue to pay such rent to Bartow in the future. The Company believes that the
rent paid by Morgan to Bartow is a competitive market rate for the location.
The Company has entered into a Management Services Agreement with
Southwestern Holdings, Inc. a corporation ("Southwestern") owned by Mr.
Poindexter. Pursuant to the Management Services Agreement, Southwestern provides
services to the Company, including those of Mr. Poindexter and Mr. Magee its
Chief Financial Officer. The Company pays to Southwestern approximately $600,000
per year for these services, subject to annual automatic increases based upon
the consumer price index. The Company may also pay a discretionary annual bonus
to Southwestern subject to certain limitations. The Company and Subsidiaries use
certain facilities provided by Southwestern for meetings and conferences. For
all services and facility use, the Company paid Southwestern approximately
$619,000, $613,000 and $600,000 during 1998, 1997 and 1996, respectively.
The Company believes that the amounts paid by it to Southwestern for
the use of these facilities is a market rate. Radco, which is not a restricted
subsidiary under the terms of the Senior Notes Indenture or a guarantor under
the terms of the Company's Revolving Loan Agreement, paid Southwestern Holdings
$85,0000, $60,000 and $-0- during 1998, 1997 and 1996, respectively for certain
services.
TAG Manufacturing leases certain real estate in Canada from an entity
controlled by an executive vice president of TAG Manufacturing. Total lease
expenses was $108,000 and $117,000 in 1998 and 1997, respectively, the Company
considers this to be a market rate for the property.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements-None, other than as previously listed in response
to Item 8.
(a)(2) Financial Statement Schedules - None
(a)(3) Exhibits
3.1(a) Second Restated Certificate of Incorporation
3.1.1(e) Certificate of First Amendment to Second Restated Certificate of
Incorporation.
3.2(a) Amended and Restated Bylaws
4.1(e) Form of 12 1/2% Senior Note due 2004 (included in Exhibit 4.2)
4.2(e) Indenture dated as of May 23, 1994
4.2.1(f) First Supplemental Indenture dated as of May 11, 1995. Incorporated by
reference to Exhibit 4.1 to the Form 10-Q for the quarterly period
ended June 30, 1995, as filed with the Commission on August 15, 1995
4.2.2(f) Second Supplemental Indenture dated as of June 26, 1995.
Incorporated by reference to Exhibit 4.2 to the Form 10-Q for
the quarterly period ended June 30, 1995, as filed with the
Commission on August 15, 1995.
4.3(a) List of certain promissory notes
10.1.5(h)Loan and Security Agreement by and among Congress Financial
Corporation and J.B. Poindexter & Co., Inc., dated June 28,
1996.
10.1.6(j)Amendment No. 1 to Loan and Security Agreement by and among
Congress Financial Corporation and J.B. Poindexter & Co.,
Inc., dated May 13, 1998.
60
<PAGE>
10.23(a) Lease Agreement, dated as of March 29, 1990, between Bartow
Partners, L.P. and Morgan Trailer Manufacturing Co., d/b/a Morgan
Corporation, as amended by the First Amendment to Lease Agreement,
dated June 13, 1991
10.24(a) Form of Salary Continuance Agreement for director level employees of
Morgan Trailer Mfg. Co.
10.25(a) Form of Salary Continuance Agreement for officers of Morgan Trailer
Mfg. Co.
10.26(a) Form of Incentive Plan for certain employees of the Subsidiaries
10.27(a) Morgan Trailer Mfg. Co. Long-Term Management Equity Appreciation
Program
10.32(a) Lease Agreement, dated August 14, 1987, between C&D Realty Partnership
and Leer, Inc., as amended by the Lease Option and Amendment Agreement,
dated as of August 14, 1992
10.33(a) Lease Agreement, dated August 14, 1987, between J&R Realty Company and
Leer, Inc.
10.34(a) Lease Agreement, dated August 14, 1987, between BCD Realty Partnership
with Leer,Inc., as amended by the Lease Option and Amendment Agreement,
dated as of August 14, 1992 (missing page 2 of Amendment)
10.35(a) Lease Agreement, dated August 14, 1987, between John M. Collins and
Leer, Inc., as amended by the Lease Option and Amendment Agreement,
dated as of August 14, 1992, and the Addendum to Lease Agreement,
dated as of August 1, 1993
10.36(a) Lease agreement, dated August 14, 1987, between PCD Realty Partnership
and Leer, Inc., as amended by the Lease Option and Amendment Agreement,
dated as of August 14, 1992
10.86(e) Management Services Agreement dated as of May 23, 1994, between J.B.
Poindexter & Co., Inc. and Southwestern Holdings, Inc.
10.102(f)Asset Purchase Agreement, dated as of June 15, 1995, among Leer Inc.,
20th Century Fiberglass, Inc., Steven E.Robinson and Ronald E.Hickman.
Incorporated by reference to Exhibit 10.1 to the current report on Form
8-K, dated June 29, 1995, as filed with the Commission on September 11,
1995
10.103(f)Promissory Note, dated June 29, 1995, executed by Leer, Inc.
Incorporated by reference to Exhibit 10.2 to the current report on Form
8-K, dated June 29, 1995, as filed with the Commission on September 11,
1995
10.104(f)Asset Purchase Agreement, dated as of June 15, 1995 among Leer Inc.,
Century Distributing, Inc., Steven E. Robinson and Ronald E. Hickman.
Incorporated by reference to Exhibit 10.3 to the current report on Form
8-K, dated June 29, 1995, as filed with the Commission on September 11,
1995
10.105(f)Consulting Agreement, dated as of June 29, 1995, between Leer, Inc.
and Steven E.Robinson. Incorporated by reference to Exhibit 10.4 to the
current report on Form 8-K, dated June 29, 1995, as filed with the
Commission on September 11, 1995
10.106(f)Consulting Agreement, dated as of June 29, 1995, between Leer, Inc.
and Ronald E. Hickman. Incorporated by reference to Exhibit 10.5 to the
current report on Form 8-K, dated June 29, 1995, as filed with the
Commission on September 11, 1995.
10.107(f)Non-Competition Agreement, dated as of June 29, 1995, between Leer,
Inc.and Steven E.Robinson. Incorporated by reference to Exhibit 10.6 to
the current report on Form 8-K, dated June 29, 1995, as filed with the
Commission on September 11, 1995.
10.108(f)Non-Competition Agreement, dated as of June 29, 1995, between Leer,
Inc. and Ronald E.Hickman. Incorporated by reference to Exhibit 10.7 to
the current report on Form 8-K, dated June 29, 1995, as filed with the
Commission on September 11, 1995.
10.109(f)Share Purchase Agreement dated as of June 30, 1995, between Raider
Industries, Inc. and Martin Brown
61
<PAGE>
10.110(f)Asset Purchase Agreement dated as of June 30, 1995, by and between
Raider Industries Inc., Pro-More Industries Ltd., Brown Industries
(1976) Ltd. and Martin Brown
10.111(i)Loan and Security Agreement by and between Congress Financial
Corporation and Radco Industries Inc., dated October 31,1997
10.112(i)Asset Purchase Agreement by and among Radco Industries Inc. and
Midwest TruckAfter Market and William J. Avery, Sr. and Sarah A. Avery,
dated October 31.1997.
10.113 Asset Purchase Agreement by and among Lowy Group, Inc., J.B. Poindexter &
Co., Inc. and Blue Ridge Acquisition Company, LLC, dated August 31, 1998.
21.1 Subsidiaries of the Registrant
27.1 Financial data schedule
27.2 Restated financial data schedule for the years 1997 and 1996
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-75154) as filed with the Commission on February 10, 1994
(b) Incorporated by reference to the Company's Amendment No. 1 to Registration
Statement (No. 33-75154) as filed with the Commission on February 24, 1994
(c) Incorporated by reference to the Company's Amendment No. 2 to Registration
Statement (No. 33-75154) as filed with the Commission on March 23, 1994
(d) Incorporated by reference to the Company's Amendment No. 3 to Registration
Statement (No. 33-75154) as filed with the Commission on May 16, 1994
(e) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, as filed with the Commission on March 31,
1995.
(f) Incorporated by reference to the Company's Annual Report on form 10-K for
the year ended December 31, 1995, as filed with the Commission on March 29,
1996.
(g) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, as filed with the Commission on May
10, 1996.
(h) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, as filed with the Commission on August
13, 1996.
(i) Incorporated by reference to the Company's Annual Report of Form 10-K for
the year ended December 31, 1997, as filed with the Commission of March 30,
1998.
(j) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, as filed with the Commission on August
14, 1998.
- ---------------
(b) Reports of Form 8-K. The Company filed the following reports on Form 8-K
during the year:
None
Supplemental Information to Be Furnished With Reports Filed Pursuant to Section
15 (d) of the Act by Registrants Which Have Not Registered Securities Pursuant
to Section 12 of the Act.
The registrant has not delivered to its security holders any annual report to
security holders covering the last fiscal year, proxy statement, form of proxy
or other proxy soliciting material (as described under this caption in Form 10-K
as promulgated by the Securities and Exchange Commission). A copy of this Form
10-K will be sent to each registered holder of the registrant's 12 1/2% Senior
Notes due 2004.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
J.B. POINDEXTER & CO., INC.
Date: March 29, 1999 By: John B. Poindexter
-------------------------------------------
John B. Poindexter, Chairman of the
Board and Chief Executive Officer
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.
Date: March 29, 1999 John B. Poindexter
------------------
John B. Poindexter
Chairman and Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 29, 1999 Stephen P. Magee
----------------
Stephen P. Magee
Chief Financial Officer and Director
(Principal Financial Officer)
Date: March 29, 1999 W.J. Bowen
-----------
W.J. Bowen
Director
Date: March 29, 1999 Robert S. Whatley
-----------------
Robert S. Whatley
Chief Accounting Officer
(Principal Accounting Officer)
63
ASSET PURCHASE AGREEMENT
By and Among
LOWY GROUP, INC.,
J.B. POINDEXTER & CO., INC.,
and
BLUE RIDGE ACQUISITION COMPANY, LLC
August 31, 1998
<PAGE>
Table of Contents
Page
ARTICLE 1 PURCHASE AND SALE OF ASSETS 1
1.1 Purchased Assets; Excluded Assets 1
1.2 Assumed Liabilities; 3
1.3 Purchase Price for the Assets 4
1.4 Transfer Taxes; Recording Fees 7
1.5 Closing 7
1.6 Risk of Loss 8
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE
SELLER AND PARENT8
2.1 Corporate Matters 8
2.2 Validity of Agreement and Conflict with Other
Instruments 8
2.3 Approvals, Licenses and Authorizations 9
2.4 Title to and Condition of Properties 9
2.5 Purchased Proprietary Rights 9
2.6 Contracts and Commitments 9
2.7 No Litigation 10
2.8 No Adverse Changes or Events 11
2.9 Suppliers 12
2.10 Customers 12
2.11 Certain Business Relationships with Affiliates 12
2.12 Environmental Matters 12
2.13 Financial Statements; No Undisclosed Liabilities 13
2.14 Purchased Real Property 14
2.15 Equipment; Vehicles; Personal Property 14
2.16 Inventory 14
2.17 Accounts Receivable 15
2.18 Disclaimer of Implied Warranties 15
2.19 Insurance 15
2.20 Employee Benefit Plans and Employment Agreements 15
2.21 Employment and Labor Matters 16
2.22 Immigration 16
2.23 Taxes 16
2.24 No Defaults or Violations 17
2.25 Finder's Fees 17
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BUYER 17
<PAGE>
3.1 Organizational Matters 17
3.2 Validity of Agreement and Conflict with Other
Instruments. 17
3.3 Approvals and Authorizations 18
3.4 Litigation. 18
3.5 Finder's Fees 18
ARTICLE 4 ADDITIONAL AGREEMENTS 18
4.1 Implementing Agreements 18
4.2 Consents and Approvals 18
4.3 Employee Matters 18
4.4 Continuation of Employee Benefits. 19
4.5 Use of Names. 20
4.6 Access to Information and Facilities 20
4.7 Due Diligence 20
4.8 Preservation of Businesses 20
4.9 Exclusivity 20
4.10 Accounts 20
4.11 Monthly Financial Statements 21
4.12 Inquiry of Lagasse 21
ARTICLE 5 BUYER'S CONDITIONS 21
5.1 Representations, Warranties and Covenants 21
5.2 No Material Adverse Change. 21
5.3 No Litigation 21
5.4 Real Estate 22
5.5 Beck Purchase Price 22
5.6 Consents and Approvals 22
5.7 Updated Schedules 22
5.8 Closing Actions 22
ARTICLE 6 SELLER'S CONDITIONS 23
6.1 Representations, Warranties and Covenants 23
6.2 No Litigation 23
6.3 Consents and Approvals 23
6.4 Closing Actions 23
<PAGE>
ARTICLE 7 INDEMNIFICATION 24
7.1 Indemnification by Seller 24
7.2 Indemnification by Buyer. 24
7.3 Indemnification Procedures. 25
7.4 Settlement. 25
7.5 Limitations on Liability 26
7.6 Effect on Purchase Price of Indemnity Payments 26
ARTICLE 8 NATURE OF STATEMENTS AND SURVIVAL OF COVENANTS,
REPRESENTATIONS, WARRANTIES AND AGREEMENTS 26
ARTICLE 9 TERMINATION 27
9.1 Events of Termination 27
9.2 Liability Upon Termination27
9.3 Notice of Termination 27
ARTICLE 10 DEFINITIONS OF CERTAIN TERMS 28
10.1 "Accounts Receivable" 28
10.2 "Affiliate" 28
10.3 "Agreement" 29
10.4 "Assumed Liabilities" 29
10.5 "Businesses" 29
10.6 "Business Day" 29
10.7 "Businesses'Financial Statements" 29
10.8 "Buyer" 29
10.9 "CERCLA" 29
10.10 "Code" 29
10.11 "Confidential Information" 29
10.12 "Contracts" 29
10.13 "Debt Obligations" 29
10.14 "Easements" 29
10.15 "Environmental Laws" 30
10.16 "Environmental Permit" 30
10.17 "Equipment" 30
10.18 "ERISA" 30
10.19 "Excluded Assets" 30
10.20 "GAAP" 30
10.21 "Governmental Entity" 30
10.22 "Hazardous Substance" 30
<PAGE>
10.23 "Inventories" 31
10.24 "Law" 31
10.25 "Lien" 31
10.26 "Loss"or "Losses" 31
10.27 "Material Adverse Change" 31
10.28 "Material Adverse Effect" 31
10.29 "Order" 31
10.30 "Ordinary Course of Business" 31
10.31 "Permits" 32
10.32 "Permitted Liens" 32
10.33 "Person" 32
10.34 "Proprietary Information" 32
10.35 "Proprietary Rights" 32
10.36 "Proceeding" 32
10.37 "Seller" 32
10.38 "Taxes" 32
10.39 "Tax Return" 33
10.40 "Title Insurer" 33
10.41 "Knowledge" 33
ARTICLE 11 MISCELLANEOUS 33
11.1 Public Announcements 33
11.2 Other Action 33
11.3 Expenses 33
11.4 Notices 34
11.5 Successors 35
11.6 Entire Agreement 35
11.7 Governing Law 36
11.8 Waiver 36
11.9 Severability 36
11.10 No Third Party Beneficiaries 36
11.11 Counterparts 36
11.12 Interpretation 36
<PAGE>
List of Schedules
Schedule Subject Matter
1.1(a)(i) Equipment
1.1(a)(ii) Inventories
1.1(a)(iii) Accounts Receivable
1.1(a)(iv) Purchased Real Property
1.1(a)(v) Easements
1.1(a)(vi) Purchased Proprietary Rights
1.1(a)(vii) Vehicles
1.1(a)(x) Personal Property Leases
1.1(a)(xi) Contracts
1.1(a)(xii) Permits
1.1(b) Excluded Assets
1.2(a) Certain Assumed Liabilities
1.3(a) Beck Purchase Price
1.3(b)(iv) Determination of Net Inventory
1.3(d) Allocation of Purchase Price
2.1 Seller Foreign Jurisdiction
2.2(b) Conflicts
2.3 Seller Consents
2.5 Purchased Proprietary Rights
2.6 Contracts
2.7 Litigation
2.8 Adverse Changes or Events
2.9 Suppliers
2.10 Customers
2.11 Relationships with Affiliates
2.12 Environmental Matters
2.13(a) Businesses' Financial Statements
2.14 Purchased Real Property Matters
2.16 "As Is" Inventory
2.19(a) Insurance
2.19(b) Insurance Claims
2.20 Benefit Plans
2.21 Employment and Labor Matters
2.22 Immigration
2.24 Defaults and Violations
3.3 Buyer Consents
4.4(c) Former Employees
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is made and
entered into this 31st day of August, 1998 by and among LOWY GROUP, INC., a
Delaware corporation (the "Seller"), J.B. POINDEXTER & CO., INC., a Delaware
corporation and the sole stockholder of Seller ("Parent"), and BLUE RIDGE
ACQUISITION COMPANY, LLC, a Delaware limited liability company (the "Buyer").
WITNESSETH:
WHEREAS, Seller is engaged in the business of, among other
things, manufacturing carpet through its Blue Ridge Carpet Mills Division
located in Ellijay, Georgia and dyeing carpet through its Courier Dyeing and
Printing Division located in Ellijay, Georgia (collectively, the "Businesses");
and
WHEREAS, the Seller and Parent desire to transfer to the Buyer
the Businesses and the properties and assets related to or used for operating
the Businesses, and the Buyer desires to acquire such Businesses, properties and
assets, and assume certain liabilities related thereto all upon the terms and
subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the
respective covenants and agreements contained herein and other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows (all capitalized terms not otherwise defined in
this Agreement shall have the meanings given to them in Article 10):
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 Purchased Assets; Excluded Assets
(a) Purchased Assets. Subject to the terms and conditions of this
Agreement and in consideration of the obligations of the Buyer as provided
herein, and except as otherwise provided in Section 1.2, at the Closing, the
Seller shall sell, assign, transfer, deliver and convey to the Buyer, free and
clear of any Liens except Permitted Liens, and the Buyer shall purchase, acquire
and take assignment and delivery from the Seller, the Seller's right, title and
interest in, to and under the Businesses and certain assets, properties and
rights that are related to or used for the Businesses (the "Purchased Assets"),
including the following:
(i) the Equipment set forth in Schedule 1.1(a)(i);
(ii) the Inventories set forth in Schedule 1.1(a)(ii);
1
<PAGE>
(iii) the Accounts Receivable set forth in Schedule 1.1(a)(iii);
(iv) the parcels of land set forth in Schedule 1.1(a)(iv),
together with all privileges and easements appurtenant thereto and all
buildings, plants, facilities, installations, fixtures and other structures
and improvements situated or located thereon or attached thereto
(collectively, the "Purchased Real Property");
(v) the Easements set forth in Schedule 1.1(a)(v);
(vi) the Purchased Proprietary Rights set forth in Schedule 1.1(a)(vi)
(the "Purchased Proprietary Rights");
(vii) the Vehicles set forth in Schedule 1.1(a)(vii);
(viii) all prepaid expenses, deposits made by the Seller, and deposits
made by customers relating to the Businesses;
(ix) any goodwill associated with the Businesses;
(x) the equipment leases and other leases set forth in Schedule
1.1(a)(x) (collectively, the "Personal Property Leases");
(xi) the Contracts set forth in Schedule 1.1(a)(xi),including, but not
limited to, all customer purchase orders;
(xii) the Permits set forth in Schedule 1.1(a)(xii)
(xiii) copies of all financial books and records necessary for the
operations of Businesses and the Purchased Assets;
(xiv) all rights under warranties relating to the Equipment;
(xv) copies of all employee records;
(xvi) all customer lists;
(xvii) all Benefit Plans set forth in Schedule 1.1(a)(xvii); and
(xviii) all other assets used in the Businesses.
Items (x) and (xi) are referred to herein collectively as the "Purchased
Contracts."
2
<PAGE>
(b) Excluded Assets. Notwithstanding anything in Section 1.1(a)
to the contrary, the Purchased Assets shall not include those assets of the
Seller listed or described in Schedule 1.1(b) to this Agreement (collectively,
the "Excluded Assets").
1.2 Assumed Liabilities; Retained Liabilities.
(a) Assumed Liabilities. At the Closing, the Seller shall assign all
of its respective right, title and interest in and to, and the Buyer shall
assume and agree to pay, perform, fulfill and discharge in a timely manner:
(i) all liabilities and obligations of Seller under all Purchased
Contracts or service commitments relating to the Businesses except as
specifically set forth in Section 1.2(b) or elsewhere in this Agreement;
(ii) all payroll, accrued vacation obligations, and other liabilities
(except for payroll, accrued vacation obligations and other liabilities to
Norman E. Gibbs, Jr.) incurred with respect to employee benefits with respect to
Continuing Employees for any periods prior to the Closing Date which are accrued
on the Businesses' Financial Statements or incurred in the Ordinary Course of
Business since the date of the last balance sheet included in the Businesses'
Financial Statements;
(iii) Except as otherwise provided in this Agreement, all liabilities
and obligations in connection with Environmental Laws;
(iv) all warranty obligations for products sold and services performed
by the Businesses prior to the Closing Date;
(v) certain non-interest bearing current liabilities of the
Businesses listed in Schedule 1.2(a) including trade accounts payable (excluding
an amount equal to the sum of all checks issued by Seller for the payment of
trade accounts payable but not presented for payment at the effective time of
the Closing ("Checks in Transit") and operating expenses which are accrued on
the Businesses' Financial Statements or incurred in the Ordinary Course of
Business since the date of the last balance sheet included in the Businesses'
Financial Statement;
(vi) up to $150,000 of health insurance claims liability existing
on the Closing Date which are accrued on the Businesses' Financial Statements or
incurred in the Ordinary Course of Business since the date of the last balance
sheet included in the Businesses' Financial Statement or which represent
incurred but not reported claims (the "Assumed Health Insurance Liability"); and
3
<PAGE>
(vii) up to $115,000 of the unfunded liability of the Seller at the
Closing Date under its Unfunded Deferred Compensation Plan (Top Hat Plan) (the
"Assumed Retirement Plan Liability").
The obligations being assumed by the Buyer are collectively referred to herein
as the "Assumed Liabilities". The assumption of the Assumed Liabilities will be
evidenced by the Buyer's execution and delivery of the assumption contemplated
by Section 6.4(c).
(b) Liabilities Not Assumed by the Buyer. Except for the Assumed
Liabilities, the Buyer shall not assume or otherwise be liable in respect of, or
be deemed to have assumed or otherwise be liable in respect of, any Debt, claim,
obligation or other liability of the Seller (collectively, "Retained
Liabilities"). The Retained Liabilities shall include, but are not limited to,
the following:
(i) all obligations or liabilities under the Retention Bonus Letters
dated December 11, 1997 and December 19, 1997 sent to C.B. Hatch, David
Westmoreland, Edgar Bailey, Eric Krause, Clarence Griffin and Norman Gibbs, III;
(ii) all obligations of the Seller to Norman E. Gibbs, Jr.;
(iii) all interest bearing Debt of the Seller and all accrued interest
or prepayment fees thereon;
(iv) any incentive compensation liability of the Seller payable as a
result of this transaction;
(v) all health insurance liability in excess of the Assumed Health
Insurance Liability;
(vi) all retirement plan liability in excess of the Assumed Retirement
Plan Liability;
(vii) any liability relating to worker's compensation claims associated
with events occurring on or prior to the Closing Date; and
(viii) any liability relating to Checks in Transit; and
(ix) any liability relating to the Excluded Assets.
4
<PAGE>
1.3 Purchase Price for the Assets.
(a) Base Purchase Price. At the Closing, in consideration of the sale
and transfer to the Buyer of the Purchased Assets, the Buyer shall pay to the
Seller an amount equal to $18,000,000 plus all amounts expended by the Seller
prior to the Closing Date to acquire, transport and install the small pressure
beck described in Schedule 1.3(a) (the "Beck Purchase Price")(the "Base Purchase
Price"). The Base Purchase Price shall be subject to adjustment prior to Closing
as provided in Section 1.3(b) and after Closing as provided in Section 1.3(d) .
The Base Purchase Price shall be paid to Seller as follows:
(i) $17,500,000 plus (A) the Beck Purchase Price and (B) any
Preclosing Price Adjustment (to the extent the calculation described in Section
1.3(c) results in an increase to the Base Purchase Price) and less any
Preclosing Price Adjustment (to the extent the calculation described in Section
1.3(c) results in a decrease to the Base Purchase Price) by wire transfer of
immediately available funds to an account or accounts designated by Seller; and
(ii) $500,000 by wire transfer of immediately available funds to
Chase Bank of Texas, national association (the "Escrow Agent") to be held
pursuant to the terms and conditions of the escrow agreement attached hereto as
Exhibit A (the "Escrow Agreement").
(b) Preclosing Adjustments. The Base Purchase Price will be increased or
decreased dollar for dollar to the extent Seller's Working Capital is greater
than or less than, respectively, the average working capital employed in the
Businesses for the twelve (12) months ended July 31, 1998 of $7,090,000 (the
"Working Capital Peg") based upon a Preliminary Closing Date Balance Sheet (the
"Preliminary Closing Date Balance Sheet") and a Preliminary Working Capital
Schedule (the "Preliminary Working Capital Schedule") provided for herein. For
the purposes of this Section, the following terms have the following meanings:
(i) "Current Assets" means all Net Accounts Receivable, Net
Inventory and prepaid expenses.
(ii) "Current Liabilities" means, without duplication, all
Assumed Liabilities which would be considered under GAAP to be current
liabilities.
(iii) "Net Accounts Receivable" shall mean all Accounts Receivable,
excluding any amounts recorded therein related to cash deposits for unfilled
purchase orders from customers for shipments not made as of the end of each
month for the period being used to calculate such receivables ("Customer
Deposits"), acquired by Buyer on the Closing Date less a reserve of $101,000
(the "Reserve").
(iv) "Net Inventory" shall mean all Inventory acquired by the Buyer
on the Closing Date (but excluding all Inventory described on Schedule 2.16
except to the extent such Inventory is included in inventory reserves
established in accordance with GAAP) valued according to GAAP less a reasonable
5
<PAGE>
inventory reserve established in accordance with GAAP applied in a manner
consistent with Seller's past practice. The manner and method for determining
Net Inventory shall be as described in Schedule 1.3(b)(iv).
(v) "Working Capital" means the excess of Current Assets over
Current Liabilities as shown in the Purchase Price Adjustment Schedule.
(c) Calculations. The calculations of Working Capital are to be made in a
manner consistent with Seller's preparation of the Financial Statements of the
Businesses for the year ended December 31, 1997 (including classifications of
assets and liabilities) and consistent with the provisions of Section 1.3(b).
Prior to the Closing Date, the Buyer shall deliver to Seller a Preliminary
Closing Date Balance Sheet and a schedule based upon the Preliminary Closing
Date Balance Sheet showing the Current Assets, the Current Liabilities and the
Working Capital (the "Preliminary Working Capital Schedule") which Buyer and
Seller shall agree upon prior to the Closing. When the Preliminary Working
Capital Schedule is agreed upon, the Base Purchase Price shall be (i) increased
dollar for dollar to the extent Working Capital shown on the Preliminary Working
Capital Schedule is greater than the sum of Working Capital Peg and Customer
Deposits and (ii) decreased dollar for dollar to the extent Working Capital
shown on the Preliminary Working Capital Schedule is less than the sum of
Working Capital Peg and Customer Deposits (the "Preclosing Price Adjustment").
(d) Post Closing Adjustments. The Base Purchase Price will be (i) increased
dollar for dollar to the extent Seller's Working Capital as finally determined
after the Closing pursuant to Section 1.3(e) is greater than the sum of the
Working Capital Peg and Customer Deposits and (ii) decreased dollar for dollar
to the extent Seller's Working Capital as finally determined after the Closing
pursuant to Section 1.3(e) is less than the sum of the Working Capital Peg and
Customer Deposits. The Base Purchase Price as adjusted by Section 1.3(b) and
this Section 1.3(d) is hereinafter referred to as the "Purchase Price."
(e) Post Closing Calculations.Within 60 days after the Closing Date, Buyer
shall deliver to Seller a draft closing date balance sheet (the "Draft Closing
Date Balance Sheet") and a schedule based upon the Draft Closing Date Balance
Sheet showing the Current Assets, the Current Liabilities and the Working
Capital (the "Draft Working Capital Schedule"). Within 15 days after Buyer
delivers the Draft Closing Date Balance Sheet and the Working Capital Schedule
to Seller, Seller must state, in writing by notice to Buyer within such 15 day
period, whether Seller agrees or disagrees with the Draft Closing Date Balance
Sheet or Working Capital Schedule (in whole or in part). The failure of Seller
to so state within such 15 day period will result in the Seller's deemed
acceptance of the Draft Closing Date Balance Sheet and Working Capital Schedule.
If the parties are in agreement as to the Draft Closing Date Balance Sheet and
Working Capital Schedule (either as a result of Seller's notice being delivered
within the 15 day period or Seller being deemed in agreement for failure to
deliver its notice within such 15 period) then the Draft Closing Date Balance
Sheet shall become the Closing Date Balance Sheet and the adjustment to the Base
6
<PAGE>
Purchase Price under Section 1.3(d) will be calculated using the Working Capital
Schedule and taking into account the Preclosing Price Adjustment and the party
owing the other will pay that amount, plus interest calculated at a rate of 8%
per annum accrued on the amount owed from the Closing Date to the date of
payment. If Seller timely delivers its notice of disagreement, then Seller and
Buyer will have 15 days to resolve their differences. If they resolve their
differences, the adjustment to the Base Purchase Price and payment will be made
as set forth above. If they are unable to resolve their differences within such
15 day period, the matter will be submitted within 15 days to a mutually agreed
upon independent accountant with the Atlanta office of KPMG Peat Marwick LLP
(the "Accountant") for arbitration with the adjustment to the Base Purchase
Price under Section 1.3(d) being calculated in accordance with the Accountant's
decision, which shall be final and binding on all parties. Seller and Buyer will
cooperate with each other in order to facilitate and complete the procedures as
described in this paragraph. All fees and expenses of the Accountant shall be
paid by the Buyer and the Seller in such amounts as the Accountant shall
determine based upon his determination as to the merits of each such party's
arguments with respect to the differences resolved by him.
(f) Allocation of Purchase Price. The Purchase Price shall be allocated
among the Purchased Assets by the Buyer and the Seller in the manner set forth
in Schedule 1.3(d) with such Schedule to be revised based upon the Closing Date
Balance Sheet. The Seller and Buyer agree that:
(i) such allocation of the Purchase Price will be in accordance with
Section 1060 of the Code and the regulations thereunder; and
(ii) the Buyer and the Seller will treat and report in filings under
the Code and the transactions contemplated by this Agreement in a manner
consistent with Schedule 1.3(f).
1.4 Transfer Taxes; Recording Fees .
(a) Transfer Taxes. The Buyer shall pay, and indemnify the Seller against,
and protect, save and hold the Seller harmless from, any loss, liability,
obligation or claim for any and all sales, use, transfer, stamp, vehicle,
service, or other similar taxes (other than income or similar taxes relating to
the sale of the Purchased Assets) and any interest, penalties, additions to tax
and fines thereon or related thereto imposed as a result of the consummation of
the transactions contemplated by this Agreement.
(b) Recording Fees. The Buyer shall pay any and all recording, filing or
other fees relating to the conveyance or transfer of the Purchased Assets from
the Seller to the Buyer.
1.5 Closing . Subject to the conditions set forth in this Agreement, the
consummation of the purchase, sale and assignment of the Purchased Assets, and
assumption of the Assumed Liabilities, pursuant to this Agreement (the
"Closing") shall take place at 10:00 a.m. on August 31, 1998, or at such other
7
<PAGE>
time, date and place as the parties hereto shall mutually agree upon in writing,
but not later than September 30, 1998 (the "Closing Date"). The effective date
and time of the Closing shall be 12:01 a.m. on August 31, 1998.
1.6 Risk of Loss . Risk of loss or damage to the Purchased Assets by fire
or other casualty occurring prior to the Closing shall remain with the Seller,
and risk of loss or damage to the Purchased Assets by fire or other casualty
occurring after the Closing shall be borne by the Buyer.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND PARENT
The Seller and Parent, jointly and severally, represent and
warrant to the Buyer as follows:
2.1 Corporate Matters . The Seller is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
with full corporate power and authority (i) to enter into this Agreement, (ii)
to perform its obligations under this Agreement, (iii) to own, lease and operate
its properties and (iv) to carry on the Businesses as they are now owned,
leased, operated and carried on. The Seller is qualified to do business in those
foreign jurisdictions set forth in Schedule 2.1 which jurisdictions are, to
Seller's Knowledge, the only jurisdictions where the failure to be so qualified
could result in a Material Adverse Effect.
2.2 Validity of Agreement and Conflict with Other Instruments .
(a) Validity of Agreement. This Agreement constitutes a legal, valid and
binding obligation of the Seller enforceable against the Seller in accordance
with its terms, except that the enforceability of Seller's obligations are
subject to (i) applicable bankruptcy, insolvency, or other similar laws relating
to or affecting the enforcement of creditors' rights generally and (ii) general
principles of equity.
(b) Conflict with Other Instruments. Except as set forth in Schedule
2.2(b), neither (i) the execution and delivery of this Agreement, nor (ii) the
consummation or performance of the transactions contemplated hereby will
directly or indirectly, with or without notice or lapse of time or both:
(i) conflict with or violate the Certificate of Incorporation or Bylaws
of the Seller;
(ii) conflict with, result in a violation or breach of any provision of,
or give any Person the right to declare a default or exercise any remedy under,
or to accelerate the maturity or performance of, or to cancel, terminate or
modify, any Purchased Contract;
8
<PAGE>
(iii) result in the creation or imposition of any material Lien, other
than Permitted Liens and Liens created by the Buyer, on any of the Purchased
Assets or permit the acceleration of the maturity of any indebtedness of Seller
or any indebtedness secured by any Purchased Asset; or
(iv) violate any Law in effect on the date of this Agreement applicable
to the Seller, the Businesses or any of the Purchased Assets.
2.3 Approvals, Licenses and Authorizations. Except as set forth in Schedule
2.3 ("Seller Consents"), no consent, authorization or approval of, filing or
registration with, or notification to, any Person not a party to this Agreement,
or any Governmental Entity, is required in connection with Seller's execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby.
2.4 Title to and Condition of Properties . The Seller has good and
marketable title to and is the lawful owner of the Purchased Real Property, free
and clear of any Liens, other than Permitted Liens. The Seller has the right to
sell, convey, transfer and deliver all Purchased Assets to the Buyer. Except as
set forth in Schedule 2.4, all of the tangible Purchased Assets (other than
Inventory), whether real or personal, owned or leased, are fit for the purpose
for which they were procured or manufactured. and have been maintained in
accordance with past practices and in good operating condition and repair, with
the exception of normal wear and tear.
2.5 Purchased Proprietary Rights . Schedule 1.1(a)(vi) sets forth a true
and accurate list of all Proprietary Rights owned by the Seller that are related
to or necessary to the Businesses as presently conducted or which are related to
other Purchased Assets (the "Purchased Proprietary Rights"). Except as otherwise
described in Schedule 2.5: (a) Seller owns or possesses adequate, perpetual and
irrevocable rights in and to all of the Purchased Proprietary Rights and is not
obligated to pay any royalty, license fee or other payment to any Person in
order to use them; and (b) none of the Purchased Proprietary Rights is the
subject of any (i) pending or, to the Seller's Knowledge, threatened litigation,
or (ii) claim of infringement or misappropriation and, to Seller's Knowledge,
there is no basis for making any such claim.
2.6 Contracts and Commitments .
(a) Schedule 2.6 sets forth a true and accurate list of the following
Contracts and commitments relating to the Businesses:
(i) any Contract requiring the expenditure or series of related
expenditures of funds in excess of $10,000, other than purchase orders entered
into in the Ordinary Course of Business for goods necessary for the Seller to
complete then existing contracts or purchase orders;
9
<PAGE>
(ii) any loan or advance to, or investment in, any Person or any
agreement, contract, commitment or understanding relating to the making of any
such loan, advance or investment;
(iii) any Debt Obligations;
(iv) any management service, employment, consulting, leased employee or
other similar type of Contract or arrangement;
(v) any license, royalty or similar agreement;
(vi) any collective bargaining agreement;
(vii) any Contract or arrangement pursuant to which Seller grants
or is granted any license or other rights to use any of the assets or any rights
of joint use with respect to any of the assets, other than any Personal Property
Lease;
(viii) any Contract not made in the Ordinary Course of Business that is
to be performed in whole or in part on or after the date of this Agreement; and
(ix) any Contract not specified above that is material to the
Businesses.
The Seller has delivered to the Buyer true and accurate copies of each document
set forth on Schedule 2.6 as amended or modified and each of the Contracts
included in the Purchased Contracts as amended or modified.
(b) To Seller's Knowledge, each of the Purchased Contracts is valid and
enforceable by the Seller in accordance with its terms. The Seller has performed
all of, and is not in default with respect to, its material obligations under
any of the Purchased Contracts and to the Seller's Knowledge, other parties
thereto have performed all of, and are not in default with respect to, their
material obligations thereunder. The Seller has not given nor received any
notice of termination or cancellation of any Purchased Contracts. Schedule 2.6
also sets forth a listing of all Purchased Contracts requiring the consent of
any party for them to be transferred to Buyer.
2.7 No Litigation . Except as disclosed in Schedule 2.7, Seller (i) has not
received any notice that an injunction, judgment, Order, decree, ruling or
charge has been entered against it and (ii) has not received any notice that it
is a party to or, to the Seller's Knowledge, is not threatened to be made a
party to, any action, suit, proceeding, hearing or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local or foreign jurisdiction or before any arbitrator.
2.8 No Adverse Changes or Events .
10
<PAGE>
(a) Except as disclosed in Schedule 2.8, since June 30, 1998 (or with
respect to any matter relating to taxes, December 31, 1997) the Businesses have
been operated in the Ordinary Course of Business, and there has not been:
(i) to Seller's Knowledge any Material Adverse Change in the condition
or results of operations of the Businesses except for such changes that in the
aggregate have not had a Material Adverse Effect;
(ii) any physical damage or physical destruction incurred or suffered
by the Businesses or the Purchased Assets in excess of $10,000;
(iii) any sale, transfer or other disposition of any properties or
assets, real, personal or mixed, tangible or intangible, used in, held for use
in, or related to the Businesses having a value of $10,000 or more, other than
sales in the Ordinary Course of Business; or
(iv) any change in the Seller's method or principle of accounting.
(b) Except as disclosed in Schedule 2.8, since June 30, 1998 (or with
respect to any matter relating to taxes, December 31, 1997) the Seller, with
respect to the Businesses and the Purchased Assets, has not:
(i) taken any action, or entered into or authorized any Contract or
other transaction or any amendment or modification to any Contract or other
transaction, other than in the Ordinary Course of Business;
(ii) waived, released or canceled any claims against third parties or
debts owing to it or any rights, which have value in the aggregate, in excess of
$10,000;
(iii) made any loan, advance or capital contribution to, or investment
in, any other Person other than cash advances to officers, directors and
employees for reimbursable expenses which are in the Ordinary Course of
Business, and do not individually exceed $10,000;
(iv) made any Tax election or settled or compromised any federal, state
or local Tax liability, or waived or extended the statute of limitations in
respect of any such Taxes;
(v) increased, or promised increases in compensation to employees
other than regularly scheduled increases made in a manner consistent with past
practices; or
(vi) altered or amended any Benefit Plan.
11
<PAGE>
2.9 Suppliers . Except as set forth in Schedule 2.9, no supplier of
materials or services to the Businesses in an amount in excess of $250,000 per
year has during the last twelve (12) months decreased materially, or, to the
Seller's Knowledge, threatened to decrease materially or limit materially,
except upon the Businesses' request, its provision of services or supplies. The
Seller does not have any knowledge of any termination, cancellation, or
limitation of, or any material modification or change in, during the last twelve
(12) months, the business relationships of the Businesses with any suppliers of
materials or services in any amount in excess of $250,000 per year. The
Businesses' relationships and pricing terms with its yarn suppliers have not
changed in any material respects from those in effect during 1997.
2.10 Customers . Except as set forth in Schedule 2.10, to Seller's
Knowledge there has not been any change in the business relationships or
prospects of the Businesses with any customer to whom the Company had aggregate
sales during 1997 or during the 7-month period ending July 31, 1998 in excess of
$500,000.
2.11 Certain Business Relationships with Affiliates . Except as set forth
in Schedule 2.11, the Businesses have not been involved in any business
arrangement or relationship involving sales of products or supplies within the
last twelve (12) months with any Affiliate of the Businesses or of the Seller.
2.12 Environmental Matters .
(a) The sole representations of the Seller with respect to environmental
matters are set forth in this Section 2.12. To the extent representations in
other sections of this Agreement also could be interpreted to apply to
environmental matters, including, but not limited to, matters related to,
arising under or concerning Environmental Laws, such representations shall be
construed to exclude all environmental matters and to apply to matters other
than environmental matters. The exclusive remedy which may be asserted by Buyer
with respect to any environmental matter or matters related to, arising under or
concerning Environmental Laws, shall be a contract action to recover Buyer's
actual economic damages pursuant to the indemnification provisions of Article 7
of this Agreement if Buyer proves a breach of any of the representations
contained in this Section 2.12. Without limiting the foregoing, no action in
tort or strict liability or for contribution or cost recovery may be maintained
by Buyer against Seller, related to the Purchased Assets, the Businesses, or any
Real Property in connection therewith including any action pursuant to any
Environmental Laws, and BUYER HEREBY IRREVOCABLY WAIVES THE RIGHT TO BRING, AND
AGREES NOT TO BRING, ANY SUCH ACTION AGAINST SELLER.
(b) Except as set forth on Schedule 2.12 to Seller's Knowledge:
(i) The Businesses and the Purchased Assets are in material
compliance with all applicable Environmental Laws that could give rise to any
material Liens and no condition or event has occurred which, with or without
12
<PAGE>
notice or the passage of time or both, is reasonably likely to give rise to any
material Liens under any applicable Environmental Laws in connection with the
Purchased Assets or the Businesses;
(ii) The Seller has obtained and is in compliance in all
material respects with all Environmental Permits required for the ownership of
the Purchased Assets and the conduct and operation of the Businesses;
(iii) No material quantity of any Hazardous Substance has been
intentionally or unintentionally released into the environment (including
releases to air, soil, surface water, and groundwater) at, on or near the
Purchased Real Property except releases in compliance with Environmental Laws,
nor has the Purchased Real Property been used at any time by any person or
entity as a landfill or a disposal site for any Hazardous Substance or for
garbage, waste, or refuse of any kind, which release or use would be reasonably
likely to give rise to any Liens or Proceedings under any Environmental Laws;
(iv) The Seller is not subject to any existing, pending, or
threatened Proceedings involving any alleged violations of, or potential
liability arising under,any Environmental Laws in connection with the Businesses
or the Purchased Assets;
(v) All underground storage tanks and connected pipes, valves,
and/or associated appurtenances("USTs")located on or under the Purchased Real
Property are properly registered with the State of Georgia and are in material
compliance with current Georgia and federal law as well as with future law which
is proposed to take effect on December 22, 1998 (40 CFR Section 280.21); and
(vi) The Purchased Real Property is not listed on the United
States Environmental Protection Agency's National Priorities List of Hazardous
Wastes Sites nor any other list, log, schedule, inventory, or record of
hazardous materials or hazardous waste sites maintained by any federal,state,
county, or municipal governmental agency.
2.13 Financial Statements; No Undisclosed Liabilities .
(a) Attached hereto as Schedule 2.13(a) are true and accurate copies
of the Businesses' Financial Statements which were prepared and delivered to the
Buyer prior to the date of this Agreement. The Businesses' Financial Statements
(i) present fairly, in all material respects, the financial position, assets and
liabilities of the Businesses as of the dates thereof and the revenues,
expenses, results of operations and cash flows of the Businesses for the periods
covered thereby in each case in conformity with GAAP applied consistently during
such periods in accordance with past accounting practices of Seller and (ii)
make adequate disclosure of, and provision for, all material obligations and
liabilities of the Businesses as of the dates thereof. Except as set forth in or
reflected on the balance sheets or Schedule 2.13(a) included in the Businesses'
Financial Statements, there are no liabilities, debts, claims or obligations,
whether accrued, absolute,contingent or otherwise, including "off-balance sheet"
liabilities, whether due or to become due.
13
<PAGE>
(b) The Businesses' Financial Statements (i) have been prepared from
the books and records of the Businesses, and (ii) do not reflect any
transactions that are not bona fide transactions.
2.14 Purchased Real Property . Schedule 1.1(a)(iv) sets forth true and
accurate legal descriptions of all of the parcels of land owned by the Seller
and related to or necessary for the Businesses and a description of any and all
buildings, plants, facilities, installations, fixtures and structures situated
or located thereon. Schedule 1.1(a)(v) sets forth true and accurate legal
descriptions of all material Easements (together with Real Property, "Purchased
Real Property"). Except as disclosed on Schedule 2.14, there are no leases of
Real Property to which the Seller is a party and which provide for the lease to
or by the Seller of any Real Property related to or necessary for the Businesses
(the "Real Property Leases"). The Seller has delivered to the Buyer the most
recent title insurance policies and surveys, if any, for the Real Property and
true and accurate copies of material Easements as amended or modified. Except as
disclosed on Schedule 2.14, the Seller has not received notice of, and to the
Seller's knowledge, there exists no, dispute, claim, event of default or event
which constitutes or would constitute, with or without notice or lapse of time
or both, a default by the Seller under any material Easement or any Real
Property Lease.
2.15 Equipment; Vehicles; Personal Property . Schedule 1.1(a)(i) sets forth
a true and accurate list of all of the Equipment. Schedule 1.1(a)(vii) sets
forth a true and accurate list of all of the Vehicles. Schedule 1.1(a)(x) sets
forth a true and accurate list of all material leases to or by the Seller of
personal property that relates to other Purchased Assets or are related to or
necessary for the Businesses. Except as set forth in Schedule 2.15, all of the
Equipment and all of the personal property leased by the Seller under the
Personal Property Leases is presently utilized by the Seller in the Businesses
in the Ordinary Course of Business.
2.16 Inventory . Schedule 1.1(a)(ii) sets forth a true and accurate
description of the nature, amount and location of the Inventory as of the date
of this Agreement. Except for inventory listed on Schedule 2.16, which will be
sold "as is," each item of the Inventory is of merchantable quality and is
usable or salable in the Ordinary Course of Business, and none of such items is
obsolete or is held by the Seller on assignment or consignment.
2.17 Accounts Receivable . Schedule 1.1(a)(iii) set forth a true and
accurate list of all Accounts Receivable as of the date of this Agreement. Each
Account Receivable represents a sale made in the Ordinary Course of Business and
which arose pursuant to an enforceable order for a bona fide sale of goods or
for services performed and is collectable in accordance with their terms subject
to the Reserve.
2.18 Disclaimer of Implied Warranties . EXCEPT AS EXPRESSLY PROVIDED IN
THIS AGREEMENT, THE SELLER MAKES NO REPRESENTATION OR WARRANTY, EXPRESSED OR
IMPLIED, AS TO (A) THE MAINTENANCE, REPAIR, CONDITION, DESIGN, WORKMANSHIP,
SUITABILITY, UTILITY OR MARKETABILITY OF ANY OF THE PURCHASED ASSETS OR ANY
PORTION THEREOF OR OTHER PROPERTY THEREON OR THE ABSENCE OF ANY DEFECTS THEREIN,
14
<PAGE>
WHETHER LATENT OR PATENT, OR (B) ANY MATERIALS OR INFORMATION THAT MAY HAVE BEEN
MADE OR THAT WILL BE MADE AVAILABLE OR COMMUNICATED TO BUYER OR ITS AGENTS,
CONSULTANTS OR REPRESENTATIVES IN CONNECTION WITH THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY, OR ANY DISCUSSION OR PRESENTATION RELATING
THERETO, INCLUDING ANY EXPRESSED OR IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. IT IS THE EXPRESS AGREEMENT OF THE BUYER AND
THE SELLER THAT EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE BUYER WILL
OBTAIN RIGHTS IN THE PURCHASED ASSETS IN THEIR PRESENT CONDITION AND STATE OF
REPAIR, "AS IS" AND "WHERE IS" AND "WITH ALL FAULTS".
2.19 Insurance .
(a) Schedule 2.19(a) sets forth a true and accurate list of all
material policies of fire and casualty, liability, worker's compensation, title
and other forms of insurance held by the Seller and applicable to any Purchased
Asset or the Businesses. All such insurance is currently in full force and
effect.
(b) Schedule 2.19(b) sets forth a true and accurate list of
all material claims which (i) have been made by the Seller since December 31,
1996 under any insurance policy held by the Seller with respect to the Purchased
Assets or the operations of the Businesses, (ii) are still pending or (iii) were
for more than $10,000 as to any one event or loss. Except as set forth on
Schedule 2.19(b) there are no pending or, to Seller's Knowledge, threatened
claims under such insurance policy.
2.20 Employee Benefit Plans and Employment Agreements . Schedule 2.20
contains an accurate list of (a) all "employee welfare benefit plans" or
"employee pension benefit plans" as those terms are respectively defined in
sections 3(1) and 3(2) of ERISA, (b) all retirement or deferred compensation
plans, incentive compensation plans, stock plans, unemployment compensation
plans, vacation pay, severance pay, bonus or benefit arrangements, insurance or
hospitalization programs or any other fringe benefit arrangements, whether
pursuant to any Contract, arrangement, custom or informal understanding, which
do not constitute "employee benefit plans" as defined in section 3(3) of ERISA
and (c) all employment agreements, covering any employee of the Businesses
(collectively, the "Benefit Plans"). True and accurate copies or descriptions of
the Benefit Plans have been supplied to the Buyer. Seller does not now and has
never maintained a defined benefit pension plan. All Benefit Plans comply and
have been administered in form and in operation in all material respects with
all requirements of Law, and to Seller's Knowledge no event has occurred which
will or could cause any such Benefit Plan to fail to comply with such
requirements and no notice has been issued by any Governmental Entity
questioning or challenging such compliance. Each Benefit Plan that is qualified
under the provisions of Section 401(a) of the Code has obtained a determination
letter signifying its qualified status and copies of those determination letters
have been provided to Buyer. Seller does not participate in and has never
15
<PAGE>
participated in a multiemployer pension plan, as defined in ERISA ss. 3(37)(A)
except for such participation which would not result in any liability to the
Buyer. The consummation of the transaction contemplated by this Agreement shall
not result in the payment, vesting or acceleration of any benefit which would
result in any liability to the Buyer. Other than claims for benefits to
participants or beneficiaries in accordance with the terms of the Benefit Plans,
there are no claims pending or, to the knowledge of Seller, threatened by any
participant in any Benefit Plan which would result in any liability to the
Buyer.
2.21 Employment and Labor Matters . Schedule 2.21 sets forth a true and
accurate list of all salaried employees of the Seller who are employed by the
Seller, as of the date hereof, in connection with the Businesses and their
annual compensation for the current fiscal year. There is neither pending nor,
to the Seller's knowledge, threatened, any labor dispute, strike, work stoppage
or organizational effort in connection with the Businesses or any charge or
complaint of an unfair labor practice or similar charge against the Seller in
connection with the Businesses. The Seller has not signed any currently
effective collective bargaining or union agreement in connection with the
Businesses.
2.22 Immigration . To Seller's Knowledge the Businesses' hiring procedures
have fully complied with all applicable immigration laws, regulations, and other
requirements of government authorities having jurisdiction over the Businesses.
Except as disclosed in Schedule 2.22, the Businesses have received no inquiries
from Immigration and Natural Services ("INS") concerning their employees and are
not a party to, or to the Seller's Knowledge, threatened to become a party to,
any INS proceeding or action.
2.23 Taxes . Seller has filed or will file all (a) Tax Returns prior to the
due dates thereof and (b) all other material filings in respect of Taxes for all
periods through and including the Closing Date as required by applicable Law.
All Taxes shown as due on all such Tax Returns and other filings have been paid
or will be paid prior to the due dates thereof. Each such Tax Return and filing
is true and accurate and the Seller does not and will not have any additional
liability for Taxes with respect to any Tax Return or other filing heretofore
filed or which was required by Law to be filed, other than as reflected as
liabilities on the Financial Statements. There are no Tax Liens upon any of the
Purchased Assets.
2.24 No Defaults or Violations . Except as set forth on Schedule 2.24, to
the Seller's Knowledge:
(a) the Businesses and the Purchased Assets are in material
compliance with, and no violation exists under, all Laws applicable to the
Businesses and the Purchased Assets; and
(b) no notice from any Governmental Entity has been received by
the Seller with respect to the Businesses (i) claiming any material violation
of any Law,including any building, zoning or other ordinance or(ii)requiring any
work, construction or expenditure, or asserting any Tax, assessment or penalty.
16
<PAGE>
2.25 Finder's Fees . Except for Wheat First Union, Inc., the Seller has not
employed or retained any investment banker, broker, agent, finder or other
party, or incurred any obligation for brokerage fees, finder's fees or
commissions, with respect to the sale by the Seller of any of the Purchased
Assets or with respect to the transactions contemplated by this Agreement, or
otherwise dealt with anyone purporting to act in the capacity of a finder or
broker with respect thereto whereby any party hereto may be obligated to pay
such a fee or commission. The fees and expenses of Wheat First Union, Inc. shall
be borne by Seller.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Seller as follows:
3.1 Organizational Matters . The Buyer is a limited liability company,
validly existing and in good standing under the laws of the State of Delaware
with full requisite power and authority to enter into this Agreement and to
perform its obligations under this Agreement.
3.2 Validity of Agreement and Conflict with Other Instruments. This
Agreement and all transactions contemplated hereby have been duly authorized and
approved by all necessary action on the part of the Buyer. No further action is
necessary on the part of the Buyer to execute and deliver this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Buyer and is a legal, valid and binding obligation
of the Buyer, enforceable against it in accordance with its terms, except that
the enforceability of this Agreement is subjected to applicable bankruptcy,
insolvency or similar laws relating to or affecting the enforcement of
creditors' rights generally and to general principles of equity. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby by the Buyer will not, directly or indirectly, violate any
provision of, or constitute a default under, any Contract to which the Buyer is
a party or by which it is bound, or conflict with its organizational documents
other than violations, defaults or conflicts that would not have a Material
Adverse Effect on the ability of the Buyer to consummate the transactions
provided for in this Agreement.
3.3 Approvals and Authorizations . Except as set forth on Schedule 3.3
("Buyer Consents") no consent, authorization or approval of, filing or
registration with, or notification to, any Person not a party to this Agreement,
or any Governmental Entity, is required in connection with Buyer's execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby.
3.4 Litigation. There is no pending or, to Buyer's Knowledge, threatened
Proceeding by and against Buyer that challenges, or that seeks to prevent, delay
or make illegal this Agreement or any of the transactions contemplated herein.
3.5 Finder's Fees . The Buyer has not employed or retained any investment
banker, broker, agent, finder or other party, or incurred any obligation for
17
<PAGE>
brokerage fees, finder's fees or commissions, with respect to the sale of the
Purchased Assets or with respect to the transactions contemplated by this
Agreement, or otherwise dealt with anyone purporting to act in the capacity of a
finder or broker with respect thereto whereby any party hereto may be obligated
to pay such a fee or a commission.
ARTICLE 4
ADDITIONAL AGREEMENTS
4.1 Implementing Agreements . Subject to the terms and conditions hereof,
the Seller and the Buyer shall take all actions required of them to fulfil
their respective obligations under the terms of this Agreement and shall use all
commercially reasonable efforts to facilitate the consummation of the
transactions contemplated hereby. Except as otherwise expressly permitted
hereby, the Seller and the Buyer agree that they will not take any action that
would have the effect of preventing or impairing the performance of their
respective obligations under this Agreement.
4.2 Consents and Approvals .The Seller and the Buyer shall use commercially
reasonable efforts to obtain the consents and approvals set forth on Schedule
2.3 and Schedule 3.3, respectively.
4.3 Employee Matters . All employees of the Businesses except for Norman E.
Gibbs, Jr. (the "Continuing Employees") shall, commencing on the Closing Date,
become employees of the Buyer; and thereupon, the Buyer shall have full
responsibility for all matters affecting such Continuing Employees, including,
without limitation, the institution of new benefit plans and severance
practices. With respect to periods prior to the Closing Date, the Seller shall
pay all obligations relating to the employees except for such liabilities as are
specifically included in Assumed Liabilities. Notwithstanding anything herein to
the contrary, Buyer shall not be obligated to retain any Continuing Employee for
any specified period of time after the Closing.
4.4 Continuation of Employee Benefits.
(a) For a period of one year from and after the Closing Date, Buyer
shall provide the Continuing Employees pension, health and other fringe benefits
that in the aggregate are substantially equivalent to and no less favorable than
those provided to such Continuing Employees under the Benefit Plans immediately
prior to the Closing Date, subject to the eligibility rules of such Benefit
Plans.
(b) To the extent that service is relevant for purposes of eligibility
or vesting under any employee benefit plan, program or arrangement established
or maintained by Buyer for the benefit of the Continuing Employees heretofore or
in the future, such plan, program or arrangement shall credit such Continuing
Employees for service with the Seller on or prior to the Closing Date and, to
the extent recognized by the Benefit Plans of Seller, its predecessors. Any such
plan, program or arrangement shall waive any preexisting condition limitations
18
<PAGE>
with respect to Continuing Employees who are on the Closing Date fully
participating in Seller's health insurance plans and shall honor any deductible
and out-of-pocket expenses incurred by the Continuing Employees and their
beneficiaries under plans, programs or arrangements of the Seller.
(c) Effective as of the Closing Date, and except as provided below,
Buyer shall assume and become the successor sponsor of all Plans and the
obligations thereunder with respect to any Continuing Employee or any former
employee listed on Schedule 4.4(c). In connection therewith, (i) as soon as
practicable after the Closing Date, Seller and Buyer shall use their best
efforts to cause to be transferred to the trust that implements and forms a part
of Buyer's qualified 401(k) plan, in accordance with the provisions of the JBP
Co., Inc. 401(k) Savings Plan ("Seller's 401(k) Plan") and Buyer's qualified
401(k) plan and in accordance with the provisions of ERISA, the Code and all
applicable law, the assets of Seller's 401(k) Plan attributable to any former or
Continuing Employee (the "assumed trust") and Buyer shall assume and become the
successor grantor of the assumed trust, and (ii) Buyer shall assume and the
Seller shall be relieved of all liabilities and obligations with respect to the
Plans and the assumed trust, including without limitation all obligations to
make contributions required to be made to the Plans and the assumed trust.
Seller shall take all corporate action necessary, including amending the Plans
or the trust, to effect such transfer and assumption. Buyer represents, warrants
and covenants that Buyer's qualified 401(k) plan is and as of the date of the
asset transfer referred to in this paragraph will satisfy the requirements of
section 401(a) of the Code. Buyer shall promptly give such notices as are
necessary to advise all third parties providing benefits under any of the Plans
of Buyer's intent to continue all such Plans in the name and at the expense of
Buyer. Notwithstanding the foregoing, as of the Closing Date Seller shall make
any contributions to Seller's 401(k) Plan required by law or promised by the
Seller prior to the Closing Date.
4.5 Use of Names . All uses of the names set forth in Schedule 1.1(a)(vi)
to this Agreement, or any derivations thereof, are being transferred to the
Buyer hereunder as part of the Purchased Assets. The Seller agrees that it will
not take any action that could reasonably be expected to have a Material Adverse
Effect on the Buyer's right to the such names or cause confusion with respect to
the Buyer's use of the such names.
4.6 Access to Information and Facilities . After the Closing, the Buyer and
Seller shall make available to each other, as reasonably requested by such other
party, all information, records or documents relating to the Businesses for all
periods prior to the Closing and shall preserve all such information, records
and documents until the later of five (5) years after the Closing or the
expiration of any statute of limitations or extensions thereof applicable to the
Seller. Prior to destroying any records related to the Businesses after the
Closing Date, each party shall notify the other of its intent to destroy such
records.
4.7 Due Diligence . The Seller agrees to give Buyer and Buyer's lender
representatives full access during normal business hours to the Businesses'
facilities, records, personnel, customers and suppliers for the purpose of
conducting its due diligence investigation provided that no contact will be
permitted with the Businesses' personnel, customers or supplier without the
19
<PAGE>
prior consent of the Seller in writing. Buyer agrees to coordinate its due
diligence and work with the Seller so as to minimize any disruption to the
Businesses' operations.
4.8 Preservation of Businesses . Prior to the Closing, the Seller will
cause the Businesses to be operated in a manner consistent with past practice
and use commercially reasonable efforts to preserve the present business
organization and work force of the Businesses and the relationships with
lessors, licensors, suppliers and customers.
4.9 Exclusivity . The Seller and Parent will not (i) solicit, initiate,
continue, or encourage the submission of any proposal or offer from any Person
relating to the acquisition of any capital stock or other voting securities of
the Seller, or any substantial portion of the assets of the Businesses, or (ii)
participate in any discussions or negotiations regarding, furnish any
Confidential Information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any Person to do or seek
any of the foregoing. The Seller and Parent will notify the Buyer immediately if
any Person makes any written proposal or offer with respect to any of the
foregoing.
4.10 Accounts . With respect to all Accounts Receivable acquired by Buyer
from Seller, Buyer agrees to use reasonably prudent collection practices in
order to attempt to collect all such Accounts Receivable existing as of the
Closing Date within 120 days thereafter. All payments on Seller's Accounts
Receivable existing as of the Closing Date will be applied: (i) as directed by
the customer; or (ii) if no such direction is made, to the oldest invoice first.
If Buyer has not collected an Account Receivable (after exhaustion of the
Reserve) included in Working Capital within 120 days after the Closing Date,
Buyer may, within the next 30 days, reassign such uncollected Account Receivable
back to Seller, together with the contractual obligation giving rise to such
Account Receivable and all rights of Buyer in and to such contractual
obligation. Upon any such reassignment, Seller will pay to Buyer, in cash, the
amount of such uncollected Account Receivable (but only to the extent such
uncollected Account Receivable was included in Working Capital) within 5 days
after such reassignment. If Buyer receives any payment on such reassigned
Account Receivable after Seller has paid to Buyer the amount of such Account
Receivable in accordance with the preceding sentence, Buyer will promptly remit
to Seller any such payment.
4.11 Monthly Financial Statements . Prior to the Closing, the Seller shall
deliver interim monthly financial statements for months ending subsequent to the
date of this Agreement within fifteen days of the end of each such month.
4.12 Inquiry of Lagasse . Prior to the Closing, Seller and Stephen P. Magee
will inquiry of Linda Lagasse as to her knowledge of the matters addressed by
Sections 2.7, 2.8, 2.9 and 2.10 as they relate to the Courier Dyeing and
Printing Division.
20
<PAGE>
ARTICLE 5
BUYER'S CONDITIONS
The obligation of the Buyer to purchase the Purchased Assets or to assume
the Assumed Liabilities as contemplated hereby and to consummate the
transactions contemplated hereby is, subject to the satisfaction on or before
the Closing Date of the conditions set forth below, any of which may be waived
by the Buyer in writing.
5.1 Representations, Warranties and Covenants . The representations and
warranties of the Seller contained in this Agreement shall be true and correct
in all material respects on and as of the Closing Date with the same force and
effect as though such representations and warranties had been made on and as of
such date. All of the agreements and covenants of the Seller to be performed or
complied with by the Seller on or before the Closing Date pursuant to this
Agreement shall have been performed or complied with in all material respects.
5.2 No Material Adverse Change. No Material Adverse Change shall have
occurred with respect to the Seller or the Businesses and no event shall have
occurred which might cause a loss to the Businesses in excess of $250,000.
5.3 No Litigation . No Proceeding shall have been instituted or threatened
which (a) might have a Material Adverse Effect on the Purchased Assets or the
Business or (b) could enjoin, restrain or prohibit, or have a Material Adverse
Effect on any provision of this Agreement or the consummation of the
transactions contemplated hereby. No court order shall have been entered in any
Proceeding, and no Law shall have been enacted or is existing as of the date
hereof and no action shall have been taken by any Governmental Entity which
enjoins, restrains or prohibits this Agreement or the consummation of the
transactions contemplated hereby.
5.4 Real Estate . Seller shall deliver good and marketable title to the
Purchased Real Property, free and clear of any Liens other than Permitted Liens.
5.5 Beck Purchase Price . Seller shall have delivered a detailed
schedule showing the calculation of the Beck Purchase Price and the Buyer shall
be satisfied with such schedules.
5.6 Consents and Approvals . The consents and approvals set forth on
Schedule 2.3 shall have been received by the Seller and delivered to the Buyer.
5.7 Updated Schedules . The Buyer shall have received and be satisfied
with new Schedules 1.1(a)(i),(ii) and (iii) which shall be updated to the
Closing Date.
5.8 Closing Actions . The Seller shall deliver or cause to be delivered
to the Buyer each of the following, duly executed by the Seller (where
appropriate):
21
<PAGE>
(a) bills of sale conveying to the Buyer the Purchased Assets and other
instruments of transfer as may be reasonably required by the Buyer;
(b) a special warranty deed or deeds conveying the Purchased Real Property
to the Buyer;
(c) originals of all of the following: (i) the Personal Property Leases;
(ii) all other Purchased Contracts; and (iii) any consents required for the
Purchased Contracts;
(d) title insurance policies for each parcel of Real Property issued by
Title Insurer, dated the Closing Date, each of which such policies (i) shall be
in the full amount of the portion of the Purchase Price that the Seller and the
Buyer mutually allocate to each such parcel in accordance with Section 1.3(c),
and (ii) shall be in the form of American Land Title Association Owner's Policy,
1970 Form B, subject only to the standard exclusions from coverage contained in
such policy and the applicable Permitted Liens;
(e) certificates of title for all Vehicles, duly endorsed for transfer to
the Buyer and keys for all Vehicles;
(f) certificates of the secretaries of the Seller and the Parent, dated as
of the Closing Date, certifying the resolutions of the boards of directors of
the Seller and Parent approving and authorizing the execution and delivery of
this Agreement and the consummation by the Seller and Parent of the transactions
contemplated hereby, together with an incumbency and signature certificate
regarding the officer(s) signing on behalf of the Seller and Parent;
(g) non-competition agreements duly executed by Seller and Parent in the
form of Exhibit D attached hereto;
(h) a certificate executed by the Seller and Parent indicating that all
conditions to Seller's obligations have been satisfied or waived and that all
representations of the Seller and Parent contained herein are true and correct
at the Closing Date;
(i) the Escrow Agreement; and
(j) any and all other documents and instruments reasonably required to
satisfy the obligations under the transactions contemplated herein.
22
<PAGE>
ARTICLE 6
SELLER'S CONDITIONS
The obligation of the Seller to transfer the Purchased Assets as
contemplated hereby is subject to the satisfaction on or before the Closing Date
of the conditions set forth below, any of which may be waived by the Seller in
writing.
6.1 Representations, Warranties and Covenants . The representations and
warranties of the Buyer contained in this Agreement shall be true and correct in
all material respect on and as of the Closing Date with the same force and
effect as though such representations and warranties had been made on and as of
such date. All of the agreements and covenants of the Buyer to be performed or
complied with by it on or before the Closing Date pursuant to this Agreement
shall have been performed or complied with in all material respects.
6.2 No Litigation . No Proceeding shall have been instituted or threatened
which would enjoin, restrain or prohibit, or have a Material Adverse Effect on
this Agreement or the consummation of the transactions contemplated hereby. No
court order shall have been entered in any Proceeding, and no law shall have
been enacted or is existing as of the date hereof and no action shall have been
taken by any Governmental Entity which enjoins, restrains or prohibits this
Agreement or the consummation of the transactions contemplated hereby.
6.3 Consents and Approvals . The consents and approvals set forth in
Schedule 3.3 shall have been received by the Buyer.
6.4 Closing Actions . The Buyer shall have delivered to the Seller each of
the following:
(a) wire transfer of same day funds in the amount determined under
Section 1.3(a)(i);
(b) wire transfer of same day funds totaling $500,000 to the Escrow
Agent;
(c) an instrument of assumption in form and substance reasonably
satisfactory to the Seller; and
(d) the Escrow Agreement;
(e) a certificate executed by the Buyer indicating that all conditions
to Buyer's obligations have been satisfied or waived and that all
representations of the Buyer contained herein are true and correct at the
Closing Date; and
23
<PAGE>
(f) a certificate of the secretary of the Buyer, dated as of the
Closing Date, certifying the resolutions of the board of managers of the Buyer
approving and authorizing this Agreement and the consummation by the Buyer of
the transactions contemplated hereby, together with an incumbency and signature
certificate regarding the officer(s) signing on behalf of the Buyer.
ARTICLE 7
INDEMNIFICATION
7.1 Indemnification by Seller and Parent. The Seller and Parent agree to
indemnify the Buyer, its officers, directors, employees, agents and
representatives (collectively, the "Buyer Indemnified Parties") against, and
agree to hold each of the Buyer Indemnified Parties harmless from, the amount of
any and all Losses incurred or suffered by them relating to or arising out of or
in connection with any of the following:
(i) any breach in any inaccuracy in any representation or warranty
made by the Seller in this Agreement or any covenant of Seller contained in this
Agreement;
(ii) any Retained Liability.
7.2 Indemnification by Buyer. The Buyer agrees to indemnify the Seller, its
officers, directors, employees, agents and representatives (collectively, the
"Seller Indemnified Parties") against, and agrees to hold each of them harmless
from, any and all Losses incurred or suffered by them relating to or arising out
of or in connection with any of the following:
(i) any breach of any representation or warranty made by the Buyer
in this Agreement or any covenant of Buyer contained in this Agreement;
(ii) any Assumed Liabilities.
7.3 Indemnification Procedures. A party which believes it is entitled to
indemnification hereunder (an "Indemnified Party") shall promptly (but in any
event within 30 days after any claim is asserted against the Indemnified Party)
give written notice to the party believed to be responsible for indemnification
hereunder (the "Indemnifying Party") of any claim or the commencement of any
Proceeding by any Person (a "Claim"), in respect of which indemnity may be
sought hereunder; provided that the delay in giving, or the failure to give,
such written notice shall not limit the Indemnifying Party's obligation to
provide indemnification hereunder except to the extent that the Indemnifying
Party is materially damaged by such delay or failure. The Indemnified Party
shall notify the Indemnifying Party with reasonable particularity of the basis
for the Claim and the Indemnified Party shall give the Indemnifying Party such
other information with respect thereto as the Indemnifying Party may reasonably
request. Upon receipt of the notice of such Claim, the Indemnifying Party may by
giving notice to the Indemnified Party and at the Indemnifying Party's own
expense: (i) participate in the defense of such Claim at any time during the
24
<PAGE>
course of such Claim; or (ii) assume the defense thereof; provided, however,
that the Indemnifying Party shall thereafter consult with the Indemnified Party
upon the Indemnified Party's reasonable request from time to time with respect
to such Claim. If the Indemnifying Party assumes such defense, the Indemnified
Party shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the Indemnifying Party; provided, further, that if there are legal
or equitable defenses available to an Indemnified Party which are not available
to or ascertainable by the Indemnifying Party with respect to such Claim, the
Indemnified Party shall have the right to participate in the defense and employ
counsel at the reasonable expense of the Indemnifying Party for such purpose
(provided that the Indemnifying Party shall not be required to reimburse the
expenses and costs of more than one law firm for such purpose). Whether or not
the Indemnifying Party chooses to defend any such Claim, all of the parties
hereto shall cooperate in the defense thereof. After notice from the
Indemnifying Party of its election so to assume the defense thereof, the
Indemnifying Party shall not be liable (except as provided in the second
preceding sentence) to such Indemnified Party for any legal or other expense in
connection with such defense incurred by the Indemnified Party after such date.
The parties hereto agree that any such defense shall be conducted expeditiously
and that the Indemnified Party shall be advised of all significant developments.
7.4 Settlement. Any settlement or compromise made or caused to be made by
the Indemnified Person or the Indemnifying Person, as the case may be, of any
Claim of the kind referred to in Section 7 shall also be binding upon the
Indemnifying Person or the Indemnified Person, as the case may be, in the same
manner as if a final judgment or decree had been entered by a court of competent
jurisdiction in the amount of such settlement or compromise; provided, however,
that no obligation, restriction or Loss shall be imposed on the Indemnified
Person as a result of such settlement without its prior written consent. If the
Indemnifying Party assumes the defense of any Claim as described in Section 7
and so long as the Indemnifying Party is defending such Claim in good faith, the
Indemnifying Party shall have the right to settle such Claim and the Indemnified
Party will not settle such Claim; provided, however, that no obligation,
restriction or Loss shall be imposed on the Indemnified Person as a result of
such settlement without its prior written consent; and provided further that the
Indemnified Party shall have no right to settle any Claim the defense of which
it has assumed if the Indemnified Party is participating in the defense as a
result of there being legal or equitable defenses available to an Indemnified
Party which are not available to or ascertainable by the Indemnifying Party with
respect to such Claim. The Indemnified Person will give the Indemnifying Person
at least thirty (30) days' notice of any proposed settlement or compromise of
any claim, suit, action or proceeding it is defending, during which time the
Indemnifying Person may reject such proposed settlement or compromise; provided,
however, that from and after such rejection, the Indemnifying Person shall be
obligated to assume the defense of and full and complete liability and
responsibility for such claim, suit, action or proceeding and any and all Losses
in connection therewith in excess of the amount of unindemnifiable Losses which
the Indemnified Person would have been obligated to pay under the proposed
settlement or compromise.
7.5 Limitations on Liability . Except for claims of indemnification
resulting from a breach of the representations contained in Sections 2.25, or
25
<PAGE>
under Sections 7.1(ii) or Section 7.2(ii), and notwithstanding the foregoing, a
claim by any of the parties pursuant to this Article 7 against the others shall
not be asserted unless and until the aggregate and cumulative totals of all such
claims by the Buyer Indemnified Parties or Seller Indemnified Parties, as the
case may be, shall have exceeded One Hundred Thousand Dollars ($100,000) (the
"Deductible"), whereupon the Indemnified Person shall be entitled to
indemnification for all Losses to the extent such Losses exceed the Deductible;
provided, however, the total liability of the Indemnifying Party shall not
exceed Ten Million Dollars ($10,000,000) in the aggregate.
7.6 Effect on Purchase Price of Indemnity Payments . Any amounts payable
under Section 7.1 or Section 7.2 shall be treated by the Buyer and the Seller as
an adjustment to the Purchase Price of the Purchased Assets.
ARTICLE 8
NATURE OF STATEMENTS AND SURVIVAL OF COVENANTS,
REPRESENTATIONS, WARRANTIES AND AGREEMENTS
The several representations and warranties of the parties to this Agreement
shall survive the Closing Date and shall remain in full force and effect until
April 30, 2000 (the period during which the representations and warranties shall
survive being referred to herein with respect to such representations and
warranties as the "Survival Period"); provided, however, that the tax
representations and warranties contained in Section 2.23 shall remain in full
force and effect until the expiration of the last applicable statute of
limitations for the particular representation and warranty that has been
breached and that the environmental representations and warranties contained in
Section 2.12 and all representations and warranties of the Seller in Section 2.4
relating to title to the properties and assets of the Businesses, shall remain
in full force and effect for a period of five (5) years. No indemnification with
respect to any representation or warranty herein shall be made after the
Survival Period, except as to claims for indemnification under Section 7 which
have been made in writing during the Survival Period.
ARTICLE 9
TERMINATION
9.1 Events of Termination . The obligation to close the transactions
contemplated by this Agreement may be terminated by:
(a) mutual agreement of the Buyer and the Seller;
(b) the Buyer, if a material default shall be made by the Seller
in the observance or in the due and timely performance by the Seller of any
agreements and covenants of the Seller herein contained, or if there shall have
been a material breach by the Seller of any of the warranties and
representations of the Seller herein contained, and such default or breach has
not been cured, or has not been waived in writing by the Buyer within twenty
(20) days of written notice thereof;
26
<PAGE>
(c) the Seller, if a material default shall be made by the Buyer
in the observance or in the due and timely performance by the Buyer of any
agreements and covenants of the Buyer herein contained, or if there shall have
been a material breach by the Buyer of any of the warranties and representations
of the Buyer herein contained, and such default or breach has not been cured or
has not been waived in writing by the Seller within twenty (20) days of written
notice thereof; or
(d) the Buyer or the Seller, provided the terminating party has not
materially breached any of its agreements, covenants, representations or
warranties, if the Closing shall not have occurred on or before September 30,
1998.
9.2 Liability Upon Termination . If the obligation to close the transactions
contemplated by this Agreement is terminated pursuant to any provision of this
Article 9 then this Agreement shall forthwith become void and there shall not be
any liability or obligation with respect to the terminated provisions of this
Agreement on the part of the Seller or the Buyer, except and to the extent such
termination results from the willful breach by a party of any of its
representations, warranties or agreements.
9.3 Notice of Termination . The parties hereto may exercise their respective
rights of termination under this Article 9 only by delivering written notice to
that effect (setting forth the reasons therefor) to the other party, provided,
however, that such notice must be received on or before the Closing Date. 1.5
27
<PAGE>
ARTICLE 10
DEFINITIONS OF CERTAIN TERMS
The terms listed below are defined in the respective referenced sections of
this Agreement:
Term Section Reference
Affected Employees Section 2.21
Benefit Plans Section 2.20
Buyer Consents Section 3.3
Buyer Indemnified Parties Section 7.1
Claim Section 7.3
Closing Section 1.5
Deductible Section 7.5
Easements Section 1.1(a)(v)
Excluded Assets Section 1.1(b)
Indemnified Party Section 7.3
Indemnifying Party Section 7.3
Purchased Real Property Section 1.1(a)(iv)
Personal Property Leases Section 1.1(a)(x)
Purchase Price Section 1.3
Purchased Assets Section 1.1(a)
Purchased Contracts Section 1.1(a)
Purchased Proprietary Rights Section 2.5
Purchased Real Property Section 2.14
Retained Liabilities Section 1.2(b)
Seller Consents Section 2.3
Seller Indemnified Parties Section 7.2
Survival Period Article 8
In addition to terms defined elsewhere in this Agreement, the following
terms shall have the meanings assigned to them herein, unless the context
otherwise indicates, both for purposes of this Agreement and the Disclosure
Schedule:
10.1 "Accounts Receivable" shall mean all accounts receivable, trade
receivables, notes receivable and other receivables, which in any case are
payable as a result of goods sold or services provided by Seller in connection
with the Businesses.
10.2 "Affiliate" shall mean, with respect to any Person, an individual or
entity that, directly or indirectly, controls, is controlled by or is under
common control with such Person.
28
<PAGE>
10.3 "Agreement" shall mean this Asset Purchase Agreement between the Seller
and the Buyer, as amended from time to time by such parties.
10.4 "Assumed Liabilities" shall have the meaning given such term in Section
1.2(a) hereof.
10.5 "Businesses" shall have the meaning given such term in the First
Recital hereof.
10.6 "Business Day" shall mean any day other than a Saturday, Sunday or
other day on which commercial banks in Chattanooga, Tennessee are authorized by
law to close.
10.7 "Businesses' Financial Statements" shall mean the unaudited year end
financial statements of the Businesses for the years ended December 31, 1997 and
December 31, 1996 and for the year to date period ended July 31, 1998.
10.8 "Buyer" shall have the meaning specified in the preamble.
10.9 "CERCLA" shall mean the United States Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et seq., as
amended.
10.10 "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or similar provisions of legislation replacing such law from time
to time.
10.11 "Confidential Information" means all Proprietary Rights and Proprietary
Information included within the Purchased Assets that are not and have not
become ascertainable or obtainable from public or published information.
10.12 "Contracts" shall mean all contracts, agreements, purchase orders and
contracts, customer contracts, understandings, indentures, notes, bonds, loan
agreements, instruments, leases, mortgages, franchises, licenses, commitments or
binding arrangements, whether express or implied, oral or written, to which,
with respect to the Businesses, the Seller is a party or bound, or to which the
Purchased Assets are subject.
10.13 "Debt Obligations" or "Debt" shall each mean any contract, agreement,
mortgage, credit or loan agreement, lease indenture, note or other instrument
relating to the borrowing of money or any guarantee or other contingent
liability in respect of any indebtedness or obligation of any Person, other than
the endorsement of negotiable instruments for deposit or collection in the
Ordinary Course of Business.
10.14 "Easements" shall mean all easements, rights-of-way and similar
interests of Seller related to or necessary for the Businesses.
29
<PAGE>
10.15 "Environmental Laws" shall mean any Laws that require or relate to the
environment in effect in the jurisdiction in which the Business are being
conducted or where any of the Purchased Assets are located, including without
limitation, the Superfund Amendments and Reauthorization Act of 1986, as
amended, the Resource Conservation and Recovery Act of 1976, as amended, the
Toxic Substances Control Act of 1976, as amended, the Federal Water Pollution
Control Act Amendments of 1972, the Clean Water Act of 1977, as amended, any
so-called "Superfund" or "Superlien" Law (including those already referenced in
this definition), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, and the Hazardous Transportation Act, as
amended, and any other Law having a similar subject matter. "Environmental Laws"
does not include the Occupational Safety and Health Act or any other federal,
state or local law, statute, ordinance, regulation or Order governing worker
safety or workplace conditions.
10.16 "Environmental Permit" shall mean any Permit required by or given or
granted pursuant to any applicable Environmental Law.
10.17 "Equipment" shall mean all machinery, transportation equipment, parts,
equipment, furnishings and fixtures and other items of personal property of
every kind and description that are related to or necessary for the Businesses
as operated by the Seller (other than the Vehicles and Inventory).
10.18 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
10.19 "Excluded Assets" shall have the meaning given such term in Section
1.2(b) hereof.
10.20 "GAAP" shall mean U.S. generally accepted accounting principles at the
time in effect.
10.21 "Governmental Entity" shall mean any: (a) nation, state, county, city,
town, village, district, or other jurisdiction of any nature; (b) federal,
state, local, municipal, foreign, or other government; (c) governmental or
quasi-governmental authority of any nature (including any governmental agency,
branch, department, official, or entity and any court or other tribunal); (d)
multi-national organization or body; or (e) body exercising, or entitled to
exercise, any administrative, executive, judicial, legislative, police,
regulatory, or taxing authority or power of any nature.
10.22 "Hazardous Substance" shall mean any material, chemical, substance,
waste or matter which (i) is petroleum or a petroleum product, (ii) constitutes
a hazardous substance, hazardous waste, toxic substance or pollutant as such
terms are defined by or pursuant to any Environmental Law or (iii) is regulated
or controlled as a Hazardous Substance, toxic substance, pollutant or other
regulated or controlled material, chemical, substance, waste or matter pursuant
to any Environmental Law.
30
<PAGE>
10.23 "Inventories" and "Inventory" shall each mean all inventories of
finished goods, tooling inventory, work in progress, supplies and raw materials
that are related to or necessary for the Businesses, wherever situated.
10.24 "Law" shall mean any applicable federal, state, local, municipal,
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principal of common law, regulation, statute or
treaty.
10.25 "Lien" shall mean any mortgage, deed of trust, lien, pledge, claim,
charge, security interest, restriction, lease or sublease or other encumbrance,
option, defect or other rights of any third Person of any nature whatsoever.
10.26 "Loss" or "Losses" shall mean any and all liabilities, losses, costs,
claims, damages (including consequential damages but excluding punitive and
exemplary damages), penalties and expenses (including reasonable attorneys' fees
and expenses and reasonable costs of investigation and litigation). In the event
any of the foregoing are indemnifiable hereunder, the terms "Loss" and "Losses"
shall include any and all reasonable attorneys' fees and expenses and reasonable
costs of investigation and litigation incurred by the Indemnified Person in
enforcing such indemnity.
10.27 "Material Adverse Change" shall mean a change or circumstance
involving a prospective change in the business, operations, assets, liabilities,
results of operations, cash flows, condition (financial or otherwise) or
prospects of the Businesses or the Purchased Assets that is material and
adverse.
10.28 "Material Adverse Effect" shall mean a single event, occurrence or
fact that, together with all other events, occurrences and facts, has, or might
reasonably be expected to have, a material adverse effect on the business,
operations, assets, liabilities, results of operations, cash flows, condition
(financial or otherwise) or prospects of the Businesses or of the Purchased
Assets. For purposes of the foregoing, any aggregate loss to the Businesses
equal to or greater than $100,000 shall be deemed to have a Material Adverse
Effect.
10.29 "Order" shall mean any award, decision, injunction, judgment, order,
ruling, subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Entity or by any arbitrator.
10.30 "Ordinary Course of Business" shall mean an action taken by a Person
that is consistent with the past practices of such Person and is taken in the
ordinary course of the normal operations of such Person.
10.31 "Permits" shall mean permits, tariffs, authorizations, licenses,
certificates, variances, interim permits, approvals, franchises and rights under
any Law or otherwise required by any Governmental Entity and any applications
for the foregoing.
31
<PAGE>
10.32 "Permitted Liens" shall mean (a) Liens for current taxes and
assessments not yet due or payable or that are being contested in good faith in
the Ordinary Course of Business or (b) Liens securing the claims of materialmen,
carriers, landlords and like persons, all of which are not yet due and payable.
10.33 "Person" shall mean a corporation, an association, a partnership, a
limited liability company, an organization, a business, an individual or a
Governmental Entity.
10.34 "Proprietary Information" shall mean collectively (a) Proprietary
Rights and (b) any and all other information and material proprietary to a
Person, owned, possessed or used by such Person, whether or not such information
is embodied in writing or other physical form, and which is not generally known
to the public, that (i) relates to financial information regarding such Person
or such Person's business, including, but not limited to, (A) business plans and
(B) sales, financing, pricing and marketing procedures or methods of such Person
or such business or (ii) relates to specific business matters concerning such
Person or such business, including such Person or such Person's business, the
identity of or other information regarding sales personnel and customers of such
Person or such business.
10.35 "Proprietary Rights" means trademarks, tradenames, service marks,
patents, copyrights, trade secrets, know-how and similar rights, and all
registrations, applications, licenses and rights with respect to any of the
foregoing; provided, however, that the name and trademarks "Lowy" whether alone
or in conjunction with another name(s), word(s) or term(s) is not included
within the definition of "Proprietary Rights".
10.36 "Proceeding" shall mean any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Entity or arbitrator.
10.37 "Seller" shall have the meaning specified in the preamble.
10.38 "Taxes" shall mean all federal, state, local, foreign and other taxes,
charges, fees, duties, levies, imposts, customs or other assessments, including
all net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, profit share, license, lease, service, service use, value
added, withholding, payroll, employment, unemployment, excise, estimated,
severance, stamp, occupation, premium, real and personal property (tangible and
intangible), windfall profits, or other taxes, fees, assessments, customs,
duties, levies, imposts, or charges of any kind whatsoever, together with any
interest, penalties, additions to tax, fines or other additional amounts imposed
thereon or related thereto, and the term "Tax" means any one of the foregoing
Taxes.
10.39 "Tax Return" shall mean any report, return or other information
required to be supplied to a Governmental Entity in connection with any Taxes.
32
<PAGE>
10.40 "Title Insurer" shall mean Stewart Title Guaranty Company.
10.41 "Knowledge" shall mean, with respect to a particular fact or other
matter, actual knowledge and awareness of such fact or other matter after due
and reasonable inquiry (including, but not limited to, inquiry of the Company's
general counsel. As used in this Agreement, the phrases "Seller's Knowledge,"
"Knowledge of Seller" and similar phrases shall mean only the Knowledge of John
B. Poindexter, Stephen P. Magee, Norman E. Gibbs, Jr., Norman E. Gibbs, III,
Clarence Griffin, Timothy Gentry, Eric Krause, C.B. Hatch, David Westmoreland,
Edgar Bailey, William David Rose and Frank Klaus.
ARTICLE 11
MISCELLANEOUS
11.1 Public Announcements . Subject to applicable securities law or stock
exchange requirements, neither the Buyer nor the Seller shall, without the prior
approval of the other party hereto which shall not be unreasonably withheld,
issue, or permit any of their respective partners, directors, officers,
employees, agents or Affiliates to issue, any press release or other public
announcement with respect to this Agreement or the transactions contemplated
hereby provided, that nothing in this Section 11.1 shall prevent such parties
from discussing such transactions with those Persons whose approval, agreement
or opinion, as the case may be, is required for consummation of such
transactions.
11.2 Other Action . Each of the parties shall use commercially reasonable
efforts to cause the fulfillment at the earliest practicable date but, in any
event, prior to the Closing Date of all of the conditions to their respective
obligations to consummate the transactions under this Agreement.
11.3 Expenses . Except as otherwise set forth herein, and whether or not the
transactions contemplated by this Agreement shall be consummated, each party
agrees to pay, without right of reimbursement from any other party, the costs
incurred by such party incident to the preparation and execution of this
Agreement and performance of its obligations hereunder, including without
limitation the fees and disbursements of legal counsel, accountants and
consultants employed by such party in connection with the transactions
contemplated by this Agreement. The Buyer shall pay all costs relating to the
transfer of title to the Purchased Assets, including all sales, use, stamp,
transfer, service, recording, real estate and like taxes or fees, if any,
imposed by any Government Entity in connection with the transfer and assignment
of the Purchased Assets.
11.4 Notices . All notices, requests, consents, directions and other
instruments and communications required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given if
delivered in person, by courier, by an internationally recognized overnight
delivery service with proof of delivery or by prepaid registered or certified
United States first-class mail, return receipt requested, addressed to the
respective party at the address set forth below, or if sent by facsimile
33
<PAGE>
transmission or other similar form of communication (with receipt confirmed) to
the respective party at the facsimile number set forth below:
If to the Seller, to:
Lowy Group, Inc.
Suite 5400
1100 Louisiana Street
Houston, Texas 77002
Attention: Stephen Magee
Facsimile: (713) 951-9038
Confirm: (713) 655-9800
Copies to:
J.B. Poindexter & Co., Inc.
Suite 5400
1100 Louisiana Street
Houston, Texas 77002
Attention: Stephen Magee
Facsimile: (713) 951-9038
Confirm: (713) 655-9800
If to Poindexter, to:
Mayer, Brown & Platt
700 Louisiana, Suite 3600
Houston, Texas 77002-2730
Attention: Paul B. Clemenceau
Facsimile: (713) 224-6410
Confirm: (713) 546-0512
If to the Buyer, to:
River Associates, LLC
Suite 1640, One Republic Centre
633 Chestnut Street
Chattanooga, TN 37450
Attention: Mark Jones, Jim Baker
Facsimile: (423) 755-0870
Confirm: (423) 755-0888
34
<PAGE>
Copies to:
Miller & Martin
Suite 1000, Volunteer Building
832 Georgia Avenue
Chattanooga, TN 37402
Attention: Jonathan F. Kent
Facsimile: (423) 785-8480
Confirm: (423) 785-8301
or to such other address or facsimile number and to the attention of such other
Person(s) as either party may designate by written notice. Any notice mailed
shall be deemed to have been given and received on the third Business Day
following the day of mailing.
11.5 Successors . This Agreement shall inure to the benefit of and be
binding upon the Buyer and the Seller and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by either of the parties hereto without
the prior written consent of the other party hereto except that Buyer shall be
allowed to collaterally assign its rights under this Agreement to SouthTrust
Bank, National Association.
11.6 Entire Agreement . This Agreement and the exhibits and schedules
hereto constitute the entire agreement and understanding between the parties
relating to the subject matter hereof and supersede all prior representations,
endorsements, premises, agreements, memoranda, communications, negotiations,
discussions, understandings and arrangements, whether oral, written or inferred,
between the parties relating to the subject matter hereof and thereof. This
Agreement may not be modified, amended, rescinded, canceled, altered or
supplemented, in whole or in part, except upon the execution and delivery of a
written instrument executed by a duly authorized representative of each of the
parties hereto.
11.7 Governing Law .This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Georgia without giving
effect to choice of law principles.
11.8 Waiver . The failure of a party hereto at any time or times to
require performance of any provision hereof shall in no manner affect its right
at a later time to enforce the same. No waiver by a party of any condition or of
any breach of any term, covenant, representation or warranty contained in this
Agreement shall be effective unless in writing, and no waiver in any one or more
instances shall be deemed to be a further or continuing waiver of any such
condition or breach in other instances or a waiver of any other condition or
breach of any other term, covenant, representation or warranty.
35
<PAGE>
11.9 Severability . Any provision hereof that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
11.10 No Third Party Beneficiaries . Any agreement contained, expressed or
implied in this Agreement shall be only for the benefit of the parties hereto
and their respective legal representatives, successors and permitted assigns,
and such agreements shall not inure to the benefit of the obligees of any
indebtedness of any party hereto, it being the intention of the parties hereto
that no Person shall be deemed a third party beneficiary of this Agreement.
11.11 Counterparts . This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.12 Interpretation . The headings preceding the text of Articles and
Sections included in this Agreement and the headings to schedules attached to
this Agreement are for convenience only and shall not be deemed part of this
Agreement or be given any effect in interpreting this Agreement. The use of the
masculine, feminine or neuter gender or the singular or plural form of words
herein shall not limit any provision of this Agreement. The use of the terms
"including" or "include" shall in all cases herein mean "including, without
limitation" or "include, without limitation," respectively. Reference to any
Person includes such Person's successors and assigns to the extent such
successors and assigns are permitted by the terms of any applicable agreement,
and reference to a Person in a particular capacity excludes such Person in any
other capacity or individually. Reference to any agreement (including this
Agreement), document or instrument means such agreement, document or instrument
as amended or modified and in effect from time to time in accordance with the
terms thereof and, if applicable, the terms hereof. Reference to any Law means
such Law as amended, modified, codified, replaced or re-enacted, in whole or in
part, and in effect on the date hereof, including rules, regulations,
enforcement procedures and any interpretations promulgated thereunder. The use
of the terms "hereunder", "hereof", "hereto" and words of similar import shall
refer to this Agreement as a whole and not to any particular Article, Section or
clause of or Exhibit or Schedule to this Agreement. Any lawsuit arising out of
this Agreement shall be brought in a court of competent jurisdiction in Harris
County, Texas. Each party hereby waives any objection it may have to the
jurisdiction of such court.
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
SELLER:
LOWY GROUP, INC.
By:_______________________________________
Name:_____________________________________
Title:______________________________________
BUYER:
BLUE RIDGE ACQUISITION COMPANY, LLC
By:_______________________________________
Name:_____________________________________
Title:______________________________________
PARENT:
J.B. POINDEXTER & CO., INC.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
Subsidiaries of J. B. Poindexter & Co., Inc.
1. EFP Corporation, a Delaware corporation
a. EFP Corporation also operates under the following names:
i. Astro Pattern Corporation
ii. Engineered Foam Plastics
2. Lowy Group, Inc., a Delaware corporation
a. Tile By Design, Inc., a Delaware corporation, is a wholly- owned
subsidiary of Lowy Group, Inc.
b. Lowy Group, Inc. also operates under the following names:
i. Fred T. Lowy Distributors Division
ii. Lowy Enterprises of Minnesota
iii. Fred Lowy Linoleum & Rug
iv. Flooring Distributors
v. Lowy Distributors
3. Magnetic Instruments Corp., a Delaware corporation
a. Magnetic Instruments Corp. also operates under the following names:
i. Electrospec Corporation
ii. MIC Group
iii. Manufacturing Innovations
4. Morgan Trailer Mfg. Co., a New Jersey corporation
a. Acero-Tec S.A. de C.V., a Monterry, Nuevo Leon, Mexico corporation, is
a subsidiary of Morgan Trailer Mfg. Co.
b. Morgan Trailer Mfg. Co. also operates under the names Morgan
Corporation and Gem Top Mfg.
5. Truck Accessories Group, Inc., a Delaware corporation, f/w/a Leer, Inc.,
f/w/a Leer Holdings Inc.
a. Subsidiaries of Truck Accessories Group, Inc. include:
i Raider Industries, Inc., a Saskatchewan, Canada corporation, is
a wholly- owned subsidiary of Truck Accessories Group, Inc.
(a) Raider Industries, Inc. also operates under the
following names:
1) Lo Rider
2) Raider
ii. Leer Acquisition Company, Inc., a Delaware corporation, is a
wholly-owned subsidiary of Truck Accessories Group, Inc.
(a) Welshman Industires, Inc., f/w/a Radco Industries,
Inc., a Minnesota corporation, is a wholly-owned
subsidiary of Leer Acquisition Company, Inc., and
operates under the following names:
1) Midwest Truck Aftermarket
b. Truck Accessories Group, Inc. also operates under the following names:
i. 20th Century Fiberglass
ii. Century Fiberglass
iii. Century
iv. Leer
v. Leer Corporate
vi. Leer East
vii. Leer Midwest
viii. Leer Retail
ix. Leer Southeast
x. Leer Specialty Products
xi. Leer Truck Accessory Centers
xii. Leer West
xiii. National Truck Accessories
xiv. National Truck Accessories Headquarters
xv. National Truck Accessories Midwest
xvi. National Truck Accessories Southeast
xvii. National Truck Accessories West
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1998
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,191
<SECURITIES> 0
<RECEIVABLES> 26,999
<ALLOWANCES> 710
<INVENTORY> 31,094
<CURRENT-ASSETS> 63,207
<PP&E> 92,829
<DEPRECIATION> 54,631
<TOTAL-ASSETS> 133,975
<CURRENT-LIABILITIES> 48,205
<BONDS> 102,969
0
0
<COMMON> 16,486
<OTHER-SE> (491)
<TOTAL-LIABILITY-AND-EQUITY> 133,975
<SALES> 365,327
<TOTAL-REVENUES> 365,327
<CGS> 310,094
<TOTAL-COSTS> 310,094
<OTHER-EXPENSES> 335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,648
<INCOME-PRETAX> (7,970)
<INCOME-TAX> 744
<INCOME-CONTINUING> (8,714)
<DISCONTINUED> (3,439)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,153)
<EPS-PRIMARY> (3.973)
<EPS-DILUTED> (3.973)
<FN>
LOSS PROVISION IS INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE ON
THE FINANCIAL STATEMENTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1998
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 3,191 0
<SECURITIES> 0 0
<RECEIVABLES> 29,827 0
<ALLOWANCES> 1,426 0
<INVENTORY> 29,960 0
<CURRENT-ASSETS> 64,877 0
<PP&E> 89,782 0
<DEPRECIATION> 48,697 0
<TOTAL-ASSETS> 161,199 0
<CURRENT-LIABILITIES> 62,596 0
<BONDS> 103,344 0
0 0
0 0
<COMMON> 16,486 0
<OTHER-SE> (186) 0
<TOTAL-LIABILITY-AND-EQUITY> 161,199 0
<SALES> 338,559 310,924
<TOTAL-REVENUES> 338,559 310,924
<CGS> 280,193 257,065
<TOTAL-COSTS> 280,193 257,065
<OTHER-EXPENSES> 1,364 1,001
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,775 14,484
<INCOME-PRETAX> (6,823) (6,512)
<INCOME-TAX> 947 (991)
<INCOME-CONTINUING> (7,770) (5,521)
<DISCONTINUED> 224 (633)
<EXTRAORDINARY> 0 (260)
<CHANGES> 0 0
<NET-INCOME> (7,546) (6,414)
<EPS-PRIMARY> (2.467) (2.097)
<EPS-DILUTED> (2.467) (2.097)
<FN>
LOSS PROVISION IS INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE ON
THE FINANCIAL STATEMENTS.
</FN>
</TABLE>
