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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[X] Preliminary Proxy Statement [ ] Confidential, for use of the Commission
only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
</TABLE>
Central Tractor Farm & Country, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01
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(2) Aggregate number of securities to which transaction applies:
3,621,435
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$14.25
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(4) Proposed maximum aggregate value of transaction:
$51,605,449
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(5) Total fee paid:
$10,321
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[X] Fee paid previously with preliminary materials.
The total fee of $10,321 computed pursuant to Exchange Act Rules
14a-6(l)(1) and 0-11 was previously paid in connection with the initial
filing of preliminary information statement materials on December 23, 1996.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
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PRELIMINARY COPY
CENTRAL TRACTOR FARM & COUNTRY, INC.
3915 DELAWARE AVENUE
DES MOINES, IOWA 50316-3330
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD
MARCH, 1997
To the Stockholders of Central Tractor Farm & Country, Inc.:
Notice is hereby given that a Special Meeting of Stockholders of Central
Tractor Farm & Country, Inc. (the "Company") will be held at the offices of
at a.m. on March , 1997 for the following purposes:
1. To approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement") dated November 27, 1996 by and among the Company, J.W. Childs
Equity Partners, L.P., a Delaware limited partnership ("Childs"), CT
Holding, Inc., a Delaware corporation ("Holding"), and JWC Acquisition I,
Inc., a Delaware corporation ("Acquiror").
2. To transact any other business that may properly come before the
Special Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on February 7, 1997
as the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at this Special Meeting and at any adjourned
session thereof.
The members of a Special Committee of the Board of Directors of the Company
unanimously recommended that the Board of Directors approve the Merger
Agreement, and the Board of Directors unanimously approved the Merger Agreement
and the transactions contemplated thereby, including the Merger, and the Board
of Directors has determined that the Merger is fair to, and in the best
interests of, the holders of the Common Stock and recommends that stockholders
vote for the adoption of the Merger Agreement and the transactions contemplated
thereby.
Under Section 251 of the Delaware General Corporation Law (the "DGCL"), the
affirmative vote of at least a majority of the outstanding shares of common
stock, par value $.01 per share (the "Common Stock"), of the Company is required
to adopt the Merger Agreement. On the Record Date, approximately 66.1% of the
issued and outstanding shares of Common Stock were owned by Acquiror.
Under the DGCL, stockholders of the Company have the right to demand
appraisal rights for their shares of Common Stock, provided that the Merger is
consummated and such stockholders comply with the requirements of Section 262 of
the DGCL. See "THE MERGER -- Appraisal Rights" in the Proxy Statement for a
description of the rights of dissenting stockholders and a discussion of the
procedures which must be followed by dissenting stockholders of the Company to
obtain appraisal of their shares of Common Stock.
ACQUIROR OWNS A SUFFICIENT NUMBER OF THE SHARES OF COMPANY COMMON STOCK TO
ADOPT AND APPROVE THE MERGER AGREEMENT WITHOUT THE VOTE OF ANY OTHER STOCKHOLDER
AND IT INTENDS TO VOTE ITS SHARES OF COMPANY COMMON STOCK IN FAVOR OF THE MERGER
AGREEMENT. ADOPTION OF THE MERGER AGREEMENT IS ASSURED WITHOUT THE VOTE OF ANY
OTHER STOCKHOLDER.
Please sign, date and return the enclosed proxy card promptly in the
enclosed envelope, whether or not you expect to attend the meeting. If you sign
and return your proxy card without specifying your choices, it will be
understood that you wish to have your shares voted in accordance with the Board
of Directors' recommendations.
The Merger Agreement is attached as Exhibit 1 to the accompanying Proxy
Statement.
By order of the Board of Directors,
G. DEAN LONGNECKER
Executive Vice President, Finance
and Secretary
March, 1997
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PRELIMINARY COPY
CENTRAL TRACTOR FARM & COUNTRY, INC.
3915 DELAWARE AVENUE
DES MOINES, IOWA 50316-3330
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH , 1997
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
INTRODUCTION
This Proxy Statement is being furnished to the stockholders of record as of
February 7, 1997 (the "Record Date") of shares of common stock, par value $.01
per share (the "Common Stock") of Central Tractor Farm & Country, Inc., a
Delaware corporation (the "Company" or "CT"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at a
Special Meeting of stockholders of the Company (the "Special Meeting") to be
held on March , 1997, at the time and place set forth in the Notice of Special
Meeting, and at any adjournment or postponement thereof. The purpose of the
Special Meeting is to vote upon the adoption of the Agreement and Plan of Merger
dated as of November 27, 1996 (the "Merger Agreement") by and among the Company,
J.W. Childs Equity Partners, L.P., a Delaware limited partnership ("Childs"), CT
Holding, Inc., (formerly JWC Holdings I, Inc.), a Delaware corporation
("Holding"), and JWC Acquisition I, Inc., a Delaware corporation ("Acquiror").
Pursuant to the Merger Agreement, (i) Acquiror will be merged with and into
the Company (the "Merger"), and the Company will be the surviving corporation
and will become a wholly owned subsidiary of Holding, and (ii) each share of
Common Stock (other than shares of Common Stock held by Childs, Holding,
Acquiror or the Company or any of their subsidiaries or that are held by those
stockholders who properly perfect their appraisal rights under Section 262 of
the Delaware General Corporation Law) will be converted into the right to
receive $14.25 in cash, without payment of interest thereon (the "Merger
Consideration"). After consummation of the Merger, the current stockholders of
the Company will cease to be stockholders of the Company, except that certain
members of the Company's management (the "Management Investors") have been, or
will be, offered the opportunity by Holding to exchange a portion of their
equity investment in the Company for an equity investment in Holding or to
purchase equity of Holding and may be granted new options for the common stock
of Holding after the Merger.
THE MEMBERS OF A SPECIAL COMMITTEE (THE "SPECIAL COMMITTEE") OF THE BOARD
OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDED THAT THE BOARD OF DIRECTORS
APPROVE THE MERGER AGREEMENT, AND THE BOARD OF DIRECTORS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
MERGER, AND THE BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTEREST OF, THE HOLDERS OF THE COMMON STOCK AND RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
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You are urged to review this Proxy Statement carefully. If the Merger is
consummated, stockholders who comply with applicable Delaware law will have
appraisal rights enabling them to decline the $14.25 per share cash payment
offered in the Merger and, in lieu of receiving such cash, to petition the
Delaware Court of Chancery for the "fair value" of their shares of Common Stock.
There can be no assurances that the determination of "fair value" in any such
proceeding will result in a stockholder receiving more than $14.25 per share of
Common Stock, and such a proceeding could result in a stockholder receiving less
than $14.25 per share of Common Stock. Stockholders pursuing appraisal rights
will not receive any payment for their shares of Common Stock until conclusion
or settlement of the applicable court proceedings but would receive interest
thereon from the Effective Time of the Merger to the date of judgment. See "THE
MERGER -- Appraisal Rights"
As of the Record Date there were issued and outstanding 10,670,892 shares
of Common Stock. Under the Delaware General Corporation Law (the "DGCL"), the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock that are entitled to vote thereon is required to adopt the Merger
Agreement. As of the Record Date, Acquiror owned approximately 66.1% of the
issued and outstanding shares of Common Stock, which were acquired by Acquiror
pursuant to a Securities Purchase Agreement dated November 27, 1996 (the
"Securities Purchase Agreement") by and among Childs, Acquiror and Mezzanine
Lending Associates I, L.P., a Delaware limited partnership, Mezzanine Lending
Associates II, L.P., a Delaware limited partnership, Mezzanine Lending
Associates III, L.P., a Delaware limited partnership, Senior Lending Associates
I, L.P., a Delaware limited partnership (collectively, the "BCC Funds"), and BCC
Industrial Services, Inc., a Delaware corporation and pursuant to Management
Letter Agreements (as hereinafter defined) between Acquiror and each of James T.
McKitrick, Chief Executive Officer of the Company, and G. Dean Longnecker,
Executive Vice President-Finance of the Company. Acquiror intends to vote all
shares of Common Stock held by it as of the Record Date in favor of adoption of
the Merger Agreement. ACCORDINGLY, ADOPTION OF THE MERGER AGREEMENT IS ASSURED
WITHOUT THE VOTE OF ANY OTHER STOCKHOLDER.
No persons have been authorized to give any information or to make any
representations other than those contained in, or incorporated by reference in,
this Proxy Statement, and if given or made, such information or representations
must not be relied upon as having been authorized by the Company, Childs,
Holding, Acquiror or any other person.
All information contained in this Proxy Statement relating to the Company
and its subsidiaries has been supplied by the Company, and all information
contained in this Proxy Statement relating to Childs, Holding, Acquiror and
their affiliates has been supplied by Childs.
The date of this Proxy Statement is March , 1997. This Proxy Statement is
first being mailed to stockholders of record as of the Record Date on or about
March , 1997, and constitutes both the notice of a special meeting pursuant to
Section 222 of the DGCL and notice of appraisal rights required by Section 262
of the DGCL.
The principal executive offices of the Company are located at 3915 Delaware
Avenue, Des Moines, Iowa 50316-3330, and its telephone number is (515) 266-3101.
The principal executive offices of Childs, Holding and Acquiror are located at
One Federal Street, Boston, MA 02110, and their telephone number is (617)
753-1100.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Copies of such
reports, proxy statements and other information may be inspected and copied at
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, DC 20549, and at the public reference
facilities of the Commission's regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material may be
obtained by mail, at prescribed rates, from the Public Reference
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Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549. In
addition, such material should also be available for inspection at the library
of the NASDAQ National Market. The Commission maintains a Website that contains
reports, proxy and information statements and other information regarding the
Company; the address of such site is http://www.sec.gov.
None of Childs, Holding or Acquiror files information with the Commission.
Pursuant to the requirements of Section 13(e) of the Exchange Act and Rule
13e-3 promulgated thereunder, the Company, as the issuer of the class of equity
securities which is the subject of the Rule 13e-3 transaction, and Acquiror and
Holding, have filed with the Commission a Transaction Statement on Schedule
13E-3 (the "Schedule 13E-3") with respect to the Merger. As permitted by the
rules and regulations of the Commission, this Proxy Statement omits certain
information contained in the Schedule 13E-3. The Schedule 13E-3 and the
respective exhibits thereto, may be inspected at and obtained from the
Commission and the Company in the manner set forth above.
3
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TABLE OF CONTENTS
<TABLE>
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PAGES
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INTRODUCTION.......................................................................... 1
AVAILABLE INFORMATION................................................................. 2
THE SPECIAL MEETING................................................................... 6
Date, Time and Place................................................................ 6
Matters to be Considered at the Special Meeting..................................... 6
Voting Rights and Vote Required..................................................... 6
Revocation and Use of Proxies; Solicitation......................................... 6
SPECIAL FACTORS....................................................................... 7
Recommendation of the Board of Directors............................................ 7
Background of the Merger............................................................ 7
Fairness of the Merger; Reasons for the Recommendation of the Company's Board of
Directors........................................................................ 9
Opinion of Piper Jaffray............................................................ 11
Purpose, Structure and Reasons for the Merger; Plans for the Company................ 15
Interests of Certain Persons........................................................ 16
Accounting Treatment of the Merger.................................................. 19
Certain Effects of The Merger....................................................... 20
Regulatory Approvals................................................................ 20
Certain Federal Income Tax Consequences............................................. 21
CERTAIN PROJECTIONS................................................................... 21
THE MERGER............................................................................ 23
Description of the Merger........................................................... 23
Board Representation................................................................ 24
Other Provisions in the Merger Agreement............................................ 24
SOURCE AND AMOUNT OF FUNDS............................................................ 27
APPRAISAL RIGHTS...................................................................... 30
RELATED AGREEMENTS.................................................................... 32
Securities Purchase Agreement....................................................... 32
Management Letter Agreements........................................................ 33
THE COMPANY........................................................................... 33
Overview............................................................................ 33
Strategy............................................................................ 34
Expansion Plan...................................................................... 35
Retail Stores....................................................................... 36
Store Operations.................................................................... 38
Other Operations.................................................................... 39
Purchasing and Distribution......................................................... 39
Corporate Offices and Management Information Systems................................ 39
Competition......................................................................... 40
Advertising and Promotions.......................................................... 40
Employees........................................................................... 40
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PAGES
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Properties.......................................................................... 41
Legal Proceedings................................................................... 41
PRICE RANGE OF SHARES; DIVIDENDS; BOOK VALUE.......................................... 42
OWNERSHIP OF COMMON STOCK............................................................. 43
CERTAIN TRANSACTIONS IN THE COMMON STOCK.............................................. 44
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................................... 45
SELECTED CONSOLIDATED FINANCIAL DATA.................................................. 47
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 48
FINANCIAL INFORMATION................................................................. 52
FEES AND EXPENSES..................................................................... 52
INDEPENDENT ACCOUNTANTS............................................................... 53
INFORMATION CONCERNING CHILDS, HOLDING AND ACQUIROR................................... 53
OTHER MATTERS TO COME BEFORE THE MEETING.............................................. 53
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Exhibit 1 Agreement and Plan of Merger
Exhibit 2 Securities Purchase Agreement
Exhibit 3 Management Letter Agreements
Exhibit 4 Section 262 of the Delaware General Corporation Law
Exhibit 5 Opinion of Piper Jaffray Inc.
Exhibit 6 Information Regarding the Directors and Executive Officers of Acquiror,
Holding and the General Partner of Childs
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THE SPECIAL MEETING
DATE, TIME AND PLACE
This Proxy Statement is being furnished to the holders of Common Stock (the
"Stockholders") as of the Record Date in connection with the Special Meeting to
be held at a.m. on March , 1997 at March , and at any adjournment or
postponement thereof.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the Stockholders will be asked to consider and vote
upon a proposal to adopt the Merger Agreement, pursuant to which Acquiror will
be merged with and into the Company, with the Company continuing as the
surviving corporation (the "Surviving Corporation") and becoming a wholly owned
subsidiary of Holding. The Stockholders also will consider and vote upon such
other matters as may properly come before the Special Meeting.
VOTING RIGHTS AND VOTE REQUIRED
Only Stockholders of record as of the close of business on the Record Date
will be entitled to vote at the Special Meeting, or any adjournment or
postponement thereof, with respect to the proposal for the adoption of the
Merger Agreement. As of the Record Date, the shares of Common Stock
issued and outstanding were held by approximately holders of record. At
such date, 7,208,551 shares of Common Stock (or approximately 66.1%) were held
by Acquiror.
Stockholders have the right to demand appraisal rights for their shares of
Common Stock and, subject to certain conditions provided under the DGCL, to
receive payment for the fair value of their shares of Common Stock. See "THE
MERGER" -- Appraisal Rights" and Exhibit 4 to this Proxy Statement.
Stockholders of record as of the close of business on the Record Date are
entitled to one vote per share with respect to the proposal for the adoption of
the Merger Agreement at the Special Meeting or any adjournment or postponement
thereof. The presence of the Stockholders representing not less than one-third
of the shares of Common Stock entitled to vote on the Merger is necessary to
constitute a quorum to transact business at the Special Meeting. If a quorum is
not present at the Special Meeting, the Stockholders who are present and
entitled to vote at the Special Meeting may, by majority vote, adjourn the
Special Meeting from time to time without notice or other announcement until a
quorum is present. Abstentions of shares of Common Stock that are present at the
Special Meeting and broker non votes will have the same effect as votes against
adoption of the Merger Agreement. Because the shares of Common Stock owned by
Acquiror will be represented at the Special Meeting, a quorum will be present,
even if no other shares of Common Stock are represented.
Under the DGCL, the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock that are entitled to vote thereon is required
to adopt the Merger Agreement. As of the Record Date, Acquiror owned
approximately 66.1% of the issued and outstanding shares of Common Stock.
Acquiror intends to vote all shares of Common Stock held by it as of the Record
Date in favor of adoption of the Merger Agreement. ACCORDINGLY, ADOPTION OF THE
MERGER AGREEMENT IS ASSURED WITHOUT THE VOTE OF ANY OTHER STOCKHOLDER. You may
vote your shares of Common Stock, if you wish, by attending the Special Meeting
in person or by returning the enclosed proxy card, signed and dated, in the
enclosed envelope.
REVOCATION AND USE OF PROXIES; SOLICITATION
Shares of Common Stock which are represented by properly executed, dated
and returned proxies, unless such proxies shall have previously been properly
revoked, will be voted in accordance with the instructions indicated in such
proxies. If no contrary instructions are indicated, such shares will be voted
FOR authorization and adoption of the Merger Agreement and in the discretion of
the proxy holder as to any other matter which may properly come before the
Special Meeting. Any other matter which may properly come
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before the Special Meeting at which a quorum is present for such purpose
requires the affirmative vote of at least a majority of the shares of Common
Stock present, in person or by proxy. A Stockholder who has given a proxy may
revoke it at any time prior to its exercise at the Special Meeting by delivering
a written notice of revocation of the proxy being revoked, or by submission of a
properly executed proxy bearing a later date than the proxy being revoked, to
the Secretary of the Company at 3915 Delaware Avenue, Des Moines, Iowa 50313, or
by voting the Common Stock covered thereby in person at the Special Meeting.
In addition to soliciting proxies by mail, certain directors, officers and
regular employees of the Company, without receiving additional compensation
therefor, may solicit proxies personally or by telephone, telegram or other
forms of wire or facsimile communication. The Company has also retained
Kissell-Blake as its proxy solicitor in connection with the Special Meeting. The
fee for such services will be not more than approximately $2,500 plus
out-of-pocket expenses. The Company will bear the cost of the Special Meeting
and of soliciting proxies therefor, including the reasonable expenses incurred
by brokerage houses, custodians, nominees and fiduciaries in forwarding proxy
material to the beneficial owners of shares of Common Stock.
SPECIAL FACTORS
RECOMMENDATION OF THE BOARD OF DIRECTORS
At a special meeting held on November 27, 1996, the Board of Directors of
the Company (the "Board"), upon the recommendation of the Special Committee
comprised solely of independent, non-employee directors of the Company,
unanimously approved the Merger Agreement and the transactions contemplated
thereby and determined that the Merger was fair to, and in the best interests
of, the Company and its Stockholders. THE BOARD RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
BACKGROUND OF THE MERGER
Since the initial public offering of the Common Stock in 1994, management
has continually sought to implement an aggressive expansion strategy which it
believed was necessary to maintain the competitiveness and prospects of the
Company in the agricultural retail market. Despite the rapid growth of the
Company over the past two years, however, Butler Capital Corporation ("BCC"),
whose affiliates owned a controlling interest in the Company, has generally
favored a more conservative growth strategy that did not contemplate the raising
of additional capital in the form of either debt or equity. As a result of these
differences, both management and BCC agreed that a sale of the Company was
appropriate. In the summer of 1995, BCC had informal discussions with strategic
buyers about a possible acquisition of the Company. These discussions proved to
be unfruitful.
In October 1995, the Company's managers, with BCC's consent, began the
process of seeking a financial buyer to acquire the Company in concert with
management. The managers retained Cybus Capital Markets ("Cybus"), a Des
Moines-based financial advisor, in October, 1995. Over the course of the next
twelve months, Cybus contacted a number of financial buyers, but no proposals
were received by the Company.
On September 16, 1996, representatives of Childs were contacted by
representatives of Cybus. On September 17, 1996, Childs received from Cybus an
information memorandum in connection with a possible sale or other transaction
involving the Company. On October 1, 1996, Steven Segal, Managing Director, Adam
Suttin, Vice President, Adam Feild, Associate, and Stephen Wise, Financial
Analyst, all of Childs met with Jim McKitrick, Chief Executive Officer, and Dean
Longnecker, Senior Vice President and Chief Financial Officer of the Company and
were provided access to certain financial information (including financial
statements and projections) concerning the Company in order to evaluate Childs'
interest in pursuing a possible transaction with the Company. On October 7,
1996, management of Childs visited the Company's headquarters and a number of
its retail locations.
In the ensuing weeks, as part of Childs' continuing review, representatives
of Childs had various contacts with Company employees and representatives in
order to obtain additional information with regard to the
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Company. On October 21, 1996, representatives of Childs and various potential
lenders had a meeting with Company management and toured the Company's
headquarters and various retail locations.
On October 28, 1996, Childs' senior management requested a meeting with
representatives of the Company. At this meeting, which was held on November 4,
1996, Childs delivered a letter to Mr. McKitrick which outlined a non-binding
proposal to acquire 100% of the outstanding shares of the Company for $14.00 per
share in cash in a merger transaction.
A special meeting of the Company's Board of Directors was convened on
November 7, 1996 to discuss the proposal made by Childs. The Board of Directors
decided that the proposal merited consideration, and formed a special committee
comprised of a majority of the independent, non-employee directors of the
Company (the "Special Committee") to negotiate with Childs. The Special
Committee initially consisted of Francis J. Palamara (Chairman), Glenn Kraiss,
Daryl Lansdale, and Costa Littas. Mr. Littas resigned as a member of the Special
Committee on November 15, 1996. The Special Committee retained Piper Jaffray
Inc. ("Piper Jaffray") to render an opinion regarding the fairness, from a
financial point of view, of the consideration to be received by the Stockholders
in the Merger.
During the following week, representatives of Childs met with
representatives of the Special Committee to negotiate the terms of a proposal to
be delivered to the Special Committee. On November 14, 1996, Childs delivered a
modified proposal letter to the Chairman of the Special Committee. The modified
Childs proposal contemplated that Childs and its affiliates would purchase from
the BCC Funds approximately 10% of the outstanding shares of Common Stock
simultaneously with the execution of the proposed merger agreement and that the
acquisition of the Company would take the form of a tender offer by Childs for
all outstanding shares of Common Stock at $14.00 per share followed by a merger
transaction in which all remaining shares of Common Stock not held by Childs or
its affiliates would be converted into $14.00 per share.
The Special Committee met on November 15, 1996 to evaluate the modified
proposal. Representatives of Piper Jaffray described to the Special Committee
the analysis they would perform to evaluate the consideration proposed to be
received in the Merger from a financial point of view. The Special Committee
also considered other strategic alternatives to the Merger, including remaining
independent and possible transactions with other strategic buyers. After
considering the many discussions which the Company had participated in during
the past year with other potential acquirors, none of which resulted in a
proposal, and the performance of the Company's Common Stock over the past
several years, the Special Committee concluded it was in the best interests of
the Company and its Stockholders to pursue the Childs proposal. The Special
Committee also explored whether it was necessary to auction the Company, but was
advised by Ropes & Gray, its special counsel, that an auction of the Company,
was not required under the circumstances. The Special Committee also received
legal advice from Ropes & Gray with respect to their fiduciary duties in
connection with the proposal.
The Special Committee met again on November 20, 1996 and received a
preliminary report from Piper Jaffray on their analysis of the consideration
proposed to be received pursuant to the modified proposal. The Special Committee
concluded that it was in the best interests of the Company's stockholders to
continue to pursue the modified proposal.
On November 25, the Special Committee met again and representatives of
Piper Jaffray made a presentation with respect to the consideration to be
received by the Company's stockholders pursuant to the modified proposal. The
Special Committee decided that the public stockholders of the Company should
receive higher consideration for their shares of Common Stock than the
consideration that would be received by the Securityholders. Negotiations
between representatives of Childs and the Special Committee continued during the
week. As a result of these negotiations, a definitive Merger Agreement was
submitted to Childs and the Board of Directors of the Company on November 27,
1996. The Merger Agreement provided for a cash consideration of $14.25 per share
and was conditioned upon the prior sale by certain affiliates of BCC (the
"Securityholders") of all of their shares of Common Stock to Childs for $14.00
per share in cash. As a result of the proposed prior sale by the BCC Funds of
their shares to Childs at a lower consideration than that proposed to be
received by the public stockholders of the Company, the Merger Agreement no
longer provided for a tender offer to be followed by a merger, but rather
provided for a one-step merger transaction.
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At a November 27, 1996 meeting of the Board of Directors, Piper Jaffray
rendered to the Board of Directors its oral opinion, subsequently confirmed by
its written opinion, that as of such date, and subject to the assumptions made,
matters considered and limitations set forth in its opinion, the Merger
Consideration to be received by the Stockholders pursuant to the Merger
Agreement was fair from a financial point of view to such stockholders. Both
parties approved the Merger Agreement and executed it on that day.
FAIRNESS OF THE MERGER; REASONS FOR THE RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS.
In light of the Board's consideration of various strategic alternatives and
its review of the Company's competitive position and recent operating results,
the Board determined that the Merger was fair to, and in the best interests of,
the Company and its Stockholders.
The Board of Directors, in determining to approve the Merger Agreement and
the transactions contemplated thereby considered the recommendations of the
Special Committee and all of the factors considered by the Special Committee as
described below.
The members of the Board of Directors believe that the factors considered
by the Special Committee operate both individually and in combination to support
their determination that the Merger is fair to, and in the best interest of, the
holders of the Common Stock. In determining to recommend to the Board of
Directors that it approve the Merger Agreement, and in determining the fairness
of the terms of the Merger, the Special Committee considered the factors set
forth below, each of which, in the Special Committee's view, supported the
Special Committee's determination to recommend the Merger. Those factors which
refer to the prospects or revenue and earnings growth rates of the Company
should be read in conjunction with "CERTAIN PROJECTIONS."
(i) the Special Committee's knowledge of the business, financial
results and prospects of the Company, as well as the Special Committee's
knowledge of the agricultural retail industry generally; specifically, the
Special Committee considered the potential for growth through new store
openings and the alternative of expanding through the acquisition of
smaller, locally-owned independent agricultural retail operators;
(ii) the history of the negotiations with respect to the Merger
Consideration that, among other things, led to an increase in Childs' offer
from $14.00 per share of Common Stock to $14.25 per share of Common Stock,
and the belief of the members of the Special Committee that $14.25 per
share of Common Stock was the highest price that Childs would agree to pay;
(iii) the terms and conditions of the Merger Agreement, including the
amount and form of consideration and the nature of the parties'
representations, warranties, covenants and agreements;
(iv) the views expressed by management of the Company regarding the
financial condition, results of operations, business and prospects of the
Company, including the prospects of the Company if the Company were to
remain independent:
(v) the trading price of the shares of Common Stock over the past two
years; that the $14.25 per share to be paid in the Merger represents a
premium of approximately 21.3% over the $11.75 closing sale price for the
Shares of Common Stock on the Nasdaq National Market on November 27, 1996,
the last trading day prior to the execution of the Merger Agreement and its
subsequent public announcement;
(vi) that over the past year the shares of Common Stock traded at
prices exceeding the Merger Consideration on only 35 days, and that the
shares of Common Stock had not traded above $14.25 per share since May 28,
1996;
(vii) the absence of a significant public trading market for the
shares of Common Stock since the initial public offering in October 1994;
(viii) the Special Committee's belief that the Company's ability to
generate capital through future equity financings was limited;
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<PAGE> 12
(ix) the risk that the projected revenue and earnings growth rates
underlying the current market price of the Common Stock might not be
realized;
(x) that over the past year the Company had engaged in several
discussions with other potential acquirors and that those inquiries had
failed to identify a transaction that was more favorable to the Company and
its Stockholders;
(xi) the presentation and opinion of Piper Jaffray to the effect that
as of the date of the opinion the $14.25 per share Merger Consideration to
be received by the Company's stockholders in the Merger was fair to such
stockholders from a financial point of view.
In addition to the factors described above which, in the Special
Committee's view supported the Special Committee's determination to recommend
the Merger, the Special Committee also considered the fact that the premium paid
analysis conducted by Piper Jaffray in connection with its presentation and
opinion indicated that the Merger Consideration would include a lower premium
over the closing price of the Common Stock at certain times prior to the
announcement of the Merger than the mean, median and maximum premiums paid in
connection with the acquisition of certain other public companies. See "SPECIAL
FACTORS -- Opinion of Piper Jaffray."
The Special Committee and the Board of Directors did not assign relative
weights to the above factors or determine that any factor was of significant
importance. Rather, the Special Committee and the Board of Directors viewed
their position and recommendations as being based on the totality of the
information presented to and considered by them, except that particular
consideration was placed on (i) the opinion of Piper Jaffray that, as of the
date of the opinion, the $14.25 per share Merger Consideration to be received by
the Company's stockholders in the Merger was fair to such stockholders from a
financial point of view, (ii) the fact that the BCC Funds, as the owners of
approximately 65% of the outstanding Common Stock, would receive a lower cash
price per share pursuant to the Securities Purchase Agreement than the public
stockholders in the Merger and (iii) the active arm's length bargaining that had
occurred between the Special Committee, on the one hand, and Childs and its
affiliates on the other hand, that resulted in the $14.25 per share Merger
Consideration, which the members of the Special Committee believed was the
highest price that Childs would agree to pay. While the Special Committee and
the Board noted that certain of the individual analyses contained in the Piper
Jaffray presentation and opinion were, in the judgement of the Special Committee
and the Board of Directors, more supportive of their decision to approve the
Merger than others, and that the premium paid analysis contained in the Piper
Jaffray presentation and opinion appeared to be less supportive of their
decision to approve the Merger, both the Special Committee and the Board
considered the totality of the presentation and the opinion in determining
whether the Merger was fair from a financial point of view.
The Special Committee believes that Piper Jaffray's analysis was
reasonable.
The Special Committee and the Board recognized that, as a result of the
proposed Merger, Stockholders of the Company (other than the Initial Management
Investors (as defined herein)) would cease to have an interest in an ongoing
corporation with potential for future growth, and the Special Committee and the
Board therefore gave consideration to the Company's results of operations and
current forecasts of future revenues and earnings in reaching its determination
to approve the Merger Agreement. See "CERTAIN PROJECTIONS." The Board also
recognized that the Initial Management Investors would have an opportunity,
subject to the risks of the Surviving Corporation's business and in
consideration of their ongoing service to the Surviving Corporation, to benefit
from any increases in the value of the Surviving Corporation following the
Merger. The Special Committee and the Board recognized that this represented a
potential conflict between the interests of those officers and employees and the
Company's other Stockholders. However, the Special Committee and the Board
recognized that Holding was willing to enter into the Merger Agreement only if
satisfactory arrangements for the retention of, and equity reinvestment by,
management could be put in place. See "-- Interests of Certain Persons."
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<PAGE> 13
In considering the fairness of the Merger, Stockholders should be aware
that the Management Investors have a substantial equity ownership position in
the Company and will be offered an opportunity, not available to the Company's
other Stockholders, to indirectly participate in the equity of the Surviving
Corporation through the ownership of shares of common stock of Holding. As of
January 2, 1997, the Management Investors owned approximately 4.9% of the
outstanding shares of Common Stock on a fully diluted basis. Assuming the
transactions contemplated by the Management Letter Agreements are consummated,
on a pro forma basis giving effect to the consummation of the Merger, the
Management Investors will own approximately 8% of Holding.
The Special Committee believes that the Merger is procedurally fair
because: (1) the Special Committee consisted of disinterested directors (none of
whom will be directors or investors in Holding or the Surviving Corporation)
appointed to represent the interest of the holders of shares of Common Stock
(other than shares of Common Stock held by Childs or its affiliates), and to
negotiate on an arm's length basis with Childs, Acquiror and Holding on behalf
of such holders; (2) the Special Committee retained and was advised by Ropes &
Gray; and (3) the Special Committee retained Piper Jaffray to render an opinion
concerning the fairness, from a financial point of view, of the consideration to
be received by the Stockholders in the Merger. In addition, the Special
Committee believes that the Merger is procedurally fair because the $14.25 per
share of Common Stock and the other terms and conditions of the Merger Agreement
resulted from active arm's length bargaining between the Special Committee, on
the one hand, and Childs, Acquiror and Holding on the other hand.
The rules of the Commission require each of Acquiror and Holding to express
its belief as to the fairness of the Merger to the Stockholders. While each of
Acquiror and Holding has undertaken no evaluation of the Merger from the
standpoint of fairness to the Stockholders, it has considered the factors noted
above which were taken into account by the Board and Special Committee, based
however only on the more limited facts and information available to it. Although
Acquiror and Holding did not find it practicable to quantify or otherwise attach
relative weights to the specific factors considered by the Board or the Special
Committee, each of Acquiror and Holding did consider in particular the fact that
(i) the Merger Consideration represented a significant premium over the
historical stock prices of Common Stock as described above in the discussion of
the Board's approval, and (ii) the unaffiliated Stockholders would be receiving
$.25 per share more consideration in the Merger than (x) the BCC affiliates
received per share of Common Stock pursuant to the Securities Purchase Agreement
and (y) the Initial Management Investors received per share of Common Stock
acquired by Acquiror or to be rolled-over into common stock of Holding pursuant
to the Management Letter Agreements. Each of Acquiror and Holding also
considered the fact that it required, as a condition to its execution and
delivery of the Merger Agreement, the Board and the Special Committee to have
determined that the Merger Agreement was fair to the Stockholders and to have
obtained an opinion of Piper Jaffray that the Merger Consideration to be
received in the Merger by holders of the Common Stock pursuant to the Merger
Agreement is fair to such holders. On the basis of the foregoing considerations,
each of Acquiror and Holding believes that the Merger is fair from a financial
point of view to the Stockholders. In addition, each of Acquiror and Holding
have considered the measures taken by the Board of Directors to ensure the
procedural fairness of the transaction, including the formation of the Special
Committee, the retention of legal and financial advisors by the Special
Committee and the arms-length nature of the negotiations. See "SPECIAL FACTORS
- -- Background of the Merger".
The rules of the Commission also require Messrs. McKitrick and Longnecker
to express their belief as to the fairness of the Merger to the Stockholders.
While Messrs. McKitrick and Longnecker have undertaken no evaluation of the
Merger from the standpoint of fairness to the Stockholders, they have considered
the factors noted above which were taken into account by the Board (of which
Messrs. McKitrick and Longnecker are members) and Special Committee, based
however only on the more limited facts and information available to them
inasmuch as they did not participate in the deliberations of the Board with
respect to the Merger. Although Messrs. McKitrick and Longnecker did not find it
practicable to quantify or otherwise attach relative weights to the specific
factors considered by the Board or the Special Committee, Messrs. McKitrick and
Longnecker did consider in particular the fact that (i) the Merger Consideration
represented a significant premium over the historical stock prices of Common
Stock as described above in the discussion of the Board's
11
<PAGE> 14
approval, and (ii) the unaffiliated Stockholders would be receiving $.25 per
share more consideration in the Merger than (x) the BCC affiliates received per
share of Common Stock pursuant to the Securities Purchase Agreement and (y) the
Initial Management Investors received per share of Common Stock acquired by
Acquiror or to be rolled-over into common stock of Holding pursuant to the
Management Letter Agreements. Messrs. McKitrick and Longnecker also considered
that fact that each of Acquiror and Holding required, as a condition to its
execution and delivery of the Merger Agreement, the Board and the Special
Committee to have determined that the Merger Agreement was fair to the
Stockholders and to have obtained an opinion of Piper Jaffray that the Merger
Consideration to be received in the Merger by holders of the Common Stock
pursuant to the Merger Agreement is fair to such holders. On the basis of the
foregoing consideration, Messrs. McKitrick and Longnecker believe that the
Merger is fair from a financial point of view to the Stockholders. In addition,
Messrs. Mckitrick and Longnecker have considered the measures taken by the Board
of Directors to ensure the procedural fairness of the transaction as described
above.
In light of these approvals and factors, the Special Committee and the
Board did not consider it necessary to provide for the approval of the Merger
Agreement by the affirmative vote of at least a majority of the unaffiliated
Stockholders of the Company.
Other than the recommendations of the Special Committee and Board of
Directors that Stockholders vote in favor of the Merger, no other person filing
the Schedule 13E-3 has made any recommendation with respect to the Merger or any
other transaction contemplated thereby. Acquiror and its affiliates and the
Management Investors intend to vote their shares of Common Stock in favor of the
Merger.
OPINION OF PIPER JAFFRAY
CERTAIN STATEMENTS CONTAINED UNDER THIS SECTION "OPINION OF PIPER JAFFRAY,"
SUCH AS STATEMENTS CONCERNING THE ESTIMATES OF FUTURE REVENUES, EARNINGS AND
CASH FLOWS AND OTHER STATEMENTS CONTAINED IN THIS SECTION REGARDING MATTERS THAT
ARE NOT HISTORICAL FACTS, ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS
DEFINED IN THE RULES PROMULGATED PURSUANT TO THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT")). BECAUSE SUCH FORWARD-LOOKING STATEMENTS INCLUDE
RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED IN OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED ELSEWHERE HEREIN UNDER "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. NONE OF THE COMPANY, CHILDS OR
PIPER JAFFRAY UNDERTAKES ANY OBLIGATION TO RELEASE PUBLICLY THE RESULT OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
Piper Jaffray was retained by the Company and the Special Committee by
letter dated November 15, 1996 to render an opinion regarding the fairness from
a financial point of view of the consideration to be received by the
Stockholders in a proposed acquisition of the Company by Childs. At the November
27, 1996 meeting of the Company's Board of Directors, Piper Jaffray rendered its
oral opinion, subsequently confirmed in writing by its written opinion, dated
November 27, 1996 (the "Piper Jaffray Opinion"), to the effect that, as of the
date thereof and based on and subject to the assumptions, factors and
limitations set forth in such opinion and described below, the Merger
Consideration of $14.25 proposed to be paid in the Merger to the holders of the
Common Stock pursuant to the Merger Agreement was fair, from a financial point
of view, to holders of the Common Stock.
The full text of the Piper Jaffray Opinion is attached as Exhibit 5 to this
Proxy Statement. The following summary of the Piper Jaffray Opinion is qualified
in its entirety by reference to the full text of the Piper Jaffray Opinion. The
Stockholders are urged to read the opinion in its entirety for a complete
description of the assumptions made, matters considered and limits of the review
undertaken.
In arriving at its opinion, Piper Jaffray reviewed, analyzed and relied
upon material bearing upon the financial and operating condition and prospects
of the Company and material prepared in connection with the Merger, and
considered such financial and other factors as it deemed appropriate under the
circumstances, including, among other things, the following: (i) the draft dated
November 26, 1996, of the Merger Agreement; (ii) the draft dated November 26,
1996, of the Securities Purchase Agreement; (iii) the reports on Form 10-K for
the Company for the five fiscal years ended October 28, 1995; (iv) the reports
on Form 10-Q for the Company for the quarters ended January 27, 1996, April 27,
1996, and July 27, 1996;
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<PAGE> 15
(v) estimated financial results for the fiscal year ended November 2, 1996, and
financial forecasts for the five fiscal years ending 2001 for the Company
prepared by Company management; and (vi) the historical prices and trading
activity for Common Stock. Piper Jaffray visited the headquarters of the Company
and conducted discussions with members of senior management of the Company,
including the Chief Executive Officer, Executive Vice President-Finance and
Senior Vice President-Finance. Topics discussed included, but were not limited
to, the background and rationale of the proposed Merger, the financial
condition, operating performance and the balance sheet characteristics of the
Company and the prospects for the Company. In addition, Piper Jaffray held
discussions with members of the Special Committee of the Board of Directors of
the Company.
The Piper Jaffray Opinion, which was delivered for use and considered by
the Company Board, is directed only to the fairness, from a financial point of
view, of the Merger Consideration, does not address the Company's underlying
business decision to participate in the Merger and does not constitute a
recommendation to any Stockholder as to how such Stockholder should vote with
respect to the Merger. The per share consideration was determined pursuant to
negotiations between the Company, the Special Committee and Childs and not
pursuant to a recommendation of Piper Jaffray. Nor was Piper Jaffray requested
to opine as to, and its opinion did not address in any manner, the consideration
to be paid to the Securityholders pursuant to the Securities Purchase Agreement
or other terms of the Securities Purchase Agreement or the consideration to be
paid to any other Stockholder, other than pursuant to the Merger Agreement.
Based on this information, Piper Jaffray performed a variety of financial
and comparative analyses, including those summarized below, which it discussed
with the Special Committee on November 25, 1996, and updated for purposes of its
opinion presentation on November 27, 1996 to the entire Board of Directors of
the Company.
A copy of the full text of the written materials used in connection with
Piper Jaffray's November 27, 1997 presentation has been filed as an exhibit to
the Schedule 13E-3 filed with the Commission with respect to the Merger, may be
inspected and copied, and obtained by mail, from the Commission as set forth in
"AVAILABLE INFORMATION" and will be made available for inspection and copying at
the principal executive offices of the Company during regular business hours by
any interested Stockholder of the Company or his or her representative who has
been so designated in writing.
Discounted Cash Flow Analysis. At the direction of the Company and the
Special Committee, Piper Jaffray utilized the forecast identified as Final
Projections, Scenario A herein under "CERTAIN PROJECTIONS" for its discounted
cash flow analysis. Piper Jaffray was advised that the Scenario A Final
Projections involving opening fewer stores in smaller markets were based on the
more conservative growth strategy then in effect for the Company for the period
to be analyzed. The Scenario A projections forecasted five new stores per year,
which in management's view was more realistic given the considerable management
effort required to integrate the Big Bear stores which would divert management
attention from new store expansion. The Scenario B projections, on the other
hand, forecasted fifteen new stores per year, which management believed was less
realistic given the time and attention that management expects will be necessary
for the Big Bear integration. See "CERTAIN PROJECTIONS." Piper Jaffray performed
a discounted cash flow analysis on the Company's Scenario A Final Projections to
calculate a range of theoretical values per share of the Common Stock based
upon: (i) the net present value of the implied future cash flows of the Company;
and (ii) a terminal value assuming the Company is sold in the year 2001 at a
multiple of earnings before interest and taxes ("EBIT"). Assuming an EBIT
multiple of 7-9x, a discount rate average of 15-17% and a tax rate of 41.0%,
Piper Jaffray concluded that the net present value of the implied future cash
flows projected in Scenario A Final Projections would be approximately $53.3
million to $55.6 million, the net present value of the terminal value would be
approximately $99.9 million to $140.1 million and the net present value of each
share of Common Stock would be approximately $12.32 to $16.19. This range of
values was then compared to the Merger Consideration.
Comparable Company Analysis. Piper Jaffray conducted a comparable company
analysis by comparing certain financial and stock market information relating to
the Company to corresponding data and rates for a group of six comparable
publicly traded companies. The group of comparable companies consisted of:
D.I.Y. Home Warehouse, Inc., Duckwall-ALCO Stores, Inc., Fred's, Inc., Michaels
Stores, Inc., Old America
13
<PAGE> 16
Stores, Inc. and Tractor Supply Company. These comparable companies were
selected based on a search using the following criteria: the company's primary
business is retail; the company is mid-sized with respect to revenues; the
company has a moderate growth rate; and the company overlaps on multiple product
categories and/or has a rural focus and/or has a comparable store size. Among
other things, Piper Jaffray determined that for the comparable companies the
mean stock price to latest twelve months ("LTM") net income ratio was 11.9x, the
median such ratio was 10.5x and the Company ratio at a closing stock price as of
November 26, 1996, was 14.8x and at the Merger Consideration was 17.4x; the mean
stock price to fiscal year 1997 net income estimates ratio for the comparable
companies was 11.7x, the median such ratio was 11.2x and the Company ratio at a
closing stock price as of November 26, 1996 was 14.3x and at the Merger
Consideration was 16.8x; the mean stock price to fiscal year 1998 net income
estimates ratio for the comparable companies was 9.6x, the median such ratio was
9.8x and the Company ratio at a closing stock price as of November 26, 1996 was
11.3x and at the Merger Consideration was 15.0x; the mean ratio of company value
(market capitalization plus debt less cash) to LTM revenue for the comparable
companies was 0.3x, the median such ratio was 0.3x and the Company ratio was
0.5x and was 0.6x at the Merger Consideration; the mean company value to LTM
earnings before interest taxes depreciation and amortization (EBITDA) ratio for
the comparable companies was 6.5x, the median such ratio was 6.6x, and the
Company ratio was 6.7x and was 8.0x at the Merger Consideration; and the mean
company value to LTM EBIT ratio for the comparable companies was 11.0x, the
median such ratio was 8.3x, and the Company ratio was 7.9x and was 8.2x at the
Merger Consideration.
Comparable Acquisition Analysis. Piper Jaffray conducted a comparable
acquisition analysis through a review of selected retail industry transactions
deemed comparable to the Merger. The analysis was based upon information
obtained from Commission filings, public company disclosures, press releases,
industry and popular press reports, databases and other sources. Piper Jaffray
identified all acquisitions of retail companies that were pending or completed
from January 1, 1990 through November 12, 1996, with a minimum equity value
(price per share multiplied by shares of Common Stock outstanding) of $40MM.
This search yielded three transactions that Piper Jaffray deemed comparable,
including (in acquired/acquiror format) Orchard Supply Hardware Stores
Corporation/Sears Roebuck & Co.; LeeWards Creative Crafts, Inc./Michaels Stores,
Inc.; and Sunbelt Nursery Group, Inc./Pier 1 Imports, Inc.
Piper Jaffray then determined certain mean and median purchase price ratios
based upon information for the comparable acquisitions. Among other things,
Piper Jaffray determined that for the comparable acquisitions the mean company
value to LTM revenues ratio was 0.5x, the median such ratio was 0.5x and the
Company ratio at the Merger Consideration was 0.6x; the mean company value to
LTM EBIT was 11.2x, the median such ratio was 12.5x, and the Company ratio at
the Merger Consideration was 9.8x; the mean company value to LTM EBITDA ratio
was 7.8x, the median such ratio was 8.9x and the Company ratio at the Merger
Consideration was 8.0x; and the mean equity value to LTM net income ratio was
18.1x, the median such ratio was 18.1x and the Company ratio at the Merger
Consideration was 17.6x.
Premium Analysis. Piper Jaffray performed a comparable acquisition premium
analysis through a review of transactions involving the acquisition of stock of
public companies. The analysis was based upon information obtained from
Commission filings, public company disclosures, press releases, industry and
popular press reports, databases and other sources. Piper Jaffray identified
three distinct groups of acquisitions to use as a basis of comparison: (i) 16
acquisitions of retail companies from January 1, 1994 to November 15, 1996 such
that in each transaction the equity value acquired was greater than $40 million
and the acquiror owned at least 80% of the target after the transaction ("Group
One Acquisitions"); (ii) 14 going private transactions from January 1, 1992 to
November 15, 1996 such that in each transaction the transaction value ranged
from $40 million to $750 million, the acquiror owned greater than 80% after the
transaction, the target was a public company and the acquiror was a private
entity ("Group Two Acquisitions"); and (iii) 27 acquisitions covering all SIC
Codes except REITS and financial institutions from January 1, 1996 to November
15, 1996 such that in each transaction cash was the consideration, the equity
value acquired was greater than $40 million and the acquiror owned greater than
80% after the transaction ("Group Three Acquisitions"). Piper Jaffray noted that
based on management's internal financial planning data, anticipated results for
the Company's fiscal quarter ending November 2, 1996, and for the fiscal year
ending November 2,
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<PAGE> 17
1996, would not meet the published expectations of research analysts who follow
the Company. Piper Jaffray determined that the price proposed to be paid for the
Common Stock would constitute a 17.5% premium over the closing price of $12.13
on November 26, 1996 (the day before the announcement of the Merger), a 17.5%
premium over the closing price of $12.13 on November 20, 1996 (one week prior to
the announcement of the Merger), and a 22.6% premium over the closing price of
$11.63 on October 30, 1996 (four weeks prior to the announcement of the Merger).
In comparison, Piper Jaffray determined that the range of premiums for the three
acquisition groups were as follows:
<TABLE>
<CAPTION>
GROUP ONE ACQUISITIONS GROUP TWO ACQUISITIONS GROUP THREE ACQUISITIONS
TIME PRIOR TO ------------------------------ ------------------------------ --------------------------------
ANNOUNCEMENT MIN MEAN MEDIAN MAX MIN MEAN MEDIAN MAX MIN MEAN MEDIAN MAX
- ------------- ----- ------ ------ ------ ----- ------ ------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Day................ -0.4% 25.8% 25.7% 45.8% 4.3% 21.9% 20.6% 42.2% -14.3% 29.5% 26.4% 79.5%
One Week............... 8.8% 33.1% 28.2% 66.3% 3.4% 22.1% 22.0% 45.9% 2.5% 40.6% 36.3% 90.8%
Four Weeks............. 11.4% 40.4% 36.7% 68.8% 2.3% 28.5% 29.0% 63.1% -2.4% 47.3% 49.2% 103.3%
</TABLE>
No company or transaction used in any comparable analysis as a comparison
is identical to the Company or to the Merger. Accordingly, an analysis of the
results is not mathematical and involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
comparable companies and comparable transactions. In reaching its conclusion as
to the fairness of the consideration proposed to be paid in the Merger and in
its presentation to the Company Board of Directors, Piper Jaffray did not rely
on any single analysis or factor described above, assign relative weights to the
analyses or factors considered by it, or make any conclusions as to how the
results of any given analysis, taken alone, supported its fairness opinion. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analyses or summary description. Piper Jaffray believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and of the factors considered by it, without considering all
factors and analyses, would create a misleading view of the processes underlying
the Piper Jaffray Opinion. These analyses of Piper Jaffray are not necessarily
indicative of actual values, which may be significantly more or less favorable
than the values used herein. Analyses relating to the value of companies do not
purport to be appraisals or valuations or necessarily reflect the price at which
companies may actually be purchased or sold.
For purposes of the Piper Jaffray Opinion, Piper Jaffray relied upon and
assumed the accuracy, completeness and fairness of the financial and other
information made available to it and did not assume responsibility independently
to verify such information. Piper Jaffray relied upon the assurances of the
Company's management that the information provided by the Company had a
reasonable basis and, with respect to financial planning data and other business
outlook information, reflected the best available estimates, and that they were
not aware of any information or fact that would make the information provided to
Piper Jaffray incomplete or misleading. In arriving at the Piper Jaffray
Opinion, Piper Jaffray did not perform and was not provided with any appraisals
or valuations of specific assets or liabilities of the Company and expressed no
opinion regarding the liquidation value of any entity. The Piper Jaffray Opinion
relates only to the Merger and is not an assessment of the fairness of the
Merger relative to other potential transactions. Piper Jaffray was not
authorized by the Special Committee to solicit, and did not solicit, other
entities for purposes of a possible business combination. No limitations were
imposed by the Company on the scope of Piper Jaffray's investigation or the
procedures to be followed in rendering its opinion. The Piper Jaffray Opinion
was based upon the information available to Piper Jaffray and the facts and
circumstances as they existed and were subject to evaluation on the date of the
Piper Jaffray Opinion. Events occurring after such date could materially affect
the assumptions used in preparing the Piper Jaffray Opinion.
Piper Jaffray, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwritings and secondary distributions of
securities, private placements and valuations for estate, corporate and other
purposes. The Special Committee selected Piper Jaffray because of its expertise,
reputation and familiarity with the Company and the retail industry generally.
In the past, Piper Jaffray has provided investment banking services to the
Company. Piper Jaffray also makes a market in the Common Stock and provides
research coverage on the Company. In addition, subsequent to the rendering of
the Piper Jaffray Opinion, Piper Jaffray was requested to be engaged, and
expects to be engaged, by the Company to act as the qualified independent
15
<PAGE> 18
underwriter, within the meaning of the rules of the National Association of
Securities Dealers, Inc., in connection with the proposed offering of the Senior
Notes (as defined below under "SOURCE AND AMOUNT OF FUNDS") of the Company.
Piper Jaffray will receive aggregate fees of $100,000, payment of which is
contingent upon closing of the proposed offering. The Company is expected to
agree to indemnify Piper Jaffray against certain liabilities incurred by it
(including liabilities under the federal securities laws) and to reimburse it
for certain other expenses.
The Company has agreed to pay Piper Jaffray $325,000 in fees in connection
with its engagement and for rendering its fairness opinion. These fees are not
contingent upon consummation of the Merger. The Company has agreed to indemnify
Piper Jaffray against certain liabilities incurred by it (including liabilities
under the federal securities laws) and reimburse it for reasonable out-of-pocket
expenses, including the fees and disbursements of its counsel, in connection
with the engagement of Piper Jaffray by the Special Committee and the Company.
PURPOSE, STRUCTURE AND REASONS FOR THE MERGER
The purpose of the Merger is for the equity investors in Childs, Acquiror
and Holding to acquire the entire equity interest in the Company. Acquiror and
Holding were formed at the direction of Childs for the purpose of effecting the
Merger. In connection with the Merger, (i) the Company will become a wholly
owned subsidiary of Holding, (ii) The Management Investors Group will,
immediately prior to the Merger, exchange $4.0 million in cash, notes and equity
securities of the Company (valued on the basis of $14.00 per common share) for
equity securities of Holding and (iii) the Stockholders of the Company will
receive the Merger Consideration. On a fully diluted basis, immediately after
giving effect to the Merger, Holding will be owned approximately 85% by Childs
and its affiliates, approximately 7% by affiliates of Fleet National Bank and
approximately 8% by the Management Investors. See "SPECIAL FACTORS -- Interests
of Certain Persons" and "RELATED AGREEMENTS".
The acquisition of the Company was structured as a cash merger in which
Childs, Acquiror, Holding and the Surviving Corporation would incur indebtedness
to cash out all shares of Common Stock other than shares acquired pursuant to
the Management Letter Agreements and the Securities Purchase Agreement. The
Company's purpose in submitting the Merger to the vote of its Stockholders with
a favorable recommendation at this time is to allow the Stockholders an
opportunity to receive a cash payment at a price that has been determined by the
Special Committee and the Board of Directors to be fair to the Stockholders. The
Merger has been structured as a cash merger in order to provide a prompt and
orderly transfer of ownership of the Company to the stockholders of Acquiror and
to provide the Stockholders (other than Acquiror and the Management Investors)
with cash for all of their shares of Common Stock.
If the Merger is consummated, the Stockholders of the Company (other than
Acquiror and the Management Investors) will no longer have any equity interest
in the Company, and therefore will not share in its future earnings and growth.
Instead, each such stockholder (other than such Stockholders who properly
perfect appraisal rights in accordance with Section 262 of the DGCL) will
receive, upon surrender of the certificate or certificates evidencing the
appropriate number of shares, the Merger Consideration in exchange for each
share of Common Stock owned immediately prior to the Effective Time.
Holding and the Management Investors do not have any present plans that
relate to or would result in an extraordinary corporate transaction such as a
merger, reorganization or liquidation involving the Company or any of its
subsidiaries or a sale or other transfer of a material amount of assets of the
Company or any of its subsidiaries to any changes in the Company's corporate
structure or business. Holding and the Management Investors, however, will
continue to evaluate the business and operations of the Company after the Merger
and make such changes as are deemed appropriate.
INTERESTS OF CERTAIN PERSONS
Except as described below, to the knowledge of the Company, as of the date
hereof, no director or officer of the Company has any interest, direct or
indirect, in the transactions contemplated by the Merger Agreement.
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<PAGE> 19
Indemnification of Officers and Directors. The Company is a Delaware
corporation. Section 102(b)(7) of the DGCL enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for violations of the director's fiduciary duty, except (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions), or (iv) for any
transaction from which a director derived an improper personal benefit. The
Certificate of Incorporation of the Company contains provisions eliminating the
liability of directors to the extent permitted by Section 102(b)(7) of the DGCL.
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Section 145 further provides that a corporation similarly
may indemnify any such person serving in any such capacity who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor, against expenses actually and reasonably incurred in connection with
the defense or settlement of such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the corporation and except that no indemnification shall be made in respect
of any claim, issue or matter as to which such person shall have been adjudged
to be liable to the corporation unless and only to the extent that the Delaware
Court of Chancery or such other court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper. The Certificate of Incorporation of the
Company provides for indemnification of each of the Company's directors,
officers and employees to the full extent permitted by the DGCL.
The Merger Agreement provides that the provisions in the Surviving
Corporation's Certificate of Incorporation with respect to indemnification shall
not be modified in any manner that would adversely affect the rights of persons
who are directors, officers, employees or agents of the Company at the Effective
Time, except as required by applicable law, for a period of six years from the
Effective Time. The Merger Agreement also requires the Surviving Corporation,
for a period of six years from the Effective Time, to provide indemnification
and to maintain the coverage provided by the Company's current directors and
officers liability insurance policies for the benefit of present and former
directors, officers, or employees of the Company or any of its subsidiaries. See
"THE MERGER -- Other Provisions in the Merger Agreement".
Employment Agreements. Mr. McKitrick is currently employed as President
and Chief Executive Officer pursuant to an employment agreement dated September
16, 1994. Under this agreement, Mr. McKitrick currently receives a salary of
$365,000, subject to increases determined annually by the Compensation Committee
(which increases must at least equal increases in the consumer price index). In
addition, Mr. McKitrick is eligible for an annual bonus of up to 60% of his
salary, based on financial targets and non-quantitative performance objectives
established by the Compensation Committee at the beginning of each fiscal year.
If his employment is terminated by the Company other than for cause or because
of death or disability, or because the Company either removed him or failed to
elect him as President and Chief Executive Officer, the Company will pay to Mr.
McKitrick his base salary (reduced by compensation received from other
businesses) from the date of termination to the later of November 1, 1997 and
the first anniversary of such termination. Pursuant to the employment agreement,
Mr. McKitrick was granted an option to acquire, at
17
<PAGE> 20
an exercise price equal to the initial public offering price, up to 112,512
shares of Common Stock on the seventh anniversary of the original date of grant,
with accelerated vesting if certain EBIT targets are met during fiscal 1996
through 1998. Mr. McKitrick's employment agreement also contains certain
confidentiality and non-competition requirements.
Mr. Longnecker is employed as Executive Vice President, Finance pursuant to
an agreement dated September 16, 1994. Under this agreement, Mr. Longnecker
currently receives a salary of $234,000, subject to salary increases determined
annually by the Compensation Committee (which increases must at least equal
increases in the consumer price index). In addition, Mr. Longnecker is eligible
for an annual bonus of up to 48% of his salary, based on financial targets and
non-quantitative performance objectives established by the Compensation
Committee at the beginning of the fiscal year. If his employment is terminated
by the Company other than for cause or because of death or disability, or
because the Company either removed him or failed to retain him as Executive Vice
President, Finance, the Company will pay to Mr. Longnecker his base salary
(reduced by compensation received from other businesses) from the date of
termination through the first anniversary of such termination. Mr. Longnecker's
employment agreement also contains certain confidentiality and non-competition
provisions.
Management Letter Agreements. As an additional incentive for management of
the Company to continue their employment with the Surviving Corporation
following the Merger and to provide them with a stake in the future operations
of the Surviving Corporation, Holding has offered the Management Investors the
opportunity to obtain shares, and options on shares, of common stock of Holding
upon consummation of the Merger. Holding expects that the Management Investors
will exchange in the aggregate approximately $4.0 million in cash, notes and
equity securities of the Company for equity securities of Holding representing
in the aggregate approximately 8% of the equity securities of Holding. The
equity securities of Holding to be received by the Management Investors in
exchange for the $4.0 million in cash, notes and equity securities of the
Company, shall include 48,320 shares of Holding common stock (representing
approximately 5% of the common stock of Holding) and options to purchase 29,570
shares of Holding common stock (representing approximately 3% of the common
stock of Holding). Mr. McKitrick and Mr. Longnecker entered into the Management
Letter Agreements with Acquiror on November 27, 1996. See "RELATED
AGREEMENTS -- Management Letter Agreements." The Management Letter Agreements
are attached hereto as Exhibit 3. The Management Letter Agreements also address
the terms of the employment by the Company of Mr. McKitrick and Mr. Longnecker
after the Effective Time.
Pursuant to Mr. McKitrick's Management Letter Agreement, Mr. McKitrick will
be employed as President and Chief Executive Officer of the Company after the
Effective Time. He will receive a base salary of $385,000, subject to increases
determined annually by the Board of Directors (which increases must at least
equal the percentage increases in the consumer price index for the prior year).
In addition, Mr. McKitrick is eligible for an annual bonus of up to 50% of his
salary, based on the achievement of certain financial targets. Mr. McKitrick is
also entitled to certain employee benefits, including an automobile allowance
and a country club membership. Mr. McKitrick's employment can be terminated at
any time by the Company or by Mr. McKitrick. If his employment is terminated by
the Company other than for cause or because of death or disability, or by Mr.
McKitrick because the Company either removed him or failed to elect him as
President and Chief Executive Officer, the Company will pay to Mr. McKitrick his
base salary (reduced by compensation received from other businesses) for a
period of 18 months from the date of termination. Mr. McKitrick's Management
Letter Agreement also contains certain confidentiality and non-competition
restrictions.
Pursuant to Mr. Longnecker's Management Letter Agreement, Mr. Longnecker
will be employed as Executive Vice President, Finance of the Company after the
Effective Time. He will receive a base salary of $250,000, subject to increases
determined annually by the Board of Directors (which increases must at least
equal the percentage increases in the consumer price index for the prior year).
In addition, Mr. Longnecker is eligible for an annual bonus of up to 50% of his
salary, based on the achievement of certain financial targets. Mr. Longnecker is
also entitled to certain employee benefits, including an automobile allowance
and a country club membership. Mr. Longnecker's employment can be terminated at
any time by the Company or by Mr. Longnecker. If his employment is terminated by
the Company other than for cause or because of death or
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<PAGE> 21
disability, or by Mr. Longnecker because the Company either removed him or
failed to elect him as Executive Vice President, Finance, the Company will pay
to Mr. Longnecker his base salary (reduced by compensation received from other
businesses) for a period of 12 months from the date of termination. Mr.
Longnecker's Management Letter Agreement also contains certain confidentiality
and non-competition restrictions.
The Management Letter Agreements also contemplate that Messrs. McKitrick
and Longnecker will participate with other management personnel in two stock
option plans of Holding involving 4.5% and 2.2% in the aggregate of Holding's
outstanding common stock and common stock equivalents on a fully diluted basis,
respectively. Allocations of options among the management group which will be
eligible to participate in such plans are to be made in the first instance by
the Chief Executive Officer of the Company, subject to ratification by Holding's
Board of Directors. Such allocations have not been made as of the date of this
Proxy Statement. The management stock options will be subject to vesting based
on the Company's achievement of certain operating cash flow targets.
Additionally, the Management Letter Agreements contemplate that Messrs.
McKitrick and Longnecker will receive additional stock options which vest if the
Company is sold within six years after the effective time of the Merger and the
realized value of the common equity of the original investment group in Holding
should equal or exceed ten times the value thereof at the time of the Merger.
Mr. McKitrick's and Mr. Longnecker's options under this program will entitle
them to acquire an aggregate number of shares of common stock of Holding equal
to 1.25% and 0.75%, respectively, of the total outstanding common stock and
common stock equivalents of Holding on a fully diluted basis.
Pursuant to the Management Letter Agreements, on January 2, 1997, (i) Mr.
McKitrick sold to Acquiror, for $14.00 per share, 81,810 shares of Common Stock
upon the exercise of certain options held by Mr. McKitrick (having an exercise
price of $3.08 per share), for an aggregate purchase price of $1,145,340 and
(ii) Mr. Longnecker sold to Acquiror, for $14.00 per share, 64,489 shares of
Common Stock, for an aggregate purchase price of $902,846.
In addition, the Management Letter Agreements provide that immediately
prior to the closing of the Merger, Mr. McKitrick will exchange with Holding
outstanding options to purchase 183,935 shares of Common Stock (valued at $14.00
per share) having an aggregate exercise price of approximately $0.6 million (and
valued at $14.00 per share) for options to acquire shares of Holding common
stock valued at approximately $2.6 million and that Mr. Longnecker will exchange
with Holding 71,429 shares of Common Stock (valued at $14.00 per share) for
shares of Holding common stock valued at approximately $1.0 million.
Additional Management Agreements. The Company intends to enter into
agreements ("Additional Management Agreements") with seven other members of
management other than the Initial Management Investors (the "Management
Investment Group"; and together with the Initial Management Investors, the
"Management Investors") relating to the roll-over by the Management Investment
Group of Common Stock and Company options into stock and options of Holding and
direct equity investments in Holding, which roll-overs and investments will
occur immediately prior to the closing of the Merger.
The Additional Management Agreements are expected to provide that,
immediately prior to the Merger, (i) two members of the Management Investor
Group will exchange outstanding options to purchase an aggregate 23,152 shares
of Common Stock having an aggregate exercise price of $74,823 for options to
acquire shares of Holding common stock valued at $324,128 and (ii) three members
of the Management Investor Group will exchange an aggregate 13,195 shares of
Common Stock for shares of Holding common stock valued at $184,730. In addition,
the Additional Management Agreements are expected to provide that, prior to the
Merger, (i) three members of the Management Investor Group will sell to Holding,
for $14.00 per share, 67,190 shares of Common Stock upon the exercise of certain
options held by such members of the Management Investor Group (having an
aggregate exercise price of $818,062), for an aggregate purchase price of
$940,660, and (ii) one member of the Management Investor Group will sell to
Holding, for $14.00 per share, 2,102 shares of Common Stock, for an aggregate
purchase price of $29,428.
Stockholders Agreement. Additionally, Messrs. McKitrick and Longnecker are
parties to a Stockholders Agreement dated as of December 23, 1996 applicable to
all shares of Holding common stock or vested options to acquire such common
stock held now or hereafter acquired by them. The Stockholders Agreement, among
other terms, permits Holding to "call" their shares and vested options on their
termination of
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<PAGE> 22
employment for any reason. Additionally, if either Mr. McKitrick or Mr.
Longnecker is terminated for any reason other than for cause or without good
reason (as those terms are defined in the Stockholders Agreement), he has the
right to "put" his shares or vested options to Holding. Depending on the
circumstances, the price for shares of Holding common stock purchased in
connection with a call or put under the Stockholders Agreement will range from
cost to seven times EBITDA. The put and call features of the Stockholders
Agreement terminate on completion of a public offering of Holding common stock
with aggregate net proceeds of $50.0 million or more.
Childs Management Agreement. At the effective time of the Merger, it is
contemplated that the Company and Holding will enter into a management agreement
with J.W. Childs Associates, L.P. ("Associates") providing for payment by the
Company to Associates of (i) a $1.7 million advisory and financing fee in
consideration of Associates' services regarding the planning, structuring and
negotiation of the transactions contemplated by the Merger Agreement and the
Securities Purchase Agreement and related financing and (ii) an annual
management fee of $240,000 in consideration of Associates' ongoing provision of
certain consulting and management advisory services. Payments under this
management agreement may be made only to the extent permitted by the New Credit
Facility (as hereinafter defined) and the indenture (the "Indenture") relating
to the Senior Notes (as hereinafter defined). The management agreement is
expected to be for a five-year term, automatically renewable for successive
extension terms of one year, unless Associates or Holding shall give notice of
termination.
Loans to Messrs. Miller and Fiechtner. In connection with the Merger, the
Company will loan $250,000 to George D. Miller and $25,000 to Jack Fiechtner as
part of the Management Investor Group to partially fund each of their investment
in Holding common stock. The loans will be due in ten years and require payments
of interest only prior to maturity at the applicable rate under the New
Revolving Credit Facility (as hereinafter defined).
Special Committee. The Company's Board of Directors formed a special
committee to evaluate the proposals made by Childs. See "RECOMMENDATIONS OF THE
BOARD OF DIRECTORS -- Background of the Merger". Each member of this committee
(other than the Chairman) will be paid a fee of $15,000. The Chairman of this
committee will be paid a fee of $25,000.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for under the purchase method of accounting. A
final determination of required purchase accounting adjustments of the fair
value of the assets and liabilities of the Company has not yet been made.
Following the Merger, the Surviving Corporation will undertake a study to
determine the fair value of specific assets and liabilities and will make
appropriate purchase accounting adjustments.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, Holding will own all of the outstanding
shares of common stock of the Surviving Corporation (the Management Investors
will own shares of, or options exercisable into, Holding common stock) and would
be entitled to all of the benefits and detriments resulting from that interest,
including all income or losses generated by the Surviving Corporation's
operations and any future increase or decrease in the Surviving Corporation's
value which is attributable thereto. After the Merger is consummated, the
present holders of the Common stock (other than the Management Investors) will
no longer have any equity interest in the Surviving Corporation, will not share
in the results of the Surviving Corporation and will no longer have rights to
vote on corporate matters. The Company is currently subject to the information
filing requirements of the Exchange Act, and in accordance therewith, is
required to file reports and other information with the Commission relating to
its business, financial statements and other matters. As a result of the Merger,
the Company will become a wholly owned subsidiary of Holding and there will
cease to be any public market for the Common Stock, and after the Effective
Time, the Common Stock will be delisted from the NASDAQ National Market. Upon
such event, the Surviving Corporation is expected to apply to the Commission for
the deregistration of the Common Stock under the Exchange Act. Upon
deregistration, the Surviving Corporation's continuing obligation to file
reports and other information under the 1934 Act will result from the
registration of the Senior Notes (as hereinafter defined). The termination of
the registration of the Common Stock under the Exchange Act would make certain
provisions of the Exchange Act (including
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<PAGE> 23
the proxy solicitation provisions of Section 14(a), and the short swing trading
provisions of Section 16(b)), no longer applicable to the Surviving Corporation.
Additionally, upon the termination of the registration of the Common Stock under
the Exchange Act, the Common Stock will no longer constitute "margin securities"
under the regulations of the Board of Governors of the Federal Reserve System.
REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act")
provides that certain transactions may not be consummated unless certain
information has been furnished to the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the Federal Trade Commission (the "FTC")
and certain waiting period requirements have been satisfied. The consummation of
the Second Disposition (as defined herein) under the Securities Purchase
Agreement was subject to such requirements. The regulations promulgated by the
FTC under the HSR Act required Notification and Report Forms (the "Forms") to be
filed by Childs and the Company with the Antitrust Division and the FTC with
respect to the Second Disposition under such Security Purchase Agreement and
prevented such Second Disposition from being consummated until thirty days after
receipt of the Forms by the Antitrust Division and the FTC, unless such
thirty-day waiting period was earlier terminated by the FTC or the Antitrust
Division.
On November 29, 1996, Childs and the Company filed Forms with the FTC and
the Antitrust Division relating to the Securities Purchase Agreement (as defined
herein) and requested early termination of the thirty-day waiting period. Any
waiting period under the HSR Act may be terminated in individual cases by the
FTC or the Antitrust Division before expiration. Early termination of the
waiting period with regard to the Securities Purchase Agreement was granted by
the FTC on December 12, 1996 and Childs and Acquiror consummated the Second
Disposition on December 23, 1996. The Merger will not require an additional
filing under the HSR Act because Acquiror owns more than fifty percent of the
outstanding shares of Common Stock of the Company.
A certificate of merger must be filed on behalf of the Company and Acquiror
with the Secretary of State of the State of Delaware in order to effectuate the
Merger.
Except as described above, the Company is not aware of any license or
regulatory permit that is material to its business that might be adversely
affected by the Merger, nor of any approval or other action by any governmental,
administrative or regulatory agency or authority that would be required prior to
the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon consummation of the Merger, each outstanding share of Common Stock of
the Company will be converted into the right to receive the Merger
Consideration.
The following discussion is a summary of the principal federal income tax
consequences of the Merger to Stockholders whose shares of Common Stock are
surrendered pursuant to the Merger (including any cash amounts received by
dissenting stockholders pursuant to the exercise of appraisal rights). The
discussion applies only to Stockholders in whose hands shares of Common Stock
are capital assets, and may not apply to shares of Common Stock received
pursuant to the exercise of employee stock options or otherwise as compensation,
or to Stockholders who are not citizens or residents of the United States.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE INCLUDED FOR
GENERAL INFORMATIONAL PURPOSES ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER IS URGED TO CONSULT SUCH
STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES
DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE
MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash pursuant to the Merger (including any cash amounts
received by dissenting Stockholders pursuant to the exercise of appraisal
rights) will be a taxable transaction for federal income tax purposes under the
Internal Revenue Code of 1986, as amended, (the "Code") and also may be a
taxable transaction under applicable state, local and other income tax laws. In
general, for federal income tax
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purposes, a Stockholder will recognize gain or loss equal to the difference
between the cash received by the Stockholder pursuant to the Merger and the
Stockholder's adjusted tax basis in the shares of Common Stock surrendered
pursuant to the Merger. Such gain or loss will be capital gain or loss and will
be long-term gain or loss if, on the Effective Date of the Merger, the shares of
Common Stock were held for more than one year. There are limitations on the
deductibility of capital losses.
Payments in connection with the Merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
stockholder fails to furnish such stockholder's social security number or other
taxpayer identification number ("TIN"), or furnishes an incorrect TIN. Backup
withholding is not an additional tax but merely an advance payment, which may be
refunded to the extent it results in an overpayment of tax. Certain persons
generally are exempt from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include the reportable payments in income.
Stockholders should consult with their own tax advisors as to the qualifications
for exemption from withholding and procedures for obtaining such exemption.
CERTAIN PROJECTIONS
The Company does not as a matter of course make public forecasts or
projections as to future revenues or results of operations. However, during the
course of Childs' review of the Company, as discussed under "THE
MERGER -- Background of the Merger", in September 1996 the Company presented
certain financial information regarding the Company to representatives of
Childs. The information reviewed included estimates by the Company's management
of the Company's future financial performance (the "Initial Projections") that
are set forth below under the heading "Initial Projections." Subsequently, in
late November 1996 the Company's management prepared an updated set of
projections (the "Final Projections") that were communicated to Childs and
delivered to Piper Jaffray in connection with the preparation of its fairness
opinion. The Final Projections are set forth below under the heading "Final
Projections."
The Final Projections were provided by management to the Board as well as
Piper Jaffray and present more conservative growth assumptions than the Initial
Projections delivered by management to Childs. The Final Projections and the
Initial Projections include the same assumptions except for the projected
revenue and profitability provided by new stores. The new store assumptions
included in the Final Projections projected that the new stores would generate
less revenue and profits than those included in the Initial Projections. The
Initial Projections were prepared at a time when the Company anticipated that
its growth strategy would involve expansion into larger markets. The Final
Projections reflect the Company's subsequent change in strategy to expansion
into smaller markets. In aggregate, the revenue and EBITDA forecasts in the
Final Projections are 2% and 3% less than those included in the comparable
scenario included in the Initial Projections.
While presented with numerical specificity, the projections are based upon
numerous estimates and assumptions that are inherently subject to significant
economic, industry, weather and competitive uncertainties, all of which are
difficult to predict and many of which are beyond the Company's control. Certain
assumptions on which the projections were based related to the achievement of
strategic goals, objectives and targets over the applicable periods that are
more favorable than recent historical results. Specifically, inventory turns and
comparable store revenue growth are forecasted to exceed the results of the
Company over the past two years. Accordingly, there can be no assurance that the
projected results would be realized or that actual results would not be
significantly higher or lower than those predicted.
While such projections were prepared in good faith by Company management,
no assurance can be made regarding future events. Therefore, such projections
cannot be considered a reliable predictor of future operating results, and this
information should not be relied on as such. Additionally, the financial
projections do not reflect revised prospects for the Company, changes in general
business and economic conditions, or any other transaction or event that has
occurred or may occur and that was not anticipated at the time such information
was prepared. The projections were not prepared with a view toward public
disclosure or complying with either the published guidelines of the Commission
regarding projections or forecasts or the American Institute of Certified Public
Accountants' Guide for Prospective Financial Statements. The projections do not
purport to present operations in accordance with generally accepted accounting
principles,
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and the Company's independent auditors have not examined, compiled or performed
any procedures regarding these projections, and accordingly, assume no
responsibility for them. Stockholders are cautioned not to place undue reliance
on the projections.
For each of the Initial Projections and the Final Projections, Company
management prepared two subsets of projections. The two subsets include the same
assumptions as each other with the exception of the rate of new store
construction. For each of the Initial Projections and the Final Projections, one
subset forecast included the addition of five new stores per year ("Scenario A")
while the other subset forecasted the construction of 15 new stores per year
("Scenario B"). In rendering its opinion to the Board and the Special Committee,
Piper Jaffray was directed by the Special Committee to use the Final
Projections, Scenario A, as it reflected the current growth strategy then in
effect for the Company for the period to be analyzed. The Scenario A projections
forecasted five new stores per year, which in management's view was more
realistic given the considerable management effort required to integrate the Big
Bear stores which would divert management attention from new store expansion.
The Scenario B projections, on the other hand, forecasted fifteen new stores per
year, which management believed was less realistic given the time and attention
that management expects will be necessary for the Big Bear integration. The
Initial Projections were not furnished to Piper Jaffray. See "SPECIAL FACTORS --
Opinion of Piper Jaffray".
INITIAL PROJECTIONS
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SCENARIO A (ALL FIGURES IN MILLIONS)
Revenue....................................... $348.8 $379.0 $409.1 $436.6 $465.3
EBITDA........................................ 26.4 29.8 32.9 36.0 38.7
Capital Expenditures.......................... 5.0 6.5 6.5 6.5 6.5
SCENARIO B (ALL FIGURES IN MILLIONS)
Revenue....................................... $348.5 $391.1 $447.2 $503.9 $563.2
EBITDA........................................ 25.7 29.7 35.2 40.9 46.3
Capital Expenditures.......................... 5.0 11.5 11.5 11.5 11.5
</TABLE>
FINAL PROJECTIONS
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SCENARIO A (ALL FIGURES IN MILLIONS)
Revenue....................................... $346.5 $376.1 $403.5 $428.2 $454.0
EBITDA........................................ 24.7 29.5 32.4 35.2 37.7
Capital Expenditures.......................... 4.5 6.0 6.0 6.0 6.0
SCENARIO B (ALL FIGURES IN MILLIONS)
Revenue....................................... $346.5 $386.1 $433.5 $479.8 $528.3
EBITDA........................................ 24.7 29.3 34.1 39.0 43.6
Capital Expenditures.......................... 4.5 11.0 11.0 11.0 11.0
</TABLE>
THE MERGER
The following is a summary of certain matters relating to the Merger. Such
summary is qualified in its entirety by reference to the Merger Agreement, a
copy of which is filed herewith as Exhibit 1 and is incorporated herein by
reference. Capitalized terms not otherwise defined in the following summary have
the respective meanings ascribed to them in the Merger Agreement.
DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time (as defined
below) and upon the terms and subject to the conditions of the Merger Agreement
and the DGCL, Acquiror will be merged with and into the Company, and the
separate existence of Acquiror will cease with the Company continuing as the
surviving corporation.
As soon as practicable after the satisfaction or waiver of the conditions
to the Merger, the parties will file with the Secretary of State of the State of
Delaware the certificate of merger and will make all other filings or recordings
required by Delaware law. The Merger will become effective upon the filing and
acceptance of the certificate of merger, or at such later time as is specified
in the certificate of merger (the "Effective Time").
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<PAGE> 26
At the Effective Time, each share of Common Stock outstanding immediately
prior to the Effective Time (other than shares of Common Stock held by Childs,
Holding, Acquiror, the Company, or any of their respective subsidiaries, and
shares of Common Stock held by stockholders who properly perfect their appraisal
rights under the DGCL), will be cancelled and extinguished and will be
automatically converted into the right to receive an amount equal to the Merger
Consideration.
Shares of Common Stock outstanding immediately prior to the Effective Time
and held by a holder who has not voted in favor of the Merger or consented
thereto in writing and who has demanded appraisal for such share of Common Stock
in accordance with Delaware law will not be converted into a right to receive
the Merger Consideration unless such holder fails to perfect or withdraws or
otherwise loses such holder's right to appraisal. If, after the Effective Time,
such holder fails to perfect or withdraws or loses such holder's right to
appraisal, such shares of Common Stock will be treated as if they had been
converted into a right to receive the Merger Consideration without interest
thereon.
The Merger Agreement provides that at the Effective Time each Company
Option Security issued and outstanding immediately prior to the Effective Time
(other than Company Option Securities held by Childs or any of its wholly owned
subsidiaries or held in the treasury of the Company or by any of its wholly
owned subsidiaries) shall, by virtue of the Merger and without any action on the
part of the holder thereof, (i) in the case of Company Option Securities with a
per share exercise price that is less than the Merger Consideration, be
converted into the right to receive, upon the surrender of the instrument
evidencing such Company Option Security, a cash payment equal to the product of
(A) the number of shares of Common Stock subject to such Company Option
Security, and (B) the excess, if any, of the Merger Consideration over the per
share exercise price of the Company Option Security (the "Company Option
Security Price"), and each Company Option Security so converted will, upon such
payment, be canceled, and, (ii) in the case of all other Company Option
Securities, shall be canceled without payment of any consideration therefor and
without any conversion thereof. Pursuant to the terms of the Merger Agreement,
in no event shall the holder of any Company Option Security be entitled, from
and after the Effective Time, to acquire securities of the Surviving Corporation
or Childs. The Merger Agreement further provides that no interest or dividends
shall accrue or be payable or paid on the Company Option Security Price to any
person thereunder.
Pursuant to the Merger Agreement, each share of common stock, $.01 par
value per share, of Acquiror, all of which are owned by Holding, issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of common
stock, $.01 par value per share, of the Surviving Corporation.
Promptly after the Effective Time, Childs shall deposit the aggregate
Merger Consideration with the Disbursing Agent in trust for the benefit of the
Company's Stockholders. As soon as practicable after the Effective Time, the
Disbursing Agent will mail to each Stockholder of record as of the Record Date a
notice advising such Stockholder of the effectiveness of the Merger and
describing the procedure for effecting the surrender of such Stockholder's
certificates for the Merger Consideration, along with a Letter of Transmittal.
Upon surrender of the certificate(s) representing a Stockholder's shares of
Common Stock, together with a completed and validly executed Letter of
Transmittal, such holder will be entitled to receive the Merger Consideration in
respect thereof. Until so surrendered or exchanged, each certificate will
represent only the right to receive the Merger Consideration.
BOARD REPRESENTATION
Pursuant to the Merger Agreement, upon the written request of Childs or
Acquiror, following the purchase of shares of Common Stock pursuant to the
Securities Purchase Agreement, Acquiror is entitled to designate a number of
directors on the Company's Board of Directors equal to the product (rounded to
the next whole number) of (i) the total number of directors on the Company's
Board of Directors and (ii) Acquiror's and its Affiliates' percentage ownership
of the outstanding Shares of Common Stock of the Company. In order to effectuate
such provision, the Company will either increase the size of the Company's Board
of Directors or secure the resignation of the necessary number of directors to
enable Acquiror's designees to be elected to the Company's Board of Directors.
In addition, the Company shall use its best
24
<PAGE> 27
efforts to cause persons designated by Acquiror to constitute the same
percentage as persons designated by Acquiror shall constitute of the Board of
Directors of the Company, of: (i) each committee of the Board of Directors of
the Company (some of whom may be required to be independent as required by
applicable law), (ii) each board of directors of each subsidiary of the Company,
and (iii) each committee of each such board, but in each case only to the extent
permitted by applicable law. For information concerning the current directors
and officers of the Company, Acquiror and Holding and the general partner of
Childs, see "DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" and Exhibit 6 to
this Proxy Statement.
Following the election or appointment of Acquiror's designees and prior to
the Effective Time, any amendment of the Merger Agreement or the Certificate of
Incorporation or By-Laws of the Company, any termination of the Merger Agreement
by the Company, and any extension by the Company of the time for performance of
obligations or other acts of Childs, Holding, or Acquiror or the waiver of any
rights of the Company under the Merger Agreement will require the vote of a
majority of directors of the Company who are not Acquiror's designees.
OTHER PROVISIONS IN THE MERGER AGREEMENT
Representations and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto including
representations and warranties by the Company as to the absence of certain
changes or events concerning the Company's business, compliance with law,
litigation, employee benefit plans, labor matters, related party transactions,
undisclosed liabilities, financial and other information, material agreements,
real property and leases, intellectual property, environmental matters, brokers
and taxes.
Covenants. The Merger Agreement contains certain covenants made by the
parties. These covenants are described below:
(a) Conduct of Business of the Company. Pursuant to the Merger
Agreement, the Company has covenanted and agreed that, between the date of
the Merger Agreement and the Effective Time, each of the Company and its
subsidiaries will conduct their business in a manner substantially
consistent with past practice, and will not amend their organization
documents, alter their capitalization, declare dividends, or engage in any
other transactions outside the ordinary course of business without the
written consent of Holding.
(b) Access to Information; Confidentiality. The Company will give
Childs, Holding and Acquiror and their representatives reasonable access to
all necessary information. Childs, Holding and Acquiror will keep such
information confidential except for disclosures required by applicable law
or to obtain governmental authorizations and contractual consents.
(c) Reasonable Efforts. Each of the parties will use its reasonable
efforts to take all actions and do all things reasonably necessary to
consummate and make effective the transactions contemplated by the Merger
Agreement.
(d) Stockholders' Meeting and Proxy Statement. The Company shall, as
soon as practicable following the date of the Merger Agreement, submit the
Merger Agreement for the approval of its Stockholders at an annual or
special meeting. Unless otherwise required under the applicable fiduciary
duties of the Board of Directors of the Company, as determined by such
directors in good faith after consultation with and based upon the opinion
of outside legal counsel, the Board of Directors of the Company shall
recommend approval of the Merger by the Stockholders. The Company shall
prepare and file a Proxy Statement with the Commission and, if required
under the Securities and Exchange Act of 1934, a Schedule 13E-3, as soon as
reasonably practicable after the date of the Merger Agreement and shall use
its reasonable best efforts to have the Proxy Statement and Schedule 13E-3
cleared by the Commission.
(e) Public Announcements. Until such time as may be mutually agreed
upon by the parties, neither party shall, without the approval of the other
party, make or cause to be made any press release or
25
<PAGE> 28
other public announcement that directly or indirectly discloses the
transactions contemplated by the Merger Agreement, except to the extent
required by applicable law.
(f) Indemnification and Insurance. The Merger Agreement provides that
the provisions in the Surviving Corporation's Certificate of Incorporation
with respect to indemnification shall not be amended, repealed or otherwise
modified in any manner that would adversely affect the rights of persons
who were directors, officers, employees or agents of the Company at the
Effective Time, except as required by applicable law, for a period of six
years from the Effective Time.
Pursuant to the Merger Agreement, the Company (and after the Merger is
consummated, Holding and the Surviving Corporation) shall, to the fullest
extent permitted under applicable law or under the Company's (or the
Surviving Corporation's) Certificate of Incorporation or By-Laws as in
effect at the Effective Time, indemnify each present and former director,
officer or employee of the Company or any of its subsidiaries against any
costs or expenses (including attorney's fees) arising out of or pertaining
to the transactions contemplated by the Merger Agreement or the Securities
Purchase Agreement or otherwise with respect to any acts or omissions
occurring at or prior to the Effective Time, to the same extent as provided
in the Company's By-Laws or any applicable contract or agreement as in
effect on the date the Merger Agreement was executed, in each case for a
period of six years from the date of the Merger Agreement.
Pursuant to the Merger Agreement, Holding will cause the Surviving
Corporation to maintain in effect for six years from the Effective Time, if
available, the coverage provided by the current directors' and officers'
liability insurance policies maintained by the Company with respect to
matters occurring prior to the Merger. The Merger Agreement also provides
that the Surviving Corporation will not be required to incur any annual
premium in excess of 150% of the last annual aggregate premium paid prior
to the date of the Merger Agreement for all current directors' and
officers' liability insurance policies maintained by the Company. If the
premium for such coverage exceeds such amount, Holding or the Surviving
Corporation shall purchase a policy with the greatest coverage available
for 150% of the last annual aggregate premium paid.
(g) No Solicitation of Transactions. The Merger Agreement provides
that the Company shall not directly or indirectly solicit, initiate, or
encourage the initiation of an Acquisition Proposal, engage in negotiations
or provide any nonpublic information to any person relating to any
Acquisition Proposal, or agree to approve or recommend any Acquisition
Proposal. Notwithstanding the foregoing, the Board of Directors of the
Company may consider, discuss and provide non-public information to any
persons relating to, a bona fide Acquisition Proposal not solicited in
violation of the Merger Agreement, provided the Board of Directors
determines in good faith (upon advice of outside counsel) that it is
required to do so in order to discharge properly its fiduciary duties. The
Board of Directors may also comply with Rule 14e-2 promulgated under the
Exchange Act with regard to a tender or exchange offer.
The Company shall immediately notify Childs and Acquiror upon the
receipt of any Acquisition Proposal, or any modification to any Acquisition
Proposal, any request for nonpublic information relating to the Company in
connection with an Acquisition Proposal, or for access to the records of
the Company by any person that is considering making or has made an
Acquisition Proposal.
If the Board of Directors receives a request for material nonpublic
information by a person who has made or is considering making a bona fide
Acquisition Proposal, and the Board of Directors determines in good faith
and upon the advice of outside counsel that it is required to cause the
Company to act in order to discharge its fiduciary duties, the Company may
provide such person with access to information regarding the Company
provided such person has executed a confidentiality agreement substantially
similar to the one then in effect between the Company, Childs, and
Acquiror.
(h) Financing. The Company has agreed to cooperate with Childs to
enable Childs to obtain financing in connection with the transactions
contemplated by the Merger Agreement and the Securities Purchase Agreement.
Childs, Holding, and Acquiror have agreed to use their reasonable efforts
to arrange such financing.
26
<PAGE> 29
Conditions to the Consummation of the Merger. The obligations of the
Company, Childs, Holding and Acquiror under the Merger Agreement are subject to
the satisfaction or, if appropriate, waiver of the following conditions:
(a) Stockholder Approval. If required by the DGCL, the Merger
Agreement shall have been approved and adopted by the affirmative vote of a
majority of the Stockholders of the Company.
(b) No Prohibition. No law, order, stay, decree or ruling or other
action restraining, enjoining or otherwise prohibiting the Merger, shall
have been issued or taken by any court or other governmental body.
(c) Solvency Letters. Acquiror shall have delivered letters from its
Chief Financial Officer, in form and substance reasonably satisfactory to
the Company, attesting to the solvency of the Surviving Corporation
individually, and the Surviving Corporation and its Subsidiaries, taken as
a whole, immediately before and immediately after giving effect to the
Merger.
(d) Antitrust Clearance. The filing and waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or
been terminated.
(e) Securities Purchase Agreement. The transactions contemplated by
the Securities Purchase Agreement shall have been consummated.
The obligations of each party to effect the Merger are further subject to
the accuracy as of the Closing Date of the representations and warranties of the
other party and the performance by the other party of the obligations required
to be performed by that party at or prior to the Closing Date. In addition, the
obligation of Childs, Holding, and Acquiror to effect the Merger are subject to
(x) the closing of financings sufficient to provide Childs with funds to
consummate the Merger, and (y) the absence of any material adverse change in
circumstances involving the Company and its subsidiaries.
Termination. The Merger Agreement may be terminated and the Merger and the
other transactions contemplated by the Merger Agreement may be abandoned at any
time prior to the Effective Time, whether before or after the approval of the
Stockholders:
(a) By mutual agreement of the parties duly authorized by the Board of
Directors of each party; or
(b) By Childs or the Company if the Merger shall not have been
consummated on or before March 30, 1997 (the "Termination Date"); or
(c) By either party, if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling (which order, decree, ruling or action
the parties hereto shall use their best efforts to lift or reverse), in
each case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement, and such order, decree,
ruling or other action shall have become final and nonappealable; or
(d) (i) By the Company, if both (A) it is not in material breach of
any of its representations, warranties or covenants contained in the Merger
Agreement or in any document executed in connection with the consummation
of the Merger and the other transactions contemplated by the Merger
Agreement (each, a "Transaction Document") and (B) there has been a
material breach of a representation or warranty in the Merger Agreement by
Childs, Holding or the Acquiror, or a material breach by Childs, Holding or
the Acquiror of any covenant set forth therein, or a failure of any
condition to which the obligations of the Company thereunder are subject,
and such breach or failure cannot be cured by the Termination Date and has
not been waived, or (ii) by Childs, Holding or the Acquiror, if both (A)
neither Childs, Holding nor the Acquiror is in material breach of any of
its representations, warranties or covenants contained in the Merger
Agreement or in any Transaction Document and (B) there has been a material
breach of a representation or warranty in the Merger Agreement by the
Company, or a material breach by the Company of any covenant set forth
therein, or a failure of any condition to which the obligations of Childs,
Holding and the Acquiror thereunder are subject, and such breach or failure
cannot be cured by the Termination Date and has not been waived; or
27
<PAGE> 30
(e) By Childs, Holding or the Acquiror if (i) the Board of Directors
shall have (A) withdrawn or modified (including by amendment of the Proxy
Statement), in a manner adverse to the Acquiror, its approval or
recommendation of the Merger Agreement or the Merger or any of the
transactions contemplated thereby, (B) failed to include such
recommendation in the Proxy Statement, (C) approved or recommended any
Acquisition Proposal from any person other than Childs, Holding or the
Acquiror, or (D) resolved to do any of the foregoing; or
(f) By Childs or the Company if the Securities Purchase Agreement
shall have been terminated pursuant to its terms.
The Merger Agreement provides that in the event of termination, the Merger
Agreement shall become void and there shall be no liability on the part of
Childs, Holding, Acquiror or the Company or any of their respective
stockholders, partners, officers or directors.
Survival of Representations and Warranties. The representations and
warranties in the Merger Agreement shall not survive beyond the Effective Time,
except that the covenants and agreements in the Merger Agreement shall survive
in accordance with their respective terms.
Amendment. Any provision in the Merger Agreement may be amended, but only
with the written consent of the party entitled to the benefit thereof.
Expenses. Each party shall bear its own expenses and costs in connection
with the Merger Agreement and the transactions contemplated thereby, whether or
not the transactions contemplated thereby are consummated.
Governing Law. The Merger Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
SOURCE AND AMOUNT OF FUNDS
As of January 2, 1997, Acquiror had consummated the purchases of Common
Stock pursuant to each of the Securities Purchase Agreement and the Management
Letter Agreements (the "Securities Purchases") and paid related expenses
utilizing (i) $65.4 million of cash equity contributed to Acquiror by Holding
("Equity Contribution") and (ii) $35.1 million of borrowings under an interim
margin loan facility (the "Margin Loan Facility") with NationsBank, N.A.
("NationsBank") as Administrative Agent, and Fleet National Bank ("Fleet"), as
Co-Agent. See "RELATED AGREEMENTS." Holding funded its Equity Contribution by
issuing $10.0 million of preferred stock (the "Preferred Stock") and $55.4
million of common stock, of which $60.3 million was purchased by Childs and its
affiliates and $5.0 million was purchased by affiliates of Fleet. Childs and the
Fleet affiliates presently expect to sell their respective interests in the
Preferred Stock to other institutions shortly after the consummation of the
Merger.
Acquiror estimates that approximately $62.4 million in additional funds
will be required to consummate the Merger and to pay related transactions costs
(collectively, the "Merger Expenses"). See "FEES AND EXPENSES" for a description
of such transaction costs.
The Margin Loan Facility is guaranteed by Holding and is secured by a
pledge of all of the Common Stock of the Company owned by Acquiror. Loans under
the Margin Loan Facility bear interest at the following rates per annum, at
Acquiror's option: (a) 1.5% over the higher of (i) the NationsBank, prime rate
in effect from time to time and (ii) the Federal Funds Rate plus 0.50%, or (b)
3.50% over the London Interbank Offered Rate adjusted for reserves. All amounts
outstanding under the Margin Loan Facility are due and payable upon the earlier
to occur of (i) the consummation of the Merger, or (ii) April 30, 1997.
In connection with the Securities Purchases, the Company entered into a new
term loan (the "New Term Loan") and a new revolving credit facility (the "New
Revolving Credit Facility") with Fleet, as Administrative Agent, and
NationsBank, as Co-Agent (collectively, the "New Credit Facility") and used a
portion of such facility to refinance existing debt of the Company, including a
$16.0 million convertible note held by BCC. Indebtedness under the New Credit
Facility will be guaranteed by Holding and secured by substantially
28
<PAGE> 31
all of the assets of the Company and the Company's future subsidiaries. Loans
made pursuant to the New Term Loan must be repaid in 10 installments of $0.8
million beginning June 30, 1997 and must be repaid in full on December 31, 2001.
In addition to the scheduled repayment of the New Term Loan, the Company is
obligated to make annual prepayments based on the Company's excess cash flow.
All payments and prepayments of the New Term Loan permanently reduce the
availability under the New Term Loan as defined in the New Credit Facility.
Advances made pursuant to the New Revolving Credit Facility may be borrowed,
repaid and reborrowed from time to time until the fifth anniversary of the
establishment of the facility. Advances under the New Credit Facility are
subject to the satisfaction of certain conditions on the date of advance.
Amounts outstanding under the New Credit Facility will bear interest at a
rate based, at the Company's option, upon (i) the greater of Fleet's prime rate
and 0.50% over the federal funds rate, plus 1.0% through the first day of the
Company's 1998 fiscal year and thereafter plus a percentage between 0.25% and
1.0% depending on the Company's debt to EBITDA ratio ("Prime Rate Advances") or
(ii) the Eurodollar Rate, plus 2.25% through the first day of the Company's 1998
fiscal year and thereafter plus a percentage between 1.50% and 2.25% depending
on the Company's debt to EBITDA ratio. As of December 31, 1996, the interest
rate on the New Term Loan was 7.89% and the interest rate on the outstanding
balance under the New Revolving Credit Facility was 7.85%.
The New Credit Facility contains a number of financial, affirmative and
negative covenants that regulate the Company's operations. Financial covenants
require maintenance of ratios of minimum interest coverage and debt to EBITDA
and minimum net worth and EBITDA. Negative covenants restrict, among other
things, the incurrence of debt, the existence of liens, transactions with
affiliates, loans advances and investments by the Company, payment of dividends
and other distributions to shareholders, disposition of assets, mergers,
consolidations and dissolutions, contingent liabilities and changes in business.
Acquiror expects the funds for the Merger Expenses to be made available
through the issuance of approximately $100 million of permanent senior notes of
the Company (the "Senior Notes"). The Company has filed a registration statement
on Form S-1 with the Commission with respect to the Senior Notes. The
description herein of the Senior Notes is qualified in its entirety by reference
to such registration statement which is filed as an exhibit to the Schedule
13E-3.
The Senior Notes will be general unsecured obligations of the Company,
senior to all existing and future subordinated indebtedness of the Company and
pari passu in right of payment which all other existing and future
unsubordinated indebtedness of the Company. The interest rate and interest
payment dates for the Senior Notes have not yet been determined. The Senior
Notes will mature in 2007, unless previously redeemed. The Senior Notes will be
redeemable at the option of the Company, in whole or in part, on or after 2002,
at redemption prices yet to be determined. Notwithstanding the foregoing, at any
time on or before a date to be specified in 2000, the Company may redeem up to
35% of the original aggregate principal amount of the Senior Notes with the net
cash proceeds of a public equity offering at a redemption price to be
determined, provided that 65% of the original aggregate principal amount of the
Senior Notes originally issued remain outstanding immediately after redemption.
The Senior Notes will be unconditionally guaranteed on a joint and several basis
by any future subsidiaries of the Company, subject to certain exceptions.
The Indenture for the Senior Notes will restrict, among other things, the
Company's and its future subsidiaries' ability to incur additional indebtedness,
pay dividends or make certain other restricted payments, incur liens, engage in
any sale and leaseback transaction, sell stock of subsidiaries, apply net
proceeds from certain asset sales, merge or consolidate with any other person,
sell, assign, transfer, lease, convey or otherwise dispose of substantially all
of the assets of the Company or enter into certain transactions with affiliates.
Upon a "change of control" of the Company, the Company (i) will be required to
make an offer to repurchase all the outstanding Senior Notes at 101% of the
principal amount thereof plus accrued and unpaid interest thereon, and (ii)
prior to 2002 will have the option to redeem the Senior Notes, in whole or in
part, at a redemption price equal to the principal amount thereof, plus accrued
and unpaid interest, if any, to the redemption date plus a premium to be
determined.
In addition, Acquiror intends to use the remaining proceeds of the offering
of Senior Notes to repay the Margin Loan Facility and pay down a portion of the
New Revolving Credit Facility and pay related fees and
29
<PAGE> 32
expenses. Upon consummation of the Merger, the Company will have been
capitalized with $69.2 million of equity and $107.7 million of long-term debt
(excluding $1.8 million of current maturities). On a fully diluted basis,
immediately after giving effect to the Merger, Holding will be owned
approximately 85% by Childs and its affiliates, approximately 7% by affiliates
of Fleet and approximately 8% by the Management Investors. See "RELATED
AGREEMENTS" and "INTERESTS OF CERTAIN PERSONS." The $69.2 million of equity
shall include the following: (i) $60.3 million in cash contributed by Childs,
(ii) $135,000 in cash contributed by new outside directors, (iii) the $5.0
million investment of Fleet, (iv) approximately $589,000 in cash contributions
of the Management Investors, (v) the roll over by the Management Investors of
Common Stock valued at $1.19 million into common stock of Holding, and (vi) the
roll over by the Management Investors of Company options valued at approximately
$2.90 million into Holding stock options; less (i) $275,000 in loans to certain
of the Management Investors to fund their capital contributions and (ii) the
exercise price of $654,000 of the Company stock options rolled over by the
Management Investors.
To the extent that the Senior Notes cannot be placed at or prior to the
Merger, NationsBridge L.L.C. has committed to purchase up to $100 million of
senior secured bridge notes of the Company (the "Bridge Financing") subject to
and as provided in a Bridge Commitment Letter dated November 26, 1996 (the
"Bridge Commitment Letter").
The Bridge Financing will be on terms which differ from, and are less
favorable to the Company than, the terms of the Senior Notes. Interest under the
Bridge Financing would be payable at a floating rate higher than the interest
rate on the Senior Notes, which rate would increase at the end of each
three-month interval from the date of issuance for as long as the Bridge
Financing is outstanding subject to certain caps and certain cash interest and
non-cash interest caps. The Bridge Financing matures twelve (12) months from the
date of funding ("Maturity Date"), and if not repaid in full by the Maturity
Date it may be satisfied at that time through the issuance and delivery of
Senior Notes with a maturity of nine (9) years.
Acquiror and the Company currently have no specific plans or arrangements
for the repayment of the Senior Notes or the Bridge Financing, but they
currently expect to repay such indebtedness primarily from cash flow from
operations of the Company. Acquiror's obligation to consummate the Merger is
conditioned upon Acquiror's ability to obtain financing. Accordingly, if all
other conditions to the Merger were satisfied but such funds were not available,
the Merger would not be consummated.
APPRAISAL RIGHTS
The Stockholders who have not voted in favor of the Merger or consented
thereto in writing have the right to demand an appraisal of the fair value of
their Common Stock in accordance with the provisions of Section 262 of the DGCL
("Section 262"), which sets forth the rights and obligations of Stockholders
demanding an appraisal and the procedures to be followed. Stockholders who
perfect such rights will not be entitled to surrender their Common Stock for
payment of the Merger Consideration in the manner otherwise described in this
Proxy Statement. Stockholders should assume that the Surviving Corporation will
take no action to perfect any appraisal rights of any Stockholder. Therefore, to
exercise his or her appraisal rights, a Stockholder should strictly comply with
the procedures set forth in Section 262 and is urged to consult his or her legal
advisor before electing or attempting to exercise such appraisal rights.
Stockholders who vote in favor of the Merger or consent thereto in writing
cannot demand appraisal rights, but Stockholders are not required to vote their
shares of Common Stock against the Merger in order to obtain such appraisal
rights. Stockholders who sign and return the proxy card included with this Proxy
Statement with instructions to vote in favor of the Merger or, since proxy cards
returned without instructions will be voted in favor of the Merger, with no
instruction to vote against or abstain from voting with respect to the Merger,
will not be entitled to appraisal rights.
The following is a summary of the procedures to be followed under Section
262, the text of which is attached to this Proxy Statement as Exhibit 4. The
summary does not purport to be a complete statement of, and is qualified in its
entirety by reference to, Section 262 and to any amendments to such section
after the date of this Proxy Statement. Failure to follow any Section 262
procedures may result in termination or waiver of appraisal rights under Section
262. Any Stockholder who desires to exercise his appraisal rights should
30
<PAGE> 33
review carefully Section 262 and is urged to consult his legal advisor before
electing or attempting to exercise such rights.
Only a Stockholder of record is entitled to seek appraisal. The demand for
appraisal must be executed by or for the Stockholder of record, fully and
correctly, as such Stockholder's name appears on the holder's stock
certificates. If the stock is owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be made in that capacity,
and if the stock is owned of record by more than one person, as in a joint
tenancy in common, the demand should be made by or for all owners of record. An
authorized agent, including one or more joint owners, may execute the demand for
appraisal for a Stockholder of record; however, such agent must identify the
record owner or owners and expressly disclose in such demand that the agent is
acting as agent for the record owner or owners of such shares of Common Stock.
A record Stockholder such as a broker who holds shares of Common Stock as a
nominee for beneficial owners, some of whom desire to demand appraisal, must
exercise appraisal rights on behalf of such beneficial owners with respect to
the shares of Common Stock held for such beneficial owners. In such case, the
written demand for appraisal should set forth the number of shares of Common
Stock covered by it. Unless a demand for appraisal specifies a number of shares
of Common Stock, such demand will be presumed to cover all shares of Common
Stock held in the name of such record owner.
The Company is mailing by certified or registered mail return receipt
requested to each Stockholder of record as of the Record Date this Proxy
Statement, which constitutes the notice required under Section 262. Included
with this Proxy Statement is a copy of Section 262. Any Stockholder entitled to
appraisal rights may, by March , 1997, demand in writing from the Company an
appraisal of his shares of Common Stock. Such demand will be sufficient if it
reasonably informs the Company of the identity of the Stockholder and that the
Stockholder intends to demand an appraisal of the fair value of his shares of
Common Stock. Failure to make such a demand on or before March , 1997 will
foreclose a Stockholder's right to appraisal. In addition, any Stockholder
voting in favor of the Merger or consenting thereto in writing is not entitled
to appraisal rights under Section 262. A proxy or vote against the Merger shall
not constitute a demand. Stockholders who sign and return the proxy card
included with this Proxy Statement with instructions to vote in favor of the
Merger or, since proxy cards returned without instructions will be voted in
favor of the Merger, with no instruction to vote against or abstain from voting
with respect to the Merger, will not be entitled to appraisal rights.
A Stockholder may withdraw his demand for appraisal by written request
within 60 days after the Effective Time of the Merger, but thereafter the
approval of the Company is needed for such a withdrawal. Upon withdrawal of an
appraisal demand, a Company Stockholder will be entitled to receive the Merger
Consideration.
Within 10 days after the Effective Time of the Merger, the Surviving
Corporation shall notify each Stockholder who has complied with the provision of
Section 262. Within 120 days after the Effective Time (the "120-Day Period"), in
compliance with Section 262, any Stockholder who has properly demanded an
appraisal and who has not withdrawn his demand as provided above (such
Stockholders being referred to collectively as the "Dissenting Stockholders")
and the Company each has the right to file in the Delaware Court of Chancery
(the "Delaware Court") a petition (the "Petition") demanding a determination of
the value of the Common Stock held by all of the Dissenting Stockholders. If,
within the 120-Day Period, no Petition shall have been filed as provided above,
all rights to appraisal will cease and all of the Dissenting Stockholders who
owned Common Stock will become entitled to receive the Merger Consideration. The
Company is not obligated and does not intend to file such a Petition. Any
Dissenting Stockholder is entitled, within the 120-Day Period and upon written
request to the Company, to receive from the Company a statement setting forth
the aggregate number of shares of Common Stock not voted in favor of the Merger
and with respect to which demands for appraisal have been received and the
aggregate number of Dissenting Stockholders.
Upon the filing of the Petition by a Dissenting Stockholder, the Delaware
Court may order that notice of the time and place fixed for the hearing on the
Petition be mailed to the Company and all of the Dissenting Stockholders and be
published at least one week before the day of the hearing in a newspaper of
general
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<PAGE> 34
circulation published in the City of Wilmington, Delaware or in another
publication determined by the Delaware Court. The costs relating to these
notices will be borne by the Company. If a hearing on the Petition is held, the
Delaware Court is empowered to determine which Dissenting Stockholders have
complied with the provisions of Section 262 and are entitled to an appraisal of
their Common Stock. The Delaware Court may require that Dissenting Stockholders
submit their certificates for notation thereon of the pendency of the appraisal
proceedings. The Delaware Court is empowered to dismiss the proceedings as to
any Dissenting Stockholder who does not comply with such requirement.
Accordingly, Dissenting Stockholders are cautioned to retain their certificates
pending resolution of the appraisal proceedings.
Stockholders considering seeking appraisal should have in mind that the
fair value of their shares of Common Stock determined under Section 262 could be
more, the same, or less than the Merger Consideration and that investment
banking opinions as to fairness from a financial point of view are not
necessarily opinions as to fair value under Section 262.
Dissenting Stockholders are generally permitted to participate in the
appraisal proceedings. No appraisal proceeding in the Delaware Court shall be
dismissed as to any Dissenting Stockholder without the approval of the Delaware
Court, and this approval may be conditioned upon terms which the Delaware Court
deems just.
From and after the Effective Time, Dissenting Stockholders will not be
entitled to vote their Common Stock for any purpose and will not be entitled to
receive payment of dividends or other distributions in respect of such Common
Stock payable to Stockholders of record thereafter.
RELATED AGREEMENTS
SECURITIES PURCHASE AGREEMENT
Concurrently with the execution of the Merger Agreement on November 27,
1996, Childs and Acquiror and certain affiliates of Butler Capital Corporation
that owned securities of the Company (the "Securityholders") entered into a
securities purchase agreement (the "Securities Purchase Agreement") as a
condition to the willingness of Childs, Holding and Acquiror to proceed with the
Merger. The following is a summary of certain provisions of the Securities
Purchase Agreement. Such summary is qualified in its entirety by reference to
the Securities Purchase Agreement, a copy of which is filed herewith as Exhibit
2 and is incorporated herein by reference. Capitalized terms not otherwise
defined in the following summary have the respective meanings ascribed to them
in the Securities Purchase Agreement.
Purchase of Shares. Pursuant to the Securities Purchase Agreement, each
Securityholder agreed to sell, and sold, to Acquiror, on the date of the
Securities Purchase Agreement, a specified amount of shares of Common Stock
owned by such Securityholder, aggregating a total of 1,048,214 shares of Common
Stock, for $14.00 per share, payable in immediately available funds. The
Securities Purchase Agreement further provided that the Securityholders agreed
to sell to Acquiror the remaining 5,783,515 shares of Common Stock and a warrant
to purchase 230,523 shares of Common Stock at an exercise price of $3.59 per
share (the "Second Disposition") beneficially owned by such Securityholders as
of the date of the Securities Purchase Agreement, (i) with respect to the
5,783,515 shares of Common Stock, at a price of $14.00 per share, (ii) with
respect to the warrant, at a price equal to the product of (x) 230,523, the
number of shares of Common Stock with respect to which such warrant is vested at
the time of exercise, and (y) the excess of $14.00 over $3.59, the per share
exercise price of such warrant, payable in immediately available funds. On
December 23, 1996 the Securityholders and Acquiror consummated the Second
Disposition.
Topping Fee. The Securities Purchase Agreement provides that, in the event
that any Topping Fee Event shall occur, Childs shall pay to the Securityholders
any Topping Fee due to the Securityholders in connection with such Topping Fee
Event, which payment shall be due simultaneously with the consummation of the
related Topping Fee Event and be payable in immediately available funds.
"Topping Fee" is defined in the Securities Purchase Agreement as a fee
payable by Childs to the Securityholders equal, in the aggregate, to fifty
percent (50%) of the excess, if any, of (a) the aggregate fair market value of
any consideration received by Childs, Acquiror or any of their affiliates in
connection with a
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<PAGE> 35
Topping Fee Event, over (b) the aggregate consideration (calculated using the
Merger Consideration of $14.25 per share) which would have been payable to such
Securityholder in respect of any shares of Common Stock or any Company Option
Securities.
"Topping Fee Event" is defined in the Securities Purchase Agreement as (a)
a sale or other disposition by Childs or any of its affiliates of shares of
Common Stock, (b) a merger or consolidation of the Company or any of its
subsidiaries with or into another entity, (c) a sale or other disposition of all
or substantially all of the assets of the Company and its subsidiaries (whether
in one or more transactions) or (d) any other extraordinary transaction
involving the Company or any of its subsidiaries or any of their respective
assets in which Childs or any of its affiliates recognizes value or receives
consideration with respect to any of its shares of Common Stock, provided that
such sale, other disposition, merger, consolidation or other extraordinary
transaction is consummated (or a definitive written agreement with respect
thereto is entered into) within twelve (12) months after the date of the
Securities Purchase Agreement.
Prepayment of Company Convertible Securities. Pursuant to the Securities
Purchase Agreement, each Securityholder consented and agreed, notwithstanding
any term, provision or condition contained in any Company Convertible Securities
to the contrary, to the prepayment by the Company on the Second Disposition
Effective Date of the outstanding principal, together with all accrued and
unpaid interest thereon, of all Company Convertible Securities then or
thereafter owned beneficially or of record by such Securityholder, and waived
any right to the payment of a prepayment premium or similar amount under the
terms of such Company Convertible Securities. The Company had outstanding 7%
Convertible Notes with a face amount of $16,000,000, all of which were held by
the Securityholders. The notes were convertible at a conversion price of $19.375
per share into 825,806 shares of Common Stock. The terms of the Company
Convertible Securities provided that the Company could not prepay them until
October 14, 1999, and then only with a prepayment premium. The Company prepaid
these notes at par plus accrued interest on December 23, 1996 and the
Securityholders waived any rights to prepayment premiums.
Representations and Warranties. The Securities Purchase Agreement contains
customary representations and warranties by the Securityholders, Childs and
Acquiror.
MANAGEMENT LETTER AGREEMENTS
Concurrently with the execution of the Merger Agreement and the Securities
Purchase Agreement, Acquiror entered into letter agreements (the "Management
Letter Agreements") with each of James T. McKitrick and G. Dean Longnecker (the
"Initial Management Investors"). The Management Letter Agreements are attached
hereto as Exhibit 3. Pursuant to the Management Letter Agreements, on January 2,
1997, (i) Mr. McKitrick sold to Acquiror for $14.00 per share 81,810 shares of
Common Stock upon the exercise of certain options held by Mr. McKitrick (having
an exercise price of $3.08 per share), and (ii) Mr. Longnecker sold to Acquiror
for $14.00 per share 64,489 shares of Common Stock.
In addition, the Management Letter Agreements provide that immediately
prior to the closing of the Merger (i) Mr. McKitrick will exchange outstanding
options to purchase 183,935 shares of Common Stock (valued at $14.00 per share)
having an aggregate exercise price of approximately $0.6 million for options to
acquire a number of shares of Holding common stock valued at approximately $2.6
million and (ii) Mr. Longnecker will exchange 71,429 shares of Common Stock
(valued at $14.00 per share) for a number of shares of Holding common stock
valued at approximately $1.0 million.
The Management Letter Agreements also address the terms of the employment
by the Company of Messrs. McKitrick and Longnecker after the Effective Time. See
"INTERESTS OF CERTAIN PERSONS."
33
<PAGE> 36
THE COMPANY
OVERVIEW
Central Tractor Farm & Country, Inc. is one of the largest agricultural
specialty retailers in the United States. As of December 31, 1996, the Company
operated 112 retail stores in 16 states in the Northeast and Midwest, primarily
under the "CT Farm & Country" name. CT specializes in meeting the farming,
gardening and related needs of rural consumers, especially part-time and
full-time farmers, hobby gardeners, skilled tradespersons and "do-it-yourself "
customers. For the fiscal year ended November 2, 1996, the Company generated pro
forma sales of $307.8 million, pro forma earnings before interest, taxes,
depreciation and amortization ("EBITDA") of $21.2 million and pro forma net
income of $1.2 million.
CT was founded in 1935 and has established itself as a leader in the
agricultural specialty market, having strong name recognition and a loyal
customer base. The Company obtained this position by (i) offering a full range
of agricultural and related products not typically found in general merchandise
retailers and home centers, (ii) merchandising high quality "CT" brand products
at competitive prices, and (iii) providing superior in-store service to its
customers.
The Company's stores offer a wide selection of agricultural products such
as tractor parts and accessories, specialty hardware, lawn and garden items,
rural automotive products, workwear, pet supplies and general consumer products.
Management believes that products accounting for approximately 60% of CT's net
sales cannot be found at general merchandise retailers and home centers. In
addition, CT offers a high level of customer service, ranging from answering
technical questions about products to special ordering of hard to find items.
The Company believes that this merchandising and service strategy is a
significant competitive advantage, enabling CT to differentiate itself from
other retailers and generate attractive gross margins. The Company has also
established national visibility for its products and services through its
catalog operations, which has an annual circulation of approximately 550,000.
The Company's stores are located primarily in rural communities with
populations in each trading area ranging from 30,000 to 100,000 people (the
Company considers a trading area to be the 30 mile radius around a store). While
CT adjusts its store size and product mix to match the demographics of each
trading area, the stores generally contain from 10,000 to 25,000 square feet of
indoor selling space and carry approximately 18,000 to 24,000 SKUs. The average
sales for the Company's stores open for the full 1996 fiscal year were $3.9
million. The Company's average customer transaction in fiscal 1996 were
approximately $27, reflecting the high frequency of customer purchases and the
replacement nature of CT's product line.
In 1992, the Company hired its current CEO, establishing a senior
management team with considerable retail experience. Management has since
initiated programs designed to increase sales and profitability, enhance
customer service and improve the efficiency of CT's operations. Further, the
Company initiated an aggressive expansion plan, operating 32 new stores and
acquiring 33 stores since the beginning of fiscal 1993.
In May 1996, the Company acquired 31 retail stores and certain net
operating assets from Big Bear, a privately owned agricultural specialty
retailer, for $5.7 million. Management believes that it will significantly
improve sales and EBITDA in the acquired stores by converting them to the CT
format. Further, these stores were added to CT's operations without a
substantial increase in corporate selling, general and administrative or
distribution expenses. As of December 31, 1996, 14 locations have been converted
by the Spring of 1997 at an estimated cost of $3.0 million. With locations in
Iowa, Minnesota, Missouri and Wisconsin, the Big Bear stores provide additional
geographic diversity to CT's Northwestern focus.
In October 1994, the Company completed the sale of 3,565,000 shares of its
Common Stock in an initial public offering (the "IPO") at a price of $15.50 per
share. The aggregate proceeds received by the Company from the IPO was $50.1
million.
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<PAGE> 37
BUSINESS STRATEGY
CT seeks to continue to increase its revenues and cash flows by
capitalizing on the programs it has implemented and by growing its store count.
Key elements of the Company's strategy include: (i) focused merchandising and
service; (ii) improved inventory management; (iii) Big Bear integration; (iv)
new store openings; and (v) selective acquisitions.
- Focused Merchandising and Service: Since 1992, the Company has
aggressively expanded its in-store product offerings, increasing the
range of agricultural specialty products offered and reducing the number
of products typically carried by general merchandise retailers.
Management also plans to expand the breadth of the Company's profitable
"CT" branded product line. In addition, CT offers a high level of
specialized customer service. This merchandising and service strategy
differentiates the Company from general merchandise retailers and home
centers, enabling it to achieve attractive gross margins (29.3% in fiscal
1996). This strategy also allows the Company to locate stores near
general merchandise retailers and home centers to capitalize on their
retail traffic.
- Improved Inventory Management: In June, 1996 the Company implemented a
program to reduce inventory levels in each store and more efficiently
utilize the Company's inventory replenishment system. As a result,
comparable store inventory was reduced by 7.7% during fiscal 1996.
Despite lower in-store inventory levels, comparable store sales grew by
approximately 1.5% for fiscal 1996. Management believes CT can reduce
in-store inventory levels by an additional 10% without adversely
affecting revenues and margins. Further, management believes that there
are additional opportunities to improve the Company's in-stock inventory
position by more accurately matching inventory levels to expected rates
of sales.
- Big Bear Integration: The acquired Big Bear stores averaged $0.8 million
in sales for the twelve months prior to CT's acquisition. In contrast,
CT's comparable Midwestern stores open for the full 1996 fiscal year
averaged $2.2 million in sales, with a greater emphasis on agricultural
and related product sales. Management believes that by converting the Big
Bear stores into the CT store format, and by employing better
merchandising and inventory management strategies, the Company will
significantly increase the operating performance and cash flows at the
acquired stores. The impact on sales is already being demonstrated in the
recently converted stores. Within two weeks of their acquisition, all 35
Big Bear stores were operating on CT's point-of-sale ("POS") and central
management information systems. Management expects to continue in
leverage its existing distribution and corporate administration
capabilities by consolidating the Big Bear stores into CT's operations
without a substantial increase in expenses.
- New Store Openings. CT increased its store count from 47 at the
beginning of fiscal 1993 to 112 as of December 31, 1996. Of the new
stores, 32 were opened (net of three closed) and 33 were acquired by the
Company. Following the Merger and the transactions contemplated thereby,
CT plans to open 31 stores in the next three years (including one
additional store in fiscal 1997). CT stores typically generate positive
cash flow in their first full year of operation. With two exceptions, all
66 stores which the Company operated for the full 1996 fiscal year
generate positive cash flow at the store level. The Company believes that
its existing infrastructure will accommodate its planned expansion
through 1999 without substantially increasing its distribution and
corporate-level expenses.
- Selective Acquisitions: The agricultural specialty retail market is
highly fragmented, with no retailer holding a dominant national position.
Management estimates this market to be approximately $6.0 billion.
Management believes that there are opportunities to further diversify
CT's operations, achieve additional operating efficiencies and increase
purchasing power by acquiring single store locations, small chains and
larger regional chains. From time to time the Company has had discussions
with several agricultural specialty retailers. There are no current
agreements with respect to any such acquisition and there can be no
assurance that any such acquisition will be consummated in the future.
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<PAGE> 38
EXPANSION PLAN
Since the beginning of fiscal 1993, the Company has increased the number of
its retail stores from 47 to 112. From Fiscal 1993 through fiscal 1994, the
Company opened 10 new stores, acquired one store and closed three stores. In
fiscal 1996, the Company opened fourteen new stores and acquired 31 store
locations from Big Bear. Subsequent to fiscal 1996, the Company has opened one
new store.
Following the Merger and the transactions contemplated thereby, the Company
plans to open an additional 31 stores in the next three years through further
penetration of the Northeastern and Midwestern United States markets and through
expansion into Southeastern United States. Management intends to achieve this
growth through new store openings and selective acquisitions. The Company
expects to open one additional store in fiscal 1997 and complete the conversion
of the remaining 17 Big Bear stores to the CT store format by the Spring of
1997. On a preliminary basis, the Company has identified potential new markets
outside of its existing markets that are attractive candidates for one or more
new CT stores. The number of actual new CT store openings in the next three
years may differ materially from the Company's current projections if the
Company makes a major acquisition or is unable to find attractive store
locations to rent at reasonable prices, negotiate acceptable lease terms or
acquire small regional farm store chains at reasonable prices.
The Company seeks to locate stores in high traffic shopping districts
whenever possible in order to attract customers who prefer to do much of their
shopping at one time and place. As with its existing stores, the Company intends
to lease its new stores. The estimated cash required to open a new, leased,
large prototype store is $850,000 and the estimated cash required to open a new,
leased, small prototype store averages $600,000 (in each case, including
inventory net of accounts payable and excluding an average of approximately
$125,000 in pre-opening expenses). Of these estimated cash expenditures,
approximately half is used for initial inventory (net of accounts payable), and
the balance is used for capital expenditures, principally leasehold
improvements, fixtures and equipment. CT stores typically generate positive cash
flow in their first full year of operation.
The Company also intends to continue to opportunistically relocate existing
CT stores. These relocations reflect, in most cases, the expiration of an
existing lease coupled with an opportunity to move to a more demographically
and/or physically attractive site. The Company relocated two existing stores
during fiscal 1996.
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<PAGE> 39
RETAIL STORES
CT stores focus on agricultural and agricultural related products. The
Company segments its merchandising mix into seven key product categories:
agricultural products (including tractor parts and accessories), speciality
hardware, lawn and garden products, rural automotive products, workwear, pet
supplies and general consumer products. The Company's "CT" brand products, which
are available in several product categories, represent approximately 8% of total
store sales. Sale of agricultural and related products represent approximately
60% of CT's total net sales. The growth and percentage of total store sales for
each retail product category for fiscal 1994, fiscal 1995, and fiscal 1996, and
a description of each product category, are set forth below:
<TABLE>
<CAPTION>
ANNUAL STORE EARLY PERCENTAGE OF
GROWTH TOTAL STORE SALES
-------------------- -------------------------
PRODUCT CATEGORIES 1994 1995 1996 1994 1995 1996
- ------------------ ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Agricultural (including tractor parts and
accessories)................................... 14.8% 18.5% 20.4% 21.6% 23.2% 24.0%
Speciality Hardware.............................. 15.3 12.0 11.4 21.2 21.6 20.6
Lawn & Garden.................................... 22.2 4.7 18.4 20.2 19.3 19.6
Rural Automotive................................. 9.4 5.1 7.7 16.8 16.0 14.8
Workwear......................................... 17.5 4.9 33.2 7.7 7.3 8.4
Pet Supplies..................................... 23.1 22.5 36.5 4.9 5.4 6.3
General Consumer................................. 22.7 3.7 3.4 7.6 7.2 6.3
---- ---- ---- ----- ----- -----
Total for all stores................... 16.5% 10.1% 16.6% 100.0% 100.0% 100.0%
==== ==== ==== ===== ===== =====
</TABLE>
Agricultural Products. CT's agricultural product line consists of
approximately 6,000 SKUs supplying the needs of the part-time and full-time
farmer, including tractor parts, tillage and harvesting parts, fencing materials
and animal health supplies, including feed. This product line consists largely
of consumable products and other items requiring replacement on a regular basis.
This product line accounted for $47.1 million, $55.9 million and $67.3 million
of the Company's net sales in fiscal years 1994, 1995 and 1996, respectively. CT
emphasizes consumable products and other items requiring replacement on a
regular basis and does not sell heavy equipment such as tractors or combines.
Speciality Hardware. CT's specialty hardware line consists of
approximately 9,000 SKUs, with an emphasis on products with agricultural
applications. These products accounted for $46.4 million, $51.9 million and
$57.9 million of the Company's net store sales in fiscal years 1994, 1995 and
1996, respectively. CT stores carry a broad range of high-quality hardware with
an emphasis on recognized branded professional products, including air
compressors and air tools, welders and accessories, generators, well system
plumbing supplies, tractor and barn paint, hand tools, power tools and
electrical products including outdoor security lighting and motors.
Lawn and Garden Products. CT's lawn and garden products consist of
approximately 2,000 SKUs, including lawn and garden tools, nursery stock,
fertilizers, lawn fencing and weed killers. These products accounted for $44.2
million, $46.3 million and $54.8 million of the Company's net store sales in
fiscal years 1994, 1995 and 1996, respectively. To differentiate itself from
other retailers, CT also stocks a wide selection of lawn mowers including large
horse-powered full-featured riding lawn mowers. CT assembles, tests and delivers
the lawn mowers and sells a full assortment of parts for follow-up service
needs. CT stores also offer seasonal bedding plants, trees and shrubs and lawn
chemicals and fertilizer in large product sizes.
Rural Automotive Products. CT's rural automotive parts and accessories
consist of approximately 3,000 SKUs, including a selection of maintenance items,
batteries and accessories primarily for trucks and tractors as well as farm
equipment, oil and lubricants. These products accounted for $36.6 million, $38.4
million, and $41.4 million of the Company's net sales in fiscal years 1994, 1995
and 1996, respectively. Although CT generally stocks larger product sizes, it
also stocks an assortment of general automotive items as a convenience to its
customers, including oil and lubrication products and anti-freeze.
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<PAGE> 40
Workwear. CT's workwear consists of approximately 2,000 SKUs, including
premium quality insulated outerwear, overalls, flannel shirts and work jeans.
These products accounted for $16.8 million, $17.6 million and $23.5 million of
the Company's net store sales in fiscal years 1994, 1995 and 1996, respectively.
Workwear products are targeted at the specialized needs of its outdoor-oriented
customers who require high quality functional apparel which is not generally
available from general merchandise retailers. The Company has been expanding its
workwear line to include quality non-insulated workwear, bib overalls, twill
pants and hunting clothing.
Pet Supplies. CT's pet supplies consist of approximately 1,000 SKUs,
including dog and cat foods, wild bird feed and rabbit supplies. These products
accounted for $10.6 million, $13.0 million and $17.7 million of the Company's
net store sales in fiscal years 1994, 1995 and 1996, respectively. Pet supplies
sold by CT include economically priced large sizes, such as 50 pound bags of dog
food. CT has been expanding its pet supplies product category.
General Consumer Products. CT's general consumer products line consists of
approximately 1,000 SKUs, including hunting accessories, camping items and
outdoor living needs. These products accounted for $16.6 million, $17.2 million
and $17.8 million of the Company's net store sales in fiscal years 1994, 1995
and 1996, respectively. CT stores also offer seasonal merchandise such as
charcoal grills and coolers in the summer. Management expects that this category
will represent a declining percentage of total store sales due to the Company's
continuing emphasis on agricultural and related product sales.
CT's merchandising strategy differentiates the Company from general
merchandise retailers and home centers and has enabled CT to (i) maintain high
gross margins (approximately 29% and (ii) defend itself against competition,
resulting in a track record of comparable store sales growth since 1989 (when CT
had 34 comparable stores), as set forth below.
<TABLE>
<CAPTION>
COMPARABLE COMPARABLE COMPARABLE
STORE STORE STORE
FISCAL SALES FISCAL SALES FISCAL SALES
YEAR GROWTH(1) YEAR GROWTH(1) YEAR GROWTH(1)
- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
1989 5.8 1992 5.4% 1995 (1.6)(3)
1990 (2) 6.9 1993 4.2 1996(2) 1.0
1991 4.2 1994 10.0
</TABLE>
- ---------------
(1) This data is derived from the company's historical operating results and
does not purport to represent what the Company's results of operations might
be for any future period.
(2) Includes a 53rd week in the fiscal year. For purposes of the growth rates
shown in this table, comparable store sales for this period have been
reduced by 1/53 to facilitate comparison with 52-week years.
(3) Reflects unusual severe weather conditions which resulted resulting in
severe drought conditions during fiscal 1995.
TARGET MARKET
CT's stores are designed primarily to meet the agricultural needs of
farmers operating small to medium-sized farms (i.e., farms typically under 250
acres) as well as hobby gardeners and do-it-yourself customers. While CT's
product line is also potentially applicable to large commercial farming
operations, the Company does not actively service certain aspects of this
market. For example, CT does not sell large, heavy duty farm equipment and
machinery nor commodities (e.g. feed) by the truckload or drop-shipped pallet.
Further, CT does not sell its products on a long-term credit basis, which is
typical in the large commercial farm market.
CT is also focused on capturing sales attributable to such growth in rural
populations. From 1990 to 1994 (the most recent year for which government
statistics are currently available), population growth in this target market
exceeded population growth in the metropolitan areas. Management believes this
population growth will continue to lead to increased interest in part-time
farming, expanding the customer base and usage of its stores.
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<PAGE> 41
STORE OPERATIONS
The Company utilizes large and small store formats in order to enable
management to enhance CT's return on investment in light of varying population
density. The Company's small stores average 11,000 square feet of indoor selling
space and had an average comparable store sales of $2.5 million in fiscal 1996.
The large stores average 22,000 square feet of indoor selling space and had
average comparable store sales of $4.4 million in fiscal 1996. Small stores
generally carry a smaller selection of workwear and seasonal and other general
consumer products than large stores. In addition, the Company looks for store
sites that have 15,000 to 20,000 square feet of outdoor selling space. This
outdoor selling space is primarily used for displaying lawn and garden products,
fencing, tractor accessories and livestock watering and feeding equipment.
Both prototype stores are designed to provide CT's customers with ease in
locating desired products and are clean and colorful in order to provide an
overall enjoyable shopping environment. The use of informative directional
signing adds to the ease of the customer's shopping experience. Plan-o-grams are
utilized to set merchandise assortments in the seven core product categories to
ensure uniformity of presentation, ease of shopping for the customer and to
facilitate inventory management and replenishment.
The agricultural products department is prominently featured in each store
and is identified by the parts desks. The parts desk is the focal point for CT's
new and used tractor parts program. In addition, the parts desk enables CT to
offer a high level of customer service, ranging from answering technical
questions regarding various products to the special ordering of hard to find
parts. Each parts desk is managed by the store's agricultural product specialist
who has access to the CT catalog and other inventory sources to quickly obtain
needed parts.
Each store is managed by a store manager who is responsible for all aspects
of the store operations, including the hiring and training of store associates,
work scheduling, inventory control, expense control, customer service and
associate morale. Typically, the store manager is supported by an assistant
manager and core department heads, along with an average of 18 sales associates.
Store operations are coordinated through nine district managers, each of whom is
currently responsible for eleven to fifteen retail stores. In addition, the
Company has developed and implemented consistent store standards, processes and
best practices for the chain.
The Company has established an internal store management training program
which focuses training on store operations, systems, financial matters, human
resources and sales. To support the Company's planned expansion and its
management training programs, the Company has implemented a long-range personnel
plan that provides for internal promotions, coupled with recruitment of college
graduates and hiring of individuals with previous retail and agricultural
experience. Store associates receive training which emphasizes customer service,
sales, product knowledge and store procedures. District managers, store managers
and assistant managers are compensated based on job performance, and all
participate in an incentive program, which is based on the store/district
exceeding a targeted level of profitability. The Company also has established an
incentive program for all store associates that focuses on sales and
profitability.
OTHER OPERATIONS
The CT catalog offers a broad assortment of new, used and rebuilt tractor
parts and agricultural componentry, including approximately 20,000 SKUs. In
fiscal 1996, catalog sales were $7.3 million. The catalog will be distributed
nationally to approximately 550,000 households in rural and agricultural
communities in fiscal 1997. The breadth of this distribution provides the
Company with name recognition among agricultural consumers in areas outside of
its core geographical markets. As a consequence, the Company anticipates some
customer familiarity with the Company when it expands into new areas.
The Company also sells tractor parts and other items, on a wholesale basis,
to agricultural retailers and distributors. In recent years, the Company has
been reducing the number of products offered and the number of customers served
by this unit. In fiscal 1996, the Company's wholesale business generated sales
of $5.4 million.
39
<PAGE> 42
PURCHASING AND DISTRIBUTION
The Company maintains a staff of six merchandise buyers, each of whom is
responsible for specific product categories, at its headquarters in Des Moines,
Iowa. The purchasing and inventory control process is controlled centrally by
the Company's point of sale ("POS") and automatic replenishment systems. See
"-- Corporate Offices and Management Information Systems." The Company purchases
its merchandise from approximately 1,500 vendors, none of which accounted for
more than 10% of the Company's purchases during fiscal 1996. The Company
generally maintains multiple sources of supply for its products in order to
minimize the risk of supply disruption and to improve its negotiating position.
The Company has no long-term contractual commitments with any of its vendors.
The Company operates a 135,000 square-foot distribution center in Des
Moines, Iowa and a 155,000 square-foot distribution center in Youngstown, Ohio,
from which it currently supplies the majority of its retail stores' inventory
needs. The Des Moines facility is used to handle the small part items and to
receive purchases sourced from vendors located in the Midwest. The Youngstown
facility serves primarily as a flow-through distribution station. Approximately
35% of total purchases, consisting mainly of high volume commodity items, are
shipped by vendors directly to individual store locations. Merchandise from the
distribution centers is shipped to each store through supply orders generated by
an automated replenishment system. The Company transports most of its
merchandise to each store once a week from both the distribution centers through
a major contract carrier. The contract carrier's truck fleet delivers all
warehouse shipments and most of the merchandise which is shipped directly from
vendors to store locations.
The Company expects that its current distribution facilities will be
sufficient to accommodate its planned expansion through fiscal 1999.
CORPORATE OFFICES AND MANAGEMENT INFORMATION SYSTEMS
To facilitate the Company's expansion plan and to maintain consistent store
operations, CT has centralized specific functions of its operations, including
accounting, the development of policies and procedures, store layouts, visual
merchandise presentation, inventory management, merchandise procurement and
allocations, marketing and advertising, human resources and real estate. This
centralization effectively utilizes the experience and resources of the
Company's senior management and provides a high level of consistency throughout
the chain.
The Company has invested considerable resources in its management
information and control systems, which were developed beginning in 1981 and have
been expanded and improved yearly. These systems provide support for the
purchase and distribution of merchandise and help to improve the manner in which
the CT stores, the corporate offices and distribution centers are operated. All
CT stores, including all of the acquired Big Bear Stores, use the Company's POS
system to capture sales information at the SKU level with approximately 70% of
the stores using bar code scanning. Through the POS system, the Company can
monitor customer purchases and inventory levels with respect to every item of
merchandise in each store daily. The Company has implemented scanning
capabilities in the receiving process of its distribution centers and current
plans are to expand this to the picking and shipping process. Electronic data
interchange ("EDI") is used to send purchase orders to certain of its largest
suppliers. CT intends to expand its use of EDI to communicate invoicing,
shipments and sales activity to and from most major suppliers.
The Company also has an automated inventory replenishment system which uses
POS information to facilitate the timely replenishment of both the stores and
the warehouses. The sales and inventory information used in this system is
updated on a daily basis. This system also provides for minimum stocking levels
for lower volume items enabling CT to carry a large number of SKUs at a minimum
of inventory carrying expense.
COMPETITION
The Company faces competition primarily from other chain and single-store
agricultural specialty retailers, general merchandise retailers and home
centers. The Company believes that it has successfully
40
<PAGE> 43
differentiated CT stores from general merchandise retailers and home centers.
For example, the Company already competes in approximately 90% of its trading
areas with a Wal-Mart store. However, the Company will continue to face
competition from these businesses, some of which have substantially greater
financial and other resources than the Company. While there are a small number
of large agricultural retail companies in the United States that offer product
lines similar to the Company's, most of their stores do not compete directly in
CT's trading areas. In some trading areas, however, the Company competes with
Tractor Supply Company and Quality Stores, Inc., or small local agricultural
specialty retailers. The Company's expansion plan will likely result in more
direct competition with such competitors. In addition, certain of these
competitors have announced expansion plans.
ADVERTISING AND PROMOTIONS
The Company's primary advertising occurs through the bi-weekly distribution
of approximately 2.5 million color circulars distributed as newspaper inserts,
at CT stores and by direct mail. In order to focus its marketing on the many
farmers in CT's markets, the Company also advertises in geographically zoned
editions of leading farming industry magazines. In addition, the Company runs
periodic special events promoted through local flyers, circulars and radio
advertising.
EMPLOYEES
As of November 2, 1996, CT had approximately 2,492 employees (approximately
1,171 in full-time and approximately 1,321 in part-time positions). The Company
believes that its relations with its employees are good.
PROPERTIES
As of December 31, 1996, the Company had retail stores located in 16 states
as follows:
<TABLE>
<CAPTION>
NUMBER OF
STATE STORES
----- ---------
<S> <C>
New York.......................................... 22
Iowa.............................................. 21
Pennsylvania...................................... 17
Minnesota......................................... 12
Virginia.......................................... 7
Ohio.............................................. 6
Kentucky.......................................... 5
Maryland.......................................... 4
Indiana........................................... 4
Wisconsin......................................... 4
Tennessee......................................... 3
Missouri.......................................... 2
New Jersey........................................ 2
Delaware.......................................... 1
Massachusetts..................................... 1
Vermont........................................... 1
---
Total................................... 112
===
</TABLE>
All of the Company's stores, its corporate headquarters and its two
distribution centers are leased. The Company's corporate headquarters are
located adjacent to its distribution center in Des Moines, Iowa. The Company
generally negotiates retail store leases with an initial term between five and
seven years, with three renewal periods of five years each, exercisable at the
Company's option. In fiscal 1996, the Company paid an average of $5.03 per
square foot in retail store occupancy expenses, including rent, taxes, common
area
41
<PAGE> 44
charges, repairs and maintenance. Rent expenses typically do not vary based on
sales, and generally increase 10-15% at the beginning of each option period.
The Company leases its corporate offices and distribution facility in Des
Moines and 16 of its stores from the owner of the Company prior to 1988, and
certain of his family members and affiliates. The Company believes that, on
average, the rental rates and other terms of these leases are no less favorable
to the Company than could have been obtained from other third party lessors.
Each of these leases is due to expire by their terms on or before fiscal 2006,
subject to options to renew exercisable at the discretion of the Company.
LEGAL PROCEEDINGS
The Company has been notified by the U.S. Environmental Protection Agency
that it may have potential liability for costs associated with the cleanup of a
dumpsite near Owensburg, Kentucky. To date, the only articles of waste
identified as possibly once belonging to the Company are certain empty battery
acid containers. The Company also has been notified that it is a fourth-party
defendant of a Superfund action pending in the United States District Court. The
action alleges the Company contributed retail and office waste which may have
contained hazardous substances to a landfill in Adams County, Pennsylvania. The
Company believes that any liability it might have as a result of these actions
would be as a de minimis contributor and will not have a material adverse effect
on the Company's financial position, liquidity or results of operations.
Moreover, compliance with federal, state and local laws and regulations
pertaining to the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had, and is not
anticipated to have, a material effect upon the Company's financial position,
liquidity or results of operations.
The Company is not a party to any other legal proceedings, other than
routine claims and lawsuits arising in the ordinary course of business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's business,
financial condition, liquidity or results of operations.
PRICE RANGE OF SHARES; DIVIDENDS; BOOK VALUE
The shares of Common Stock are traded in the over-the-counter market and
are quoted on the Nasdaq National Market ("NNM"). The following table sets forth
for the periods indicated the high and low prices per share as reported by the
NNM and the Dow Jones Historical Stock Quote Reporter Service:
<TABLE>
<CAPTION>
PRICE
---------------
HIGH LOW
------ ------
<S> <C> <C>
1995:
First Quarter..................................... $17.25 $14.25
Second Quarter.................................... $16.00 $12.00
Third Quarter..................................... $13.25 $ 9.75
Fourth Quarter.................................... $12.00 $ 8.50
1996:
First Quarter..................................... $11.25 $ 6.75
Second Quarter.................................... $16.25 $10.50
Third Quarter..................................... $14.63 $11.75
Fourth Quarter.................................... $12.50 $ 9.13
1997:
First Quarter..................................... $14.25 $11.50
Second Quarter (through February 27, 1997)........ $14.38 $13.75
</TABLE>
On November 27, 1996, the last day of trading prior to the issuance by the
Company of a press release announcing the execution of the Merger Agreement, the
high and low sale prices for the shares of the Common Stock on the NNM were
$12.25 and $11.50. On December 23, 1996, the day Acquiror acquired the shares of
Common Stock pursuant to the Second Disposition, the reported high and low sales
prices for the
42
<PAGE> 45
shares of the Common Stock on the NNM were $13.75 and $13.63. STOCKHOLDERS ARE
URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THEIR SHARES OF COMMON STOCK.
On February 27, 1997, there were 10,670,892 shares of Common Stock
outstanding and approximately 1,000 stockholders of record.
The Company has not paid any dividends on its shares of Common Stock. After
the Merger, the Company will be a wholly-owned subsidiary of Holding. Holding is
a holding company with no significant assets or operations other than its
investment in the Company. After the closing, Holding's primary source of funds
will be dividends and other advances and transfers of funds from the Company.
The Company's ability to make dividends and other advances and transfer of funds
will be subject to the terms of the New Credit Facility, the Indenture and other
agreements to which the Company becomes a party from time to time. The Indenture
and the New Credit Facility permit the Company (subject to certain conditions)
to pay cash dividends to Holding in an amount sufficient to permit Holding to
fund certain expenses incurred in the ordinary course of business.
The book value of the outstanding shares of Common Stock at the close of
its most recent fiscal year ended November 2, 1996 was $8.51.
43
<PAGE> 46
OWNERSHIP OF COMMON STOCK
The following table sets forth information regarding the beneficial
ownership of the Common Stock as of January 2, 1997 and the pro forma beneficial
ownership of the voting stock of Holding, giving effect to the Merger and the
transactions contemplated thereby, by each person known to the Company to be the
beneficial owner of more than five percent of the Common Stock, each director of
the Company, each executive officer of the Company and all directors and
executive officers of the Company as a group. Upon consummation of the Merger,
the Company will become a wholly owned subsidiary of Holding. Except as
otherwise indicated, the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares of Common Stock. The business address for each
executive officer of the Company is care of the Company. As a result of the
Merger, Holding will own beneficially all of the issued and outstanding shares
of the Company.
<TABLE>
The Company believes it is the present intention of each director and
executive officer of the Company to vote all their shares of Common Stock in
favor of the Merger.
<CAPTION>
CT PRO FORMA HOLDING
------------------------ ------------------------
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED PERCENT OWNED PERCENT
- ---------------------------------------------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
JWC Acquisition I, Inc.
CT Holding, Inc.
JWC Equity Funding, Inc.
J.W. Childs Equity Partners, L.P.
J.W. Childs Advisors, L.P.
J.W. Childs Associates, L.P.
J.W. Childs Associates, Inc.(1)..................... 7,208,551 66.1% 804,984 85.1%
James T. McKitrick(2)............................... 307,770 2.8 42,918 4.4
Dean Longnecker(3).................................. 102,194 * 16,667 1.8
John W. Childs(1)................................... 7,208,551 66.1 838,427 88.6
Jerry D. Horn(1).................................... 7,208,551 66.1 813,318 85.9
c/o General Nutrition Companies, Inc.
921 Penn Avenue
Pittsburgh, PA 15222
Steven G. Segal(1).................................. 7,208,551 66.1 813,516 86.0
Adam L. Suttin(1)................................... 7,208,551 66.1 808,180 85.4
Jeffrey D. Swartz................................... 0 * 1,417 *
c/o The Timberland Company
200 Domain Drive
Stratham, NH 03885
William E. Watts.................................... 0 * 833 *
c/o General Nutrition Companies, Inc.
921 Penn Avenue
Pittsburgh, PA 15222
Habib Y. Gorgi(4)................................... 0 * 72,231 7.6
George D. Miller(5)................................. 60,000 * 8,333 *
Don Walter(6)....................................... 26,850 * 0 *
All Directors and executive officers as a group (6
persons)(7)....................................... 7,705,365 67.9 884,630 89.4
- ---------------
<FN>
* Less than 1.0%
(1) Represents 6,978,028 CT shares and 785,229 Holding shares owned by Acquiror
and an additional 230,523 CT shares and 19,756 non-voting Holding shares
(which are convertible to voting shares at any time) subject to warrants
owned by Acquiror and JWC Equity Funding, Inc., respectively, exercisable
within 60 days. CT Holding, Inc., JWC Equity Funding Inc., J.W. Childs
Equity Partners, L.P., J.W. Childs Advisors L.P., J.W. Childs Associates,
L.P., J.W. Childs Associates, Inc. and Messrs. Childs,
</TABLE>
44
<PAGE> 47
Horn, Segal and Suttin may each be deemed to beneficially own shares owned
or deemed beneficially owned by Acquiror or JWC Equity Funding. Each of the
foregoing, except Mr. Horn, has a business address c/o J.W. Childs
Associates, L.P., One Federal Street, Boston, MA 02110.
(2) Includes 305,370 CT shares and 42,918 Holding shares subject to stock
options exercisable within 60 days. Includes 2,400 CT shares beneficially
owned by Mr. McKitrick's wife, as to which Mr. McKitrick disclaims
beneficial ownership.
(3) Includes 19,565 CT shares subject to stock options exercisable within 60
days. Includes 11,000 CT shares beneficially owned by Mr. Longnecker's wife
and 200 CT shares beneficially owned by Mr. Longnecker's son, as to which
Mr. Longnecker disclaims beneficial ownership.
(4) Represents 43,958 Holding shares, 26,638 non-voting Holding shares (which
are convertible to voting shares at any time) and warrants to acquire an
additional 1,635 non-voting Holding shares, exercisable within 60 days and
then convertible into voting shares at any time, held by Chisholm Partners
III, L.P., Fleet Equity Partners VII, L.P., Fleet Growth Resources, Inc. or
Kennedy Plaza Partners, all affiliates of Fleet. Mr. Gorgi may be deemed to
beneficially own shares beneficially owned by any of the foregoing. Mr.
Gorgi and each of the foregoing has a business address at 50 Kennedy Plaza,
Providence, RI 02903.
(5) Includes 60,000 CT shares subject to stock options exercisable within 60
days.
(6) Includes 26,850 CT shares subject to stock options exercisable within 60
days.
(7) Includes 230,523 CT shares and 19,756 non-voting Holding shares subject to
warrants, and 459,635 CT shares and 42,918 Holding shares subject to stock
options exercisable within 60 days.
CERTAIN TRANSACTIONS IN THE COMMON STOCK
As of the date hereof, Childs and its affiliates beneficially own 7,208,551
(approximately 66.1%) of the outstanding shares of Common Stock all of which
were acquired pursuant to the Securities Purchase Agreement and the Management
Letter Agreements. See "RELATED AGREEMENTS -- Securities Purchase Agreement; and
- -- Management Letter Agreements." The Company has not made any purchases of
Common Stock or engaged in any transaction with respect to shares of Common
Stock during the past two fiscal years, other than the issuance of shares of
Common Stock in the ordinary course of business pursuant to the exercise of
stock options.
With respect to Mr. McKitrick, in March 1995, Mr. McKitrick's spouse
purchased 700 shares of Common Stock for $12.95 per share, and 200 shares of
Common Stock for $13.00 per share, which shares Mr. McKitrick may be deemed to
beneficially own. In addition, in March 1996, Mr. McKitrick's spouse sold 500
shares of Common Stock for $15.50 per share. With respect to Mr. Longnecker, in
March 1995, Mr. Longnecker's spouse purchased 1,000 shares of Common Stock for
$13.00 per share, which shares Mr. Longnecker may be deemed to beneficially own.
45
<PAGE> 48
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and position of each of the
Company's directors, directors designate, executive officers and other
significant employees. All of the Company's officers are elected annually and
serve at the discretion of the Board of Directors of the Company. As of February
11, 1997, Mr. Francis J. Palamara, Mr. Glenn Kraiss and Mr. Daryl Landsdale each
resigned from the Company's Board of Directors. Acquiror has not yet exercised
its rights to designate any directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
James T. McKitrick............... 51 President, Chief Executive Officer,
Director
Dean Longnecker.................. 49 Executive Vice President, Finance,
Secretary, Director
John W. Childs................... 55 Director Designate
Jerry D. Horn.................... 59 Director Designate and Chairman Designate
Steven G. Segal.................. 36 Director
Adam L. Suttin................... 29 Director
Jeffrey B. Swartz................ 36 Director Designate
William E. Watts................. 43 Director Designate
Habib Y. Gorgi................... 40 Director Designate
George D. Miller................. 54 Senior Vice President, Merchandising
Denny Starr...................... 43 Senior Vice President, Finance
Jeffrey A. Stanton............... 44 Vice President, Human Resources
David E. Enos.................... 36 Vice President, Management Information
Systems/Logistics
Daniel Cunningham................ 60 Vice President, New, Used and Rebuilt
Tractor Parts
Jack P. Fiechtner................ 50 Vice President, Advertising and Marketing
</TABLE>
James T. McKitrick, President and Chief Executive Officer, joined the
Company in July 1992. He has over 30 years experience in retailing, including 20
years at Kmart Corporation. Prior to joining CT, Mr. McKitrick was President and
Chief Executive Officer of Builder's Emporium, a California-based home
improvement center chain. Previously, he was with Ames Department Stores from
1987 through 1990, where he held the positions of Executive Vice President,
Chairman of Zayre Discount Store Division and President and Chief Executive
Officer of G.C. Murphy Division, a $900 million variety store chain. Mr.
McKitrick also served as President and Chief Executive Officer of Warehouse
Club, Inc. from 1986 through 1987 and Executive Vice President of Merchandising
for T.G. & Y. Stores Company from 1984 through 1986. From 1963 through 1984, Mr.
McKitrick was with the Kmart Corporation, where his most recent position was
Director of Merchandising.
Dean Longnecker, Executive Vice President of Finance, has held his current
position since 1995. He joined the Company in 1980 as Controller. Mr. Longnecker
was employed at Payless Cashways form 1973 until 1980, most recently as
Treasurer. He received a B.S. from Iowa State University in 1970 and C.P.A. in
1972.
John W. Childs has been President of J.W. Childs Associates, L.P. since
July 1995. Prior to that time, he was an executive at Thomas H. Lee Company form
May 1987, most recently holding the position of Senior Managing Director. He is
a director of Big V Supermarkets, Inc., Cinnabon, Inc., The Edison Project,
Inc., Personal Care Group, Inc. and Select Beverages, Inc.
Jerry D. Horn has been Chairman of the Board of General Nutrition
Companies, Inc., a 3,000 store vitamin and nutritional supplement retail chain
operating under the GNC name, since October 1991, and prior to that, was
President and Chief Executive Officer since 1985. Mr. Horn is also Chairman of
the Board of Cinnabon, Inc. and has been a Managing Director of J.W. Childs
Associates, L.P. since July 1995.
Steven G. Segal has been a Managing Director of J.W. Childs Associates,
L.P. since July 1995. Prior to that time, he was an executive at Thomas H. Lee
Company from August 1987, most recently holding the
46
<PAGE> 49
position of Managing Director. He is a director of Big V Supermarkets, Inc.,
Cinnabon, Inc. and Fitz and Floyd, Inc.
Adam L. Suttin has been a Vice President of J.W. Childs Associates, L.P.
since July 1995. Prior to that time, he was an executive at Thomas H. Lee
Company from August 1989, most recently holding the position of Associate. He is
a director of Personal Care Group, Inc.
Jeffrey B. Swartz has been Chief Operating Officer of Timberland Co., a
manufacturer and marketer of branded footwear and apparel, since May 1991, and
has worked for that company in various positions since June 1986.
William E. Watts has been President, Chief Executive Officer and a Director
of General Nutrition Companies, Inc. since October 1991, and prior to that, held
various positions with its predecessor since 1984.
Habib Y. Gorgi is President of Fleet Growth Resources, Inc. and a Marketing
Partner of Fleet Equity Partners and Chisholm Partners and has worked at Fleet
Equity Partners since 1986. He is a director of La Petite Academy, Diners
Industrial Group, Rosina Food Products, Savage Sports Corporation, Simonds
Industries and Walin-Rov, Inc.
George D. Miller, Senior Vice President, Merchandising, joined the Company
in June 1996. Previously, he was Vice President, Merchandising, with Home Base,
a California-based home improvement center chain from 1993 through 1996. Mr.
Miler was employed by Sears, Roebuck & Company from 1968 through 1993, most
recently as Senior Merchandise Manager. He received B.S. and M.B.A. degrees from
Indiana University.
Denny Starr, Senior Vice President, Finance, joined the Company in October
1989 as Assistant Controller. He previously served as Assistant Controller of
the Witten Group, a holding company with operations in manufacturing, real
estate and finance, from 1986 through 1989. He was an Audit Manager with
McGladrey & Pullen from 1982 until 1986. Mr. Starr received his B.A. from the
University of lowa in 1982 and C.P.A. in 1982.
Jeffery A. Stanton, Vice President Human Resources, joined the Company in
June 1992. Previously, he was with R.R. Donnelly & Sons and Meredith/Burda
Corporation from 1985 through 1992, as well as Reichardt's Inc., a specialty
retailer, from 1972 through 1985. Mr. Stanton received a B.B.A. degree from the
University of Iowa in 1972.
David E. Enos, Vice President Management Information Systems/Logistics, has
held his current position since 1990. Mr. Enos joined CT in 1981. Previously, he
was employed at Meredith/Burda Corporation from 1979 through 1981. He received
an A.A.S. degree in Data Processing from DMACC in 1979.
Daniel Cunningham, Vice President, New, Used and Rebuilt Tractor Parts,
joined the Company in 1958. Mr. Cunningham has held several positions within the
Company, including store operations, mail order and the Company's tractor parts
area. Mr. Cunningham was promoted to his current position in 1991.
Jack P. Fiechtner, Vice President Advertising and Marketing, joined the
Company in July 1995. He was previously with Kmart Corporation for 27 years,
where his most recent position was Director, Advertising.
47
<PAGE> 50
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is selected consolidated financial information of the
Company. The income statement information of the Company for fiscal 1992 through
fiscal 1996, and the balance sheet data as of November 2, 1996 have been derived
from the Company's audited financial statements for those periods. The
information presented below should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the financial statements and notes thereto included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------------
NOVEMBER 2, OCTOBER 28, OCTOBER 29, OCTOBER 30, OCTOBER 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING DATA:
Net Sales......................... $293,020 $251,703 $231,064 $202,589 $198,055
Income from continuing
operations...................... 8,744 8,185 5,181 3,270 1,464
OTHER DATA:
Income per share from continuing
operations...................... $ 0.80 $ 0.74 $ 0.66 $ 0.42 $ 0.19
Number of stores at end of
period(1)....................... 111 66 55 50 47
Net retail store sales per square
foot of indoor selling space for
comparable stores(2)............ $ 222 $ 224 $ 240 $ 218 $ 210
Comparable store sales increases
(decreases)(3).................. 1.0% (1.6%) 10.0% 4.2% 5.4%
Ratio of earnings to fixed
charges(4)...................... 5.3x 5.8x 2.5x 2.0x 1.4x
BALANCE SHEET DATA:
(at end of period)
Working Capital................. $ 63,803 $ 62,496 $ 50,442 $ 37,055 $ 34,167
Total assets.................... 159,238 149,977 139,416 113,241 111,446
Long-term debt, less current
portion(5)................... 17,341 16,862 16,959 37,536 37,881
Stockholders' equity............ 90,063 81,277 75,735 24,287 22,840
</TABLE>
- ---------------
(1) Net of three store closings in fiscal 1994.
(2) Comparable store sales per square foot is calculated by dividing store sales
by total indoor selling square footage for stores open and operated by the
Company at least twelve months in each period.
(3) Percentage change in store sales for the same stores for the prior years for
stores open and operated by CT for at least twelve months each year. The
1.0% increase in comparable store sales in 1996 has been adjusted to reflect
a comparable 52-week fiscal year. Comparable store sales grew by 2.9%
without such adjustment.
(4) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing costs, and 20.0% of the rent expense from
operating leases which the Company believes is a reasonable approximation of
the interest factor included in the rent.
(5) Excluding long-term debt from discontinued operations.
48
<PAGE> 51
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operation should be read in conjunction with the selected consolidated financial
data and the consolidated financial statements of the Company and related notes
thereto.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's Statement of Income expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
OCTOBER 29, OCTOBER 28, NOVEMBER 2,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0%
Gross profit..................................... 30.1 29.5 29.3
Selling, general and administrative expenses..... 23.6 23.2 23.3
Amortization of intangibles...................... 0.4 0.3 0.3
----- ----- -----
Operating income................................. 6.1 6.0 5.7
Interest expense................................. 2.1 0.5 0.6
----- ----- -----
Income before income taxes....................... 4.1 5.5 5.1
Income taxes..................................... 1.8 2.3 2.1
----- ----- -----
Income from continuing operations................ 2.2% 3.2% 3.0%
===== ===== =====
</TABLE>
COMPARISON OF THE YEAR ENDED NOVEMBER 2, 1996 TO THE YEAR ENDED OCTOBER 28, 1995
Net Sales for the fiscal year ended November 2, 1996 were $293.0 million,
an increase of $41.3 million, or 16.4%, as compared to net sales for the fiscal
year ended October 28, 1995 of $251.7 million. This increase was due to a
comparable store sales increase of approximately 1.0% (net of sales attributable
to an extra (53rd) week in fiscal 1996), sales during such extra week, the
opening of 14 new stores in fiscal 1996, a full year of operations for the
eleven new stores opened in fiscal 1995 as compared to a partial year for those
stores during fiscal 1995 and the acquisition of the Big Bear stores in May
1996. The increase in comparable store sales was primarily due to a comparable
store sales increase of 13.8% during the fourth quarter of fiscal 1996 as
compared to the fourth quarter of fiscal 1995. This increase in comparable store
sales during the fourth quarter was the result of normal weather conditions
during fiscal 1996 as compared to unusual and severe drought conditions during
fiscal 1995.
Gross profit for fiscal 1996 was $85.8 million, an increase of $11.4
million, or 15.4%, as compared to $74.4 million for fiscal 1995. Gross profit as
a percentage of sales was 29.3% for fiscal 1996, as compared to 29.5% for fiscal
1995. This decrease is primarily attributable to the sale of lower margin
product in the Big Bear stores prior to conversion to the CT format. Management
expects that the completion of the conversion of the Big Bear stores to the CT
store format will improve gross margins as a percentage of sales.
Selling, general, and administrative expenses for fiscal 1996 were $68.2
million, an increase of $9.9 million, or 17.0%, from $58.3 million for fiscal
1995. This increase was due primarily to costs related to new store openings and
costs related to stores acquired and operated in the Big Bear acquisition.
Selling, general, and administrative expenses as a percentage of sales increased
to 23.3% in fiscal 1996 as compared to 23.2% in fiscal 1995. This increase is
attributable to higher selling, general and administrative expenses as a
percentage of sales at the new Big Bear stores, partially offset by a decrease
in selling, general and administrative expenses as a percentage of sales at CT's
existing stores. Management expects that the completion of the conversion of the
Big Bear stores to the CT format will decrease selling, general and
administrative expenses as a percentage of sales.
Amortization of intangibles was $0.9 million for fiscal 1996 and $0.9
million for 1995.
49
<PAGE> 52
Operating income for fiscal 1996, was $16.7 million, an increase of $1.5
million, or 9.5%, as compared to $15.2 million for fiscal 1995. Operating income
as a percentage of sales decreased to 5.7% in fiscal 1996 from 6.0% in fiscal
1995. The decrease resulted from the factors affecting sales, gross profit, and
selling, general and administrative expenses discussed above.
Interest expense for fiscal 1996 was $1.7 million, an increase of $0.4
million, or 27.7%, as compared to $1.3 million for fiscal 1995. This increase
was primarily due to an increase in interest related to short-term borrowings
under the Company's credit agreement.
Income tax expense related to continuing operations for fiscal 1996, was
$6.2 million, an increase of $0.5 million, or 8.8%, as compared to $5.7 million
for fiscal 1995. Income taxes as a percentage of pretax earnings were 41.7% in
fiscal 1996 as compared to 41.1% in fiscal 1995. This increase was primarily due
to the effect of a reduction of prior year over-accrual in fiscal 1995.
RECENT RESULTS
Based upon preliminary unaudited results for the three months ending
February 1, 1997, the Company's net sales were $71.5 million, an increase of
$1.5 million or 2.2%, as compared to the three months ending January 27, 1996.
This increase is primarily attributed to the addition of new stores and the
acquisition of the Big Bear stores, each of which occurred during the 1996
fiscal year, offset by a decline in comparable store sales. For the three months
ending February 1, 1997 versus the same period for the prior fiscal year, the
Company's EBITDA grew from $3.5 million to $3.7 million, an increase of 5.0%,
while net income decreased from $1.2 million to $1.1 million. Comparable stores
sales, which exclude the recently acquired Big Bear stores, declined by 11.9%
versus the same period for the prior fiscal year. The revenue of the six Big
Bear stores that were converted to the CT format at the beginning of fiscal 1997
increased by 16.4% during the three months ending February 1, 1997 as compared
to same period for the prior fiscal year. Based upon its analysis of sales by
product line, management believes that the decreases in comparable store sales
is primarily attributable to mild Northeastern winter weather conditions
compared to the previous fiscal year. The majority of the Company's sales occur
in the second and third quarters of its fiscal year, and management does not
believe that comparable store sales for the three months ending February 1, 1997
are necessarily indicative of results for the entire 1997 fiscal year. In the
preparation of the unaudited financial data for the three month periods, all
adjustments (consisting of normal recurring accruals) have been made which are,
in the opinion of management, necessary for the fair and consistent presentation
such of financial data.
COMPARISON OF THE YEAR ENDED OCTOBER 28, 1995 TO THE YEAR ENDED OCTOBER 29, 1994
Net Sales for the fiscal year ended October 28, 1995 were $251.7 million,
an increase of $20.6 million, or 8.9%, as compared to net sales for the fiscal
year ended October 29, 1994 of $231.1 million. This increase was due to the
opening of eleven new stores in fiscal 1995 and a full year of operations for
the eight new stores opened in fiscal 1994 partially offset by a comparable
store sales decrease of 1.6% and the closing of three stores during the latter
part of fiscal 1994. The 1.6% decrease in comparable store sales was primarily a
result of unusual and severe drought conditions throughout fiscal 1995 and
generally unfavorable economic conditions in the Northeast where most of the
Company's retail stores were located.
Gross profit for fiscal 1995 was $74.4 million, an increase of $4.9
million, or 6.9%, as compared to $69.5 million for fiscal 1994. Gross profit as
a percentage of sales was 29.5% for fiscal 1995, as compared to 30.1% for fiscal
1994. The decrease in gross profit percentage was primarily the result of
increased promotional sales in fiscal 1995 at lower gross margins, partially
offset by improvements in distribution costs.
Selling, general and administrative expenses for fiscal 1995 was $58.3
million, an increase of $3.8 million, or 6.9%, as compared to $54.5 for fiscal
1994. This increase was due primarily to increased costs related to new store
openings, partially offset by a reduction in costs due to the closing of three
stores in fiscal 1994 and a reduction in incentive compensation costs. Selling,
general and administrative expenses as a percentage of sales decreased to 23.2%
in fiscal 1995 as compared to 23.6% in fiscal 1994, reflecting the decrease in
incentive compensation expenses as a percentage of sales, partially offset by
higher selling, general and administrative expenses as a percentage of sales in
new stores.
Amortization of intangibles was $0.9 million for fiscal 1995 and $0.8
million for fiscal 1994.
50
<PAGE> 53
Operating income for fiscal 1995 was $15.2 million, an increase of $1.0
million, or 7.5%, as compared to $14.2 for fiscal 1994. Operating income as a
percentage of sales decreased to 6.0% in fiscal 1995 from 6.1% in fiscal 1994.
The decrease resulted from the factors affecting sales, gross profit, and
selling, general and administrative expenses discussed above.
Interest expense for fiscal 1995 was $1.3 million, a decrease of $3.5
million, or 72.7% as compared to $4.8 million for fiscal 1994. This was
primarily due to the reduction in long-term debt resulting from the debt prepaid
with the proceeds from the initial public offering completed in October 1994.
Income tax expense related to continuing operations for fiscal 1995 was
$5.7 million, an increase of $1.5 million, or 36.3%, as compared to $4.2 million
for fiscal 1994. Income taxes as a percentage of pretax earnings were 41.1% in
fiscal 1995, as compared to 44.8% in fiscal 1994. This decrease was primarily
due to the effect of a proportionately lower amount of non-deductible goodwill
amortization and a reduction of prior year over-accrual.
Discontinued operations represent the results of operations of the
Company's former subsidiary, Herschel Corporation ("Herschel"), a manufacturer
and distributor of non-original equipment sickle bar cutting parts, tractor
parts, tillage and other agricultural componentry. Discontinued operations
generated net income of $0.8 million in fiscal 1995, as compared to a net loss
of $0.7 million in fiscal 1994. The sale of Herschel, which was completed on
December 6, 1995, resulted in an estimated net loss on the sale of $3.4 million,
net of an income tax benefit of $0.7 million, which was reflected in the
Company's financial statements for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
In addition to cash to fund operations, the Company's primary on-going cash
requirements are those necessary for the Company's expansion programs, including
inventory purchases and capital expenditures, and debt service, including
payment of interest in the Senior Notes. The Company's primary sources of
liquidity are funds provided from operations, borrowings pursuant to its credit
facilities and short-term trade credit.
On November 2, 1996, the Company had working capital of $63.8 million, an
increase of $1.3 million as compared to working capital of $62.5 million on
October 28, 1995. This increase resulted primarily from an increase in inventory
and a decrease in borrowings under the Company's revolving credit facility,
partially offset by a decrease in the net assets of Herschel and an increase in
accounts payable. On November 2, 1996, the Company's inventories were $107.2
million, an increase of $13.3 million as compared to $93.9 million at October
28, 1995. This increase reflected inventory for new stores and inventory for the
stores acquired in the Big Bear acquisition. The increase in inventory was
funded with cash from operations, short-term trade credit and proceeds of
approximately $13.5 million from the sale of the net assets of Herschel,
including the repayment of approximately $2.1 million in advances.
Continuing operations (before payment of income taxes) generated $10.3
million of net cash in fiscal 1996, used $1.1 million of net cash in fiscal 1995
and generated $0.6 million of net cash in fiscal 1994. The increase in net cash
generated in fiscal 1996, as compared to fiscal 1995, resulted primarily from a
smaller increase in inventory and an increase in income from continuing
operations before income taxes, partially offset by a reduction in accounts
payable in fiscal 1996, as compared to an increase in fiscal 1995. The decrease
in net cash generated in fiscal 1995, compared to fiscal 1994, resulted
primarily from an increase in inventory exceeding the increase in accounts
payable, offset by an increase in income from continuing operations before
income taxes.
The Company's capital expenditures were $8.8 million and $6.3 million for
fiscal 1996 and 1995, respectively. The majority of capital expenditures were
for store fixtures, equipment and leasehold improvements for new and existing
stores. The Company expects its capital expenditures for fiscal 1997 to be
approximately $5.3 million in connection with renewal and replacement costs at
existing stores and distribution centers, conversion of the Big Bear stores and
the opening of two new stores.
The Company completed the acquisition of 31 store locations and certain net
operating assets of Big Bear on May 31, 1996. These stores average 11,000 square
feet and are being converted the CT format with a projected completion date of
Spring 1997. The Big Bear stores average approximately 11,000 square feet and
fit the Company's small store prototype. The total investment in the 31 stores,
including acquisition cost, additional capital investments and working capital
needs and conversion costs is expected to be approximately
51
<PAGE> 54
$12.0 million. In addition, the conversion process requires each store to be
closed for approximately three weeks. The acquisition and the additional
investments made were funded with cash from operations and borrowings under the
Company's revolving credit facility. The Company anticipates utilizing the New
Credit Facility and cash from operations to fund the additional investments.
On November 27, 1996, the Board of Directors of the Company approved, and
the Company entered into the Merger Agreement. The Merger Agreement provides
that following the acquisition by Childs of all of the Company shares held by
the BCC Funds pursuant to the Securities Purchase Agreement, Acquiror will merge
with and into the Company, and Childs will acquire the remaining shares of the
Company held by public stockholders for $14.25 per share in cash. The
consummation of the Merger is subject to the satisfaction of certain conditions
including, among other things, the availability of sufficient funds to
consummate the Merger.
Pursuant to an agreement executed contemporaneously with the Merger
Agreement between Childs and the BCC Funds which owned 64.5% of the Company's
outstanding common stock, the BCC Funds sold 1,046,214 shares of the Company's
common stock (representing 9.9% of the outstanding shares) to Childs for a cash
consideration of $14.00 per share, and agreed to sell their remaining shares to
Childs for $14.00 per share in cash. The agreement also provided that the BCC
Funds would agree, immediately following the conclusion of the stock sale, to
the prepayment by the Company (without payment of any prepayment premium) of the
Company's 7% convertible notes with a face amount of $16 million. In connection
with the purchase of the balance of the BCC Funds' shares, certain members of
management agreed to sell 146,299 shares to Childs for a cash consideration of
$14.00 per share (together with the purchases from the BCC Funds, the
"Securities Purchase"). The Second Disposition and related sales and prepayment
were consummated on December 23, 1996 and the purchases from the Initial
Management Investors were consummated on January 2, 1997.
The Company's former revolving credit facility contained a commitment,
expiring February 1, 1998, to provide revolving loans of $25.0 million from
November 1 through May 31 of each year and $12.0 million from June 1 through
October 31 of each year. At November 2, 1996 and October 28, 1995 the Company
had $3.7 million and $6.8 million, respectively, of borrowings outstanding under
such revolving credit facility. The maximum amount of borrowings outstanding
during fiscal 1996 and 1995 was $11.9 million and $15.6 million, respectively.
On December 23, 1996, such revolving credit facility was replaced by the New
Credit Facility, which consists of an $8 million five-year term facility, which
was fully funded, and a $30 million revolving credit facility, under which $17.3
million was outstanding as of December 23, 1996. The Company anticipates that
approximately $1.8 million of the proceeds of the offering will be used to repay
revolving borrowings under the New Credit Facility.
The New Credit Facility will mature on December 31, 2001. Borrowings under
the New Credit Facility will bear interest at rates based upon prime or
Eurodollar rates plus an applicable margin. Loans under the New Credit Facility
will be guaranteed by any and all future subsidiaries of the Company and will be
accrued by security interests in substantially all of the assets of the Company
and its subsidiaries, as well as the capital stock of the Company. As of
December 31, 1996, the interest rate on the New Term Loan was 7.89% and the
interest rate on the New Revolving Credit Facility was 7.85%.
The Company anticipates that approximately $179 million in funds will be
required in connection with the Merger and related transactions for (i) the
consummation of the purchases of Common Stock pursuant to the Securities
Purchase Agreement and the Management Letter Agreements; (ii) the consummation
of the Merger, (iii) the repayment of the existing long-term debt of the Company
and (iv) the payment of fees and expenses associated with the Merger. The
Company expects to obtain the necessary funds from (i) the 69.1 million of
equity, (ii) the issuance and sale of the Senior Notes and (iii) borrowings
under the New Credit Facility.
After the Merger, the Company will be a wholly-owned subsidiary of Holding.
Holding is a holding company with no significant assets or operations other than
its investment in the Company. After the closing, Holding's primary source of
funds will be dividends and other advances and transfers of funds from the
Company. The Company's ability to make dividends and other advances and transfer
of funds will be subject to the terms of the New Credit Facility, the Indenture
and other agreements to which the Company becomes
52
<PAGE> 55
party from time to time. The Indenture and the New Credit Facility permit the
Company (subject to certain conditions) to pay cash dividends to Holding in an
amount sufficient to permit Holdings to fund certain expenses incurred in the
ordinary course of business.
The Company anticipates that its principal uses of cash following the
Merger will be working capital requirements, debt service requirements and
capital expenditures, as well as expenditures relating to acquisitions. Based
upon current and anticipated levels of operations, the Company believes that its
cash flow from operations, together with amounts available under the New Credit
Facility, will be adequate to meet its anticipated requirements in the
foreseeable future for working capital, capital expenditures and interest
payments. The Company expects that if it were to pursue a significant
acquisition, it would arrange prior to the acquisition any additional debt or
equity financing required to fund the acquisition. No discussions with respect
to any significant acquisition are ongoing.
There can be no assurance, however, that CT will continue to generate
sufficient cash flow from operations in the future to service its debt, and the
Company may be required to refinance all or a portion of its debt, obtain
additional financing or reduce its capital spending. There can be no assurance
that any such refinancing would be possible or that any additional financing
could be obtained. The inability to obtain additional financing could have a
material adverse effect on the Company.
SEASONALITY
Unlike many specialty retailers, the Company has historically generated
positive operating income in each of its four fiscal quarters. However, because
the Company is an agricultural specialty retailer, its sales necessarily
fluctuate with the seasonal needs of the agricultural community. The Company
responds to this seasonality by attempting to manage inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
to a degree its use of part-time employees. Historically, the Company's sales
and operating income have been highest in the third quarter of each fiscal year
due to the farming industry's planting season and the sale of seasonal products.
Working capital needs are highest during the second quarter. The Company expects
these trends to continue for the foreseeable future.
INFLATION
Management does not believe its operations have been materially affected by
inflation.
FINANCIAL INFORMATION
The Company's audited financial statements for the years ended November 2,
1996, October 28, 1995, and October 29, 1994 are included as part of this Proxy
Statement.
FEES AND EXPENSES
The Merger Agreement provides that Childs, Acquiror and Holding on the one
hand, and the Company, on the other hand, will bear their respective expenses
and costs in connection with the Merger Agreement and the transactions
contemplated thereby. See "THE MERGER AGREEMENT -- Other Provisions in the
Merger Agreement -- Expenses". The expenses incurred and to be incurred by the
Company, Childs, Acquiror and Holding in connection with the Merger Agreement,
the Merger and the related transactions are estimated as follows:
<TABLE>
<S> <C>
Investment Banking Fees............................... $ 2,152,000
Financing and Commitment Fees......................... 5,034,000
Advisory and Financing Fee............................ 1,702,000
Professional Fees..................................... 1,710,000
Filing Fees........................................... 41,000
Printing and Mailing Costs............................ 100,000
Miscellaneous......................................... 261,000
-----------
Total....................................... $11,000,000
===========
</TABLE>
53
<PAGE> 56
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP was the Company's independent auditor for the most recent
year. Representatives of Ernst & Young LLP are not expected to attend the
Special Meeting.
INFORMATION CONCERNING CHILDS, HOLDING AND ACQUIROR
Acquiror is a wholly owned subsidiary of Holding, which is a subsidiary of
Childs. Acquiror and Holding are corporations organized under the laws of
Delaware for the purpose of the Merger and are not engaged in any business
unrelated to the Merger and the transactions contemplated thereby. The financial
statements of Holding and Acquiror are not included herein because they have no
material assets (other than shares of Common Stock).
The principal executive offices of Childs, Holding and Acquiror are located
at One Federal Street, Boston, MA 02110 and their telephone number is (617)
753-1100.
Certain information regarding the directors and officers of Acquiror and
Holding and the general partner of Childs is set forth in Exhibit 6 to this
Proxy Statement.
OTHER MATTERS TO COME BEFORE THE MEETING
No other matters are intended to be brought before the meeting by the
Company nor does the Company know of any matters that are expected to be
properly brought before the meeting by others. If any other matter should come
before the Special Meeting, the persons named in the enclosed proxy will have
discretionary authority to vote the shares of Common Stock thereby represented
in accordance with their best judgment.
If the Merger is not consummated, the Company will hold its 1997 Annual
Meeting of Stockholders in accordance with the Company's By-laws and the DGCL.
Stockholder proposals intended to be presented at the 1997 Annual Meeting of the
Stockholders must have been received by the Company not later than October 18,
1996 for inclusion in the proxy materials for the 1997 Annual Meeting of
Stockholders.
By Order of the Board of Directors,
G. DEAN LONGNECKER
Executive Vice President, Finance
and Secretary
Des Moines, Iowa
March , 1997
54
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP........................................................... F-2
Consolidated Balance Sheets as of October 29, 1994, October 28, 1995 and November 2,
1996................................................................................ F-3
Consolidated Statements of Income for fiscal years ended October 29, 1994, October 28,
1995 and November 2, 1996........................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for fiscal years ended
October 29, 1994, October 28, 1995 and November 2, 1996............................. F-5
Consolidated Statements of Cash Flows for fiscal years ended October 29, 1994, October
28, 1995 and November 2, 1996....................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Central Tractor Farm & Country, Inc.
We have audited the accompanying consolidated balance sheets of Central
Tractor Farm & Country, Inc. as of October 29, 1994, October 28, 1995 and
November 2, 1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Central Tractor
Farm & Country, Inc. at October 29, 1994, October 28, 1995 and November 2, 1996,
and the consolidated results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Des Moines, Iowa
December 6, 1996
F-2
<PAGE> 59
CENTRAL TRACTOR FARM & COUNTRY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 29 OCTOBER 28 NOVEMBER 2
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,582 $ 3,094 $ 3,809
Receivable from sale of common stock (Note 6).............................. 6,703 -- --
Trade receivables, less allowances of $168 in 1994, $72 in 1995 and $50 in
1996..................................................................... 1,469 883 992
Inventory.................................................................. 75,044 93,874 107,203
Deferred income taxes (Note 7)............................................. 172 -- --
Other...................................................................... 1,511 1,383 2,368
Net assets of discontinued operations (Note 10)............................ 8,113 13,520 --
-------- -------- --------
Total current assets......................................................... 95,594 112,754 114,372
Property, improvements and equipment:
Leasehold improvements..................................................... 7,740 9,988 12,803
Furniture and fixtures..................................................... 14,614 18,253 23,766
Capitalized property rights (Note 5)....................................... 2,508 2,508 2,859
Automobiles and trucks..................................................... 499 817 1,065
-------- -------- --------
25,361 31,566 40,493
Less allowances for depreciation and amortization.......................... 10,917 13,339 16,036
-------- -------- --------
14,444 18,227 24,457
Goodwill, net of amortization of $3,490 in 1994, $4,014 in 1995 and $4,592 in
1996....................................................................... 17,454 16,930 19,018
Other intangible assets, net of amortization of $2,406 in 1994,
$2,527 in 1995 and $2,759 in 1996.......................................... 1,630 1,406 1,016
Other assets................................................................. 775 660 375
Noncurrent assets of discontinued operations................................. 9,519 -- --
-------- -------- --------
Total assets........................................................ $139,416 $149,977 $159,238
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit (Note 3)............................................... $ 977 $ 6,789 $ 3,669
Accounts payable........................................................... 37,557 39,150 41,081
Accrued payroll and bonuses................................................ 4,438 2,553 3,631
Deferred income taxes (Note 7)............................................. - - 913
Accrued income taxes....................................................... 140 163 4
Other accrued expenses..................................................... 1,482 1,506 1,101
Current portion of long-term debt and capital lease obligations............ 558 97 170
-------- -------- --------
Total current liabilities.................................................... 45,152 50,258 50,569
Long-term debt (due to related party), less current portion (Notes 2 and
4)......................................................................... 16,017 16,000 16,000
Capital lease obligations, less current portion (Note 5)..................... 942 862 1,341
Deferred income taxes (Note 7)............................................... 1,570 1,580 1,265
-------- -------- --------
Total liabilities............................................................ 63,681 68,700 69,175
Stockholders' equity (Notes 3 and 6):
Preferred stock, $.01 par value: authorized shares -- 5,000,000; none
issued or outstanding.................................................... -- -- --
Common stock, $.01 par value: authorized shares -- 45,000,000; issued and
outstanding shares -- 10,576,676 in 1994, 10,576,676 in 1995 and
10,589,082 in 1996....................................................... 106 106 106
Stock warrant outstanding.................................................. 665 665 665
Additional paid-in capital................................................. 69,667 69,667 69,709
Retained earnings.......................................................... 5,297 10,839 19,583
-------- -------- --------
Total stockholders' equity................................................... 75,735 81,277 90,063
Commitments (Notes 5 and 8).................................................. -- -- --
-------- -------- --------
Total liabilities and stockholders' equity.......................... $139,416 $149,977 $159,238
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 60
CENTRAL TRACTOR FARM & COUNTRY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
OCTOBER 29 OCTOBER 28 NOVEMBER 2
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................................. $231,064 $251,703 $293,020
Cost of sales............................................. 161,523 177,340 207,228
-------- -------- --------
Gross profit.............................................. 69,541 74,363 85,792
Selling, general and administrative expenses, including
amounts with related parties (Note 2)................... 54,548 58,294 68,197
Amortization of intangibles............................... 841 862 938
-------- -------- --------
Operating income.......................................... 14,152 15,207 16,657
Interest expense, including amounts with related parties
(Note 2)................................................ 4,774 1,302 1,663
-------- -------- --------
Income from continuing operations before income taxes and
extraordinary item...................................... 9,378 13,905 14,994
Income taxes (Note 7)..................................... 4,197 5,720 6,250
-------- -------- --------
Income from continuing operations before extraordinary
item.................................................... 5,181 8,185 8,744
Discontinued operations (Notes 7 and 10):
Income (loss) from discontinued operations, net of
income taxes (benefit) of $(340) in 1994 and $474 in
1995................................................. (745) 812 --
Loss on sale of Herschel Corporation, net of $665 income
tax benefit.......................................... -- (3,455) --
-------- -------- --------
Loss from discontinued operations......................... (745) (2,643) --
-------- -------- --------
Income before extraordinary item.......................... 4,436 5,542 8,744
Extraordinary loss on early extinguishment of debt, net of
income tax benefit of $2,073 (Note 6)................... 3,110 -- --
-------- -------- --------
Net income................................................ $ 1,326 $ 5,542 $ 8,744
======== ======== ========
Per share (Note 1):
Income from continuing operations before extraordinary
item................................................. $ 0.66 $ 0.74 $ 0.80
Discontinued operations:
Income (loss) from operations........................ (0.10) 0.07 --
Loss on sale......................................... -- (0.31) --
-------- -------- --------
Loss from discontinued operations....................... 0.10 0.24 --
Extraordinary loss...................................... (0.40) -- --
Net income.............................................. 0.17 0.50 0.80
Weighted average common and common equivalent shares
outstanding (Note 1).................................... 7,791 11,019 10,986
</TABLE>
See accompanying notes.
F-4
<PAGE> 61
CENTRAL TRACTOR FARM & COUNTRY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FISCAL YEARS ENDED OCTOBER 29, 1994,
OCTOBER 28, 1995 AND NOVEMBER 2, 1996
<TABLE>
<CAPTION>
STOCK ADDITIONAL NOTE RECEIVABLE TOTAL
COMMON WARRANT PAID-IN FROM RETAINED STOCKHOLDERS'
STOCK OUTSTANDING CAPITAL STOCKHOLDER EARNINGS EQUITY
------ ----------- ---------- --------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity at October 30, 1993......... $ 70 $ 665 $ 19,664 $ (83) $ 3,971 $24,287
Repurchase of common stock..................... -- -- (70) -- -- (70)
Reduction in notes from stockholders........... -- -- -- 83 -- 83
Issuance of common stock in connection with the
Company's initial public offering, net of
offering expenses (Note 6).................. 36 -- 50,073 -- -- 50,109
Net income..................................... -- -- -- -- 1,326 1,326
---- ---- ------- ---- ------- -------
Stockholders' equity at October 29, 1994......... 106 665 69,667 -- 5,297 75,735
Net income..................................... -- -- -- -- 5,542 5,542
---- ---- ------- ---- ------- -------
Stockholders' equity at October 28, 1995......... 106 665 69,667 -- 10,839 81,277
Exercise of common stock options............... -- -- 42 -- -- 42
Net income..................................... -- -- -- -- 8,744 8,744
---- ---- ------- ---- ------- -------
Stockholders' equity at November 2, 1996......... $106 $ 665 $ 69,709 $ -- $ 19,583 $90,063
==== ==== ======= ==== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 62
CENTRAL TRACTOR FARM & COUNTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 29 OCTOBER 28 NOVEMBER 2
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations before extraordinary item......... $ 5,181 $ 8,185 $ 8,744
Adjustments to reconcile pretax income from continuing operations to
net cash provided by (used in) continuing operations:
Depreciation and amortization of property, improvements and
equipment....................................................... 2,206 2,523 3,056
Amortization of intangibles and other deferred assets............. 1,180 862 998
Loss on sale of assets............................................ 143 24 20
Deferred interest................................................. 109 -- --
Deferred income taxes............................................. 367 800 1,000
Changes in operating assets and liabilities:
Trade receivables................................................. (362) 586 83
Inventory......................................................... (23,345) (18,830) (4,549)
Other current assets.............................................. (330) 128 (972)
Accounts payable.................................................. 11,371 1,593 (3,806)
Accrued expenses.................................................. (91) (1,838) 287
-------- -------- -------
(3,571) (5,967) 4,961
Income (loss) from discontinued operations.......................... (745) (2,643) --
Adjustments to reconcile pretax income (loss) from discontinued
operations to net cash provided by discontinued operations:
Loss on sale of Herschel Corporation.............................. -- 4,120 --
Depreciation and amortization of property, improvements and
equipment....................................................... 559 559 --
Amortization of intangibles....................................... 561 561 --
Deferred interest................................................. 336 -- --
Deferred income taxes............................................. (38) (618) (367)
Changes in operating assets and liabilities....................... (1,321) (651) 13,520
-------- -------- -------
(648) 1,328 13,153
Extraordinary loss on early extinguishment of debt
before income taxes............................................... (3,110) -- --
Net cash provided by (used in) operating activities................. (7,329) (4,639) 18,114
INVESTING ACTIVITIES
Purchases of property, improvements and equipment................... (5,207) (6,339) (8,789)
Acquisition of Big Bear Farm Stores, Inc. (Note 11)................. -- -- (5,650)
Other............................................................... (54) (74) 255
Discontinued operations............................................. (255) (400) --
-------- -------- -------
Net cash used in investing activities............................... (5,516) (6,813) (14,184)
FINANCING ACTIVITIES
Repurchase of common stock.......................................... (70) -- --
Proceeds from sale of assets........................................ -- 7 --
Borrowings under line of credit..................................... 39,025 67,020 86,782
Repayments on line of credit........................................ (38,048) (61,208) (89,902)
Payments on long-term debt.......................................... (37,757) (372) (17)
Payments on capitalized lease obligations........................... (244) (186) (120)
Proceeds from issuance of common stock.............................. 43,406 6,703 42
-------- -------- -------
Net cash provided by (used in) financing activities................. 6,312 11,964 (3,215)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents................ (6,533) 512 715
Cash and cash equivalents at beginning of period.................... 9,115 2,582 3,094
-------- -------- -------
Cash and cash equivalents at end of period.......................... $ 2,582 $ 3,094 $ 3,809
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest............................ $ 7,925 $ 1,491 $ 1,991
Cash paid during the period for income taxes........................ 1,815 5,324 5,675
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Receivable from sale of common stock................................ 6,703 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE> 63
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED OCTOBER 29, 1994,
OCTOBER 28, 1995 AND NOVEMBER 2, 1996
1. SUMMARY OF ACCOUNTING POLICIES AND OTHER MATTERS
Business and Principles of Consolidation
Central Tractor Farm & Country, Inc. and subsidiaries (the Company) is an
agricultural specialty retailer which operates retail stores primarily located
in the Midwest and Northeastern United States. The Company also sells
merchandise on a wholesale basis under various distributor agreements throughout
the United States. With the sale of the net operating assets of Herschel
Corporation, a wholly-owned subsidiary of the Company, continuing operations
constitute one business segment for financial reporting purposes.
The Company operates on a 52-53 week fiscal year ending on the Saturday
nearest to October 31.
All significant intercompany transactions have been eliminated from the
consolidated financial statements.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents. Investments, including repurchase agreements and
commercial paper, are carried at cost, which approximates market.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Trade Receivables
Most of the Company's retail sales are cash or credit card sales, while
wholesale sales are generally on account. Concentrations of credit risk with
respect to trade receivables are limited due to the number of customers of the
Company and their geographic dispersion. The allowance for doubtful accounts is
based on a current analysis of receivable delinquencies and historical loss
experience.
Inventory
Inventory is recorded at cost, including warehousing and freight costs,
determined principally by the last-in, first-out (LIFO) method, which is not in
excess of market. The Company reviews its inventory for slow-moving, obsolete or
otherwise unsalable items on a regular basis throughout the year, including at
the time of physical inventory counts. Write-downs are made for any estimated
losses to be incurred, which have not been material, with respect to
slow-moving, obsolete or otherwise unsalable inventory as such inventory is
identified. Inventories valued using the LIFO method were approximately
$3,926,000, $4,851,000 and $5,081,000 at October 29, 1994, October 28, 1995 and
November 2, 1996, respectively, less than the amounts of such inventories valued
at current cost.
F-7
<PAGE> 64
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES AND OTHER MATTERS -- (CONTINUED)
Property, Improvements and Equipment
Property, improvements and equipment are carried at cost less allowances
for depreciation and amortization. Depreciation and amortization expense is
computed primarily on a basis of the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Leasehold improvements (not in excess of underlying lease terms)....... 5 to 20 years
Furniture and fixtures................................................. 5 to 15 years
Automobiles and trucks................................................. 3 to 10 years
</TABLE>
Certain long-term lease transactions have been accounted for as capital
leases. The property rights recorded under direct financing leases are amortized
on a straight-line basis over the lesser of the useful life or the respective
terms of the leases.
Goodwill and Other Intangible Assets
Goodwill is being amortized utilizing the straight-line method over periods
of 40 years. Other intangible assets are being amortized over the periods of
expected benefit, ranging from 5 to 24 years. The carrying value of goodwill and
other intangibles is reviewed continually to determine whether any impairment
has occurred. This review takes into consideration the recoverability of the
unamortized amounts based on a comparison of the estimated undiscounted future
cash flows of the related business lines to the respective carrying value of the
related assets, including goodwill and other intangibles. To the extent that the
estimated undiscounted future cash flows are less than the carrying value of the
assets, an impairment loss can be measured based upon various methods, including
undiscounted cash flows, discounted cash flows and fair value. Based upon
undiscounted cash flows, no impairment of goodwill or other intangibles was
determined to exist as of November 2, 1996, and, accordingly, no measurement was
required.
Deferred Income Taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
the difference between financial reporting and income tax bases of assets and
liabilities using the enacted marginal tax rates. Deferred income tax expenses
or credits are based on the changes in the asset or liability from period to
period.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value of financial instruments:
Cash equivalents, short-term investments, accounts receivable and
payable and bank line of credit: Carrying amounts reported in the Company's
consolidated balance sheets based on historical cost approximate estimated
fair value for these instruments, due to their short-term nature.
The fair value of the convertible long-term debt is estimated to
approximate its carrying value as of November 2, 1996 and was based on the
estimated market price for this security as of that date.
Returns and Warranties
Costs relating to merchandise returns from sales at retail stores and
through distributors are not significant and are accounted for as they occur.
F-8
<PAGE> 65
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES AND OTHER MATTERS -- (CONTINUED)
Catalogs, Sale Flyers and Advertising Costs
The direct cost of printing and mailing the Company's annual mail order
catalog is deferred and amortized against mail order revenues over the year the
catalog is in use. The direct cost of printing and distributing sale flyers is
deferred and amortized over the life of the flyer which is generally two weeks
or less. Other advertising costs are expensed as incurred. Unamortized amounts
relating to the costs of the annual catalog and periodic sale flyers is
immaterial at each fiscal year-end. Advertising expenses were approximately
$6,184,000, $7,228,000 and $8,841,000 for fiscal 1994, 1995 and 1996,
respectively.
Store Pre-Opening Costs
Direct costs, which consist principally of rent, employee compensation and
travel costs for merchandise set-up and supplies, incurred in setting up new
stores for opening are deferred and amortized over the first twenty-six weeks of
store operations. The amount of unamortized store pre-opening costs at October
29, 1994, October 28, 1995 and November 2, 1996, amounted to $502,000, $431,000
and $1,123,000, respectively.
Earnings Per Share
Per share earnings is based on the weighted average number of shares of
common stock and common stock equivalents outstanding and assuming all stock
options issued prior to the Company's initial public offering and the stock
warrant were outstanding at the beginning of each respective year. The dilutive
effect of outstanding stock options and the stock warrant were determined based
upon the Treasury Stock Method. Fully diluted earnings per share did not vary
significantly from earnings per share as presented.
Emerging Accounting Issues
The Company is not aware of any accounting standards which have been issued
and which will require the Company to change its current accounting policies or
adopt new policies, the effect of which would be material to the Company's
financial statements.
2. TRANSACTIONS WITH RELATED PARTIES
Certain investment funds (collectively referred to as "BCC Funds") managed
by Butler Capital Corporation ("BCC") own a majority of the outstanding common
stock of the Company. The BCC Funds held the senior and subordinated notes
extinguished in October 1994, and currently hold the outstanding 7% convertible
notes (see Note 4). Interest paid on such notes in fiscal 1994, 1995 and 1996
was approximately $6,960,000, $883,000 and $1,425,000, respectively.
A company affiliated with the BCC Funds was paid a management and
consulting fee of approximately $238,000 in fiscal 1994.
The Company purchases inventory from two suppliers who are controlled by
the BCC Funds. Purchases from these suppliers aggregated approximately
$3,882,000, $6,254,000 and $6,228,000 for fiscal years 1994, 1995 and 1996,
respectively.
3. LINE OF CREDIT
On January 28, 1994, the Company entered into a line of credit agreement
with a commercial bank through February 1, 1998. At November 2, 1996, borrowings
of $3,669,000 and letters of credit totaling approximately $1,515,000 were
outstanding against the line of credit. Available borrowings under the line of
credit are $25,000,000 each year from November 1 through May 31 and $12,000,000
from June 1 through October 31. Interest on the outstanding borrowing varies,
but is primarily payable monthly at an annual rate
F-9
<PAGE> 66
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LINE OF CREDIT -- (CONTINUED)
equal to the bank's prime rate. The interest rate on October 29, 1994, October
28, 1995 and November 2, 1996 was 8.25%, 8.75%, and 8.25%, respectively. In
addition, the Company is required to pay commitment fees ranging from 0.375%
down to 0.125% on the total credit line, less outstanding borrowing. During the
period from April 15 through December 31 in each year, the Company must have
borrowing less than $5,000,000 outstanding under this line of credit for a
consecutive period of 45 days. The line of credit contains, among other
provisions, requirements that the Company maintain a minimum current ratio,
leverage ratio and fixed charge coverage ratio, and restricts the payment of
cash dividends. At November 2, 1996, substantially all retained earnings were
restricted from payment of cash dividends under the Company's line of credit
agreement.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 29 OCTOBER 28 NOVEMBER 2
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
7% Convertible notes........................ $16,000,000 $16,000,000 $16,000,000
Other....................................... 388,989 17,044 --
----------- ----------- -----------
16,388,989 16,017,044 16,000,000
Less current portion........................ 371,944 17,044 --
----------- ----------- -----------
$16,017,045 $16,000,000 $16,000,000
=========== =========== ===========
</TABLE>
Interest on the convertible notes is payable quarterly at 7.0% per annum
and the entire principal amount is due October 31, 2002. The note may be prepaid
after October 14, 1999, at a premium of 2.0%, which declines by 1.0% annually on
each October 14 thereafter. The holders of the convertible notes have the right,
at any time prior to the close of business on October 31, 2002, to convert the
principal amounts into shares of common stock at a conversion price of $19.375
per share. The conversion price of the convertible notes is subject to
adjustment in certain events, including a common stock split, the issuance of
securities convertible or exchangeable into common stock at less than the then
fair market value of the common stock and certain mergers, consolidations or
sales of stock. The convertible notes are subordinated to the principal amounts
outstanding pursuant to the line of credit (see Note 3).
As of November 2, 1996, there are no maturities of long-term debt during
the next five fiscal years.
5. LEASE OBLIGATIONS
The Company has entered into certain long-term lease agreements for the use
of warehouses, certain retail store facilities and computer equipment. These
leases have been accounted for as purchases of property rights and designated as
capitalized leases.
Amortization expense relating to such property rights recorded under
capitalized leases was $213,000, $130,000 and $125,000 for fiscal 1994, 1995 and
1996, respectively. The net book value of property rights recorded under capital
leases was $829,000, $699,000 and $926,000 at October 29, 1994, October 28, 1995
and November 2, 1996, respectively.
F-10
<PAGE> 67
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASE OBLIGATIONS -- (CONTINUED)
As of November 2, 1996, the debt associated with the capitalized property
rights is represented by the present value of the minimum lease payments as
follows:
<TABLE>
<S> <C>
Fiscal year ended in:
1997........................................................... $ 347,108
1998........................................................... 324,648
1999........................................................... 292,968
2000........................................................... 292,968
2001........................................................... 292,968
After 2001..................................................... 735,000
----------
Total minimum lease payments..................................... 2,285,660
Less amount representing interest................................ 774,663
----------
Present value of minimum lease payments.......................... 1,510,997
Less current installments........................................ 170,072
----------
$1,340,925
=========
</TABLE>
The Company also has entered into certain noncancelable operating leases
for the use of real estate, automobiles and trucks, and office equipment.
Aggregate rental expense for operating leases for fiscal 1994, 1995 and 1996 was
approximately $6,724,000, $7,833,000 and $9,294,000, respectively.
The following is a summary of minimum rental commitments as of November 2,
1996, for operating leases:
<TABLE>
<CAPTION>
AUTOMOBILE
AND OFFICE
FISCAL YEAR-END REAL ESTATE TRUCKS EQUIPMENT TOTAL
---------------------------------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
1997.............................. $ 9,479,335 $ 12,293 $ 52,328 $ 9,543,956
1998.............................. 8,320,110 8,195 52,328 8,380,633
1999.............................. 6,822,291 -- 46,280 6,868,571
2000.............................. 5,288,555 -- 16,544 5,305,099
2001.............................. 2,927,707 -- 1,972 2,929,679
After 2001........................ 6,315,729 -- -- 6,315,729
----------- ---------- --------- -----------
$39,153,727 $ 20,488 $ 169,452 $39,343,667
========== ======== ======== ==========
</TABLE>
6. CAPITAL STOCK AND STOCK OPTIONS
Capital Stock
During October 1994, the Company completed an initial public offering for
the sale of 3,565,000 shares of its common stock. The net proceeds from the
offering were used to prepay both principal and prepayment premium on the
outstanding Senior Notes and a portion of the outstanding Subordinated Notes.
Prepayment premiums on the early extinguishment of these notes resulted in an
extraordinary loss of $3,110,000, net of income tax benefit. The remaining
Subordinated Notes in the amount of $16,000,000 were exchanged for notes which
are convertible into the Company's common stock. At October 29, 1994, $6,703,000
of the net proceeds representing the Underwriter's exercise of their
over-allotment option was receivable. This amount was received on November 2,
1994.
F-11
<PAGE> 68
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL STOCK AND STOCK OPTIONS -- (CONTINUED)
The Board of Directors is authorized to issue up to an aggregate of
5,000,000 shares of preferred stock, $0.01 par value per share, in one or more
series, each series to have voting preferences or other rights as determined by
the Board of Directors.
Under the Company's stockholders' agreement, common stock acquired by a
management stockholder is subject to certain restrictions on the sale or
transfer of such shares.
Stock Options
The Company has stock option arrangements with various officers, directors
and other members of management which it accounts for under the provisions of
APB Opinion No. 25 and related interpretations. The option prices approximated
fair market value at the date of grant. The options generally vest over periods
of three to seven years and must be exercised no later than ten years from the
date of grant. With respect to options for 150,200 shares, their vesting period
may be accelerated based upon the attainment of specified Company operating
goals. Shares of common stock issuable upon exercise of stock options are
subject to restrictions on transfer.
A summary of common stock option activity through November 2, 1996 is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Outstanding at beginning of year....... 468,923 637,774 623,960
Options granted........................ 323,464 66,800 81,900
Options exercised...................... -- -- (12,406)
Options canceled....................... (154,613) (80,614) (30,771)
------------ ------------- -------------
Outstanding at end of year............. 637,774 623,960 662,683
=========== ============ ============
Range of option prices per share:
Outstanding.......................... $3.08-$15.50 $ 3.08-$15.50 $ 3.08-$15.50
Granted during year.................. $3.41-$15.50 $11.50-$15.50 $11.38-$14.50
</TABLE>
At November 2, 1996, options for 295,973 shares were exercisable. The
remaining options become exercisable in fiscal years as follows: 1997 -- 90,802
shares; 1998 -- 30,916 shares; 1999 -- 25,409 shares; 2000 -- 14,000 shares;
2001 -- 156,583 shares; 2002 -- 49,000 shares.
As of November 2, 1996, the Company has reserved 914,025 shares of common
stock for issuance under stock option arrangements described above. In addition,
the Company has reserved 230,523 shares of common stock for issuance under the
stock warrant.
Compensation expense charged to operating income relating to stock option
grants amounts to $111,000 for fiscal 1994, $1,000 for fiscal 1995 and $0 for
fiscal 1996.
F-12
<PAGE> 69
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
OCTOBER 29 OCTOBER 28 NOVEMBER 2
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
Differences in depreciation on property,
improvements and equipment................ $1,789,000 $1,890,000 $1,766,000
LIFO and uniform capitalization differences
on inventories............................ 787,000 1,391,000 1,160,000
Prepaid advertising.......................... 211,000 174,000 244,000
Deferred leasing costs....................... 185,000 82,000 --
Store pre-opening costs...................... 208,000 172,000 449,000
Other........................................ 10,000 10,000 9,000
---------- ---------- ----------
Total deferred tax liabilities....... 3,190,000 3,719,000 3,628,000
---------- ---------- ----------
Deferred tax assets:
Loss on sale of discontinued operations:
Ordinary loss............................. $ -- $ 665,000 $ --
Capital loss carryforward................. -- 755,000 755,000
Allowance for doubtful accounts.............. 101,000 45,000 20,000
Compensation and employee benefit accruals... 174,000 148,000 58,000
Operating leases............................. 330,000 261,000 273,000
Accrued profit sharing contributions......... 323,000 321,000 356,000
Stock warrant................................ 279,000 266,000 266,000
Accrued store closing costs.................. 168,000 86,000 32,000
Capitalized property rights and lease
obligations treated as operating leases
for income tax purposes................... 126,000 97,000 234,000
Other........................................ 291,000 250,000 211,000
---------- ---------- ----------
1,792,000 2,894,000 2,205,000
Less valuation allowance for capital loss
carryforward.............................. -- (755,000) (755,000)
---------- ---------- ----------
Total deferred tax assets............ 1,792,000 2,139,000 1,450,000
---------- ---------- ----------
Net deferred tax liabilities......... $1,398,000 $1,580,000 $2,178,000
========== ========== ==========
</TABLE>
The capital loss carryforward relating to the sale of Herschel will expire
in the year 2001.
F-13
<PAGE> 70
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (CONTINUED)
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
OCTOBER 29 OCTOBER 28 NOVEMBER 2
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal.................................... $3,121,000 $3,768,000 $3,951,000
State...................................... 709,000 1,152,000 1,199,000
---------- ---------- ----------
3,830,000 4,920,000 5,150,000
Deferred...................................... 367,000 800,000 1,100,000
---------- ---------- ----------
4,197,000 5,720,000 6,250,000
Discontinued operations:
Current....................................... (302,000) 427,000 367,000
Deferred...................................... (38,000) (618,000) (367,000)
---------- ---------- ----------
(340,000) (191,000) --
Extraordinary loss -- currently deductible...... (2,073,000) -- --
---------- ---------- ----------
Total................................. $1,784,000 $5,529,000 $6,250,000
========== ========== ==========
</TABLE>
Total reported income tax expense differs from the tax that would have
resulted by applying the statutory expected federal income tax rate to income
before taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
OCTOBER 29 OCTOBER 28 NOVEMBER 2
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income tax at federal statutory rate............ $1,057,000 $3,764,000 $5,098,000
Increases in taxes resulting from:
State income taxes, net of federal income tax
effect..................................... 403,000 897,000 833,000
Goodwill amortization......................... 215,000 215,000 178,000
Capital loss carryforward..................... -- 755,000 --
Other, net.................................... 109,000 102,000 141,000
Reduction of prior year overaccruals.......... -- (204,000) --
---------- ---------- ----------
$1,784,000 $5,529,000 $6,250,000
========== ========== ==========
</TABLE>
8. EMPLOYMENT COMMITMENTS
The Company has employment agreements with three officers of the Company
which provide for annual salaries amounting to approximately $775,000. Upon
termination of employment for death, disability or without cause, compensation
may be continued for a period not to exceed two years.
9. PROFIT SHARING PLAN
The Company has a profit sharing plan covering all employees who meet
certain eligibility requirements. The plan provides for discretionary employer
contributions and allows voluntary participant contributions. Company
contributions are determined by its Board of Directors. The Company incurred
expense in connection with the profit sharing plan of $770,000, $804,000 and
$881,000 for fiscal 1994, 1995 and 1996, respectively.
F-14
<PAGE> 71
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DISCONTINUED OPERATIONS
During fiscal 1996, the Company completed the sale of its wholly-owned
subsidiary, Herschel Corporation (Herschel), a manufacturer and wholesale
distributor of equipment parts for use in the farming industry. Herschel has
been reported as a discontinued segment of the business; accordingly, its net
assets and operating results have been segregated in the consolidated financial
statements. The net assets of Herschel Corporation have been classified as
current at October 28, 1995 as the carrying amount approximates the selling
price, plus advances to be repaid, less expenses of sale, and were realized upon
closing in December 1995.
Summarized financial information of the Company's income (loss) from
discontinued operations follow:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
OCTOBER 29 OCTOBER 28
1994 1995
----------- -----------
<S> <C> <C>
Net sales................................................. $23,312,046 $22,969,504
Income (loss) before income taxes......................... (1,085,217) 1,286,242
Income taxes (credit)..................................... (340,000) 474,127
Income (loss) from discontinued operations................ (745,217) 812,115
</TABLE>
11. ACQUISITION
On May 31, 1996, the Company acquired 31 retail stores and related net
operating assets from Big Bear Farm Stores, Inc. (Big Bear), an agricultural
specialty retailer, for approximately $5,650,000. The transaction was accounted
for as a purchase. The purchase price was allocated based on fair value as
follows:
<TABLE>
<S> <C>
Inventories..................................................... $ 8,780,000
Accounts receivable and other assets............................ 206,000
Leaseholds and equipment........................................ 517,000
Deferred income taxes........................................... 135,000
Goodwill........................................................ 2,666,000
Accounts payable and accrued expenses........................... (6,654,000)
-----------
$ 5,650,000
===========
</TABLE>
The results of operations of Big Bear from the date of purchase to the end
of fiscal year 1996 are included in the accompanying consolidated statement of
income.
Pro forma amounts, based on the assumption that the purchase occurred at
the beginning of fiscal 1995, are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
OCTOBER 28 NOVEMBER 2
1995 1996
---------- ----------
<S> <C> <C>
Net sales............................................. $275,685 $307,847
Net income............................................ 6,018 9,104
Net income per share.................................. .55 .83
</TABLE>
F-15
<PAGE> 72
CENTRAL TRACTOR FARM & COUNTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
operations for the years ended October 28, 1995 and November 2, 1996 (in
thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal year ended October 28, 1995:
Net sales......................................... $61,836 $59,347 $74,362 $56,158
Gross profit...................................... 17,362 18,214 22,557 16,230
Income from continuing operations................. 1,473 2,121 4,249 342
Income (loss) from discontinued operations........ (1) 467 187 (3,296)
Net income (loss)................................. 1,472 2,588 4,436 (2,954)
Per share:
Income from continuing operations.............. 0.13 0.19 0.39 0.03
Income (loss) from discontinued operations..... -- 0.04 0.02 (0.30)
Net income (loss).............................. 0.13 0.23 0.40 (0.27)
Fiscal year ended November 2, 1996:
Net sales......................................... 69,967 62,989 86,169 73,895
Gross profit...................................... 18,862 19,245 25,417 22,268
Net income........................................ 1,280 1,684 3,937 1,843
Net income per share.............................. 0.12 0.15 0.36 0.17
</TABLE>
The sum of quarterly per share amounts do not necessarily equal the annual
amount reported, as per share amounts are computed separately for each quarter
and the full year based on respective weighted average of common and common
equivalent shares outstanding.
13. SUBSEQUENT EVENT
On November 27, 1996, the Board of Directors of the Company approved, and
the Company entered into, a Merger Agreement ("the Merger Agreement") with J. W.
Childs Equity Partners, L.P. and two of its affiliates (collectively, "Childs")
that provides for the acquisition of the Company by Childs in a two-stage
transaction. The Merger Agreement provides that following the acquisition by
Childs of all of the Company shares held by affiliates of Butler Capital
Corporation (collectively "BCC"), an affiliate of Childs will merge with and
into the Company, and Childs will acquire the remaining shares of the Company
held by public stockholders for $14.25 per share in cash. The consummation of
the merger is subject to the satisfaction of certain conditions including, among
other things, (i) the acquisition by Childs of all of the Company's shares held
by affiliates of BCC, and (ii) the availability of sufficient funds to
consummate the merger pursuant to commitments obtained by Childs from its
prospective lenders.
Pursuant to an agreement executed contemporaneously with the Merger
Agreement between Childs and affiliates of BCC, which own 64.5% of the Company's
outstanding common stock, BCC's affiliates have sold 1,048,214 shares of the
Company's common stock (representing 9.9% of the outstanding shares) to Childs
for a cash consideration of $14.00 per share, and have agreed to sell their
remaining shares to Childs for $14.00 per share in cash. The agreement also
provides that such BCC affiliates will agree, immediately following the
conclusion of the stock sale, to the prepayment by the Company (without payment
of any prepayment premium) of all the Company's 7% convertible notes with a face
amount of $16,000,000. In connection with the second purchase, certain members
of management agreed to sell 146,299 shares to Childs for a cash consideration
of $14.00 per share.
While the Merger Agreement is subject to stockholder approval, it is
expected that Childs will own a sufficient number of shares of Company common
stock to adopt and approve the merger.
F-16
<PAGE> 73
EXHIBIT 1
THIS IS A DRAFT AGREEMENT ONLY AND DELIVERY OR DISCUSSION OF THIS DRAFT
AGREEMENT SHOULD NOT BE CONSTRUED AS AN OFFER OR COMMITMENT WITH RESPECT TO THE
PROPOSED TRANSACTION TO WHICH THIS DRAFT AGREEMENT PERTAINS. NOTWITHSTANDING THE
DELIVERY OF THIS DRAFT AGREEMENT OR ANY PAST, PRESENT OR FUTURE APPROVALS BY THE
MANAGEMENTS, BOARDS OF DIRECTORS, OR STOCKHOLDERS OF ANY PARTY TO THE PROPOSED
TRANSACTION (OR ANY RELATED PERSON OR ENTITY) OR ANY OTHER PAST, PRESENT OR
FUTURE WRITTEN OR ORAL INDICATIONS OF ASSENT, OR INDICATIONS OF THE RESULTS OF
NEGOTIATIONS OR AGREEMENTS, NO PARTY TO THE PROPOSED TRANSACTION (AND NO PERSON
OR ENTITY RELATED TO ANY SUCH PARTY) WILL BE UNDER ANY LEGAL OBLIGATION WITH
RESPECT TO THE PROPOSED TRANSACTION OR ANY SIMILAR TRANSACTION, AND NO OFFER OR
BINDING COMMITMENT OF ANY NATURE WHATSOEVER SHALL BE IMPLIED, UNLESS AND UNTIL
THE DEFINITIVE AGREEMENT PROVIDING FOR THE TRANSACTION HAS BEEN EXECUTED AND
DELIVERED BY ALL PARTIES THERETO.
AGREEMENT AND PLAN OF MERGER
By and Among
Central Tractor Farm & Country, Inc.
("Company"),
J.W. Childs Equity Partners, L.P.
("Childs"),
JWC Holdings I, Inc.
("Acquiror Parent")
and
JWC Acquisition I, Inc.
("Acquiror")
November 27, 1996
<PAGE> 74
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
SECTION 1. THE MERGER AND RELATED MATTERS............................................ 1
1.1 The Merger................................................................ 1
1.2 Closing................................................................... 2
1.3 Certificate of Incorporation; By-Laws; Directors and Officers............. 2
1.4 Conversion of Shares...................................................... 2
1.5 Payment................................................................... 3
SECTION 2. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF COMPANY.......... 5
2.1 Organization and Business; Power and Authority; Effect of Transaction..... 5
2.2 Filings with the Commission; Financial Statements......................... 6
2.3 Absence of Certain Changes or Events...................................... 6
2.4 No Undisclosed Liabilities................................................ 7
2.5 Employee Benefit Plans, Employment Agreements............................. 7
2.6 Labor Matters............................................................. 7
2.7 Title to Properties; Leases............................................... 7
2.8 Compliance with Contractual Obligations and Private Authorizations........ 8
2.9 Compliance with Governmental Authorizations and Applicable Law............ 8
2.10 Intellectual Property..................................................... 8
2.11 Interested Party Transactions............................................. 9
2.12 Insurance................................................................. 9
2.13 Taxes..................................................................... 9
2.14 Absence of Sensitive Payments............................................. 9
2.15 Inapplicability of Specified Statutes..................................... 10
2.16 Material Agreements....................................................... 10
2.17 Ordinary Course of Business............................................... 10
2.18 Broker or Finder.......................................................... 11
2.19 Environmental Matters..................................................... 11
2.20 Certain State Statutes Inapplicable....................................... 11
2.21 Information Supplied...................................................... 11
2.22 Opinion of Financial Advisor.............................................. 12
2.23 Voting Agreements and Noncompetition Agreements........................... 12
2.24 Vote Required............................................................. 12
2.25 Consents.................................................................. 12
2.26 Board Recommendation...................................................... 12
SECTION 3. REPRESENTATIONS AND WARRANTIES OF CHILDS, ACQUIROR PARENT AND ACQUIROR.... 13
3.1 Organization and Business; Power and Authority; Effect of Transaction..... 13
3.2 Adverse Restrictions...................................................... 13
3.3 Information Supplied...................................................... 14
</TABLE>
i
<PAGE> 75
<TABLE>
<C> <S> <C>
3.4 Broker or Finder.......................................................... 14
3.5 Financing of the Merger and the Second Disposition........................ 14
SECTION 4. COVENANTS OF COMPANY AND CHILDS........................................... 14
4.1 Access to Information..................................................... 14
4.2 Agreement to Cooperate.................................................... 14
4.3 Expenses.................................................................. 15
4.4 Public Announcements...................................................... 16
4.5 Stockholders' Approval.................................................... 16
4.6 Proxy Statement; Schedule 13E-3........................................... 16
4.7 Company Board Representation; Section 14(f)............................... 17
4.8 No Solicitation........................................................... 17
4.9 Tax Returns............................................................... 18
4.10 Indemnification and Insurance............................................. 18
4.11 Convertible Securities.................................................... 19
4.12 Financing................................................................. 19
SECTION 5. CONDITIONS PRECEDENT TO THE MERGER........................................ 21
SECTION 6. DEFINITIONS............................................................... 22
SECTION 7. TERMINATION............................................................... 29
7.1 Termination............................................................... 29
7.2 Effect of Termination..................................................... 30
SECTION 8. GENERAL PROVISIONS........................................................ 30
8.1 Effectiveness of Representations and Warranties........................... 30
8.2 Entire Agreement.......................................................... 30
8.3 Waivers; Amendments....................................................... 30
8.4 Assignment; Successors and Assigns........................................ 31
8.5 Notices................................................................... 31
8.6 Severability.............................................................. 32
8.7 Counterparts.............................................................. 32
8.8 Section Headings.......................................................... 32
8.9 Further Acts.............................................................. 32
8.10 Governing Law............................................................. 32
8.11 Consent to Jurisdiction and Service....................................... 32
8.12 No Presumption............................................................ 32
</TABLE>
SCHEDULES AND EXHIBITS
- -----------------------------------
Disclosure Schedule
ii
<PAGE> 76
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made as of November 27, 1996, by and
among Central Tractor Farm & Country, Inc., a Delaware corporation ("Company"),
J.W. Childs Equity Partners, L.P., a Delaware limited partnership ("Childs"),
JWC Holdings I, Inc., a Delaware corporation ("Acquiror Parent") and JWC
Acquisition I, Inc., a Delaware corporation ("Acquiror") (Company and Acquiror
being hereinafter sometimes collectively referred to as the "Constituent
Corporations").
RECITALS
A. The respective Boards of Directors of Company and Acquiror deem the
acquisition of Company by Acquiror on the terms and conditions set forth in this
Agreement and Plan of Merger (this "Agreement") to be desirable and generally to
the welfare and advantage of each, and in the best interests of the stockholders
of each.
B. In furtherance of such acquisition, the Boards of Directors of Acquiror
Parent, Acquiror and Company have each approved this Agreement and the merger
(the "Merger") of Acquiror with and into Company in accordance with the Delaware
General Corporation Law (the "DGCL") and upon the terms and subject to the
conditions set forth herein.
C. The Board of Directors of Company has (i) determined that the
consideration to be paid for each share of Common Stock, par value $.01 per
share, of Company ("Company Common Stock") in the Merger is fair to and in the
best interests of the stockholders of Company, (ii) approved this Agreement and
the Merger and the other transactions contemplated hereby and (iii) resolved and
agreed to recommend approval of the Merger and adoption of this Agreement by
such stockholders.
D. As a condition and inducement to Childs', Acquiror Parent's and
Acquiror's entering into this Agreement and incurring the obligations set forth
herein, concurrently with the execution and delivery of this Agreement, Childs,
Acquiror Parent, and Acquiror are entering into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with certain securityholders of Company
parties thereto (collectively, the "Securityholders"), pursuant to which the
Securityholders have agreed to sell all of their shares of Company Common Stock
to Acquiror pursuant to the terms and subject to the conditions set forth in the
Securities Purchase Agreement.
G. The Board of Directors of Company has approved the transactions
contemplated by this Agreement and the Securities Purchase Agreement in
accordance with the provisions of Section 203 of the DGCL.
H. Certain terms used herein are defined in Section 6 of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other valuable consideration, the receipt and adequacy
whereof are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby represent, warrant, covenant and agree as follows:
SECTION 1. THE MERGER AND RELATED MATTERS.
1.1 The Merger.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the DGCL, at the Effective Time, Acquiror
shall be merged with and into Company. At the Effective Time, the separate
corporate existence of Acquiror shall cease, and Company shall continue as the
surviving corporation under the name Central Tractor Farm & Country, Inc. (the
"Surviving Corporation").
(b) Upon the terms and subject to the conditions set forth in Section 5,
the Merger shall become effective at the time of filing of a certificate of
merger with the Secretary of State of the State of Delaware in accordance with
the provisions of the DGCL (the "Certificate of Merger"), or at such later time
in accordance with the provisions of the DGCL as is specified in the Certificate
of Merger. Company and Acquiror agree to file the Certificate of Merger at the
time of the Closing. The date and time when the Merger shall become effective is
hereinafter referred to as the "Effective Time."
<PAGE> 77
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of Acquiror and Company, and the
Merger shall otherwise have the effects provided for under the DGCL.
1.2 Closing. Unless this Agreement shall have been terminated and the
transactions contemplated hereby abandoned pursuant to Section 7, the closing of
the Merger contemplated by this Agreement (the "Closing") shall take place at
the offices of Sullivan & Worcester LLP, One Post Office Square, Boston,
Massachusetts at 10:00 a.m., local time, on the third (3rd) Business Day after
the date on which the last of the conditions set forth in Section 5 is fulfilled
or waived or at such other time, date or place as Company, Childs and Acquiror
may mutually agree in writing. The date on which the Closing actually takes
place is hereinafter referred to as the "Closing Date".
1.3 Certificate of Incorporation; By-Laws; Directors and Officers.
(a) The Certificate of Incorporation of Acquiror, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation until amended in accordance with the terms thereof and the
DGCL.
(b) The By-laws of Acquiror, as in effect immediately prior to the
Effective Time, shall be the By-laws of the Surviving Corporation until amended
in accordance with the terms thereof, the Certificate of Incorporation of the
Surviving Corporation and the DGCL.
(c) The directors of Acquiror immediately prior to the Effective Time shall
be the initial directors of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation until a successor is elected or appointed and has qualified or until
the earliest of such director's death, resignation, removal or disqualification,
and the officers of Company immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified, or as
otherwise provided in the By-laws of the Surviving Corporation.
1.4 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of Acquiror or Company or their respective
stockholders:
(a) Each share of Company Common Stock, issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares and
shares held by Childs, Acquiror Parent, Acquiror or any of their wholly
owned Subsidiaries and shares held in the treasury of Company or by any of
its wholly owned Subsidiaries) shall, by virtue of the Merger and without
any action on the part of the holder thereof, be cancelled, extinguished
and converted automatically into the right to receive $14.25 (the "Merger
Price"), in cash payable without interest, to the holder of such share,
upon surrender, in the manner provided in Section 1.5, of the certificate
that formerly evidenced such share, less any required withholding taxes,
upon the surrender of the certificate representing such share.
(b) Prior to the Effective Time, the Board of Directors of Company
(or, if appropriate, any Committee thereof) shall adopt appropriate
resolutions and take all other actions necessary to provide that, except as
may be otherwise agreed in writing between Acquiror and any holder of any
Company Option Securities, each Company Option Security issued and
outstanding immediately prior to the Effective Time (other than Company
Option Securities held by Childs or any of its wholly owned Subsidiaries or
held in the treasury of Company or by any of its wholly owned Subsidiaries)
shall, by virtue of the Merger and without any action on the part of the
holder thereof, (i) in the case of Company Option Securities with a per
share exercise price that is less than the Merger Price, be converted into
the right to receive, upon the surrender of the instrument evidencing such
Company Option Security, a cash payment equal to the product (the "Company
Option Security Price") of (A) the number of shares of Company Common Stock
subject to such Company Option Security and (B) the excess, if any, of the
Merger Price over the per share exercise price of the Company Option
Security, and each Company Option Security so converted will, upon such
payment, be canceled, and, (ii) in the case of all other Company Option
Securities, shall be canceled without payment of any consideration therefor
and without any conversion thereof. In no event shall the holder of any
Company Option Security be entitled, from
2
<PAGE> 78
and after the Effective Time, to acquire securities of the Surviving
Corporation or Childs. Anything herein to the contrary notwithstanding, no
interest or dividends shall accrue or be payable or paid on the Company
Option Security Price to any Person hereunder.
(c) Each share of common stock, par value $0.01 per share, of Acquiror
issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder
thereof, be converted into one share of common stock, par value $0.01 per
share, of the Surviving Corporation.
(d) Each share of Company Common Stock then held by Childs or any
direct or indirect wholly owned Subsidiary of Childs, or held in the
treasury of Company or by any direct or indirect wholly owned Subsidiary of
Company, shall be canceled without payment of any consideration therefor
and without any conversion thereof.
(e) Notwithstanding anything in this Agreement to the contrary but
only in the circumstances and to the extent provided by the DGCL, shares of
Company Common Stock which are outstanding immediately prior to the
Effective Time and which are held by stockholders who were entitled to and
did not vote such shares in favor of the Merger or consented thereto in
writing and who shall have properly and timely delivered to Company a
written demand for payment of the fair cash value of shares of Company
Common Stock in the manner provided in and complied with all of the
relevant provisions of Section 262 of the DGCL ("Dissenting Shares") shall
not be converted into or represent the right to receive the Merger Price.
Instead, the holders thereof shall be entitled to payment of the fair cash
value of such shares in accordance with the provisions of Section 262 of
the DGCL; provided, however, that (i) if any holder of Dissenting Shares
shall subsequently deliver a written withdrawal of his demand for payment
of the fair cash value of such shares and the Board of Directors of Company
or the Surviving Corporation, as the case may be, shall consent thereto, or
(ii) if any holder fails to establish and perfect his entitlement to the
relief provided in such Section 262 or if the right of such holder to
receive the fair cash value of such shares of Company Common Stock as to
which he seeks relief otherwise terminates pursuant to Section 262 of the
DGCL, such shares shall thereupon cease to be deemed to be Dissenting
Shares and shall be deemed to have been converted into and represent the
right to receive, upon the surrender of the certificate or certificates
representing such shares, as of the Effective Time, the Merger Price.
Company will not settle any demand with respect to any Dissenting Shares
without the consent of Childs and Acquiror.
1.5 Payment. (a) Pursuant to an agreement reasonably satisfactory to
Company, Childs and Acquiror (the "Disbursing Agent Agreement") to be entered
into before the Closing Date among Childs, Acquiror and a disbursing agent to be
selected by Acquiror and reasonably satisfactory to Company (the "Disbursing
Agent"), at or immediately following the Effective Time, Childs shall deposit or
cause to be deposited in trust for the benefit of Company's stockholders cash to
which holders of Company Common Stock and holders of the Company Option
Securities shall be entitled at the Effective Time pursuant to the provisions of
Section 1.4. The Disbursing Agent shall invest the cash deposited with it in
such manner as the Surviving Corporation directs; provided, however, that
substantially all of such investments shall be in obligations of or guaranteed
by the United States of America, in commercial paper obligations receiving the
highest rating from either Moody's Investors Service, Inc. or Standard & Poor's
Corporation, or in certificates of deposit, bank repurchase agreements or
bankers' acceptances of commercial banks with capital exceeding $1,000,000,000
(collectively, "Permitted Investments") or in money market funds which are
invested solely in Permitted Investments; provided further, however, that the
maturities of Permitted Investments shall be such as to permit the Disbursing
Agent to make prompt payment of the Merger Price. Any net profit from, or
interest or income produced by, Permitted Investments shall be payable to the
Surviving Corporation as and when requested by the Surviving Corporation. The
Surviving Corporation shall be required to replace any funds lost as a result of
any investment. Any funds remaining unclaimed following the expiration of the
sixth (6th) month after the Effective Time shall be released and repaid or
redelivered by the Disbursing Agent to the Surviving Corporation upon demand,
after which time Persons entitled thereto may look, subject to applicable
escheat and other similar laws, only to the Surviving Corporation, which shall
remain responsible for payment thereof. Notwithstanding the foregoing, neither
the Surviving Corporation or the Disbursing Agent shall be
3
<PAGE> 79
liable to any holder of a share of Company Common Stock for any Merger Price
delivered in respect of such share to a public official pursuant to any
property, escheat or similar law.
(b) As soon as practicable after the Effective Time, the Disbursing Agent
shall send a notice and transmittal form to each holder of a certificate or
certificates theretofore evidencing shares of Company Common Stock, other than
certificates representing Dissenting Shares (such certificates, other than those
representing shares to be canceled pursuant to Section 1.4(d) and Dissenting
Shares, are collectively referred to herein as the "Certificates"), advising
such holder of the effectiveness of the Merger and the procedure for
surrendering to the Disbursing Agent such Certificate for payment of the Merger
Price. Upon the surrender of a Certificate to the Disbursing Agent together with
and in accordance with such transmittal form, the holder thereof shall be
entitled to receive in exchange therefor the Merger Price payable in respect of
each share of Company Common Stock represented thereby. Upon such surrender, the
Disbursing Agent will promptly pay the Merger Price. Except as otherwise
provided in Section 1.4, until so surrendered, each such Certificate shall be
deemed for all purposes to evidence only the right to receive the Merger Price.
(c) If the Merger Price (or any portion thereof) is to be paid to a Person
other than the Person in whose name the Certificate surrendered in exchange
therefor is registered, it shall be a condition to the payment of the Merger
Price that the Certificate so surrendered shall be properly endorsed or
accompanied by appropriate stock powers and otherwise be in proper form for
transfer, that such transfer otherwise be proper and that the Person requesting
such transfer pay to the Disbursing Agent any transfer or other taxes payable by
reason of the foregoing or establish to the satisfaction of the Disbursing Agent
that such taxes have been paid or are not required to be paid.
(d) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed and subject to such other conditions
as the Board of Directors of the Surviving Corporation may impose, the Surviving
Corporation shall issue in exchange for such lost, stolen or destroyed
Certificate the Merger Price deliverable in respect thereof as determined in
accordance with Section 1.4. When authorizing such issue of the Merger Price in
exchange therefor, the Board of Directors of the Surviving Corporation may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificate to give the Surviving
Corporation a bond or other surety in such sum as it may reasonably direct as
indemnity against any claim that may be made against the Surviving Corporation
with respect to the Certificate alleged to have been lost, stolen or destroyed.
(e) Anything herein to the contrary notwithstanding, no interest or
dividends shall accrue or be payable or paid on any portion of the Merger Price
payable to any Person hereunder.
(f) At and after the Effective Time, each holder of a Certificate or of a
certificate representing shares of Company Common Stock to be canceled pursuant
to Section 1.4(d) or of Dissenting Shares shall cease to have any rights as a
stockholder of Company, except, in the case of the holder of a Certificate for
the right to surrender Certificates in the manner prescribed by Section 1.5(b)
in exchange for payment of the Merger Price or, in the case of the holder of
Dissenting Shares, the right to perfect the right to receive payment for
Dissenting Shares pursuant to Section 262 of the DGCL. No transfer of Company
Common Stock shall be made on the stock transfer books of the Surviving
Corporation at or after the Effective Time.
(g) The Disbursing Agent Agreement shall also contain provisions of a
nature similar to those set forth in this Section with respect to payment of the
Company Option Security Price required to be made with respect to Company Option
Securities as provided for in Section 1.4(b).
4
<PAGE> 80
SECTION 2. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF COMPANY.
Company represents, warrants, covenants and agrees that:
2.1 Organization and Business; Power and Authority; Effect of Transaction.
(a) Company (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) has all requisite
corporate power and authority to own or hold under lease its properties and to
conduct its business as now conducted and as presently proposed to be conducted,
and is in possession of all material Governmental Authorizations and Private
Authorizations to the extent required for such ownership and lease of its
property and conduct of its business and (iii) has duly qualified and is
authorized to do business and is in good standing as a foreign corporation in
each jurisdiction in which it owns or leases properties, conducts operations or
maintains a stock of goods, except where the failure to be so qualified would
not have a Material Adverse Effect. Complete and correct copies of the
Certificate of Incorporation and By-laws of Company, each as amended to date,
have heretofore been delivered by Company to Acquiror. Such Certificate of
Incorporation and By-laws are in full force and effect.
(b) Company has all requisite corporate power and authority necessary to
enable it to execute and deliver, and to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement and each Transaction
Document executed or to be executed by Company; and the execution, delivery and
performance of this Agreement and each Transaction Document executed or to be
executed by Company have been duly authorized by all requisite corporate action,
other than the Company Stockholder Approval. This Agreement has been duly
executed and delivered by Company and constitutes, and each Transaction Document
when executed and delivered by Company will constitute, legal, valid and binding
obligations of Company and each of the other parties, if any, thereto which is
Affiliated with Company, enforceable in accordance with their respective terms.
(c) The authorized and outstanding capital stock of Company is as set forth
in Section 2.1 of the Disclosure Schedule. All of such outstanding capital stock
has been duly authorized and validly issued, is fully paid and nonassessable and
is not subject to any preemptive or similar rights. Except as set forth in
Section 2.1 of the Disclosure Schedule, (i) there is neither outstanding nor has
Company or any Subsidiary agreed to grant or issue any shares of its capital
stock or any Option Security or Convertible Security and (ii) neither Company
nor any Subsidiary is a party to or is bound by any agreement, put or commitment
pursuant to which it is obligated to purchase, redeem or otherwise acquire any
shares of capital stock or any Option Security or Convertible Security. Complete
and correct copies of each of the Company Option Securities and Company
Convertible Securities listed on the Disclosure Schedule, each as amended to
date, have heretofore been made available to Acquiror.
(d) Except as set forth in Section 2.1 of the Disclosure Schedule and
subject to obtaining the Company Stockholder Approval, neither the execution and
delivery of this Agreement or any Transaction Document, nor the consummation of
the transactions herein or therein contemplated, nor compliance with the terms,
conditions and provisions hereof or thereof by Company or any of its
Subsidiaries:
(i) (A) will conflict with, or result in a breach or violation of, or
constitute a default under, any Applicable Law on the part of Company or
any of its Subsidiaries or (B) will conflict with or result in a breach or
violation of, or constitute a default under, any of the Organic Documents
of Company or any of its Subsidiaries or (C) will conflict with, or result
in a breach or violation of, or constitute a default under, or permit the
acceleration of any obligation or liability under, or but for any
requirement of giving of notice or passage of time or both would constitute
such a conflict with, breach or violation of, or default under, or permit
any such acceleration of, any Contractual Obligation of Company or any of
its Subsidiaries, or
(ii) will result in or permit the creation or imposition of any
Encumbrance upon any property now owned or leased by Company or any such
other party.
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(e) Company does not have any Subsidiaries other than those set forth in
Section 2.1 of the Disclosure Schedule, each of which is wholly owned, is a
corporation which is duly organized, validly existing and in good standing under
the laws of the respective state of incorporation set forth opposite its name on
the Disclosure Schedule, and is duly qualified and in good standing as a foreign
corporation in each other jurisdiction in which it owns or leases properties,
conducts operations or maintains a stock of goods, except where the failure to
be so qualified would not have a Material Adverse Effect, with corporate power
and authority to carry on the business in which it is engaged. Each such
Subsidiary is in possession of all Governmental Authorizations and Private
Authorizations required for such ownership and lease of its property and conduct
of its business. Company owns all of the outstanding capital stock of each such
Subsidiary, free and clear of all Encumbrances, and all such stock has been duly
authorized and validly issued and is fully paid and nonassessable. There are no
outstanding Option Securities or Convertible Securities, or agreements, puts,
commitments or understandings with respect to any of the foregoing, of any
nature whatsoever relating to the authorized and unissued or the outstanding
capital stock of any such Subsidiaries. Except as set forth in Section 2.1 of
the Disclosure Schedule, neither Company nor any of its Subsidiaries owns
directly or indirectly any capital stock or equity or proprietary interest in
any other Entity or enterprise, however organized and however such interest may
be denominated or evidenced, or is party to or bound by any agreements, puts,
commitments or understandings pursuant to which it is obligated to purchase or
otherwise acquire any of the foregoing.
2.2 Filings with the Commission; Financial Statements.
(a) Company has filed all forms, reports and documents required to be filed
with the Commission and has made available to Acquiror and Childs (i) its Annual
Report on Form 10-K for the fiscal year ended October 28, 1995, (ii) its
Quarterly Reports on Form 10-Q for the quarters ended January 27, 1996, April
27, 1996 and July 27, 1996, (iii) all other reports or registration statements
filed by Company with the Commission since October 29, 1995, (iv) all proxy
statements relating to Company's meetings of stockholders (whether annual or
special) since October 29, 1995, and (v) all amendments and supplements to all
such reports and registration statements filed by Company with the Commission
pursuant to the requirements of the Exchange Act ((i)-(v) collectively, the
"Company SEC Reports"). Except as disclosed in Section 2.2 of the Disclosure
Schedule, the Company SEC Reports (i) were prepared in all material respects in
accordance with the requirements of the Securities Act or the Exchange Act, as
the case may be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. None of Company's Subsidiaries is required to file any
forms, reports or other documents with the Commission.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports was prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
thereto), and each fairly presents the consolidated financial position of
Company and its Subsidiaries as at the respective dates thereof and the
consolidated results of its operations and cash flows and stockholder equity for
the periods indicated, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were not
or are not expected to be material in amount.
2.3 Absence of Certain Changes or Events. Except as set forth in Section
2.3(a) through Section 2.3(f) of the Company Disclosure Schedule or the Company
SEC Reports, since October 29, 1995, Company has conducted its business in the
ordinary course and there has not occurred: (a) any Material Adverse Effect; (b)
any amendments or changes in the Organic Documents of Company or its
Subsidiaries; (c) any damage to, destruction or loss of any asset of Company or
any of its Subsidiaries (whether or not covered by insurance) that constitutes a
Material Adverse Effect; (d) any change by Company in its accounting methods,
principles or practices except as required by any change in generally accepted
accounting principles; (e) any revaluation by Company of any of its or any of
its Subsidiaries' assets, including, without limitation, writing down the value
of inventory or writing off notes or accounts receivable other than in the
ordinary course of business; or (f) any sale, pledge, disposition of or
encumbrance upon any assets of Company or any of its
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Subsidiaries (except (i) sales of assets in the ordinary course of business and
in a manner consistent with past practice, (ii) dispositions of obsolete or
worthless assets and (iii) sales of immaterial assets not in excess of $300,000
in the aggregate.
2.4 No Undisclosed Liabilities. Except as is disclosed in Section 2.4 of
the Disclosure Schedule, neither Company nor any of its Subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise), except liabilities (a)
in the aggregate adequately provided for in Company's audited balance sheet
(including any related notes thereto) for the fiscal year ended October 28, 1995
included in the Company's 1995 Annual Report on Form 10-K (the "1995 Company
Balance Sheet"), (b) incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected on the
1995 Company Balance Sheet, (c) incurred since October 28, 1995 in the ordinary
course of business consistent with past practice, or (d) incurred in connection
with this Agreement.
2.5 Employee Benefit Plans, Employment Agreements. Except in each case as
set forth in Section 2.5 of the Disclosure Schedule, (i) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any employee pension plans (as defined
in Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), any material employee welfare plans (as defined in Section
3(1) of ERISA), or any material bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and other similar
fringe or employee benefit plans, programs or arrangements (collectively, the
"Company Employee Plans"), which could result in any liability of Company or any
of its Subsidiaries; (ii) all Company Employee Plans are in compliance in all
respects with the requirements prescribed by any and all Laws (including ERISA
and the Code), currently in effect with respect thereto (including all
applicable requirements for notification to participants or the Department of
Labor, Pension Benefit Guaranty Corporation (the "PBGC "), Internal Revenue
Service (the "IRS ") or Secretary of the Treasury), and Company and each of its
Subsidiaries have performed all material obligations required to be performed by
them under, are not in any respect in default under or violation of, and have no
knowledge of any material default or violation by any other party to, any of the
Company Employee Plans; (iii) each Company Employee Plan intended to qualify
under Section 401(a) of the Code and each trust intended to qualify under
Section 501(a) of the Code is the subject of a favorable determination letter
from the IRS, and nothing has occurred which may reasonably be expected to
impair such determination; (iv) all contributions required to be made to any
Company Employee Plan pursuant to Section 412 of the Code, or the terms of the
Company Employee Plan or any collective bargaining agreement, have been made on
or before their due dates; (v) with respect to each Company Employee Plan, no
"reportable event" within the meaning of section 4043 of ERISA (excluding any
such event for which the 30-day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063 or 4041 of ERISA has occurred; (vi) no withdrawal (including a partial
withdrawal) has occurred with respect to any multiemployer plan within the
meaning set forth in Section 3(37) of ERISA that has resulted in, or could
reasonably be expected to result in, any withdrawal liability for Company or any
of its Subsidiaries; and (vii) neither Company nor any of its Subsidiaries has
incurred, or reasonably expects to incur, any liability under Title IV of ERISA
(other than liability for premium payments to the PBGC, and contributions not in
default to the respective plans, arising in the ordinary course).
2.6 Labor Matters. Except as set forth in Section 2.6 of the Disclosure
Schedule: (i) there are no claims or proceedings pending or, to the knowledge of
Company or any of its Subsidiaries, threatened, between Company or any of its
Subsidiaries and any of their respective employees; (ii) neither Company nor any
of its Subsidiaries is a party to any collective bargaining agreement or other
labor union contract applicable to persons employed by Company or its
Subsidiaries, nor does Company or any of its subsidiaries know of any activities
or proceedings of any labor union to organize any such employees; and (iii)
neither Company nor any of its Subsidiaries has any knowledge of any strikes,
slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to
any employees of Company or any of its Subsidiaries.
2.7 Title to Properties; Leases. Company and each of its Subsidiaries has
good and defensible title to all real property, if any, reflected as an asset on
the most recent balance sheet forming part of the financial statements, or used
by Company or any of its Subsidiaries in its business if not so reflected, and
good indefeasible and merchantable title to all other assets, tangible and
intangible, reflected on such balance sheet,
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or used by Company or any of its Subsidiaries in its business if not so
reflected, or purported to have been acquired by Company or any of its
Subsidiaries since such date (other than inventory sold, or property, plant and
other equipment used up or retired, since such date, in each case in the
ordinary course of business consistent with past practice of Company and its
Subsidiaries), free and clear of all Encumbrances except for Permitted
Encumbrances. Except for financing statements evidencing Encumbrances referred
to in the preceding sentence, no financing statements under the Uniform
Commercial Code and no other filing which names Company or any of its
Subsidiaries as debtor or which covers or purports to cover any of the property
of Company or any of its Subsidiaries is on file in any state or other
jurisdiction, and neither Company nor any Subsidiary has signed or agreed to
sign any such financing statement or filing or any security agreement
authorizing any secured party thereunder to file any such financing statement or
filing. Each Lease or other occupancy or other agreement under which Company or
any of its Subsidiaries holds real or personal property has been duly
authorized, executed and delivered by either the Company or the Subsidiaries
which are parties thereto and is a legal, valid and binding obligation of each
of them, enforceable in accordance with its terms. Company and each of its
Subsidiaries has a valid leasehold interest in and enjoys peaceful and
undisturbed possession under all Leases pursuant to which it holds any real
property or tangible personal property. All of such Leases are valid and
subsisting and in full force and effect; and neither Company nor any of its
Subsidiaries nor, to Company's knowledge, any other party thereto, is in default
in the performance, observance or fulfillment of any material obligation,
covenant or condition contained in any such Lease. Neither Company nor any of
its Subsidiaries owns any real property. Section 2.7 of the Disclosure Schedule
lists all material real estate leased by Company or any of its Subsidiaries and
all material Leases. None of the fixed assets and machinery and equipment is
subject to contracts of sale, and none is held by Company or any of its
Subsidiaries as lessee or as conditional sales vendee under any Lease or
conditional sales contract and none is subject to any title retention agreement,
except as set forth in Section 2.7 of the Disclosure Schedule. The real property
(other than land), fixtures, fixed assets and machinery and equipment are in a
state of good repair and maintenance and are in good operating condition.
2.8 Compliance with Contractual Obligations and Private
Authorizations. Section 2.8 of the Disclosure Schedule sets forth a true,
accurate and complete list and description of each Private Authorization and
each Contractual Obligation which individually is material to Company and its
Subsidiaries taken as a whole, all of which are in full force and effect. Each
of Company and its Subsidiaries has obtained all Private Authorizations which
are necessary for the ownership by it of its properties and the conduct of its
business as now conducted or as presently proposed to be conducted, or which, if
not obtained and maintained, would, singly or in the aggregate, have a Material
Adverse Effect. Neither Company nor any Subsidiary is in breach or violation of,
or is in default in the performance, observance or fulfillment of, any
Contractual Obligation or Private Authorization, and no Event exists or has
occurred, which constitutes, or but for any requirement of giving of notice or
passage of time or both would constitute, such a breach, violation or default,
under any Contractual Obligation or Private Authorization, except for such
defaults, breaches or violations, as do not and will not have in the aggregate a
Material Adverse Effect. No Private Authorization is the subject of any pending
or, to Company's knowledge, threatened repudiation, revocation or termination.
2.9 Compliance with Governmental Authorizations and Applicable
Law. Section 2.9 of the Disclosure Schedule contains a brief description of all
Legal Actions which are pending or in which Company or any of its Subsidiaries
or any of its business, operations or properties, or any of its officers or
directors in connection therewith, is, engaged, or which involves the business,
operations or properties of Company or any of its Subsidiaries, or, to Company's
knowledge, which is threatened against Company or any of its Subsidiaries or any
of their business, operations or properties, or any of their officers or
directors in connection therewith.
2.10 Intellectual Property. Each of Company and its Subsidiaries is the
sole and exclusive owner of the material trademarks, trade names, service marks
and copyrights constituting a part of the Intellectual Property, the holder of
the full record title to the trademark registrations and the sole owner of the
inventions covered by the patents and patent applications constituting a part of
the Intellectual Property. Each of Company and its Subsidiaries has the legally
defensible right to use such trademarks, trade names, service marks, patents and
copyrights and, except as set forth in Section 2.10 of the Disclosure Schedule,
all the aforesaid are free and clear of all Encumbrances other than Permitted
Encumbrances. There are no claims of
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any Person pertaining to such trademarks, trade names, service marks, patents
and copyrights, no Legal Actions are pending or, to the knowledge of Company,
threatened which challenge any of Company's or its Subsidiaries' respective
rights in respect to any of its Intangible Assets, and none of its Intangible
Assets infringes upon or otherwise violates the rights of any other Person or,
to the knowledge of Company, is being infringed or violated by any other Person,
except in each case for any infringement or violation which could not have a
Material Adverse Effect.
2.11 Interested Party Transactions. Except as set forth in Section 2.11
of the Disclosure Schedule, since the date of Company's proxy statement dated
February 15, 1996, no event has occurred that would be required to be reported
as a Certain Relationship or Related Transaction, pursuant to Item 404 of
Regulation S-K promulgated by the Commission.
2.12 Insurance. Company maintains fire and casualty, general liability,
business interruption, product liability, professional liability and sprinkler
and water damage insurance policies with reputable insurance carriers, which
provide full and adequate coverage for all normal risks incident to the business
of Company and its Subsidiaries and their respective properties and assets and
are in character and amount similar to that carried by entities engaged in
similar business and subject to the same or similar perils or hazards.
2.13 Taxes
(a) Other than as disclosed in Section 2.13 of the Disclosure Schedule, (i)
Company and its Subsidiaries have filed all United States federal income Tax
Returns and all other Tax Returns required to be filed by them, (ii) Company and
its Subsidiaries have paid and discharged all Taxes due in connection with or
with respect to the periods or transactions covered by such Tax Returns and have
paid all other Taxes as are due, except such as are being contested in good
faith by appropriate proceedings (to the extent that any such proceedings are
required) and with respect to which Company is maintaining adequate reserves,
(iii) there are no other material Taxes that would be due if asserted by a
taxing authority, except with respect to which Company is maintaining reserves
to the extent currently required, Except as does not involve or would not result
in any material liability to Company or any of its Subsidiaries (i) there are no
tax liens on any assets of Company or any Subsidiary thereof; and (ii) neither
Company nor any of its Subsidiaries has granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment of,
any Tax. The accruals and reserves for Taxes (including deferred taxes)
reflected in the balance sheet of Company as at July 27, 1996 included in
Company's Quarterly Report on Form 10-Q for the quarter ended July 27, 1996 are
in all material respects adequate to cover all Taxes required to be accrued
through the date thereof (including interest and penalties, if any, thereon and
Taxes being contested) in accordance with generally accepted accounting
principles applied on a consistent basis with the 1995 Company Balance Sheet,
and the accrual and reserves for Taxes (including deferred taxes) reflected in
the books and records of Company as at the last day of Company's most recently
completed fiscal month end are in all material respects adequate to cover all
Taxes required to be accrued through such date (including interest and
penalties, if any, thereon and Taxes being contested) in accordance with
generally accepted accounting principles applied on a consistent basis with the
1995 Company Balance Sheet.
(b) Company is not, and has not been, a United States real property holding
corporation (as defined in Section 897(c)(2) of the Code) during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code. To the knowledge of
Company, neither Company nor any of its Subsidiaries owns any property of a
character, the indirect transfer of which, pursuant to this agreement, would
give rise to any material documentary, stamp or other transfer tax.
2.14 Absence of Sensitive Payments. Neither Company nor any of its
Subsidiaries (a) made any contributions, payments or gifts to or for the private
use of any governmental official, employee or agent where either the payment or
the purpose of such contribution, payment or gift is illegal under any
Applicable Law, (b) established or maintained any unrecorded fund or asset for
any purpose or made any false or artificial entries on its books, or (c) made
any payments to any Person with the intention or understanding that any part of
such payment was to be used for any purpose other than that described in the
documents supporting the payment.
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2.15 Inapplicability of Specified Statutes. Neither Company nor any of
its Subsidiaries is a "holding company", or a "subsidiary company" or an
"affiliate" of a "holding company", as such terms are defined in the Public
Utility Holding Company Act of 1935, as amended, or an "investment company" or a
company "controlled" by or acting on behalf of an "investment company", as
defined in the Investment Company Act of 1940, as amended, or a "carrier" or a
person which is in control of a "carrier", as defined in sections 10102 or 11301
of Title 49, U.S.C.
2.16 Material Agreements. Section 2.16 of the Disclosure Schedule lists
all Material Agreements relating to the ownership or operation of the business
and property of Company or any of its Subsidiaries presently held or used by
Company or any of its Subsidiaries or to which Company or such Subsidiary is a
party or to which it or any of its property is subject or bound. True, complete
and correct copies of each of the Material Agreements have been furnished by
Company to Acquiror (or true, complete and correct descriptions thereof have
been set forth in the Disclosure Schedule, if any such Material Agreements are
oral). Each of Company and its Subsidiaries has duly complied in all material
respects with all of the terms and conditions of each such Material Agreement
and has not done or performed, or failed to do or perform (and there is not
pending or, to the knowledge of Company, threatened any claim that Company or
any Subsidiary has not so complied, done and performed or fail to do and
perform) any act which would invalidate or provide grounds for the other party
thereto to terminate (with or without notice, passage of time or both) or
materially impair its rights or benefits, or increase the costs of Company or
any Subsidiary, under any of such Material Agreements.
2.17 Ordinary Course of Business. Except as described in Section 2.17 of
the Disclosure Schedule, each of Company and its Subsidiaries, since October 28,
1995 to the date hereof:
(a) has operated its business in the normal, usual and customary
manner in the ordinary and regular course of business consistent with past
practice, including the maintenance of working capital at normal operating
levels consistent with prior practice;
(b) has not sold or otherwise disposed of any material properties or
assets, other than inventory sold or otherwise disposed of in the ordinary
course of business consistent with past practice;
(c) except in each case in the ordinary course of business consistent
with past practice,
(i) has not incurred any material obligations or liabilities
(fixed, contingent or other);
(ii) has not entered into any material commitments;
(iii) has not sold or transferred any material tangible asset or
canceled any material debts or claims; and
(iv) has not incurred any indebtedness for borrowed money or issued
any debt securities or assumed, guaranteed or endorsed, or otherwise as
an accommodation became responsible for, the obligations of any person,
or made any loans or advances.
(d) has not made or committed to make any additions to its property or
any purchases of machinery or equipment, except for normal maintenance and
replacements and capital expenditures in accordance with the budget
therefor heretofore provided to Acquiror;
(e) has not discharged or satisfied any Encumbrance or paid any
obligation or liability (absolute or contingent) other than current
liabilities or obligations under contracts then existing or thereafter
entered into in the ordinary course of business, and commitments under
Leases existing on that date or incurred since that date in the ordinary
course of business;
(f) has not Encumbered any of its tangible property, other than
Permitted Encumbrances;
(g) has not Transferred or Encumbered any Intellectual Property other
than Permitted Encumbrance;
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(h) has not increased the compensation payable or to become payable to
any of its officers, employees, advisers, consultants, salesmen or agents
or otherwise alter, modify or change the terms of their employment or
engagement;
(i) has not waived any rights of substantial value without fair and
adequate consideration;
(j) has not declared, made or paid any Distribution other than any
Distribution from a Subsidiary of Company to Company or to another
Subsidiary of Company; and
(k) has not issued, pledged, granted, split, reclassified, combined or
redeemed any shares of any class of capital stock or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
such capital stock except for issuances upon exercise of outstanding
options or other convertible securities.
2.18 Broker or Finder. No Person assisted in or brought about the
negotiation of this Agreement or the subject matter of the transactions
contemplated hereby in the capacity of broker, agent or finder or in any similar
capacity on behalf of Company or any of its Subsidiaries other than as set forth
in Section 2.18 of the Disclosure Schedule, which sets forth a true, accurate
and complete description of the arrangements with any such Person.
2.19 Environmental Matters. Except as set forth in Section 2.19 of the
Disclosure Schedule:
(a) The operations of each of Company and its Subsidiaries are in
compliance in all material respects with all applicable Environmental Laws.
(b) To Company's knowledge, all real property currently or formerly
owned, leased or operated by Company or any of its Subsidiaries is free
from contamination by any Hazardous Material. None of Company or its
Subsidiaries has disposed or arranged for the disposal of Hazardous
Material so as to give rise to liability for any off-site disposal or
contamination.
(c) To the knowledge of Company, each of Company and its Subsidiaries
currently maintains all Environmental Permits necessary for their
operations and are in compliance in all material respects with such
Environmental Permits.
(d) There are no Legal Actions or Environmental Claims pending or, to
Company's knowledge, threatened, nor, to Company's knowledge,
investigations with respect to any Environmental Claim pending or
threatened, against any of Company or its Subsidiaries alleging the
violation of any Environmental Law or asserting claims regarding
Environmental Costs and Liabilities under any Environmental Law. None of
Company or its Subsidiaries has received any claims or notices alleging
liability under any Environmental Law.
(e) None of Company or its Subsidiaries nor, to the knowledge of
Company, any owner of premises leased or operated by any of Company or its
Subsidiaries has with respect to such premises, filed any formal notice
under any Environmental Law or other Law indicating past or present
generation, treatment, storage, or disposal of Hazardous Material or
reporting an Environmental Release of Hazardous Material into the
environment.
(f) There is not now nor, to the knowledge of Company, has there been
in the past on, in or under any real property owned, leased or operated by
any of Company or its Subsidiaries (i) any underground storage tanks,
aboveground storage tanks, dikes or impoundments, (ii) any friable
asbestos-containing materials or (iii) any polychlorinated biphenyls.
2.20 Certain State Statutes Inapplicable. Company's Board of Directors
has approved and ratified, within the meaning of Section 203 of the DGCL, the
transactions contemplated by this Agreement and the Securities Purchase
Agreement, so as to render the provisions of Section 203 of the DGCL
inapplicable to this Agreement and the Securities Purchase Agreement.
2.21 Information Supplied. Neither the proxy statement relating to the
approval by the stockholders of the Company of the Merger (such proxy statement
(including the exhibits thereto and the documents
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incorporated by reference therein), as amended or supplemented from time to
time, the "Proxy Statement") nor, if required under the Exchange Act, the
Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") filed by the
Company under the Exchange Act with the Proxy Statement shall, at the respective
dates first mailed to the Company's stockholders, at the time of the Company
Stockholders Meeting and at the Effective Time, as the case may be, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein,
in the light of the circumstances under which they are made, not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of proxies for the Company Stockholders Meeting
which shall have become false or misleading, except that no representation or
warranty is made by Company with respect to information supplied in writing by
Acquiror or Acquiror Parent for inclusion in the Proxy Statement or Schedule
13E-3. The Proxy Statement and Schedule 13E-3 (if one is required) shall comply
in all material respects as to form with the requirements of the Exchange Act
and the rules and regulations thereunder.
2.22 Opinion of Financial Advisor. On or prior to the date of this
Agreement, Company has received the Fairness Opinion of Piper Jaffray Inc.
("Piper Jaffray").
2.23 Voting Agreements and Noncompetition Agreements. Except as set forth
in Section 2.23 of the Disclosure Schedule, there are no voting trusts or other
agreements or understandings with respect to the voting of Company Common Stock.
Except as set forth in the Disclosure Schedule, none of Company, its
Subsidiaries or any Person in which Company or its Subsidiaries own any interest
is a party to any noncompetition agreement or other agreement or arrangement
which restrains, limits or impedes the current or contemplated business or
operations of Company or any of its Subsidiaries or would apply to Acquiror or
any of its Affiliates following the Effective Time.
2.24 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock is the only vote of the holders
of any class or series of Company capital stock necessary or required (under
Applicable Law or otherwise) to approve this Agreement and the transactions
contemplated hereby.
2.25 Consents. Except for (i) as set forth in Section 2.25 of the
Disclosure Schedule, (ii) compliance with and filings under the HSR Act, (iii)
the filing with the Commission of the Proxy Statement, and such reports under
the Exchange Act as may be required in connection with this Agreement and the
transactions contemplated hereby, (iv) the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware and appropriate documents
with the relevant authorities of other states in which the Company is qualified
to do business, (v) if required under the Exchange Act, the filing of the
Schedule 13E-3 with the Commission, and (vi) such filings in connection with any
state or local tax which is attributable to the change in beneficial ownership
of Company's or its Subsidiaries' real property, if any (collectively, "Gains
Taxes"), (the items in clauses (i) through (vi) being collectively referred to
herein as ("Company Consents"), no Governmental Authorizations or Private
Authorizations are required to be obtained or made by or with respect to Company
or any of its Subsidiaries on or prior to the Closing Date in connection with
(A) the execution, delivery and performance of this Agreement or any of the
Transaction Documents to which Company is a party, the consummation of the
transactions contemplated hereby and thereby or the taking by Company of any
other action contemplated hereby or thereby, (B) the continuing validity and
effectiveness of (and prevention of any material default under or violation of
the terms of) any Lease or Material Agreement to which any of Company or its
Subsidiaries is a party or any Governmental Authorization of any of Company or
its Subsidiaries or (C) the conduct by Company or any of its Subsidiaries of
their respective businesses following the Closing as conducted on the date
hereof.
2.26 Board Recommendation. The Board of Directors of Company, at a
meeting duly called and held on November 27, 1996, has (A) determined that this
Agreement and the transactions contemplated hereby, including, without
limitation, the Merger, are fair to and in the best interests of the
stockholders of the Company (other than Acquiror Parent and its subsidiaries),
(B) approved and adopted this Agreement and (C) resolved to recommend, subject
to the provisions of Sections 4.5 and 4.8 hereof, that the stockholders of
Company approve and adopt this Agreement and the Merger. Subject to the
provisions of Sections 4.5 and 4.8
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hereof, Company has been authorized by Piper Jaffray, subject to prior review by
Piper Jaffray, to include the Fairness Opinion (or references thereto) in the
Proxy Statement and in the Schedule 13E-3 (if one is required). Company hereby
consents to the inclusion in the Proxy Statement and the Schedule 13E-3 of the
recommendation of the Board of Directors of Company described above.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF CHILDS, ACQUIROR PARENT AND
ACQUIROR.
Childs, Acquiror Parent and Acquiror represent, warrant, covenant and agree
that:
3.1 Organization and Business; Power and Authority; Effect of Transaction.
(a) Each of Childs, Acquiror Parent and Acquiror (i) is a limited
partnership or corporation, as the case may be, duly organized, validly existing
and in good standing under the laws of its jurisdiction of formation or
incorporation as set forth in the Disclosure Schedule, and (ii) has all
requisite partnership or corporate power and authority, as the case may be, to
own or hold under lease its properties and to conduct its business as now
conducted and as presently proposed to be conducted, and is in possession of all
Governmental Authorizations and Private Authorizations to the extent required
for such ownership and lease of its property and conduct of its business.
(b) Each of Childs, Acquiror Parent and Acquiror has all requisite
partnership or corporate authority, as the case may be, necessary to enable it
to execute and deliver, and to perform its obligations under, and to consummate
the transactions contemplated by, this Agreement and each Transaction Document
executed or to be executed by it; and the execution, delivery and performance of
this Agreement and each such Transaction Document have been duly authorized by
all requisite partnership or corporate action, as the case may be, including
that, if required, of Childs partners, Acquiror Parent's stockholders and
Acquiror's stockholders. This Agreement has been duly executed and delivered by
each of Childs, Acquiror Parent and Acquiror and constitutes, each Transaction
Document executed or to be executed by it when executed and delivered by Childs,
Acquiror Parent or Acquiror will constitute, its legal, valid and binding
obligations, enforceable against it in accordance with their respective terms.
(c) Neither the execution and delivery of this Agreement or any Transaction
Document executed or to be executed by Childs, Acquiror Parent or Acquiror, nor
the consummation of the transactions herein or therein contemplated, nor
compliance with the terms, conditions and provisions hereof or thereof by
Childs, Acquiror Parent or Acquiror:
(i) (A) will conflict with, or result in a breach or violation of, or
constitute a default under, any Applicable Law on the part of Childs,
Acquiror Parent or Acquiror or (B) will conflict with or result in a breach
or violation of, or constitute a default under, any of the certificate of
limited partnership or partnership agreement of Childs or the certificate
of incorporation or by-laws of Acquiror Parent or Acquiror or (C) will
conflict with, or result in a breach or violation of, or constitute a
default under, or permit the acceleration of any obligation or liability
under, or but for any requirement of giving of notice or passage of time or
both would constitute such a conflict with, breach or violation of, or
default under, or permit any such acceleration of, any material Contractual
Obligation of Childs, Acquiror Parent or Acquiror,
(ii) will result in or permit the creation or imposition of any
Encumbrance upon any property now owned or leased by Childs or Acquiror, or
(iii) will require any Governmental Authorization or Private
Authorization, except as to the HSR Act and the filing with the Secretary
of State of Delaware of the Certificate of Merger,
except, with respect to clauses (i)(A), (i)(C), (ii) and (iii) above, such
conflicts, breaches, defaults, violations, accelerations, Encumbrances,
authorizations or filings, that individually or in the aggregate are not
reasonably likely to result in a Material Adverse Effect on Childs, Acquiror
Parent or Acquiror.
3.2 Adverse Restrictions. Neither Acquiror, Acquiror Parent or Childs is
a party to or subject to, nor is any of their property subject to, any
Applicable Law, Governmental Authorization, Contractual Obligation or
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Private Authorization, which now or, as far as Childs can now reasonably
foresee, at any time in the future could, individually or in the aggregate, have
any Material Adverse Effect on the ability of Childs, Acquiror or Acquiror to
perform any of its obligations set forth in this Agreement or any Transaction
Document.
3.3 Information Supplied. The information supplied by Childs, Acquiror
Parent or Acquiror for inclusion in the Proxy Statement and, if required under
the Exchange Act, the Schedule 13E-3 will not, on the date the Proxy Statement
or Schedule 13E-3 (or any amendment or supplement thereto) is first mailed to
stockholders of the Company, at the time of the Company Stockholders Meeting and
at the Effective Time, contain any statement which, at such time and in light of
the circumstances under which it is made, is false or misleading with respect to
any material fact, or omits to state any material fact required to be stated
therein or necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of proxies for the Company Stockholders Meeting
which shall have become false or misleading; provided, however, that Childs,
Acquiror Parent and Acquiror make no representation or warranty with respect to
information supplied by Company for inclusion in the Proxy Statement or Schedule
13E-3. The Proxy Statement and Schedule 13E-3 shall comply in all material
respects as to form with the requirements of the Exchange Act and the rules and
regulations thereunder.
3.4 Broker or Finder. No Person assisted in or brought about the
negotiation of this Agreement or the subject matter of the transactions
contemplated hereby in the capacity of broker, agent or finder or in any similar
capacity on behalf of Acquiror, Acquiror Parent or Childs.
3.5 Financing of the Merger and the Second Disposition. Acquiror Parent
or Acquiror (as the case may be) has all funds, or appropriate commitments for
funds (complete copies of which have been provided to Company), necessary for
the purchase or exchange of all outstanding shares of Company Common Stock,
Company Option Securities and Company Convertible Securities pursuant to the
Merger and the Second Disposition (as defined in the Securities Purchase
Agreement).
SECTION 4. COVENANTS OF COMPANY AND CHILDS.
4.1 Access to Information. Company shall afford to each of Childs,
Acquiror Parent and Acquiror and their accountants, counsel, financial advisors,
financing sources and other representatives (the "Representatives") full access
during normal business hours throughout the period prior to the Effective Time
to all of its and its Subsidiaries properties, books, contracts, commitments and
records (including Tax Returns) and, during such period, shall furnish promptly
(i) a copy of each report, schedule and other document filed or received by it
pursuant to the requirements of any Applicable Law (including without limitation
federal or state securities laws) or filed by it with the Commission or any
other Authority in connection with the transactions contemplated by this
Agreement or which may have a material effect on its business, operations,
properties, financial condition, or results of operations and (ii) such other
information concerning any of the foregoing as Childs, Acquiror Parent and
Acquiror shall reasonably request; provided, however, that no investigation
pursuant to this Section shall affect any representations or warranties made
herein or the conditions to the obligations of the respective parties to
consummate the transactions contemplated hereby. Childs, Acquiror Parent and
Acquiror shall hold, and shall use their reasonable business efforts to cause
their Representatives to hold, in strict confidence all non-public documents and
information furnished to Childs, Acquiror Parent and Acquiror in connection with
the transactions contemplated by this Agreement, except that Childs, Acquiror
Parent and Acquiror may disclose such information as may be necessary in
connection with seeking all Governmental Authorizations and any required
approval of Childs' limited partners, and Childs, Acquiror Parent and Acquiror
may disclose any information that is required by Applicable Law to be disclosed.
4.2 Agreement to Cooperate. (a) Each of the parties hereto shall
cooperate and use its best business efforts to prepare and file with the
applicable Authorities as promptly as practicable after the execution of this
Agreement all requisite applications and amendments thereto, together with
related information, data and exhibits, necessary to request issuance of orders
approving the transactions contemplated by this Agreement
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by all such applicable Authorities, each of which must be obtained in order to
satisfy the conditions set forth in and Section 5 hereof.
(b) Subject to the terms and conditions herein provided, each of the
parties hereto shall use reasonable efforts or take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable under Applicable Laws to consummate and make effective the
transactions contemplated by this Agreement, including using its reasonable
efforts to obtain all necessary or appropriate waivers, consents and approvals
and Commission "no-action" letters, to effect all necessary registrations,
filings and submissions (including without limitation filings under the HSR Act
and any other submissions requested by the Federal Trade Commissions or
Department of Justice) (and, in such case, to proceed with the Merger as
expeditiously as possible). The parties recognize that the consummation of the
transactions contemplated hereby is subject to the preacquisition notification
requirements of the HSR Act. Each of the parties agrees that it will file with
the Antitrust Division of the Department of Justice and the Federal Trade
Commission a Notification and Report Form in a manner so as to constitute
substantial compliance with the notification requirements of the HSR Act. Each
of the parties covenants and agrees to use its reasonable business efforts to
achieve the prompt termination or expiration of the waiting period or any
extension thereof under the HSR Act.
(c) In addition to the covenants set forth in the preceding subsections of
this Section, Childs, Acquiror Parent and Acquiror and Company each agree to
take such actions as may be necessary to obtain any Governmental Authorizations
legally required for the consummations of the transactions contemplated hereby,
including the making of any Governmental Filings, publications and requests for
extensions and waivers. Nothing in this Section shall be construed to require
(i) Childs Acquiror Parent and Acquiror to (A) sell or otherwise dispose of any
Subsidiary or assets which either alone or in the aggregate with all such other
sales or dispositions would constitute the sale or disposition of a "significant
subsidiary" of Childs Acquiror Parent or Acquiror, (B) take any action the
effectiveness of which cannot be conditioned upon the consummation of the
transactions which would have any Material Adverse Effect on Childs Acquiror
Parent or Acquiror, or (C) take any action which either would have any Material
Adverse Effect on Childs or Acquiror, following the consummation of the
transactions or materially impair the value to Childs Acquiror Parent or
Acquiror of the transactions; or (ii) Company to (A) sell or otherwise dispose
of any of its Subsidiaries or assets which either alone or in the aggregate with
all such other sales or dispositions would constitute the sale or disposition of
a "significant subsidiary" of Company, (B) take any action the effectiveness of
which cannot be conditioned upon the consummation of the transactions which
would have any Material Adverse Effect on Company, or (C) take any action which
either would have any Material Adverse Effect on Childs, Acquiror Parent or
Acquiror, following the transactions or materially impair the value to Childs,
Acquiror Parent or Acquiror of the transactions. For purposes of this Section,
the term "significant subsidiary" shall have the meaning attributed to such term
by Rule 1-02(v) of Regulation S-X of the rules and regulations of the
Commission.
(d) In addition to the covenants set forth in the preceding subsections of
this Section, (i) Company will use its best efforts on or prior to the Closing
Date to obtain the satisfaction of the conditions specified in Section 5 hereof
and (ii) Childs, Acquiror Parent and Acquiror will each use its best efforts on
or prior to the Closing Date to obtain the satisfaction of the conditions
specified in Section 5 hereof. Childs, Acquiror Parent and Acquiror agree to
cooperate with and to assist Company with respect to securing all necessary
Governmental Authorizations and Private Authorizations to the consummation of
the Merger.
(e) Company will promptly notify Childs of any and all Events which would
require any change to be made in the Disclosure Schedule or which could cause or
result in any breach or inaccuracy of Company's representations and warranties
including without limitation those set forth in Section 2, or which could impair
the likelihood that all of the conditions to be satisfied by Company which are
specified in Section 5 will be satisfied on or prior to the Closing Date.
4.3 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation, performance and enforcement of this Agreement
(including all fees and expenses of its counsel, accountants and other
consultants, advisors and representatives for all activities of such persons
undertaken pursuant to this Agreement), whether or not the transactions
contemplated hereby are consummated.
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4.4 Public Announcements. Until such time as may be mutually agreed upon
by the parties to this Agreement, neither party hereto shall, without the
approval of the other party, make or cause to be made any press release or other
public announcement that directly or indirectly discloses the transactions
contemplated by this Agreement, except as and to the extent that it is required
by law (including, without limitation, applicable federal and state securities
laws) to make such an announcement.
4.5 Stockholders' Approval. (a) Company shall, as soon as practicable
following consummation of the transactions contemplated by the Securities
Purchase Agreement, submit this Agreement and the transactions contemplated
hereby for the approval of its stockholders at a meeting of stockholders (the
"Company Stockholders Meeting", which term shall include any postponements or
adjournments of such meeting). Unless otherwise required under the applicable
fiduciary duties of the Board of Directors of Company, as determined by such
directors in good faith after consultation with and based upon the opinion of
outside legal counsel, Company shall (i) recommend adoption of this Agreement
and approval of the Merger by the stockholders of Company and include in the
Proxy Statement such recommendation and (ii) use all reasonable best efforts to
solicit from its respective stockholders proxies in favor of adoption of this
Agreement and approval of the Merger and shall take all other action necessary
or advisable to secure the vote or consent of stockholders to obtain such
approvals (the "Company Stockholder Approval"). Without limiting the generality
of the foregoing, Company agrees that its obligations pursuant to the first
sentence of this Section 4.5 shall not be affected by (i) the commencement,
public proposal, public disclosure or communication to Company of any
Acquisition Proposal (as defined in Section 4.8) or (ii) the withdrawal or
modification by the Board of Directors of the Company of its approval or
recommendation of this Agreement or the Merger. The Company Stockholders Meeting
shall be held as soon as practicable following consummation of the transactions
contemplated by the Securities Purchase Agreement. To the extent permitted by
law, Childs, Acquiror Parent and Acquiror each agree to vote all shares of
Company Common Stock beneficially owned by them in favor of the Merger.
4.6 Proxy Statement; Schedule 13E-3. (a) As soon as practicable following
the date of this Agreement, Company shall prepare and file the Proxy Statement
and, if required under the Exchange Act, the Schedule 13E-3, and shall use its
reasonable best efforts to have the Proxy Statement and, if required under the
Exchange Act, the Schedule 13E-3 cleared by the Commission as promptly as
reasonably practicable, and in addition, shall also take any action required to
be taken under Applicable Law in connection with the consummation of the
transactions contemplated by this Agreement. Childs and Acquiror and Company
shall promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by any of
them in connection with the provisions of this Section 4.6.
(b) Prior to the date of approval of the Merger by Company's stockholders,
each of Company, Childs and Acquiror shall correct promptly any information
provided by it to be used specifically in the Proxy Statement and, if required
under the Exchange Act, the Schedule 13E-3 that shall have become false or
misleading in any material respect and shall take all steps necessary to file
with the Commission and have cleared by the Commission any amendment or
supplement to the Proxy Statement and, if required under the Exchange Act, the
Schedule 13E-3 as so corrected to be disseminated to the stockholders of Company
to the extent required by Applicable Law. Without limiting the generality of the
foregoing, Company shall notify Childs promptly of the receipt of the comments
of the Commission and of any request by the Commission for amendments or
supplements to the Proxy Statement or Schedule 13E-3, or for additional
information, and shall supply Childs with copies of all correspondence between
Company or its representatives, on the one hand, and the Commission or members
of its staff, on the other hand, with respect to the Proxy Statement or Schedule
13E-3. If at any time prior to the Company Stockholders Meeting any event should
occur relating to Company, Childs or Acquiror or their respective officers or
directors which is required to be described in an amendment or supplement to the
Proxy Statement or Schedule 13E-3, the parties shall promptly inform each other.
Whenever any event occurs which is required to be described in an amendment or a
supplement to the Proxy Statement or Schedule 13E-3, Company, Childs and
Acquiror shall, upon learning of such event, cooperate in promptly preparing,
filing and clearing with the Commission and mailing to the stockholders of
Company such amendment or supplement; provided, however, that, prior to such
mailing, (i) Company, Childs and Acquiror shall consult with each other with
respect to such amendment or supplement, (ii) shall
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afford each other reasonable opportunity to comment thereon and (iii) each such
amendment or supplement shall be reasonably satisfactory to the other.
4.7 Company Board Representation; Section 14(f).
(a) If requested in writing by Acquiror, following the purchase by Acquiror
of all the shares of Company Common Stock subject to the Securities Purchase
Agreement, and from time to time thereafter, Acquiror shall be entitled to
designate up to such number of directors, rounded up to the next whole number,
on the Board of Directors of Company as shall give Acquiror representation on
the Board of Directors of Company equal to the product of the total number of
directors on the Board of Directors of Company (giving effect to the directors
elected pursuant to this sentence) multiplied by the percentage that the
aggregate number of shares beneficially owned by Acquiror or any Affiliate of
Acquiror at such time bears to the total number of shares then outstanding, and
Company shall, at such time, promptly take all actions necessary to cause
Acquiror's designees to be elected as directors of Company, including increasing
the size of the Board of Directors of Company or securing the resignations of
incumbent directors or both. At such times, Company shall use its best efforts
to cause persons designated by Acquiror to constitute the same percentage as
persons designated by Acquiror shall constitute of the Board of Directors of
Company of (i) each committee of the Board of Directors of Company (some of whom
may be required to be independent as required by Applicable Law), (ii) each
board of directors of each Subsidiary of Company and (iii) each committee of
each such board, in each case only to the extent permitted by applicable law.
(b) Company shall promptly take all actions required pursuant to Section
14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to
fulfill its obligations under this Section 4.7 and shall include in the Proxy
Statement such information with respect to Company and its officers and
directors as is required under Section 14(f) and Rule 14f-1 to fulfill such
obligations. Childs, Acquiror Parent or Acquiror shall supply to Company and be
solely responsible for any information with respect to either of them and their
nominees, officers, directors and Affiliates required by such Section 14(f) and
Rule 14f-1.
(c) Following the election or appointment of designees of Acquiror pursuant
to this Section 4.7 and prior to the Effective Time, any amendment of this
Agreement or the Certificate of Incorporation or By-laws of Company, any
termination of this Agreement by Company, any extension by Company of the time
for the performance of any of the obligations or other acts of Childs, Acquiror
Parent or Acquiror or waiver of any of Company's rights hereunder shall require
the concurrence of a majority of the directors of Company then in office who
were not designated by Acquiror.
4.8 No Solicitation.
(a) Company shall not, directly or indirectly through any officer,
director, employee, representative or agent of Company or any of its
Subsidiaries (i) solicit, initiate or encourage the initiation of any inquiries
or proposals regarding any merger, sale of substantial assets, sale of share of
capital stock (including without limitation by way of a tender offer) or similar
transactions involving Company or any Subsidiaries of Company other than the
Merger (any of the foregoing inquiries or proposals being referred to herein as
an "Acquisition Proposal"), (ii) engage in negotiations or discussions
concerning, or provide any nonpublic information to any person relating to, any
Acquisition Proposal or (iii) agree to, approve or recommend any Acquisition
Proposal. Nothing contained in this Section 4.8(a) shall prevent the Board of
Directors of Company from considering, discussing, or providing any nonpublic
information to any person relating to, a bona fide Acquisition Proposal not
solicited in violation of this Agreement, provided the Board of Directors of
Company determines in good faith (upon advice of outside counsel) that it is
required to do so in order to discharge properly its fiduciary duties. Nothing
contained in this Section 4.8(a) shall prohibit the Board of Directors of
Company from complying with Rule 14e-2 promulgated under the Exchange Act with
regard to a tender or exchange offer.
(b) Company shall immediately notify Childs and Acquiror Parent after
receipt of any Acquisition Proposal, or any modification of or amendments to any
Acquisition Proposal, or any request for nonpublic information relating to
Company or any of its Subsidiaries in connection with an Acquisition Proposal or
for access to the properties, books or records of Company or any Subsidiary by
any person or entity that informs the Board of Directors of Company or such
Subsidiary that it is considering making, or has made, an
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Acquisition Proposal. Such notice to Childs and Acquiror Parent shall be made
orally and in writing, and shall indicate whether Company is providing or
intends to provide the person making the Acquisition Proposal with access to
information concerning Company as provided in Section 4.8(c).
(c) If the Board of Directors of Company receives a request for material
nonpublic information by a person who makes, or indicates that it is considering
making, a bona fide Acquisition Proposal, and the Board of Directors determines
in good faith and upon the advice of outside counsel that it is required to
cause Company to act as provided in this Section 4.8(c) in order to discharge
properly the directors' fiduciary duties, then, provided such person has
executed a confidentiality agreement substantially similar to the one then in
effect between Company and Childs and Acquiror, Company may provide such person
with access to information regarding Company.
(d) Company shall immediately cease and cause to be terminated any existing
discussions or negotiations with any persons (other than Childs, Acquiror Parent
and Acquiror) conducted heretofore with respect to any of the foregoing. Company
agrees not release any third party from the confidentiality and standstill
provisions of any confidentiality agreement to which Company is a party.
(e) Company shall ensure that the officers, directors and employees its
Subsidiaries and any investment banker or other advisor or representative
retained by Company are aware of the restrictions described in this Section 4.8.
4.9 Tax Returns. Without the prior written consent of Childs, neither
Company nor any of its Subsidiaries shall make or change any election, change an
annual accounting or Tax period, adopt or change any accounting method, file any
amended Tax Return, enter into any closing agreement, settle any Tax claim
relating to Company or its Subsidiaries, surrender any right to claim a refund
of Taxes, take or omit to take any similar action with respect to Taxes (other
than the filing of any original Tax Return), if any such election, adoption,
change, amendment, agreement, settlement, surrender or other action or omission
would have the effect of increasing the Tax liability of Company and its
Subsidiaries, by more than an aggregate amount of $250,000; provided, however,
that Company may consent to an extension of a limitation period applicable to a
Tax claim without Childs's prior written consent (and Company will notify Childs
of any such extension no later than five (5) Business Days after taking such
action if it would relate to the Company or its Subsidiaries).
4.10 Indemnification and Insurance.
(a) The By-Laws of the Surviving Corporation shall contain the provisions
with respect to indemnification set forth in the Certificate of Incorporation of
Company on the date hereof, which provisions shall not be amended, repealed or
otherwise modified for a period of six years from the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who on
or prior to the Effective Time were directors, officers, employees or agents of
Company, unless such modification is required by law.
(b) Company shall, to the fullest extent permitted under Applicable Law or
under Company's Certificate of Incorporation or By-Laws and regardless of
whether the Merger becomes effective, indemnify and hold harmless, and, after
the Effective Time, Acquiror Parent and the Surviving Corporation shall, to the
fullest extent permitted under Applicable Law or under the Surviving
Corporation's Certificate of Incorporation or By-Laws as in effect at the
Effective Time, indemnify and hold harmless, each present and former director,
officer or employee of Company or any of its Subsidiaries (collectively, the
"Indemnified Parties") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any claim, action, suit, proceeding or
investigation whether civil, criminal, administrative or investigative, (x)
arising out of or pertaining to the transactions contemplated by this Agreement
or the Securities Purchase Agreement or (y) otherwise with respect to any acts
or omissions occurring at or prior to the Effective Time, to the same extent as
provided in Company's Certificate of Incorporation or By-Laws or any applicable
contract or agreement as in effect on the date hereof, in each case for a period
of six years after the date hereof. In the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the Effective
Time), (i) any counsel retained by the Indemnified Parties for any period after
the Effective Time shall be reasonably satisfactory to the Surviving
Corporation,
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(ii) after the Effective Time, the Surviving Corporation shall pay the
reasonable fees and expenses of such counsel, promptly after statements therefor
are received, and (iii) the Surviving Corporation will cooperate in the defense
of any such matter; provided, however, that the Surviving Corporation shall not
be liable for any settlement effected without its written consent (which consent
shill not be unreasonably withheld); and provided, further, that, in the event
that any claim or claims for indemnification are asserted or made within such
six-year period, all rights to indemnification in respect of any such claim or
claims shall continue until the disposition of any and all such claims. The
Indemnified Parties as a group may seek reimbursement pursuant to the foregoing
indemnification arrangements for the fees and expenses of only one law firm
representing them with respect to any single action.
(c) Acquiror Parent and the Surviving Corporation shall honor and fulfill
in all respects the obligations of Company pursuant to indemnification
agreements with Company's directors and of officers existing at or before the
Effective Time.
(d) For a period of six years after the Effective Time, Acquiror Parent
shall cause the Surviving Corporation to maintain in effect, if available,
directors' and officers' liability insurance covering those persons who are
currently covered by Company's directors' and officers' liability insurance
policy (a copy of which has been made available to Acquiror Parent) on terms
comparable to those now applicable to directors and officers of Company;
provided, however, that in no event shall Acquiror Parent or the Surviving
Corporation be required to expend in excess of 150% of the annual premium
currently paid by Company for such coverage; and provided further, that if the
premium for such coverage exceeds such amount, Acquiror Parent or the Surviving
Corporation shall purchase a policy with the greatest coverage available for
such 150% of the annual premium.
(e) This Section 4.10 shall survive the consummation of the Merger at the
Effective Time, is intended to benefit Company, the surviving Corporation and
the Indemnified Parties, shall be binding on all successors and assigns of
Acquiror Parent and the Surviving Corporation and shall be enforceable by the
Indemnified Parties.
4.11 Convertible Securities. On or immediately following the Second
Disposition Effective Date (as defined in the Securities Purchase Agreement),
Company shall prepay all Company Convertible Securities owned by the
Securityholders, in accordance with Section 3.6 of the Securities Purchase
Agreement.
4.12 Financing. (a) Company agrees to provide, and will cause its
Subsidiaries and its and their respective officers and employees to provide, all
necessary cooperation in connection with the arrangement of any financing to be
consummated contemporaneous with or at or after the Second Disposition Effective
Date (as defined in the Securities Purchase Agreement) or the Effective Time in
respect of the transactions contemplated by the Securities Purchase Agreement or
this Agreement, including without limitation, the execution and delivery of any
commitment letters, underwriting or placement agreements, pledge and security
documents, other definitive financing documents, or other requested certificates
or documents relating to the Second Disposition or the Merger or any refinancing
of any existing indebtedness of Company or any of its Subsidiaries under which a
default or event of default could occur as a result of the transactions
contemplated by the Securities Purchase Agreement or this Agreement.
(b) Each of Childs, Acquiror Parent and Acquiror hereby agree to use their
reasonable efforts to arrange the financing in respect of the transactions
contemplated by this Agreement described in Section 3.5 hereof, including, using
their reasonable efforts to satisfy all conditions applicable to Childs,
Acquiror Parent and Acquiror in the commitment letters and the definitive
agreements relating thereto.
4.13 Conduct of Business by Company Pending the Effective Time. Company
covenants and agrees that, between the date of this Agreement and the Effective
Time, unless Acquiror Parent shall otherwise agree in writing, (i) the business
of Company and its Subsidiaries shall be conducted only in, and Company and its
Subsidiaries shall not take any action except in, the ordinary course of
business and in a manner substantially consistent with past practice including
the maintenance of working capital at normal operating levels, (2) Company shall
use all reasonable efforts to preserve substantially intact its business
organization, to keep available the services of the current officers, employees
and consultants of Company and its Subsidiaries and
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to preserve the current relationships of Company and its Subsidiaries with
customers, suppliers and other persons with which Company or any of its
Subsidiaries has significant business relations and (3) Company shall not, and
shall not permit any Subsidiary to:
(a) amend or otherwise change its Organic Documents;
(b) sell or otherwise dispose of any material properties or assets,
other than inventory sold or otherwise disposed of in the ordinary course
of business consistent with past practice;
(c) except in each case in the ordinary course of business consistent
with past practice,
(i) incur any material obligations or liabilities (fixed,
contingent or other);
(ii) enter into any material commitments;
(iii) sell or transfer any material tangible asset or cancel any
material debts or claims; or
(iv) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any Person, or
make any loans or advances;
(d) make or commit to make any additions to its property, capital
expenditures or any purchases of machinery or equipment, except for normal
maintenance and replacements and capital expenditures in accordance with
the budget therefor heretofore provided to Acquiror;
(e) discharge or satisfy any Encumbrance or pay any obligation or
liability (absolute or contingent) other than current liabilities or
obligations under contracts existing on the date hereof or hereafter
entered into in the ordinary course of business, and commitments under
Leases existing on the date hereof or incurred since such date in the
ordinary course of business;
(f) Encumber any of its tangible property, other than Permitted
Encumbrances;
(g) transfer or Encumber any Intellectual Property, other than
Permitted Encumbrances;
(h) (i) increase the compensation payable or to become payable to any
of its officers, employees, advisers, consultants, salesmen or agents or
otherwise alter, modify or change the terms of their employment or
engagement, (ii) except in accordance with Company's current policies,
grant any severance or termination pay to, or enter into any employment or
severance agreement with, any director, officer or other employee of
Company or any Subsidiary or enter into or amend any collective bargaining
agreement, or (iii) establish, adopt, enter into or amend any bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation or other plan, trust or fund for the
benefit of any director, officer or class of employees; or
(i) settle or compromise any pending or threatened litigation which is
material or which relates to the transactions contemplated hereby or waive
any rights of substantial value without fair and adequate consideration;
(j) declare, make or pay any Distribution other than any Distribution
from a Subsidiary of Company to Company or to another Subsidiary of
Company;
(k) issue, pledge, grant, dispose of, Encumber, or authorize the
issuance, sale, pledge, grant, disposition or Encumbrance of any shares of
any class of capital stock of Company or any Subsidiary or options,
warrants, convertible securities or other rights of any kind to acquire any
shares of such capital stock except for issuances upon exercise of
outstanding Company Option Securities or Company Convertible Securities;
(l) reclassify, combine, split, divide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock; or
(m) acquire (including, without limitation, by merger, consolidation,
or acquisition of stock or assets) any interest in any corporation,
partnership, other business organization or any division thereof or
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any assets (other than inventory, equipment and similar assets acquired int
he ordinary course of business).
SECTION 5. CONDITIONS PRECEDENT TO THE MERGER.
5.1 Conditions to Obligation of Each Party to Effect the Merger. The
respective obligations of Company, Childs Acquiror Parent and Acquiror to
consummate the Merger shall be subject to the satisfaction or waiver (subject to
Applicable Law) of the following conditions:
(a) Stockholder Approval. The Merger shall have been approved and
adopted by the affirmative vote of a majority of the stockholders of
Company.
(b) No Change in Law; No Opposition. No Authority shall have enacted,
issued, promulgated, enforced or entered any law, order, executive order,
stay, decree, judgment, injunction or other order or statute, rule or
regulation which is in effect and which has the effect of making the
acquisition of shares of Company Common Stock by Childs, Acquiror Parent or
Acquiror or any Affiliate of any of them illegal or otherwise preventing or
prohibiting consummation of the transactions contemplated hereby.
(c) Antitrust Improvement Act. The filing and waiting period
requirements under the HSR Act relating to the consummation of the Merger
shall have expired or been terminated.
(d) Solvency Letters. Acquiror shall have delivered letters, in form
and substance reasonably satisfactory to Company, attesting to the solvency
of the Surviving Corporation individually, and the Surviving Corporation
and its Subsidiaries, taken as a whole, immediately before and immediately
after giving effect to the Merger, from its chief financial officer.
(e) Securities Purchase Agreement. The transactions contemplated by
the Securities Purchase Agreement shall have been consummated.
5.2 Conditions to Obligations of Childs. The obligations of Childs,
Acquiror Parent and Acquiror to effect the Merger are further subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Company set forth in this Agreement that are qualified as to
materiality shall be true and correct and any such representations and
warranties that are not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date (other than
representations and warranties which address matters only as of a certain
date which shall be true and correct (or true and correct in all material
respects, as the case may be) as of such certain date). Childs shall have
received a certificate signed on behalf of Company by the chief executive
officer and the chief financial officer of Company to the effect set forth
in this paragraph.
(b) Performance of Obligations of Company. Company shall have
performed the obligations required to be performed by it under this
Agreement at or prior to the Closing Date (except for such failures to
perform as would not have a Material Adverse Effect on Company).
(c) No Material Adverse Change. There shall not have occurred any
event or change in circumstances involving Company or any of its
Subsidiaries that, individually or when taken together with all other such
events or changes in circumstances, is or is reasonably likely to be
materially adverse to the business, operations, properties, financial
condition or results of operations of Company and its Subsidiaries taken as
a whole, or does or is reasonably likely to delay or prevent the
consummation of the transactions contemplated by the Merger Agreement.
(d) Financing. The closings of the financings described in each of
the commitment letters, dated November 26, 1996, of Fleet National Bank and
NationsBank, N.A. to provide sufficient funds to consummate the Merger
shall have taken place.
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5.3 Conditions to Obligations of Company. The obligations of Company to
effect the Merger are further subject to the satisfaction at or prior to the
Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Childs, Acquiror Parent and Acquiror set forth in this
Agreement that are qualified as to materiality shall be true and correct
and any such representations and warranties that are not so qualified shall
be true and correct in all material respects, in each case as of the date
of this Agreement and as of the Closing Date as though made on and as of
the Closing Date (other than representations and warranties which address
matters only as of a certain date which shall be true and correct (or true
and correct in all material respects, as the case may be) as of such
certain date). Company shall have received a certificate signed on behalf
of Childs, Acquiror Parent and Acquiror by an authorized officer of each to
the effect set forth in this paragraph.
(b) Performance of Obligations of Childs. Each of Childs, Acquiror
Parent and Acquiror shall have performed the obligations required to be
performed by it under this Agreement at or prior to the Closing Date
(except for such failures to perform as have not had or could not
reasonably be expected, either individually or in the aggregate, to
materially adversely affect the ability of each of Childs, Acquiror Parent
Acquiror to consummate the transactions herein contemplated or perform its
obligations hereunder).
SECTION 6. DEFINITIONS.
6.1 Principles of Construction. As used herein, unless the context
otherwise requires, the following terms (or any variant in the form thereof)
have the following respective meanings. Terms defined in the singular shall have
a comparable meaning when used in the plural, and vice versa, and the reference
to any gender shall be deemed to include all genders. Except where the context
otherwise requires, references to "this Section" or words of similar import
shall be deemed to refer to the entire section and not a particular subsection
and references to "hereunder," "herein," "hereof" or words of similar import
shall be deemed to refer to the entire Agreement and not the particular Section
or subsection or other provision. The words "includes" and "including" are not
limiting and mean "including without limitation." In computation or periods of
time from a specified date to a later specified date, the word "from" means
"from and including," the words "to" and "until" each means "to but excluding,"
and the word "through" means "to and including." Unless otherwise defined or the
context otherwise clearly requires, terms for which meanings are provided in
this Agreement shall have such meanings when used in the Disclosure Schedule and
each Instrument, notice, certificate, communication, opinion or other document
executed or required to be executed pursuant hereto or thereto or otherwise
delivered, from time to time, pursuant hereto or thereto. All accounting terms
not specifically defined herein shall be construed in accordance with GAAP.
References to any statute or regulation are to be construed as including all
statutory and regulatory provisions consolidating, amending or replacing such
statute or regulation.
6.2 "Acquiror" is defined in the preamble preceding the Recitals.
6.3 "Acquiror Parent" is defined in the preamble preceding the Recitals.
6.4 "Acquisition Proposal" is defined in Section 4.8.
6.5 "Affiliate," when used with respect to any Person, shall mean (a) any
other Person at the time directly or indirectly controlling, controlled by or
under direct or indirect common control with such Person, (b) any other Person
of which such Person at the time owns, or has the right to acquire, directly or
indirectly, five percent (5%) or more on a consolidated basis of the equity or
beneficial interest, (c) any other Person which at the time owns, or has the
right to acquire, directly or indirectly, five percent (5%) or more of any class
of the capital stock or beneficial interest of such Person, (d) any executive
officer (as defined in the Exchange Act) or director of such Person, and (e)
when used with respect to an individual, shall include a spouse, any descendant,
or any other relative (by blood, adoption or marriage) within the third degree
of such individual or a trust for the benefit of any such spouse, descendant or
relative. A Person shall be deemed to be "controlled by" any other Person if
such other Person possesses, directly or indirectly, power to direct or cause
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the direction of the management or policies of such Person or the disposition of
its assets or properties, whether by stock, equity or other ownership, by
contract, arrangement or understanding, or otherwise.
6.6 "Agreement" is defined in the Recitals.
6.7 "Applicable Law" shall mean any Law of any Authority, whether domestic
or foreign, including all federal and state Laws, to which the Person in
question is subject or by which it or any of its property is bound, and
including without limitation any: (a) administrative, executive, judicial,
legislative or other statute, code, consent decree, constitution, decree,
directive, enactment, finding, guideline, injunction, interpretation, judgment,
law, order, ordinance, policy statement, proclamation, promulgation, regulation,
requirement, rule, rule of law, rule of public policy, settlement agreement, or
writ, of any Authority, domestic or foreign; (b) common law or other legal or
quasi-legal precedent; or (c) arbitrator's, mediator's or referee's award,
decision, finding or recommendation, or, in any case, any particular section,
part or provision thereof.
6.8 "Authority" shall mean any governmental or quasi-governmental
authority, whether administrative, executive, judicial, legislative or other, or
any combination thereof, including any federal, state, territorial, county,
municipal or other government or governmental or quasi-governmental agency,
arbitrator, authority, board, body, branch, bureau, central bank or comparable
agency or entity, commission, corporation, court, department, instrumentality,
master, mediator, panel, referee, system or other political unit or subdivision
or other entity of any of the foregoing, whether domestic or foreign.
6.9 "Benefit Arrangement" shall mean any benefit arrangement (whether or
not written), including (a) any employment or consulting agreement, (b) any
arrangement providing for insurance coverage or workers' compensation benefits,
(c) any incentive bonus or deferred bonus arrangement, (d) any arrangement
providing termination allowance, severance or similar benefits, (e) any equity
compensation plan, (f) any deferred compensation plan and (g) any compensation
policy and practice, but excluding in any event any Employee Benefit Plan.
6.10 "Business Day" shall mean any day on which the principal offices of
the Commission in Washington, D.C. are open to accept filings, or, in the case
of determining a date when any payment is due, any day on which banks are not
required or authorized to close in New York, New York or Boston, Massachusetts.
6.11 "Certificate of Merger" is defined in Section 1.1.
6.12 "Certificates" is defined in Section 1.5.
6.13 "Childs" is defined in the preamble preceding the Recitals.
6.14 "Closing" is defined in Section 1.2.
6.15 "Closing Date" is defined in Section 1.2.
6.16 "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended, as set forth in Section 4980B of the Code and Part 6 of
Title I of ERISA.
6.17 "Code" shall mean the United States Internal Revenue Code of 1986,
and the rules and regulations thereunder, all as from time to time in effect, or
any successor law, rules or regulations, and any reference to any statutory or
regulatory provision shall be deemed to be a reference to any successor
statutory or regulatory provision.
6.18 "Commission" shall mean the Securities and Exchange Commission or any
successor Authority.
6.19 "Company" is defined in the preamble preceding the Recitals.
6.20 "Company Benefit Arrangement" shall mean any Benefit Arrangement
maintained by Company or any of its Subsidiaries, or any ERISA Affiliates of
Company or any of its Subsidiaries, covering any employees, directors or former
directors of Company or any of its Subsidiaries or any ERISA Affiliates of
Company or any of its Subsidiaries, and the beneficiaries of any of them.
6.21 "Company Common Stock" is defined in the Recitals.
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6.22 "Company Consents" is defined in Section 2.25.
6.23 "Company Convertible Securities" shall mean any Convertible
Securities directly or indirectly convertible into or exchangeable for shares of
Company Common Stock.
6.24 "Company Employee" shall mean any present employee of Company or any
of its Subsidiaries.
6.25 "Company Employee Plans" is defined in Section 2.5.
6.26 "Company Option Securities" shall mean any Option Securities for the
purchase or other acquisition of shares of Company Common Stock.
6.27 "Company Option Security Price" is defined in Section 1.4.
6.28 "Company SEC Reports" is defined in Section 2.2.
6.29 "Company Stockholder Approval" is defined in Section 4.5.
6.30 "Company Stockholders Meeting" is defined in Section 4.5.
6.31 "Constituent Corporations" is defined in the preamble preceding the
Recitals.
6.32 "Contractual Obligation" shall mean, with respect to any Person, any
term, condition, provision, representation, warranty, agreement, covenant,
undertaking, commitment, indemnity or other obligation set forth or which is
outstanding or existing under any Instrument (including without limitation any
Instrument relating to or evidencing any indebtedness or capital lease
obligation) to which such Person is a party or by which it or any of its
properties is bound.
6.33 "Convertible Securities" shall mean, with respect to any Person, any
evidences of indebtedness, shares of capital stock (other than common stock) or
other securities directly or indirectly convertible into or exchangeable for
shares of common stock, whether or not the right to convert or exchange
thereunder is immediately exercisable or is conditioned upon the passage of
time, the occurrence or non-occurrence or existence or non-existence of some
other Event, or both.
6.34 "Disbursing Agent" is defined in Section 1.5.
6.35 "Disbursing Agent Agreement" is defined in Section 1.5.
6.36 "Disclosure Schedule" shall mean the disclosure schedule dated as of
the date of this Agreement heretofore delivered by Company to Childs and
Acquiror.
6.37 "Dissenting Shares" is defined in Section 1.4.
6.38 "Distribution" shall mean, with respect to any Person: (a) the
declaration or payment of any dividend on or in respect of any shares of any
class of capital stock of such Person; (b) the purchase, redemption or other
retirement of any shares of any class of capital stock of such Person or any
shares of capital stock of any Subsidiary owned by a Person other than such
Person or a wholly owned Subsidiary of such Person; and (c) any other
distribution on or in respect of any shares of any class of capital stock of
such Person or any shares of capital stock of any Subsidiary owned by a Person
other than such Person or a wholly owned Subsidiary of such Person.
6.39 "DGCL" is defined in the Recitals.
6.40 "Effective Time" is defined in Section 1.1.
6.41 "Employee Benefit Plan" shall mean any benefit plan, as defined in
Section 3(3) of ERISA.
6.42 "Encumber" or "Encumbrance" shall mean any of the following:
mortgage; lien (statutory or other); preference, priority or other security
agreement, arrangement or interest; hypothecation, pledge or other deposit
arrangement; assignment; charge; levy; executory seizure; attachment;
garnishment; encumbrance (including any easement, exception, variance,
reservation or limitation, right of way, zoning restriction, building or use
restriction, and the like); conditional sale, title retention or other similar
agreement, arrangement, device or restriction; preemptive or similar right; any
financing lease involving substantially the
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same economic effect as any of the foregoing; the filing of any financing
statement under the Uniform Commercial Code or comparable law of any
jurisdiction; restriction on sale, transfer, assignment, disposition or other
alienation; or any option, equity, claim or right of or obligation to, any other
Person, of whatever kind and character.
6.43 "Entity" shall mean any corporation, firm, unincorporated
organization, association, partnership, limited liability company, a trust
(inter vivos or testamentary), an estate of a deceased, insane or incompetent
individual, business trust, joint stock company, joint venture or other
organization, entity or business, whether acting in an individual, fiduciary or
other capacity, or any Authority.
6.44 "Environmental Claim" means any notice received by Company or any of
its Subsidiaries of violation, action, claim, Environmental Lien, demand,
abatement or other order or direction (conditional or otherwise) by any
Authority or any other Person for personal injury (including sickness, disease
or death), tangible or intangible property damage, damage to the environment,
pollution, contamination or other adverse effects on the environment, or for
fines, penalties or restrictions resulting from or based upon (a) the existence
of an Environmental Release (including, without limitation, a sudden or
non-sudden accidental or non-accidental Environmental Release) of, or exposure
to, any Hazardous Material, noxious odor or illegal audible noise in, into or
onto the environment (including, without limitation, the air, soil, surface
water or groundwater) at, in, by, from or related to any property presently or
formerly owned, operated or leased by any of Company or its Subsidiaries or any
activities or operations thereon; (b) the transportation, storage, treatment or
disposal of Hazardous Material in connection with any property presently or
formerly owned, operated or leased by any of Company or its Subsidiaries or
their operations or facilities; or (c) the violation, or alleged violation, of
any Environmental Law relating to environmental matters connected with any
property presently or formerly owned, leased or operated by any of Company or
its Subsidiaries.
6.45 "Environmental Costs and Liabilities" means any and all losses,
liabilities, obligations, damages, fines, penalties, judgments, actions, claims,
costs and expenses (including, without limitation, fees, disbursements and
expenses of legal counsel, experts, engineers and consultants and the costs of
investigation and feasibility studies and Remedial Action) arising from or under
any Environmental Law or contract, agreement or similar arrangement with any
Authority or other Person required under any Environmental Law.
6.46 "Environmental Law" shall mean any Law relating to or otherwise
imposing liability or standards of conduct concerning pollution or protection of
the environment or health or safety, occupational or other, including without
limitation Laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals, noises, odors or industrial,
toxic or hazardous substances, materials or wastes, including without limitation
Hazardous Materials, whether solid, liquid or gaseous in nature and whether as
matter or energy, into the environment (including, without limitation, ambient
air, surface water, ground water, mining or reclamation or mined land, land
surface or subsurface strata) or otherwise relating to the manufacture,
processing, generation, distribution, use, treatment, storage, disposal,
cleanup, transport or handling of pollutants, contaminants, chemicals or
industrial, toxic or hazardous substances or wastes, whether solid, liquid or
gaseous in nature, including without limitation any Law relating to reporting,
licensing, permitting, investigation and remediation of any of the foregoing.
Environmental Laws shall include without limitation the Comprehensive
Environmental Response, compensation and Liability Act (42 U.S.C. Section 9601
et seq.), the Hazardous Material Transportation Act (49 U.S.C. Section 1801 et
seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et
seq.), the Clean Water Act (Federal Water Pollution Control Act) (33 U.S.C.
Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the
Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), the Safe Drinking
Water Act (42 U.S.C. Section 300f et seq.), the Endangered Species Act (16
U.S.C. Section 1531 et seq.), the Emergency Planning and Community Right-to-Know
Act of 1986 (42 U.S.C. Section 11001 et seq.), the Occupational Safety and
Health Act (29 U.S.C. Section 651 et seq.), the Federal Insecticide, Fungicide
Rodenticide Act (7 U.S.C. Section 136 et seq.), the Food, Drug and Cosmetic Act
(21 U.S.C. Section 301 et seq.), the Medical Waste Tracking Act of 1988, Pub. L.
No. 100-582, 102 Stat. 2950 (1988), and the Surface Mining Control and
Reclamation Act of 1977 (30 U.S.C. Section 1201 et seq.), as such laws have been
amended or supplemented from time to time, and any analogous present or future
federal, state, local or foreign statutes, including transfer of ownership
notification statutes.
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6.47 "Environmental Lien" means any Encumbrance arising under any
Environmental Law.
6.48 "Environmental Permit" means any permit, approval, authorization,
license, variance, registration or permission required under any applicable
Environmental Law.
6.49 "Environmental Release" means any release, spill, emission, leaking,
pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge,
dispersal, leaching, or migration on or into the indoor or outdoor environment
or into or out of any property not authorized under any Environmental Permit and
requiring notification under any applicable Environmental Law.
6.50 "ERISA" is defined in Section 2.5.
6.51 "ERISA Affiliate" shall mean a Person and/or such Person's
Subsidiaries or any trade or business (whether or not incorporated) which is
under common control with such Person's or such Person's Subsidiaries or which
is treated as a single employer with such Person or any Subsidiary of such
Person under Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(f)
of ERISA.
6.52 "Event" shall mean the occurrence or existence of any act, action,
activity, circumstance, condition, event, fact, failure to act, incident or
practice, or any set or combination of any of the foregoing.
6.53 "Exchange Act" shall mean the Securities Exchange Act of 1934, and
the rules and regulations of the Commission thereunder, all as from time to time
in effect, or any successor law, rules or regulations, and any reference to any
statutory or regulatory provision shall be deemed to be a reference to any
successor statutory or regulatory provision.
6.54 "Fairness Opinion" shall mean the opinion of Piper Jaffray to the
effect that the consideration to be received by the holders of shares of Company
Common Stock in the Merger is fair from a financial point of view to such
holders.
6.55 "GAAP" shall mean, with respect to any Person, except to the extent
that a deviation therefrom is expressly required by this Agreement, generally
accepted accounting principles applied on a consistent basis (a) as set forth in
Opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants ("AICPA") and/or in statements of the Financial
Accounting Standards Board that are applicable in the circumstances as of the
date in question, (b) when not inconsistent with such opinions and statements,
as set forth in other AICPA publications and guidelines and/or (c) that
otherwise arise by custom for the particular industry. The requirement that such
principles be consistently applied means that the accounting principles in a
current period are comparable in all material respects to those applied in
preceding period. All accounting and financial terms used in this Agreement, all
determinations and computations required to be made pursuant to the provisions
of this Agreement, and the compliance with each covenant contained in this
Agreement that relates to financial matters shall, except as otherwise
specifically provided to the contrary, be determined in accordance with GAAP as
defined in this paragraph.
6.56 "Gains Taxes" is defined in Section 2.25.
6.57 "Governmental Authorizations" shall mean all approvals, concessions,
consents, exemptions, franchises, licenses, permits, plans, registrations and
other authorizations of and all reports to and filings with all Authorities.
6.58 "Hazardous Material" means any substance, material or waste which is
regulated by any Authority in jurisdictions in which any of Company or its
Subsidiaries operates, including, (a) any material, substance or waste which is
defined as a "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous waste," "restricted hazardous waste," "contaminant," "toxic
waste" or "toxic substance" under any provision of Environmental Law, and (b)
petroleum, petroleum products, asbestos and polychlorinated biphenyls.
6.59 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvement Act
of 1976, and the rules and regulations thereunder, all as from time to time in
effect, or any successor law, rules or regulations, and any reference to any
statutory or regulatory provision shall be deemed to be a reference to any
successor statutory or regulatory provision.
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6.60 "Indemnified Parties" is defined in Section 4.10.
6.61 "Instrument" shall mean any agreement, bond, contract, debenture,
indenture, lease, letter of credit, mortgage, note, commitment, memorandum,
certificate, notice, document or other writing (whether by formal agreement,
letter or otherwise), or any oral arrangement, understanding or commitment,
under which any debt, liability or other obligation is evidenced, assumed or
undertaken, or any lien (or right or interest therein) is granted, perfected or
exists.
6.62 "Intellectual Property" shall mean, with respect to any Person, any
and all research, information, inventions, designs, procedures, developments,
discoveries, improvements, patents and applications therefor, trademarks and
applications therefor, service marks, tradenames, copyrights and applications
therefor, trade secrets, drawing, plans, systems, methods, specifications,
computer software programs, tapes, discs and related data processing software
owned by such Person or in which it has an interest and all other manufacturing,
engineering, technical, research and development data and know-how made,
conceived, developed and/or acquired by such Person, which relate to the
manufacture, production or processing of any products developed or sold by such
Person or which are within the scope of or usable in connection with such
Person's business as it may, from time to time, hereafter be conducted or
proposed to be conducted.
6.63 "IRS" or the "Service" is defined in Section 2.5.
6.64 "Law" shall mean any action, approval, authorization, code, consent
decree, constitution, demand, decree, directive, enactment, finding, guideline,
injunction, interpretation, judgment, law, license, order, ordinance, permit,
policy statement, proclamation, promulgation, regulation, requirement, rule,
rule of law, rule of public policy, settlement agreement, statute, or writ, or
the common law, or any particular section, part or provision thereof, or any
interpretation, directive, guideline or request (whether or not having the force
of law), of any Authority, including without limitation the judicial systems
thereof, or any particular section, part or provision thereof.
6.65 "Lease" shall mean any lease of property, whether real, personal or
mixed.
6.66 "Legal Action" shall mean, with respect to any Person, any litigation
or legal or other actions, arbitrations, investigations, proceedings or suits,
at law or in arbitration, equity or admiralty (whether or not purported to be
brought on behalf of such Person) affecting such Person or any of its business
or property or assets.
6.67 "Material Adverse Effect" or "Material Adverse Change" in respect of
any Person shall mean any change, effect or circumstance that, individually or
when taken together with all other such changes, effects or circumstances that
have occurred prior to the date of determination of the occurrence of the
Material Adverse Effect, (a) is or is reasonably likely to be materially adverse
to the business, operations, properties, financial condition or results of
operations of such Person and its Subsidiaries taken as a whole, or (b) does or
is reasonably likely to delay or prevent the consummation of the transactions
contemplated hereby.
6.68 "Material Agreement" or "Material Commitment" shall mean, with
respect to any Person, any Contractual Obligation which (a) was not entered into
in the ordinary course of business, (b) was entered into in the ordinary course
of business which (i) involves the purchase, sale or lease of goods or materials
or performance of services aggregating more than $250,000, (ii) extends for more
than twelve (12) months, or (iii) is not terminable on thirty (30) days' or less
notice without penalty or other payment or (c) involves indebtedness for money
borrowed or capital lease obligations in excess of $250,000.
6.69 "Merger" is defined in the Recitals.
6.70 "Merger Price" is defined in Section 1.4.
6.71 "Multiemployer Plan" shall mean a multiemployer plan, as defined in
Sections 3(37) and 4001(a)(3) of ERISA.
6.72 "1995 Company Balance Sheet" is defined in Section 3.4.
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6.73 "Option Securities" shall mean all rights, options and warrants, and
calls or commitments evidencing the right, to subscribe for, purchase or
otherwise acquire shares of capital stock or Convertible Securities, whether or
not the right to subscribe for, purchase or otherwise acquire is immediately
exercisable or is conditioned upon the passage of time, the occurrence or
non-occurrence or the existence or non-existence of some other Event.
6.74 "Organic Documents" shall mean, with respect to any Entity, the
instrument, as from time to time in effect, filed by such Entity under the laws
of its jurisdiction of organization for the purpose of effecting such
organization, its by-laws, partnership agreement, management agreement,
operating agreement and all stockholder, partner and member agreements, voting
trusts and similar arrangements applicable to any of its capital stock,
partnership interests or membership interests.
6.75 "PBGC" is defined in Section 2.5.
6.76 "Pension Plan" shall mean any employer pension benefit plan, as
defined in Section 3(2) of ERISA.
6.77 "Permitted Encumbrances" shall mean the following: (a) liens for
taxes, assessments and governmental charges not yet due and payable; (b) rights
reserved to any Authority to regulate the affected property; (c) as to leased
assets, interests of lessors and encumbrances affecting the interests of the
lessors; and (d) leases, encumbrances or restrictions that do not in any
material respect, individually or in the aggregate, affect or impair the value
or use of the affected asset or property.
6.78 "Permitted Investments" is defined in Section 1.5.
6.79 "Person" shall mean any natural individual or any Entity.
6.80 "Piper Jaffray" is defined in Section 2.22.
6.81 "Private Authorizations" shall mean all franchises, permits,
licenses, approvals, consents, concessions and other authorizations of or
filings with all Persons (other than Authorities) including without limitation
those with respect to patents, trademarks, service marks, trade names,
copyrights, computer software programs, technology and know-how.
6.82 "Prohibited Transaction" shall mean a transaction that is prohibited
under Section 4975 of the Code or Section 406 of ERISA and not exempt under
Section 4975 of the Code or Section 408 of ERISA, respectively.
6.83 "Proxy Statement" is defined in Section 2.21.
6.84 "Remedial Action" means all actions required under any applicable
Environmental Law or otherwise undertaken by any Authority, including any
capital expenditures, required or undertaken to (a) clean up, remove, treat, or
in any other way address any Hazardous Material; (b) prevent an Environmental
Release or the threat of an Environmental Release, or minimize any further
Environmental Release so it does not migrate or endanger or threaten to endanger
public health or welfare or the indoor or outdoor environment; (c) perform
pre-remedial studies and investigations or post-remedial monitoring and care; or
(d) bring facilities on any property owned, operated or leased by any of Company
or its Subsidiaries and operations conducted thereon into compliance with any
applicable Environmental Law or Environmental Permit.
6.85 "Representatives" is defined in Section 5.1.
6.86 "Reportable Event" shall mean a "reportable event", as defined in
Section 4043 of ERISA, whether or not the reporting of such event to the Pension
Benefit Guaranty Corporation has been waived.
6.87 "Schedule 13E-3" is defined in Section 2.21
6.88 "Securities Act" shall mean the Securities Act of 1933, as amended.
6.89 "Securities Purchase Agreement" is defined in the Recitals.
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6.90 "Subsidiary" shall mean, with respect to any Person, any Entity a
majority of the capital stock ordinarily entitled to vote for the election of
directors, or if no such voting stock is outstanding a majority of the equity
interests, of which is owned directly or indirectly by such Person or any other
Person which is a Subsidiary of such Person.
6.91 "Surviving Corporation" is defined in Section 1.1.
6.92 "Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies
or other assessments, including, without limitation, all net income, franchise,
profits, gross receipts, capital, sales, use, ad valorem, value added, transfer,
transfer gains, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation,
real or personal property, and estimated taxes, water, rent and sewer service
charges, custom duties, fees, assessments and charges of any kind whatsoever,
together with any interest and any penalties, fines, additions to tax or
additional amounts thereon, imposed by any taxing authority or other Authority
(federal, state, local or foreign) and shall include any transferee liability in
respect of Taxes.
6.93 "Tax Return" shall mean any return, declaration, report, estimate,
information return or statement required to be filed in respect of any Taxes.
6.94 "Termination Date" is defined in Section 7.1.
6.95 "Transfer" shall mean any sale, assignment, conveyance, transfer or
other disposition, mortgage, pledge or other Encumbrance, lease, exchange,
abandonment, parting with control of, gift, granting of an option or proxy or
other act of alienation.
6.96 "Transaction Document" shall mean any Instrument executed or to be
executed in connection with the consummation of the Merger and the other
transactions contemplated hereby, whether or not expressly referred to in this
Agreement.
SECTION 7. TERMINATION.
7.1 Termination. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the Merger and the other
transactions contemplated by this Agreement may be abandoned at any time prior
to the Effective Time, whether before or after the Company Stockholder Approval:
(a) By mutual agreement of the parties duly authorized by the board of
directors of each party; or
(b) By Childs or the Company if the Merger shall not have been
consummated on or before March 30, 1997 (the "Termination Date"); or
(c) By Childs or the Company if the Securities Purchase Agreement
shall have been terminated pursuant to Section 8.1 thereof; or
(d) By either party, if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling (which order, decree, ruling or action
the parties hereto shall use their best efforts to lift or reverse), in
each case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling
or other action shall have become final and nonappealable; or
(e) (i) By Company, if both (A) it is not in material breach of any of
its representations, warranties or covenants contained herein or in any
Transaction Document and (B) there has been a material breach of a
representation or warranty in this Agreement by Childs, Acquiror Parent or
Acquiror, or a material breach by Childs, Acquiror Parent or Acquiror of
any covenant set forth herein, or a failure of any condition to which the
obligations of Company hereunder are subject, and such breach or failure
cannot be cured by the Termination Date and has not been waived, or (ii) by
Childs, Acquiror Parent and Acquiror, if both (A) neither Childs, Acquiror
Parent nor Acquiror is in material breach of any of its representations,
warranties or covenants contained herein or in any Transaction Document and
(B) there has been a material breach of a representation or warranty in
this Agreement by Company, or a material
29
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breach by Company of any covenant set forth herein, or a failure of any
condition to which the obligations of Childs, Acquiror Parent and Acquiror
hereunder are subject, and such breach or failure cannot be cured by the
Termination Date and has not been waived; or
(f) By Childs, Acquiror Parent or Acquiror if the Board of Directors
of Company shall have (A) withdrawn or modified (including by amendment of
the Proxy Statement), in a manner adverse to Acquiror, its approval or
recommendation of this Agreement or the Merger or any of the transactions
contemplated hereby, (B) failed to include such recommendation in the Proxy
Statement, (C) approved or recommended any Acquisition Proposal from any
Person other than Childs, Acquiror Parent or Acquiror or (D) resolved to do
any of the foregoing.
In the event of any termination pursuant to this Section (other than
pursuant to paragraph (a)), written notice setting forth the reasons thereof
shall forthwith be given by the terminating party to the other party and, in the
case of paragraph (d), such termination may not occur unless the breach or
failure set forth in such notice shall not have been cured by the earlier to
occur of (x) the Termination Date and (y) the seventh (7th) day after such
written notice.
7.2 Effect of Termination. In the event of termination of this Agreement
pursuant to Section 7.1, this Agreement shall forthwith become void, there shall
be no liability on the part of any party, or any of its respective stockholders,
partners, officers or directors, to the other and all rights and obligations of
each party shall cease; except that such termination shall not relieve any party
from liability for any misrepresentation or breach of any of its warranties,
covenants or agreements set forth in this Agreement.
SECTION 8. GENERAL PROVISIONS.
8.1 Effectiveness of Representations and Warranties. All representations,
warranties, covenants and agreements made in this Agreement or in any agreement,
instrument, other document or certificates delivered in connection with the
transactions contemplated hereby shall be deemed material and relied on by each
party notwithstanding any investigation made by it or on its behalf. The
representations, warranties and agreements in this Agreement shall terminate at
the Effective Time or upon the termination of this Agreement pursuant to Section
7.1, as the case may be, except for those covenants and agreements contained
herein that by their terms apply or are to be performed in whole or in part
after the Effective Time. Nothing in this Section 8.1 shall relieve any party
for any breach of any representation, warranty or agreement in this Agreement
occurring prior to termination.
8.2 Entire Agreement. This Agreement (which term, unless the context
otherwise specifically requires, includes any exhibits or schedules hereto and
all agreements, instruments, other documents and certificates delivered pursuant
hereto or thereto) constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements,
arrangements, covenants, promises, conditions, understandings, inducements,
representations and negotiations, expressed or implied, written or oral, between
them as to such subject matter, including, without limitation, any so-called
"letters of intent" and confidentiality agreements with respect thereto.
8.3 Waivers; Amendments. Anything in this Agreement to the contrary
notwithstanding, amendments to and modifications of this Agreement may be made,
required consents and approvals may be granted, compliance with any term,
covenant, agreement, condition or other provision set forth herein may be
omitted or waived, and misrepresentations and breaches of warranties may be
waived, either generally or in a particular instance and either retroactively or
prospectively with, but only with, the written consent of the party entitled to
the benefit thereof.
8.4 Assignment; Successors and Assigns. This Agreement shall not be
assignable by either party without the prior written consent of the other. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, executors, legal representatives, successors
and permitted assigns, including, without limitation, successors by operation of
law pursuant to any merger, consolidation or sale of assets involving any of the
parties. Nothing in this Agreement expressed or implied is intended to and shall
not be construed to confer upon or create in any person (other than the parties
hereto
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and their permitted successors and assigns) any rights or remedies under or by
reason of this Agreement, including without limitation any rights to enforce
this Agreement.
8.5 Notices All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
facsimile, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 8.5):
If to Childs, Acquiror Parent or Acquiror, at:
c/o J.W. Childs Associates, L.P.
One Federal Street
Boston, Massachusetts 02110
Attention: Mr. Steven G. Segal
Facsimile: 617-753-1101
with copies to:
Christopher Cabot, Esq.
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Facsimile: 617-338-2880
and
Robert L. Friedman, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Facsimile: 212-455-2502
If to Company, at:
Central Tractor Farm & Country, Inc.
3915 Delaware Avenue
Des Moines, Iowa 50313
Attention: President
Facsimile: 515-266-4229
with a copy to:
David C. Chapin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Facsimile: 617-951-7050
or to such other person(s), telex or facsimile number(s) or address(es) as the
party to receive any such communication or notice may have designated by written
notice to the other party.
8.6 Severability. If any provision of this Agreement shall be held or
deemed to be, or shall in fact be, invalid, inoperative, illegal or
unenforceable as applied to any particular case in any jurisdiction or
jurisdictions, or in all jurisdictions or in all cases, because of the
conflicting of any provision with any constitution or statute or rule of public
policy or for any other reason, such circumstance shall not have the effect of
rendering the provision or provisions in question invalid, inoperative, illegal
or unenforceable in any other jurisdiction or in any other case or circumstance
or of rendering any other provision or provisions herein contained invalid,
inoperative, illegal or unenforceable to the extent that such other provisions
are not
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themselves actually in conflict with such constitution, statute or rule of
public policy, but this Agreement shall be reformed and construed in any such
jurisdiction or case as if such invalid, inoperative, illegal or unenforceable
provision had never been contained herein and such provision reformed so that it
would be valid, operative and enforceable to the maximum extent permitted in
such jurisdiction or in such case, except when such reformation and construction
would operate as an undue hardship on either party, or constitute a substantial
deviation from the general intent and purpose of such party as reflected in this
Agreement.
8.7 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument, binding upon all the parties hereto,
notwithstanding that all the parties are not signatories to the original or the
same counterpart. In pleading or proving any provision of this Agreement, it
shall not be necessary to produce more than one of such counterparts.
8.8 Section Headings. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
8.9 Further Acts. Each of the parties hereto agrees to do all such things
and execute and deliver all such further instruments, agreements and documents
and to take all such further action as any other party may reasonably request in
order to effectuate the terms and conditions of this Agreement.
8.10 Governing Law. Except for provisions required to be governed by the
General Corporation Law of the State of Delaware, the validity, interpretation,
construction and performance of this Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts made and performed in such jurisdiction and, in any event, without
giving effect to any choice or conflict of laws provision or rule that would
cause the application of domestic substantive laws of any other jurisdiction.
8.11 Consent to Jurisdiction and Service. To the extent permitted by
Applicable Law, hereby absolutely and irrevocably consents and submits to the
jurisdiction of the courts of the State of Delaware and of any Federal Court
located in the said jurisdiction in connection with any actions or proceedings
brought against it by any other party to this Agreement arising out of or
relating to this Agreement and hereby irrevocably agrees that all claims in
respect of any such action or proceeding may be heard and determined in any such
court.
8.12 No Presumption. This Agreement shall be construed without regard to
any presumption or other rule requiring construction against the party causing
this Agreement to be drafted.
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<PAGE> 108
IN WITNESS WHEREOF, and have each caused this Agreement to be entered into
and signed, effective and delivered as of the date first-above written.
COMPANY:
CENTRAL TRACTOR FARM
& COUNTY, INC.
By: /s/ Dean Longnecker
----------------------------------
Name: Dean Longnecker
Title: Executive Vice
President-Finance
CHILDS:
J.W. CHILDS EQUITY PARTNERS, L.P.
By: J.W. CHILDS ADVISORS, L.P.,
its general partner
By: J.W. CHILDS ASSOCIATES, L.P.,
its general partner
By: J.W. CHILDS ASSOCIATES, INC.,
its general partner
By: /s/ Adam Suttin
----------------------------------
Name: Adam Suttin
Title: Vice President
ACQUIROR PARENT:
JWC HOLDINGS I, INC.
By: /s/ Adam Suttin
----------------------------------
Name: Adam Suttin
Title: Vice President
ACQUIROR:
JWC ACQUISITION I, INC.
By: /s/ Adam Suttin
----------------------------------
Name: Adam Suttin
Title: Vice President
33
<PAGE> 109
DISCLOSURE SCHEDULE
[HERE ATTACH DISCLOSURE SCHEDULE]
<PAGE> 110
EXHIBIT 2
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), is dated as of
November 27, 1996, by and among each of the undersigned securityholders
(individually, a "Securityholder" and collectively, the "Securityholders") of
Central Tractor Farm & Country, Inc., a Delaware corporation ("Company"), J.W.
Childs Equity Partners, L.P., a Delaware limited partnership ("Childs"), and JWC
Acquisition I, Inc., a Delaware corporation and an indirect, wholly-owned
subsidiary of Childs ("Acquiror").
RECITALS
A. Each Securityholder is the beneficial and record owner of the number of
shares, if any, of common stock, par value $.01 per share, of Company ("Company
Common Stock") and Company option securities ("Company Option Securities") set
forth opposite such Securityholder's name on Schedule A hereto.
B. Each Securityholder is the beneficial and record owner of Company
Convertible Securities, if any, and Company Option Securities, if any, (which
under existing circumstances may be converted into or exercised for the number
of shares of Company Common Stock set forth opposite each such Securityholder's
name on Schedule A hereto) set forth opposite such Securityholder's name on
Schedule A hereto.
C. Securityholders desire to sell and transfer (the "Disposition"), and
Acquiror desires to purchase, all shares of Company Common Stock and Company
Option Securities beneficially owned by Securityholders for $14.00 per share, on
the terms and conditions set forth in this Agreement.
D. Childs, Acquiror, JWC Holdings I, Inc., a Delaware corporation and a
subsidiary of Childs ("Acquiror Parent"), and Company have concurrently herewith
entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant
to which (i) Acquiror has agreed to pay $14.25 per share (the "Merger Price")
for all the issued and outstanding shares of Company Common Stock, excluding the
Disposition Shares (as defined herein) being sold pursuant to this Agreement,
and (ii) Acquiror will be merged with and into Company (the "Merger"), with
Company continuing as the surviving corporation.
E. In consideration for the agreements contained herein, prior to the date
hereof, and prior to the time at and date on which Childs, Acquiror Parent or
Acquiror became an "interested stockholder" for purposes of Section 203 of the
DGCL, the board of the directors of the Company has approved the agreements of
the Securityholders provided in this Agreement.
F. In order to induce Childs, Acquiror Parent and Acquiror to enter into
the Merger Agreement, the Securityholders wish to make certain representations,
warranties, covenants and agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants hereinafter set forth, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. Terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa. The reference to any gender
shall be deemed to include all genders. Capitalized terms used herein (including
in the recitals) but not otherwise defined herein shall have the respective
meanings ascribed thereto in the Merger Agreement. The following terms shall
have the following meanings:
"beneficially own" shall have the meaning set forth in Rule 13d-3
under the Securities Exchange Act of 1934, as amended.
"Representatives" shall have the meaning set forth in Section 3.4.
<PAGE> 111
"Topping Fee" means, a fee payable by Childs to the Securityholders,
which shall be pro rata in accordance with the number of Disposition Shares
(as defined in Section 2.1) acquired from each Securityholder pursuant to
this Agreement, as an addition to the Aggregate Purchase Price (as defined
in Section 2.2(b) hereof), equal to (x) 50% of the excess, if any, of any
cash or non-cash consideration received by Childs, Acquiror or any of their
Affiliates in connection with a Topping Fee Event, over the aggregate
consideration which would have been payable to the Securityholders in
respect of the Disposition Shares (calculated using the $14.25 per share
Merger Price); provided that, (i) if the consideration received by Childs
or Acquiror or such Affiliates shall be securities listed on a national
securities exchange or traded on the NASDAQ National Market ("NASDAQ"), the
per share value of such consideration shall be equal to the closing price
per share listed on such national securities exchange or NASDAQ on the date
such transaction is consummated and (ii) if the consideration received by
Childs, Acquiror or such Affiliates shall be in a form other than
securities, the per share value shall be determined in good faith as of the
date such transaction is consummated by Childs and the Securityholders, or,
if Childs and the Securityholders cannot reach agreement, by a nationally
recognized investment banking firm reasonably acceptable to the parties. In
determining the fair market value of the aggregate consideration received
or to be received by a Securityholder in connection with a Topping Fee
Event, all relevant factors shall be considered including, without
limitation, the nature and timing of the consideration to be paid and the
presence of contingent consideration or of contingent liabilities;
provided, however, that in any event, if, during the 12 month period
following the date of this Agreement, the outstanding shares of Company
Common Stock shall have been changed into a different number of shares or a
different class by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares, the aggregate consideration received or to be received by a
Securityholder in connection with a Topping Fee Event shall be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares.
"Topping Fee Event" means, (a) a direct or indirect sale or other
disposition by Childs or its Affiliates (other than the Company pursuant to
an offering of its shares of Company Common Stock) of shares of Company
Common Stock, (b) a merger or consolidation of Company or any of its
Subsidiaries with or into another Entity, (c) a sale or other disposition
of all or substantially all of the assets of Company and its Subsidiaries
(whether in one or more transactions) or (d) any other extraordinary
transaction involving Company or any of its Subsidiaries or any of their
respective assets, in each case in which Childs or any of its Affiliates
(other than the Company pursuant to an offering of its shares of Company
Common Stock) receives, cash or non-cash consideration with respect to any
of its shares of Company Common Stock, provided that such sale, other
disposition, merger, consolidation or other extraordinary transaction is
consummated (or a definitive written agreement with respect thereto is
entered into) within twelve (12) months after the date of this Agreement.
ARTICLE II
SALE OF SECURITIES AND TERMS OF PAYMENT
2.1 The Sale. (a) Initial Disposition. Upon the terms and subject to the
conditions of this Agreement, on the date hereof the Securityholders will sell,
assign, transfer and deliver to Acquiror, and Acquiror will accept and purchase
from Securityholders (the "Initial Disposition"), 1,048,214 aggregate shares of
Company Common Stock (the "Initial Disposition Shares"). The number of Initial
Disposition Shares to be sold by each of the Securityholders on the date hereof
is set forth opposite such Securityholder's name in Schedule A to this Agreement
under the column "Number of Initial Disposition Shares".
(b) Second Disposition. Upon the terms and subject to the conditions of
this Agreement, on the Second Disposition Effective Date (as hereinafter
defined) the Securityholders will sell, assign, transfer and deliver to
Acquiror, and Acquiror will accept and purchase from the Securityholders (the
"Second Disposition"), (i) 5,783,515 shares of Company Common Stock, and (ii)
the Common Stock Purchase Warrant No. 1 (the "Warrant") issued on October 5,
1994 (collectively, the "Second Disposition Shares"; and together with the
Initial Disposition Shares, the "Disposition Shares"). The number of Second
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<PAGE> 112
Disposition Shares to be sold by each of the Securityholders on the Second
Disposition Effective Date is set forth opposite such Securityholder's name on
Schedule A to this Agreement under the column "Number of Second Disposition
Shares".
2.2 Purchase Price; Manner of Payment. Upon the terms and subject to the
conditions contained in this Agreement, in reliance upon the representations,
warranties and agreements of the Securityholders contained herein, and in
consideration of the Initial Disposition and the Second Disposition:
(a) On the date hereof Acquiror will pay or cause to be paid to each
Securityholder, in the form of a bank check or certified check payable to
the order of such Securityholder, an amount equal to the product of (x)
$14.00 times (y) the number of Initial Disposition Shares to be sold by
such Securityholder (the "Initial Purchase Price"); and
(b) On the Second Disposition Effective Date, Acquiror will pay or
cause to be paid to each Securityholder, in immediately available funds by
wire transfer to bank accounts designated three (3) business days in
advance by each of the Securityholders or in the form of a bank check or
certified check payable to each of the Securityholders, an amount equal to
(i) in the case of Second Disposition Shares which are shares of Company
Common Stock, the product of (x) $14.00 times (y) the number of Second
Disposition Shares to be sold by such Securityholder, and (ii) in the case
of Second Disposition Shares which are Company Option Securities, a cash
payment equal to the product of (x) the number of shares of Company Common
Stock subject to such Company Option Security and (y) the excess, if any,
of $14.00 over the per share exercise price of the Company Option Security
(the "Second Disposition Price" and, together with the Initial Purchase
Price, the "Aggregate Purchase Price").
2.3 Delivery of Stock Certificates. (a) In consideration for the Initial
Purchase Price, each Securityholder shall deliver to Acquiror on the date hereof
a certificate or certificates representing all of the Initial Disposition Shares
owned by such Securityholder which certificates shall name Acquiror as the owner
of such Initial Disposition Shares.
(b) In consideration for the Second Disposition Price, each Securityholder
shall deliver to the Acquiror on the Second Disposition Effective Date a
certificate or certificates representing all of the Second Disposition Shares
owned by such Securityholder together with stock powers duly executed and
endorsed in blank and the Warrant.
ARTICLE III
THE SECOND DISPOSITION CLOSING
3.1 Time and Place of Closing. Upon the terms and subject to the
conditions contained in this Agreement, the closing of the Second Disposition
(the "Second Disposition Closing") will take place at the offices of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017 at 10:00 a.m.
on the first business day following the date on which all of the conditions to
each party's obligations hereunder set forth in Article VI hereof have been
satisfied or waived, or such other place or time or both as the parties may
agree; provided however, that in no event will the Second Disposition Closing
occur on or before December 16, 1996. The date and time on which the Second
Disposition Closing actually occurs and the transactions contemplated in
connection therewith become effective is hereinafter referred to as the "Second
Disposition Effective Date".
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<PAGE> 113
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE SECURITYHOLDERS
4.1 Representations and Warranties of the Securityholders. Each
Securityholder represents and warrants, severally but not jointly, to Childs and
Acquiror as follows:
(a) Ownership of Company Securities. Such Securityholder is the
beneficial owner of the shares of Company Common Stock, Company Convertible
Securities and/or Company Option Securities set forth opposite such
Securityholder's name on Schedule A, free and clear of all Encumbrances.
There are no rights, agreements, arrangements or commitments of any
character to which such Securityholder is a party relating to the pledge,
disposition or voting of any shares of capital stock of Company or any of
its Subsidiaries that are owned by such Securityholder or which may be
issued to such Securityholder upon a conversion of Company Convertible
Securities or exercise of Company Option Securities, and there are no
voting trusts or voting agreements with respect to any of such shares or
securities. The shares of Company Common Stock and Company Convertible
Securities or Company Option Securities set forth opposite such
Securityholder's name on Schedule A constitute all of the outstanding
shares of capital stock of Company and all Company Convertible Securities
and Company Option Securities owned beneficially or of record by such
Securityholder and, except as disclosed in Schedule A, such Securityholder
does not own beneficially or of record any other capital stock of Company
or Company Convertible Securities or Company Option Securities.
(b) Authority to Execute and Perform Agreements. Such Securityholder
has the full legal right and power and all authority required to enter
into, execute and deliver this Agreement and to perform fully such
Securityholder's obligations hereunder. The execution and delivery of this
Agreement by such Securityholder have been duly authorized by all requisite
organizational action, if any, on the part of such Securityholder. This
Agreement has been duly executed and delivered and constitutes the legal,
valid and binding obligation of such Securityholder enforceable against
such Securityholder in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or similar laws now or hereafter in
effect generally affecting creditors' rights or by general principles of
equity, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
(c) No Conflicts; Consents.
(i) The execution and delivery by such Securityholder of this
Agreement do not, and the consummation of the transactions contemplated
hereby will not, (A) conflict with or result in any violation of or
default (with or without notice or lapse of time or both) under (I) the
Organic Documents of such Securityholder, (II) any Contractual
Obligation or Private Authorization of such Securityholder, (III) any
Applicable Law or (B) create or give rise to any Encumbrance on any of
the shares of Company Common Stock, Company Convertible Securities or
Company Option Securities set forth opposite such Securityholder's name
on Schedule A.
(ii) Except for compliance with and filings under the HSR Act and
compliance with the provisions of Section 203 of the DGCL, no
Governmental Authorizations or Private Authorizations are required to be
obtained or made by such Securityholder in connection with the execution
and delivery by such Securityholder of this Agreement or the
consummation of the transactions contemplated hereby.
(d) Information Supplied. None of the information specifically
supplied or to be supplied by such Securityholder with respect to such
Securityholder for inclusion or incorporation by reference in the Proxy
Statement or Schedule 13E-3 will, at the date such documents are first
published, sent or given to the stockholders of Company, at the time of
the Company Stockholders Meeting or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
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<PAGE> 114
4.2 Representations and Warranties of Childs and Acquiror. Each of Childs
and Acquiror represents and warrants to the Securityholders:
(a) Authority to Execute and Perform Agreements. Each of Childs and
Acquiror has the full legal right and power and all authority required to
enter into, execute and deliver this Agreement and to perform fully their
obligations hereunder. The execution and delivery of this Agreement by
Childs and Acquiror has been duly authorized by all requisite
organizational action, if any, on the part of each of Childs and Acquiror.
This Agreement has been duly executed and delivered and constitutes the
legal, valid and binding obligation of each of Childs and Acquiror
enforceable against each of Childs and Acquiror in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or similar
laws now or hereafter in effect generally affecting creditors' rights or by
general principles of equity, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
(b) No Conflicts; Consents.
(i) The execution and delivery by each of Childs and Acquiror of
this Agreement do not, and the consummation of the transactions
contemplated hereby and by the Merger Agreement will not, conflict with
or result in any violation of or default (with or without notice or
lapse of time or both) under (A) the Organic Documents of such person,
(B) any Contractual Obligation or Private Authorization of such person
or (C) any Applicable Law.
(ii) Except for compliance with and filings under the HSR Act and
compliance with the provisions of Section 203 of DGCL, no Governmental
Authorizations or Private Authorizations are required to be obtained or
made by such Securityholder in connection with the execution and
delivery by such Securityholder of this Agreement or the consummation of
the transactions contemplated hereby or by the Merger Agreement.
(c) Financing. Acquiror Parent or Acquiror (as the case may be) has
all funds, or appropriate commitments for funds (complete copies of which
have been provided to Company), necessary for the purchase of all
outstanding shares of Company Common Stock and Company Option Securities
held by the Securityholders pursuant to this Agreement.
(d) Purchase from Affiliate; Restrictions on Transfer. (i) Childs and
Acquiror acknowledge that Securityholders are "affiliates" of Company and,
accordingly, any shares of Company Common Stock, Company Convertible
Securities and Company Option Securities acquired hereunder will be
"restricted securities" within the meaning of Rule 144 under the Securities
Act and the certificates evidencing any such securities will bear a legend
thereon regarding restrictions on resale.
(ii) Acquiror is purchasing the Disposition Shares (as defined in
Section 2.1 hereof) for its own account and not with a view to, or for
resale in connection with, the distribution thereof in violation of the
Securities Act.
(iii) Each of Childs and Acquiror has such knowledge and experience in
financing and business matters so as to be capable of evaluating the merits
and risks of such investment, is able to incur a complete loss of such
investment and to bear the economic risk of such investment for a long
period of time. Childs is an "accredited investor" as that term is defined
in Regulation D under the Securities Act.
(iv) Each of Childs and Acquiror have made its own inquiry and
investigation into, and based thereon will have formed an independent
judgment concerning, the business, assets, financial condition, results of
operations and liabilities of Company and its Subsidiaries. In connection
with such inquiry and investigation, Childs and Acquiror have received
certain estimates, projections, forecasts, plans and budgets and other
forward-looking information, and Childs and Acquiror acknowledge that (i)
there are uncertainties inherent in the preparation of any such information
and they have taken and will take full responsibility for making their own
evaluation of the accuracy, adequacy and reliability of all such estimates,
projections, forecasts, plans, budgets and other forward-looking
information, and (ii) the Securityholders have not made, and are not hereby
making, any representation or warranty with respect
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<PAGE> 115
to such information or otherwise relating to the business, assets,
financial condition, results of operations or liabilities of Company and
its Subsidiaries.
ARTICLE V
COVENANTS
5.1 No Disposition of Securities. Each Securityholder agrees that such
Securityholder shall not, except pursuant to this Agreement, sell, transfer,
pledge, hypothecate, encumber or otherwise dispose of, or enter into any
contract, option or other arrangement or understanding with respect to the sale,
transfer, pledge, hypothecation, encumbrance or other disposition of, any of or
any interest in any of the shares of Company Common Stock, Company Convertible
Securities or Company Option Securities, or shares of Company Common Stock
issuable upon conversion of any such Company Convertible Securities or exercise
of any such Company Option Securities, set forth opposite such Securityholder's
name on Schedule A. Each Securityholder agrees that (a) the certificates
representing the shares of Company Common Stock and Company Convertible
Securities and Company Option Securities owned by such Securityholder shall bear
a legend indicating that such shares or securities, as the case may be, are
subject to this Agreement, which legend may be removed upon termination of this
Agreement, (b) any attempted or purported transfer of Company Common Stock,
Company Convertible Securities or Company Option Securities in violation of this
Section 5.1 shall be null and void and without effect, and (c) Company shall not
be required to enter in its stock or other records, or reflect, recognize or
give effect to for any purpose, any transfer of securities of Company in
violation of this Agreement.
5.2 Voting Arrangements. Each Securityholder agrees that, except pursuant
to this Agreement, it shall not grant any proxies, deposit any shares of Company
Common Stock into a voting trust or enter into any voting agreement with respect
to any shares of Company Common Stock now owned beneficially or of record by
such Securityholder, other than proxies to vote such shares at any annual or
special meeting of stockholders of Company on matters unrelated to the matters
set forth in Section 7.1 hereof.
5.3 Satisfaction of Conditions to the Merger. Each Securityholder agrees
that, subject to the fiduciary duty of any of its Representatives (as
hereinafter defined) serving as a director of Company, such Securityholder, in
its capacity as such, shall assist and cooperate with the parties to the Merger
Agreement in doing all things necessary, proper or advisable under Applicable
Laws as promptly as practicable to consummate and make effective the Merger and
the other transactions contemplated by the Merger Agreement. Each Securityholder
agrees that it shall not take any action that would or is reasonably likely to
result in any of its representations and warranties set forth in this Agreement
being untrue as of the date made.
5.4 No Solicitation. Each Securityholder agrees that such Securityholder
shall not, nor shall it authorize or permit any of its partners, officers,
affiliates, employees, agents, investment bankers, attorneys, financial advisors
or other representatives (collectively, "Representatives") to, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing
information or assistance) or take other action to facilitate any inquiries or
the making of any proposal that constitutes or may reasonably be expected to
lead to, an Acquisition Proposal from any Person other than Childs, Acquiror
Parent and Acquiror, or engage in any discussions or negotiations relating
thereto or in furtherance thereof or accept or enter into any agreement with
respect to any Acquisition Proposal; provided, however, that, notwithstanding
any other provision of this Agreement, if a Representative of such
Securityholder is a director of Company, such Representative may take any action
in such Person's capacity as a director that the Board of Directors of Company
would be permitted to take in accordance with Section 4.5 and Section 4.8 of the
Merger Agreement. Subject to the foregoing, such Securityholder shall
immediately cease and cause to be terminated any existing solicitation,
initiation, encouragement, activity, discussion or negotiation with any parties
conducted heretofore by such Securityholder or any of its Representatives with
respect to any of the foregoing.
5.5 Topping Fee. In the event that any Topping Fee Event shall occur,
Childs shall pay to the Securityholders any Topping Fee due to the
Securityholders in connection with such Topping Fee Event. Payment of such
Topping Fee to the Securityholders shall be due immediately following the
consummation of
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<PAGE> 116
the related Topping Fee Event and shall be payable in immediately available
funds by wire transfer to accounts designated in writing by the Securityholders.
5.6 Prepayment of Company Convertible Securities. Each Securityholder
hereby consents and agrees, notwithstanding any term, provision or condition
contained in any Company Convertible Securities to the contrary, to the
prepayment by Company on the Second Disposition Effective Date of all of the
outstanding principal, together with all accrued and unpaid interest thereon, of
the Company Convertible Securities now or hereafter owned beneficially or of
record by such Securityholder, and waives any and all provisions and
requirements under such Company Convertible Securities for the payment of any
prepayment penalty, premium or similar amount in connection with any such
prepayment. Each Securityholder acknowledges and agrees that such prepayment
shall constitute payment in full and satisfaction of each such Company
Convertible Security so prepaid, and agrees to surrender each such Company
Convertible Security to Company on the Second Disposition Effective Date against
such prepayment.
5.6 Cooperation. Each of the parties hereto shall use reasonable efforts
or take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under Applicable Laws to consummate and
make effective the transactions contemplated by this Agreement, including using
its reasonable efforts to obtain all necessary or appropriate waivers, consents
and approvals, to effect all necessary filings and submissions, including
without limitation filings under the HSR Act.
ARTICLE VI
CLOSING CONDITIONS
6.1 Conditions to Obligations of Securityholders, Childs and
Acquiror. The respective obligations of the Securityholders, Childs and
Acquiror to effect the Second Disposition shall be subject to the satisfaction
or waiver (subject to Applicable Law) of the following conditions on or prior to
the Second Disposition Closing Date:
(a) No Change in Law; No Opposition. No Authority shall have enacted,
issued, promulgated, enforced or entered any law, order, executive order,
stay, decree, judgment, injunction or other order or statute, rule or
regulation which is in effect and which has the effect of making the
acquisition of shares of Company Common Stock by Childs, Acquiror Parent or
Acquiror or any Affiliate of any of them illegal or otherwise preventing or
prohibiting consummation of the transactions contemplated hereby or by the
Merger Agreement.
(b) HSR Act. The filing and waiting period requirements under the HSR
Act relating to the consummation of the Second Disposition shall have
expired or been terminated.
6.2 Conditions to Obligations of Childs and Acquiror. The obligations of
Acquiror and Childs to effect the Second Disposition shall be further subject to
the fulfillment at or prior to the Second Disposition Effective Date of the
following conditions, any one or more of which may be waived by Acquiror or
Childs:
(a) The Securityholders shall be in compliance in all material
respects with the agreements contained in this Agreement required to be
performed and complied with by them as of the Second Disposition Effective
Date, and the representations and warranties of Securityholders set forth
in this Agreement shall be true and correct in all material respects
(without giving effect to any qualifications as to materiality contained in
any such representation) as of the date of this Agreement and as of the
Second Disposition Closing Date as though made at and as of the Second
Disposition Closing Date, and Childs and Acquiror shall have received
certificates to that effect signed by each Securityholder.
(b) Company shall be in compliance in all material respects with the
agreements contained in the Merger Agreement required to be performed and
complied with by it as of the Second Disposition Effective Date, and the
representations and warranties of Company set forth in the Merger Agreement
shall be true and correct in all material respects (without giving effect
to any qualifications as to materiality contained in any such
representation) as of the date of the Merger Agreement and as of the
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<PAGE> 117
Second Disposition Closing Date as though made at and as of the Second
Disposition Closing Date, and Childs and Acquiror shall have received
certificates to that effect signed by the Company.
(c) Board Resignation. If requested by Childs, each Securityholder
shall have caused the persons on the Board of Directors of Company who are
designees of such Securityholders to resign from their positions on the
Board of Directors of Company effective as of the Second Disposition
Effective Date.
(d) No Material Adverse Change. There shall not have occurred any
event or change in circumstances involving Company or any of its
Subsidiaries that, individually or when taken together with all other such
events or changes in circumstances, is or is reasonably likely to be
materially adverse to the business, operations, properties, financial
condition or results of operations of Company and its Subsidiaries taken as
a whole, or does or is reasonably likely to delay or prevent the
consummation of the transactions contemplated by this Agreement or the
Merger Agreement.
(e) Consents. Company shall have obtained consents to the assignment
and continuation of all Contractual Obligations which, in the judgment of
Childs, require such consents, provided, that this condition shall be
deemed satisfied with respect to landlords' consents and other consents and
approvals relating to the ownership and operation of the Company's and its
Subsidiaries' stores if all such consents and approvals are obtained with
respect to stores whose annual store level cash contribution in the year
ended November 2, 1996 aggregated at least 90% of the consolidated store
level cash contribution of the Company and its Subsidiaries for such year.
(f) Affiliate Transactions. Each of the Contractual Obligations
between (a) the Company or any of its Subsidiaries and (b) the
Securityholders or Butler Capital Corporation, or their respective
Affiliates, officers, directors, employees, agents, partners, or
stockholders shall have been terminated (except for any agreements relating
to the purchase of inventory from entities controlled by Butler Capital
Corporation).
(g) Financing. The closings of the financings described in each of
the commitment letters, dated November 26, 1996, of Fleet National Bank and
NationsBank, N.A. sufficient to provide funds to consummate the Second
Disposition shall have taken place.
6.3 Conditions to Obligations of the Securityholders. The obligations of
the Securityholders to effect the Second Disposition shall be further subject to
the fulfillment at or prior to the Second Disposition Effective Date of the
following conditions, any one or more of which may be waived by the
Securityholders:
(a) Childs and Acquiror shall be in compliance in all material
respects with the agreements contained in this Agreement required to be
performed and complied with by them as of the Second Disposition Effective
Date, and the representations and warranties of Childs and Acquiror set
forth in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Second Disposition Closing
Date as though made at and as of the Second Disposition Closing Date, and
the Securityholders shall have received certificates to that effect signed
by Childs, Acquiror Parent and Acquiror.
(b) Childs, Acquiror Parent and Acquiror shall be in compliance in all
material respects with the agreements contained in the Merger Agreement
required to be performed and complied with by them as of the Second
Disposition Closing Date, and the representations and warranties of Childs,
Acquiror Parent and Acquiror set forth in the Merger Agreement shall be
true and correct in all material respects (without giving effect to any
qualifications as to materiality contained in any such representation) as
of the date of the Merger Agreement and as of the Second Disposition
Closing Date as though made at and as of the Second Disposition Closing
Date, and Company shall have received certificates to that effect signed by
Childs, Acquiror Parent and Acquiror.
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ARTICLE VII
PROXY; WAIVER OF RIGHTS
7.1 Proxy. (a) Each Securityholder hereby agrees that, during the term of
this Agreement, at any meeting of the stockholders of Company, however called,
and at every adjournment thereof, and in any action by written consent of the
stockholders of Company, to (i) vote all of the shares of Company Common Stock
then owned by such Securityholder in favor of the adoption of the Merger
Agreement as in effect on the date hereof (as such agreement may be amended (A)
as contemplated by Section 8.3 of the Merger Agreement or (B) with the consent
of such Securityholder) and each of the other transactions contemplated thereby
and any action required in furtherance thereof, (ii) vote such shares against
any action or agreement that would result in a breach in any material respect of
any covenant, representation or warranty or any other obligation of Company
under the Merger Agreement, and (iii) vote such shares against any Acquisition
Proposal or any other action or agreement that, directly or indirectly, is
inconsistent with or that would, or is reasonably likely to, directly or
indirectly, impede, interfere with or attempt to discourage the Merger or any
other transaction contemplated by the Merger Agreement, including but not
limited to (I) any extraordinary corporate transaction (other than the Merger on
the terms set forth in the Merger Agreement), such as a merger, consolidation,
business combination, reorganization, recapitalization or liquidation involving
Company or any of its Subsidiaries, (II) a sale or transfer of a material amount
of assets of Company or any of its Subsidiaries, (III) any redemption of
securities of Company or any of its Subsidiaries, or (IV) any material change in
Company's capitalization, corporate structure or business; provided, however,
that, if a Representative of such Securityholder is a director of Company,
nothing herein shall be construed to obligate such Representative to act in such
Representative's capacity as a director in any manner which conflicts with such
Person's fiduciary duties as a director of Company.
(b) In furtherance of the foregoing, (i) each Securityholder hereby
appoints Childs and the proper officers of Childs and its general partners, and
each of them, with full power of substitution in the premises, its proxies to
vote all such Securityholder's shares of Company Common Stock now or hereafter
owned beneficially or of record by such Securityholder at any meeting, general
or special, of the stockholders of Company, and to execute one or more written
consents or other instruments from time to time in order to take such action
without the necessity of a meeting of the stockholders of Company, in accordance
with the provisions of the preceding paragraph and (ii) Childs hereby agrees to
vote such shares or execute written consents or other instruments in accordance
with the provisions of the preceding paragraph.
(c) The proxy and power of attorney granted herein shall be irrevocable
during the term of this Agreement, shall be deemed to be coupled with an
interest and shall revoke all prior proxies granted by such Securityholder. Such
Securityholder shall not grant any proxy to any person which conflicts with the
proxy granted herein, and any attempt to do so shall be void. The power of
attorney granted herein is a durable power of attorney and shall survive the
disability or incompetence of such Securityholder.
7.2 Waiver of Appraisal Rights. Each Securityholder hereby waives its
rights to appraisal under Section 262 of the Delaware General Corporation Law
with respect to any shares of Company Common Stock owned by it or issuable to it
in connection with the transactions contemplated by the Merger Agreement.
7.3 Waiver of Certain Rights. Each Securityholder hereby waives and
agrees not to assert any claims or rights it may have against any director of
Company in respect of approval or adoption of the Merger Agreement or the
consummation of the Merger or the other transactions contemplated thereby.
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ARTICLE VIII
MISCELLANEOUS
8.1 Termination. This Agreement may be terminated at any time prior to
the Second Disposition Effective Date:
(a) by mutual consent of each of the Securityholders and Childs and
Acquiror;
(b) by the Securityholders or Childs or Acquiror at any time after (i)
January 31, 1997 or (ii) February 28, 1997, if on January 31, 1997, the
Second Disposition shall not have been consummated solely because a decree,
ruling, injunction or order against the consummation of the Second
Disposition pursuant to any antitrust law shall be outstanding or any
waiting period applicable to the Second Disposition under the HSR Act shall
not have terminated or expired, (in the case of either (i) or (ii), other
than due to the failure of the party seeking to terminate this Agreement to
perform its obligations under this Agreement required to be performed at or
prior to the Second Disposition Effective Date);
(c) by Childs or Acquiror, if there has been a material violation or
breach by the Securityholders of any agreement, representation or warranty
contained in this Agreement which has rendered the satisfaction of any
condition to the obligations of Childs and Acquiror impossible and such
violation or breach has not been waived by Childs and Acquiror; or
(d) by the Securityholders, if there has been a material violation or
breach by Childs or Acquiror of any agreement, representation or warranty
contained in this Agreement which has rendered the satisfaction of any
condition to the obligations of the Securityholders impossible and such
violation or breach has not been waived by the Securityholders.
8.2 Amendment. This Agreement may be amended only by a written instrument
executed by the parties or their respective successors or assigns.
8.3 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
facsimile, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 8.3):
If to Childs or Acquiror, at the addresses and to the Persons (including
the copies) set forth in the Merger Agreement; and
If to any of the Securityholders to:
Butler Capital Corporation
767 Fifth Avenue, 6th Floor
New York, New York 10153
Facsimile: (212) 758-2514
Attention: Gilbert E. Butler
With a copy to:
David C. Chapin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Facsimile: (617) 951-7050
8.4 Counterparts. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original, but all of
which shall constitute one and the same original.
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8.5 Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware without reference to choice
of law principles, including all matters of construction, validity and
performance.
8.6 Severability; Enforcement. The invalidity of any portion hereof shall
not affect the validity, force or effect of the remaining portions hereof. If it
is ever held that any restriction hereunder is too broad to permit enforcement
of such restriction to its fullest extent, each party agrees that a court of
competent jurisdiction may enforce such restriction to the maximum extent
permitted by law, and each party hereby consents and agrees that such scope may
be judicially modified accordingly in any proceeding brought to enforce such
restriction.
8.7 Further Assurances. Each party hereto shall execute and deliver such
additional documents as may be necessary or desirable to consummate the
transactions contemplated by this Agreement.
8.8 Parties in Interest; Assignment. Neither this Agreement nor any of
the rights, interest or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties.
8.9 Entire Agreement. This Agreement and the Merger Agreement contain the
entire understanding of the parties hereto and thereto with respect to the
subject matter contained herein and therein, and supersede and cancel all prior
agreements, negotiations, correspondence, undertakings and communications of the
parties, oral or written, respecting such subject matter. There are no
restrictions, promises, representations, warranties, agreements or undertakings
of any party hereto or to the Merger Agreement with respect to the transactions
contemplated by this Agreement and the Merger Agreement other than those set
forth herein or therein or made hereunder or thereunder.
8.10 Specific Performance. The parties hereto agree that the remedy at
law for any breach of this Agreement will be inadequate and that any party by
whom this Agreement is enforceable shall be entitled to specific performance or
injunctive relief in addition to any other appropriate relief or remedy. Such
party may, in its sole discretion, apply to a court of competent jurisdiction
for specific performance or injunctive relief or such other relief as such court
may deem just and proper in order to enforce this Agreement or prevent any
violation hereof and, to the extent permitted by applicable law, each party
waives any objection to the imposition of such relief or any requirement for the
posting of a bond or other collateral in connection therewith.
8.11 Headings; References. The section and paragraph headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. All references herein to
"Sections" or "Exhibits" shall be deemed to be references to Articles or
Sections hereof or Exhibits hereto unless otherwise indicated.
8.12 Limited Liability of Partners. Notwithstanding any other provision
of this Agreement, neither the general partner nor the limited partners, nor any
future general or limited partner of any Securityholder, shall have any personal
liability for performance of any obligation of such Securityholder under this
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed and delivered as of the day and year first above written.
CHILDS:
J.W. CHILDS EQUITY PARTNERS, L.P.
By:J.W. CHILDS ADVISORS, L.P.,
its general partner
By:J.W. CHILDS ASSOCIATES, L.P.,
its general partner
By:J.W. CHILDS ASSOCIATES, INC.,
its general partner
By: /s/ Adam Suttin
----------------------------------
Name: Adam Suttin
Title: Vice President
ACQUIROR:
JWC ACQUISITION I, INC.
By: /s/ Adam Suttin
----------------------------------
Name: Adam Suttin
Title: Vice President
SECURITYHOLDERS:
MEZZANINE LENDING ASSOCIATES I,
L.P.
By:MEZZANINE LENDING
MANAGEMENT I, its General Partner
By: /s/ Costa Littas
----------------------------------
Name: Costa Littas
Title: Managing Director
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MEZZANINE LENDING ASSOCIATES II,
L.P.
By: MEZZANINE LENDING
MANAGEMENT II, its General Partner
By: /s/ Costa Littas
----------------------------------
Name: Costa Littas
Title: Managing Director
MEZZANINE LENDING ASSOCIATES III,
L.P.
By: MEZZANINE LENDING
MANAGEMENT III, its General
Partner
By: /s/ Costa Littas
----------------------------------
Name: Costa Littas
Title: Managing Director
SENIOR LENDING ASSOCIATES I, L.P.
By: SENIOR LENDING MANAGEMENT I,
its General Partner
By: /s/ Costa Littas
----------------------------------
Name: Costa Littas
Title: Managing Director
BCC INDUSTRIAL SERVICES, INC.
By: /s/ Donald E. Cibak
----------------------------------
Name: Donald E. Cibak
Title: Managing Director
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<PAGE> 123
Central Tractor Farm & Country, Inc., a Delaware corporation ("Company")
hereby consents to the foregoing Securities Purchase Agreement. Company hereby
waives any and all transfer restrictions applicable to any and all Company
Common Stock, Company Convertible Securities and Company Option Securities held
by any of the Securityholders in connection with the transfer thereof to Childs
or Acquiror pursuant to the Initial Disposition or the Second Disposition (as
defined in the foregoing Securities Purchase Agreement), including without
limitation the provisions of Sections 10 and 11 of the Exchange Agreement, dated
as of October 14, 1994, by and among Company, the Securityholders and certain
other parties named therein.
CENTRAL TRACTOR FARM & COUNTRY, INC.
By: /s/ Dean Longnecker
------------------------------------
Name: Dean Longnecker
Title: Exec. Vice President --
Finance
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<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMPANY COMPANY NUMBER OF NUMBER OF
COMMON OPTION INITIAL SECOND
STOCK COMPANY CONVERTIBLE SECURITIES DISPOSITION DISPOSITION
NAME AND ADDRESS OF SECURITYHOLDER OWNED SECURITIES OWNED OWNED SHARES SHARES
- ----------------------------------------- --------- ------------------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Mezzanine Lending Associates I, L.P...... 562,296 $1,225,510 0 86,275 476,021
c/o Butler Capital Corporation principal amount of
767 Fifth Avenue 6th Floor Company's 7%
New York, NY 10153 Convertible
Subordinated Notes
due 2002, which are
convertible into
63,252 shares of
Company Common
Stock at any time
at a conversion
price of $19.375
per share
Mezzanine Lending Associates II, L.P..... 4,102,746 $8,941,799 0 629,497 3,473,249
c/o Butler Capital Corporation principal amount of
767 Fifth Avenue 6th Floor Company's 7%
New York, NY 10153 Convertible
Subordinated Notes
due 2002, which are
convertible into
461,512 shares of
Company Common
Stock at any time
at a conversion
price of $19.375
per share
Mezzanine Lending Associates III, L.P.... 1,161,393 $5,832,691 0 178,196 983,197
c/o Butler Capital Corporation principal amount of
767 Fifth Avenue 6th Floor Company's 7%
New York, NY 10153 Convertible
Subordinated Notes
due 2002, which are
convertible into
301,042 shares of
Company Common
Stock at any time
at a conversion
price of $19.375
per share
Senior Lending Associates, L.P........... 1,005,294 0 0 154,246 851,048
c/o Butler Capital Corporation
767 Fifth Avenue 6th Floor
New York, NY 10153
BCC Industrial Services, Inc............. 0 0 230,523 shares 0 230,523 shares a
c/o Butler Capital Corporation issuable at a per Common Stock
767 Fifth Avenue 6th Floor share price of issuable at a per
New York, NY 10153 $3.59 upon the share price of
exercise of a $3.59 upon the
Common Stock exercise of
Purchase Warrant Purchase Warrant
No. 1 issued by No. 1 issued by
Company on October Company on October
5, 1994 5, 1994
</TABLE>
15
<PAGE> 125
EXHIBIT 3
JWC ACQUISITION I, INC.
C/O J.W. CHILDS ASSOCIATES, L.P.
ONE FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
November 27, 1996
Mr. James T. McKitrick
c/o Central Tractor
Farm & Country, Inc.
3915 Delaware Avenue
Des Moines, Iowa 50316-0330
Dear Jim:
This letter agreement between us is being entered into contemporaneously
with the execution of an Agreement and Plan of Reorganization (the "Merger
Agreement") by and among Central Tractor Farm & Country, Inc. (the "Company"),
J.W. Childs Equity Partners, L.P., JWC Holdings I, Inc. ("Holdings"), and JWC
Acquisition I, Inc. ("Acquisition"). The Merger Agreement provides for the
merger (the "Merger") of Acquisition with and into the Company, with the Company
to become the surviving corporation. Upon consummation of the Merger, the
Company will be a wholly-owned subsidiary of Holdings. The agreements set forth
herein are subject to the condition subsequent that the "Closing" (as defined in
the Merger Agreement) shall have occurred, and the performance of the parties
hereunder is intended to commence at the "Effective Time" (as defined in the
Merger Agreement) of the Merger. This letter agreement is entered into by the
parties in contemplation of the Merger pursuant to which the Company will
succeed to and assume all the obligations of Acquisition hereunder as a matter
of law.
1. Duties, etc. From and after the Effective Time throughout and subject
to the terms of this agreement, you will be employed as President and Chief
Executive Officer of the Company. In your capacity as an officer and employee of
the Company, you will be accountable to, and will also have such powers, duties
and responsibilities as may from time to time be prescribed by the Board of
Directors of the Company, provided that such duties and responsibilities are
consistent with your executive position. You will perform and discharge your
duties and responsibilities faithfully, diligently, and to the best of your
ability. You will devote substantially all of your working time and efforts to
the business and affairs of the Company.
2. Base Salary. Your base salary will be paid at the rate of $385,000 per
year through the end of the Company's next fiscal year. After October 31, 1997,
you will be eligible for raises in your base salary in amounts to be determined
by the Board of Directors (it being understood that the Board of Directors may
delegate the authority to act under this agreement to the Compensation
Committee), which raises will increase your base salary by at least the same
percentage as the increase in the prior year's Consumer Price Index (all urban
consumers, U.S. city average). All payments under this paragraph or any other
paragraph of this agreement will be made in accordance with the regular payroll
practices of the Company, reduced by applicable withholdings.
3. Bonuses. See EXHIBIT I attached.
4. Options. See EXHIBIT II attached.
5. Benefits. You will receive 5 weeks of paid vacation per fiscal year,
prorated for partial years. You will be eligible to participate in all benefit
plans made generally to executives of the Company, as in effect from time to
time, all subject to plan terms and generally applicable Company policies. These
benefit plans will include, without limitation, health insurance, continuation
of the Company's group life insurance coverage at current levels (i.e.
$500,000), disability insurance, the Company's 401(k) plan, etc. The Company
will pay for an annual physical examination for you by a medical doctor of your
choice. The Company will continue to
<PAGE> 126
pay monthly dues for membership in a country club in which the Company currently
owns a membership. In addition, the Company will also pay you a $7,000 per year
automobile allowance and will reimburse you for automobile insurance and
maintenance expenses and normal reimbursable business travel.
6. Nature of Employment; Severance. This agreement is not meant to
constitute a contract of employment for a stated term. This means that you will
retain the right to terminate your employment and officership duties at any
time, and that the Company retains a similar right. However, if (x) the Company
terminates your employment, other than because of your death, because of your
disability for a 180 days in one fiscal year, or for cause (meaning dishonesty,
breach of fiduciary duty, material violation of law or negligent or willful
failure to perform your duties or responsibilities) as determined by the Company
in its reasonable judgment, or (y) you terminate your employment because the
Company removes or fails to re-elect you as President and Chief Executive
Officer (other than for any of the reasons described in clause (x) above), the
Company will, in lieu of all other payments or benefits hereunder or otherwise,
pay you severance payments for a period of 18 months from the date of
termination equal to your base salary at the rate in effect at the time your
employment is terminated, reduced by any compensation you earn during such
18-month period from other businesses (whether as an employee, consultant,
partner or otherwise).
7. Confidentiality. Without the written consent of the Board of
Directors, you will not, during or after the term of your employment with the
Company, disclose to any person or entity (other than a person or entity to
which disclosure is in your reasonable judgment necessary or appropriate in
connection with the performance of your duties as an executive officer of the
Company), any information obtained by you while in the employ of the Company the
disclosure of which may be adverse to the interests of the Company, or use any
such information to the detriment of the Company; provided, however, that such
restriction shall not apply to information generally known to the public other
than as a result of unauthorized disclosure by you.
8. Restricted Activities. You agree that, during the term of your
employment with the Company and for a period of one year thereafter, (a) you
will not, directly or indirectly, be connected as an officer, employee,
consultant, owner or otherwise with any business which competes with any
business of the Company or its subsidiaries in any area where such business is
then being conducted by the Company or a subsidiary, and (b) you will not, and
you will not assist any other person or entity to hire or otherwise seek to
induce employees of the Company or any of its subsidiaries to terminate their
employment.
9. Stock Purchase; Company Stock Options. It is agreed that Acquisition
will purchase, and you will sell to Acquisition, 81,810 shares of Company Common
Stock acquired by you on the exercise of options therefor after the date hereof.
The purchase price for such shares will be $14 per share, for an aggregate price
of $1,145,340, which will be paid on the later to occur of (i) January 2, 1997
or (ii) the same time as the closing by Acquisition of its purchase of all of
the shares of Company Common Stock owned by all of the entities affiliated with
Butler Capital Corporation pursuant to a purchase agreement of even date
herewith. At the time of such closing, you will deliver to Acquisition your
stock certificates for such shares identified above together with stock powers
duly endorsed in blank, against payment of the full purchase price therefor in
immediately available funds by wire transfer or certified or bank check. Such
shares must be free of all liens and claims of third parties. It is also agreed
that in the Merger, at the Closing thereof, you will be entitled to, and you
agree to, exchange outstanding options heretofore granted to you to purchase
183,935 shares of Company Common Stock, $0.01 par value per share, for options
to acquire such number of shares of Holdings Common Stock having a value at the
date of the Merger Closing (based on the same per share valuation as the common
equity investment being made by J.W. Childs Equity Partners, L.P. and affiliates
in connection with the Merger and related transactions) of $2,575,090. The total
aggregate exercise price of these Holdings stock options will be $578,896. The
stock options of JWC Holdings I, Inc. issued to you in exchange for Company
stock options hereunder will be immediately vested and subject to no
restrictions, other than restrictions on the underlying shares of Common Stock
of JWC Holdings I, Inc. to be contained in a Stockholders Agreement to be
executed by all holders of such Common Stock and securities exchangeable or
convertible into shares of such Common Stock. Key provisions of such a
stockholders agreement are attached hereto as EXHIBIT III. Acquisition's
agreement to purchase shares of Company Common Stock and Holdings' agreement to
permit your exchange stock options pursuant to this section are made as an
inducement to you to enter into this letter agreement, and any failure by you to
sell your shares and exchange your stock options as
2
<PAGE> 127
herein contemplated and agreed shall render all other provisions of this letter
agreement, including, without limitation, provisions governing your employment,
compensation and benefits, void and of no effect.
10. Miscellaneous. The headings in this agreement are for convenience
only and shall not affect the meaning hereof. This agreement constitutes the
entire agreement between the parties, and supersedes any prior communications,
agreements and understandings, written or oral, with respect to your employment
and compensation and all matters pertaining thereto. If any provision in this
agreement should, for any reason, be held invalid or unenforceable in any
respect, it shall be construed by limiting it so as to be enforceable to the
maximum extent compatible with applicable law. This agreement shall be governed
by and construed in accordance with the substantive laws of the State of Iowa.
All determinations by the Board of Directors hereunder may be made by them in
their sole discretion.
11. Acceptance. In accepting and entering into this agreement, you
represent that you have not relied on any agreement or representation, oral or
written, express or implied, that is not set forth expressly in this agreement.
If the terms of this agreement are acceptable to you, please sign and return a
copy to the undersigned for delivery by the close of business on November 25,
1996 whereupon it shall become a binding agreement between us on the terms
provided herein.
12. Table 1. A number of provisions in the Exhibits hereto contemplate
achievement of certain objectives by the Company. Those objectives are set forth
in Table 1 attached hereto.
JWC ACQUISITION I, INC.
By: /s/ STEVEN G. SEGAL
------------------------------------
President
Agreed to and Accepted
/s/ JAMES T. MCKITRICK
- --------------------------------------
James T. McKitrick
Attachments: Table 1
Exhibit I
Exhibit II
Exhibit III
3
<PAGE> 128
TABLE 1
ANNUAL OPERATING CASH FLOW TARGETS
Outlined below are the Operating Cash Flow Targets for vesting incentive
options and for earning bonuses.
Operating Cash Flow for any fiscal year equals earnings before interest,
taxes, depreciation and amortization ("EBITDA") less the amount by which actual
capital expenditures exceed the corresponding target amounts in the table below:
<TABLE>
<CAPTION>
TARGET CAPITAL TARGET OPERATING
($000S) EXPENDITURES CASH FLOW
- ------------ -------------- ----------------
<S> <C> <C>
F.Y.E. 1997 $ 5,250 $ 25,896
F.Y.E. 1998 9,023 29,930
F.Y.E. 1999 9,421 34,574
F.Y.E. 2000 9,820 39,229
F.Y.E. 2001 10,218 44,392
Cumulative $ 43,732 $174,021
</TABLE>
(Assumes Company maintains its current fiscal year.)
Adjustments. In the event of an acquisition or disposition of a
significant business or assets (determined in a manner comparable to the
determination of a significant subsidiary under Article 1-02(v) of Regulation
S-X of the Securities and Exchange Commission), financial and other quantitative
targets specified in or determined pursuant hereto shall be appropriately
adjusted by the Board of Directors in good faith based on the expected
contribution to the target amount in question of the assets or business acquired
or disposed.
<PAGE> 129
EXHIBIT I
CASH BONUS
For each fiscal year, a cash bonus will be paid to the executive if the
Company achieves (based upon the Company's audit) between more than 90% and 100%
or less of the Annual Operating Cash Flow Targets for such year set forth in
Table 1. Such cash bonus will equal five percent (5%) of executive's base salary
for such fiscal year for each one percent (1%) by which the Company exceeds 90%
of the Annual Operating Cash Flow Targets and will increase on a linear basis as
illustrated by the following:
<TABLE>
<CAPTION>
PERCENTAGE
ACHIEVEMENT OF
ANNUAL
BONUS AS PERCENT OPERATING CASH
OF BASE SALARY FLOW TARGETS
- ---------------- ---------------
<S> <C>
0% 90%
5% 91%
15% 93%
20% 94%
25% 95%
30% 96%
35% 97%
40% 98%
45% 99%
50% 100%
</TABLE>
In the event that, in any fiscal year, the Company achieves (based upon the
Company's audit) more than 100% of the Annual Operating Cash Flow Targets,
executive's cash bonus for such year shall equal one percent (1%) of his base
salary for each percentage point by which the Company's results exceed 100% of
the Annual Operating Cash Flow Targets. The cash bonus payable pursuant to this
paragraph shall not be subject to any cap or maximum amount.
<PAGE> 130
EXHIBIT II
NON-QUALIFIED STOCK OPTIONS
KEY PROVISIONS
1. OPTIONS SUBJECT TO VESTING AT ACHIEVEMENT OF 100% OF ANNUAL OPERATING CASH
FLOW TARGETS.
Effective at or shortly after the Effective Date of the Merger, Holdings
and the Company will establish a stock option plan pursuant to which the
management group will be granted non-qualified options to acquire, at "founder's
price"(1), an aggregate number of shares of common stock of Holdings equal to
four and one-half percent (4.5%) of the outstanding common stock and common
stock equivalents of Holdings, on a fully diluted basis.
The management group which will be entitled to participate in this option
plan will be identified by the Chief Executive Officer, and the allocation of
options among the members of the group will be initially determined by the Chief
Executive Officer, subject to review and ratification by the Board of Directors.
A. Vesting.
Options granted pursuant to the above plan will vest over a five-year
period based on the Company's achievement of the Annual Operating Cash Flow
Targets set forth in TABLE 1. An option shall vest and be exercisable with
respect to twenty percent (20%) of the underlying shares for each fiscal year in
which the Company achieves (based on the Company's audit) 100% or more of the
Annual Operating Cash Flow Targets for such year. Unvested portions of
outstanding options will be carried forward and will vest at the conclusion of
the fifth fiscal year set forth in TABLE 1 if (i) the Company has achieved for
the five-year period specified in TABLE 1 the cumulative EBITDA target set forth
therein and (ii) the Company's actual EBITDA achievement for F.Y.E. 2001 is
greater than that achieved in F.Y.E. 2000. Additionally, the options granted
pursuant to the above plan will vest if the bonus option outlined in paragraph 3
below is awarded in accordance with its terms.
B. Other Provisions.
Each option shall expire, unless earlier exercised or terminated, ten years
from the date of grant.
In the case of termination of an option holder's employment for cause or
resignation without good reason, to be defined in the option plan, each option
shall terminate at the time of termination of employment.
In the case of termination of an option holder's employment without cause
or his resignation for good reason, again as to be defined in the option plan,
options which have vested at the time of termination/resignation shall terminate
on the 91st day after the date of employment termination or resignation, and
options which have not vested shall terminate immediately.
If the option holder's employment is terminated due to death or disability,
options which have vested at the time of termination/resignation shall terminate
on the 181st day after the date of employment termination or death and may be
exercised during such period by the holder or his legal representative or
estate, as the case may be, and options which have not vested shall terminate
immediately.
2. OPTIONS SUBJECT TO VESTING AT ACHIEVEMENT OF 115% OF ANNUAL OPERATING CASH
FLOW TARGETS.
In addition to, or as part of, the option plan outlined in paragraph 1 of
this Exhibit II, the management group (to be selected as outlined above) will
also be granted non-qualified options to acquire, again at "founder's price", an
aggregate number of shares of common stock of Holdings equal to three and
two-tenths percent (3.2%) of the outstanding common stock and common stock
equivalents of Holdings, on a fully
- ---------------
1 I.e., the price per share, as adjusted to reflect subsequent changes in
capitalization, as the initial common equity investment in Holdings made by
J.W. Childs Equity Partners, L.P. and its affiliates for purposes of effecting
the Merger and related transactions.
<PAGE> 131
diluted basis (after taking into account, without limitation, all options
granted pursuant to paragraph 1 above). Such options will be allocated among the
management group as outlined in paragraph 1 above.
An option granted pursuant to this paragraph 2 shall vest and be
exercisable with respect to twenty percent (20%) of the underlying shares for
each fiscal year set forth in Table 1 in which the Company achieves (based on
the Company's audit) 115% or more of the Annual Operating Cash Flow Targets for
such year.
Other provisions of the options granted pursuant to this paragraph will be
substantially the same as those granted pursuant to paragraph 1 above.
3. BONUS OPTIONS.
In the event that within six years after the Effective Time of the Merger
the realized value(2) of the common equity investment of the original investment
group in Holdings should equal or exceed ten times the value of such common
equity investment at the Effective Time of the Merger, you will be awarded an
option to acquire, again at "founder's price", an aggregate number of shares of
common stock of Holdings which shall equal 1.25% of the total outstanding common
stock and common stock equivalents of Holdings on a fully diluted basis (after
taking into account, without limitation, all options vested pursuant to
paragraphs 1 and 2 above).
The options described in this paragraph 3 shall terminate if not exercised
prior to the termination of the executive's employment with the Company for any
reason.
- ---------------
2 For purposes hereof, "realized value" will mean, in general, the cash or the
market value of registered, publicly traded and tradeable, securities not
subject to transfer or Rule 144 restrictions received by the original
investment group in Holdings in the case of the sale of the business of the
Company to any person, firm, entity or group which, together with its
affiliates, prior to such transaction, did not own, directly or indirectly,
more than 50% of the outstanding common equity of the Company.
II-2
<PAGE> 132
EXHIBIT III
STOCKHOLDERS AGREEMENT
KEY PROVISIONS
I. RIGHT OF FIRST REFUSAL.
Transfer of management group shares of common stock, and options to acquire
the same, shall be subject to a right of first refusal in favor of Holdings
and/or certain persons designated by Holdings. The exercise price of such right
shall be the price offered by a bona fide third-party offeree.
II. CALL OPTION; PUT OPTION; EXERCISE PRICE.
If a member of the management group's employment is terminated for any
reason before Holdings has completed a qualified public offering, Holdings
and/or certain persons designated by Holdings will have the option to purchase
his common stock and vested options. The exercise price shall be the greater of
fair market value (determined as [EBITDA x 7 - Debt]/Outstanding Shares (fully
diluted)) or cost in all circumstances of termination other than the manager's
termination for cause or his resignation without good reason, in which instances
the exercise price shall be cost.
If the manager's employment is terminated without cause or if the manager
resigns for good reason, in either case before Holdings has completed a
qualified public offering, he shall have the right to put his common stock and
vested options to Holdings and Holdings shall be obligated to purchase the same
(which right and obligation Holdings may assign to certain designated persons)
at a price per share equal to the following formula: [(EBITDA x 6) -
Debt]/Outstanding Shares (fully diluted).
The purchase price of vested options shall, in all instances, be reduced by
the exercise price thereof.
In the case of any call or put exercise, Holdings shall pay the purchase
price in cash if and to the extent that (i) funds are legally available
therefor, (ii) such cash purchase is permitted by the agreements governing
Holdings and the Company's third-party indebtedness, and (iii) and the Board of
Directors in good faith determines that sufficient cash is available therefor.
Any portion of the purchase price not paid in cash shall be paid by a
subordinated promissory note of Holdings, bearing an interest rate equal to the
rate on the Company's senior bank indebtedness and having a maturity of ten (10)
years (subject to (a) mandatory prepayment when and if all of the conditions in
the first sentence of this paragraph are satisfied and (b) mandatory extension
if required by the terms of the agreements governing Holdings' third-party
indebtedness).
Generally, "puts" and "calls" and other transfer restrictions will be
lifted upon consummation by Holdings of a qualifying public offering.
III. "TAG ALONG" AND "DRAG ALONG".
Management's shares and options shall be subject to "tag along" provisions
whereby in the case of any proposed sale (including a "secondary" public
offering) by J.W. Childs Equity Partners, L.P. (together with certain
transferees and coinvestors) of more than ten percent (10%) of its common stock
equivalents, the seller must offer other members of such founding/management
group the right proportionately to participate in such sale.
If any holder or group holding more than fifty percent (50%) of the
outstanding common stock equivalents proposes to sell 50% or more of such
holding or cause Holdings to enter a change of control transaction, then the
remaining shareholders shall be obligated to sell their shares/options or, as
applicable, consent to such change of control transactions provided that such
sale or transaction provides that all shareholders of Holdings are to receive
the same form of, proportion and per share consideration in connection
therewith.
<PAGE> 133
JWC ACQUISITION I, INC.
C/O J.W. CHILDS ASSOCIATES, L.P.
ONE FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
November 27, 1996
Mr. G. Dean Longnecker
c/o Central Tractor
Farm & Country, Inc.
3915 Delaware Avenue
Des Moines, Iowa 50316-0330
Dear Dean:
This letter agreement between us is being entered into contemporaneously
with the execution of an Agreement and Plan of Reorganization (the "Merger
Agreement") by and among Central Tractor Farm & Country, Inc. (the "Company"),
J.W. Childs Equity Partners, L.P., JWC Holdings I, Inc. ("Holdings"), and JWC
Acquisition I, Inc. ("Acquisition"). The Merger Agreement provides for the
merger (the "Merger") of Acquisition with and into the Company, with the Company
to become the surviving corporation. Upon consummation of the Merger, the
Company will be a wholly-owned subsidiary of Holdings. The agreements set forth
herein are subject to the condition subsequent that the "Closing" (as defined in
the Merger Agreement) shall have occurred, and the performance of the parties
hereunder is intended to commence at the "Effective Time" (as defined in the
Merger Agreement) of the Merger. This letter agreement is entered into by the
parties in contemplation of the Merger pursuant to which the Company will
succeed to and assume all the obligations of Acquisition hereunder as a matter
of law.
1. Duties, etc. From and after the Effective Time throughout and subject
to the terms of this agreement, you will be employed as Executive Vice
President -- Finance of the Company (to be reviewed for promotion before April
30, 1997). In your capacity as an officer and employee of the Company, you will
be accountable to, and will also have such powers, duties and responsibilities
as may from time to time be prescribed by the Board of Directors of the Company,
provided that such duties and responsibilities are consistent with your
executive position. You will perform and discharge your duties and
responsibilities faithfully, diligently, and to the best of your ability. You
will devote substantially all of your working time and efforts to the business
and affairs of the Company.
2. Base Salary. Your base salary will be paid at the rate of $250,000 per
year through the end of the Company's next fiscal year. After October 31, 1997,
you will be eligible for raises in your base salary in amounts to be determined
by the Board of Directors (it being understood that the Board of Directors may
delegate the authority to act under this agreement to the Compensation
Committee), which raises will increase your base salary by at least the same
percentage as the increase in the prior year's Consumer Price Index (all urban
consumers, U.S. city average). All payments under this paragraph or any other
paragraph of this agreement will be made in accordance with the regular payroll
practices of the Company, reduced by applicable withholdings.
3. Bonuses. See EXHIBIT I attached.
4. Options. See EXHIBIT II attached.
5. Benefits. You will receive 5 weeks of paid vacation per fiscal year,
prorated for partial years. You will be eligible to participate in all benefit
plans made generally to executives of the Company, as in effect from time to
time, all subject to plan terms and generally applicable Company policies. These
benefit plans will include, without limitation, health insurance, continuation
of the Company's group life insurance coverage at current levels (i.e.
$500,000), disability insurance, the Company's 401(k) plan, etc. The Company
will pay for an annual physical examination for you by a medical doctor of your
choice. The Company will continue to pay monthly dues for membership in a
country club in which the Company currently owns a membership. In
<PAGE> 134
addition, the Company will also pay you a $7,000 per year automobile allowance
and will reimburse you for automobile insurance and maintenance expense and
normal reimbursable business travel.
6. Nature of Employment; Severance. This agreement is not meant to
constitute a contract of employment for a stated term. This means that you will
retain the right to terminate your employment and officership duties at any
time, and that the Company retains a similar right. However, if (x) the Company
terminates your employment, other than because of your death, because of your
disability for 180 days in one fiscal year, or for cause (meaning dishonesty,
breach of fiduciary duty, material violation of law or negligent or willful
failure to perform your duties or responsibilities) as determined by the Company
in its reasonable judgment, or (y) you terminate your employment because the
Company removes or fails to re-elect you as Executive Vice President -- Finance
(other than for any of the reasons described in clause (x) above), the Company
will, in lieu of all other payments or benefits hereunder or otherwise, pay you
severance payments for a period of 12 months from the date of termination equal
to your base salary at the rate in effect at the time your employment is
terminated.
7. Confidentiality. Without the written consent of the Board of
Directors, you will not, during or after the term of your employment with the
Company, disclose to any person or entity (other than a person or entity to
which disclosure is in your reasonable judgment necessary or appropriate in
connection with the performance of your duties as an executive officer of the
Company), any information obtained by you while in the employ of the Company the
disclosure of which may be adverse to the interests of the Company, or use any
such information to the detriment of the Company; provided, however, that such
restriction shall not apply to information generally known to the public other
than as a result of unauthorized disclosure by you.
8. Restricted Activities. You agree that, during the term of your
employment with the Company and for a period of one year thereafter, (a) you
will not, directly or indirectly, be connected as an officer, employee,
consultant, owner or otherwise with any business which competes with any
business of the Company or its subsidiaries in any area where such business is
then being conducted by the Company or a subsidiary, and (b) you will not, and
you will not assist any other person or entity to hire or otherwise seek to
induce employees of the Company or any of its subsidiaries to terminate their
employment.
9. Company Stock Purchase. It is agreed that Acquisition will purchase,
and you will sell to Acquisition, 64,489 shares of Company Common Stock owned by
you on the date hereof. The purchase price for such shares will be $14 per
share, for an aggregate price of $902,846, which will be paid on the later to
occur of (i) January 2, 1997 or (ii) the same time as the closing by Acquisition
of its purchase of all of the shares of Company Common Stock owned by all of the
entities affiliated with Butler Capital Corporation pursuant to a purchase
agreement of even date herewith. At the time of such purchase, you will deliver
to Acquisition your stock certificates for such shares identified above together
with stock powers duly endorsed in blank, against payment of the full purchase
price therefor in immediately available funds by wire transfer or certified or
bank check. Such shares must be free of all liens and claims of third parties.
It is also agreed that in the Merger, at the Closing thereof, you will be
entitled to, and you agree to, exchange 71,429 shares of Company Common Stock
for such number of shares of Holdings Common Stock having a value at the date of
the Merger Closing (based on the same per share valuation as the common equity
investment being made by J.W. Childs Equity Partners, L.P. and affiliates in
connection with the Merger and related transactions) of $1,000,006. The stock of
JWC Holdings I, Inc. issued to you in exchange for Company Common Stock
hereunder will be subject to restrictions on the underlying shares of Common
Stock of Holdings to be contained in a Stockholders Agreement to be executed by
all holders of such Common Stock and securities exchangeable or convertible into
shares of such Common Stock. Key provisions of such a stockholders agreement are
attached hereto as EXHIBIT III. Acquisition's agreement to purchase shares of
Company Common Stock and Holdings' agreement to permit you to exchange stock
pursuant to this section are made as an inducement to you to enter into this
letter agreement, and any failure by you to sell your shares and exchange your
stock as herein contemplated and agreed shall render all other provisions of
this letter agreement, including, without limitation, provisions governing your
employment, compensation and benefits, void and of no effect.
2
<PAGE> 135
10. Miscellaneous. The headings in this agreement are for convenience
only and shall not affect the meaning hereof. This agreement constitutes the
entire agreement between the parties, and supersedes any prior communications,
agreements and understandings, written or oral, with respect to your employment
and compensation and all matters pertaining thereto. If any provision in this
agreement should, for any reason, be held invalid or unenforceable in any
respect, it shall be construed by limiting it so as to be enforceable to the
maximum extent compatible with applicable law. This agreement shall be governed
by and construed in accordance with the substantive laws of the State of Iowa.
All determinations by the Board of Directors hereunder may be made by them in
their sole discretion.
11. Acceptance. In accepting and entering into this agreement, you
represent that you have not relied on any agreement or representation, oral or
written, express or implied, that is not set forth expressly in this agreement.
If the terms of this agreement are acceptable to you, please sign and return a
copy to the undersigned for delivery by the close of business on November 25,
1996 whereupon it shall become a binding agreement between us on the terms
provided herein.
12. Table 1. A number of provisions in the Exhibits hereto contemplate
achievement of certain objectives by the Company. Those objectives are set forth
in Table 1 attached hereto.
JWC ACQUISITION I, INC.
By: /s/ STEVEN G. SEGAL
------------------------------------
President
Agreed to and Accepted
/s/ G. DEAN LONGNECKER
- --------------------------------------
G. Dean Longnecker
Attachments: Table 1
Exhibit I
Exhibit II
Exhibit III
3
<PAGE> 136
TABLE 1
ANNUAL OPERATING CASH FLOW TARGETS
Outlined below are the Operating Cash Flow Targets for vesting incentive
options and for earning bonuses.
Operating Cash Flow for any fiscal year equals earnings before interest,
taxes, depreciation and amortization ("EBITDA") less the amount by which actual
capital expenditures exceed the corresponding target amounts in the table below:
<TABLE>
<CAPTION>
TARGET CAPITAL TARGET OPERATING
($000S) EXPENDITURES CASH FLOW
- ------------ -------------- ----------------
<S> <C> <C>
F.Y.E.
1997...... $ 5,250 $ 25,896
F.Y.E.
1998...... 9,023 29,930
F.Y.E.
1999...... 9,421 34,574
F.Y.E.
2000...... 9,820 39,229
F.Y.E.
2001...... 10,218 44,392
Cumulative.. $ 43,732 $174,021
</TABLE>
(Assumes Company maintains its current fiscal year.)
Adjustments. In the event of an acquisition or disposition of a
significant business or assets (determined in a manner comparable to the
determination of a significant subsidiary under Article 1-02(v) of Regulation
S-X of the Securities and Exchange Commission), financial and other quantitative
targets specified in or determined pursuant hereto shall be appropriately
adjusted by the Board of Directors in good faith based on the expected
contribution to the target amount in question of the assets or business acquired
or disposed.
<PAGE> 137
EXHIBIT I
CASH BONUS
For each fiscal year, a cash bonus will be paid to the executive if the
Company achieves (based upon the Company's audit) between more than 90% and 100%
or less of the Annual Operating Cash Flow Targets for such year set forth in
Table 1. Such cash bonus will equal five percent (5%) of executive's base salary
for such fiscal year for each one percent (1%) by which the Company exceeds 90%
of the Annual Operating Cash Flow Targets and will increase on a linear basis as
illustrated by the following:
<TABLE>
<CAPTION>
PERCENTAGE
ACHIEVEMENT OF
ANNUAL
BONUS AS PERCENT OPERATING CASH
OF BASE SALARY FLOW TARGETS
- ---------------- ---------------
<S> <C>
0% 90%
5% 91%
15% 93%
20% 94%
25% 95%
30% 96%
35% 97%
40% 98%
45% 99%
50% 100%
</TABLE>
In the event that, in any fiscal year, the Company achieves (based upon the
Company's audit) more than 100% of the Annual Operating Cash Flow Targets,
executive's cash bonus for such year shall equal one percent (1%) of his base
salary for each percentage point by which the Company's results exceed 100% of
the Annual Operating Cash Flow Targets. The cash bonus payable pursuant to this
paragraph shall not be subject to any cap or maximum amount.
<PAGE> 138
EXHIBIT II
NON-QUALIFIED STOCK OPTIONS
KEY PROVISIONS
1. OPTIONS SUBJECT TO VESTING AT ACHIEVEMENT OF 100% OF ANNUAL OPERATING CASH
FLOW TARGETS.
Effective at or shortly after the Effective Date of the Merger, Holdings
and the Company will establish a stock option plan pursuant to which the
management group will be granted non-qualified options to acquire, at "founder's
price"(1), an aggregate number of shares of common stock of Holdings equal to
four and one-half percent (4.5%) of the outstanding common stock and common
stock equivalents of Holdings, on a fully diluted basis.
The management group which will be entitled to participate in this option
plan will be identified by the Chief Executive Officer, and the allocation of
options among the members of the group will be initially determined by the Chief
Executive Officer, subject to review and ratification by the Board of Directors.
A. Vesting.
Options granted pursuant to the above plan will vest over a five-year
period based on the Company's achievement of the Annual Operating Cash Flow
Targets set forth in TABLE 1. An option shall vest and be exercisable with
respect to twenty percent (20%) of the underlying shares for each fiscal year in
which the Company achieves (based on the Company's audit) 100% or more of the
Annual Operating Cash Flow Targets for such year. Unvested portions of
outstanding options will be carried forward and will vest at the conclusion of
the fifth fiscal year set forth in TABLE 1 if (i) the Company has achieved for
the five-year period specified in TABLE 1 the cumulative EBITDA target set forth
therein and (ii) the Company's actual EBITDA achievement for F.Y.E. 2001 is
greater than that achieved in F.Y.E. 2000. Additionally, the options granted
pursuant to the above plan will vest if the bonus option outlined in paragraph 3
below is awarded in accordance with its terms.
B. Other Provisions.
Each option shall expire, unless earlier exercised or terminated, ten years
from the date of grant.
In the case of termination of an option holder's employment for cause or
resignation without good reason, to be defined in the option plan, each option
shall terminate at the time of termination of employment.
In the case of termination of an option holder's employment without cause
or his resignation for good reason, again as to be defined in the option plan,
options which have vested at the time of termination/resignation shall terminate
on the 91st day after the date of employment termination or resignation, and
options which have not vested shall terminate immediately.
If the option holder's employment is terminated due to death or disability,
options which have vested at the time of termination/resignation shall terminate
on the 181st day after the date of employment termination or death and may be
exercised during such period by the holder or his legal representative or
estate, as the case may be, and options which have not vested shall terminate
immediately.
2. OPTIONS SUBJECT TO VESTING AT ACHIEVEMENT OF 115% OF ANNUAL OPERATING CASH
FLOW TARGETS.
In addition to, or as part of, the option plan outlined in paragraph 1 of
this Exhibit II, the management group (to be selected as outlined above) will
also be granted non-qualified options to acquire, again at "founder's price", an
aggregate number of shares of common stock of Holdings equal to three and
two-tenths percent (3.2%) of the outstanding common stock and common stock
equivalents of Holdings, on a fully
- ---------------
1 I.e., the price per share, as adjusted to reflect subsequent changes in
capitalization, as the initial common equity investment in Holdings made by
J.W. Childs Equity Partners, L.P. and its affiliates for purposes of effecting
the Merger and related transactions.
<PAGE> 139
diluted basis (after taking into account, without limitation, all options
granted pursuant to paragraph 1 above). Such options will be allocated among the
management group as outlined in paragraph 1 above
An option granted pursuant to this paragraph 2 shall vest and be
exercisable with respect to twenty percent (20%) of the underlying shares for
each fiscal year set forth in Table 1 in which the Company achieves (based on
the Company's audit) 115% or more of the Annual Operating Cash Flow Targets for
such year.
Other provisions of the options granted pursuant to this paragraph will be
substantially the same as those granted pursuant to paragraph 1 above.
3. BONUS OPTIONS
In the event that within six years after the Effective Time of the Merger
the realized value(2) of the common equity investment of the original investment
group in Holdings should equal or exceed ten times the value of such common
equity investment at the Effective Time of the Merger, you will be awarded an
option to acquire, again at "founder's price", an aggregate number of shares of
common stock of Holdings which shall equal 0.75% of the total outstanding common
stock and common stock equivalents of Holdings on a fully diluted basis (after
taking into account, without limitation, all options vested pursuant to
paragraphs 1 and 2 above).
The options described in this paragraph 3 shall terminate if not exercised
prior to the termination of the executive's employment with the Company for any
reason.
- ---------------
2 For purposes hereof, "realized value" will mean, in general, the cash or the
market value of registered, publicly traded and tradeable, securities not
subject to transfer or Rule 144 restrictions received by the original
investment group in Holdings in the case of the sale of the business of the
Company to any person, firm, entity or group which, together with its
affiliates, prior to such transaction, did not own, directly or indirectly,
more than 50% of the outstanding common equity of the Company.
II-2
<PAGE> 140
EXHIBIT III
STOCKHOLDERS AGREEMENT
KEY PROVISIONS
I. RIGHT OF FIRST REFUSAL.
Transfer of management group shares of common stock, and options to acquire
the same, shall be subject to a right of first refusal in favor of Holdings
and/or certain persons designated by Holdings. The exercise price of such right
shall be the price offered by a bona fide third-party offeree.
II. CALL OPTION; PUT OPTION; EXERCISE PRICE.
If a member of the management group's employment is terminated for any
reason before Holdings has completed a qualified public offering, Holdings
and/or certain persons designated by Holdings will have the option to purchase
his common stock and vested options. The exercise price shall be the greater of
fair market value (determined as [EBITDA x 7 - Debt]/Outstanding Shares (fully
diluted)) or cost in all circumstances of termination other than the manager's
termination for cause or his resignation without good reason, in which instances
the exercise price shall be cost.
If the manager's employment is terminated without cause or if the manager
resigns for good reason, in either case before Holdings has completed a
qualified public offering, he shall have the right to put his common stock and
vested options to Holdings and Holdings shall be obligated to purchase the same
(which right and obligation Holdings may assign to certain designated persons)
at a price per share equal to the following formula: [(EBITDA x 6) -
Debt]/Outstanding Shares (fully diluted).
The purchase price of vested options shall, in all instances, be reduced by
the exercise price thereof.
In the case of any call or put exercise, Holdings shall pay the purchase
price in cash if and to the extent that (i) funds are legally available
therefor, (ii) such cash purchase is permitted by the agreements governing
Holdings and the Company's third-party indebtedness, and (iii) and the Board of
Directors in good faith determines that sufficient cash is available therefor.
Any portion of the purchase price not paid in cash shall be paid by a
subordinated promissory note of Holdings, bearing an interest rate equal to the
rate on the Company's senior bank indebtedness and having a maturity of ten (10)
years (subject to (a) mandatory prepayment when and if all of the conditions in
the first sentence of this paragraph are satisfied and (b) mandatory extension
if required by the terms of the agreements governing Holdings' third-party
indebtedness).
Generally, "puts" and "calls" and other transfer restrictions will be
lifted upon consummation by Holdings of a qualifying public offering.
III. "TAG ALONG" AND "DRAG ALONG".
Management's shares and options shall be subject to "tag along" provisions
whereby in the case of any proposed sale (including a "secondary" public
offering) by J.W. Childs Equity Partners, L.P. (together with certain
transferees and coinvestors) of more than ten percent (10%) of its common stock
equivalents, the seller must offer other members of such founding/management
group the right proportionately to participate in such sale.
If any holder or group holding more than fifty percent (50%) of the
outstanding common stock equivalents proposes to sell 50% or more of such
holding or cause Holdings to enter a change of control transaction, then the
remaining shareholders shall be obligated to sell their shares/options or, as
applicable, consent to such change of control transactions provided that such
sale or transaction provides that all shareholders of Holdings are to receive
the same form of, proportion and per share consideration in connection
therewith.
<PAGE> 141
EXHIBIT 4
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership interest of a member of a nonstock corporation; and the words
"depositary receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any share of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation;
b. Shares of stock of any other corporation or depository receipts
in respect thereof which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts of the corporations described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
<PAGE> 142
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor or or consented to the merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
253 or this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of the mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period of
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
2
<PAGE> 143
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it finally determined that he is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertified stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an
3
<PAGE> 144
appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in
the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
61, L. '93, eff. 7-1-93.)
4
<PAGE> 145
EXHIBIT 5
[PIPER JAFFRAY LETTERHEAD]
November 27, 1996
Special Committee of the Board of Directors
Central Tractor Farm & Country, Inc.
3915 Delaware Avenue
Des Moines, IA 50316-0030
Gentlemen:
We understand that Central Tractor Farm & Country, Inc. ("Central Tractor"
or the "Company"), J.W. Childs Equity Partners, L.P., JWC Holdings I, Inc. and
JWC Acquisition I, Inc. ("Acquiror") propose to enter into an Agreement and Plan
of Merger to be dated November 27, 1996 (the "Merger Agreement"), pursuant to
which Acquiror will be merged (the "Transaction") with and into the Company.
Pursuant to a Securities Purchase Agreement to be dated November 27, 1996 (the
"Securities Purchase Agreement"), Acquiror will acquire from Butler Capital
Corporation and its affiliated entities (collectively, "Butler") all outstanding
shares of common stock of the Company ("Company Common Stock") owned by Butler
for a cash consideration of $14.00 per share. Pursuant to the Merger Agreement
and subject to certain exceptions, at the effective time of the Transaction
Acquiror will acquire from the then holders thereof (the "Shareholders") all
outstanding shares of Company Common Stock for a cash consideration of $14.25
per share. You have requested our opinion as to whether the cash consideration
to be received in the Transaction by the Shareholders pursuant to the Merger
Agreement is fair, from a financial point of view, as of the date hereof, to the
Shareholders.
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, underwritings and secondary
distributions of securities, private placements, and valuations for estate,
corporate and other purposes. For our services in rendering this opinion,
Central Tractor will pay us a fee and indemnify us against certain liabilities.
The fee is not contingent upon the consummation of the Transaction. In the past,
we have provided investment banking services to Central Tractor. Piper Jaffray
makes a market in Company Common Stock and provides research coverage on the
Company.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have:
1. Reviewed the draft dated November 26, 1996 of the Merger Agreement.
2. Reviewed the draft dated November 26, 1996 of the Securities
Purchase Agreement (as defined in the Merger Agreement).
3. Reviewed the Reports on Form 10-K for Central Tractor for the five
fiscal years ended October 28, 1995.
4. Reviewed the Reports on Form 10-Q for Central Tractor for the
quarters ended January 27, 1996, April 27, 1996 and July 27, 1996.
5. Reviewed estimated financial results for the fiscal year ended
November 2, 1996 and five-year financial forecasts for Central Tractor
prepared by Company management.
6. Visited the headquarters of Central Tractor and conducted
discussions with members of senior management of Central Tractor, including
the Chief Executive Officer, Executive Vice President --
<PAGE> 146
Central Tractor Farm & Country, Inc.
November 27, 1996
Page 2
Finance and Senior Vice President -- Finance. Topics discussed included,
but were not limited to, the background and rationale of the proposed
Transaction, the financial condition, operating performance and the balance
sheet characteristics of Central Tractor and the prospects for the Company.
In addition, we held discussions with members of the Special Committee of
the Board of Directors of the Company.
7. Reviewed the historical prices and trading activity for Company
Common Stock.
8. Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions which we deemed
relevant.
9. Performed discounted cash flow analysis on the five-year financial
forecasts for Central Tractor furnished by Central Tractor's management.
10. Analyzed the premiums paid in recent public company acquisitions.
11. Compared certain financial data of Central Tractor with certain
financial and securities data of companies deemed similar to Central
Tractor or representative of the business sector in which Central Tractor
operates.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by Central Tractor or
otherwise made available to us and have not assumed responsibility independently
to verify such information. We have further relied upon the assurances of
Central Tractor's management that the information provided pertaining to Central
Tractor has been prepared on a reasonable basis in accordance with industry
practice and, with respect to financial planning data, reflects the best
currently available estimates and judgment of Central Tractor's management as to
the expected future financial performance of Central Tractor, and that it is not
aware of any information or facts that would make the information provided to us
incomplete or misleading. Without limiting the generality of the foregoing, for
the purpose of this opinion, we have assumed that Central Tractor is not a party
to any pending transaction, including external financing, recapitalizations,
acquisitions or merger discussions, other than the Transaction or in the
ordinary course of business.
In arriving at our opinion, we have not performed any appraisals or
valuations of specific assets or liabilities of Central Tractor have not been
furnished with any such appraisals or valuations, have made no physical
inspection of the properties or assets of the Company and express no opinion
regarding the liquidation value of Central Tractor. Without limiting the
generality of the foregoing, we have undertaken no independent analysis of any
pending or threatened litigation, possible unasserted claims or other contingent
liabilities, to which either Central Tractor or its affiliates is a party or may
be subject and at Central Tractor's direction and with its consent, our opinion
makes no assumption concerning and therefore does not consider, the possible
assertion of claims, outcomes or damages arising out of any such matters.
Our opinion is necessarily based upon information available to us, facts
and circumstances and economic, market and other conditions as they exist and
are subject to evaluation on the date hereof; events occurring after the date
hereof could materially affect the assumptions used in preparing this opinion.
We are not expressing any opinion herein as to the prices at which shares of
Company Common Stock have traded or at which such shares may trade at any future
time.
We have not been authorized by the Board of Directors to solicit other
purchasers for the Company or alternative transactions to the Transaction. We
were not requested to opine as to, and this opinion does not in any manner
address, Central Tractor's underlying decision to proceed with or effect the
Transaction or structure thereof. Nor have we been requested to opine as to, and
this opinion does not address in any manner, the consideration to be paid to
Butler pursuant to the Securities Purchase Agreement or other terms of the
Securities Purchase Agreement.
<PAGE> 147
Central Tractor Farm & Country, Inc.
November 27, 1996
Page 3
This opinion is for the use of the Board of Directors of Central Tractor in
evaluating the Transaction and shall not be published or otherwise used by any
other persons for any other purposes nor shall any public references to Piper
Jaffray be made without our prior written consent. However, notwithstanding the
foregoing, we consent to inclusion of this opinion in the Proxy Statement (as
defined in the Merger Agreement) to be issued in connection with the Transaction
and in any filings or disclosures required by law. This opinion is not intended
to be and does not constitute a recommendation to any Shareholder as to how such
Shareholder should vote in the Transaction.
Based upon and subject to the foregoing and based upon such other factors
as we consider relevant, it is our opinion that, as of the date hereof, the cash
consideration to be received by the Shareholders in the Transaction pursuant to
the Merger Agreement is fair, from a financial point of view, to the
Shareholders.
Sincerely,
/s/ Piper Jaffray Inc.
--------------------------------------
PIPER JAFFRAY INC.
<PAGE> 148
EXHIBIT 6
CERTAIN INFORMATION REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS
OF THE ACQUIROR, HOLDING AND THE GENERAL PARTNER OF CHILDS
1. Directors and Executive Officers of Acquiror. The name and position of
each director and executive officer of Acquiror are set forth below. The other
required information with respect to each such person is set forth under
"Directors and Executive Officers of J.W. Childs Associates, Inc." below. All
directors and executive officers listed below and in the other Sections of this
Exhibit 6 are citizens of the United States.
<TABLE>
<CAPTION>
NAME POSITION
--------------------------------------------------------------------
<S> <C>
Steven G. Segal President, Secretary and Director
Adam L. Suttin Vice President and Treasurer
</TABLE>
2. Directors and Executive Officers of Holding. The name and position of
each director and executive officer of Holding are set forth below. The other
required information with respect to each such person is set forth under
"Directors and Executive Officers of J.W. Childs Associates, Inc." below.
<TABLE>
<CAPTION>
NAME POSITION
--------------------------------------------------------------------
<S> <C>
Steven G. Segal President, Secretary and Director
Adam L. Suttin Vice President and Treasurer
</TABLE>
3. Directors and Executive Officers of JWC Equity Funding, Inc. The name
and position of each director and executive officer of JWC Equity Funding, Inc.
(a direct wholly owned subsidiary of Childs and a stockholder of Holding) are
set forth below. The other required information with respect to each such person
is set forth under "Directors and Executive Officers of J.W. Childs Associates,
Inc." below.
<TABLE>
<CAPTION>
NAME POSITION
--------------------------------------------------------------------
<S> <C>
Steven G. Segal President, Secretary and Director
Adam L. Suttin Vice President and Treasurer
</TABLE>
4. General Partner of Childs. The General Partner of Childs is J.W.
Childs Advisors, L.P. The business address of J.W. Childs Advisors, L.P. is One
Federal Street, 21st Floor, Boston, Massachusetts 02110.
5. General Partner of J.W. Childs Advisors, L.P. The General Partner of
J.W. Childs Advisors, L.P. is J.W. Childs Associates, L.P. The business address
of J.W. Childs Associates, Inc. is One Federal Street, 21st Floor, Boston,
Massachusetts 02110.
6. General Partner of J.W. Childs Associates, L.P. The General Partner of
J.W. Childs Associates, L.P. is J.W. Childs Associates, Inc. The business
address of J.W. Childs Associates, Inc. is One Federal Street, 21st Floor,
Boston, Massachusetts 02110.
<PAGE> 149
7. Directors and Executive Officers of J.W. Childs Associates, Inc. The
name, business address, present principal occupation or employment and material
occupations, positions, officers or employments during the last five years of
each director and executive officer of J.W. Childs Associates, Inc. and certain
other information are set forth below. The business address of Messrs. Childs,
Segal, Suttin and Hopkins is One Federal Street, 21st Floor, Boston,
Massachusetts 02110. Unless otherwise indicated, each occupation set forth
opposite an individual's name refers to employment with J.W. Childs Associates,
L.P.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND MATERIAL
OCCUPATIONS,
POSITIONS, OFFICES OR EMPLOYMENT HELD DURING THE LAST
NAME FIVE YEARS
- ----------------------------------- --------------------------------------------------------
<S> <C>
</TABLE>
John W. Childs................ President and Treasurer since February 1995;
President of J.W. Childs Associates, L.P. since
July 1995; executive at Thomas H. Lee Company
from May 1987 through June 1995, most recently
holding the position of Senior Managing
Director; director of Big V Supermarkets, Inc.,
Cinnabon, Inc., The Edison Project, Inc.,
Personal Care Group, Inc. and Select Beverages,
Inc.
Steven G. Segal............... Vice President and Secretary since February
1995; managing Director of J.W. Childs
Associates, L.P. since July 1995; executive at
Thomas H. Lee Company from August 1987 through
June 1995, most recently holding the position
of Managing Director; director of Big V
Supermarkets, Inc., Cinnabon, Inc. and Fitz and
Floyd, Inc.
Adam L. Suttin................ Vice President since February 1995; Vice
President of J.W. Childs Associates, L.P. since
July 1995; executive at Thomas H. Lee Company
from August 1989 through June 1995, most
recently holding the position of Associate;
director of Personal Care Group, Inc.
Glenn A. Hopkins.............. Vice President since September 1995; Vice
President of J.W. Childs Associates, L.P. since
September 1995; executive at Thomas H. Lee
Company from May 1989 through August 1995, most
recently holding the position of Associate.
<PAGE> 150
PROXY PROXY
CENTRAL TRACTOR FARM & COUNTRY, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS -- , 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints James T. McKitrick and Dean Longnecker and each of
them as proxies, with power of substitution and re-substitution to each, to vote
at the Special Meeting of Stockholders of Central Tractor Farm & Country, Inc.
(the "Company") to be held at the Company's headquarters located at 3915
Delaware Avenue, Des Moines, Iowa 50313 on , 1997 at A.M. and at
any adjournments thereof, all shares of stock of the Company that the
undersigned would be entitled to vote if personally present. A majority of said
proxies, or their substitutes or re-substitutes or any one if only one is
present and acting shall have all powers of said proxies. The undersigned
instructs said proxies, or their substitutes or re-substitutes, to vote any
matters that may properly come before the meeting as indicated in the Notice of
Special Meeting of Stockholders and Proxy Statement, receipt of which is hereby
acknowledged, and to vote as specified by the undersigned on the reverse side.
(IMPORTANT -- TO BE SIGNED AND DATED ON REVERSE SIDE)
<PAGE> 151
[X] Please mark votes as in this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE MERGER.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED,
OR IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ADOPTION
OF THE MERGER AGREEMENT.
1. Adoption of the Merger Agreement dated November 27, 1996 by and among the
Company, J.W. Childs Equity Partners, L.P., CT Holding, Inc. and JWC Acquisition
I, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
<TABLE>
<S> <C>
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW NOTE:Please sign exactly as name appears on this card
[ ] MARK HERE IF YOU PLAN TO ATTEND THIS MEETING and return this card in the enclosed envelope. When
signing as executor, administrator, attorney, trustee,
guardian, or custodian, or for a corporation, please
give full name as such.
Signature:
---------------------------------------------
Date: -------------------------------------------------
Signature:
---------------------------------------------
Date: -------------------------------------------------
</TABLE>
