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:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
SAUER INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
SAUER INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ 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:
Danfoss Fluid Power A/S common stock, par value DKK 100 per share
Danfoss Fluid Power Inc. common stock, no par value per share
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
500,000 shares of Danfoss Fluid Power A/S
100 shares of Danfoss Fluid Power Inc.
-----------------------------------------------------------------------
(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):
$106,989,000*
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$271,300,000
-----------------------------------------------------------------------
(5) Total fee paid:
$21,397.80
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
* Based upon the book value of the securities of Danfoss Fluid Power A/S and
Danfoss Fluid Power Inc. (the "Danfoss Fluid Power Companies") as of
October 3, 1999 (the latest date for which financial statements are
currently available), computed by subtracting from Total Stockholders'
Equity for the Danfoss Fluid Power Companies the amount of long term debt
recorded by Danfoss A/S (the parent of the Danfoss Fluid Power Companies)
and attributable to the Danfoss Fluid Power Companies.
[LOGO]
[-], 2000
Dear Stockholder:
On January 22, 2000, Sauer Inc., Danfoss Murmann Holding A/S, Danfoss A/S
and K. Murmann Verwaltungsgesellschaft mbH entered into a stock exchange
agreement, pursuant to which, among other things, Sauer will acquire (the
"Transaction") all of the common stock of Danfoss Fluid Power A/S and Danfoss
Fluid Power, Inc. (collectively, the "Danfoss Fluid Power Companies") from
Danfoss Murmann Holding A/S. Danfoss Murmann Holding A/S will receive 16,149,812
shares of Sauer common stock pursuant to the Transaction. Additionally, before
December 31, 2000, Sauer will acquire from Danfoss Murmann Holding A/S, for
additional shares of Sauer common stock, substantially all of the assets of the
mobile hydraulics operations used by Danfoss A/S's existing sales companies to
distribute the products manufactured by the Danfoss Fluid Power Companies in
Australia, Belgium, Brazil, Holland, Hong Kong, Japan, Mexico, New Zealand,
Portugal, Singapore, Spain and Switzerland. As more fully described in the
accompanying proxy statement, the number of shares of Sauer common stock to be
issued to Danfoss Murmann Holding A/S in connection with such secondary
acquisition cannot be specifically calculated at this time. However, Sauer
expects that the number of additional shares of Sauer common stock to be issued
to Danfoss Murmann Holding A/S will be between approximately 2,000,000 shares
and approximately 3,000,000 shares.
Sauer believes that the Transaction will create a fully integrated
manufacturer and supplier of mobile hydraulics. Sauer's board of directors
considers the Transaction to be in the best interests of Sauer and the Sauer
stockholders because it is expected to, among other things, allow Sauer to
improve its competitive position and increase customer penetration primarily due
to the expected post-Transaction ability to offer customers new product
technology, a comprehensive product line and more complete hydraulic systems. In
addition, Sauer proposes to amend its Certificate of Incorporation to increase
the number of authorized shares of Sauer common stock by 30,000,000 shares from
45,000,000 shares to 75,000,000 shares. Sauer also proposes to amend its
Certificate of Incorporation to (a) remove the classification of the Sauer board
of directors and allow for the removal of directors with or without cause by the
holders of the majority of Sauer common stock entitled to vote for the election
of directors and (b) provide that the size of the Sauer board of directors will
be determined pursuant to Sauer's Bylaws.
Under the rules of the New York Stock Exchange, the issuance of 16,149,812
shares of Sauer common stock in connection with the Transaction requires the
affirmative vote of the holders of a majority of the shares of Sauer common
stock present in person or represented by proxy at the special meeting of
stockholders. The proposal to amend Sauer's Certificate of Incorporation to
increase the number of authorized shares of Sauer common stock also requires the
affirmative vote of the holders of a majority of shares of Sauer common stock
present in person or represented by proxy at the special meeting of
stockholders. The proposal to amend Sauer's Certificate of Incorporation to
(a) remove the classification of the Sauer board of directors and allow for the
removal of directors with or without cause by the holders of the majority of
Sauer common stock entitled to vote for the election directors and (b) provide
that the size of the Sauer board of directors will be determined pursuant to
Sauer's Bylaws requires the affirmative vote of the holders of at least 80.0% of
the outstanding shares of Sauer common stock.
A special meeting of stockholders of Sauer will be held on May 3, 2000,
8:00 a.m. (local time), at Holiday Inn Gateway Center, 2100 Greenhills Drive,
Ames, Iowa 50014. At that meeting, you will be asked to vote on each of the
three proposals briefly described above. The enclosed notice and proxy statement
provides detailed information about the three proposals on which you are being
asked to vote and other information to assist you in deciding how to vote.
THE SAUER BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE TERMS AND
CONDITIONS OF EACH OF THE PROPOSALS DESCRIBED IN THIS PROXY STATEMENT AND
RECOMMENDS THAT YOU VOTE FOR EACH PROPOSAL BEING SUBMITTED TO YOU FOR APPROVAL.
THE MURMANN FAMILY, CERTAIN MEMBERS OF SAUER MANAGEMENT AND DANFOSS MURMANN
HOLDING A/S, TOGETHER HOLDING 62.8% OF THE OUTSTANDING SAUER COMMON STOCK, HAVE
INDICATED THAT THEY WILL VOTE IN FAVOR OF EACH OF THE PROPOSALS. ACCORDINGLY,
THE APPROVAL OF THE PROPOSALS TO ISSUE SAUER COMMON STOCK AND TO AMEND SAUER'S
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
SAUER COMMON STOCK IS EXPECTED. HOWEVER, NO INDIVIDUAL SAUER STOCKHOLDER CAN
APPROVE THE PROPOSAL TO AMEND SAUER'S CERTIFICATE OF INCORPORATION TO
(A) REMOVE THE CLASSIFICATION OF THE SAUER BOARD OF DIRECTORS AND ALLOW FOR THE
REMOVAL OF DIRECTORS WITH OR WITHOUT CAUSE BY THE HOLDERS OF THE MAJORITY OF
SAUER COMMON STOCK ENTITLED TO VOTE FOR THE ELECTION DIRECTORS AND (B) PROVIDE
THAT THE SIZE OF THE SAUER BOARD OF DIRECTORS SHALL BE DETERMINED PURSUANT TO
SAUER'S BYLAWS. FOR A DISCUSSION OF SPECIAL CONSIDERATIONS YOU SHOULD CONSIDER
IN EVALUATING THE PROPOSALS, SEE "SPECIAL CONSIDERATIONS" BEGINNING ON PAGE 15.
Only stockholders entitled to vote at the special meeting of stockholders
and their proxies will be permitted to attend the special meeting of
stockholders. Whether or not you plan to attend the special meeting of
stockholders, we urge you to complete, sign and return the enclosed proxy card
so that your shares will be represented and voted at the special meeting of
stockholders. If you attend the special meeting of stockholders, you may vote in
person if you wish, even though you have previously returned your proxy card.
Sincerely yours,
Klaus H. Murmann
Chairman and Chief Executive Officer
This proxy statement is dated [-], 2000 and is first being mailed to
stockholders on or about [-], 2000.
2
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 3, 2000
------------------------
TO OUR STOCKHOLDERS:
A special meeting of stockholders of Sauer Inc., a Delaware corporation,
will be held at Holiday Inn Gateway Center, 2100 Greenhills Drive, Ames, Iowa
50014, on May 3, 2000, commencing at 8:00 a.m. (local time). At the special
meeting of stockholders, stockholders will act on the following matters:
1. To consider and vote on a proposal to approve the issuance of 16,149,812
shares of Sauer common stock in connection with the acquisition by Sauer
of Danfoss Fluid Power A/S and Danfoss Fluid Power Inc. from Danfoss
Murmann Holding A/S. The Sauer common stock will be issued pursuant to a
Stock Exchange Agreement among Sauer, Danfoss Murmann Holding A/S,
Danfoss A/S and K. Murmann Verwaltungsgesellschaft mbH, dated
January 22, 2000.
2. To amend Sauer's Certificate of Incorporation to increase the number of
authorized shares of Sauer common stock by 30,000,000 shares from
45,000,000 shares to 75,000,000 shares.
3. To amend Sauer's Certificate of Incorporation to (a) remove the
classification of the Sauer board of directors and allow for the removal
of directors with or without cause by the holders of the majority of
Sauer common stock entitled to vote for the election of directors and
(b) provide that the size of the Sauer board of directors shall be
determined pursuant to Sauer's Bylaws.
4. To transact such other business as may properly come before the special
meeting of stockholders or any postponement, adjournment or adjournments.
These matters are described more fully in the accompanying proxy statement.
Stockholders of record at the close of business on [-], 2000, are entitled
to notice of and to vote at the special meeting of stockholders or any
postponement, adjournment or adjournments.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING OF STOCKHOLDERS,
PLEASE EITHER COMPLETE, DATE, SIGN, AND RETURN THE ACCOMPANYING PROXY CARD IN
THE PROVIDED ENVELOPE OR VOTE YOUR SHARES BY TELEPHONE OR VIA THE INTERNET USING
THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN ORDER TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING OF STOCKHOLDERS. EVEN IF YOU
HAVE GIVEN YOUR PROXY, WHETHER BY MAIL, BY TELEPHONE, OR VIA THE INTERNET, YOU
MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. IF YOUR SHARES ARE HELD OF
RECORD BY A BROKER, BANK, OR OTHER NOMINEE (I.E., "STREET NAME"), YOU WILL NEED
TO OBTAIN FROM THE RECORD HOLDER AND BRING TO THE MEETING A PROXY ISSUED IN YOUR
NAME, AUTHORIZING YOU TO VOTE THE SHARES.
By order of the board of directors
Kenneth D. McCuskey
CORPORATE SECRETARY
Ames, Iowa
[-], 2000
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE
TRANSACTION......................... 1
SUMMARY............................... 4
The Companies.......................
Recommendations to Stockholders..... 5
The Transaction..................... 5
The Special Meeting of
Stockholders...................... 7
Market and Dividend Information..... 10
Selected Historical Financial
Information for Sauer............. 11
Selected Historical Financial
Information for the Danfoss Fluid
Power Group....................... 13
Selected Unaudited Pro Forma
Historical Financial Information
for Sauer and the Danfoss Fluid
Power Group....................... 16
SPECIAL CONSIDERATIONS................ 17
Transaction Considerations.......... 17
Stock Ownership................... 17
Sauer Board of Directors; Board
Action.......................... 17
Uncertainty Regarding Business
Combination..................... 18
Dilution.......................... 18
Potentially Significant Increases
in Depreciation and Amortization
Expense May Result from
Amortization Periods That Are
Shorter than Preliminary
Estimates Reflected in the Pro
Forma Historical Financial
Statements That Would Cause Net
Earnings to Decrease............ 18
General Business Considerations..... 19
Competition....................... 19
Pricing and Competitive Pressures
from OEM Customers.............. 19
Cyclicality, Risks Associated with
General Economic Conditions..... 19
Risks Relating to Growth
Strategy........................ 20
Dependence on Skilled Personnel... 20
International Sales, Currency
Fluctuations and Investments in
Emerging Markets................ 21
DESCRIPTION OF THE BUSINESS OF THE
DANFOSS FLUID POWER GROUP........... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE DANFOSS FLUID
POWER GROUP......................... 27
SELECTED UNAUDITED PRO FORMA
HISTORICAL FINANCIAL STATEMENTS FOR
SAUER AND THE DANFOSS FLUID POWER
GROUP............................... 32
BUSINESS TO BE CONDUCTED AT THE
SPECIAL MEETING OF STOCKHOLDERS..... 41
THE TRANSACTION....................... 44
PROPOSAL NO. 1--THE STOCK ISSUANCE.... 55
PROPOSAL NO. 2--CHARTER AMENDMENT TO
INCREASE AUTHORIZED COMMON STOCK.... 62
PROPOSAL NO. 3--CHARTER AMENDMENT TO
REMOVE THE CLASSIFIED BOARD AND
ALLOW REMOVAL OF DIRECTORS WITH OR
WITHOUT CAUSE; DETERMINE BOARD SIZE
PURSUANT TO SAUER'S BYLAWS.......... 64
MARKET AND DIVIDEND INFORMATION....... 65
ABSENCE OF DISSENTERS' RIGHTS......... 65
THE SPECIAL MEETING OF STOCKHOLDERS... 66
SUBSTANTIAL INTERESTS OF SAUER
DIRECTORS AND OFFICERS.............. 67
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.... 67
i
DESCRIPTION OF OTHER MATERIAL
CONTRACTS BETWEEN SAUER AND THE
HOLDING COMPANY OR SAUER AND THE
DANFOSS FLUID POWER GROUP........... 69
ADDITIONAL INFORMATION................ 70
Cautionary Statement Concerning
Forward-Looking Statements........ 70
Where You Can Find More
Information....................... 70
SAUER HISTORICAL AUDITED FINANCIAL
STATEMENTS.......................... F-2
SAUER INTERIM FINANCIAL STATEMENTS.... F-26
DANFOSS FLUID POWER GROUP HISTORICAL
AUDITED AND UNAUDITED INTERIM
FINANCIAL STATEMENTS................ F-33
ANNEXES
Annex A Stock Exchange Agreement
Annex B Opinion of Credit Suisse
First Boston
ii
SUMMARY TERM SHEET/QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
Q: WHY AM I RECEIVING THIS PROXY STATEMENT?
A: You are receiving this proxy statement because it describes the following
three proposals to be considered and voted upon at a special meeting of
stockholders:
- the proposal to issue 16,149,812 shares of Sauer common stock in
connection with the acquisition by Sauer of all of the common stock of
Danfoss Fluid Power
A/S and Danfoss Fluid Power Inc. from Danfoss Murmann Holding A/S (See
"PROPOSAL NO. 1--THE STOCK ISSUANCE.");
- the proposal to amend Sauer's Certificate of Incorporation to increase the
number of authorized shares of Sauer common stock by 30,000,000 shares
from 45,000,000 to 75,000,000 shares (See "PROPOSAL NO. 2--CHARTER
AMENDMENT TO INCREASE AUTHORIZED STOCK."); and
- the proposal to amend Sauer's Certificate of Incorporation to (a) remove
the classification of the Sauer board of directors and allow for the
removal of directors with or without cause by the holders of the majority
of Sauer common stock entitled to vote for the election directors and
(b) provide that the size of the Sauer board of directors will be
determined pursuant to Sauer's Bylaws (See "PROPOSAL NO. 3--CHARTER
AMENDMENT TO REMOVE THE CLASSIFIED BOARD AND ALLOW REMOVAL OF DIRECTORS
WITH OR WITHOUT CAUSE; DETERMINE BOARD SIZE PURSUANT TO SAUER'S BYLAWS.").
Q: WHEN AND WHERE IS THE SPECIAL MEETINGS OF STOCKHOLDERS?
A: The special meeting of stockholders will take place on May 3, 2000, at
8:00 a.m. (local time) at Holiday Inn Gateway Center, 2100 Greenhills Drive,
Ames, Iowa 50014. See "BUSINESS TO BE CONDUCTED AT THE SPECIAL MEETING OF
THE STOCKHOLDERS--DATE, TIME AND PLACE OF SPECIAL MEETING OF STOCKHOLDERS."
Q: WHAT VOTE IS REQUIRED FOR EACH OF THE PROPOSALS?
A: Adoption of the proposal (a) to issue Sauer common stock in connection with
the Transaction and (b) to amend Sauer's Certificate of Incorporation to
increase the number of authorized shares of Sauer common stock each require
the affirmative vote of the holders of a majority of the shares of Sauer
common stock present in person or represented by proxy at the special
meeting of stockholders. The Murmann family, certain members of Sauer's
management and the Holding Company, which together hold 17,264,325 shares of
Sauer common stock (or approximately 62.8% of the outstanding shares of
Sauer common stock), have indicated that they will vote for each of the
proposals. Accordingly, the approval of those proposals is expected.
Adoption of the proposal to amend Sauer's Certificate of Incorporation to
(a) remove the classification of the Sauer board of directors and allow for
the removal of directors with or without cause by the holders of the
majority of Sauer common stock entitled to vote for the election directors
and (b) provide that the size of the Sauer board of directors will be
determined pursuant to Sauer's Bylaws requires the affirmative vote of the
holders of at least 80.0% of the outstanding shares of Sauer common stock.
See "BUSINESS TO BE CONDUCTED AT THE SPECIAL MEETING OF STOCKHOLDERS--VOTE
REQUIRED."
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this document, just indicate on your proxy
card how you want to vote for each of the three proposals. Complete, sign,
date and mail the enclosed proxy card in the enclosed return envelope as
soon as possible. If you are a stockholder of record, you may also vote your
shares by telephone or through the internet by following the instructions
accompanying your proxy card. See "BUSINESS TO BE CONDUCTED AT THE SPECIAL
MEETING OF STOCKHOLDERS--VOTING OF PROXIES" AND "--SOLICITATION AND
REVOCABILITY
1
OF PROXIES." THE SAUER BOARD OF DIRECTORS RECOMMENDS THAT SAUER'S
STOCKHOLDERS VOTE FOR EACH OF THE THREE PROPOSALS. See "THE
TRANSACTION--SAUER'S REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE
SAUER BOARD OF DIRECTORS."
Q: WHO CAN VOTE?
A: All record holders of Sauer common stock at the close of business on [-],
2000 are entitled to vote at the special meeting of stockholders. See
"BUSINESS TO BE CONDUCTED AT THE SPECIAL MEETING OF STOCKHOLDERS--RECORD
DATE, SHARES OUTSTANDING AND ENTITLED TO VOTE."
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: If you do not provide your broker with instructions on how to vote your
shares held in "street name," your broker will not be permitted to vote your
shares on the proposals presented at the special meeting of stockholders.
You should therefore provide your broker with instructions as to how to vote
your shares. Please check the voting form used by your broker to see if you
may vote by telephone.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE OR REVOKE MY PROXY?
A: You may change your vote at any time before your proxy is voted. You may do
this in one of the following four ways:
- by notifying Kenneth D. McCuskey, Corporate Secretary of Sauer, by mail or
by facsimile prior to the special meeting of stockholders stating that you
would like to revoke your proxy; or
- by completing, signing and dating another proxy card and returning it by
mail to Kenneth D. McCuskey, Corporate Secretary of Sauer, prior to the
special meeting of stockholders; or
- by telephone or via the internet by following the instructions provided on
your proxy card; or
- by attending the special meeting of stockholders and voting in person.
Simply attending the meeting, however, will not revoke your proxy; you
must vote at the special meeting of stockholders. See "BUSINESS TO BE
CONDUCTED AT THE SPECIAL MEETING OF STOCKHOLDERS--SOLICITATION AND
REVOCABILITY OF PROXIES."
Q: WHAT HAPPENS IF I DO NOT RETURN A PROXY CARD?
A: A failure to return your proxy card will be counted as absent for the
purpose of determining the existence of a quorum at the special meeting of
stockholders. See "BUSINESS TO BE CONDUCTED AT THE SPECIAL MEETING OF
STOCKHOLDERS--QUORUM."
Q: AM I ENTITLED TO DISSENTERS' RIGHTS?
A: You are not entitled to dissenters' rights or similar rights because none of
the proposals involve a merger or a consolidation. See "ABSENCE OF
DISSENTERS' RIGHTS."
Q: WHEN DO YOU EXPECT TO COMPLETE THE TRANSACTION?
A: We must first obtain the required approvals of stockholders at the special
meeting of stockholders and the necessary regulatory clearances.
Additionally, completion of the transaction is subject to certain conditions
that must be satisfied or waived. We presently expect to complete the
transaction in the second quarter of 2000. However, we cannot assure you
when or if the transaction will be completed.
Q: WHAT ARE THE BENEFITS OF THE TRANSACTION?
A: We believe that the transaction should:
- enable Sauer to improve its competitive position;
- increase customer penetration primarily due to the expected
post-transaction ability to offer customers new product
2
technology, a comprehensive product line and more complete hydraulic
systems; and
- increase profitability through cost savings, operational efficiencies and
economies of scale.
See "THE TRANSACTION--SAUER'S REASONS FOR THE TRANSACTION; RECOMMENDATION OF
THE SAUER BOARD OF DIRECTORS."
Q: DO ANY INSIDERS OR AFFILIATES HAVE A MATERIAL INTEREST IN THE TRANSACTION?
A: Yes. Currently, the entities and persons under the control of Klaus H.
Murmann, Chairman and Chief Executive Officer of Sauer, control 58.0% of the
voting power of Sauer. Immediately following consummation of the transaction,
the Murmann family will (a) control 17.1% of the voting power of Sauer and
(b) share control of 57.8% of the voting power of Sauer through their 50.0%
ownership of Danfoss Murmann Holding A/S. (See "SUBSTANTIAL INTERESTS OF SAUER
DIRECTORS AND OFFICERS.")
Additionally, completion of the transaction is conditioned upon:
- termination of a limited partnership agreement between Sauer and certain
affiliated entities;
- conversion of the partnership interests granted to the limited partners
pursuant to the limited partnership agreement into shares of Sauer common
stock; and
- reimbursement of the limited partners for certain taxes expected to be
payable by the limited partners in connection with such conversion.
Accordingly, as a result of the foregoing, the Murmann family is expected to
receive:
- 2,250,000 shares of Sauer common stock from the conversion of the
partnership interests; and
- $6,250,000, in the aggregate, from certain taxes expected to be payable by
the limited partners in connection with such conversion. (See "PROPOSAL
NO. 1--THE STOCK ISSUANCE--GENERAL DESCRIPTION.")
Q: WHERE CAN I FIND MORE INFORMATION ABOUT SAUER, THE SPECIAL MEETING OF
STOCKHOLDERS OR THE TRANSACTION?
A: Sauer files reports and other information with the Securities and Exchange
Commission. You may read and copy this information at the SEC's public
reference facilities. Please call the SEC at 1-800-SEC-0330 for information
about these facilities. This information is also available at the internet
site that the SEC maintains at http://www.sec.gov and at the offices of the
New York Stock Exchange, or you can request copies of these documents from
us. See "ADDITIONAL INFORMATION--WHERE YOU CAN FIND MORE INFORMATION."
Sauer stockholders may call 1-515-239-6364 for more information on the
transaction and the special meeting of stockholders. See "ADDITIONAL
INFORMATION--WHERE YOU CAN FIND MORE INFORMATION."
3
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE, AND SAUER
STOCKHOLDERS ARE URGED TO CAREFULLY READ THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROXY
STATEMENT OR INCORPORATED HEREIN BY REFERENCE. SAUER STOCKHOLDERS ARE URGED TO
READ THIS PROXY STATEMENT CAREFULLY AND IN ITS ENTIRETY.
REFERENCES TO $ ARE TO UNITED STATES DOLLARS; REFERENCES TO DKK ARE TO
DANISH KRONER. AS OF FEBRUARY 8, 2000, THE DANISH KRONER EXCHANGE RATE WAS DKK
7.55 = $1.00 AND CERTAIN AMOUNTS STATED HEREIN REFLECT SUCH EXCHANGE RATE.
THE COMPANIES
SAUER INC. ("SAUER")...................... Sauer is a worldwide leader in the design, manufacture
and sale of highly engineered hydraulic systems and
components ("mobile hydraulics") for use primarily in
demanding applications of off-highway mobile equipment.
Sauer and its predecessor organizations have been active
in the mobile hydraulics industry since the 1960s.
Sauer's products include hydrostatic transmissions, gear
pumps and motors, microprocessor controls, and
transmissions, and electro-hydraulics. Sauer sells its
products to original equipment manufacturers ("OEMs")
who use Sauer products to provide hydraulic power for
the propulsion, work, and control functions of their
vehicles. Sauer's products are sold primarily to the
construction, road building, agriculture, turf care, and
specialty vehicle markets. Sauer currently conducts its
business globally under the Sauer-Sundstrand name. Sauer
has agreed, as soon as reasonably practicable after the
completion of the acquisition of all the outstanding
shares of common stock of Danfoss Fluid Power A/S and
Danfoss Fluid Power Inc. (the "Transaction"), to change
the Sauer-Sundstrand name to Sauer-Danfoss Inc.
DANFOSS FLUID POWER A/S AND DANFOSS FLUID
POWER INC. (THE "DANFOSS FLUID POWER
COMPANIES")............................... The Danfoss Fluid Power Companies are worldwide leaders
in the design and manufacture of orbital motors,
hydrostatic steering units, proportional load-sensing
valves, gear pumps and electro-hydraulics for use by
OEMs of off-highway mobile equipment, principally in the
agriculture, construction, road building, forestry,
material handling and specialty markets. Headquartered
in Nordborg, Denmark, and with engineering and
manufacturing facilities in Denmark, the United States
and Poland, the products of the Danfoss Fluid Power
Companies are sold worldwide.
ADDITIONAL DISTRIBUTION OPERATIONS (THE The mobile hydraulics operations used by Danfoss'
"ADDITIONAL DISTRIBUTION OPERATIONS")..... existing sales companies to distribute the products
manufactured by Danfoss Fluid Power Companies in
Australia, Belgium, Brazil, Holland, Hong Kong, Japan,
Mexico, New Zealand, Portugal, Singapore, Spain and
Switzerland.
4
DANFOSS FLUID POWER GROUP (THE "DANFOSS Collectively, the Danfoss Fluid Power Companies and the
FLUID POWER GROUP")....................... Additional Distribution Operations.
DANFOSS MURMANN HOLDING A/S (THE "HOLDING
COMPANY")................................. The Holding Company is a Danish company formed by the
entities and persons under the control of Klaus H.
Murmann, the Chairman and Chief Executive Officer of
Sauer (the "Murmann family"), and Danfoss A/S
("Danfoss") to effect the Transaction. The Murmann
family owns the majority of the currently outstanding
shares of Sauer common stock.
Prior to the record date, the Murmann family will
contribute to the Holding Company 1,000 shares of Sauer
common stock in exchange for shares of the Holding
Company's common stock and will give the Holding Company
an irrevocable proxy to vote an additional 10,361,500
shares of Sauer common stock. Danfoss will contribute to
the Holding Company all of the outstanding shares of
common stock of the Danfoss Fluid Power Companies in
exchange for shares of the Holding Company's common
stock. The Holding Company's voting rights will be
shared equally by the Murmann family and Danfoss. The
Holding Company has no assets other than the shares of
common stock of the Danfoss Fluid Power Companies and
the shares of Sauer common stock contributed thereto by
Danfoss and the Murmann family, respectively, and has
not, to date, engaged in any activities other than as
incident to the ownership of such common stock.
Immediately following consummation of the Transaction
and termination of the limited partnership agreement
(described below), the Holding Company will own or have
the power to vote 26,512,312 shares of Sauer common
stock (or approximately 57.8% of the outstanding shares
of Sauer common stock) and will have no other assets.
RECOMMENDATIONS TO STOCKHOLDERS
The Sauer board of directors recommends that you vote
(1) FOR the proposal to issue Sauer common stock, (2)
FOR the proposal to amend Sauer's Certificate of
Incorporation to increase the number of authorized
shares of Sauer common stock by 30,000,000 shares from
45,000,000 shares to 75,000,000 shares, and (3) FOR the
proposal to amend Sauer's Certificate of Incorporation
to (a) remove the classification of the Sauer board of
directors and allow for the removal of directors with or
without cause by the holders of the majority of Sauer
common stock entitled to vote for the election of
directors and (b) provide that the size of the Sauer
board of directors shall be determined pursuant to
Sauer's Bylaws.
THE TRANSACTION
DESCRIPTION (PAGE 42)..................... Sauer, the Holding Company, Danfoss and K. Murmann
Verwaltungsgesellschaft mbH have entered into a stock
5
exchange agreement (the "Stock Exchange Agreement"),
pursuant to which, among other things, Sauer will
acquire from the Holding Company all of the common stock
of the Danfoss Fluid Power Companies. Subject to
approval of the issuance of Sauer common stock to the
Holding Company in connection with the Transaction by
the holders of a majority of Sauer common stock present
in person or represented by proxy at the special meeting
of stockholders, the Holding Company will contribute to
Sauer 100% of the outstanding shares of common stock of
the Danfoss Fluid Power Companies in exchange for
16,149,812 shares of Sauer common stock. Immediately
following consummation of the Transaction and
termination of the limited partnership agreement
(described below), the Holding Company will own or have
the power to vote 26,512,312 shares of Sauer common
stock (or approximately 57.8% of the outstanding shares
of Sauer common stock). As soon as reasonably
practicable after the closing of the Transaction, Sauer
will change its name to Sauer-Danfoss Inc.
Additionally, in connection with the Transaction, Sauer
will terminate an amended and restated limited
partnership agreement, dated April 14, 1998, among
Sauer, Sauer-Sundstrand GmbH, Sauer GmbH, Klaus H.
Murmann & Co. KG and Sauer GmbH & Co. Hydraulik KG (the
"Limited Partnership Agreement"). Pursuant to the terms
of the Limited Partnership Agreement, upon termination,
Sauer will issue 2,250,000 shares of Sauer common stock
(calculated pursuant to the termination provisions of
the Limited Partnership Agreement), in exchange for the
interests of the limited partners (the "Limited
Partnership Interests") and pay $6,250,000 in cash in
respect of certain taxes payable by the limited partners
related to such exchange. Accordingly, immediately
following the consummation of the Transaction, the
Murmann family will own and have the power to vote
7,847,325 shares of Sauer common stock (or approximately
17.1% of the outstanding shares of Sauer common stock).
Also, as more fully described under "PROPOSAL NO. 1--THE
STOCK ISSUANCE", before December, 31, 2000, Sauer will
issue to the Holding Company additional shares of Sauer
common stock in exchange for substantially all of the
assets of the Additional Distribution Operations. The
existing sales companies of Danfoss act as distributors
for Danfoss' entire product line, including the products
manufactured by the Danfoss Fluid Power Companies.
Danfoss continues to reorganize its existing sales
companies in order to segregate the assets necessary to
distribute the products manufactured by the Danfoss
Fluid Power Companies from the overall distribution
operations of its existing sales companies. Such
reorganization, which involves the transfer of the
relevant
6
assets to newly formed entities, is expected to be
completed on or before December 31, 2000.
OPINION OF SAUER'S FINANCIAL ADVISOR (PAGE
47)....................................... On January 18, 2000, based upon review of a draft of the
Stock Exchange Agreement and assuming that the
definitive Stock Exchange Agreement would not materially
differ from such draft, Credit Suisse First Boston
("CSFB") delivered its oral opinion to the Sauer board
of directors to the effect that, as of such date, the
consideration provided for in the Transaction was fair
from a financial point of view to Sauer and the holders
of the outstanding Sauer common stock other than the
Holding Company and the Holding Company's affiliates.
Following a review of the definitive Stock Exchange
Agreement, CSFB subsequently confirmed such opinion by
delivery of its written opinion, dated January 22, 2000,
to the Sauer board of directors, a copy of which is
attached as Annex B to this proxy statement. We
encourage you to read CSFB's written opinion thoroughly.
SPECIAL CONSIDERATIONS (PAGE 15).......... For a description of the various factors that you should
consider in connection with the proposals in this proxy
statement, in addition to the other information
described in this proxy statement, see "SPECIAL
CONSIDERATIONS."
ACCOUNTING TREATMENT (PAGE 52)............ The Transaction will be accounted for by Sauer by the
purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16 "BUSINESS
COMBINATIONS." Accordingly, upon completion of the
Transaction, the assets acquired and liabilities assumed
will be recorded at fair value based on independent
appraisal of the fair value of the acquired property,
plant and equipment, and identified intangible assets,
and information available and assumptions made by
management as to future operations. The allocation of
the purchase price will be based on the final
determination of appraised and other fair values.
THE SPECIAL MEETING OF STOCKHOLDERS
MATTERS TO BE CONSIDERED At the special meeting of stockholders, holders of Sauer
(PAGE 39)................................. common stock will consider and vote upon a proposal (1)
to issue an aggregate of 16,149,812 shares of Sauer
common stock in connection with the Transaction, (2) to
amend Sauer's Certificate of Incorporation to increase
the number of authorized shares of Sauer common stock by
30,000,000 shares from 45,000,000 shares to 75,000,000
shares, (3) to amend Sauer's Certificate of
Incorporation to (a) remove the classification of the
Sauer board of directors and allow for the removal of
directors with or without cause by the holders of the
majority of Sauer common stock entitled to vote for the
election directors and (b) provide that the size of the
Sauer board of directors shall be determined pursuant to
Sauer's Bylaws and (4) to transact such other business
as may properly
7
come before the special meeting of stockholders or any
postponement, adjournment or adjournments.
DATE, TIME AND PLACE OF SPECIAL MEETING OF The special meeting of stockholders is scheduled to be
STOCKHOLDERS (PAGE 39).................... held on May 3, 2000, at 8:00 a.m., (local time), at
Holiday Inn Gateway Center, 2100 Greenhills Drive, Ames,
Iowa 50014.
RECORD DATE, SHARES OUTSTANDING AND The close of business on [-], 2000 has been fixed as the
ENTITLED TO VOTE (PAGE 39)................ record date for determining holders of shares of Sauer
common stock entitled to notice of and to vote at the
special meeting of stockholders. As of the record date,
27,502,306 shares of Sauer common stock were outstanding
and held of record by [-] holders.
VOTING OF PROXIES (PAGE 39)............... All shares of Sauer common stock entitled to vote and
represented by properly completed proxies received prior
to the special meeting of stockholders and not revoked
will be voted in accordance with the instructions on the
proxy. If no instructions are indicated on a properly
completed proxy, the shares of Sauer common stock
represented by that proxy will be voted FOR the
proposals discussed above.
VOTE REQUIRED (PAGE 40)................... Adoption of the proposal to (a) issue Sauer common stock
in connection with the Transaction and (b) amend Sauer's
Certificate of Incorporation to increase the number of
authorized shares of Sauer common stock each require the
affirmative vote of the holders of a majority of the
shares of Sauer common stock present in person or
represented by proxy at the special meeting of
stockholders. As a result, abstentions, failures to vote
and Broker Non-Votes will have no effect on the vote (a)
to issue Sauer common stock in connection with the
Transaction or (b) to amend Sauer's Certificate of
Incorporation to increase the number of authorized
shares of Sauer common stock, except to the extent that
failures to vote and Broker Non-Votes affect the quorum
requirement.
Adoption of the proposal to amend Sauer's Certificate of
Incorporation to (a) remove the classification of the
Sauer board of directors and allow for the removal of
directors with or without cause by the holders of the
majority of Sauer common stock entitled to vote for the
election directors and (b) provide that the size of the
Sauer board of directors shall be determined pursuant to
Sauer's Bylaws requires the affirmative vote of the
holders of at least 80.0% of the outstanding shares of
Sauer common stock. As a result, abstentions, failures
to vote and Broker Non-Votes have the same effect on the
vote to amend Sauer's Certificate of Incorporation to
remove the classification of the Sauer board of
directors, allow removal of directors with or without
cause and provide that the size of the Sauer board of
directors will be determined pursuant to Sauer's Bylaws
as a vote against such proposal.
8
Holders of Sauer common stock are entitled to one vote
at the special meeting of stockholders for each share of
Sauer common stock held of record at the close of
business on the record date.
The Murmann family, certain members of Sauer's
management and the Holding Company, which together hold
17,264,325 shares of Sauer common stock (or
approximately 62.8% of the outstanding shares of Sauer
common stock), have indicated that they will vote for
each of the proposals. Accordingly, the approval of the
proposals to issue Sauer common stock in connection with
the Transaction and to amend Sauer's Certificate of
Incorporation to increase the number of shares of Sauer
common stock authorized is expected. However, no
individual Sauer stockholder can approve the proposal to
amend Sauer's Certificate of Incorporation to (a) remove
the classification of the Sauer board of directors and
allow for the removal of directors with or without cause
by the holders of the majority of Sauer common stock
entitled to vote for the election of directors and (b)
provide that the size of the Sauer board of directors
will be determined pursuant to Sauer's Bylaws.
QUORUM (PAGE 40).......................... The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Sauer common stock
is necessary to constitute a quorum for the transaction
of business at the special meeting of stockholders.
Because the Murmann family, certain members of Sauer's
management and the Holding Company, which together hold
17,264,325 shares of Sauer common stock (or
approximately 62.8% of the outstanding shares of Sauer
common stock), have indicated that they will vote for
each proposal, a quorum is expected.
SOLICITATION AND REVOCABILITY OF PROXIES The enclosed proxy is being solicited on behalf of the
(PAGE 41)................................. Sauer board of directors for use at the special meeting
of stockholders to be held on May 3, 2000. Any proxy
given by you does not affect your right to vote in
person at the special meeting of stockholders and may be
revoked by you at any time before it is exercised by
notifying Kenneth D. McCuskey, Corporate Secretary of
Sauer, by mail, by facsimile, by timely delivery of a
properly executed, later-dated proxy (including a vote
via internet or telephone) or by appearing at the
special meeting of stockholders in person and voting by
ballot. If any of your shares of Sauer common stock are
held of record by a brokerage house, bank, or other
nominee and you wish to vote such shares of Sauer common
stock at the special meeting of stockholders, you must
obtain from the record holder a proxy issued in your
name.
EXPENSES OF SOLICITATION (PAGE 41)........ Sauer will bear the entire cost of solicitation of
proxies, including the preparation, assembly, printing,
and mailing of this proxy statement, the accompanying
proxy, and any additional information furnished to
stockholders.
9
MARKET AND DIVIDEND INFORMATION
Shares of Sauer common stock have been traded on the New
York Stock Exchange under the symbol "SHS" since May 12,
1998. Additionally, shares of Sauer common stock have
been traded on the Frankfurt (Germany) Stock Exchange
under the symbol "SAR" since May 13, 1998. For
information regarding the historical market prices of
Sauer common stock, see page 63.
On February 9, 2000, the last trading day before filing
the proxy statement with the SEC, Sauer common stock
closed at $9.625 per share on the New York Stock
Exchange. On [-], 2000, the last trading day before the
printing of this proxy statement, Sauer common stock
closed at $[-] per share on the NYSE.
The common stock of each of the Danfoss Fluid Power
Companies has not been, and is not currently, publicly
traded. Accordingly, market prices are not available.
Additionally, prior to contribution of all of the
outstanding shares of common stock of the Danfoss Fluid
Power Companies to the Holding Company, from time to
time, the Danfoss Fluid Power Companies paid cash
dividends to Danfoss, its direct parent.
10
SELECTED HISTORICAL FINANCIAL INFORMATION FOR SAUER
The following selected historical financial information should be read in
conjunction with the Audited Financial Statements of Sauer (including the notes
thereto) appearing elsewhere in this proxy statement. The selected historical
financial information has been derived from the Audited Financial Statements of
Sauer for each of the fiscal years in the five-year period ended December 31,
1998, which have been audited by Arthur Andersen LLP, independent public
accountants.
SAUER
----------------------------------------------------------------------------------
YEAR-ENDED YEAR-ENDED YEAR-ENDED YEAR-ENDED YEAR-ENDED
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
(AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE, PER SHARE, EMPLOYEE AND RATIO DATA)
OPERATING DATA:
Net sales..................... $ 362,482 $ 446,774 $ 467,566 $ 535,173 $ 564,524
Gross profit.................. 86,517 110,074 113,532 131,108 136,213
Marketing expenses............ 21,615 23,577 23,523 23,256 24,942
R&D expenses.................. 16,068 18,796 20,505 20,655 22,089
Administration expenses....... 20,560 24,551 28,333 29,319 29,571
Total operating expenses...... 58,243 66,924 72,361 73,230 76,602
Earnings before interest and
taxes....................... 24,341 38,419 35,100 50,680 50,527
Total interest expense, net... 5,686 6,657 5,959 7,607 8,814
Net income.................... 11,374 26,580 18,898 27,129 26,334
PER SHARE DATA:
Income per common share, basic
and diluted................. $ 0.47 $ 1.10 $ 0.78 $ 1.12 $ 1.01
Cash dividends per share...... $ 0.08 $ 0.32 $ 0.32 $ 0.32 $ 0.29
Weighted average basic
shares outstanding............ 24,050,000 24,187,500 24,225,000 24,225,000 26,148,288
Weighted average diluted
shares outstanding............ 24,050,000 24,187,500 24,225,000 24,225,000 26,150,302
BALANCE SHEET DATA:
Inventories................... $ 64,131 $ 85,098 $ 78,273 $ 89,031 $ 89,195
Property, plant & equipment,
net......................... 89,620 117,827 152,321 191,690 262,527
Total assets.................. 235,146 304,237 337,527 388,735 459,771
Total debt.................... 68,766 92,169 108,632 136,428 151,027
Stockholders' equity.......... 37,962 59,491 70,874 85,301 148,904
Ratio of debt to
debt-equity................. 56.7% 53.6% 53.1% 53.6% 45.0%
OTHER DATA:
Backlog (at year end)......... $ 187,400 $ 235,600 $ 227,000 $ 277,500 $ 261,700
Depreciation and
amortization................ 18,204 19,898 24,830 25,835 30,635
Capital expenditures.......... 21,350 45,689 56,284 66,750 98,582
EBITDA*....................... 42,545 58,317 59,930 76,515 81,162
Number of employees (at year
end)........................ 2,628 2,899 3,055 3,751 3,710
Sales/total compensation
expense..................... 3.15x 3.37x 3.46x 3.66x 3.68x
Cash flows from (used in):
Operating activities........ 40,904 36,694 47,670 42,744 63,535
Investing activities........ (21,048) (45,544) (56,198) (70,311) (98,950)
Financing activities........ (13,543) 13,235 9,268 23,351 35,077
- ------------------------
* EBITDA for any relevant period presented above represents net income, plus
provision for income taxes and net interest expense, plus depreciation and
amortization. EBITDA may not be comparable to similarly titled measures
reported by other companies. While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which is determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of Sauer to meet its
future debt service, capital expenditures and working capital requirements.
EBITDA is not necessarily a measure of Sauer's ability to fund its cash
needs, and its discretionary
11
use of EBITDA will be subject to Sauer's future cash needs relating to its
capital expenditures, working capital requirements, future debt service
requirements and dividend payments. See Sauer's Audited Financial Statements
(including the notes thereto) appearing elsewhere in this proxy statement.
NYSE PRICE RANGE, DIVIDENDS 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FULL YEAR
- --------------------------- ----------- ----------- ----------- ----------- ---------
1997 High............................. N/A N/A N/A N/A N/A
Low.............................. N/A N/A N/A N/A N/A
Dividends........................ $0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.32
1998 High............................. N/A $18.38 $16.50 $10.00 $18.38
Low.............................. N/A 13.25 7.56 6.06 6.06
Dividends........................ $0.08 $ 0.07 $ 0.07 $ 0.07 $ 0.29
12
SELECTED HISTORICAL FINANCIAL INFORMATION FOR THE DANFOSS FLUID POWER GROUP
The following table presents selected historical financial information for
the Danfoss Fluid Power Group. It should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE DANFOSS FLUID POWER GROUP" and the Combined Financial
Statements of the Danfoss Fluid Power Group along with the accompanying notes,
included elsewhere in this proxy statement. The combined financial statements as
of September 30, 1996, December 31, 1997 and December 31, 1998, and for the
fiscal year ended September 30, 1996, the 15 months ended December 31, 1997 and
the fiscal year ended December 31, 1998, included elsewhere in this proxy
statement, have been audited by KPMG C. Jespersen, independent auditors, as
stated in their opinion included therein.
The Combined Financial Statements combine the historical financial
statements of certain Danfoss subsidiaries and, to the extent applicable, the
historical accounts of Danfoss and certain of its other subsidiaries on a
carve-out basis. Such carve-out financial statements include corporate
inter-unit charges for services rendered by Danfoss and an allocation of certain
corporate costs to the extent that the cost of services provided to the Company
by Danfoss had not been charged back. Although management believes that such
charges and allocations are reasonable, the costs reflected in the combined
financial statements are not necessarily indicative of the costs that would have
been incurred if the Danfoss Fluid Power Group had been an independent separate
entity.
THE DANFOSS FLUID POWER GROUP
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1994(6) 1995(6) 1996
--------------- --------------- ---------------
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
IN ACCORDANCE WITH DANISH GAAP:(2)
OPERATING DATA:
Net sales............................................ 1,559,032 1,847,837 1,943,501
Gross margin......................................... -- -- 539,168
Sales expenses....................................... -- -- 335,767
Administration expenses.............................. -- -- 118,655
Total operating expenses............................. -- -- 454,422
Earnings before interest and taxes(3)................ -- -- 87,710
Total interest expense, net(4)....................... -- -- 425
Net income........................................... 67,054 135,284 54,223
BALANCE SHEET DATA:
Inventories.......................................... -- -- 448,356
Property, plant & equipment, net..................... -- -- 818,179
Total assets......................................... 1,392,577 1,571,684 1,675,739
Net assets(4)........................................ 1,026,098 1,217,078 1,278,680
OTHER DATA:
Depreciation and amortization........................ -- -- 112,293
EBITDA(5)............................................ -- -- 200,003
Cash flows from (used in):
Operating activities............................... -- -- 200,518
Investing activities............................... -- -- (188,556)
IN ACCORDANCE WITH U.S. GAAP:(2)
Net income........................................... -- -- --
Net assets........................................... -- -- --
13
THE DANFOSS FLUID POWER GROUP
----------------------------------------------------------------------
FIFTEEN MONTHS ENDED DECEMBER 31, 1997 (1)
--------------------------------------------------
15 MONTHS ENDED 3 MONTHS ENDED 12 MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------- -------------- --------------- -----------------
1997 1996 1997 1998
--------------- -------------- --------------- -----------------
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
IN ACCORDANCE WITH
DANISH GAAP:(2)
OPERATING DATA:
Net sales.................... 2,643,582 459,359 2,184,223 2,269,331
Gross margin................. 854,898 124,882 730,016 686,997
Sales expenses............... 439,057 82,767 356,291 365,429
Administration expenses...... 147,744 25,822 121,921 117,095
Total operating expenses..... 586,801 108,589 478,212 465,778
Earnings before interest and
taxes(3)................... 278,239 17,687 260,552 216,180
Total interest expense,
net(4)..................... 16,685 1,485 15,201 21,918
Net income................... 168,116 10,453 157,662 127,640
BALANCE SHEET DATA:
Inventories.................. 465,705 436,540 465,705 522,000
Property, plant & equipment,
net........................ 885,802 845,208 885,802 902,274
Total assets................. 1,822,707 1,672,179 1,822,707 1,878,620
Net assets(4)................ 1,293,391 1,353,713 1,293,391 1,382,993
OTHER DATA:
Depreciation and
amortization............... 159,359 30,850 128,508 125,799
EBITDA(5).................... 437,598 48,537 389,060 341,979
Cash flows from (used in):
Operating activities....... 380,105 (6,671) 386,775 178,035
Investing activities....... (172,475) (48,804) (123,671) (164,279)
IN ACCORDANCE WITH
U.S. GAAP:(2)
Net income................... 169,418 10,701 158,717 127,893
Net assets................... 1,301,091 1,360,359 1,301,091 1,391,116
- ------------------------
(1) During 1997, the Danfoss Fluid Power Group changed its fiscal year-end from
September 30 to December 31.
(2) The Combined Financial Statements of the Danfoss Fluid Power Group are
prepared in accordance with Danish GAAP, which differ in certain significant
respects from U.S. GAAP. For further details, see Note 15 of Notes to
Combined Financial Statements.
(3) Earnings before interest and taxes include foreign exchange gains of
DKK 2,964 and DKK 10,142 for the year ended September 30, 1996 and the
fifteen months ended December 31, 1997, respectively, and foreign exchange
losses of DKK 5,039 for the year ended December 31, 1998, due principally to
exchange rate fluctuations between the United States Dollar and the Danish
Kroner.
(4) It was not possible, without making a number of arbitrary allocations, to
segregate net assets between temporary financing, long-term debt and equity.
Accordingly, interest expense has been allocated to the Danfoss Fluid Power
Group by determining the percentage relationship between the net assets of
the Danfoss Fluid Power Group and the total net assets of Danfoss and
applying that percentage to the total Danfoss net interest expense.
14
(5) EBITDA for any relevant period presented above represents net income, plus
provision for income taxes and net interest expense, plus depreciation and
amortization. EBITDA may not be comparable to similarly titled measures
reported by other companies. While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which is determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of the Danfoss Fluid
Power Group to meet its future debt service, capital expenditures and
working capital requirements. EBITDA is not necessarily a measure of the
Danfoss Fluid Power Group's ability to fund its cash needs, and its
discretionary use of EBITDA will be subject to the Danfoss Fluid Power
Group's future cash needs relating to its capital expenditures, working
capital requirements, future debt service requirements and dividend
payments.
(6) Because of organizational changes within the Danfoss Fluid Power Group, it
is practically impossible to prepare detailed financial data for the years
1994 and 1995 on a carve-out basis that would be comparable with the
financial data prepared for 1996, 1997 and 1998. Accordingly, financial data
for 1994 and 1995 is prepared on a summary basis.
The following table presents the appropriate exchange rates used to
translate Danish Kroner to United States dollars:
1996 1997
------------------ ------------------------------------------------------------
OCTOBER 1, 1995 TO OCTOBER 1, 1996 TO OCTOBER 1, 1996 TO JANUARY 1, 1997 TO
SEPTEMBER 30, 1996 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ ------------------ ------------------
High......................... 5.9805 7.2045 6.0030 7.2045
Low.......................... 5.3750 5.7277 5.7277 5.8826
Average...................... 5.7123 6.6049 6.6049 6.6049
End of Period................ 5.8685 6.8315 5.9500 6.8315
1998 SIX MONTH PERIODS
------------------ ---------------------------------------
JANUARY 1, 1998 TO JANUARY 1, 1998 TO JANUARY 1, 1999 TO
DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1999
------------------ ------------------ ------------------
High......................... 7.0755 7.0755 7.2371
Low.......................... 6.0450 6.6875 6.2673
Average...................... 6.7011 6.8833 6.8276
End of Period................ 6.3865 6.8909 7.2041
15
SELECTED UNAUDITED PRO FORMA HISTORICAL FINANCIAL INFORMATION FOR SAUER AND THE
DANFOSS FLUID POWER GROUP
The Selected Unaudited Pro Forma Historical Financial Information for Sauer
and the Danfoss Fluid Power Group give effect to Sauer acquiring the operations
of the Danfoss Fluid Power Group (as defined in the Summary to the Proxy
Statement). The acquisition will be consummated as follows:
- First, pursuant to the terms of the Stock Exchange Agreement and
consistent with the first stockholder proposal, Sauer will issue
approximately 16.2 million shares of Sauer common stock to acquire the
Danfoss Fluid Powers Companies.
- Second, before December 31, 2000, Sauer will issue approximately 2.2
million additional shares of Sauer common stock to acquire the net assets
of certain additional distribution operations of the business ("Additional
Distribution Operations"). The acquisition of the Additional Distribution
Operations is part of the overall integrated acquisition of the Danfoss
Fluid Power Group. The Additional Distribution Operations have consistent
characteristics with such distribution operations already included in the
Danfoss Fluid Power Companies.
The following selected unaudited pro forma historical financial information
gives effect to: (i) the issuance of 18.4 million shares of Sauer common stock
for the Danfoss Fluid Power Group (16.2 million shares for the Danfoss Fluid
Power Companies and 2.2 million shares for the Additional Distribution
Operations of the transaction) of Sauer common stock, (ii) the assumption of
$91.1 million of debt, (iii) the termination of the Murmann Limited Partnership
Interests of $10.7 million and the related tax payment of $6.3 million,
(iv) additional interest expense associated with the assumed debt,
(v) recording the excess of the purchase price of the Danfoss Fluid Power Group
over the estimated net assets acquired over 40 years and (vi) acquisition costs.
This information should be read in conjunction with the unaudited pro forma
statements of income and pro forma balance sheet (including the notes thereto)
appearing elsewhere in this proxy statement.
SAUER AND THE DANFOSS FLUID POWER GROUP
-------------------------------------------------------------
YEAR-ENDED THIRTY-NINE WEEKS
1998 ENDED 1999
----------------------------- -----------------------------
PRO FORMA PRO FORMA
COMBINED COMBINED
WITHOUT WITHOUT
ADDITIONAL ADDITIONAL
PRO FORMA DISTRIBUTION PRO FORMA DISTRIBUTION
COMBINED (1) OPERATIONS (2) COMBINED (1) OPERATIONS (2)
------------ -------------- ------------ --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
OPERATING DATA:
Net sales................................. $903,177 $890,642 $663,961 $653,488
Earnings before interest and taxes........ $ 84,020 $ 79,982 $ 57,464 $ 53,605
Net income................................ $ 43,387 $ 40,882 $ 29,071 $ 26,653
PER SHARE DATA:
Diluted earnings per share................ $ 0.93 $ 0.92 $ 0.61 $ 0.58
Cash dividends per share.................. $ 0.16 $ 0.17 $ 0.12 $ 0.13
Book value per share...................... $ 7.63 $ 7.45 $ 7.59 $ 7.41
OTHER:
Total assets.............................. $847,661 $818,723 $820,427 $791,599
Long-term debt............................ $204,251 $204,251 $192,485 $192,485
- ------------------------
(1) The amounts presented relate to the complete acquisition of the Danfoss
Fluid Power Group including the Additional Distribution Operations to be
acquired before December 31, 2000.
(2) The amounts presented relate to the acquisition of the Danfoss Fluid Power
Companies excluding the Additional Distribution Operations consistent with
the first stockholder proposal to issue approximately 16.2 million shares of
Sauer common stock.
16
SPECIAL CONSIDERATIONS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS DOCUMENT (INCLUDING
THE MATTERS ADDRESSED IN "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS"), IN CONSIDERING WHETHER OR NOT TO APPROVE EACH OF THE PROPOSALS,
YOU SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING SPECIAL
FACTORS. THE ORDER IN WHICH THESE FACTORS IS DISCUSSED IS NOT INTENDED TO
REPRESENT THEIR RELATIVE SIGNIFICANCE.
TRANSACTION CONSIDERATIONS
STOCK OWNERSHIP
Immediately following consummation of the Transaction and termination of the
limited partnership agreement, the Holding Company will own or will have the
power to vote 26,512,312 shares of Sauer common stock (or approximately 57.8% of
the outstanding shares of Sauer common stock). The Murmann family will continue
to own and have power to vote an additional 7,847,325 shares of Sauer common
stock (or approximately 17.1% of the outstanding shares of Sauer common stock).
Accordingly, the Holding Company and the Murmann family will control, in the
aggregate, 74.9% of the outstanding shares of Sauer common stock. Additionally,
as more fully described under "PROPOSAL NO. 1--THE STOCK ISSUANCE," before
December 31, 2000, Sauer will issue to the Holding Company additional shares of
Sauer common stock in exchange for substantially all of the assets of the
Additional Distribution Operations.
SAUER BOARD OF DIRECTORS; BOARD ACTION
SAUER BOARD OF DIRECTORS. Following consummation of the Transaction, the
Holding Company will possess sufficient voting power to elect all members of the
Sauer board of directors and, therefore, will have the ability to control the
Sauer board of directors. In connection with the Transaction, the Murmann family
and Danfoss have entered into an agreement regarding the Holding Company and
their ownership of the Holding Company's common stock (the "Holding Company
Agreement"). In addition, in connection with the Transaction, Sauer's Bylaws
will be amended. Such amendment includes establishing procedures for the
election of the Sauer board of directors. Pursuant to the Holding Company
Agreement, the Murmann family and Danfoss will each identify for recommendation
to the Sauer board of directors three candidates for director who may be
associated with the Murmann family or Danfoss. In addition, the Murmann family
and Danfoss will each identify for recommendation two additional candidates for
director. One such candidate recommended by the Murmann family will be Sauer's
Chief Executive Officer and President and the remaining three such candidates
must be independent from and not associated or affiliated with the Murmann
family or Danfoss.
BOARD ACTION. In connection with, and as a condition to, the Transaction,
Sauer's Bylaws will be amended to provide that the following acts must be
approved by at least 80.0% of Sauer's directors:
- the acquisition or disposition of assets for consideration having a value
in excess of 1% of net sales for the immediately preceding fiscal year;
- the issuance of Sauer common stock or other voting securities or any
incurrence in excess of $10,000,000 principal amount of debt;
- any amendment of Sauer's Bylaws or any recommendation by the Sauer board
of directors to Sauer stockholders to modify Sauer's Certificate of
Incorporation;
- any action having a material adverse effect on the operations conducted in
Nordborg, Denmark;
- any other material change in the lines of business operated by Sauer;
- any increase or decrease in the number of Sauer directors;
- the election or removal of the members, or alternative members, of the
nominating committee;
17
- the election or removal of Sauer's Chairman, Vice Chairman, Chief
Executive Officer, Chief Financial Officer or Chief Operating Officer; and
- the approval of Sauer's annual business plan or any action that materially
deviates from such plan.
Pursuant to the Holding Company Agreement, the Sauer board of directors will
have ten directors and may include three directors affiliated with each of the
Murmann family and Danfoss and must include at least three independent directors
who are not associated or affiliated with the Murmann family or Danfoss. As a
result, any of the foregoing acts may be blocked by the (i) directors associated
with the Murmann family, (ii) directors associated with Danfoss, or
(iii) independent directors.
UNCERTAINTY REGARDING BUSINESS COMBINATION
While Sauer anticipates that the Transaction will enhance its operations and
revenues and reduce costs, there can be no assurance that such improvements will
be realized. Integrating the operations and management of Sauer and the Danfoss
Fluid Power Companies will be a complex process, and there can be no assurance
that this integration will be completed rapidly or will result in the
realization of all of the anticipated synergies and other benefits expected to
be realized from the combination. Moreover, the integration of Sauer and the
Danfoss Fluid Power Companies will require significant management attention,
that may temporarily distract management from its regular focus on the daily
operations.
Sauer and the Danfoss Fluid Power Companies estimate that, as a result of
the Transaction, Sauer-Danfoss will incur consolidation and integration
expenses, some of which will be expensed in 2000 and some of which will be
capitalized in 2000. The amount of such costs cannot be estimated at this time.
DILUTION
As of the record date, there were 27,502,306 shares of Sauer common stock
outstanding. In connection with the Transaction, Sauer will issue 16,149,812
shares of Sauer common stock, that, as of the record date, constitutes
approximately 58.7% of the outstanding shares of Sauer common stock and will
result in the Holding Company owning or having the power to vote an aggregate of
26,512,312 shares of Sauer common stock (or approximately 57.8% of the
outstanding shares of Sauer common stock). Additionally, in connection with the
termination of the Limited Partnership Agreement and the exchange of the Limited
Partnership Interests for shares of Sauer common stock pursuant to the terms
thereof, Sauer will issue 2,250,000 shares of Sauer common stock to the limited
partners. Also, as more fully described under "PROPOSAL NO. 1--THE STOCK
ISSUANCE", before December 31, 2000, Sauer will issue to the Holding Company
additional shares of Sauer common stock in exchange for all of the assets of
Danfoss related to the mobile hydraulics operations of Danfoss in Australia,
Belgium, Brazil, Holland, Hong Kong, Japan, Mexico, New Zealand, Portugal,
Singapore, Spain and Switzerland. Accordingly, the Transaction will decrease
earnings per share and other financial ratios if the Danfoss Fluid Power
Companies' contribution to the combined company is not commensurate with the
number of shares issued.
POTENTIALLY SIGNIFICANT INCREASES IN DEPRECIATION AND AMORTIZATION EXPENSE
MAY RESULT FROM AMORTIZATION PERIODS THAT ARE SHORTER THAN PRELIMINARY
ESTIMATES REFLECTED IN THE PRO FORMA HISTORICAL FINANCIAL STATEMENTS THAT
WOULD CAUSE NET EARNINGS TO DECREASE
Pro forma results of operations reflect adjustments, which are based upon
preliminary estimates, to reflect the allocation of purchase consideration to
the acquired assets and liabilities of the Danfoss Fluid Power Group. The final
allocation of the purchase consideration will be determined after the closing of
the Transaction and will be based on independent appraisals and a comprehensive
final evaluation of the fair value of the Danfoss Fluid Power Group's tangible
assets acquired, liabilities
18
assumed, identifiable intangible assets and goodwill at the time of the closing
of the Transaction. Accordingly, the final determination of the value of
tangible and intangible assets may result in depreciation and amortization
expense that is significantly higher than the preliminary estimates of these
amounts resulting in lower net earnings. See "SELECTED UNAUDITED PRO FORMA
HISTORICAL FINANCIAL INFORMATION FOR SAUER AND THE DANFOSS FLUID POWER GROUP."
GENERAL BUSINESS CONSIDERATIONS
COMPETITION
The mobile hydraulics industry is intensely competitive, with competition
principally based on breadth of product offerings, systems capability, product
performance, quality, price, durability and availability of skilled aftermarket
support. There are a relatively small number of competitors, usually divisions
of large companies such as Mannesmann (Rexroth division), Eaton Corporation,
Linde AG and Parker Hannifin, that offer broad product ranges across
international markets. In addition, Sauer competes with a large number of
smaller companies that typically offer a single, specialized product on a more
limited geographic basis. The Transaction is expected to improve Sauer's
competitive position, primarily due to Sauer's expected post-Transaction ability
to offer to customers new product technology, a comprehensive product line and
more complete hydraulic systems and, therefore, to increase customer
penetration. However, there can be no assurance that these expected benefits
will be realized by Sauer. Certain of Sauer's competitors have greater financial
and other resources and may have lower cost structures than Sauer and can thus
better withstand adverse economic or market conditions. Companies not currently
in direct competition with Sauer may introduce competing products in the future.
For example, Sauer may face competition from current and prospective OEM
customers, who evaluate Sauer's products against the merits of manufacturing
components internally. To remain competitive, Sauer must continue to make
capital and operational expenditures, invest in research and development,
maintain and enhance quality levels, deliver finished products on a reliable
basis and compete favorably on the basis of price. Failure by Sauer to continue
to compete effectively could have a material adverse effect on Sauer's business,
financial condition and results of operations. While the consummation of the
Transaction is expected to strengthen Sauer's competitiveness, there can be no
assurance that such result will be achieved.
PRICING AND COMPETITIVE PRESSURES FROM OEM CUSTOMERS
Approximately 70.0% of Sauer's sales are made directly to OEM customers.
Increasingly, OEM customers are seeking to use their positions as volume
purchasers in the mobile hydraulics market to obtain preferential pricing and to
obtain substantial quality assurance protection from suppliers. To remain
competitive with others selling to these OEMs, Sauer will continue to face
significant limitations on its ability to raise and, in some cases, maintain
current price levels on sales to such customers. In addition, Sauer expects that
additional capital and operating expenditures will be required to meet the
enhanced quality assurance protection its OEM customers require. These
developments could have a significant impact on Sauer's operating results. Sauer
expects that it will continue to be subject to the foregoing pressures
post-Transaction.
CYCLICALITY, RISKS ASSOCIATED WITH GENERAL ECONOMIC CONDITIONS
The capital goods industry in general and the mobile hydraulics industry in
particular are subject to economic cycles. Cyclical downturns have in the past
had and could in the future have a material adverse effect on the demand for
Sauer's products and, consequently, on Sauer's business, financial condition and
results of operations. Demand for Sauer's products is dependent upon the general
condition of the off-highway mobile equipment industry which may be affected by
numerous factors, including levels of construction activity, weather conditions
and interest rates. Sauer's results of operations are also subject to price
competition and the cost of supplies and labor, both of which are
19
affected by general economic conditions. Sauer derives substantial sales from
cyclical industries, including the turf care, material handling, construction
and agricultural equipment industries. Periods of economic recession in the
United States or Europe or any other major industrial market could cause a
substantial decrease in Sauer's net sales and have a material adverse effect on
Sauer's business, financial condition and results of operations. Currently, the
agriculture market in the United States and Europe is experiencing a general
economic downturn. In 1998, Sauer had sales of $102.8 million in agriculture, or
18.2% of Sauer's total revenues. The product groups acquired by Sauer as a
result of the Transaction are complimentary to Sauer's existing product lines.
Accordingly, the Transaction is not expected to significantly impact Sauer's
exposure to the cyclicality or the risk associated with general economic
conditions.
RISKS RELATING TO GROWTH STRATEGY
A key element of Sauer's growth strategy is its continued success in
developing new, enhanced hydraulic systems and components for its existing
markets and new applications of its technology to new market segments. Sauer may
not be successful in developing these new products or such products may not
compete successfully in the markets.
In pursuing its growth strategy, Sauer intends to expand its presence in
existing markets and to enter new product markets, both of which will require
significant increases in manufacturing capacity and research, engineering and
development efforts. Sauer has commenced an expansion program requiring capital
expenditures to construct new facilities and expand existing operations. The
expansion program may take longer or require more capital than is currently
planned. Sauer may finance these capital expenditures from cash flow from
operations, bank or institutional borrowings or the issuance of equity or debt
securities. Sauer may not be able to obtain such financing or, if available,
such financing may not be on terms acceptable to Sauer.
Sauer's expansion program and product development efforts are expected to
require significant expenditures in advance of anticipated revenues. This may
have a negative effect on Sauer's operating results until such time as these
expenses are offset by increased revenues. The Transaction is expected to add
significantly to Sauer's component offerings and enhance its hydraulic systems
capabilities and, therefore, is expected to be an integral step in Sauer's
growth strategy. However, there can be no assurance that the expected benefits
of the Transaction will be realized by Sauer.
DEPENDENCE ON SKILLED PERSONNEL
Sauer's future operating results and its development of new technologies and
products depend to a significant degree upon the continued contribution of its
technical, engineering and research personnel and skilled labor force. This
segment of the labor market in the United States and in the United Kingdom is
currently experiencing very tight supply "conditions." Sauer competes for
qualified technical, engineering and research personnel with numerous other
employers, some of whom have greater financial and other resources than Sauer.
Sauer's continued success depends on its ability to attract and retain a skilled
labor force at all its facilities. The Transaction is expected to result in the
addition of skilled personnel with experience in the new product technology
acquired in connection with the Transaction. Although the addition of such
skilled personnel is expected to provide assistance in achieving the synergistic
benefits anticipated to result from the Transaction, there can be no assurance
that the integration of the Danfoss Fluid Power Group workforce will result in
such expected benefits. Moreover, the combined company is expected to continue
to be exposed to tight supply in relevant labor markets. Furthermore, while
Sauer has been successful in attracting and retaining skilled employees in the
past, Sauer may not continue to be successful in attracting or retaining the
personnel it requires to develop, manufacture and market its products and expand
its operations in the future.
20
INTERNATIONAL SALES, CURRENCY FLUCTUATIONS AND INVESTMENTS IN EMERGING
MARKETS
In 1998, approximately 64.0% of Sauer's net sales were generated in U.S.
dollars, 36.0% in European currencies and less than 1.0% in Chinese currency.
International sales are subject to various risks, including the impact of
possible recessionary environments in various economies, unexpected changes in
regulatory requirements, tariffs and other trade barriers, potentially adverse
tax consequences, trade or currency restrictions and, particularly in emerging
economies, potential political and economic instability and regional conflicts.
Any or all of these factors could have a material adverse effect on Sauer's
business, financial condition and results of operations. The Transaction is
expected to increase Sauer sales that are outside the United States and,
accordingly, could increase Sauer's susceptibility to such risks.
In 1998, approximately 36.0% of Sauer's sales were made in currencies other
than the U.S. dollar, including 19.0% in Deutsche marks, 8.0% in British pounds
and 3.0% in Italian lira. Sauer's financial statements, which are presented in
U.S. dollars, can be impacted by foreign exchange fluctuations through both
translation risk and transaction risk. Translation risk is the risk that the
financial statements of Sauer for a particular period or as of a certain date
are affected by changes in the exchange rates that are used to translate the
financial statements of Sauer's foreign operations from foreign currency into
U.S. dollars. Transaction risk is the risk of Sauer receiving its sales proceeds
or holding its assets in a currency different from that in which it pays its
expenses and holds its liabilities. Transaction gains and losses have not been
significant given Sauer's balanced global manufacturing presence. The
Transaction is expected to increase Sauer sales outside the United States and,
accordingly, could increase Sauer's susceptibility to such risks.
Since 1995, Sauer has made substantial investments in two facilities in
Slovakia and has entered into a joint venture in Shanghai, China. The Danfoss
Fluid Power Group has made a substantial investment in a facility in Poland.
Operations in emerging economies such as China, Poland and Slovakia often are
subject to numerous risks and uncertainties, including political, economic and
legal risks such as unexpected changes in regulatory requirements, taxes,
tariffs, customs, duties and other trade barriers, difficulties in staffing and
managing foreign operations, foreign exchange controls that restrict or prohibit
repatriation of funds, and technology export and import restrictions or
prohibitions. The success of market reforms undertaken in these countries is
also uncertain, and further economic and political instability may occur. Legal
systems in emerging economies have limited experience with commercial
transactions between private parties. The extent to which contractual
obligations will be honored and enforced is uncertain. The Danfoss Fluid Power
Group's investment in Poland could increase Sauer's susceptibility to such
risks.
21
DESCRIPTION OF THE BUSINESS OF THE DANFOSS FLUID POWER GROUP
BACKGROUND
The Danfoss Fluid Power Group is among the world leaders in the design and
manufacture of orbital motors, hydrostatic steering units, proportional
load-sensing valves, gear pumps and electro-hydraulics for use by OEMs of
off-highway mobile equipment, principally in the agriculture, construction, road
building, forestry, material handling and specialty markets. The principal
address of the Danfoss Fluid Power Group is DK 6430, Nordborg, Denmark; the
telephone number is 011-45-7488-2222.
Danfoss began hydraulic operations in 1961 with production initially limited
to orbital motors and hydrostatic steering units. In 1979, production was
expanded to include proportional load-sensing valves as well. Acquisitions have
broadened the product range throughout the 1990s.
Headquartered in Nordborg, Denmark, the products of the Danfoss Fluid Power
Group are sold worldwide. Sales in North America and Europe represent
approximately 90.0% of total sales. The Danfoss Fluid Power Group sells its
products either directly to OEMs or through approximately 40 sales companies
worldwide. Sales through such sales companies typically account for
approximately two-thirds of the Danfoss Fluid Power Group's total sales.
Pursuant to the Transaction, Sauer will acquire on the closing date sales
companies in Denmark, Finland, France, Germany, Italy, Norway, Poland, Sweden,
and the United Kingdom. Additionally, before December 31, 2000, Sauer will
acquire from the Holding Company for additional shares of Sauer common stock,
substantially all of the assets of the Additional Distribution Operations. In
geographic areas where the Danfoss Fluid Power Group does not have a sales
company, sales to OEMs are made through non-exclusive hydraulics distributors,
including Danfoss.
ORGANIZATION
The manufacturing operations of the Danfoss Fluid Power Group are organized
into the following three product groups:
CONTROLS
The Controls product group consists of substantially all valves and related
components produced by the Danfoss Fluid Power Group. Such products include
proportional valves, spool valves, cartridge and hydraulic integrated circuit
valves as well as remote control devices and accessories for valves. Valves
manufactured by the Danfoss Fluid Power Group are traditionally and widely used
in backhoe loaders, wheel loaders, telehandlers, ditch side cutters,
truck-mounted cranes, arial lifts, mining equipment, lawn mowers and utility and
garbage trucks. Production facilities are located in Nordborg, Denmark and
Easley, South Carolina.
DRIVES
The Drives product group consists of substantially all motors, gear pumps
and related components produced by the Danfoss Fluid Power Group. Motors
manufactured by the Danfoss Fluid Power Group include light and medium duty
motors, wheel motors, short and ultra-short motors, application dedication
motors, electrical options and small power units. Gear pumps manufactured by the
Danfoss Fluid Power Group include various gear wheel pumps. Such motors, gear
pumps and related components are typically used in skid-steer loaders, vibration
rollers, mini-excavators, fork-lift trucks, arial lifts, agricultural
harvesters, lawn mowers, forestry processor heads, sweepers, winches, drills,
injection molding machines and machine tools. Production facilities are located
in Nordborg, Denmark and Racine, Wisconsin.
22
STEERING
The Steering product group consists of substantially all steering units and
related components produced by the Danfoss Fluid Power Group. Such products
include various sizes of steering units, steering columns, priority valves and
flow amplifiers. Such steering units and related components are generally found
in agricultural tractors, forklift trucks, loaders and dumpers, including
backhoe loaders, vibration rollers, telehandlers and lawn mowers. Production
facilities are located in Nordborg, Denmark, Wroclaw, Poland and Racine,
Wisconsin.
PRODUCTION SUPPORT
The Danfoss Fluid Power Group has a single division dedicated to the support
of its manufacturing operations. Accordingly, the support division provides
maintenance services to the manufacturing operations, manufactures gear wheel
sets and operates a tempering plant.
OTHER DIVISIONS
The Danfoss Fluid Power Group also maintains core divisions, including a
Sales and Marketing Division, a Finance Division and a Supply Chain Management
Division, that are responsible for the Danfoss Fluid Power Companies'
non-manufacturing activities. The Supply Chain Management Division and the Sales
and Marketing Division link all manufacturing operations together in order to
engineer full hydraulic work functions and steering systems. The Sales and
Marketing Division has the objective of utilizing the synergies between the
product groups.
DANFOSS FLUID POWER GROUP'S PRODUCT APPLICATIONS
The Danfoss Fluid Power Group provides hydraulics components for the
following machinery and equipment:
CONSTRUCTION
& ROAD BUILDING AGRICULTURE MATERIAL HANDLING
- --------------- ----------- -----------------
Backhoe Loaders Tractors Forklift Trucks
Wheel Loaders Combines Rough Terrain Lift
Trucks
Skid Steer Loaders Seeders Telehandlers
Mini-Excavators Spreaders Arial Lifts
Rollers Cotton Pickers Cranes
Compactors Vineyard Harvesters Side Handlers
Pavers Beet Harvesters Container Handlers
Planers Sugar Cane Harvesters
Grinders Bale Wrappers
Ditchers/Trenchers Forage Box
Concrete Pumps/Mixers Silage Cutters
Screens Manure Spreaders
Winches Grain Augers
FORESTRY LAWN & TURF SPECIALTY
- ------------------------ ------------------------ ------------------------
Forestry Cranes Golf Course Mowers Sweepers
Log Skidders Commercial Mowers Garbage Trucks
Wood Chippers Consumer Mowers Utility Trucks
Forestry Harvesters Utility Mowers Salt/Grit Spreaders
Special Purpose Tractors
23
Construction and road building, agriculture and material handling typically
account for approximately 25%, 30% and 15%, respectively, of the annual sales of
the Danfoss Fluid Power Group. Additionally, forestry, lawn and turf and
specialty markets typically account for approximately 5%, 10% and 15%,
respectively, of the annual sales of the Danfoss Fluid Power Group.
COMPETITION
CONTROLS--OPEN CIRCUIT CONTROL FUNCTION MARKET
The open circuit control function market for mobile hydraulics is very
fragmented with many competitors of different sizes, product ranges and
geographical coverage, particularly with respect to directional control valves,
hydraulic-integrated circuit blocks and cartridge valves. Products include
hydraulic-integrated circuit blocks, cartridge valves, electro-hydraulic valves,
electronic sensors, directional control valves and more sophisticated
proportional load sensing control valves.
The major competitors of the Danfoss Fluid Power Group in such markets
include Parker Hannifin (Voac division), Mannesmann (Rexroth division), Bosch,
HAWE, Eaton Corporation (Vickers division), Walvoil, Commercial Intertech,
Gresen, Husco, HydroControl, Oil Control and Compact Controls.
DRIVES--LOW SPEED HIGH TORQUE MOTORS MARKET
Low speed high torque motors are motors specifically designed to produce
high torque, with primary usage in work-related applications within mobile
hydraulics. The market is comprised of orbital motors and piston motors, and is
relatively concentrated. The Danfoss Fluid Power Group's major competition
includes Eaton Corporation, Parker Hannifin, and Mannesmann (Rexroth division).
In addition, other, regional competitors serving a narrower geographic area
include White Hydraulics and Poclain Hydraulics.
DRIVES--GEAR WHEEL PUMPS AND MOTORS MARKET
Gear wheel pumps and motors are low and medium duty pumps for open circuits,
and motors for high speed applications with less demand for torque. The market
is relatively concentrated in North America with competitors that include
Commercial Intertech, and Haldex Barnes. In Europe, the market is more
fragmented with major competitors Casappa Group, Bosch, Commercial and numerous
other regional competitors with a narrow geographic focus. The market is
differentiated by equipment type.
STEERING--HYDROSTATICS STEERING UNITS MARKET
The hydrostatic steering market is highly concentrated and very competitive.
The market is served by a small number of large manufacturers, including Eaton
Corporation, Parker Hannifin and Mannesmann (Rexroth division). In addition, a
few regional competitors exist. However, such regional competitors typically
offer a limited product range and serve a narrow geographic area.
NEW PRODUCTS AND INVESTMENTS
The Danfoss Fluid Power Group has focused on strengthening its traditional
product lines by the recent introduction of new gear wheel pumps (i.e., D pump),
electrical activation and control to valves (i.e., Electrical Proff 1 Joystick,
PVE, CAN-bus), a mini-steering unit (i.e., the OSPM line), new variants of the
Danfoss Fluid Power Group's well-established hydrostatic steering units (i.e.,
the OSP line) and upgraded small motors (i.e., the OMP/OMR line).
24
In addition to its focus on new product development, the Danfoss Fluid Power
Group has invested substantially in highly automated and technologically
state-of-the-art manufacturing equipment and on the development and
implementation of computer-aided design and engineering.
RESEARCH AND DEVELOPMENT
The Danfoss Fluid Power Group believes that its emphasis on projects at the
development stage has been integral to its operations. The Danfoss Fluid Power
Group continues to invest significant resources in the development of mobile
electronics, including AC drives and electro-hydraulic steering units, with
applications in the mobile hydraulics industry.
The Danfoss Fluid Power Group allocated approximately DKK 46.8 million, DKK
36.3 million and DKK 45.7 million during 1998, 1997 and 1996, respectively, to
research and development. Significant additional resources are expended on
engineering work related to customer requested adaptations.
QUALITY CONTROL
The Danfoss Fluid Power Group tests each product prior to delivery to the
end-user and all data generated during such tests is analyzed to improve product
quality. The Danfoss Fluid Power Group's manufacturing facilities in Nordborg,
Denmark, Easley, South Carolina and Racine, Wisconsin are certified to the
quality standard ISO 9001. The Danfoss Fluid Power Group's manufacturing
facilities in Wroclaw, Poland are certified to the quality standard ISO 9002.
REGULATORY MATTERS; ENVIRONMENTAL
Environmental laws and regulations relating to, among other things, the
handling and discharge of waste as well as air and water quality, apply to and
affect the operations of the Danfoss Fluid Power Group. The Danfoss Fluid Power
Group has given high priority to utilizing environmentally friendly materials in
connection with manufacturing operations. The Danfoss Fluid Power Group's
manufacturing facilities in Nordborg, Denmark, Easley, South Carolina and
Racine, Wisconsin are certified to the environmental standard ISO 14001. The
Danfoss Fluid Power Group's manufacturing facilities in Wroclaw, Poland are
expected to be certified to the environmental standard ISO 14001 during the
second quarter of 2000. Year-to-year capital expenditures in connection with the
Danfoss Fluid Power Group's compliance with environmental laws and regulations
fluctuate, as such laws and regulations evolve. The Danfoss Fluid Power Group
believes that any future capital expenditures relating to compliance will not be
material.
FACILITIES
The Danfoss Fluid Power Group owns four facilities and lease an additional
twenty facilities, representing approximately 1,200,000 square feet of space, of
which approximately 1,050,000 square feet are used by manufacturing plants. The
Danfoss Fluid Power Group's properties are located in twenty-two countries.
RAW MATERIALS
The Danfoss Fluid Power Group buys cast iron housings and components from
various European and North American companies. Most products are sourced from
iron, steel, aluminum and powder-metal plus a limited amount of copper. All raw
material is available from a large number of suppliers.
INTELLECTUAL PROPERTY
The Danfoss Fluid Power Group owns approximately 390 patents and patent
applications worldwide relating to more than 130 products, components and
processes of the Danfoss Fluid Power
25
Group. Such portfolio of patents protects features of the Danfoss Fluid Power
Group's product range of hydraulic motors, valves, steering units and control
systems.
LEGAL PROCEEDINGS
The Danfoss Fluid Power Group is involved in certain legal proceedings in
the ordinary course of business. The management of Danfoss Fluid Power Group
does not believe that the outcome of such proceedings will have a material
adverse effect on the operations of the Danfoss Fluid Power Group.
EMPLOYEES AND HUMAN RESOURCE DEVELOPMENT
The Danfoss Fluid Power Group employs approximately 2,500 people, of which
approximately 1,600 are employed in the Nordborg, Denmark facilities,
approximately 600 are employed in the United States and approximately 300 are
employed in other locations.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
THE DANFOSS FLUID POWER GROUP
In 1997, Danfoss, then the parent of the Danfoss Fluid Power Group, changed
its fiscal year end from September 30 to December 31. Accordingly, Danfoss' 1997
fiscal year comprised fifteen months. For purposes of Management's Discussion
and Analysis of Financial Condition and Results of Operations of the Danfoss
Fluid Power Group and to facilitate future comparisons, the following discussion
is based on the comparative twelve-month period ending December 31, 1997. The
foregoing applies for both the twelve-month period ending December 31, 1998 and
the twelve-month period ending September 30, 1996.
The following is based upon the Combined Financial Statements of the Danfoss
Fluid Power Group included elsewhere in this proxy statement. Such financial
statements have been prepared in conformity with Danish GAAP, which differs in
certain respects from U.S. GAAP. Such differences between U.S. GAAP and Danish
GAAP, as related to fiscal years 1997 and 1998, are summarized in Note 15 to the
Combined Financial Statements of the Danfoss Fluid Power Group.
The Combined Financial Statements of the Danfoss Fluid Power Group, which
reflect the results of operations, financial position and cash flows of the
former Mobile Hydraulics Division of Danfoss, have been carved-out from the
Consolidated Financial Statements of Danfoss using the historical results of
operations and assets and liabilities of such business. Certain costs have been
reflected in the Combined Financial Statements of the Danfoss Fluid Power Group
which are not necessarily indicative of the costs that would have been incurred
had the entities that comprise the Danfoss Fluid Power Group operated as
independent, stand-alone entities for all periods presented. Such costs include
allocated Danfoss corporate overhead, and an allocation of Danfoss interest
expense and income taxes.
Corporate overhead related to Danfoss' corporate administrative functions
has been allocated to the Danfoss Fluid Power Group based on a specific
identification of Danfoss' administrative costs relating to the fluid power line
of business, and to the extent that such identification was not practicable,
based upon the percentage of the Danfoss Fluid Power Group's sales to Danfoss'
consolidated sales. These allocated costs of DKK 8 million in 1996, DKK
8 million in 1997 and DKK 9 million in 1998 have been included in administrative
expenses in the Combined Statement of Income of the Danfoss Fluid Power Group.
Such costs include legal support and advice, treasury and cash management and
public relations.
Interest expense included in the Combined Financial Statements of the
Danfoss Fluid Power Group reflects an allocation of Danfoss' interest costs,
based upon the percentage of the Danfoss Fluid Power Group's combined net assets
to Danfoss' consolidated net assets.
Income taxes have been reflected in the Combined Financial Statements of the
Danfoss Fluid Power Group as if each of the entities that comprise the Danfoss
Fluid Power Group had actually filed separate income tax returns. The calculated
effective tax rate differs from year to year as a result of changes in the
statutory tax rates in the different countries in which the Danfoss Fluid Power
Group would have been required to pay income tax had each of the entities that
comprise the Danfoss Fluid Power Group actually filed separate income tax
returns, as well as changes in each of the entities' relative contribution to
combined taxable income.
OVERVIEW
During 1998 and 1999, the Danfoss Fluid Power Group continued to expand its
three principal product lines (i.e., steering units, orbital motors and valves).
The Danfoss Fluid Power Group believes that it is a market leader with respect
to each product line and that such position was achieved through continuous
investment in manufacturing and product development and support of new customer
programs and promotion of future growth.
27
LIQUIDITY AND CAPITAL RESOURCES
The Danfoss Fluid Power Group is comprised of several entities that have not
operated as separate legal entities. In addition, the Danfoss Fluid Power Group
has historically financed its operations either through operating cash flows or
through contributions of Danfoss. Accordingly, it is not possible, without
making a number of arbitrary allocations, to segregate net assets between debt
(i.e., temporary and long-term financings) and equity. The following discussion
of liquidity and capital resources is, therefore, limited to cash flows and
investments.
From 1996 to 1997, cash flows from operating activities increased by DKK
186 million, primarily due to an increase in results of operations before
financial items and income taxes of DKK 167 million. Cash from changes in net
working capital elements in 1997 amounted to DKK 16 million.
From 1997 to 1998, cash flow from operating activities decreased by DKK
209 million due to a reduction in results of operations before financial items
and income taxes of DKK 31 million, as well as the payment of taxes of DKK
109 million in 1998. Changes in net working capital elements in 1998 resulted in
cash usage of DKK 27 million.
The Danfoss Fluid Power Group's investments totaled DKK 164 million in 1998.
In Nordborg, Denmark, construction of a new assembly line for small orbital
motors was completed, increasing capacity by 50.0%. In Poland, installation of
new automation equipment was completed for the production of steering units.
Under Danfoss' centralized cash management system, Danfoss deposited
sufficient cash in the Danfoss Fluid Power Group's bank accounts to meet daily
obligations, and withdrew excess funds from these accounts. These transactions
are included in changes in financing, net, in the Combined Statements of Cash
Flows of the Danfoss Fluid Power Group.
RESULTS OF OPERATIONS
IMPACT OF CURRENCY FLUCTUATIONS
The Danfoss Fluid Power Group has operations and sells its products in
various countries and, therefore, conduct its operations and receives revenues
in various currencies. The Combined Financial Statements of the Danfoss Fluid
Power Group, presented in Danish Kroner, are impacted by foreign exchange
fluctuations through both translation risk and transaction risk.
The impact of translation risk is a reporting consideration only and does
not affect the underlying results of operations. The following table presents
the impact of translation adjustments on sales, as reported:
% sales increase (decrease) compared to prior period
JUNE 30,
1997 1998 1999
-------- -------- --------
As reported................................................. 12.4% 3.9% (2.2%)
Without translation adjustment.............................. 6.7% 9.3% (1.6%)
The gains and losses on foreign exchange stemming from transaction risk,
which are recorded in accordance with Danish GAAP, and included under financial
items, were as follows:
OCTOBER 1, 1995 TO JANUARY 1, 1997 TO JANUARY 1, 1998 TO SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1999
------------------ ------------------ ------------------ ---------------- ----------------
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
Gain/(Loss) on foreign
exchange.................. 2,964 8,748 (5,039) (941) 6,170
Fluctuations in exchange rates of United States dollars against Danish
Kroner account for most of the translation and transaction risk impact.
28
SIX MONTHS ENDING JUNE 30, 1999, COMPARED TO THE SIX MONTHS ENDING JUNE 30,
1998
NET SALES. Net sales for the first six months of 1999 were DKK
1.182 million, representing a DKK 27 million or 2.2% decrease from net sales of
DKK 1.209 million for the first six months of 1998. Excluding the impact of
fluctuating currency exchange rates, the decrease was 1.6%. This decrease was
attributable to the continuing weakness of the agricultural sector in both North
America and Europe, particularly affecting sales of steering units, orbital
motors and valves. Sales in Eastern Europe and Turkey reflect a decreasing
trend, and the economic downturn in Brazil also adversely affected sales.
Conversely, sales in Asia increased during the first six months of 1999,
compared to the first six months of 1998.
COST OF SALES. Cost of sales during the first six months of 1999 increased
by DKK 40 million, or 5.0%, compared to the same period in 1998, causing gross
income to decrease from 33.4% of sales during such period in 1998 to 28.5% of
sales in 1999. This higher level of cost of sales was mainly due to the
expansion of capacity from 1998 to 1999. This expansion caused an increase in
per-unit cost of sales in 1999 because of a decrease in the Danfoss Fluid Power
Group's capacity utilization rate. Activities to reduce costs have been
implemented but will mainly have an impact on the last six months of 1999 due to
normal delays associated with downsizing.
SALES, ADMINISTRATIVE AND OTHER EXPENSES. Sales, administrative and other
expenses increased by DKK 5 million, or 2.0%, during the first six months of
1999 as compared to the same period in 1998 from DKK 242 million to DKK
247 million. The small increase reflects general inflation partially offset by
general cost reductions.
INCOME TAX. Provisions for income taxes were DKK 28 million in the first
six months of 1999 compared to DKK 52 million during the same period of 1998.
This decrease was due to lower results of operations before tax. The effective
tax rate decreased from 34.7% to 33.8%, mainly due to a 2.0% decrease (from
34.0% to 32.0%) in the statutory tax rate in Denmark.
TWELVE MONTHS ENDING DECEMBER 31, 1998, COMPARED TO THE TWELVE MONTHS ENDING
DECEMBER 31, 1997
NET SALES. 1998 net sales increased by DKK 85 million, or 3.9%, to DKK
2.269 million from DKK 2.184 million in 1997. Excluding the impact of
fluctuating currency exchange rates, the increase was 9.3%. Most of this
increase was experienced during the first six months of 1998. During the second
six months of 1998, the agricultural sector in North America and Europe
experienced a recession that adversely affected sales of steering units, orbital
motors and valves in this sector. In addition, sales decreased in Eastern Europe
and in Asia--particularly in South Korea and Taiwan. However, the Danfoss Fluid
Power Group experienced an increase in sales in South America.
COST OF SALES. 1998 cost of sales increased by DKK 128 million, or 8.8%,
from 1997 to 1998 and gross income fell in the same period from 33.4% of sales
to 30.3% of sales. The increase in the Danfoss Fluid Power Group's cost of sales
was due to a general strike in Denmark in April 1998 that resulted in a major
production backlog and the need to hire additional employees.
SALES, ADMINISTRATIVE AND OTHER EXPENSES. Sales, administrative and other
expenses decreased DKK 12 million to DKK 466 million in 1998 compared to DKK
478 million in 1997. Sales expenses increased DKK 9 million, or 2.6%, as
compared to a 3.9% increase in net sales over the same period. The overall
decrease in sales, administrative and other expenses was the result of a general
cost reduction in administrative expenses of DKK 5 million and the realization
of other operating income of DKK 17 million. Such other operating income mainly
resulted from the proceeds of an indemnification claim received from the DANISH
EMPLOYERS CONFEDERATION in connection with a general strike in April 1998.
INCOME TAX. From 1997 to 1998, provisions for income tax decreased from DKK
88 million to DKK 67 million, due to a decrease in results of operations before
tax and a decrease in the effective tax
29
rate from 35.7% to 34.3%. The decrease in the effective tax rate mainly resulted
from a decrease in the statutory tax rate in Italy.
TWELVE MONTHS ENDING DECEMBER 31, 1997, COMPARED TO THE TWELVE MONTHS ENDING
SEPTEMBER 30, 1996
NET SALES. Net sales increased by DKK 241 million, or 12.4%, to DKK
2.184 million in 1997 from DKK 1.944 million in 1996. Excluding the impact of
fluctuating currency exchange rates, the increase was 6.7%. This increase was
due to the combination of a general market increase (particularly in the
construction and agricultural markets in North America and Western Europe) and
further penetration and gains in market share in North America. Even though all
product areas experienced growth, the overall increase was primarily
attributable to the significant growth in orbital motors, directional valves and
proportional valves. With respect to the Danfoss Fluid Power Group's emerging
markets (i.e., markets outside of Western Europe and North America), sales were
flat, mainly as a result of stagnating/declining markets in Asia, Turkey and
Australia/New Zealand. However, the Danfoss Fluid Power Group experienced
increased sales in South America and Eastern Europe.
COST OF SALES. Cost of sales in 1997 increased by DKK 50 million, or 3.6%,
to DKK 1,454 million from DKK 1,404 in 1996, while gross income rose from 27.7%
to 33.4% of sales mainly as a result of the significant increase in net sales
resulting in a high-capacity utilization rate.
SALES, ADMINISTRATIVE AND OTHER EXPENSES. Sales expense for 1997 increased
DKK 21 million, or 6.1%, resulting from the increase in net sales.
Administrative expenses increased by DKK 3 million, or 2.8%, due primarily to
general inflation. Accordingly, sales, administrative and other expenses for
1997 increased to DKK 478 million, representing a 5.2% increase from 1996 to
1997.
INCOME TAX. From 1996 to 1997, the provision for income tax increased from
DKK 33 million to DKK 88 million due to higher results of operations before
taxes. The effective tax rate decreased from 37.9% to 35.7% mainly because a
larger proportion of taxable income in 1997 was attributable to operations in
Denmark, a country that has a lower statutory tax rate relative to the Danfoss
Fluid Power Group's other operating segments.
MARKET RISK
IMPACT OF CURRENCY FLUCTUATIONS
The Danfoss Fluid Power Group has operations and sell its products in many
various countries and, therefore, conducts its business in various currencies.
The Combined Financial Statements of the Danfoss Fluid Power Companies,
presented in Danish Kroner, may be impacted by foreign exchange fluctuations
through both translation risk and transaction risk.
Translation risk is the risk that the Combined Financial Statements of the
Danfoss Fluid Power Group, for a particular period or as of a certain date, may
be affected by changes in the exchange rates that are used to convert the
financial statements of the Danfoss Fluid Power Group's foreign subsidiaries
from local currencies into Danish Kroner. Currency fluctuations, particularly
with respect to United States dollars against Danish Kroner, may be material and
may therefore affect period-to-period comparisons.
Transaction risk is the risk stemming from the Danfoss Fluid Power Group's
receipt of sale proceeds or holding of assets in a currency different from that
in which the Danfoss Fluid Power Group pays its expenses and holds its
liabilities, and relates mainly to the relationship between the United States
dollar and the Danish Kroner. Because the Danfoss Fluid Power Companies operate
manufacturing plants both in Europe and the United States, the Danfoss Fluid
Power Group effects sales in currencies related to those in which it incur its
expenses. According to Danish accounting principles, the gains and losses on
foreign exchange stemming from transaction risk are included under financial
items in the Danfoss Fluid Power Group's Statement of Income.
30
GENERAL ECONOMIC CONDITIONS
The mobile hydraulics industry is subject to economic cycles. The Danfoss
Fluid Power Group derives substantial sales from cyclical industries including
agricultural equipment, material handling and construction industries, and
periods of economic recession could cause a decrease in net sales and have a
material adverse effect on the Danfoss Fluid Power Group's business, financial
condition and results of operations.
OTHER MATTERS
YEAR 2000 COMPLIANCE
The Danfoss Fluid Power Group has, during the course of the last two years,
implemented a program to ensure year 2000 compliance of business-critical
systems. The scope of this program comprised readiness within business systems,
suppliers, back-up procedures and audits of material suppliers with regard to
production machines. The Danfoss Fluid Power Group has not experienced any
significant year 2000 related issues and will continue to monitor its
business-critical systems for, and address any, year 2000 issues that may arise.
ENVIRONMENT
The Danfoss Fluid Power Group's manufacturing facilities in Nordborg,
Denmark were certified to the environmental standard ISO 14001 in 1988. The
Danfoss Fluid Power Group's manufacturing facilities in Easley, South Carolina
and Racine, Wisconsin were certified to ISO 14001 in 1999. According to plan,
the Danfoss Fluid Power Group's manufacturing facilities in Wroclaw, Poland are
expected to be certified during the second quarter of 2000.
EURO CURRENCY CONVERSION
The Danfoss Fluid Power Group has prepared for the conversion to the Euro
currency and, in early 1999, begun processing transactions in Euro. The Danfoss
Fluid Power Group's business systems are multi-currency functional and the
Danfoss Fluid Power Group's European operations currently transact business in
various European currencies, including the Euro.
RECENT FINANCIAL INFORMATION (UNAUDITED)
Following is an update of certain unaudited interim combined financial data
of Danfoss Fluid Power Group included elsewhere in the Proxy Statement:
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
Net sales................................. 532,863 1,715,264
------- ---------
Net Income................................ 20,559 74,578
------- ---------
These updated financial data have been derived from the audited interim
combined statement of income for the 9 months ended September 30, 1999, which
has been prepared on a carve-out basis and in accordance with Danish GAAP. Such
accounting principles and practices have been applied consistently during 1999,
and are therefore consistently applied when considered in relation to the
combined audited interim financial statements as of and for the period ended
June 30, 1999, appearing elsewhere in the Proxy Statement.
Differences between Danish GAAP and U.S. GAAP, as related to fiscal years
1997 and 1998 and the audited interim periods ended June 30, 1998 and 1999, are
summarized in note 15 to the Combined Financial Statements. Variations between
Danish GAAP and U.S. GAAP for the period ended September 30, 1999 are
substantially consistent with those described in note 15.
31
SELECTED UNAUDITED PRO FORMA HISTORICAL FINANCIAL STATEMENTS FOR
SAUER AND THE DANFOSS FLUID POWER GROUP
The Selected Unaudited Proforma Historical Financial Statements for Sauer
and the Danfoss Fluid Power Group give effect to Sauer acquiring the operations
of the Danfoss Fluid Power Group (as defined in the summary to the Proxy
Statement). The acquisition will be consummated as follows:
- First, pursuant to the terms of the Stock Exchange Agreement and
consistent with the first stockholder proposal, Sauer will issue
approximately 16.2 million shares of Sauer common stock to acquire the
Danfoss Fluid Power Companies.
- Second, before December 31, 2000, Sauer will issue approximately
2.2 million additional shares of Sauer common stock to acquire the net
assets of certain additional distribution operations of the business
("Additional Distribution Operations"). The acquisition of the Additional
Distribution Operations is part of the overall integrated acquisition of
the Danfoss Fluid Power Group. The Additional Distribution Operations have
consistent characteristics with the distribution operations already
included in the Danfoss Fluid Power Companies.
The following unaudited pro forma statements of income and pro forma balance
sheet of Sauer give effect to the acquisition of the Danfoss Fluid Power Group
both with and without the Additional Distribution Operations as if the
acquisition had occurred as of the beginning of the period presented or at the
balance sheet date and incorporates the purchase method of accounting. The
proforma combined amounts presented relate to the complete acquisition of the
Danfoss Fluid Power Group including the Additional Distribution Operations to be
acquired before December 31, 2000. The proforma combined amounts without the
Additional Distribution Operations presented relate to the acquisition of the
Danfoss Fluid Power Companies, excluding the Additional Distribution Operations,
consistent with the first stockholder proposal to issue approximately
16.2 million shares of Sauer common stock.
For pro forma purposes, Sauer's audited historical consolidated statement of
income for the year ended December 31, 1998 has been combined with the audited
historical combined statement of income of the Danfoss Fluid Power Group (which
includes the Additional Distribution Operations) for the year ended
December 31, 1998, and the effects of pro forma adjustments as set forth in the
notes thereto.
For pro forma purposes, Sauer's unaudited historical consolidated statement
of income for the thirty-nine weeks ended October 3, 1999 has been combined with
the unaudited historical combined statement of income of the Danfoss Fluid Power
Group (which includes the Additional Distribution Operations) for the nine
months ended September 30, 1999, and the effects of pro forma adjustments as set
forth in the notes thereto.
For pro forma purposes, Sauer's unaudited historical consolidated balance
sheet as of October 3, 1999 has been combined with the unaudited historical
combined statement of net assets of the Danfoss Fluid Power Group (which
includes the Additional Distribution Operations) as of September 30, 1999, and
the effects of the pro forma adjustments as set forth in the notes thereto.
The following unaudited pro forma statements of income and pro forma balance
sheet are based on historical financial data, and on assumptions and adjustments
described in the notes thereto. All such assumptions and adjustments are
inherently subject to significant uncertainty and contingencies. It can be
expected that some or all of the assumptions on which the following unaudited
pro forma statements of income and balance sheet are based will prove to be
inaccurate. As a result, the unaudited pro forma statements of income and pro
forma balance sheet do not purport to represent what Sauer's results of
operations or financial position would have been if the acquisition of the
Danfoss Fluid Power Group had occurred on the dates indicated, and are not
intended to project Sauer's results of operations or financial position for any
future period.
32
The unaudited pro forma historical financial information should be read in
conjunction with Sauer's consolidated financial statements and the related notes
appearing in Sauer's 1998 Annual Report on Form 10-K and Quarterly Report on
Form 10-Q dated as of October 3, 1999.
The unaudited pro forma historical financial information has been prepared
utilizing the following facts and assumptions:
- Sauer acquires the Danfoss Fluid Power Group in exchange for 18.4 million
shares of Sauer common stock including an estimated 2.2 million shares for
the Additional Distribution Operations. The estimate of 2.2 million shares
is based upon the preliminary results of operations of the Additional
Distribution Operations and Sauer for 1999 and other defined periods. The
estimate also assumes a share price of $11.16. The actual number of shares
to be issued will be based upon an agreed upon formula subject to the
final audited 1999 results of operations for the Additional Distribution
Operations and Sauer and agreement between the parties of the results for
other defined time periods. The calculation of the actual number of shares
to be issued will also be impacted by the Sauer share price at the date
that the acquisition of the Danfoss Fluid Power Companies is effected.
- The market price per share issued of $11.16 is based on the average market
price of Sauer's common stock five days prior to and five days after the
date the Stock Exchange agreement was signed.
- Pursuant to the Stock Exchange Agreement, the Danfoss Fluid Power
Companies will be required to enter into a credit facility prior to the
closing of the transaction. The objective of the debt assumption provision
in the purchase agreement is to ensure that the leverage ratio of the
Danfoss Fluid Power Companies at the time they are acquired by Sauer is
equivalent to that of Sauer. The debt to be assumed is based on the
current estimate of the leverage ratios of the Danfoss Fluid Power
Companies and Sauer at December 31, 1999. The debt to be assumed serves as
additional purchase price consideration paid by Sauer.
The following table presents the appropriate exchange rates used to
translate Danish Kroner to United States dollars:
JANUARY 1, 1998 TO DECEMBER 31, 1998 JANUARY 1, 1999 TO SEPTEMBER 30, 1999
------------------------------------ -------------------------------------
Average.......................... 6.7011 6.9209
End of Period.................... 6.3866 6.9638
The total consideration for the acquisition of the Danfoss Fluid Power Group
is as follows:
(AMOUNTS IN MILLIONS OF DOLLARS)
---------------------------------------
THE DANFOSS THE ADDITIONAL
FLUID POWER DISTRIBUTION
COMPANIES OPERATIONS TOTAL
----------- -------------- --------
Shares issued............................................. $180.2 $24.6 $204.8
Debt to be assumed........................................ 91.1 -- 91.1
Estimated acquisition costs............................... 5.0 .5 5.5
------ ----- ------
Total purchase price.................................... $276.3 $25.1 $301.4
====== ===== ======
In connection with the Transaction, Sauer will terminate the Limited
Partnership Agreement. Pursuant to the Limited Partnership Agreement, upon
termination, Sauer is required to issue 2.3 million shares of Sauer common stock
in complete satisfaction of all limited partners' claims. Sauer is also
required, pursuant to the terms of the Limited Partnership Agreement, to pay the
limited partners, in the aggregate $6.3 million in respect to certain taxes
payable by the limited partners as a result of the exchange of shares of the
Limited Partnership Interests. See "PROPOSAL NO. 1--THE STOCK
33
ISSUANCE." Because the transactions are with the controlling shareholder of
Sauer, they have been reflected as equity transactions in the proforma
statements.
A preliminary purchase price allocation in accordance with the criteria
established under Accounting Principles Board Opinion No. 16, "Business
Combinations," has been performed. Since the independent appraisals are not yet
complete, this preliminary allocation results in goodwill of $91.8 million being
recorded ($78.2 million for the Danfoss Fluid Power Companies and $13.6 million
for the Additional Distribution Operations of the transaction). The final
purchase price allocation, when such appraisals are completed, will result in
changes to the amount of recorded assets and goodwill included as proforma
amounts herein.
The preliminary allocation of the purchase price of $301.4 million is as
follows:
(AMOUNTS IN MILLIONS OF DOLLARS)
---------------------------------------
THE DANFOSS THE ADDITIONAL
FLUID POWER DISTRIBUTION
COMPANIES OPERATIONS TOTAL
----------- -------------- --------
Property, plant and equipment.............................. $136.4 $ .7 $137.1
Other net assets acquired.................................. 61.7 10.8 72.5
Preliminary goodwill....................................... 78.2 13.6 91.8
------ ----- ------
Preliminary purchase price................................. $276.3 $25.1 $301.4
====== ===== ======
Assigned useful lives are as follows:
Goodwill.................................................. 40 years
34
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
PRO
FORMA
THE COMBINED
HISTORICAL ADDITIONAL WITHOUT THE
------------------------------ PRO PRO DISTRIBUTION ADDITIONAL
THE DANFOSS FLUID FORMA FORMA OPERATIONS DISTRIBUTION
SAUER POWER GROUP ADJUSTMENTS COMBINED TO BE ACQUIRED OPERATIONS
---------- ----------------- ----------- ---------- -------------- ------------
NET SALES........................ $ 564,524 $338,653 $ 903,177 (12,535)(7) 890,642
COSTS AND EXPENSES
Cost of sales.................. 428,311 231,820 660,131 (985)(7) 659,146
Selling, general and
administrative............... 54,513 66,885 2,295 (1) 123,693 (7,173)(7)
(339) 116,181
Research and development....... 22,089 6,982 29,071 29,071
---------- -------- ---------- ---------- ---------- ----------
Total costs and expenses..... 504,913 305,687 2,295 812,895 (8,497) 804,398
---------- -------- ---------- ---------- ---------- ----------
Operating income............. 59,611 32,966 (2,295) 90,282 (4,038) 86,244
---------- -------- ---------- ---------- ---------- ----------
NONOPERATING INCOME (EXPENSES)
Interest expense, net.......... (8,814) (3,167) (6,330)(2)
3,167 (6) (15,144) (15,144)
Royalty income................. 986 -- 986 986
Other, net..................... (576) (751) (1,327) (1,327)
---------- -------- ---------- ---------- ---------- ----------
Nonoperating expenses, net... (8,404) (3,918) (3,163) (15,485) (15,485)
---------- -------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST.............. 51,207 29,048 (5,458) 74,797 (4,038) 70,759
PROVISION FOR INCOME TAXES....... (15,379) (9,962) (148)(4) (25,489) 1,533 (7) (23,956)
---------- -------- ---------- ---------- ---------- ----------
INCOME BEFORE MINORITY
INTEREST....................... 35,828 19,086 (5,606) 49,308 (2,505) 46,803
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES......... (9,494) -- 3,573(3) (5,921) (5,921)
---------- -------- ---------- ---------- ---------- ----------
NET INCOME....................... $ 26,334 $ 19,086 $ (2,033) $ 43,387 $ (2,505) $ 40,882
========== ======== ========== ========== ========== ==========
Net income per weighted average
common share--basic and
diluted........................ $ 1.01 $ 0.93 $ 0.92
Weighted average common shares
outstanding--basic............. 26,148,288 18,349,812 (5)
2,250,000 (5) 46,748,100 (2,200,000)(7) 44,548,100
Effect of dilutive securities.... 2,014 2,014 2,014
Weighted average common shares
outstanding--diluted........... 26,150,302 18,349,812
2,250,000 46,750,114 (2,200,000)(7) 44,550,114
Cash dividends per share......... $ 0.28 $ 0.16 $ 0.17
Book value per share............. $ 5.44 $ 7.63 $ 7.45
35
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
The following notes to the pro forma adjustments for the unaudited Combined
Statement of Income for the year ended December 31, 1998 represent the
adjustments to reflect the entire acquisition of the Danfoss Fluid Power Group
had the acquisition occurred on January 1, 1998.
(1) Amortize the excess of the purchase price of the Danfoss Fluid Power Group
over the estimated net assets acquired over 40 years.
(2) Record additional interest expense related to the $91.1 million increase in
debt assumed as part of the acquisition of the Danfoss Fluid Power Companies
and the $6.3 million tax payment made as a result of terminating the limited
partnership interest using a weighted average interest rate of 6.5%.
(3) Adjust minority interest expense as a result of terminating the Limited
Partnership Agreement.
(4) Record the income tax effect of the above adjustments, except for adjustment
(1) which is nontaxable, assuming a 36% effective tax rate.
(5) Reflect the shares issued to effect the purchase of the Danfoss Fluid Power
Group and the shares issued to the Murmann family in termination of the
Limited Partnership Agreement.
(6) Eliminate the Danfoss Fluid Power Group interest expense.
The following notes to the pro forma adjustments, "Additional Distribution
Operations to be Acquired," for the unaudited "Combined Without Distribution
Operations" Statement of Income for the year ended December 31, 1998 represent
the adjustments to eliminate the acquisition of the Additional Distribution
Operations of the Danfoss Fluid Power Group.
(7) Eliminate the historical accounts and operations of the Additional
Distribution Operations to be acquired.
(8) Eliminate the goodwill and goodwill amortization in connection with the
Additional Distribution Operations to be acquired.
36
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE THIRTY NINE WEEK PERIOD ENDED OCTOBER 3, 1999
AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
PRO FORMA
THE COMBINED
HISTORICAL ADDITIONAL WITHOUT THE
------------------------------- PRO PRO DISTRIBUTION ADDITIONAL
THE DANFOSS FLUID FORMA FORMA OPERATIONS DISTRIBUTION
SAUER POWER GROUP ADJUSTMENTS COMBINED TO BE ACQUIRED OPERATIONS
----------- ----------------- ----------- ----------- -------------- ------------
NET SALES...................... $ 416,129 $247,832 $ 663,961 (10,473)(7) 653,488
COSTS AND EXPENSES
Cost of sales................ 312,196 172,369 484,565 (681)(7) 483,884
Selling, general and
administrative............. 42,634 50,969 1,721 (1) 95,324 (5,679)(7)
(254)(8) 89,391
Research and development..... 17,149 6,118 23,267 23,267
----------- -------- ----------- ----------- ----------- -----------
Total costs and expenses... 371,979 229,456 1,721 603,156 (6,614) 596,542
----------- -------- ----------- ----------- ----------- -----------
Operating income........... 44,150 18,376 (1,721) 60,805 (3,859) 56,946
----------- -------- ----------- ----------- ----------- -----------
NONOPERATING INCOME (EXPENSES)
Interest expense, net........ (6,402) (2,998) (4,748)(2)
2,998 (6) (11,150) (11,150)
Royalty income............... 547 -- 547 547
Other, net................... (650) 921 271 271
----------- -------- ----------- ----------- ----------- -----------
Nonoperating expenses,
net...................... (6,505) (2,077) (1,750) (10,332) (10,332)
----------- -------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST............ 37,645 16,299 (3,471) 50,473 (3,859) 46,614
PROVISION FOR INCOME TAXES..... (11,449) (5,509) (285)(4) (17,243) 1,441 (7) (15,802)
----------- -------- ----------- ----------- ----------- -----------
INCOME BEFORE MINORITY
INTEREST..................... 26,196 10,790 (3,756) 33,230 (2,418) 30,812
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES....... (6,701) -- 2,542 (3) (4,159) (4,159)
----------- -------- ----------- ----------- ----------- -----------
NET INCOME..................... $ 19,495 $ 10,790 $ (1,214) $ 29,071 $ (2,418) $ 26,653
=========== ======== =========== =========== =========== ===========
Net income per weighted average
common share--basic and
diluted...................... $ 0.72 $ 0.61 $ 0.58
Weighted average common shares
outstanding--basic........... 27,225,428 18,349,812 (5)
2,250,000 (5) 47,825,240 (2,200,000)(7) 45,625,240
Effect of dilutive
securities................... 10,701 10,701 10,701
Weighted average common shares
outstanding--diluted......... 27,236,129 18,349,812 (5)
2,250,000 (5) 47,835,941 (2,200,000)(7) 45,635,941
Cash dividends per share....... $ 0.21 $ 0.12 $ 0.13
Book value per share........... $ 5.67 $ 7.59 $ 7.41
37
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE THIRTY NINE WEEK PERIOD ENDED OCTOBER 3, 1999 (CONTINUED)
AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
The following notes to the pro forma adjustments for the unaudited Combined
Statement of Income for the thirty-nine weeks ended October 3, 1999 represent
the adjustments that would have resulted from the acquisition of the Danfoss
Fluid Power Group had the acquisition occurred on January 1, 1999.
(1) Amortize the excess of the purchase price of the Danfoss Fluid Power Group
over the estimated net assets acquired over 40 years.
(2) Record additional interest expense related to the $91.1 million increase in
debt assumed as part of the acquisition of the Danfoss Fluid Power Companies
and the $6.3 million tax payment made as a result of terminating the Limited
Partnership Agreement using a weighted average interest rate of 6.5%.
(3) Adjust minority interest expense as a result of terminating the Limited
Partnership Agreement.
(4) Record the income tax effect of the above adjustments, except for adjustment
(1) which is nontaxable, assuming a 36% effective tax rate.
(5) Reflect the shares issued to effect the purchase of the Danfoss Fluid Power
Group and the shares issued to the Murmann family in connection with the
termination of the Limited Partnership Agreement.
(6) Eliminate the Danfoss Fluid Power Group's interest expense.
The following notes to the pro forma adjustments, "Additional Distribution
Operations to be Acquired," for the unaudited "Combined Without Distribution
Operations" Statement of Income for the the thirty-nine weeks ended October 3,
1999 represent the adjustments to eliminate the acquisition of the Additional
Distribution Operations of the Danfoss Fluid Power Group.
(7) Eliminate the historical accounts and operations of the Additional
Distribution Operations to be acquired.
(8) Eliminate the goodwill and goodwill amortization in connection with the
Additional Distribution Operations to be acquired.
38
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF OCTOBER 3, 1999
AMOUNTS IN THOUSANDS OF DOLLARS
PRO FORMA
THE COMBINED
HISTORICAL ADDITIONAL WITHOUT THE
---------------------------- PRO DISTRIBUTION ADDITIONAL
THE DANFOSS FLUID PRO FORMA FORMA OPERATIONS TO DISTRIBUTION
SAUER POWER GROUP ADJUSTMENTS COMBINED BE ACQUIRED OPERATIONS
-------- ----------------- ----------- --------- -------------- ------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents........... 5,932 5,477 11,409 (222)(6) 11,187
Accounts receivable, less
allowances........................ 76,389 63,802 140,191 (5,641)(6) 134,550
Inventories......................... 74,276 64,680 138,956 (8,699)(6) 130,257
Other current assets................ 10,519 0 10,519 10,519
------- ------- ------- ------- -------
Total current assets.............. 167,116 133,959 301,075 (14,562) 286,513
------- ------- ------- ------- -------
PROPERTY, PLANT AND EQUIPMENT,
NET............................... 272,122 137,081 409,203 (663)(6) 408,540
OTHER ASSETS:
Intangible assets, net.............. 2,501 3,868 91,803 (1) 98,172 (13,560)(7) 84,612
Deferred income taxes............... 4,453 1,639 6,092 (43)(6) 6,049
Other............................... 4,780 1,105 5,885 5,885
------- ------- -------- ------- ------- -------
Total other assets................ 11,734 6,612 91,803 110,149 (13,603) 96,546
------- ------- -------- ------- ------- -------
Total assets.................... 450,972 277,652 91,803 820,427 (28,828) 791,599
======= ======= ======== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts... 33,084 -- 33,084 33,084
Long-term debt due within one
year.............................. 1,812 -- 1,812 1,812
Accounts payable.................... 34,694 17,517 5,500 (1) 57,711 (844)(6) 56,867
Accrued salaries and wages.......... 8,976 9,800 18,776 (403)(6) 18,373
Accrued warranty.................... 8,118 2,827 10,945 (207)(6) 10,738
Other accrued liabilities........... 22,213 14,740 36,953 (926)(6) 36,027
------- ------- -------- ------- ------- -------
Total current liabilities......... 108,897 44,884 5,500 159,281 (2,380) 156,901
------- ------- -------- ------- ------- -------
LONG-TERM DEBT...................... 95,096 91,139 (2)
------- -------
6,250 (4) 192,485 192,485
-------- ------- ------- -------
OTHER LIABILITIES:
Long-term pension liability......... 32,203 -- 32,203 32,203
Postretirement benefits other than
pensions.......................... 13,608 567 14,175 14,175
Deferred income taxes............... 4,898 17,255 22,153 (11)(6) 22,142
Other............................... 4,966 5,325 10,291 (1,384)(6) 8,907
------- ------- -------- ------- ------- -------
Total other liabilities........... 55,675 23,147 78,822 (1,395) 77,427
------- ------- -------- ------- ------- -------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED COMPANIES............ 35,979 -- (10,699)(3) 25,280 25,280
------- ------- -------- ------- ------- -------
Total stockholders' equity........ 155,325 209,621 204,785 (1)
10,699 (3)
(6,250)(4) (13,560)(7)
(209,621)(5) 364,559 (11,493)(6) 339,506
------- ------- -------- ------- ------- -------
Total liabilities and stockholder's
equity............................ 450,972 277,652 91,803 820,427 (28,828) 791,599
======= ======= ======== ======= ======= =======
39
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF OCTOBER 3, 1999 (CONTINUED)
AMOUNTS IN THOUSANDS OF DOLLARS
The following notes to the pro forma adjustments for the unaudited Combined
Balance Sheet as of October 3, 1999 represent the adjustments to reflect the
acquisition of the Danfoss Fluid Power Group had the acquisition occurred on
October 3, 1999.
(1) Record the issuance by Sauer of 18.4 million shares of common stock to
finance the acquisition price of the Danfoss Fluid Power Group, plus
estimated acquisition costs of $5.5 million and the excess of the purchase
price of the Danfoss Fluid Power Group over the estimated net assets
acquired.
(2) Record debt to be assumed by Sauer of $91.1 million.
(3) Eliminate the minority interest from the termination of the Limited
Partnership Agreement through the issuance of 2.3 million shares of common
stock.
(4) Record the tax payment due upon termination of the Limited Partnership
Agreement.
(5) Eliminate the net equity of the Danfoss Fluid Power Group.
The following notes to the pro forma adjustments, "Additional Distribution
Operations to be Acquired," for the unaudited "Combined Without Distribution
Operations" Balance Sheet at October 3, 1999 represent the adjustments to
eliminate the acquisition of the Additional Distribution Operations of the
Danfoss Fluid Power Group.
(6) Eliminate the historical accounts and operations of the Additional
Distribution Operations to be acquired.
(7) Eliminate the goodwill and goodwill amortization in connection with the
Additional Distribution Operations to be acquired.
40
BUSINESS TO BE CONDUCTED AT THE SPECIAL MEETING OF STOCKHOLDERS
MATTERS TO BE CONSIDERED
This proxy statement is furnished to holders of Sauer's common stock in
connection with the solicitation of proxies by the Sauer board of directors for
use at the special meeting of stockholders to be held for the purposes described
in this proxy statement. Each copy of this proxy statement mailed to holders of
Sauer common stock is accompanied by a form of proxy for use at the special
meeting of stockholders.
PROPOSAL TO ISSUE COMMON STOCK
Sauer stockholders will be asked at the special meeting of stockholders to
consider and approve the issuance of an aggregate of 16,149,812 shares of Sauer
common stock in connection with the Transaction.
PROPOSAL TO AMEND SAUER'S CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF SAUER COMMON STOCK
Sauer stockholders will be asked at the special meeting of stockholders to
consider and approve the amendment of Sauer's Certificate of Incorporation to
increase the number of authorized shares of Sauer common stock by 30,000,000
shares from 45,000,000 shares to 75,000,000 shares.
PROPOSAL TO AMEND SAUER'S CERTIFICATE OF INCORPORATION TO REMOVE THE
CLASSIFIED BOARD AND ALLOW REMOVAL OF DIRECTORS WITH OR WITHOUT CAUSE;
DETERMINE BOARD SIZE PURSUANT TO SAUER'S BYLAWS
Sauer stockholders will be asked at the special meeting of stockholders to
consider and approve the amendment of Sauer's Certificate of Incorporation to
(a) remove the classification of the Sauer board of directors and allow for the
removal of directors with or without cause by the holders of the majority of
Sauer common stock entitled to vote for the election directors and (b) provide
that the size of the Sauer board of directors shall be determined pursuant to
Sauer's Bylaws.
DATE, TIME AND PLACE OF SPECIAL MEETING OF STOCKHOLDERS
The special meeting of stockholders will be held on May 3, 2000 at
8:00 a.m. (local time) at Holiday Inn Gateway Center, 2100 Greenhills Drive,
Ames, Iowa 50014.
RECORD DATE, SHARES OUTSTANDING AND ENTITLED TO VOTE
Only holders of record of Sauer common stock as of the close of business on
[-], 2000, are entitled to notice of and to vote at the special meeting of
stockholders. At the close of business on that date, 27,502,306 shares of Sauer
common stock were outstanding. Holders of Sauer common stock are entitled to one
vote for each share held on all matters to be voted upon. Shares of Sauer common
stock cannot be voted at the special meeting of stockholders unless the owner is
present in person or represented by proxy.
VOTING OF PROXIES
All shares of Sauer common stock entitled to vote and represented by
properly completed proxies received prior to the special meeting of stockholders
and not revoked will be voted in accordance with the instructions on the proxy.
If no instructions are indicated on a properly completed proxy, the shares of
Sauer common stock represented by that proxy will be voted in favor of the
proposals discussed above.
41
VOTE REQUIRED
Holders of Sauer common stock are entitled to one vote at the special
meeting of stockholders for each share of Sauer common stock held of record at
the close of business on the record date.
Adoption of the proposals (a) to issue Sauer common stock in connection with
the Transaction and (b) to amend Sauer's Certificate of Incorporation to
increase the number of authorized shares of Sauer common stock by 30,000,000
shares from 45,000,000 shares to 75,000,000 shares requires the affirmative vote
of the holders of a majority of the shares of Sauer common stock present in
person or represented by proxy, and entitled to vote thereon. Abstentions,
failures to vote and Broker Non-Votes will have no effect on the vote (a) to
issue Sauer common stock in connection with the Transaction or (b) to amend
Sauer's Certificate of Incorporation to increase the number of authorized shares
of Sauer common stock, except to the extent that failures to vote and Broker
Non-Votes affect the quorum requirement.
Adoption of the proposal to amend Sauer's Certificate of Incorporation to
(a) remove the classification of the board of directors and allow for the
removal of directors with or without cause by the holders of the majority of
Sauer common stock entitled to vote for the election of directors and
(b) provide that the size of the board of directors shall be determined pursuant
to Sauer's Bylaws requires the affirmative vote of the holders of at least 80.0%
of the outstanding shares of Sauer common stock. Abstentions, failures to vote
and Broker Non-Votes have the same effect on the vote to amend Sauer's
Certificate of Incorporation to remove the classified board, allow removal of
directors with or without cause and provide that the size of the Sauer board of
directors will be determined pursuant to Sauer's Bylaws as a vote against such
proposal.
For all other matters to be voted upon at the special meeting of
stockholders, the affirmative vote of a majority of shares of Sauer common stock
present in person or represented by proxy, and entitled to vote on the matter,
is necessary for approval.
The Murmann family, certain members of Sauer management and the Holding
Company, together holding 62.8% of the outstanding Sauer common stock, have
indicated that they will vote for each of the proposals. Accordingly, approval
of the proposal to issue shares of Sauer common stock pursuant to the
Transaction under the proposal to amend Sauer's Certificate of Incorporation to
increase the number of authorized shares of Sauer common stock is expected.
However, the proposal to amend Sauer's Certificate of Incorporation to
(a) remove the classification of the Sauer board of directors and allow for the
removal of directors with or without cause by the holders of the majority of
Sauer common stock entitled to vote for the election directors and (b) provide
that the size of the Sauer board of directors shall be determined pursuant to
Sauer's Bylaws can be disapproved because the affirmative vote of the holders of
at least 80.0% of the outstanding shares of Sauer common stock is required to
approve such proposal.
QUORUM
The required quorum for the transaction of business at the special meeting
is a majority of shares of Sauer common stock issued and outstanding on the
record date, or 13,751,154 shares, which shares must be present in person or
represented by proxy at the special meeting of stockholders.
Because the Murmann family, certain members of Sauer's management and the
Holding Company, which together own or have the power to vote 17,264,325 shares
of Sauer common stock (or approximately 62.8% of the outstanding shares of Sauer
common stock), have indicated that they will vote for each proposal, a quorum is
expected.
SOLICITATION AND REVOCABILITY OF PROXIES
The enclosed proxy is being solicited on behalf of the Sauer board of
directors for use at the special meeting of stockholders to be held on May 3,
2000.
42
Any proxy given does not affect a stockholder's right to vote in person at
the meeting and may be revoked at any time before it is exercised by notifying
Kenneth D. McCuskey, Corporate Secretary of Sauer, by mail, by facsimile, by
timely delivery of a properly executed, later-dated proxy (including an internet
or telephone vote) or by appearing at the special meeting of stockholders in
person and voting by ballot. Stockholders whose shares are held of record by a
brokerage house, bank or other nominee and who wish to vote at the meeting must
obtain from the record holder a proxy issued in such person's name.
Sauer intends to mail this proxy statement and the accompanying proxy on or
about [-], 2000.
EXPENSES OF SOLICITATION
Sauer will bear the entire cost of solicitation of proxies, including the
preparation, assembly, printing and mailing of this proxy statement, the
accompanying proxy and any additional information furnished to Sauer
stockholders. Sauer will reimburse banks, brokerage houses, custodians, nominees
and fiduciaries for reasonable expenses incurred in forwarding proxy material to
beneficial owners. In addition to solicitations by mail, regular employees and
directors of Sauer may solicit proxies in person or by telephone.
INDEPENDENT ACCOUNTANTS
Representatives from Arthur Andersen LLP, independent accountants for Sauer,
are not presently expected to attend the special meeting of stockholders, but
will have the opportunity to be present and, if present, to make a statement if
they elect to do so. In the event that representatives of Arthur Andersen elect
to be present, they will also be available to respond to appropriate questions.
43
THE TRANSACTION
BACKGROUND
Sauer has, from time to time, considered various strategic transactions with
various parties, including, Danfoss, intended to generate incremental growth and
improved profitability. Prior to September 1997, Sauer and Danfoss conducted
discussions and negotiations concerning a potential strategic transaction. At
that time, Sauer and Danfoss could not reach agreement on the terms of a
transaction and, accordingly, in September 1997, negotiations were terminated.
On February 1, 1999, Eaton Corporation announced its acquisition of
Aeroquip-Vickers. On April 12, 1999, Ole-Steen Andersen, Executive Vice
President of Danfoss, and Hans Kirk, Executive Vice President of Danfoss, met
with Klaus Murmann, Chairman and Chief Executive Officer of Sauer, and Tonio
Barlage, President and former Chief Operating Officer of Sauer, in Neumuenster,
Germany, to discuss the effect of that transaction on the mobile hydraulics
industry. At that meeting, the potential value that could be realized from a
strategic transaction between Sauer and the Danfoss Fluid Power Companies was
discussed and it was agreed that representatives of Sauer and Danfoss would meet
to attempt to negotiate a mutually beneficial strategic transaction between
Sauer and the Danfoss Fluid Power Companies.
On May 3, 1999, Mr. Murmann and Mr. Barlage met with Jorgen Clausen,
Chairman and Chief Executive Officer of Danfoss, Peter Hansen-Damm, Executive
Vice-President and Chief Financial Officer of Danfoss, Mr. Kirk and
Mr. Andersen to broadly negotiate the terms and conditions of the Transaction.
Discussions faltered as a result of an inability to agree upon terms.
From time to time during May, 1999, June, 1999 and July, 1999, senior
executives of Sauer and Danfoss held brief discussions, however, little progress
was made in reaching agreement on a possible transaction.
On August 6 and 7, 1999, Mr. Murmann, Mr. Barlage and members of the Murmann
family met with Mr. Clausen, Mr. Hansen-Damm, Mr. Kirk and Mr. Andersen in
Horuphav, Denmark to negotiate financial and other terms of the transaction. In
negotiating the financial terms of the transaction, the parties looked primarily
at the financial results of Sauer and Danfoss during the thirty month period
ending June 30, 1999 to measure the relative contributions of Sauer and Danfoss
to the combined company. As then contemplated, the Transaction included a
bidding procedure pursuant to which, at any time after the fourth anniversary of
the closing of the Transaction, the Murmann family and Danfoss could each bid to
acquire the other's shares of Sauer common stock, with the winning bidder
simultaneously commencing a tender offer for the publicly-held shares of Sauer
common stock at the price paid to the other stockholder.
In late August, 1999, Sauer retained the investment banking firm of CSFB and
the law firm of Shearman & Sterling to advise on the Transaction.
On September 7, 1999, representatives of Sauer and Danfoss met in
Copenhagen, Denmark, to continue to negotiate the terms of the Transaction.
The Sauer board of directors reviewed the negotiations at a regular meeting
on September 9, 1999 in Povazska, Bystrica, Slovakia.
On September 13, 1999, the Executive Committee of the Sauer board of
directors met to discuss the Transaction at a telephonic meeting. Later that
day, a press release was issued which indicated that Sauer and Danfoss were
engaged in negotiations concerning the Transaction.
During the remainder of September, 1999, a series of meeting and discussions
were held in person and by telephone between representatives of Sauer and
Danfoss to negotiate the terms of the Transaction.
In late September, 1999, Mr. Murmann and Mr. Clausen met to discuss the
Transaction. At that meeting, Mr. Murmann and Mr. Clausen agreed to restructure
the Transaction to provide that the
44
Murmann family and Danfoss would form the Holding Company and that the
previously agreed upon bidding procedure would no longer include the tender
offer for publicly-held shares of Sauer common stock.
On October 11, 1999 the Sauer board of directors reviewed the Transaction.
During the meeting, Sauer management reviewed the strategic and operational
benefits expected from the Transaction, representatives of Shearman & Sterling
and Spencer Fane Britt & Browne LLP, outside counsel for Sauer, updated the
Sauer board of directors on the status of negotiations and representatives of
CSFB reviewed with the Sauer board of directors various financial considerations
concerning the Transaction.
Also during the October 11, 1999 meeting, Mr. Murmann advised the Sauer
board of directors of his recent discussions with Mr. Clausen. The Sauer board
of directors discussed in detail the proposed change to the structure of the
Transaction. After discussion with counsel, the Sauer board of directors
indicated that it intended to negotiate with Mr. Murmann (acting on behalf of
the Murmann family) and Danfoss to ensure that the best interests of all Sauer
stockholders were considered. In addition, the Sauer board of directors
encouraged Mr. Murmann to retain independent counsel in the United States to
represent his interests and advise him in connection with the negotiation
process.
On October 12, 1999, Mr. Murmann and representatives of Sauer and Danfoss
met to further negotiate the Transaction. Negotiations with respect to the
Transaction continued throughout October and November of 1999.
On November 16, 1999, representatives of Sauer and Danfoss met in Nordborg,
Denmark, to continue negotiation of the terms of the Transaction and to discuss
the post-closing integration of Sauer and the Danfoss Fluid Power Companies.
Also on that date, Mr. Murmann met with representatives of Sauer and its counsel
and Danfoss and its counsel to discuss the Transaction.
In late November, 1999, Mr. Murmann apprised the independent directors of
the details of the proposed revisions to the structure of the Transaction. The
proposed structure included a bidding procedure between the Murmann family and
Danfoss as originally contemplated by the parties, but without the provision for
a tender offer for the publicly-held shares of Sauer common stock. Throughout
the remainder of November, 1999, Sauer's independent directors had numerous
telephone conversations with counsel and CSFB to discuss the proposed structure
and its impact on the Sauer stockholders.
Over the next two weeks, the independent directors and Shearman & Sterling
had numerous communications with Mr. Murmann and his counsel and representatives
of Danfoss. In those communications, the independent directors indicated that
they believed that the proposed structure and, specifically, the bidding
procedure, was not in the best interests of Sauer's public stockholders. Such
determination by the Sauer board of directors was based upon the possibility
that the public holders of Sauer common stock could be excluded from sharing, on
a pro rata basis, in any control premium paid by the winning bidder in a bidding
procedure that did not include a tender offer for the publicly-held shares of
Sauer common stock (or some other form of protection for the public holders of
Sauer common stock).
On December 15, 1999, Mr. Murmann met with the independent directors of
Sauer in Nordborg, Denmark. At that meeting, Mr. Murmann agreed to withdraw the
originally contemplated bidding procedure entirely from the Transaction.
The Sauer board of directors reviewed the Transaction again at a regular
meeting on December 16, 1999 in Nordborg, Denmark. At that meeting, CSFB
reviewed various financial and other information related to the Transaction and
Spencer Fane reviewed the terms of the Transaction.
Negotiations between representatives of Sauer and Danfoss continued
throughout December of 1999.
On January 18, 2000, the Sauer board of directors met telephonically to
review the Transaction. At that meeting, Sauer's management, Shearman &
Sterling, Spencer Fane and CSFB made presentations
45
to the Sauer board of directors regarding the Transaction. On that date, based
upon review of a draft of the Stock Exchange Agreement and assuming that the
definitive Stock Exchange Agreement would not materially differ from such draft,
and after reviewing with the Sauer board of directors various financial and
other information relating to the Transaction, CSFB delivered its oral opinion
to the Sauer board of directors to the effect that, as of such date, the
consideration provided for in the Transaction was fair from a financial point of
view to Sauer and the holders of the outstanding Sauer common stock other than
the Holding Company and the Holding Company's affiliates. Representatives of
Sauer management reviewed the strategic and operational benefits expected to be
derived from the Transaction. Representatives of Shearman & Sterling and Spencer
Fane updated the Sauer board of directors on the status of negotiations and
reviewed the terms of the various transaction documents.
On January 18, 2000 through January 21, 2000, negotiation of the Stock
Exchange Agreement continued.
On January 20, 2000, Sauer issued a press release which indicated that
Mr. Barlage had, on that date, tendered his resignation which was effective
immediately with respect to the office of Chief Operating Officer and effective
as of April 1, 2000 with respect to the office of President. Further, such press
release indicated that David Pfeifle, an Executive Vice President of Sauer,
would succeed Mr. Barlage as President and Chief Operating Officer.
On January 21, 2000, the Sauer board of directors met telephonically. After
discussion, which included updates from Shearman & Sterling and Spencer Fane,
Sauer's board unanimously approved the Transaction.
On January 22, 2000, following review of the definitive Stock Exchange
Agreement, CSFB delivered its written opinion, dated January 22, 2000,
confirming its oral opinion delivered previously and the Stock Exchange
Agreement and the Holding Company Agreement were executed.
The market price of the 16.2 million shares of Sauer common stock was
calculated based on the 10-day average share price of the Sauer common stock,
consisting of the 5 days before January 22, 2000 and the 5 days immediately
after such date, which resulted in an average price $11.16.
SAUER'S REASONS FOR THE TRANSACTION; RECOMMENDATIONS OF THE SAUER BOARD OF
DIRECTORS
In reaching its decision to approve the Transaction and recommend to Sauer's
stockholders the adoption of the Stock Exchange Agreement and the issuance of
Sauer common stock pursuant to the Transaction, the Sauer board of directors
consulted with its management and advisors and independently considered a number
of factors, including the following:
- INDUSTRY TRENDS. Sauer and Danfoss have each been made aware by their
respective OEMs that, in order to lower costs and improve quality,
OEMs are seeking suppliers capable of providing complete systems rather
than suppliers who only provide separate component parts and are awarding
sole-source contracts to full-service suppliers able to supply complete
hydraulic systems on a global basis. OEMs' criteria for supplier selection
include cost, quality and responsiveness, full-service design, engineering
and program management capabilities. Neither Sauer nor Danfoss has
discussed with their respective OEMs the feasibility of cross-selling the
other's products. However, Sauer believes the Transaction will allow it to
capitalize on the foregoing trends by significantly expanding Sauer's
product offerings by adding steering and work functions to Sauer's
existing line of products and enhancing Sauer's ability to supply complete
systems to its customers.
- INCREASED CUSTOMER PENETRATION. Sauer believes that the Transaction will
enhance Sauer's competitive position as a result of the complementary
nature of, and lack of overlap between, the product lines of Sauer and the
Danfoss Fluid Power Companies. Sauer believes the Transaction will
increase Sauer's ability to become a leading supplier of highly engineered
hydraulic systems and components for the global off-highway mobile
equipment industry. Sauer
46
believes that the Transaction will strengthen existing customer
relationships and, as a result of Sauer's ability to provide complete and
new product technology systems to OEMs, will allow Sauer to obtain new
business from existing customers and develop new customer relationships.
In addition, Sauer expects to increase its sales by cross-selling its
products to the existing OEM customers of the Danfoss Fluid Power
Companies and the products of the Danfoss Fluid Power Companies to its
existing OEM customers.
- OPPORTUNITIES FOR COST SAVINGS AND EFFICIENCIES. The Sauer board of
directors believes that the Transaction will present Sauer with a number
of opportunities for increasing profitability through cost savings,
manufacturing efficiencies, economies of scale, stronger market position
and other synergies stemming from the combination of Sauer and the Danfoss
Fluid Power Companies. For example, because there is some overlap of
existing manufacturing facilities and marketing organizations between the
two companies, the combined company will be able to eliminate redundant
manufacturing facilities, marketing organizations and duplicative
administrative costs.
- ADDITION OF STRONG MANAGEMENT TEAM. The strong and experienced management
team of the Danfoss Fluid Power Companies will be of great assistance in
achieving the synergistic benefits expected to result from the
Transaction. Sauer's management believes that the management of the
Danfoss Fluid Power Companies will work together with Sauer's existing
management to implement successfully their strategies.
- FINANCIAL CONSIDERATIONS. In evaluating the Transaction, the Sauer board
of directors considered information with respect to the financial
condition, results of operations and businesses of the Danfoss Fluid Power
Companies, on both a historical and prospective basis. Sauer believes that
the Transaction will result in both cost savings and incremental revenues,
which are expected to have a near-term positive impact on the key criteria
used by Sauer to measure its financial performance, including reported
earnings per share, return on invested capital, cash flow generation and
balance sheet strength.
- PRO FORMA IMPACT ON SAUER. The Sauer board of directors considered the
effect of the issuance of additional shares of Sauer common stock pursuant
to the Transaction and the likely effect of such issuance on Sauer's
earnings per share. While the Sauer board of directors expects the
Transaction to be slightly accretive to earnings per share in 2001, the
Sauer board of directors also believes that the Transaction will become
more accretive to earnings per share in the future.
- FAIRNESS OPINION. The Sauer board of directors considered the oral opinion
delivered by CSFB on January 18, 2000. Based upon review of a draft of the
Stock Exchange Agreement and assuming that the definitive Stock Exchange
Agreement would not materially differ from such draft, CSFB delivered its
oral opinion to the Sauer board of directors to the effect that, as of
such date, the consideration provided for in the Transaction was fair from
a financial point of view to Sauer and the holders of the outstanding
Sauer common stock other than the Holding Company and the Holding
Company's affiliates. Following a review of the definitive Stock Exchange
Agreement, CSFB subsequently confirmed such opinion by delivery of its
written opinion, dated January 22, 2000, to the Sauer board of directors.
CSFB's written opinion is summarized below, and a complete copy of such
opinion, setting forth the procedures followed, the matters considered,
the scope of the review undertaken and the assumptions made by CSFB, is
included as Annex B to this proxy statement. See "--OPINION OF CSFB."
- TERMS OF THE STOCK EXCHANGE AGREEMENT. The Sauer board of directors took
into consideration the terms of the Stock Exchange Agreement, including
the representations, warranties, covenants, termination provisions and
conditions contained in the Stock Exchange Agreement, as well as the
financial terms of the Transaction, which Sauer believes are fair and in
the best interests of Sauer and Sauer's stockholders.
- CORPORATE GOVERNANCE. The Sauer board of directors considered that,
currently, the Murmann family owns 15,959,825 shares of Sauer common stock
(or approximately 58.0% of the
47
outstanding shares of Sauer common stock) and that, immediately after
consummation of the Transaction and termination of the Limited Partnership
Agreement, the Holding Company and the Murmann family together will own or
have power to vote 34,359,637 shares of Sauer common stock (or
approximately 74.9% of the outstanding shares of Sauer common stock).
Accordingly, prior to the consummation of the Transaction, the Murmann
family alone has the ability to control the Sauer board of directors and,
after the consummation of the Transaction, the Murmann family and the
Holding Company will, together, have the ability to control the Sauer
board of directors. The Sauer board of directors also took into
consideration that the Sauer board of directors will consist of ten
directors and must include at least three independent directors who are
not associated or affiliated with the Murmann family or Danfoss.
Additionally, Sauer's Bylaws will be amended to provide that certain
significant actions must be approved by at least 80.0% of the Sauer board
of directors. As a result, no such significant action may be taken without
the approval of at least one independent director.
- INDEMNITY. The Sauer board of directors considered the benefit to Sauer
and its stockholders of the indemnification provisions of the Stock
Exchange Agreement, which provide that Danfoss will indemnify Sauer, over
a certain dollar threshold and up to a certain dollar limit, for specified
indemnifiable losses, including any breach of any representation or
warranty, attributable to Danfoss while the Murmann family (and not Sauer)
will indemnify Danfoss, over a certain dollar threshold and up to a
certain dollar limit, for such indemnifiable losses attributable to Sauer.
In the course of its deliberations, the Sauer board of directors considered
the above factors and reviewed with the senior management and outside legal and
financial advisors a number of additional factors relevant to the Transaction,
including:
- historical information concerning Sauer's and the Danfoss Fluid Power
Companies' respective businesses, financial performance and condition,
operations, technology, management and competitive position;
- reports from management and legal advisors as to the results of their due
diligence investigation of the Danfoss Fluid Power Companies and their
operations;
- current financial market conditions and historical market prices and
trading information with regard to Sauer's common stock;
- the budgets and financial projections of Sauer and the Danfoss Fluid Power
Companies separately and on a combined basis; and
- the projected sales growth and cost reduction synergies.
The Sauer board of directors also identified and considered the following
potentially negative factors in its deliberations concerning the Transaction:
- the substantial charges to be incurred in connection with the Transaction,
including costs of integrating the businesses and expenses arising from
the Transaction;
- the risk that potential benefits expected as a result of the Transaction
might not be fully realized; and
- the other risks described under the caption "SPECIAL CONSIDERATIONS"
presented earlier in this proxy statement.
48
The foregoing discussion of the information and factors considered by the
Sauer board of directors is not intended to be exhaustive but includes all
material factors considered by the Sauer board of directors. In view of the
variety of factors considered in connection with its evaluation of the Stock
Exchange Agreement and the issuance of Sauer common stock in connection with the
Transaction, the Sauer board of directors did not find it practicable to, and
did not, quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination. In addition, the individual members of
the Sauer board of directors may have given different weight to different
factors.
After careful consideration, the Sauer board of directors unanimously
determined that the terms of the Stock Exchange Agreement are fair to and in the
best interests of Sauer and its stockholders and has unanimously approved the
Stock Exchange Agreement and the issuance of Sauer common stock in connection
with the Transaction.
EFFECT ON RIGHTS OF EXISTING STOCKHOLDERS
The shares of Sauer common stock issued pursuant to the Transaction will be
identical to the shares of Sauer common stock currently outstanding.
Accordingly, the Holding Company, as holder of such shares, will have the same
rights, preferences and privileges as the current holders of shares of Sauer
common stock. As of the record date for the special meeting of stockholders,
there were 27,502,306 shares of Sauer common stock outstanding. In connection
with the Transaction, Sauer will issue 16,149,812 shares of Sauer common stock,
which, after such issuance and termination of the Limited Partnership Agreement,
will constitute approximately 35.2% of the outstanding shares of Sauer common
stock, and will result in the Holding Company owning or having the power to vote
an aggregate of 26,512,312 shares of Sauer common stock (or approximately 57.8%
of the outstanding shares of Sauer common stock).
For a discussion of the procedures for the election of the Sauer board of
directors and the amendment to Sauer's Bylaws which provides for the approval by
at least 80.0% of the Sauer board of directors for certain acts, see "SPECIAL
CONSIDERATIONS--TRANSACTION CONSIDERATION--SAUER BOARD OF DIRECTORS; BOARD
ACTION."
STOCK ISSUANCE
Sauer will acquire the Danfoss Fluid Power Companies pursuant to the terms
of the Stock Exchange Agreement, in accordance with which, among other things,
Sauer will issue to the Holding Company 16,149,812 shares of Sauer common stock.
Immediately following consummation of the Transaction and termination of the
Limited Partnership Agreement, the Holding Company will own or have the power to
vote 26,512,312 shares of Sauer common stock (or approximately 57.8% of the
outstanding shares of Sauer common stock).
The Sauer board of directors has unanimously approved the Transaction and
recommends the stock issuance for the reasons set forth in this proxy statement.
Stockholders are urged to read carefully all sections of this proxy statement,
including the related Annexes, before voting on this proposal.
The affirmative vote of the holders of a majority of the shares of Sauer
common stock present in person or represented by proxy at the special meeting of
stockholders must approve the stock issuance.
OPINION OF SAUER'S FINANCIAL ADVISOR
CSFB has acted as financial advisor to Sauer in connection with the
Transaction. Sauer selected CSFB based on its experience, expertise and
familiarity with Sauer and its business. CSFB is an internationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated
49
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
In connection with CSFB's engagement, Sauer requested that CSFB evaluate the
fairness of the consideration (defined in the CSFB opinion as the Consideration)
provided for in the Transaction from a financial point of view to Sauer and the
holders of the outstanding Sauer common stock other than the Holding Company and
the Holding Company's affiliates. On January 18, 2000, based upon review of a
draft of the Stock Exchange Agreement and assuming that the definitive Stock
Exchange Agreement would not materially differ from such draft, CSFB delivered
its oral opinion to the Sauer board of directors to the effect that, as of such
date, the consideration provided for in the Transaction was fair from a
financial point of view to Sauer and the holders of the outstanding Sauer common
stock other than the Holding Company and the Holding Company's affiliates.
Following a review of the definitive Stock Exchange Agreement, CSFB subsequently
confirmed such opinion by delivery of its written opinion dated January 22,
2000, to the Sauer board of directors, a copy of which is attached as Annex B to
this proxy statement.
ATTACHED AS ANNEX B TO THIS DOCUMENT AND INCORPORATED BY REFERENCE IS THE
FULL TEXT OF CSFB'S OPINION TO THE SAUER BOARD OF DIRECTORS, WHICH SETS FORTH
THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN. WE ENCOURAGE YOU TO READ CSFB'S WRITTEN OPINION
THOROUGHLY. CSFB'S OPINION IS ADDRESSED TO THE SAUER BOARD OF DIRECTORS AND
RELATES ONLY TO THE FAIRNESS OF THE CONSIDERATION PROVIDED FOR IN THE
TRANSACTION FROM A FINANCIAL POINT OF VIEW TO SAUER AND THE HOLDERS OF THE
OUTSTANDING SAUER COMMON STOCK OTHER THAN THE HOLDING COMPANY AND THE HOLDING
COMPANY'S AFFILIATES. IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED
TRANSACTION OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING
OF STOCKHOLDERS. THE FOLLOWING IS A SUMMARY OF THE MATERIAL FINANCIAL ANALYSES
PERFORMED BY CSFB IN CONNECTION WITH RENDERING ITS ORAL AND WRITTEN OPINIONS AND
DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH OPINIONS.
In arriving at its opinion, CSFB reviewed the Transaction agreements and
publicly available business and financial information relating to Sauer and
business and financial information relating to the Danfoss Fluid Power
Companies. CSFB also reviewed other information relating to Sauer and the
Danfoss Fluid Power Companies, including financial forecasts provided by Sauer
and the Danfoss Fluid Power Companies, and discussed with the managements of
Sauer, the Danfoss Fluid Power Companies and Danfoss the businesses and
prospects of Sauer and the Danfoss Fluid Power Companies. CSFB also considered
financial and stock market data of Sauer and financial data of the Danfoss Fluid
Power Companies and compared those data with similar data for other publicly
held companies in businesses similar to Sauer and the Danfoss Fluid Power
Companies and considered, to the extent publicly available, the financial terms
of other business combinations and transactions recently effected. CSFB also
considered other information, financial studies, analyses and investigations and
financial, economic and market criteria which it deemed relevant. CSFB relied
upon the views of the respective managements of Sauer, the Danfoss Fluid Power
Companies and Danfoss concerning the business, operational and strategic
benefits and implications of the Transaction, including financial forecasts
provided to it by the Danfoss Fluid Power Companies and Sauer relating to
synergistic values and operating cost savings expected to be achieved through
the combination of the operations of the Danfoss Fluid Power Companies and
Sauer.
In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by it and relied on that information being complete and accurate in all
material respects. With respect to the financial forecasts, CSFB assumed that
they were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of Sauer and the Danfoss Fluid Power
Companies as to the future financial performance of Sauer and the Danfoss Fluid
Power Companies, respectively. With respect to the cost savings and other
potential synergies anticipated to result from the Transaction, including the
50
amount, timing and achievability of those cost savings and other potential
synergies, the managements of Sauer and the Danfoss Fluid Power Companies
informed CSFB that those estimates represented the best currently available
estimates and judgments of the managements of Sauer and the Danfoss Fluid Power
Companies.
CSFB was not requested to make, and did not make, an independent evaluation
or appraisal of the assets or liabilities, contingent or otherwise, of the
Danfoss Fluid Power Companies, nor was CSFB furnished with any such evaluations
or appraisals. CSFB's opinion was necessarily based upon information available
to, and financial, economic, market and other conditions as they existed and
could be evaluated by, CSFB on the date of its opinion. CSFB did not express any
opinion as to the actual value of the Sauer common shares when issued pursuant
to the Transaction or the prices at which the Sauer common shares will trade
subsequent to the Transaction.
In preparing its opinion to the Sauer board of directors, CSFB performed a
variety of financial and comparative analyses, including those described below.
The summary of CSFB's analyses set forth below does not purport to be a complete
description of the analyses underlying CSFB's opinion. The preparation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore, an
opinion is not readily susceptible to summary description. CSFB's opinion was
not based on any single factor or analysis, but rather on the totality of the
factors considered and analyses performed. In arriving at its opinion, CSFB made
qualitative judgments as to the significance and relevance of each analysis and
factor considered by it. Accordingly, CSFB believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors or
focusing on information presented in tabular format, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying its analyses and opinion.
In its analyses, CSFB made numerous assumptions with respect to Sauer, the
Danfoss Fluid Power Companies, industry performance, regulatory, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Sauer and the Danfoss Fluid Power Companies. No
company, transaction or business used in its analyses as a comparison is
identical to Sauer or the Danfoss Fluid Power Companies or the proposed
Transaction, nor is an evaluation of the results of CSFB's analyses entirely
mathematical. Rather, CSFB's analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the Transaction, public trading or other values of the
companies, business segments or transactions being analyzed. The estimates
contained in CSFB's analyses and the ranges of valuations resulting from any
particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by the analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, CSFB's analyses and estimates are inherently subject to substantial
uncertainty.
CSFB's opinion and financial analyses were only one of many factors that the
Sauer board of directors considered in its evaluation of the proposed
Transaction and should not be viewed as determinative of the views of the Sauer
board of directors or its management with respect to the Transaction or the
consideration for the Transaction.
FINANCIAL ANALYSES PERFORMED BY CSFB
The following is a summary of the material analyses performed by CSFB in
connection with its oral opinion delivered January 18, 2000, followed by a
written opinion, dated January 22, 2000, confirming its oral opinion. SOME OF
THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED IN TABULAR
FORMAT. IN ORDER TO FULLY UNDERSTAND CSFB'S FINANCIAL ANALYSES, THE TABLES MUST
51
BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT
CONSTITUTE A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE
DATA SET FORTH IN THE TABLES BELOW WITHOUT CONSIDERING THE FULL NARRATIVE
DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE METHODOLOGIES AND
ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING OR INCOMPLETE
VIEW OF CSFB'S FINANCIAL ANALYSES.
DISCOUNTED CASH FLOW ANALYSIS. CSFB performed three separate discounted
cash flow analyses on each of Sauer and the Danfoss Fluid Power Companies in
order to estimate the present value of the unlevered after-tax free cash flows
that each company could produce on a stand-alone basis from 2000 through 2004,
before any synergies. The first, referred to herein as the Sauer Management Case
and DFP Management Case, respectively, are based on projections provided by and
discussions with the managements of Sauer and the Danfoss Fluid Power Companies,
respectively, for 2000 through 2004. The second, referred to as the Sauer Upside
Case and DFP Upside Case, respectively, incorporate certain sensitivities to the
Sauer Management Case and DFP Management Case, respectively, based on
discussions with the managements of Sauer and the Danfoss Fluid Power Companies,
respectively, that assume, among other things, sales growth and margins of
earnings before interest, taxes, depreciation and amortization, commonly known
as EBITDA, higher than those which were used in the Sauer Management Case and
DFP Management Case, respectively. The third, referred to as the Sauer Downside
Case and the DFP Downside Case, respectively, incorporate certain sensitivities
to the Sauer Management Case and DFP Management Case, respectively, based on
discussions with the managements of Sauer and the Danfoss Fluid Power Companies,
respectively, that assume, among other things, sales growth and EBITDA margins
lower than those which were used in the Sauer Management Case and DFP Management
Case, respectively.
Ranges of terminal values for the discounted cash flow analyses were
estimated using multiples of terminal year 2004 EBITDA of 6.0x to 7.0x and
discount rates ranging from 11.0% to 12.0% based on a weighted average cost of
capital analysis. The following chart shows the range of implied equity values
of Sauer and the Danfoss Fluid Power Companies.
IMPLIED EQUITY VALUE
(AMOUNTS IN MILLIONS OF DOLLARS)
--------------------------------
Sauer Management Case...... $361 -- $451
Sauer Upside Case.......... $404 -- $502
Sauer Downside Case........ $257 -- $333
Reference Range............ $323 -- $418
DFP Management Case........ $202 -- $252
DFP Upside Case............ $234 -- $290
DFP Downside Case.......... $174 -- $218
Reference Range............ $208 -- $258
Based on the foregoing, CSFB determined that Danfoss' implied ownership of
the combined company ranged from 33.2% to 44.4%, compared to its actual
ownership of 35.3% (which percentage does not consider the issuance of shares of
Sauer common stock in connection with an immaterial strategic acquisition) in
the Transaction.
COMPARABLE COMPANIES ANALYSIS. CSFB compared financial and operating data
of Sauer and the Danfoss Fluid Power Companies with corresponding data of the
following selected companies in the hydraulics business:
SELECTED HYDRAULICS COMPANIES:
52
Commercial Intertech Corporation
Dennison International plc
Eaton Corporation
Parker Hannifin
CSFB reviewed enterprise values, calculated as fully diluted equity market
value, plus total debt, preferred stock and minority interests, less cash,
unconsolidated equity investments and cash equivalents, of the selected
companies as multiples of estimated 1999 and 2000 revenues and EBITDA.
Additionally, CSFB reviewed equity market values of the selected companies as
multiples of estimated 1999 and 2000 net income. All multiples were based on
closing prices on January 13, 2000. CSFB then applied a range of selected
multiples derived from the selected companies to corresponding financial and
operating data of Sauer and the Danfoss Fluid Power Companies separately.
Estimated financial data for the selected companies were based on publicly
available research analysts' estimates and estimated financial data for Sauer
and the Danfoss Fluid Power Companies were based on the Sauer Management Case
and DFP Management Case projections, respectively. This analysis indicated an
implied equity value of Sauer ranging from $288 million to $393 million and an
implied equity value of the Danfoss Fluid Power Companies ranging from
$185 million to $253 million. Such equity valuations indicated that Danfoss'
implied ownership of the combined company ranged from 32.0% to 46.7%, compared
to its actual ownership of 35.3% in the Transaction.
COMPARABLE ACQUISITIONS ANALYSIS. Using publicly available information and
information supplied by Sauer's and the Danfoss Fluid Power Companies'
management, CSFB analyzed the purchase prices and implied transaction multiples
paid or proposed to be paid in the following selected merger and acquisition
transactions in the hydraulics industry:
SELECTED HYDRAULICS TRANSACTIONS
ACQUIROR
- - Eaton Corporation
- - Textron, Inc.
- - IDEX Corporation
- - Applied Power Inc.
- - Dana Corporation
- - Lucas Industries plc
- - Parker Hannifin Corporation
TARGET
- - Gast Manufacturing Corporation
- - Versa Technologies Inc.
- - Aeroquip-Vickers, Inc.
- - David Brown plc
- - Ingersoll-Rand Company's Clark-Hurth Components Business
- - Varity Corporation
- - Precision Control Technologies' Abex/ NWL Aerospace Assets
CSFB reviewed transaction values, calculated as the amount paid in the
Transaction for the equity of the target company, plus total debt, preferred
stock and minority interests, less cash, unconsolidated equity investments and
cash equivalents, of the selected transactions as multiples of the latest
12 month revenues, EBITDA and earnings before interest and taxes, or commonly
known as EBIT. CSFB also reviewed the amount paid for the equity of the target
company of the selected transactions as multiples of latest 12 month net income.
CSFB then applied a range of selected multiples derived from the selected
transactions to the estimated 1999 revenues, EBITDA, EBIT and net income of
Sauer and the Danfoss Fluid Power Companies separately. All multiples for the
selected transactions were based on financial information available at the time
of the announcement of the relevant transaction and estimated financial data for
Sauer and the Danfoss Fluid Power Companies were based on the Sauer Management
Case and DFP Management Case projections, respectively.
This analysis indicated an implied equity of Sauer ranging from
$353 million to $488 million and an implied equity of the Danfoss Fluid Power
Companies ranging from $188 million to $263 million.
53
Such equity valuations indicated that the Danfoss' implied ownership of the
combined company ranged from 27.8% to 42.7%, compared to its actual ownership of
35.3% in the Transaction.
CONTRIBUTION ANALYSIS. CSFB also analyzed the contribution each of Sauer
and the Danfoss Fluid Power Companies have made or are projected to make to
sales, EBITDA and EBIT of the 30-month period ending June 30, 1999 and fiscal
years 1999 and 2000, and net income for fiscal year 2000. Based on the
foregoing, CSFB derived an implied ownership reference range for Danfoss of
33.0% to 38.0%, compared to the 35.3% it would receive in the Transaction.
PRO FORMA ANALYSIS. CSFB analyzed the potential pro forma effect of the
business combination on the earnings per share of Sauer in fiscal years 2000,
2001 and 2002, based on the Sauer Management Case and DFP Management Case
projections. This analysis includes the potential synergies that the managements
of Sauer and the Danfoss Fluid Power Companies anticipate will result from the
business combination. The synergies that the managements of Sauer and the
Danfoss Fluid Power Companies project may result from the Transaction are
estimates, and the actual synergies realized from the Transaction, if they
occur, may vary from these estimates. This analysis, assuming a December 31,
1999 closing date, indicated that the business combination would be accretive to
the earnings per share of Sauer in fiscal years 2001 and 2002 before any
non-recurring restructuring and merger related charges. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
CSFB FEES
Sauer has agreed to pay CSFB for its financial advisory services in
connection with the Transaction an aggregate fee of up to $2,000,000. The fee is
contingent upon consummation of the Transaction. Sauer also has agreed to
reimburse CSFB for all out-of-pocket expenses incurred by CSFB in performing its
services, including the fees and expenses for legal counsel and any other
advisor retained by CSFB, and to indemnify CSFB and related persons and entities
against liabilities, including liabilities under the federal securities laws,
arising out of CSFB's engagement. In the opinion of the SEC, indemnification for
liabilities arising under the federal securities laws may not be enforceable.
CSFB and its affiliates have in the past provided financial services to
Sauer and its affiliates unrelated to the proposed Transaction, for which
services CSFB and its affiliates have received fees of approximately $4.2
million. In the ordinary course of business, CSFB and its affiliates may
actively trade the debt and equity securities of Sauer and its respective
affiliates for its own accounts and for the accounts of customers and,
accordingly, may at any time hold long or short positions in those securities.
ACCOUNTING TREATMENT
The Transaction will be accounted for by the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "BUSINESS
COMBINATIONS." Accordingly, upon completion of the Transaction, the assets
acquired and liabilities assumed will be recorded at fair value based on an
independent appraisal of the fair value of the acquired property, plant and
equipment, and identified intangible assets, and information available and
assumptions made by management as to future operations. The allocation of the
purchase price will be based on the final determination of the appraised and
other fair values.
54
PROPOSAL NO. 1--THE STOCK ISSUANCE
RECOMMENDATION OF SAUER BOARD OF DIRECTORS
The Sauer board of directors has unanimously approved the issuance of Sauer
common stock in connection with the Transaction and, therefore, recommends that
the holders of Sauer common stock vote FOR this proposal.
GENERAL DESCRIPTION
Sauer will acquire all of the common stock of the Danfoss Fluid Power
Companies pursuant to the terms of the Stock Exchange Agreement, in accordance
with which, among other things, Sauer will issue to the Holding Company
16,149,812 shares of Sauer common stock. Immediately following consummation of
the Transaction and termination of the Limited Partnership Agreement, the
Holding Company will own or have the power to vote 26,512,312 shares of Sauer
common stock (or approximately 57.8% of the outstanding shares of Sauer common
stock).
Additionally, Sauer conducts its German operations through Sauer-Sundstrand
GmbH & Co., a German limited partnership. Sauer and Sauer Sundstrand GmbH, a
company wholly owned by Sauer, are the general partners of Sauer-Sundstrand
GmbH & Co. Sauer GmbH and Klaus H. Murmann & Co. KG--as holding company for
Sauer GmbH & Co. Hydraulik KG--are limited partners and have the Limited
Partnership Interests in Sauer-Sundstrand GmbH & Co. The limited partners are
owned entirely by the Murmann family. The creation of the Limited Partnership
Interests (as opposed to the acquisition of the entire share capital of Sauer)
was a result of tax considerations in connection with the formation of Sauer in
1989. The Limited Partnership Interests remained essentially unchanged since
that date.
In connection with the Transaction, Sauer is required to terminate the
Limited Partnership Agreement pursuant to its terms. Accordingly, Sauer's
independent directors have approved the termination of the Limited Partnership
Agreement and the Limited Partnership Interests in exchange for 2,250,000 shares
of Sauer common stock (calculated pursuant to the termination provisions of the
Limited Partnership Agreement), in complete satisfaction of all limited
partners' claims with respect to Sauer-Sundstrand GmbH & Co. Since Sauer's
election to terminate the limited partnership is not related to:
- a decline in the Murmann family beneficial ownership (economic or voting)
of Sauer common stock to less than 50.1%;
- a sale of a majority in book value of the consolidated assets of Sauer and
its subsidiaries or assets that generated a majority of the consolidated
revenues of Sauer and its subsidiaries in the prior fiscal year;
- a transfer of the beneficial ownership of the Limited Partnership
Interests (or any voting rights in respect thereof) outside the Murmann
family;
- a merger or other business combination in which Sauer is not the survivor
or the acquisition of at least 50.1% of the outstanding Sauer common stock
pursuant to a tender offer or exchange offer; or
- the withholding of the consent of the limited partner in a manner adverse
to holders of Sauer common stock, or effected after December 31, 2017,
Sauer is also required to, pursuant to the terms of the Limited Partnership
Agreement, pay the limited partners, in the aggregate, $6,250,000 in respect of
certain taxes payable by the limited partners as a result of the exchange of the
shares of Sauer common stock for the Limited Partnership Interests. Such
55
amounts have been reflected in the Selected Unaudited Pro Forma Historical
Financial Information for Sauer and the Danfoss Fluid Power Companies.
Also, before December 31, 2000, Sauer will acquire from the Holding Company,
for additional shares of Sauer common stock, all of the assets of Danfoss used
by Danfoss' existing sales companies to distribute the products manufactured by
the Danfoss Fluid Power Companies in Australia, Belgium, Brazil, Holland, Hong
Kong, Japan, Mexico, New Zealand, Portugal, Singapore, Spain and Switzerland.
The existing sales companies of Danfoss act as distributors for Danfoss' entire
product line, including the products manufactured by the Danfoss Fluid Power
Companies. Danfoss continues to reorganize its existing sales companies in order
to segregate the assets necessary to distribute the products manufactured by the
Danfoss Fluid Power Companies from the overall distribution operations of its
existing sales companies. Such reorganization, which involves the identification
of the relevant assets and the transfer of such assets to newly formed entities,
is expected to be completed on or before December 31, 2000. Accordingly, Sauer
cannot, at this time, acquire such assets as part of the Transaction. The number
of shares of Sauer common stock to be issued to the Holding Company in
connection with such secondary acquisition will be based upon the same financial
parameters used to calculate the number of shares of Sauer common stock issued
by Sauer in connection with the acquisition of all of the common stock of the
Danfoss Fluid Power Companies, including the closing stock price of Sauer common
stock as of the closing date and, therefore, cannot be specifically calculated
at this time. However, Sauer expects that the number of additional shares of
Sauer common stock will be between approximately 2,000,000 shares and
approximately 3,000,000 shares.
VOTE REQUIRED
Adoption of the proposal to issue Sauer common stock requires the
affirmative vote of the holders of a majority of the shares of Sauer common
stock present in person or represented by proxy at the special meeting of
stockholders.
DESCRIPTION OF THE STOCK EXCHANGE AGREEMENT
The description set forth below describes the material terms of the Stock
Exchange Agreement but does not purport to be complete. All stockholders are
urged to carefully read the Stock Exchange Agreement attached as Annex A in its
entirety.
GENERAL
Sauer, the Holding Company, Danfoss and K. Murmann Verwaltungsgesellschaft
mbH have entered into a Stock Exchange Agreement, in accordance with which,
among other things, Sauer will acquire all of the common stock of the Danfoss
Fluid Power Companies. Pursuant to the Holding Company Agreement, prior to the
closing of the Transaction, the Murmann family will contribute 1,000 shares of
Sauer common stock to the Holding Company in exchange for shares of the Holding
Company's common stock and will give the Holding Company an irrevocable proxy to
vote an additional 10,361,500 shares of Sauer common stock. Danfoss will
contribute to the Holding Company all of the outstanding shares of common stock
of the Danfoss Fluid Power Companies also in exchange for shares of the Holding
Company's common stock. The Holding Company's voting rights will be shared
equally by the Murmann family and Danfoss. Subject to the approval of the
issuance of Sauer common stock to the Holding Company in connection with the
Transaction by the holders of a majority of Sauer common stock present in person
or represented by proxy at the special meeting of stockholders, pursuant to the
Stock Exchange Agreement, the Holding Company will contribute to Sauer 100% of
the outstanding common stock of the Danfoss Fluid Power Companies in exchange
for 16,149,812 shares of Sauer common stock. Additionally, before December 31,
2000, Sauer will acquire from the Holding Company, for additional shares of
Sauer common stock, all of the assets of Danfoss related to the mobile
hydraulics operations of Danfoss in Australia, Belgium, Brazil, Holland, Hong
56
Kong, Japan, Mexico, New Zealand, Portugal, Singapore, Spain and Switzerland.
The number of shares of Sauer common stock to be issued to the Holding Company
in connection with such secondary acquisition is based upon the same financial
parameters used to calculate the number of shares of Sauer common stock issued
by Sauer in connection with the acquisition of all of the common stock of the
Danfoss Fluid Power Companies, including the closing stock price of Sauer common
stock as of the closing date and, therefore, cannot be specifically calculated
at this time. However, Sauer expects that the number of additional shares of
Sauer common stock will be between approximately 2,000,000 shares and
approximately 3,000,000 shares.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Stock Exchange Agreement contains customary representations and
warranties made by the Holding Company and Sauer, including representations and
warranties relating to:
- organization and qualification;
- financial statements;
- capitalization;
- subsidiaries;
- investment purposes;
- indebtedness;
- reorganization;
- SEC filings;
- investment company status; and
- termination and conversion of the silent partnership.
The representations and warranties of Sauer and the Holding Company
contained in the Stock Exchange Agreement survive the closing for a period of
37 months.
CONDITIONS TO CLOSING
The obligations of Sauer and the Holding Company to consummate the
transactions contemplated by the Stock Exchange Agreement are subject to the
fulfillment of certain conditions, including the following significant
conditions:
- approval by Sauer's stockholders for the issuance of Sauer common stock in
connection with the Transaction;
- no proceeding or litigation against Sauer or the Holding Company seeking
to restrain the Transaction has been commenced;
- the expiration or termination of the waiting period under (i) the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (ii) the
January 1, 1999 version of the Gesetz gegen Wettbewerbsbechrankungen;
- the execution and delivery of the Holding Company Agreement;
- the representations and warranties of each of the Holding Company and
Sauer being true and correct when made and will be true as of the closing
date;
- compliance by the Holding Company and Sauer with the covenants in the
Stock Exchange Agreement;
57
- the receipt of all approvals from all governmental authorities and all
third party consents and estoppel certificates, other than as would not
have a material adverse effect;
- no material adverse effect with respect to Sauer or the Danfoss Fluid
Power Companies;
- Sauer has amended its Certificate of Incorporation and its Bylaws; and
- Danfoss shall have completed its reorganization such that certain
manufacturing facilities and certain sales operations of the Danfoss Fluid
Power Companies shall be segregated from the overall operations of
Danfoss.
INDEMNIFICATION
Sauer shall be indemnified by Danfoss, and Danfoss shall be indemnified by
the Murmann family, from all losses resulting from:
- the breach of any representation or warranty made by Sauer or the Holding
Company;
- the breach of any covenant or agreement by Sauer, or the Holding Company
or Danfoss;
- liabilities of any of the Danfoss Fluid Power Companies or of Sauer not
reflected on the year-end balance sheet of the Danfoss Fluid Power
Companies or Sauer, respectively, arising from actions or inactions of
Sauer, any of its subsidiaries, or of any of the Danfoss Fluid Power
Companies, respectively, or the conduct of their respective businesses
prior to the closing; or
- any and all losses incurred by Danfoss, Sauer, or any of the Danfoss Fluid
Power Companies by reason of any claim of any third party to the extent
arising out of any action, inaction, event, condition, liability or
obligation of any of the Danfoss Fluid Power Companies occurring or
existing prior to the closing, provided that all such losses mentioned
above must be in the aggregate in excess of $5.0 million.
The maximum amount of indemnification will be:
- $50.0 million for losses by Sauer which may be recovered;
- the product of (a) the amount of any loss and (b) 0.2821, with the
aggregate amount of all such losses not to exceed $50.0 million, in the
aggregate, for losses by Danfoss which may be recovered;
- $100.0 million for any Danish taxes arising out of the transfer, sale or
other disposition by Sauer of (a) the shares of Danfoss Fluid Power A/S or
(b) the shares of Danfoss Hydraulic A/S for a period of 37 months
following the closing; and
- all losses arising out of the operation or termination of the Limited
Partnership Agreement, provided that (a) all such losses must be in the
aggregate in excess of the German income tax liabilities arising out of
the termination of the Limited Partnership Agreement recomputed as of the
closing date and (b) no person shall be deemed to have suffered such a
loss as a result of the dilution caused by the issuance of Sauer common
stock in connection with the conversion of Limited Partnership Interests
pursuant to the termination of the Limited Partnership Agreement.
TERMINATION
The Stock Exchange Agreement may be terminated by Sauer or by the Holding
Company at any time prior to the closing, if between the date of the Stock
Exchange Agreement and the closing:
- an event or condition occurs that has resulted in a material adverse
effect with respect to Sauer or any of the Danfoss Fluid Power Companies;
58
- any representation or warranty of Sauer or the Holding Company contained
in the Stock Exchange Agreement was not true or correct when made and such
defect is not cured within 30 days following written notice of Sauer's or
the Holding Company's intent to terminate the Stock Exchange Agreement;
- Sauer or the Holding Company has not complied with all covenants or
agreements to be complied with and contained in the Stock Exchange
Agreement and such defect is not cured within 30 days following written
notice of Sauer's or the Holding Company's intent to terminate the Stock
Exchange Agreement;
- Sauer, any of its subsidiaries, the Holding Company, or any of the Danfoss
Fluid Power Companies makes a general assignment for the benefit of
creditors, or any proceeding is instituted by or against Sauer, any of its
subsidiaries, the Holding Company, or any of the Danfoss Fluid Power
Companies seeking to adjudicate any of them bankrupt or insolvent, or
seeking liquidation, winding up or reorganization, arrangement,
adjustment, protection, or relief under any law relating to bankruptcy,
insolvency or reorganization;
- if the closing has not occurred by September 30, 2000 unless the failure
to close by this date is due to the failure of the party seeking to
terminate the Stock Exchange Agreement to fulfill any obligation under
such agreement;
- in the event that any governmental authority has issued an order, decree
or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Stock Exchange Agreement
and such order, decree, ruling or other action has become final and
nonappealable;
- by the mutual written consent of the Holding Company and Sauer; or
- if, within five business days after receipt of Sauer's or the Holding
Company's disclosure schedule relating to the Stock Exchange Agreement if,
in the good faith judgment of Sauer or the Holding Company, either the
form or substance of the other party's disclosure schedule is unacceptable
to Sauer or the Holding Company.
If the Stock Exchange Agreement is terminated, it will become void and of no
effect with no liability on the part of any party, except:
- for breaches by either Danfoss or Sauer of the obligations under the
confidentiality agreement (as defined in the Stock Exchange Agreement);
- no party will be relieved of any liability resulting from its breach of
the Stock Exchange Agreement; and
- each party will bear its respective expenses, costs and fees in connection
with the Stock Exchange Agreement and the transactions contemplated
thereby.
DESCRIPTION OF THE HOLDING COMPANY AGREEMENT
GENERAL
The Transaction is being effected through the Holding Company. The Holding
Company is a Danish company formed, pursuant to the Holding Company Agreement,
by the Murmann family. The Holding Company has no assets other than 1,000 shares
of Sauer common stock and has not engaged in any activities other than as
incidental to the ownership of such common stock. Immediately following
consummation of the Transaction and termination of the Limited Partnership
Agreement, the Holding Company will own or have the power to vote 26,512,312
shares of Sauer common stock (or approximately 57.8% of the outstanding shares
of Sauer common stock) and will have no other assets.
59
CONTRIBUTIONS
Prior to the closing of the Transaction, Danfoss will contribute to the
Holding Company all of the outstanding common stock of the Danfoss Fluid Power
Companies in exchange for shares of the Holding Company common stock. Prior to
the closing of the Transaction, the Murmann family will contribute 1,000 shares
of Sauer common stock to the Holding Company also in exchange for shares of the
Holding Company common stock. The Holding Company's voting rights will be shared
equally between the Murmann family and Danfoss. The Holding Company, pursuant to
the Stock Exchange Agreement, will subsequently contribute to Sauer 100% of the
outstanding common stock of the Danfoss Fluid Power Companies in exchange for
16,149,812 shares of Sauer common stock.
REPRESENTATIONS AND WARRANTIES
Danfoss makes the same representations, warranties, covenants and
indemnities that the Holding Company makes to Sauer in the Stock Exchange
Agreement under the Holding Company Agreement.
SUPERVISORY BOARD AND MANAGEMENT BOARD OF THE HOLDING COMPANY
The supervisory board of the Holding Company will consist of six members.
The Murmann family and Danfoss will each nominate three candidates and the
Murmann family and Danfoss have agreed to vote in favor of duly appointing the
nominated candidates of the other party as members of the supervisory board.
The management board of the Holding Company will consist of two members,
each a member of the supervisory board appointed by each of Danfoss and the
Murmann family.
The supervisory board will issue general principles for the management board
with respect to the management of the Holding Company, specifically in
connection with the requirement of prior approval of the supervisory board for
certain transactions and the right of the supervisory board to instruct the
management board.
NOMINATIONS OF THE MEMBERS OF THE SAUER BOARD OF DIRECTORS
The Sauer board of directors will consist of ten members. Director
candidates will be identified by a nominating committee. The Murmann family and
Danfoss have agreed to support the election of the director nominee of the other
party to the nominating committee.
Each of the Murmann family and Danfoss is entitled to recommend three
candidates for director who may be associated or affiliated with the Murmann
family or Danfoss and two other candidates for director, one of which will be
the first Chief Executive Officer and President of Sauer. After such first Chief
Executive Officer and President of Sauer ceases to serve in such capacities, the
Sauer board of directors will choose a successor and the Murmann family's
representative will nominate a second independent director to replace the
individual who was Chief Executive Officer and President. The other three
candidates must be completely independent from and in no way associated with
either the Murmann family or Danfoss.
CHAIRMAN AND VICE CHAIRMAN OF THE SAUER BOARD OF DIRECTORS
Mr. Murmann will be the Chairman and Mr. Clausen will be the Vice Chairman
of the Sauer board of directors for the period starting at closing and ending on
the second anniversary of the closing. By the second anniversary of the closing,
Mr. Murmann must declare whether he wants to extend his period as Chairman for
another two years, and if he decides to do so, Mr. Clausen will continue to be
Vice Chairman of the Sauer board of directors.
60
If Mr. Murmann ceases to be a member of the Sauer board of directors or does
not extend his period as the Chairman of the Sauer board of directors on or
before the second anniversary of the closing, Mr. Clausen will become the
Chairman of the Sauer board of directors until the fourth anniversary of the
closing, and the Murmann family may propose a director as Vice Chairman for such
period, who may or may not be part of the Murmann family.
If Mr. Murmann ceases to be a member of the Sauer board of directors or does
not extend his period as the Chairman of the Sauer board of directors after or
on the March 31st of the year two years after the closing, but prior to or on
the March 31st of the year four years after the closing, Mr. Clausen will become
the Chairman of the Sauer board of directors until March 31, 2008, and the
Murmann family may propose a director as Vice Chairman for such period.
If Mr. Clausen ceases to be a member of the Sauer board of directors or
refuses to be Vice Chairman of the Sauer board of directors during the period
Mr. Murmann is still Chairman, Danfoss may propose any other director as Vice
Chairman of the Sauer board of directors. If Mr. Clausen does not become or
continue as Chairman, the Murmann family has agreed to use its best efforts to
either cause the Vice Chairman to resign or cause the Sauer board of directors
to remove the Vice Chairman. The Sauer board of directors will thereafter, in
its sole discretion, fill the vacancies in both offices.
SUPER MAJORITY FOR BOARD RESOLUTIONS
The following acts require the approval of at least 80.0% of the fully
constituted Sauer board of directors:
- the acquisition or disposition of assets of Sauer for consideration having
a value in excess of 1% of net sales for the immediately preceding fiscal
year;
- the issuance of Sauer common stock or other voting securities or any
incurrence in excess of $10,000,000 principal amount of debt;
- any amendment of Sauer's Bylaws or any recommendation by the Sauer board
of directors to Sauer stockholders to modify Sauer's Certificate of
Incorporation;
- any action having a material adverse effect on the operations conducted in
Nordborg, Denmark;
- any other material change in the lines of business operated by Sauer;
- any increase or decrease in the number of Sauer directors;
- the election or removal of the members, or alternative members, of the
nominating committee;
- the election or removal of Sauer's Chairman, Vice Chairman, Chief
Executive Officer, Chief Financial Officer or Chief Operating Officer; and
- the approval of Sauer's annual business plan or any action that materially
deviates from such plan.
61
PROPOSAL NO. 2--CHARTER AMENDMENT TO INCREASE AUTHORIZED COMMON STOCK
RECOMMENDATION OF SAUER BOARD OF DIRECTORS
The Sauer board of directors has unanimously approved the amendment of
Sauer's Certificate of Incorporation to increase the number of authorized shares
of Sauer common stock by 30,000,000 shares from 45,000,000 shares to 75,000,000
shares.
REASON FOR INCREASING THE AUTHORIZED COMMON STOCK
The Sauer board of directors believes that, if the Transaction is completed,
it is in Sauer's best interests to increase the number of authorized shares of
Sauer common stock to allow Sauer flexibility in maintaining its capital
structure, to allow Sauer to effect possible acquisitions and to conduct the
business and operations of Sauer. Currently, Sauer is authorized to issue
45,000,000 shares of common stock. The number of shares of Sauer common stock to
be issued in connection with the Transaction, when added to the number of shares
of Sauer common stock currently outstanding, would exceed the 45,000,000 shares
currently authorized. In addition, the Sauer board of directors believes that
the availability of such additional shares is required to allow Sauer to attract
and retain talented employees through the grant of stock options and other
stock-based incentives. The Sauer board of directors also believes that the
availability of such shares will provide Sauer with the flexibility to issue
Sauer common stock for other proper corporate purposes which may be identified
by the Sauer board of directors in the future, such as stock splits, stock
dividends, financings or acquisitions. The issuance of additional shares of
Sauer common stock may have a dilutive effect on earnings per share and, for a
person who does not purchase additional shares to maintain his or her pro rata
interest, on a stockholder's percentage voting power.
The Sauer board of directors does not recommend this proposed amendment with
the intent to use the ability to issue additional Sauer common stock to
discourage tender offers or takeover attempts. However, the availability of
authorized Sauer common stock for issuance could render more difficult or
discourage a merger, tender offer, proxy contest or other attempt to obtain
control of Sauer. Neither the management of Sauer nor the Sauer board of
directors is aware of any existing or planned effort on the part of any party to
accumulate material amounts of Sauer common stock or to acquire control of Sauer
by means of merger, tender offer, proxy contest or otherwise, or to change
Sauer's management, nor is Sauer aware of any offer by any person to acquire any
material amount of Sauer common stock or assets of Sauer.
EFFECT ON EXISTING STOCKHOLDERS
Sauer will acquire all of the common stock of the Danfoss Fluid Power
Companies pursuant to the terms of a Stock Exchange Agreement, in accordance
with which, among other things, Sauer will issue to the Holding Company
16,149,812 shares of Sauer common stock. The holder of these shares will have
the same rights, preferences and privileges as the holders of shares of Sauer
common stock currently outstanding.
As of the record date of the special meeting of stockholders, there were
27,502,306 shares of Sauer common stock outstanding. In connection with the
Transaction, Sauer will issue 16,149,812 shares of Sauer common stock, which,
after such issuance and the termination of the Limited Partnership Agreement,
will constitute approximately 35.2% of the outstanding shares of Sauer common
stock and will result in the Holding Company owning or having the power to vote
an aggregate of 26,512,312 shares of Sauer common stock (or approximately 57.8%
of the outstanding shares of Sauer common stock). Additionally, pursuant to the
Holding Company Agreement, the Murmann family and the Holding Company, who will
together control approximately 74.9% of the outstanding Sauer common stock after
the consummation of the Transaction and the termination of the Limited
Partnership Agreement, have agreed to vote together to determine the outcome of
certain corporate actions
62
requiring stockholder approval. See "SPECIAL CONSIDERATIONS--TRANSACTION
CONSIDERATIONS--SAUER BOARD OF DIRECTORS; BOARD ACTION."
VOTE REQUIRED
Adoption of the proposal to amend Sauer's Certificate of Incorporation to
increase the number of authorized shares of Sauer common stock requires the
affirmative vote of the holders of a majority of the shares of Sauer common
stock present in person or represented by proxy at the special meeting of
stockholders.
63
PROPOSAL NO. 3--CHARTER AMENDMENT TO REMOVE THE CLASSIFIED BOARD
AND ALLOW REMOVAL OF DIRECTORS WITH OR WITHOUT CAUSE;
DETERMINE BOARD SIZE PURSUANT TO SAUER'S BYLAWS
RECOMMENDATION OF SAUER BOARD OF DIRECTORS
The Sauer board of directors has unanimously approved the amendment of
Sauer's Certificate of Incorporation to (a) remove the classification of the
Sauer board of directors and allow for the removal of directors with or without
cause by the holders of the majority of Sauer common stock entitled to vote for
the election of directors and (b) provide that the size of the Sauer board of
directors will be determined pursuant to Sauer's Bylaws.
REASON FOR REMOVING THE CLASSIFIED BOARD AND ALLOWING REMOVAL OF DIRECTORS WITH
OR WITHOUT CAUSE
The proposal to remove the classified board will result in all directors of
the Sauer board of directors standing for election annually. Pursuant to the
terms of the Holding Company Agreement, members of the Sauer board of directors
will be required to be removed with or without cause, which directly conflicts
with the existing provision contained in Sauer's Certificate of Incorporation
that states that a director may only be removed with cause. The concept of
removing a director only for cause was included in Sauer's Certificate of
Incorporation in connection with the inclusion of the provision relating to the
classification of the board of directors. The classification of the Sauer board
of directors, an anti-takeover corporate governance provision, is not meaningful
since, immediately after the closing of the Transaction, the Holding Company
will be, and, pursuant to the terms of the Holding Company Agreement, will
continue to be, the owner of the majority of shares of Sauer common stock
outstanding. Accordingly, a change of control of Sauer cannot take place without
the consent of the Holding Company. As a result of the execution of the Holding
Company Agreement, the Sauer board of directors believes that the provisions
contained in Sauer's Certificate of Incorporation relating to the classification
of the board of directors and allowing for removal of directors only with cause
are no longer necessary.
REASON FOR DETERMINING THE SIZE OF THE BOARD OF DIRECTORS PURSUANT TO THE BYLAWS
Pursuant to the terms of the Holding Company Agreement, Sauer's Bylaws will
be required to contain a provision providing for the approval of at least 80.0%
of the fully constituted Sauer board of directors to effect any increase or
decrease in the number of directors comprising the Sauer board of directors.
This provision directly conflicts with the existing provision contained in
Sauer's Certificate of Incorporation which only requires the affirmative vote of
a majority of the directors in office to effect any increase or decrease in the
number of directors comprising the Sauer board of directors. Accordingly,
Sauer's Certificate of Incorporation requires amendment.
VOTE REQUIRED
Adoption of the proposal to amend Sauer's Certificate of Incorporation to
(a) remove the classification of the board of directors and allow for the
removal of directors with or without cause by the holders of the majority of
Sauer common stock entitled to vote for the election of directors and
(b) provide that the size of the Sauer board of directors shall be determined
pursuant to Sauer's Bylaws requires the affirmative vote of the holders of 80.0%
of the outstanding shares of Sauer common stock.
64
MARKET AND DIVIDEND INFORMATION
SAUER
Sauer common stock is traded on the New York Stock Exchange and the
Frankfurt (Germany) Stock Exchange. As of February 9, 2000, there were
approximately 160 stockholders of record. Although exact information is
unavailable, Sauer also estimates that there are approximately 1,750 additional
beneficial owners of Sauer common stock, based upon the 1999 proxy solicitation.
Sauer currently pays a quarterly dividend of $0.07 per share. Sauer's
ability to pay dividends to its stockholders is effectively limited by certain
restrictive covenants contained in certain of its credit agreements.
The following table sets forth the high and low prices on the NYSE for Sauer
common stock since the commencement of trading on May 12, 1998, and the
quarterly cash dividends paid in 1998 and 1999 with respect to Sauer common
stock
HIGH LOW DIVIDEND
-------- -------- --------
FISCAL 1999
1st Quarter........................................ $10.38 $ 5.25 $0.07
2nd Quarter........................................ $11.58 $ 8.31 $0.07
3rd Quarter........................................ $17.13 $ 8.88 $0.07
4th Quarter........................................ $14.94 $ 8.94 $0.07
FISCAL 1998
1st Quarter........................................ N/A N/A $0.08
2nd Quarter........................................ $18.38 $13.25 $0.07
3rd Quarter........................................ $16.50 $ 7.56 $0.07
4th Quarter........................................ $10.00 $ 6.06 $0.07
On February 9, 2000, the last trading day before filing the proxy statement
with the SEC, Sauer common stock closed at $9.625 per share on the New York
Stock Exchange. On [-], 2000, the last trading day before the printing of this
proxy statement, Sauer common stock closed at $[-] per share on the NYSE.
THE DANFOSS FLUID POWER COMPANIES
The common stock of each of the Danfoss Fluid Power Companies has not been,
and is not currently, publicly traded. Accordingly, market prices are not
available. Additionally, prior to contribution of all of the outstanding shares
of common stock of the Danfoss Fluid Power Companies to the Holding Company,
from time to time, the Danfoss Fluid Power Companies paid cash dividends to
Danfoss, its direct parent.
ABSENCE OF DISSENTERS' RIGHTS
Holders of Sauer common stock do not have dissenters' rights or similar
rights for any matter to be acted on at the special meeting of stockholders
because the proposals do not involve a merger or consolidation.
65
THE SPECIAL MEETING OF STOCKHOLDERS
DESCRIPTION OF PROPOSALS AND RECOMMENDATION OF THE SAUER BOARD OF DIRECTORS
The Sauer board of directors has considered each of the proposals described
in this proxy statement and believes that each proposal is in the best interests
of Sauer and the Sauer stockholders.
THE SAUER BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH PROPOSAL
DESCRIBED IN THIS SECTION. YOUR PROXY, IF SIGNED AND RETURNED, WILL BE SO VOTED
UNLESS YOU SPECIFY OTHERWISE.
PROPOSAL TO ISSUE COMMON STOCK. Sauer stockholders will be asked at the
special meeting of stockholders to consider and approve the issuance of an
aggregate of 16,149,812 shares of Sauer common stock in connection with the
Transaction.
PROPOSAL TO AMEND SAUER'S CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF SAUER COMMON STOCK. Sauer stockholders will be
asked at the special meeting of stockholders to consider and approve amending
Sauer's Certificate of Incorporation to increase the number of authorized shares
of Sauer common stock by 30,000,000 shares from 45,000,000 shares to 75,000,000
shares.
PROPOSAL TO AMEND SAUER'S CERTIFICATE OF INCORPORATION TO REMOVE THE
CLASSIFIED BOARD AND ALLOW REMOVAL OF DIRECTORS WITH OR WITHOUT CAUSE; DETERMINE
BOARD SIZE PURSUANT TO SAUER'S BYLAWS. Sauer stockholders will be asked at the
special meeting of stockholders to consider and approve amending Sauer's
Certificate of Incorporation to (a) remove the classification of the board of
directors and allow for the removal of directors with or without cause by the
holders of the majority of Sauer common stock entitled to vote for the election
of directors and (b) provide that the size of the board of directors shall be
determined pursuant to Sauer's Bylaws.
STOCKHOLDER PROPOSALS
To permit Sauer and its stockholders to deal with stockholder proposals in
an informed and orderly manner, Sauer's Bylaws establish an advance notice
procedure. No stockholder proposals or other business may be brought before an
annual meeting of Sauer stockholders unless written notice of such proposal or
other business is received by the Secretary of Sauer at the address set forth on
page 69 of this proxy statement not less than 120 calendar days in advance of
the date that Sauer's proxy statement was released to stockholders in connection
with the previous year's annual meeting of Sauer stockholders. Such notice must
contain certain specified information concerning the matters to be brought
before the meeting as well as the stockholder submitting the proposal. For
Sauer's annual meeting in the year 2001, Sauer must receive this notice on or
before [-], 2000. A copy of the applicable provisions of Sauer's Bylaws may be
obtained, without charge, upon written request to the Secretary of Sauer at the
address set forth on page [-] of this proxy statement. Such proposals must
comply with certain rules and regulations promulgated by the SEC.
66
SUBSTANTIAL INTERESTS OF SAUER DIRECTORS AND OFFICERS
Pursuant to the Holding Company Agreement, the Murmann family and Danfoss
have agreed to cause the Holding Company to vote all shares of Sauer common
stock owned or controlled by the Holding Company in favor of the proposals.
Immediately prior to the closing of the Transaction, the Holding Company will
own or have the power to vote 10,362,500 shares of Sauer common stock (or
approximately 37.7% of the outstanding shares of Sauer common stock) and the
Murmann family will own and have the power to vote an additional 5,597,325
shares of Sauer common stock (or approximately 20.4% of the outstanding shares
of Sauer common stock). Accordingly, together, the Holding Company and the
Murmann family will control an additional 15,959,825 shares of Sauer common
stock (or approximately 58.0% of the outstanding shares of Sauer common stock).
However, the Murmann family, directors on the Sauer board of directors and
officers of Sauer do not have interests in the Transaction that are in addition
to their interests as Sauer common stockholders, if indeed such persons
beneficially own Sauer common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 14, 2000,
with respect to shares of common stock of Sauer that were owned beneficially by:
(i) each beneficial owner of more than 5% of the outstanding shares of common
stock; (ii) each of the directors; (iii) each of the executive officers of Sauer
named in the Summary Compensation table; and (iv) all executive officers and
directors of Sauer as a group.
NUMBER OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
BENEFICIAL OWNERS, DIRECTORS, AND EXECUTIVE OFFICERS OWNED(1)(2) SHARES
- ---------------------------------------------------- ---------------- -----------
Klaus Murmann & Co. KG(3)................................ 15,562,500(4)(5) 56.6%
Danfoss Murmann Holding A/S(6)........................... 15,261,500(7) 55.5%
Danfoss A/S(6)........................................... 15,261,500(7) 55.5%
K. Murmann Verwaltungsgesellschaft mbH(3)................ 10,662,500(4)(5) 38.8%
Sauer GmbH(3)............................................ 10,362,500(8) 37.8%
EMF Europaische Marketing und Finanzmanagement AG(3)..... 300,000 1.1%
Klaus H. Murmann, Director, Chairman and Chief Executive
Officer(3)............................................. 15,690,725(4)(5)(9) 57.1%
Hannelore Murmann(3)..................................... 15,829,600(4)(5)(9) 57.6%
Nicola Keim, Director(3)................................. 15,563,500(4)(5)(9)(10) 56.6%
Sven Murmann, Director(3)................................ 15,563,500(4)(5)(9)(10) 56.6%
Ulrike Murmann-Knuth(3).................................. 15,562,500(4)(5)(9) 56.6%
Jan Murmann(3)........................................... 15,562,500(4)(5)(9) 56.6%
Anja Murmann(3).......................................... 15,562,500(4)(5)(9) 56.6%
Brigitta Zoellner(3)..................................... 15,562,500(4)(5)(9) 56.6%
Christa Zoellner(3)...................................... 15,562,500(4)(5)(9) 56.6%
Tonio P. Barlage(11)..................................... 600,000(12) 2.2%
David L. Pfeifle, Director and Executive Vice
President.............................................. 282,200(13) 1.0%
67
NUMBER OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
BENEFICIAL OWNERS, DIRECTORS, AND EXECUTIVE OFFICERS OWNED(1)(2) SHARES
- ---------------------------------------------------- ---------------- -----------
Wolfgang P. Weisser, Vice President of Sales and
Marketing--Europe...................................... 123,500(14) *
Thomas K. Kittel, Vice President of Sauer-Sundstrand GmbH
& Co................................................... 279,800(14) 1.0%
Ole-Steen Andersen, Director Nominee..................... 0 *
Jorgen Clausen, Director Nominee......................... 58,000 *
Hans Kirk, Director Nominee.............................. 0 *
Johannes F. Kirchhoff, Director(11)...................... 1,400(10) *
Agustin A. Ramirez, Director(11)......................... 14,000(10) *
Richard M. Schilling, Director(11)....................... 6,000(10) *
All directors and executive officers as a group
(13 persons)........................................... 17,345,175(15) 63.1%
- ------------------------
* Represents less than 1%.
(1) Unless otherwise indicated in the following notes, each of the stockholders
named in this table has sole voting and investment power with respect to the
shares shown as beneficially owned.
(2) This table includes the number of shares of Restricted Common Stock held by
certain executive officers and issued pursuant to Sauer's 1998 Long-Term
Incentive Plan. The number of shares of Restricted Common Stock held by an
executive officer is indicated in the following notes. The shares of
Restricted Common Stock of Sauer are subject to a substantial risk of
forfeiture, but the holders possess voting and dividend rights.
(3) The mailing address for each of these entities and persons is c/o
Sauer-Sundstrand GmbH, Krokamp 35, 24539 Neumunster, Federal Republic of
Germany.
(4) These shares include 10,362,500 shares owned directly by Sauer GmbH, a
German limited liability company. As a result of its 100% ownership of Sauer
GmbH, K. Murmann Verwaltungsgesellschaft mbH, a German limited liability
company, has shared voting and dispositive power over these shares. As a
result of its 100% ownership of K. Murmann Verwaltungsgesellschaft mbH,
Klaus Murmann & Co. KG, a German partnership, also has shared voting and
dispositive power over these shares. Klaus H. Murmann and Hannelore Murmann,
as the general partners of Klaus Murmann & Co. KG, and Nicola Keim, Sven
Murmann, Ulrike Murmann-Knuth, Anja Murmann, Jan Murmann, Brigitta Zoellner,
and Christa Zoellner, as limited partners of Klaus Murmann & Co. KG who
share the power to vote on investment decisions, also have shared voting and
dispositive power over these shares. K. Murmann Verwaltungsgesellschaft mbH,
Klaus Murmann & Co. KG, Klaus H. Murmann, Hannelore Murmann, Nicola Keim,
Sven Murmann, Ulrike Murmann-Knuth, Anja Murmann, Jan Murmann, Brigitta
Zoellner, and Christa Zoellner each disclaim beneficial ownership of all
10,362,500 of these shares.
(5) These shares include 300,000 shares owned directly by EMF Europaische
Marketing and Finanzmanagement AG, a German corporation. As a result of its
99.99% interest in Sauer GmbH & Co. Hydraulik KG, a German limited
partnership, which is the 100% owner of EMF Europaische Marketing and
Finanzmanagement AG, K. Murmann Verwaltungsgesellschaft mbH has shared
voting and dispositive power over these shares. As a result of its 100%
ownership of K. Murmann Verwaltungsgesellschaft mbH, Klaus Murmann & Co. KG
has shared voting and dispositive power over these shares. Klaus H. Murmann
and Hannelore Murmann, as the general
68
partners of Klaus Murmann & Co. KG, and Nicola Keim, Sven Murmann, Ulrike
Murmann-Knuth, Anja Murmann, Jari Murmann, Brigitta Zoellner, and Christa
Zoellner, as limited partners of Klaus Murmann & Co. KG who share the power
to vote on investment decisions, each have shared voting and dispositive
power over these shares. K. Murmann Verwaltungsgesellschaft mbH, Klaus
Murmann & Co. KG, Klaus H. Murmann, Hannelore Murmann, Nicola Keim, Sven
Murmann, Ulrike Murmann-Knuth, Anja Murmann, Jan Murmann, Brigitta Zoellner,
and Christa Zoellner each disclaim beneficial ownership of all 300,000 of
these shares.
(6) The mailing address for each of these entities is DK-6430 Nordborg, Denmark.
(7) These shares include 10,361,500 shares owned directly by Sauer GmbH, as to
which an irrevocable voting proxy (the "Voting Proxy") has been granted to
the Holding Company. The Holding Company has sole voting power, but no
dispositive power (sole or shared), over these shares. Danfoss has shared
voting and dispositive power over these shares. These shares also include
4,900,000 shares owned directly by Klaus Murmann & Co. KG, as to which the
Holding Company and Danfoss have shared voting and dispositive power. The
Holding Company disclaims beneficial ownership of 4,900,000 of these shares.
Danfoss disclaims beneficial ownership of all 15,261,500 of these shares.
(8) These shares are owned directly by Sauer GmbH but, pursuant to the Voting
Proxy, Sauer GmbH has neither sole nor shared voting power over 10,361,500
of these shares. Sauer GmbH has sole voting power over 1,000 of these shares
and sole dispositive power over all 10,362,500 of these shares.
(9) These shares include 4,900,000 shares owned directly by Klaus Murmann & Co.
KG, Klaus H. Murmann and Hannelore Murmann, as the general partners of Klaus
Murmann & Co. KG, and Nicola Keim, Sven Murmann, Ulrike Murmann-Knuth, Anja
Murmann, Jan Murmann, Brigitta Zoellner, and Christa Zoellner, as limited
partners of Klaus Murmann & Co. KG who share the right to vote on investment
decisions, each have shared voting and dispositive power over these shares.
Klaus H. Murmann, Hannelore Murmann, Nicola Keim, Sven Murmann, Ulrike
Murmann-Knuth, Anja Murmann, Jan Murmann, Brigitta Zoellner, and Christa
Zoellner each disclaim beneficial ownership of all 4,900,000 of these
shares.
(10) Includes 1,000 shares of Restricted Common Stock.
(11) Effective March 31, 2000, Mr. Barlage has resigned as a director and
President and Chief Operating Officer of Sauer, positions he held throughout
1999. Sauer has entered into an Agreement to purchase all of the shares of
Common Stock held by Mr. Barlage and his spouse.
(12) Includes 250,000 shares held by Mr. Barlage's spouse.
(13) Includes 5,400 shares of Restricted Common Stock.
(14) Includes 3,600 shares of Restricted Common Stock.
(15) Includes 28,700 shares of Restricted Common Stock and stock owned by
Mr. Barlage's spouse and the spouses and children of other executive
officers.
DESCRIPTION OF OTHER MATERIAL CONTRACTS BETWEEN SAUER
AND THE HOLDING COMPANY OR SAUER AND THE DANFOSS FLUID POWER COMPANIES
Other than the Stock Exchange Agreement, there are no material contracts
between Sauer and the Holding Company or Sauer and the Danfoss Fluid Power
Companies.
69
ADDITIONAL INFORMATION
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements, including, most
importantly, information concerning possible or assumed future results of
operations of Sauer and statements preceded by, followed by or that include the
words "may," "believes," "expects," "anticipates" or the negation thereof, or
similar expressions. The achievement of the outcomes described in such
forward-looking statements is subject to both known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the mobile hydraulics industry generally, and of Sauer in
particular, to be materially different from any outcomes expressed or implied by
such forward-looking statements. For those statements, Sauer claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Several important factors, in
addition to those discussed under "SPECIAL CONSIDERATIONS" herein and elsewhere
in this document and in the documents which are incorporated by reference, could
affect the future results of Sauer, and could cause those results to differ
materially from those expressed in the forward-looking statements contained
herein. Such additional factors include, among other things, future economic,
competitive and regulatory conditions, demographic trends, financial market
conditions and future business decisions of Sauer and its competitors, all of
which are difficult or impossible to predict accurately, and many of which are
beyond the control of Sauer.
WHERE YOU CAN FIND MORE INFORMATION
Sauer files annual, quarterly and special reports, proxy statements and
other information with the SEC. The reports, statements or other information
filed by Sauer with the SEC may be inspected at the SEC's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Sauer's SEC filings are also available to the public from commercial document
retrieval services and at the internet web site maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information should
also be available for inspection at the offices of the New York Stock Exchange.
The SEC allows Sauer to "incorporate by reference" information into this
proxy statement, which means that Sauer can disclose important information to
you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this proxy
statement except for any information superceded by information contained
directly in this proxy statement. This proxy statement incorporates by reference
the documents set forth below that Sauer has previously filed with the SEC.
These documents contain important information about Sauer and its finances.
SAUER SEC FILINGS PERIOD
- ----------------- ------
Sauer Annual Report on Form 10-K Year ended December 31, 1998
Sauer Quarterly Report on Form 10-Q Quarter ended April 4, 1999
Quarter ended July 4, 1999
Quarter ended October 3,1999
Sauer Registration Statement on Form 8-A Dated May 7, 1998
Sauer Schedule 14-A Dated March 26, 1999
Sauer is also incorporating by reference additional documents it files with
the SEC from the date of this proxy statement to the date of the special
meeting. Any statement in this document or in a document incorporated or deemed
to be incorporated by reference in this document will be deemed to be modified
or superseded for purposes of this document to the extent that a statement
contained in this document or in any other subsequently filed document which
also is or is deemed to be
70
incorporated by reference in this document modifies or supersedes such
statement. Any such statement so modified or superseded will not be deemed to
constitute a part of this document, except as so modified or superseded.
If you are a stockholder, Sauer may have already sent you some of the
documents incorporated by reference, but you can obtain any document
incorporated by reference through Sauer, the SEC or the SEC's internet web site
as described above. Documents incorporated by reference are available from Sauer
without charge, excluding all exhibits unless Sauer has specifically
incorporated by reference an exhibit in this proxy statement. Stockholders may
obtain documents incorporated by reference in this proxy statement by requesting
them in writing to us at the following address or by telephone:
Sauer Inc.
2800 East 13th
Street
Ames, Iowa 50010
Attn: Kenneth D.
McCuskey
Tel: 1-515-239-6364
Fax: 1-515-239-6443
If you would like to request documents from Sauer, please do so by [-], 2000
to receive them before the special meeting of stockholders.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE PROPOSALS ADDRESSED IN THIS
PROXY STATEMENT. SAUER HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY
STATEMENT IS DATED [-], 2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT
DATE, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS WILL NOT CREATE
ANY IMPLICATION TO THE CONTRARY.
71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
SAUER INC. AND SUBSIDIARIES
AND
INDEX TO COMBINED FINANCIAL STATEMENTS
FOR
THE DANFOSS FLUID POWER GROUP
PAGE
--------
SAUER INC.
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998.......................... F-3
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Statements of Income for the Thirteen Weeks and
Thirty Nine Weeks Ended September 27, 1998 and October 3,
1999...................................................... F-26
Consolidated Balance Sheets as of December 31, 1998 and
October 3, 1999........................................... F-27
Consolidated Statements of Cash Flows for the Thirty Nine
Weeks Ended September 27, 1998 and October 3, 1999........ F-28
Notes to Consolidated Financial Statements.................. F-29
DANFOSS FLUID POWER GROUP
AUDITED FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
Independent Auditors' Report................................ F-33
Combined Statements of Income for the year ended September
30, 1996, the fifteen months ended December 31, 1997, the
year ended December 31, 1998 (audited) and the six month
periods ending June 30, 1998 and 1999 (unaudited)......... F-34
Combined Statements of Net Assets as of December 31, 1997
and 1998 (audited) and June 30, 1999 (unaudited).......... F-35
Combined Statements of Cash Flows for the year ended
September 30, 1996, the fifteen months ended December 31,
1997, the year ended December 31, 1998 (audited) and the
six months ended June 30, 1998 and 1999 (unaudited)....... F-36
Notes to Combined Statements................................ F-37
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Sauer Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of SAUER INC.
(a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and 1998, and
the related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SAUER INC. AND SUBSIDIARIES as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 17, 1999
F-2
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1996 1997 1998
----------- ----------- -----------
NET SALES............................................. $ 467,566 $ 535,173 $ 564,524
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales....................................... 354,034 404,065 428,311
Selling, general and administrative................. 51,856 52,575 54,513
Research and development............................ 20,505 20,655 22,089
----------- ----------- -----------
Total costs and expenses........................ 426,395 477,295 504,913
----------- ----------- -----------
Operating income................................ 41,171 57,878 59,611
----------- ----------- -----------
NONOPERATING INCOME (EXPENSES):
Interest expense.................................... (6,523) (8,305) (9,244)
Interest income..................................... 564 698 430
Royalty income...................................... 1,156 1,150 986
Other, net.......................................... (584) 144 (576)
----------- ----------- -----------
Nonoperating expenses, net...................... (5,387) (6,313) (8,404)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST................................... 35,784 51,565 51,207
PROVISION FOR INCOME TAXES............................ (10,243) (15,944) (15,379)
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST....................... 25,541 35,621 35,828
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES.............................. (6,643) (8,492) (9,494)
----------- ----------- -----------
Net income...................................... $ 18,898 $ 27,129 $ 26,334
=========== =========== ===========
Basic and diluted net income per
common share........................................ $ 0.78 $ 1.12 $ 1.01
=========== =========== ===========
Weighted average basic shares outstanding............. 24,225,000 24,225,000 26,148,288
=========== =========== ===========
Weighted average diluted shares outstanding........... 24,225,000 24,225,000 26,150,302
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1997 1998
-------- --------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,363 $ 8,891
Accounts receivable (net of allowance for doubtful
accounts of $3,195 and $3,166 in 1997 and 1998,
respectively)........................................... 77,170 73,661
Inventories............................................... 89,031 89,195
Other current assets...................................... 9,557 9,984
-------- --------
Total current assets.................................... 183,121 181,731
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 191,690 262,527
-------- --------
OTHER ASSETS:
Intangible assets, net.................................... 2,964 3,769
Deferred income taxes..................................... 6,463 2,328
Other..................................................... 4,497 9,416
-------- --------
Total other assets...................................... 13,924 15,513
-------- --------
$388,735 $459,771
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts......................... $ 60,278 $ 41,767
Long-term debt due within one year........................ 952 2,398
Accounts payable.......................................... 46,392 38,271
Accrued salaries and wages................................ 6,385 7,683
Accrued warranty.......................................... 9,398 8,601
Other accrued liabilities................................. 15,897 12,884
-------- --------
Total current liabilities............................... 139,302 111,604
-------- --------
LONG-TERM DEBT.............................................. 75,198 106,862
-------- --------
OTHER LIABILITIES:
Long-term pension liability............................... 28,959 33,044
Postretirement benefits other than pensions............... 12,784 13,608
Deferred income taxes..................................... 4,018 4,746
Other..................................................... 10,374 5,419
-------- --------
Total other liabilities................................. 56,135 56,817
-------- --------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES... 32,799 35,584
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share,
Authorized 45,000,000 shares in 1997 and 1998;
issued 24,900,000 in 1997 and 28,072,050 in 1998;
Outstanding 24,225,000 in 1997 and 27,397,050 in 1998... 249 281
Additional paid-in capital................................ 75,098 120,092
Retained earnings......................................... 12,773 31,416
Accumulated other comprehensive income.................... (119) 1,813
Unamortized restricted stock compensation................. -- (1,998)
Common stock in treasury (at cost), 675,000 shares in 1997
and 1998................................................ (2,700) (2,700)
-------- --------
Total stockholders' equity.................................. 85,301 148,904
-------- --------
$388,735 $459,771
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
ACCUMULATED UNAMORTIZED COMMON
NUMBER OF ADDITIONAL RETAINED OTHER RESTRICTED STOCK
SHARES COMMON PAID-IN EARNINGS COMPREHENSIVE STOCK IN
OUTSTANDING STOCK CAPITAL (DEFICIT) INCOME COMPENSATION TREASURY TOTAL
----------- -------- ---------- --------- ------------- ------------ -------- --------
YEAR ENDED DECEMBER 31,
1996:
Beginning balance........ 24,225,000 $249 $ 75,098 $(17,750) $4,594 $ -- $(2,700) $ 59,491
Comprehensive income:
Net income............. -- -- -- 18,898 -- -- -- --
Pension adjustment..... -- -- -- -- (92) -- -- --
Translation
adjustment........... -- -- -- -- 329 -- -- --
Total comprehensive
income................. -- -- -- -- -- -- -- 19,135
Cash dividends, ($.32 per
share)................. -- -- -- (7,752) -- -- -- (7,752)
---------- ---- -------- -------- ------ ------- ------- --------
Ending Balance....... 24,225,000 249 75,098 (6,604) 4,831 -- (2,700) 70,874
YEAR ENDED DECEMBER 31,
1997:
Comprehensive income:
Net income............. -- -- -- 27,129 -- -- -- --
Pension adjustment..... -- -- -- -- (177) -- -- --
Translation
Adjustment........... -- -- -- (4,773)
Total comprehensive
income................. -- -- -- -- -- -- -- 22,179
Cash dividends, ($.32 per
share)................. -- -- -- (7,752) -- -- -- (7,752)
---------- ---- -------- -------- ------ ------- ------- --------
Ending balance....... 24,225,000 249 75,098 12,773 (119) -- (2,700) 85,301
YEAR ENDED DECEMBER 31,
1998:
Comprehensive income:
Net income............. -- -- -- 26,334 -- -- -- --
Pension adjustment..... -- -- -- -- 157 -- -- --
Translation
adjustment........... -- -- -- -- 1,775 -- -- --
Total comprehensive
income................. -- -- -- -- -- -- -- 28,266
Sale of common stock
under initial public
offering, net of
expenses............... 3,000,000 30 48,070 -- -- -- -- 48,100
Restricted stock grant... 172,050 2 2,697 -- -- (2,699) -- --
Amortization of
restricted stock
compensation........... -- -- -- -- -- 701 -- 701
Cash dividends, ($.29 per
Share)................. -- -- -- (7,691) -- -- -- (7,691)
Purchase of Neumunster
Facility............... (5,773) -- (5,773)
---------- ---- -------- -------- ------ ------- ------- --------
Ending balance....... 27,397,050 $281 $120,092 $ 31,416 $1,813 $(1,998) $(2,700) $148,904
========== ==== ======== ======== ====== ======= ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS)
1996 1997 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 18,898 $ 27,129 $ 26,334
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 24,830 25,835 30,635
Minority interest in income of Consolidated companies... 6,643 8,492 9,494
(Increase) decrease in working capital--
Accounts receivable, net.............................. (428) (16,620) 5,723
Inventories........................................... 4,719 (17,260) 2,514
Accounts payable...................................... (7,126) 13,174 (8,915)
Accrued liabilities................................... 2,930 (6,394) (2,988)
Other................................................. (2,796) 8,388 738
-------- -------- --------
Net cash provided by operating activities........... 47,670 42,744 63,535
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (56,284) (66,750) (98,582)
Purchase of minority interest............................. -- (3,959) (693)
Proceeds from sales of property, plant and equipment...... 86 398 325
-------- -------- --------
Net cash used in investing activities............... (56,198) (70,311) (98,950)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on notes payable and bank
overdrafts.............................................. (18,067) 10,555 (11,363)
Net borrowings of long-term debt.......................... 36,647 25,171 13,916
Sale of common stock...................................... -- -- 48,100
Cash dividends............................................ (7,752) (7,752) (7,691)
Distribution to minority interest partners................ (1,560) (4,623) (7,885)
-------- -------- --------
Net cash provided by financing activities........... 9,268 23,351 35,077
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES............................. (524) (450) 1,866
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the year................... 216 (4,666) 1,528
Beginning balance......................................... 11,813 12,029 7,363
-------- -------- --------
Ending balance...................................... $ 12,029 $ 7,363 $ 8,891
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................. $ 6,826 $ 8,107 $ 9,447
Income taxes paid......................................... $ 7,625 $ 18,495 $ 14,846
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
During 1998 the Company purchased the real estate and
building of its main facility in Germany for $23,470. In
Conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired....................... $ 23,470
Cash paid for the real estate and building.......... (15,680)
--------
Liabilities assumed............................. $ 7,790
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(1) THE COMPANY AND ITS OPERATIONS:
Sauer Inc., a U.S. Delaware corporation, and subsidiaries (the "Company") is
a leading international manufacturer of components and systems that generate,
transmit and control fluid power in mobile equipment. The Company's products are
used by original equipment manufacturers of mobile equipment, including
construction, agricultural and turf care equipment. The Company's products are
sold throughout the world either directly, or through distributors.
The Company, which is a holding company, conducts its business in North
America as Sauer-Sundstrand Company (the "U.S. Operating Company"), and in
Germany as Sauer-Sundstrand GmbH & Co. (the "German Operating Company"). The
Company also has manufacturing plants in the United Kingdom, Italy, Slovakia,
and China, as well as sales companies in other locations. Sauer-Sundstrand GmbH
(the "German Holding Company"), which is wholly owned by the Company, functions
as a management and holding company on behalf of the Company.
The Company is majority owned by Mr. Klaus H. Murmann and certain of his
family members, directly and through Sauer GmbH and other wholly owned
companies. Sauer GmbH and Sauer GmbH and Co. Hydraulik K.G. ("Sauer Hydraulik")
("Murmann Limited Partners") hold limited partnership interests (the "Murmann
Limited Partnership Interests") in the German Operating Company as described
below. Sauer GmbH and Sauer Hydraulik, a German corporation and a German
partnership, respectively, are wholly owned by the Murmann family.
(2) BUSINESS VENTURES:
During 1991, the U.S. Operating Company and Agri-Fab, Inc. formed a business
venture organized as a U.S. limited partnership under the name Hydro-Gear
Limited Partnership ("Hydro-Gear"). The U.S. Operating Company contributed
inventories and machinery and equipment with a carrying amount of $4,066 for a
60% interest in Hydro-Gear. The principal business of Hydro-Gear is the
manufacture, sale, and distribution of hydrostatic and axle products to the turf
care market.
On November 29, 1994, the German Holding Company and Povazske Strojarne,
a.s. formed a business venture organized as a Slovakian corporation under the
name Sauer Mechanika, a.s. The German Holding Company contributed approximately
$6,000 of cash, technology, and machinery and equipment for a 65% interest in
Sauer Mechanika. During 1997, the German Holding Company purchased the 35%
interest held by its partner, Povazske Strojarne, a.s., for $3,959. The
principal business of Sauer Mechanika is the manufacture of gear boxes for
transit mixers.
On February 16, 1995, the Company and Shanghai Hydraulics and Pneumatics
formed a business venture organized as a Chinese Limited Liability Foreign
Investment Enterprise under the name Sauer Shanghai Hydraulic Transmission
Company, Ltd. ("SHC"). The Company contributed $5,400 of cash, machinery and
equipment and technology for a 50% interest in SHC. Operations commenced during
1996. During 1997, the Company contributed an additional $2,700 of cash to
increase its interest in SHC to 60%. The principal business of SHC is the
manufacture, sale, and distribution of high power hydrostatic transmissions to
the Chinese market.
On December 30, 1996, the German Holding Company and ZTS, a.s. formed a
business venture organized as a Slovakian corporation under the name Sauer ZTS,
a.s. The German Holding Company
F-7
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(2) BUSINESS VENTURES: (CONTINUED)
contributed approximately $5,800 of cash and technology for a 65% interest in
Sauer ZTS, a.s. During 1998, the Company contributed an additional $693 to
increase its interest in Sauer ZTS, a.s. to 80%. The principal business of Sauer
ZTS, a.s. is the manufacture of high power hydrostatic transmissions.
On October 29, 1998, the Company and the U.S. Operating Company formed a
business venture organized as a Brazilian limited liability company under the
name Sauer-Sundstrand Ltda., (SAS Ltda.). On December, 2, 1998, the Company, the
U.S. Operating Company and SAS Ltda. entered into an agreement with the
Company's Brazilian licensee, Power Transmission Industries Overseas Corporation
(PTI) and certain parties related to PTI to purchase the assets and assume
liabilities of PTI for approximately $1,500. As a result of this agreement, the
license with PTI was terminated and SAS Ltda. acquired machinery and equipment,
inventory, goodwill and other intangibles. The principal business of SAS Ltda.
is the sale and distribution of hydrostatic transmissions and gear pumps and
motors to the South American market.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION--
The accounts of the Company are stated in accordance with generally accepted
accounting principles in the U.S. The consolidated financial statements include
the accounts of Sauer Inc. and subsidiaries on a consolidated basis for all
periods presented. All significant intercompany balances and transactions have
been eliminated in consolidation.
Sauer Inc. is the general partner and 80% owner of the German Operating
Company. The Murmann Limited Partners have certain rights which include an
annual cash payment equal to 7.9% of the income of Sauer Inc. and subsidiaries
before taxes and the Murmann Limited Partnership Interests and the right to
consent to certain actions of the German Operating Company. However, the Company
has the right to elect by the action of its independent directors or the holders
of its common stock other than the Murmann family, to terminate the Murmann
Limited Partnership Interests in exchange for 2,250,000 shares of common stock
of Sauer Inc. As such, the Company controls and consolidates the German
Operating Company. The Murmann Limited Partners have no other property rights in
the assets of the Company, the U.S. Operating Company, the German Operating
Company or any other related entity.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NEW ACCOUNTING PRINCIPLES--
During 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." Total comprehensive income,
consisting of net income and adjustments for minimum pension liability and
foreign currency translation is disclosed on the face of the Statements of
Stockholders' Equity and Comprehensive Income.
The Company also adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises the disclosures made
with respect to pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position, ("SOP"), 98-5, "Reporting on the Costs
of Start-up Activities," which requires that costs of start-up activities be
expensed as incurred. These costs are defined, among others, as one-time
activities relating to opening a new facility, introducing a new product or
initiating a new process in an existing facility. The Company currently expenses
these types of costs and therefore, does not believe that this statement will
have a material impact on the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999, which requires an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and to measure those instruments at fair value. As the Company does not
currently have any such instruments outstanding, the Company does not believe
that this statement will have any material effect on the Company's financial
position or results of operations.
RECLASSIFICATION--
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
MINORITY INTEREST--
Minority interest in net assets and income reflected in the accompanying
consolidated financial statements consists of:
(a) A minority interest held by Agri-Fab, Inc. in a U. S. limited
partnership for 1996, 1997 and 1998.
(b) The Murmann Limited Partners, as holders of limited partnership
interests, in the results of the German Operating Company equal to 8.5% of
the income of Sauer Inc. and subsidiaries before taxes and the Murmann
Limited Partnership Interests for 1996 and 1997 and 7.9% for 1998.
(c) A minority interest held by Povazske Strojarne, a.s. in a Slovakian
corporation for 1996 and 1997.
F-9
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(d) A minority interest held by Shanghai Hydraulics and Pneumatics in a
Chinese equity business venture for 1996, 1997 and 1998.
(e) A minority interest held by ZTS, a.s. in a Slovakian corporation for
1997 and 1998.
The following tables set forth the components of minority interest in the
consolidated balance sheets and consolidated statements of income:
MINORITY INTEREST REFLECTED IN CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
1997 1998
-------- --------
Hydro-Gear................................................ $15,216 $18,928
German Operating Company.................................. 11,203 11,334
SHC....................................................... 3,438 3,929
Sauer ZTS, a.s............................................ 2,942 1,393
------- -------
Total................................................... $32,799 $35,584
======= =======
MINORITY INTEREST (INCOME) LOSS REFLECTED IN CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
Hydro-Gear........................................ $(4,345) $(6,339) $(7,631)
German Operating Company.......................... (2,707) (4,001) (3,573)
Sauer Mechanika, a.s.............................. 168 291 --
SHC............................................... 241 1,480 1,319
Sauer ZTS, a.s.................................... -- 77 391
------- ------- -------
Total........................................... $(6,643) $(8,492) $(9,494)
======= ======= =======
TRANSLATION OF FOREIGN CURRENCIES--
Assets and liabilities of consolidated foreign subsidiaries are translated
into U. S. dollars at exchange rates in effect at year-end, while revenues and
expenses are translated at average exchange rates prevailing during the year.
The resulting translation adjustments are included in stockholders' equity.
Gains or losses on transactions denominated in foreign currencies and the
related tax effects, which are not material, are reflected in net income.
CASH AND CASH EQUIVALENTS--
Cash equivalents are considered by the Company to be all highly liquid
instruments purchased with original maturities of three months or less.
F-10
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES--
Inventories are valued at the lower of cost or market, using various cost
methods, and include the cost of material, labor and factory overhead. The
percentage of year end inventory using average cost, last-in, first-out
("LIFO"), and first-in, first-out ("FIFO") was 61%, 32% and 7%, respectively,
for 1997 and 61%, 33% and 6%, respectively, for 1998.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION--
Property, plant and equipment are stated at historical cost, net of
accumulated depreciation. Assets under capital lease are stated at the lower of
fair market value or the present value of future minimum lease payments, net of
accumulated depreciation. Depreciation is generally computed on the
straight-line method for building equipment and buildings over 10-37 years and
for machinery and equipment over 3-12 years. Additions and improvements that
substantially extend the useful life of a particular asset are capitalized.
Repair and maintenance costs ($13,110, $15,184 and $15,410 in 1996, 1997 and
1998, respectively) are charged to expense. Upon the sale of property, plant and
equipment, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in nonoperating income or expense.
INTANGIBLE ASSETS AND AMORTIZATION--
Intangible assets include goodwill, patents and other intangibles. These
assets are stated at cost, net of accumulated amortization, and are being
amortized over the lesser of 20 years or the specific remaining identifiable
life on a straight-line basis. Goodwill was $1,201 and $2,294 as of
December 31, 1997 and 1998, net of accumulated amortization of $4,950 and
$6,409, respectively. Amortization of goodwill and other intangibles was $2,449
for 1996, $756 for 1997 and $644 for 1998.
IMPAIRMENT OF LONG-LIVED ASSETS--
Consistent with the requirements of SFAS 121, the Company periodically
assesses whether events or circumstances have occurred that may indicate the
carrying value of its long-lived tangible and intangible assets may not be
recoverable. The carrying value of long-lived tangible and intangible assets is
evaluated based on the expected future non-discounted operating cash flows. When
such events or circumstances indicate the carrying value of an asset may be
impaired, the Company recognizes an impairment loss. Based upon its most recent
analysis, the Company believes that no impairments existed at December 31, 1998.
REVENUE RECOGNITION--
Net sales are recorded at the time of shipment to customers along with
related expenses including estimates for warranty expense.
F-11
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES--
The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred taxes when it
is more likely than not that a tax benefit will not be realized.
(4) BASIC AND DILUTED PER SHARE DATA:
Basic and diluted net income per common share data is as follows:
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------------ ------------------------------------
NET INCOME NET INCOME
NET INCOME SHARES PER SHARE NET INCOME SHARES PER SHARE
---------- ---------- ---------- ---------- ---------- ----------
Basic net income per share........ $27,129 24,225,000 $1.12 $26,334 26,148,288 $1.01
Effect of Dilutive Securities:
Restricted stock................ -- -- -- -- 2,014 --
------- ---------- ----- ------- ---------- -----
Diluted net income per share.... $27,129 24,225,000 $1.12 $26,334 26,150,302 $1.01
======= ========== ===== ======= ========== =====
Basic net income per common share is based on the weighted average number of
common shares outstanding in each year. Diluted net income per common share
assumes that outstanding common shares were increased by shares issuable upon
exercise of those restricted stock shares for which market price exceeds
exercise price, if any, less shares which could have been purchased by the
Company with the related proceeds. Shares resulting in an antidilutive effect
are excluded in accordance with SFAS No. 128. There were no restricted stock
shares outstanding during 1997.
(5) INVENTORIES:
The composition of inventories is as follows:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Raw materials............................................. $41,851 $40,621
Work in process........................................... 13,101 14,102
Finished goods and parts.................................. 40,461 41,574
LIFO allowance............................................ (6,382) (7,102)
------- -------
Total................................................... $89,031 $89,195
======= =======
F-12
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(6) PROPERTY, PLANT AND EQUIPMENT:
The cost and related accumulated depreciation of property, plant and
equipment are summarized as follows:
DECEMBER 31,
---------------------
1997 1998
--------- ---------
Cost--
Land and improvements............................... $ 3,771 $ 4,597
Buildings and improvements.......................... 43,527 64,908
Machinery and equipment............................. 307,364 380,562
Construction in progress............................ 27,485 30,506
Plant and equipment under capital lease............... 638 698
--------- ---------
Total cost........................................ 382,785 481,271
Less--Accumulated depreciation........................ (191,095) (218,744)
--------- ---------
Net property, plant and equipment................. $ 191,690 $ 262,527
========= =========
Depreciation expense for 1996, 1997 and 1998 was $22,381, $25,079, and
$29,991, respectively.
(7) PENSION BENEFITS:
The Company has noncontributory defined benefit plans covering substantially
all employees. The benefits under these plans are based primarily on years of
service and compensation levels. The Company's funding policy outside of Germany
is to contribute annually an amount that falls within the range determined to be
deductible for federal income tax purposes. The net pension liabilities
reflected in the accompanying consolidated balance sheets result principally
from unfunded pension plans of the Company's operations in Germany, where it is
common practice to fund pension obligations at the time payments are made to
retirees.
Pension expense for 1996, 1997 and 1998 for these defined benefit plans
consists of the following components:
1996 1997 1998
-------- -------- --------
Service cost...................................... $ 2,846 $ 3,042 $ 3,307
Interest cost..................................... 6,400 6,562 6,774
Expected return on plan assets.................... (4,578) (6,395) (5,277)
Amortization of prior service cost................ 321 318 454
Amortization of net loss.......................... 166 1,428 93
Amortization of transition obligation............. (296) (285) (287)
------- ------- -------
Net pension expense........................... $ 4,859 $ 4,670 $ 5,064
======= ======= =======
F-13
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(7) PENSION BENEFITS: (CONTINUED)
The following table sets forth the plans' funded status as of the respective
balance sheet dates:
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------- -------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
Benefit obligation at January 1............... $(15,371) $(70,312) $(15,919) $(75,842)
Service cost.................................. (869) (2,167) (772) (2,509)
Interest cost................................. (1,278) (5,278) (1,122) (5,756)
Plan participant contributions................ (343) -- (373) --
Plan amendments............................... -- -- -- (1,449)
Actuarial gain (loss)......................... 1,369 (2,297) (494) (2,995)
Benefit payments.............................. 573 4,264 424 2,539
Effect of exchange rate changes............... -- (52) -- (1,700)
-------- -------- -------- --------
Benefit obligation at December 31............. (15,919) (75,842) (18,256) (87,712)
-------- -------- -------- --------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1........ 20,127 45,167 22,560 50,527
Actual return on plan assets.................. 1,948 6,915 1,714 6,256
Employer contributions........................ 715 2,143 779 2,674
Plan participants' contributions.............. 343 -- 373 --
Benefit payments.............................. (573) (3,698) (424) (1,933)
-------- -------- -------- --------
Fair value of plan assets at December 31...... 22,560 50,527 25,002 57,524
-------- -------- -------- --------
Funded status at December 31.................. 6,641 (25,315) 6,746 (30,188)
Unrecognized prior service cost............... 567 1,285 518 2,335
Unrecognized actuarial gain................... (3,816) (5,030) (2,912) (4,994)
Unrecognized net transition obligation........ (1,149) -- (862) --
-------- -------- -------- --------
Net amount recognized......................... $ 2,243 $(29,060) $ 3,490 $(32,847)
-------- -------- -------- --------
Amounts recognized in the balance sheet as of December 31:
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------- -------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
Long-term pension asset (liability)........... $2,243 $(28,959) $3,490 $(33,044)
Current pension liability..................... -- (738) -- (984)
Intangible asset.............................. -- 71 -- 869
Other accumulated comprehensive income........ -- 566 -- 312
------ -------- ------ --------
Net amount recognized......................... $2,243 $(29,060) $3,490 $(32,847)
------ -------- ------ --------
F-14
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(7) PENSION BENEFITS: (CONTINUED)
Significant assumptions used in determining pension expense and related
pension obligations are as follows:
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
Discount rates--
United States............................................ 7.5% 7.5% 7.0%
Germany.................................................. 7.5 7.5 6.5
United Kingdom........................................... 9.0 9.0 7.0
Rates of increase in compensation levels--
United States............................................ 5.0 5.0 4.5
Germany.................................................. 3.5 3.5 2.5
United Kingdom........................................... 8.0 8.0 5.0
Expected long-term rate of return on assets--
United States............................................ 8.5 8.5 8.5
United Kingdom........................................... 9.0 9.0 7.0
The plans' assets consist principally of short-term U.S. Government
securities, UK Government securities, equity securities, fixed income contracts
and insurance contracts.
(8) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company provides health benefits for retired employees and certain
dependents when the employee becomes eligible for these benefits by satisfying
plan provisions which include certain age and/or service requirements. Health
benefits for retirees of non-U.S. operations, where applicable, are provided
through government-sponsored plans to which contributions by the Company are
required. The health benefit plans covering substantially all U.S. employees are
contributory, with contributions reviewed annually and adjusted as appropriate.
These plans contain other cost-sharing features such as deductibles and
coinsurance. The Company does not pre-fund these plans and has the right to
modify or terminate any of these plans in the future.
The components of the postretirement benefit provisions of the
Company-sponsored plans for 1996, 1997 and 1998 were as follows:
1996 1997 1998
-------- -------- --------
Service cost........................................ $ 323 $ 365 $ 402
Interest cost....................................... 948 997 1,085
Net deferral and amortization....................... 22 20 49
------ ------ ------
Postretirement benefit provision.................... $1,293 $1,382 $1,536
====== ====== ======
F-15
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(8) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)
The funded status of the Company-sponsored plans was as follows:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Reconciliation of benefit obligation:
Accumulated postretirement benefit liability at January
1..................................................... $(13,603) $(14,361)
Service cost............................................ (365) (403)
Interest cost........................................... (997) (1,085)
Actuarial gain (loss)................................... 86 (1,489)
Benefit payments........................................ 518 624
-------- --------
Accumulated postretirement benefit liability at December
31.................................................... (14,361) (16,714)
-------- --------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1.................. -- --
Employer contributions.................................. 518 624
Benefit payments........................................ (518) (624)
-------- --------
Fair value of plan assets at December 31................ -- --
-------- --------
Funded status........................................... (14,361) (16,714)
Unrecognized actuarial loss............................. 1,577 3,106
-------- --------
Postretirement benefit liability........................ $(12,784) $(13,608)
======== ========
The assumed weighted average annual rate of increase in the per capita cost
of medical benefits is 8.0% for 1999 and is assumed to decrease ratably in 2000
and 2001 and remain level at 5.5% thereafter.
U.S. employees retiring after March 1, 1993, and hired prior to January 1,
1993, will receive the standard health benefits up to age 65 and then will be
eligible for a Medicare reimbursement allowance based on years of service. U.S.
employees hired after January 1, 1993, will only be eligible after age 65 for a
Medicare reimbursement allowance based on years of service.
A one percent increase in the annual health care trend rates would have
increased the accumulated postretirement benefit obligation at December 31,
1998, by $1,333, and increased postretirement benefit expense for 1998 by $160.
The weighted average discount rate used to estimate the accumulated
postretirement benefit obligation was 7.5% for 1997 and 7.0% for 1998.
(9) LONG-TERM INCENTIVE PLAN:
Effective June 1, 1998, the Company terminated its Phantom Share Plan.
Phantom Share Rights outstanding at the time of termination were replaced by
Restricted Common Stock as discussed below. Prior to termination, the grantee of
a Phantom Share Right was entitled to the market value of a common share as of
the December 31 immediately prior to the date the restrictions on such Phantom
Share Right lapsed, and until the restrictions lapsed, a quarterly payment in an
amount determined by the Board of Directors. At December 31, 1997, 110,400
Phantom Share Rights were outstanding.
F-16
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(9) LONG-TERM INCENTIVE PLAN: (CONTINUED)
Compensation expense was recognized ratably over the period from the date of
grant to the date the restrictions on a right lapsed. Earnings were also charged
or credited for the aggregate appreciation or depreciation of the rights during
the period as well as any quarterly payment to the grantees. Phantom share
compensation expense included in the accompanying consolidated financial
statements was $902, $955 and $0 for 1996, 1997 and 1998, respectively. The
total value of the Phantom Shares outstanding as of December 31, 1997 was
$3,257.
On June 1, 1998, the Company awarded 172,050 shares of restricted stock to a
group of employees. The restricted stock award entitles the participants to full
dividend and voting rights. Unvested shares are restricted as to disposition and
subject to forfeiture under certain circumstances. The value of the award was
established based on the market value of the stock as of the grant date. The
shares vest beginning in year five after the date of grant at a rate of 20% per
year thereafter.
Unearned compensation is shown as a reduction of stockholders' equity in the
accompanying consolidated balance sheets and is being amortized ratably over the
life of the grant. Unearned compensation was computed based on the market value
of the restricted shares. Compensation expense recognized in conjunction with
the restricted stock outstanding in 1998 amounted to $701.
The Company's Long-Term Incentive Plan provides for the grant of stock
options, stock appreciation rights, restricted stock, performance units,
performance shares and other incentive awards to officers and key employees and
for the reimbursement to certain participants for the personal income tax
liability resulting from such awards. The total number of shares of common stock
which may be subject to awards or be issued under the Long-Term Incentive Plan
will not exceed 2,400,000 shares, of which no more than 1,200,000 shares may be
issued as restricted stock.
(10) INCOME TAXES:
The Company's income before income taxes is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
United States.................................... $26,963 $37,031 $37,838
Europe and other................................. 2,178 6,042 3,875
------- ------- -------
Total.......................................... $29,141 $43,073 $41,713
======= ======= =======
The Company's primary German operation is structured as a partnership. This
operation is subject to United States as well as German income tax regulations.
The above analysis of pretax income and the following analysis of the income tax
provision by taxing jurisdiction are therefore not directly related.
F-17
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES: (CONTINUED)
The (provision) benefit for income taxes by taxing jurisdiction location are
as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
Current:
United States
Federal.................................... $ (4,994) $(11,476) $ (8,029)
State...................................... (877) (1,261) (957)
European and other........................... (4,096) (3,443) (3,230)
-------- -------- --------
Total current................................ (9,967) (16,180) (12,216)
-------- -------- --------
Deferred:
United States
Federal.................................... 400 1,593 (2,168)
-------- -------- --------
State...................................... (67) (204) (310)
European and other........................... (609) (1,153) (685)
-------- -------- --------
Total deferred............................... (276) 236 (3,163)
-------- -------- --------
Total income tax provision..................... $(10,243) $(15,944) $(15,379)
======== ======== ========
A reconciliation of the statutory and effective income tax (provision)
benefit based on the Company's income before income taxes is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
United States income tax provision at the
statutory rate of 35%........................ $(10,199) $(15,076) $(14,600)
Deferred tax benefit not previously
recognized................................... 2,069 1,923 1,687
European and Asian locations' losses not tax
benefited.................................... (1,224) (1,168) (2,140)
Taxes on European locations' income at rates
which differ from the U.S. rate.............. 443 (270) 682
State income taxes, net of U.S. federal tax
benefit...................................... (614) (871) (704)
Other.......................................... (718) (482) (304)
-------- -------- --------
Total income tax provision..................... $(10,243) $(15,944) $(15,379)
======== ======== ========
F-18
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES: (CONTINUED)
The components of the Company's net deferred tax assets and (liabilities),
determined on a jurisdictional basis, are as follows:
DECEMBER 31,
-----------------------------------------------
1997 1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
U.S. tax credit carryforwards.......................... $ 1,575 $ -- $ 1,474 $ --
Internal Revenue Code Section 743 and Other Tax Basis
Step-Ups............................................. 4,473 -- 3,776 --
Deferred compensation, post-retirement and accrued
pension benefits..................................... 11,407 (923) 11,259 (1,082)
Tax over book depreciation............................. (5,055) (3,195) (7,118) (3,594)
Inventory and warranty reserves not deducted for tax... 5,283 -- 5,652 --
Other items............................................ 2,125 100 1,443 (70)
U.S. tax on unremitted earnings of foreign
subsidiaries......................................... (2,168) -- (2,400) --
------- ------- ------- -------
Gross deferred tax assets and (liabilities)............ 17,640 (4,018) 14,086 (4,746)
Valuation allowance.................................... (3,187) -- (3,057) --
------- ------- ------- -------
Net deferred tax assets and (liabilities).............. 14,453 (4,018) 11,029 (4,746)
Less--current portion.................................. (7,990) -- (8,701) --
------- ------- ------- -------
Net deferred tax assets and (liabilities), long-term... $ 6,463 $(4,018) $ 2,328 $(4,746)
======= ======= ======= =======
In 1990, the Company issued common stock in exchange for a 40.404% interest
in the Sundstrand-Sauer Company partnership. The partnership filed an election
under Internal Revenue Code (IRC) Section 754 and, accordingly, a tax basis
step-up was provided to the Company under IRC Section 743. In 1994, certain
assets were sold from the German Operating Company to the German Holding Company
to facilitate the establishment of Sauer Mechanika a.s., described in Note 2.
For tax purposes, this was a taxable transaction and, accordingly, resulted in a
tax basis step-up when the assets were ultimately contributed to Sauer Mechanika
a.s. The remaining tax benefit from unamortized balances of these tax basis
step-ups were $4,473 and $3,776 at December 31, 1997 and 1998, respectively.
During 1998 the valuation allowance relating to the Company's deferred
income tax asset decreased by $130.
As of December 31, 1998, the Company had not provided federal income taxes
on $4,331 of undistributed earnings recorded by certain subsidiaries outside the
United States, exclusive of the UK, since these earnings were deemed permanently
invested. Although it is not practicable to determine the deferred tax liability
on the unremitted earnings, foreign tax credits would be available to reduce any
U.S. tax liability if these foreign earnings were remitted.
F-19
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES: (CONTINUED)
The Company had the following tax return carryforwards available to offset
future years' taxes at December 31, 1998:
AMOUNT EXPIRATION DATES
-------- ----------------
German net operating losses......................... $56,000 None
U.S. foreign tax credits............................ $ 2,680 1999-2002
The German net operating losses do not produce a deferred tax asset on a
consolidated basis due to the treatment of the German Operating Company as a
partnership combined with the impact of foreign tax credits.
(11) NOTES PAYABLE AND LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31
-------------------
1997 1998
-------- --------
Company's Revolving Credit Agreement, due August 2001....... $15,000 $ --
U.S. Operating Company's Revolving Credit Facility, due
March 2002................................................ 24,000 33,800
U.S. Operating Company's Senior Notes, due through December
2007...................................................... 25,000 25,000
U.S. Operating Company's Industrial Development Revenue
Bonds, due May 2026....................................... 9,000 9,000
German Holding Company's Long-Term Bank Facilities maturing
through June 2018......................................... -- 32,829
Other borrowings............................................ 3,150 8,631
------- --------
Total debt.............................................. 76,150 109,260
Less--scheduled current maturities........................ (952) (2,398)
------- --------
Total long-term debt.................................... $75,198 $106,862
======= ========
Prior to its initial public offering, the Company's Revolving Credit
Agreement ("Agreement") allowed the Company to borrow up to $15,000 at an
interest rate based on the London interbank offered rate ("LIBOR"). The company
repaid this debt using proceeds from the initial public offering. At
December 31, 1997, the interest rate on outstanding borrowings under the
Agreement was 7.05%. The Agreement required the maintenance of certain financial
results including maintaining minimum levels of net worth and cash flow and
contained limitations on the payment of cash dividends.
The U.S. Operating Company's Revolving Credit Facility, dated November 6,
1997, permits the U.S. Operating Company to choose between two interest rate
options and to specify what portion of the loan is covered by a specific
interest rate option and the applicable funding period to which the interest
rate option is to apply. The interest rate options are based on the bank's prime
lending rate and LIBOR. The U.S. Operating Company's Revolving Credit Facility
permits unsecured borrowings up to $45,000. At December 31, 1997 and 1998, the
weighted average interest rate on outstanding borrowings was approximately 6.73%
and 6.50%, respectively.
F-20
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(11) NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
The U.S. Operating Company's Revolving Credit Facility contains certain
restrictions and requires the U.S. Operating Company to maintain certain
financial ratios, including limitations on the payment of cash dividends and
maintaining profit before interest and taxes at least 2.5 times interest
expense. Additionally, the U.S. Operating Company's Revolving Credit Facility
requires the maintenance of net worth (as defined). The U.S. Operating Company
was in compliance with the requirements at December 31, 1998 and required net
worth was $64,986.
On May 1, 1996, the U.S. Operating Company issued $9,000 of Industrial
Development Revenue Bonds ("Bonds"). The Bonds are at variable interest rates.
At December 31, 1997 and 1998, the interest rate on the bonds was 4.7% and
4.95%, respectively. The Bonds are secured by a bank letter of credit. The Bonds
contain certain covenants and restrictions similar to those included in the U.S.
Operating Company's Revolving Credit Facility. At December 31, 1998, the U.S.
Operating Company was in compliance with these requirements.
On December 15, 1997, the U.S. Operating Company issued $25,000 of 6.68%
Senior Notes ("Senior Notes"). The Senior Notes have scheduled annual repayments
starting with December 15, 2001 through December 15, 2007. The Senior Notes
contain certain restrictions and require the maintenance of certain financial
ratios which are similar to the U.S. Operating Company's Revolving Credit
Facility. At December 31, 1998, the U.S. Operating Company was in compliance
with these requirements.
The German Holding Company has a series of long-term bank facilities, with
an aggregate principle of $32,829 at December 31, 1998. These facilities
generally carry fixed rates of interest, ranging from 5.65% to 7.09%. These
facilities contain a variety of repayment schedules and have final maturities
ranging from December 2001 through June 2018.
Payments required on long-term debt outstanding as of December 31, 1998,
during the years ending 1999 through 2003 and for years thereafter, are $2,398,
$2,918, $5,880, $39,531, $5,731 and $52,802, respectively.
The Company from time to time employs off-balance sheet financial
instruments to reduce its exposure to fluctuations in interest rates. These
instruments include interest rate caps and swaps. The Company designates
interest rate swaps as hedges of LIBOR-based bank debt, and accrues as interest
expense the differential to be paid or received under the agreements as rates
change over the lives of the contracts. As of December 31, 1998, there were no
interest rate swap contracts outstanding.
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its off-balance sheet
financial instruments and does not expect non-performance by the counterparties.
There were no interest rate contracts outstanding as of December 31, 1997 and
1998.
The Company also maintains revolving credit facilities, notes payable and
bankers' acceptances for its European and other operations. The German Operating
Company's credit agreement contains restrictions similar to those in the U.S.
Operating Company's agreements. The German Operating Company was in compliance
with the requirements at December 31, 1998 and required net worth was $11,597.
At December 31, 1998, accounts receivables, inventories, property, plant and
machinery and
F-21
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(11) NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
equipment in the amount of $46,708 were pledged as collateral under these
European and other operations credit facilities. All U.S. debt is unsecured.
The weighted average interest rates on short-term borrowings at year-end
were 6.6% in 1996, 6.8% in 1997 and 6.1% in 1998.
The status of lines of credit as of December 31, 1997, and 1998, is
summarized below:
1997 1998
-------- --------
Lines of credit--
Used.................................................... $74,696 $75,567
Unused.................................................. 51,975 47,032
The fair market value of long-term debt at December 31, 1997 and 1998
approximates the amounts recorded in the balance sheet based on information
available to the Company with respect to interest rates and terms for similar
financial instruments.
(12) STOCKHOLDERS' EQUITY:
In 1998, the Board of Directors authorized a class of preferred stock with
4,500,000 shares authorized at $.01 par value. The issuance of preferred shares
may adversely affect the rights of the holders of common stock. No preferred
shares have been issued.
On May 12, 1998, the Company completed an initial public offering of
9,000,000 shares of common stock at an initial public offering price of $18 per
share. Of the 9,000,000 shares of common stock offered, 3,000,000 were issued
and sold by the Company and 6,000,000 were sold by management and members of the
Murmann family. Prior to the offering, there was no public market for the
Company's common stock. The shares of common stock are not convertible and the
holders thereof have no preemptive subscription rights to purchase any
securities of the Company.
The Company did not receive any of the proceeds from the sale of the shares
by management or members of the Murmann family. The net proceeds to the Company
from the initial public offering, after deducting applicable underwriting
discounts and offering expenses, was $48,100. The net proceeds to the Company
were used to repay long-term debt and for capital expenditures.
(13) RELATED PARTY TRANSACTIONS:
On May 1, 1998, the Company acquired the real estate and building of its
main facility in Germany, which was previously leased, from Sauer Hydraulik,
which is owned by the Murmann family. The transaction was accounted for under
the rules governing transactions occurring between entities under common
control. As such, the assets were recorded at their historical cost basis of
$17,697, debt outstanding of $7,790 was assumed, cash of $15,680 was paid to
Sauer Hydraulik and $5,773 was recorded as a reduction in additional
paid-in-capital. The reduction to additional paid-in-capital was computed as the
excess of the facility's fair market value, as determined by an independent
appraisal, over the seller's historical cost basis in accordance with common
control accounting. Rent expense
F-22
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(13) RELATED PARTY TRANSACTIONS: (CONTINUED)
associated with the property while under the lease agreement was $2,633, $2,278
and $751 for 1996, 1997 and 1998, respectively.
(14) COMMITMENTS AND CONTINGENCIES:
The Company leases certain facilities and equipment under operating leases,
many of which contain renewal options. Total rental expense on all operating
leases during 1996, 1997 and 1998 was $5,484, $5,835 and $4,322, respectively.
Minimum future rental commitments under all non-cancelable leases as of
December 31, 1998, during the years ending 1999 through 2003 and for the years
thereafter, are $4,353, $3,974, $3,630, $2,011, $1,830, and $1,892,
respectively.
The Company, from time to time, is involved in certain legal proceedings in
the ordinary course of its business. The Company intends to vigorously defend
against all such claims. However, no assurance can be given that such matters
will be resolved in the Company's favor.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER
----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
1997
Net sales................................. $135,860 $146,273 $118,906 $134,134 $535,173
Gross profit.............................. 34,520 39,143 30,023 27,422 131,108
Net income................................ $ 7,894 $ 10,258 $ 5,512 $ 3,465 $ 27,129
Basic and diluted net income Per common
share................................... $ .33 $ .42 $ .23 $ .14 $ 1.12
1998
Net sales................................. $152,876 $160,410 $123,992 $127,246 $564,524
Gross profit.............................. 34,739 42,025 31,829 27,620 136,213
Net income................................ $ 6,472 $ 10,624 $ 6,040 $ 3,198 $ 26,334
Basic and diluted net income per common
share................................... $ .27 $ .41 $ .22 $ .11 $ 1.01
(16) SEGMENT AND GEOGRAPHIC INFORMATION:
The Company has two reportable segments defined by geographic region due to
the difference in economic characteristics in which these segments operate. The
activities of each reportable segment consists of the design, manufacture and
sale of hydraulic systems and other related components.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates individual
segment performance based on net
F-23
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(16) SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
income. Intersegment sales are made at established transfer prices. The
following table presents the significant items by segment:
NORTH
AMERICA EUROPE ALL OTHER ELIMINATIONS TOTAL
-------- -------- --------- ------------ --------
1996
Trade sales................................. $272,780 $194,627 $ 159 $ -- $467,566
Intersegment sales.......................... 25,343 28,344 -- (53,687)(1) --
Interest income............................. 1,377 212 411 (1,436)(2) 564
Interest expense............................ 2,760 3,864 1,335 (1,436)(2) 6,523
Depreciation and amortization............... 13,358 10,993 479 -- 24,830
Net income (loss)........................... 18,471 6,543 (3,094) (3,022)(3) 18,898
Total assets................................ 173,325 173,655 133,287 (142,740)(4) 337,527
Capital expenditures........................ 24,556 31,550 178 -- 56,284
1997
Trade sales................................. $332,974 $201,130 $ 1,069 $ -- $535,173
Intersegment sales.......................... 36,557 32,424 582 (69,563)(1) --
Interest income............................. 1,441 518 228 (1,489)(2) 698
Interest expense............................ 3,692 5,028 1,074 (1,489)(2) 8,305
Depreciation and amortization............... 13,834 11,230 771 -- 25,835
Net income (loss)........................... 26,873 6,142 (1,500) (4,386)(3) 27,129
Total assets................................ 200,167 184,533 159,223 (155,188)(4) 388,735
Capital expenditures........................ 41,781 24,851 118 -- 66,750
1998
Trade sales................................. $360,641 $201,991 $ 1,892 $ -- $564,524
Intersegment sales.......................... 32,255 37,996 685 (70,936)(1) --
Interest income............................. 1,592 1,458 1,381 (4,001)(2) 430
Interest expense............................ 5,128 7,437 680 (4,001)(2) 9,244
Depreciation and amortization............... 16,422 13,168 1,045 -- 30,635
Net income (loss)........................... 25,346 5,688 (1,127) (3,573)(3) 26,334
Total assets................................ 227,920 220,172 198,116 (186,437)(4) 459,771
Capital expenditures........................ 51,728 46,331 523 -- 98,582
- ------------------------
Reconciliations:
(1) Elimination of intersegment sales.
(2) Elimination of intersegment interest income and expense from borrowings made
between segments.
F-24
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(16) SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
(3) Net income eliminations:
1996 1997 1998
--------- --------- ---------
Minority interest in German Operating
Company................................... $ (2,707) $ (4,001) $ (3,573)
Intersegment profit on intersegment sales... (315) (385) --
--------- --------- ---------
Total net income eliminations............... $ (3,022) $ (4,386) $ (3,573)
========= ========= =========
(4) Total assets eliminations:
Investment in subsidiaries.................. $(127,415) $(137,095) $(144,391)
Intersegment receivables.................... (13,783) (16,230) (40,244)
Intersegment profit in inventory and
other..................................... (1,542) (1,863) (1,802)
--------- --------- ---------
Total assets eliminations................... $(142,740) $(155,188) $(186,437)
========= ========= =========
A summary of the Company's net sales by product line is presented below:
NET SALES
------------------------------
1996 1997 1998
-------- -------- --------
Hydrostatic transmissions..................... $358,258 $417,864 $445,585
Open circuit gear pumps and motors and piston
pumps....................................... 77,762 79,883 78,384
Electrohydraulics and others.................. 31,546 37,426 40,555
-------- -------- --------
Total..................................... $467,566 $535,173 $564,524
======== ======== ========
A summary of the Company's net sales and long-lived assets by geographic
area is presented below:
LONG-LIVED
NET SALES (1) ASSETS (2)
------------------------------ -------------------
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------
United States............. $247,339 $272,783 $335,606 $106,120 $141,021
Germany................... 45,909 49,931 47,400 26,517 46,930
United Kingdom............ 39,428 39,050 35,718 19,400 21,279
Slovakia.................. 58 5,911 4,740 33,222 39,856
Other countries........... 134,832 167,498 141,060 10,845 17,210
-------- -------- -------- -------- --------
Total................. $467,566 $535,173 $564,524 $196,104 $266,296
======== ======== ======== ======== ========
- ------------------------
(1) Net sales are attributed to countries based on location of customer.
(2) Long-lived assets include property, plant and equipment net of accumulated
depreciation, intangible assets net of accumulated amortization and certain
other long-term assets.
No single customer accounted for 10% or more of total consolidated sales in any
year presented.
F-25
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------- --------------------------
SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27, OCTOBER 3,
1998 1999 1998 1999
------------- ---------- ------------- ----------
NET SALES...................................... $123,992 $115,068 $437,278 $416,129
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales................................ 92,163 87,659 328,685 312,196
Selling, general and administrative.......... 13,382 13,501 40,469 42,634
Research and development..................... 5,305 5,621 16,534 17,149
-------- -------- -------- --------
Total costs and expenses................... 110,850 106,781 385,688 371,979
-------- -------- -------- --------
Operating income........................... 13,142 8,287 51,590 44,150
-------- -------- -------- --------
NONOPERATING INCOME (EXPENSES):
Interest expense, net........................ (1,873) (1,634) (6,512) (6,402)
Royalty income............................... 151 175 604 547
Other, net................................... (139) (138) (459) (650)
-------- -------- -------- --------
Nonoperating expenses, net................. (1,861) (1,597) (6,367) (6,505)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST..................................... 11,281 6,690 45,223 37,645
PROVISION FOR INCOME TAXES..................... (3,906) (2,137) (13,989) (11,449)
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST................ 7,375 4,553 31,234 26,196
MINORITY INTEREST IN INCOME OF CONSOLIDATED
COMPANIES.................................... (1,335) (919) (8,098) (6,701)
-------- -------- -------- --------
Net income................................. $ 6,040 $ 3,634 $ 23,136 $ 19,495
======== ======== ======== ========
Basic and diluted net income per common share
outstanding.................................. $ 0.22 $ 0.14 $ 0.90 $ 0.72
======== ======== ======== ========
Dividends declared per common share............ $ 0.07 $ 0.07 $ 0.22 $ 0.21
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-26
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, OCTOBER 3,
1998 1999
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,891 $ 5,932
Accounts receivable, less allowances...................... 73,661 76,389
Inventories............................................... 89,195 74,276
Other current assets...................................... 9,984 10,519
-------- --------
Total current assets.................................. 181,731 167,116
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 262,527 272,122
-------- --------
OTHER ASSETS:
Intangible assets, net.................................... 3,769 2,501
Deferred income taxes..................................... 5,742 4,453
Other..................................................... 6,002 4,780
-------- --------
Total other assets.................................... 15,513 11,734
-------- --------
$459,771 $450,972
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts......................... $ 41,767 $ 33,084
Long-term debt due within one year........................ 2,398 1,812
Accounts payable.......................................... 38,271 34,694
Accrued salaries and wages................................ 7,683 8,976
Accrued warranty.......................................... 8,601 8,118
Other accrued liabilities................................. 12,884 22,213
-------- --------
Total current liabilities............................. 111,604 108,897
-------- --------
LONG-TERM DEBT.............................................. 106,862 95,096
-------- --------
OTHER LIABILITIES:
Long-term pension liability............................... 33,044 32,203
Postretirement benefits other than pensions............... 13,608 13,608
Deferred income taxes..................................... 4,746 4,898
Other..................................................... 5,419 4,966
-------- --------
Total other liabilities............................... 56,817 55,675
-------- --------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES... 35,584 35,979
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, authorized
45,000,000 shares in 1998 and 1999; issued 28,072,050 in
1998 and 28,084,550 in 1999; outstanding 27,397,050 in
1998 and 27,409,550 in 1999............................. 281 281
Additional paid-in capital................................ 120,092 120,217
Retained earnings......................................... 31,416 45,155
Accumulated other comprehensive income.................... 1,813 (5,761)
Unamortized restricted stock compensation................. (1,998) (1,867)
Common stock in treasury (at cost), 675,000 shares in 1998
and 1999................................................ (2,700) (2,700)
-------- --------
Total stockholders' equity............................ 148,904 155,325
-------- --------
$459,771 $450,972
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-27
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
--------------------------
SEPTEMBER 27, OCTOBER 3,
1998 1999
------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 23,136 $19,495
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 22,977 27,405
Minority interest in income of consolidated companies... 8,098 6,701
(Increase) decrease in working capital--
Accounts receivable, net.............................. (1,462) (5,771)
Inventories........................................... 1,052 10,559
Accounts payable...................................... (7,834) (1,619)
Accrued liabilities................................... 12,209 10,285
Other................................................. (2,106) 3,550
-------- -------
Net cash provided by operating activities........... 56,070 70,605
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (73,958) (45,834)
Proceeds from sales of property, plant and equipment...... 95 358
-------- -------
Net cash used in investing activities............... (73,868) (45,476)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on notes payable and bank overdrafts....... (19,858) (5,818)
Net repayments of long-term debt.......................... (972) (8,722)
Cash dividends............................................ (5,774) (5,754)
Net proceeds from initial public offering................. 48,100 --
Distributions to minority interest partners............... (7,151) (6,049)
-------- -------
Net cash provided by (used in) financing
activities........................................ 14,345 (26,343)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES............................. 665 (1,745)
-------- -------
CASH AND CASH EQUIVALENTS:
Net decrease during the period............................ (2,783) (2,959)
Beginning balance......................................... 7,363 8,891
-------- -------
Ending balance...................................... $ 4,580 $ 5,932
======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................. $ 5,256 $ 4,452
Income taxes paid......................................... $ 7,031 $ 8,040
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the thirty-nine week period ending September 27, 1998, the Company
purchased the real estate and building of its main facility in Germany for
$23,470. In conjunction with the acquisition, assets were acquired at fair value
of $23,470, cash was paid of $15,680 and liabilities of $7,790 were assumed.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-28
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1) BASIS OF PRESENTATION AND USE OF ESTIMATES--
The consolidated financial statements of Sauer Inc. and subsidiaries (the
"Company") included herein have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Actual results could differ from
those estimates. In the opinion of management, the statements reflect all
adjustments, which are of a normal recurring nature, necessary to present fairly
the Company's financial position as of December 31, 1998 and October 3, 1999,
and results of operations for the thirteen weeks and thirty-nine weeks ended
September 27, 1998, and October 3, 1999, and cash flows for the thirty-nine
weeks ended September 27, 1998, and October 3, 1999. These financial statements
and notes are to be read in conjunction with the financial statements and notes
thereto included in the Company's latest annual report on Form 10-K as filed
with the Securities and Exchange Commission dated March 31, 1999.
2) RECLASSIFICATION--
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
3) COMPREHENSIVE INCOME--
Total comprehensive income, consisting of net income adjusted for foreign
currency translation, is as follows:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------- --------------------------
SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28, OCTOBER 3,
1998 1999 1998 1999
------------- ---------- ------------- ----------
Net income...................................... $ 6,040 $3,634 $23,136 $19,495
Translation adjustment.......................... 4,041 4,061 3,332 (7,574)
------- ------ ------- -------
Comprehensive income............................ $10,081 $7,695 $26,468 $11,921
======= ====== ======= =======
4) BASIC AND DILUTED PER SHARE DATA--
Basic net income per common share data has been computed by dividing net
income by the weighted average number of shares of common stock outstanding for
the period less those restricted stock shares issued in connection with the
Company's long-term incentive plan and subject to risk of forfeiture. The
dilutive effect of the restricted stock shares is calculated using the treasury
stock method which applies the unamortized compensation expense to repurchase
shares of common stock. The reconciliation of basic net income per common share
to diluted net income per common share is
F-29
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
4) BASIC AND DILUTED PER SHARE DATA-- (CONTINUED)
shown in the following table for the thirteen-week and thirty-nine week periods
ending September 27, 1998, and October 3, 1999:
SEPTEMBER 27, 1998 OCTOBER 3, 1999
---------------------------------- ----------------------------------
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ---------- -------- ---------- ---------- --------
THIRTEEN WEEKS:
- -------------------------------------------
Basic net income........................... $ 6,040 27,225,000 $.22 $ 3,634 27,226,050 $.14
Effect of dilutive securities:
Restricted stock......................... -- -- -- -- 32,011 --
------- ---------- ---- ------- ---------- ----
Diluted net income......................... $ 6,040 27,225,000 $.22 $ 3,634 27,258,061 $.14
======= ========== ==== ======= ========== ====
THIRTY-NINE WEEKS:
- -------------------------------------------
Basic net income........................... $23,136 25,769,444 $.90 $19,495 27,225,428 $.72
Effect of dilutive securities:
Restricted stock......................... -- 2,723 -- -- 10,701 --
------- ---------- ---- ------- ---------- ----
Diluted net income......................... $23,136 25,772,167 $.90 $19,495 27,236,129 $.72
======= ========== ==== ======= ========== ====
5) SEGMENT AND GEOGRAPHIC INFORMATION--
The Company's two reportable segments are defined by geographic region due
to the difference in economic characteristics in which these segments operate.
The activities of each reportable segment consist of the design, manufacture and
sale of hydraulic systems and other related components.
F-30
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
5) SEGMENT AND GEOGRAPHIC INFORMATION-- (CONTINUED)
The following table presents the significant items by segment for the
results of operations for each of the thirteen and thirty-nine week periods
ending September 27, 1998, and October 3, 1999, and balance sheet data as of
December 31, 1998 and October 3, 1999, respectively:
NORTH ALL
THIRTEEN WEEKS ENDED: AMERICA EUROPE OTHER ELIMINATIONS TOTAL
- --------------------- -------- -------- -------- ------------ --------
SEPTEMBER 27, 1998
Trade sales......................... $ 78,290 $ 45,245 $ 457 $ -- $123,992
Intersegment sales.................. 7,584 9,606 389 (17,579) (1) --
Net income (loss)................... 6,211 537 84 (792) (2) 6,040
Total assets........................ 227,920 220,172 198,116 (186,437) (3) 459,771
OCTOBER 3, 1999
Trade sales......................... $ 73,258 $ 40,459 $ 1,351 $ -- $115,068
Intersegment sales.................. 7,947 6,638 128 (14,713) (1) --
Net income (loss)................... 3,680 47 382 (475) (2) 3,634
Total assets........................ 237,713 209,439 193,720 (189,900) (3) 450,972
NORTH ALL
THIRTY-NINE WEEKS ENDED: AMERICA EUROPE OTHER ELIMINATIONS TOTAL
- ------------------------ -------- -------- -------- ------------ --------
SEPTEMBER 27, 1998
Trade sales......................... $279,176 $157,009 $ 1,093 $ -- $437,278
Intersegment sales.................. 26,167 30,134 502 (56,803) (1) --
Net income (loss)................... 21,369 6,242 (1,242) (3,233) (2) 23,136
Total assets........................ 227,920 220,172 198,116 (186,437) (3) 459,771
OCTOBER 3, 1999
Trade sales......................... $265,741 $145,840 $ 4,548 $ -- $416,129
Intersegment sales.................. 28,169 24,105 258 (52,532) (1) --
Net income (loss)................... 18,076 2,831 1,130 (2,542) (2) 19,495
Total assets........................ 237,713 209,439 193,720 (189,900) (3) 450,972
- ------------------------
Reconciliations:
(1) Elimination of intersegment sales.
(2) Net income eliminations--minority interest in German Operating Company.
F-31
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
5) SEGMENT AND GEOGRAPHIC INFORMATION-- (CONTINUED)
(3) Total assets eliminations:
1998 1999
--------- ---------
Investment in subsidiaries............................ $(144,391) $(145,106)
Intersegment receivables.............................. (40,244) (43,350)
Intersegment profit in inventory and other............ (1,802) (1,444)
--------- ---------
Total assets eliminations............................. $(186,437) $(189,900)
========= =========
A summary of the Company's net sales by product line is presented below:
NET SALES
-------------------------------------------
THIRTY-NINE WEEKS
THIRTEEN WEEKS ENDED ENDED
--------------------- -------------------
1998 1999 1998 1999
--------- --------- -------- --------
Hydrostatic transmissions........................... $ 96,465 $ 90,420 $345,488 $337,190
Open circuit gear pumps and motors and piston
pumps............................................. 17,971 16,153 60,417 50,973
Electrohydraulics and others........................ 9,556 8,495 31,373 27,966
-------- -------- -------- --------
Total............................................. $123,992 $115,068 $437,278 $416,129
======== ======== ======== ========
A summary of the Company's net sales and long-lived assets by geographic
area is presented below:
NET SALES (1)
-------------------------------------------
THIRTY-NINE WEEKS LONG-LIVED ASSETS
THIRTEEN WEEKS ENDED ENDED ASSETS (2)
--------------------- ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
United States.......................... $ 69,318 $ 65,873 $256,181 $243,643 $141,021 $152,879
Germany................................ 13,554 8,521 39,625 34,910 46,930 47,899
United Kingdom......................... 8,450 6,901 28,203 22,411 21,279 25,477
Slovakia............................... 231 368 1,788 770 39,856 36,912
Other countries........................ 32,439 33,405 111,481 114,395 17,210 16,236
-------- -------- -------- -------- -------- --------
Total................................ $123,992 $115,068 $437,278 $416,129 $266,296 $279,403
======== ======== ======== ======== ======== ========
- ------------------------
(1) Net sales are attributed to countries based on location of customer.
(2) Long-lived assets include property, plant and equipment net of accumulated
depreciation, intangible assets net of accumulated amortization and certain
other long-term assets.
No single customer accounted for 10% or more of total consolidated sales in
any period presented.
F-32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Danfoss Fluid Power A/S
We have audited the accompanying combined statements of net assets of the
Danfoss Fluid Power Group as of December 31, 1997 and 1998 and the related
combined statements of income and cash flows for the year ended September 30,
1996, the fifteen months ended December 31, 1997 and the year ended
December 31, 1998. These combined financial statements are the responsibility of
the management of the Danfoss Fluid Power Group. Our responsibility is to
express an opinion on the combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Denmark, which are substantially consistent with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Danfoss Fluid
Power Group at December 31, 1997 and 1998 and the results of their operations
and their cash flows for the year ended September 30, 1996, the fifteen months
ended December 31, 1997 and the year ended December 31, 1998, in conformity with
generally accepted accounting principles in Denmark.
Accounting principles generally accepted in Denmark vary in certain
significant respects from accounting principles generally accepted in the United
States. Application of accounting principles generally accepted in the United
States would have affected net income for the fifteen months ended December 31,
1997 and the year ended December 31, 1998 and net assets at December 31, 1997
and 1998, to the extent summarised in Note 15 to the combined financial
statements.
KPMG C. Jespersen
Jorgen C.S. Jacobsen Helge Kallese
State Authorized State Authorized
Public Accountant Public Accountant
Sonderborg, Denmark
December 1, 1999
F-33
DANFOSS FLUID POWER GROUP
COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1996,
THE FIFTEEN MONTHS ENDED DECEMBER 31, 1997,
THE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
1996 1997 1998 SIX MONTH PERIODS
---------- -------------------------------------- ---------- -------------------------
10-01-1995 10-01-1996 10-01-1996 1-1-1997 1-1-1998 1-1-1998 1-1-1999
9-30-1996 12-31-1997 12-31-1996 12-31-1997 12-31-1998 6-30-1998 6-30-1999
---------- ---------- ----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NET SALES................ 1,943,501 2,643,582 459,359 2,184,223 2,269,331 1,209,104 1,182,401
Cost of sales............ 1,404,333 1,788,684 334,477 1,454,207 1,582,334 805,160 845,302
--------- --------- ------- --------- --------- --------- ---------
Gross Margin........... 539,168 854,898 124,882 730,016 686,997 403,944 337,099
OPERATING EXPENSES
Sales expenses 335,767 439,057 82,767 356,291 365,429 182,257 187,411
Administrative
expenses............... 118,655 147,744 25,822 121,921 117,095 59,733 59,507
Other operating income... -- -- -- -- (16,746) -- --
--------- --------- ------- --------- --------- --------- ---------
Total operating
expenses............. 454,422 586,801 108,589 478,212 465,778 241,990 246,918
--------- --------- ------- --------- --------- --------- ---------
RESULT OF OPERATIONS
BEFORE FINANCIAL ITEMS
AND INCOME TAXES....... 84,746 268,097 16,293 251,804 221,219 161,954 90,181
FINANCIAL ITEMS
Loss/(Gain) on foreign
exchange............... (2,964) (10,142) (1,394) (8,748) 5,039 941 (6,170)
Interest expense......... 425 16,685 1,485 15,201 21,918 10,290 14,692
--------- --------- ------- --------- --------- --------- ---------
Total financial items,
net.................. (2,539) 6,543 91 6,453 26,957 11,231 8,522
--------- --------- ------- --------- --------- --------- ---------
RESULT OF OPERATIONS
BEFORE TAXES........... 87,285 261,554 16,202 245,351 194,262 150,723 81,659
Income tax............... 33,062 93,438 5,749 87,689 66,622 52,264 27,640
--------- --------- ------- --------- --------- --------- ---------
NET INCOME............... 54,223 168,116 10,453 157,662 127,640 98,459 54,019
========= ========= ======= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-34
DANFOSS FLUID POWER GROUP
COMBINED STATEMENTS OF NET ASSETS
AS OF DECEMBER 31, 1997 AND 1998 (AUDITED) AND JUNE 30, 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
12-31-1997 12-31-1998 6-30-1999
---------- ---------- -----------
(UNAUDITED)
ASSETS
LONG-TERM ASSETS:
Net Intangible Assets....................................... 25,556 22,062 20,315
Net Property, Plant and Equipment........................... 885,802 902,274 959,307
--------- --------- ---------
Total Long-Term Assets...................................... 911,358 924,336 979,622
--------- --------- ---------
Deferred Taxes.............................................. 16,555 18,872 19,102
--------- --------- ---------
CURRENT ASSETS:
Inventories................................................. 465,705 522,000 474,278
Accounts Receivable......................................... 392,327 375,431 455,969
Cash and Cash Equivalents................................... 36,762 37,981 39,381
--------- --------- ---------
Total Current Assets........................................ 894,794 935,412 969,628
--------- --------- ---------
TOTAL ASSETS................................................ 1,822,707 1,878,620 1,968,352
========= ========= =========
LIABILITIES
PROVISIONS:
Post Retirement Benefits Other Than Pensions................ 4,334 3,951 3,951
Guarantees.................................................. 26,164 20,368 25,873
Deferred Taxes.............................................. 106,480 114,861 117,029
--------- --------- ---------
Total Provisions............................................ 136,978 139,180 146,853
--------- --------- ---------
CURRENT LIABILITIES:
Trade Accounts Payable...................................... 106,577 114,415 119,938
Accrued Salaries & Wages.................................... 68,704 75,366 73,429
Accrued Expenses............................................ 13,119 15,441 21,477
Accrued VAT and Withholding Tax on Salaries................. 61,699 60,728 55,585
Income Tax.................................................. 108,844 60,558 25,702
Other Payables.............................................. 33,395 29,939 31,970
--------- --------- ---------
Total Current Liabilities................................... 392,338 356,447 328,101
--------- --------- ---------
Total Liabilities........................................... 529,316 495,627 474,954
--------- --------- ---------
NET ASSETS.................................................. 1,293,391 1,382,993 1,493,398
--------- --------- ---------
TOTAL LIABILITIES AND NET ASSETS............................ 1,822,707 1,878,620 1,968,352
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-35
DANFOSS FLUID POWER GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996,
THE FIFTEEN MONTHS ENDED DECEMBER 31, 1997,
THE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
1996 1997 1998 SIX MONTH PERIODS
---------- -------------------------------------- ---------- -------------------------
10-01-1995 10-01-1996 10-01-1996 1-1-1997 1-1-1998 1-1-1998 1-1-1999
9-30-1996 12-31-1997 12-31-1996 12-31-1997 12-31-1998 6-30-1998 6-30-1999
---------- ---------- ----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Result of Operations before
financial items and income tax... 84,746 268,097 16,293 251,804 221,219 161,954 90,181
Change in accounts receivable...... (9,508) (48,092) 15,731 (63,823) 16,897 (75,398) (80,538)
Change in inventories.............. 23,818 (17,349) 12,071 (29,420) (56,295) (32,069) 47,722
Change in accounts payable and
accrued expenses................. (13,071) 50,128 (59,466) 109,594 12,395 (36,864) 6,509
Change in provision for Guarantees
and post retirement benefits..... (299) 5,747 3,421 2,327 (6,179) 3,347 5,505
Depreciation and amotization....... 112,293 159,359 30,850 128,508 125,799 63,659 66,427
Financial items.................... 2,539 (6,543) (91) (6,453) (26,957) (11,231) (8,522)
Taxes paid......................... -- (31,242) (25,480) (5,762) (108,844) (108,844) (60,558)
-------- -------- ------- -------- -------- -------- -------
Cash Flows from Operating
Activities..................... 200,518 380,105 (6,671) 386,775 178,035 (35,446) 66,726
-------- -------- ------- -------- -------- -------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net Purchase of Property, Plant,
Equipment and Intangible
Assets........................... (173,308) (162,615) (38,944) (123,671) (164,279) (81,858) (83,440)
Purchase of activity............... (15,248) (9,860) (9,860) -- -- -- --
-------- -------- ------- -------- -------- -------- -------
Cash Flows from Investing
Activities..................... (188,556) (172,475) (48,804) (123,671) (164,279) (81,858) (83,440)
-------- -------- ------- -------- -------- -------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Changes in financing, net.......... (8,142) (188,651) 58,925 (247,576) (22,520) 124,002 29,825
EFFECT OF EXCHANGE RATE CHANGES.... (85) (14,892) (5,014) (9,877) 9,983 (3,039) (11,711)
CASH AND CASH EQUIVALENTS:
Change in Cash and Cash
Equivalents...................... 3,735 4,087 (1,564) 5,651 1,219 3,659 1,400
Cash and cash equivalents at
beginning of year................ 28,940 32,675 32,675 31,111 36,762 36,762 37,981
-------- -------- ------- -------- -------- -------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR...................... 32,675 36,762 31,111 36,762 37,981 40,421 39,381
======== ======== ======= ======== ======== ======== =======
The accompanying notes are an integral part of these financial statements.
F-36
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
THE COMPANY AND ITS OPERATIONS
The Danfoss Fluid Power Group (the "Company" or "Combined Entities") design,
manufacture and sell motors, valves and steering throughout the world. The
Company's products are used by original equipment manufacturers ("OEMs") of
off-highway mobile equipment, including agriculture, construction, forestry,
road building, material handling and specialty markets. The Company's main
markets are Europe and North America.
The Company represents the former Mobile Hydraulics Division of Danfoss A/S
("Danfoss") and consists of four production units (one in Denmark, two in the
United States and one in Poland), and a number of sales companies throughout the
world. The headquarters are located in Nordborg, Denmark.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying combined financial statements combine the historical
financial statements of certain Danfoss subsidiaries and, to the extent
applicable, the historical accounts of Danfoss and certain of its other
subsidiaries on a carve out basis. These financial statements have been prepared
in accordance with Danish accounting principles. There have been no changes in
accounting principles during the periods presented. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying combined financial statements present audited combined
financial statements for the twelve month period ended September 30, 1996, the
fifteen month period ended December 31, 1997 and the twelve month period ended
December 31, 1998, and unaudited interim combined financial statements for the
six month periods ended June 30, 1998 and 1999.
The Unaudited interim combined financial statements reflect all adjustments
consisting of normal recurring items which, in the opinion of management, are
necessary to fairly present the results of the interim periods. The results of
operations for any interim period are not necessarily indicative of the results
for the full year. The unaudited interim combined financial statements should be
read in conjunction with the audited combined financial statements and related
notes.
Following a change in fiscal year end in 1997, the audited financial
statements were prepared for the fifteen-month period ended December 31, 1997.
To facilitate analysis of results, unaudited pro forma combined statements of
income and cash flows have been provided for the three months ended
December 13, 1996 and the twelve months ended December, 1997. The information,
which is unaudited, has been derived from internal management accounts.
The Combined Entities have certain services and functions provided to them
by Danfoss and its affiliates and the Company's operations have been financed
principally through its operating cash flows and loans from Danfoss and its
affiliates. To the extent that costs related to some of those services provided
by Danfoss and its affiliates have not previously been charged to the business
units, the combined financial statements include an allocation of these costs.
These services and functions include legal support and advice, treasury and cash
management and public relations; the related costs have been allocated on the
basis of net sales or estimated use. Although the Company believes that such
charges and allocations are reasonable, the costs reflected in the combined
financial statements are not
F-37
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION (CONTINUED)
necessarily indicative of the costs that would have been incurred if the Company
had been an independent separate entity.
The Combined Entities are not consolidated under a legal entity, have never
operated on a stand-alone basis and historically have been financed through
operating cash flows or by Danfoss. Accordingly, it is not possible, without
making a number of arbitrary allocations, to segregate net assets between
short-term financing, long-term debt and equity. Interest expense has been
allocated by determining the percentage relationship between the net assets of
the Combined Entities and total net assets of Danfoss and applying that
percentage to the total Danfoss net interest expense.
Income taxes have been calculated as if the Company had filed separate
income tax returns, in the context of Danfoss' tax strategies and organizational
structure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's entities denominated in foreign
currencies are translated to Danish Kroner at exchange rates in effect at the
balance sheet date. Statements of income are translated at average exchange
rates of the respective periods. Exchange differences stemming from the
translation of opening net assets and items of income and expense of the period
are recorded directly to net assets. Gains and losses arising from foreign
currency transactions are recorded in the statements of income of the entities
concerned.
INCOME RECOGNITION
Net Sales consist of sales of goods and services, are recognized as goods
are shipped or services are rendered, and are presented net of commissions paid.
COST OF SALES
Cost of Sales consist of direct and indirect costs related to net sales of
the year. Research and Development expenses are also included in Cost of Sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash at bank and highly liquid instruments
purchased with original maturities of three months or less.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value.
Manufactured goods are valued on the basis of production costs (direct material,
labor and production overheads, including depreciation charges). The valuation
is based on the "first-in, first-out" or weighted average methods. Goods having
a slow turnover and obsolete goods are subject to write-down.
F-38
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Land is recorded at cost and is not depreciated. Buildings, machinery and
equipment are stated at cost, less accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the
assets. Buildings and machinery under construction are stated at cost and not
depreciated until they are placed in service. Repair and maintenance costs are
charged to expense as incurred.
Estimated useful lives are as follows:
Buildings 10-37 years
Machinery 10-12 years
Equipment 3-10 years
INTANGIBLE ASSETS AND AMORTIZATION
Intangible assets, which result principally from acquisitions, consist of
goodwill which is the excess of cost over the fair value of net assets acquired.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives, not to exceed ten years.
IMPAIRMENT AND LONG-LIVED ASSETS
The Company periodically assesses whether events or circumstances have
occurred that may indicate the carrying value of its long-lived tangible and
intangible assets may not be recoverable. The carrying values of long-lived
tangible and intangible assets are evaluated based on the expected future
non-discounted operating cash flows. When such events or circumstances indicate
the carrying value of an asset may be impaired, the Company recognizes an
impairment loss.
INCOME TAXES
The provision for income taxes represents income taxes paid or payable for
the current year plus the change in deferred taxes during the year, and is
determined using the asset and liability approach. Deferred taxes result from
temporary differences between the financial and tax bases of the Company's
assets and liabilities and are provided on the basis of current tax legislation
and anticipated tax rates that will apply to taxable income in the years in
which the temporary differences are expected to reverse. Deferred tax assets are
not recorded to the extent that it is more likely than not that such deferred
tax assets will not be realized.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The cost of providing pensions and other post-retirement benefits is charged
to operations over the service lives of the employees.
F-39
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GUARANTEE PROVISION AND OTHER PRODUCT RELATED COSTS
Expenditures for research and development costs and marketing and selling
expenses are expensed as incurred. Provisions for estimated guarantee costs are
recorded at the time the related sales are recognized and periodically adjusted
to reflect actual experience.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. OTHER OPERATING INCOME
Other operating income for 1998 consists primarily of indemnification
payments received from the Danish Employer Confederation because of a general
strike in April 1998.
4. NET SALES BY COUNTRY
The Company operates under one segment. Following are net sales, by
geographical region, for the year ended September 30, 1996, the fifteen-month
ended December 31, 1997 and the year ended December 31, 1998.
1996 1997 1998
---------- -------------------------------------- ----------
10-01-1995 10-01-1996 10-01-1996 1-1-1997 1-1-1998
9-30-1996 12-31-1997 12-31-1996 12-31-1997 12-31-1998
---------- ---------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
North America.......................... 471,345 744,187 121,909 622,278 614,493
--------- --------- ------- --------- ---------
Germany................................ 284,553 340,905 63,243 277,662 315,385
Scandinavian........................... 256,621 333,221 59,498 273,723 305,212
Great Britain.......................... 233,927 323,986 56,170 267,816 227,891
Italy.................................. 216,470 258,764 48,056 210,708 238,065
France................................. 139,658 179,938 32,246 147,692 160,745
Rest of Europe......................... 187,645 263,182 42,712 220,470 239,309
--------- --------- ------- --------- ---------
Europe................................. 1,318,874 1,699,996 301,925 1,398,071 1,486,607
Rest of the world...................... 153,282 199,399 35,525 163,874 168,231
--------- --------- ------- --------- ---------
TOTAL.................................. 1,943,501 2,643,582 459,359 2,184,223 2,269,331
--------- --------- ------- --------- ---------
5. LOSS /(GAIN) ON FOREIGN EXCHANGE (STATEMENT OF INCOME)
The gain and loss on foreign exchange is primarily caused by Danfoss Fluid
Power A/S's intercompany transactions with the Fluid Power entity in the United
States. The changes in exchange
F-40
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
5. LOSS /(GAIN) ON FOREIGN EXCHANGE (STATEMENT OF INCOME) (CONTINUED)
rates, between the US dollar and the Danish Kroner, have been considerable over
the periods presented.
6. INTANGIBLE ASSETS
Intangible assets were as follows at December 31, 1997 and 1998 (audited)
and June 30, 1999 (unaudited):
12-31-1997 12-31-1998 6-30-1999
---------- ---------- -----------
(UNAUDITED)
Cost
Goodwill.................................................. 34,944 34,944 34,944
------ ------- -------
Less accumulated amortization............................... (9,388) (12,882) (14,629)
------ ------- -------
Net intangibles assets...................................... 25,556 22,062 20,315
------ ------- -------
Amortization expense for the year ended September 30, 1996, the fifteen
month period ended December 31, 1997 and the year ended December 31, 1998 was
DKK 2,085, 4,368 and 3,495, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment were as follows at December 31, 1997 and 1998,
(audited) and June 30, 1999 (unaudited):
12-31-1997 12-31-1998 6-30-1999
---------- ---------- -----------
(UNAUDITED)
Cost
Land and buildings........................................ 158,354 152,383 172,246
Machinery................................................. 1,452,534 1,519,778 1,614,053
Equipment................................................. 117,841 130,148 140,745
Construction in progress.................................. 59,921 75,148 70,615
--------- --------- ----------
Total cost.................................................. 1,788,650 1,877,457 1,997,659
Less accumulated depreciation............................... (902,848) (975,183) (1,038,352)
--------- --------- ----------
Net property, plant and equipment........................... 885,802 902,274 959,307
--------- --------- ----------
Depreciation expense for the year ended September 30, 1996, the fifteen
month period ended December 31, 1997 and the year ended December 31, 1998
amounted to DKK 112,293, 159,359 and 125,799, respectively.
F-41
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
8. INVENTORIES
Inventories consist of the following at December 31, 1997 and 1998
(audited), and June 30, 1999 (unaudited):
12-31-1997 12-31-1998 6-30-1999
---------- ---------- -----------
(UNAUDITED)
Raw materials and supplies.................................. 116,193 127,643 109,487
Work in process............................................. 92,544 92,121 95,984
Finished Goods.............................................. 256,968 302,236 268,807
------- ------- -------
Total inventories........................................... 465,705 522,000 474,278
------- ------- -------
Amounts appearing in the preceding table are presented net of valuation
allowances of DKK 43,247 and 49,083 at December 31, 1997 and 1998 (audited),
respectively, and DKK 61,557, at June 30, 1999 (unaudited).
9. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an allowance for bad debts of DKK
5,259 and 8,826 at December 31, 1997 and 1998, respectively.
10. RELATED PARTY TRANSACTIONS
The products are sold directly, or through Danfoss Sales companies, to large
original equipment manufacturers (OEMs). Following are net sales to Danfoss
Sales Companies for the year ended September 30, 1996, the fifteen months ended
December 31, 1997 and the year ended December 31, 1998:
1996 1997 1998
---------- -------------------------------------- ----------
10-01-1995 10-01-1996 10-01-1996 1-1-1997 1-1-1998
9-30-1996 12-31-1997 12-31-1996 12-31-1997 12-31-1998
---------- ---------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
Sales to Danfoss Sales Companies........ 1,638 5,362 990 4,372 10,261
------- ------- ------ ------- -------
Accounts receivables and payables to Danfoss were as follows at December 31,
1997 and 1998:
12-31-1997 12-31-1998
---------- ----------
Accounts Receivables, Danfoss (included in Accounts
Receivable)............................................... 3,361 5,932
------ ------
Accounts Payables, Danfoss (included in Trade Accounts
Payable).................................................. 17,811 6,361
------ ------
The Combined Entities have certain services and functions provided to them
by Danfoss and its affiliates. To the extent that costs related to some of those
services provided by Danfoss and its affiliates have not previously been charged
to the business units, the combined financial statements include an allocation
of these costs. These services and functions include legal support and advice,
treasury and cash management and public relations, which costs have been
allocated on the basis of net sales or estimated use. The Company rents
production buildings and office space with Danfoss. All ongoing transactions
between Danfoss and the Company will be regulated by contracts.
F-42
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
11. INCOME TAXES
The details of the provision for income taxes are as follows:
1996 1997 1998
---------- -------------------------------------- ----------
10-01-1995 10-01-1996 10-01-1996 1-1-1997 1-1-1998
9-30-1996 12-31-1997 12-31-1996 12-31-1997 12-31-1998
---------- ---------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
Current income tax...................... 27,948 108,844 2,310 106,534 60,558
Change in deferred tax.................. 5,114 (15,406) 3,439 (18,845) 6,064
------ ------- ----- ------- ------
Total income tax provision.............. 33,062 93,438 5,749 87,689 66,622
====== ======= ===== ======= ======
The components of the Company's net deferred tax assets and liabilities,
determined on a jurisdictional basis, are as follows:
12-31-1997 12-31-1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Net operating loss carryforwards......................... 5,763 -- 10,427 --
Tax over book depreciation and amortization.............. 1,348 (106,368) 1,349 (113,985)
Inventory valuation allowances, bad debt and warranty
reserves not deducted for tax.......................... 9,444 (112) 7,096 (876)
------ -------- ------ --------
Net deferred tax assets and (liabilities)................ 16,555 (106,480) 18,872 (114,861)
====== ======== ====== ========
Classification of current and non-current deferred taxes:
Current deferred tax assets and (liabilities)............ 9,444 (112) 7,096 (876)
Long term deferred tax assets and (liabilities).......... 7,111 (106,368) 11,776 (113,985)
------ -------- ------ --------
16,555 (106,480) 18,872 (114,861)
------ -------- ------ --------
The Company has recognized deferred tax assets for net operating losses
which are more likely than not to be realized, otherwise, deferred tax assets
are not recognized for net operating losses.
12. EMPLOYEE PENSION AND OTHER POST-RETIREMENT BENEFITS
The majority of the Company's employees have been covered for pension
benefits through various Danfoss pension arrangements, and substantially all of
the United States based employees are also covered for post-retirement medical
benefits.
DEFINED CONTRIBUTION PENSION PLANS
Pension benefits are provided through defined contribution plans, covering
substantially all employees. The largest plan, the Danfoss Fluid Power A/S
Pension Plan, covers approximately 61% of the Company's employees. The Company
is required to make an annual contribution of 3% of members' basis salaries and
the employees can contribute to the pension plan on a voluntarily basis.
Substantially all pension plans are fully funded, the assets being held in
custody by insurance companies or independent investment managers.
F-43
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
12. EMPLOYEE PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)
Total wages and salaries for the year ended September 30, 1996, the fifteen
month period ended December 31, 1997 and the year ended December 31, 1998
amounted to DKK 619,478, 827,520 and 739,368, respectively. Included in total
wages and salaries are Company sponsored benefit plans for the year ended
September 30, 1996, the fifteen month period ended December 31, 1997 and the
year ended December 31, 1998, which amounted to DKK 22,853, 31,879 and 27,615,
respectively.
POST-RETIREMENT MEDICAL BENEFITS
In the United States, certain employees are provided with post-retirement
benefits, which are unfunded. The following schedule sets out the plan's benefit
obligations and funded status at December 31, 1997 and 1998.
1997 1998
-------- --------
Benefit obligation at December 31........................... 1,650 3,356
Fair value of assets........................................ -- --
Unrecognized cumulative (gain) loss......................... (1,940) 153
Unrecognized prior service cost............................. (744) (748)
------ -----
Accrued post-retirement benefit cost at December 31......... 4,334 3,951
------ -----
The unrecognized cumulative gain at December 31, 1997 is attributable
principally to a demographic gain of DKK 1,260 in the retiree population and a
gain of DKK 363 due to the increase in the retiree contributions under the
Medicare Supplemental Plan.
The unrecognized prior service cost results from a plan amendment that
requires a different employee contribution arrangement.
The weighted-average discount rate as of December 31, 1998 and 1997 was 7%
and 7.5%, respectively. For measurement purposes, a 7% and 8% annual rate of
increase in the per capita cost of covered benefits was assumed for 1998 and
1997, respectively.
13. COMMITMENTS AND CONTINGENCIES
Expenses paid from Danfoss Fluid Power A/S to Danfoss for use of buildings
for the year ended September 30, 1996, the fifteen month period ended
December 31, 1997 and year ended December 31, 1998 amounted to DKK 40,715,
51,567 and 30,678, respectively.
It is expected that rent contracts regarding leases of buildings, are to be
set up between the Danfoss and the Danfoss Fluid Power Group shortly, and that
the expenses for the use and maintenance of the buildings will not differ
substantially from above mentioned amounts in the foreseeable future.
F-44
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
14. NET ASSETS
Following are the changes in Net Assets for the year ended September 30,
1996, the fifteen months ended December 31, 1997 and the year ended
December 31, 1998.
1996 1997 1998
---------- ---------- ----------
10-01-1995 10-01-1996 1-1-1998
9-30-1996 12-31-1997 12-31-1998
---------- ---------- ----------
Net Assets at beginning of period........................... 1,217,078 1,278,680 1,293,391
Net income................................................ 54,223 168,116 127,640
Translation gains (losses)................................ 15,521 35,246 (15,518)
Change in financing, net.................................. (8,142) (188,651) (22,520)
--------- --------- ---------
Net Assets at end of period................................. 1,278,680 1,293,391 1,382,993
--------- --------- ---------
15. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN DANISH AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
The Company's accounts are prepared in accordance with generally
accepted accounting principles in Denmark (Danish GAAP), which differ in
certain significant respects from those applicable in the United States (US
GAAP). These differences, together with the approximate effects of the
adjustments on net income and net assets, relate principally to the items
set out below:
GOODWILL
Under Danish GAAP goodwill arising on acquisition is capitalized and
amortized by charges against income over 10 years. Under US GAAP goodwill
arising on acquisition is capitalized and amortized by charges against income
over periods not to exceed 40 years. For US GAAP, goodwill has been amortized by
the Company over 20 years.
CAPITALIZATION OF INTEREST
There is no accounting standard in Denmark requiring the capitalization of
interest, and the Company does not capitalize interest in its financial
statements. US GAAP requires interest incurred as part of the cost of
constructing fixed assets to be capitalized and amortized over the estimated
useful lives of assets.
COMPUTER SOFTWARE
Under Danish GAAP, the capitalization of the cost of computer software is
not required and the Company does not capitalize such costs. US GAAP requires
that certain costs of computer software developed or obtained for internal use
be capitalized and amortized over the estimated useful lives of the software.
For US GAAP purposes, such capitalized costs are being amortized over four
years.
DEFERRED TAXATION
Difference in deferred taxation arises in relation to the tax effect of
other US GAAP differences.
F-45
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
15. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN DANISH AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. (CONTINUED)
REPORTING COMPREHENSIVE INCOME
Under Danish GAAP, certain gains and losses are accounted for directly in
Net Assets (Stockholders' Equity). Under US GAAP, SFAS no. 130, "REPORTING
COMPREHENSIVE INCOME", establishes standards for the reporting and presentation
of comprehensive income and its components in a full set of financial
statements. Comprehensive income/(loss) generally encompasses all changes in Net
Assets, except those arising from transactions with owners. The Company's
comprehensive income differs from net income only by the amount of the foreign
currency translation differences charged to Net Assets for the period.
Comprehensive income and accumulated other Comprehensive income for the
periods presented are as follows:
ACCUMULATED OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
------------- -----------------
Balance at October 1, 1996.................................. 15,025
COMPREHENSIVE INCOME
Net income per Danish GAAP.................................. 168,116
Foreign exchange translation adjustment..................... 35,246 35,246
------- -------
Comprehensive income...................................... 203,362
-------
Balance at December 31, 1997................................ 50,271
-------
COMPREHENSIVE INCOME
Net income per Danish GAAP.................................. 127,640
Foreign exchange translation adjustment..................... (15,518) (15,518)
------- -------
Comprehensive income...................................... 112,122
-------
Balance at December 31, 1998................................ 34,753
-------
CLASSIFICATION OF CURRENT LIABILITIES
Under Danish GAAP, all provisions and deferred taxes are classified as
non-current liabilities even though they include amounts due within one year or,
in the case of deferred taxes, amounts that relate to current assets or to
temporary differences which reverse within one year, which amounts would be
classified as current liabilities under US GAAP.
STATEMENTS OF CASH FLOWS: BASIS OF PRESENTATION
The Company's statements of cash flows are prepared in accordance with
Danfoss presentation. The principal differences between this presentation and
that required by US GAAP are as follows: US GAAP requires three categories of
cash flows to be reported: operating, investing and financing; under US GAAP,
exchange rate fluctuation adjustments are classified in the same category as the
items which generated the adjustments; and under US GAAP, purchases and sales of
property, plant and equipment and intangible assets are shown separately, and
changes in deferred taxes are presented in the cash flow statement.
F-46
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
15. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN DANISH AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. (CONTINUED)
Effect on Net income of differences between Danish and US GAAP:
1997 1998 SIX MONTH PERIODS
-------------------------------------- ---------- -------------------------
10-01-1996 10-01-1996 1-1-1998 1-1-1998 1-1-1998 1-1-1999
12-31-1997 12-31-1996 12-31-1997 12-31-1998 6-30-1998 6-30-1999
---------- ----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NET INCOME
Net Income under Danish GAAP........ 168,116 10,453 157,662 127,640 98,459 54,019
US GAAP adjustments:................ -- -- -- --
Net impact of capitalization of
software costs.................. (45) (9) (36) (1,485) (755) (717)
Amortization of goodwill.......... 2,184 437 1,747 1,747 874 874
Net impact of capitalization of
interest........................ (109) (42) (67) 123 19 (68)
Tax effect of US GAAP
reconciliation items............ (728) (138) (589) (132) (47) (30)
------- ----- ------- ------- ------ ------
Net Income under US GAAP............ 169,418 10,701 158,717 127,893 98,550 54,078
------- ----- ------- ------- ------ ------
Effect on Net Assets of differences between Danish and US GAAP:
12-31-1997 12-31-1998 6-30-1999
---------- ---------- -----------
(UNAUDITED)
NET ASSETS
Net Assets under Danish GAAP................................ 1,293,391 1,382,993 1,493,398
US GAAP adjustments:
Net impact of capitalization of software costs............ 3,984 2,448 1,783
Amortization of goodwill.................................. 4,694 6,441 7,315
Net impact of capitalization of interest.................. 3,327 3,451 3,383
Tax effect of US GAAP reconciliation items................ (4,305) (4,217) (4,181)
--------- --------- ---------
Net Assets under US GAAP.................................... 1,301,091 1,391,116 1,501,698
--------- --------- ---------
16. NEW ACCOUNTING STANDARDS NOT YET ADOPTED
Accounting standard 12--Management Discussions (Regnskabsvejledning
12--Ledelsens arsberetning): In April 1998, the Association of State Authorized
Public Accountants in Denmark issued Accounting standard No. 12 "MANAGEMENT
DISCUSSIONS" ("RV 12"). RV 12 sets out guidelines for what should be included in
the management discussions related to financial statements. As the RV 12 sets
out guidelines for disclosure requirements that are overall similar with the
information that is included in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Company does not believe
that this standard will have a material impact on the Company's combined
financial statements. RV 12 is effective for accounting periods starting
January 1, 1999 or later.
F-47
DANFOSS FLUID POWER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DANISH KRONER)
16. NEW ACCOUNTING STANDARDS NOT YET ADOPTED (CONTINUED)
Accounting standard 13--Related parties (Regnskabsvejledning 13--Nrtstaende
parter): In July 1999, the Association of State Authorized Public Accountants in
Denmark issued Accounting Standard 13 "RELATED PARTIES" ("RV 13"). RV 13 sets
out guidelines for disclosing information about related parties. As the RV 13
sets guidelines for disclosing information that does not exceed the disclosures
in these combined financial statements, the Company does not believe that this
standard will have a material impact on the Company's combined financial
statements. RV 13 is effective for accounting periods starting January 1, 2000
or later.
17. DANISH ACCOUNTING LAW
The combined financial statements do not constitute "statutory accounts"
within the meaning of The Danish Accounting Law for any of the periods
presented. These combined financial statements exclude certain parent company
statements and other information required by The Danish Accounting Law; however,
they include all material disclosures required by generally accepted accounting
principles in Denmark.
F-48
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX A
------------------------------------
STOCK EXCHANGE AGREEMENT
------------------------------------
BETWEEN
DANFOSS MURMANN HOLDING A/S,
AND
SAUER INC.
DATED AS OF JANUARY 22, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
SECTION PAGE
- --------------------- --------
ARTICLE I
DEFINITIONS
1.01. Certain Defined Terms....................................... A-1
1.02. Other Defined Terms......................................... A-10
ARTICLE II
EXCHANGE OF SECURITIES
2.01. Share Exchange.............................................. A-11
2.02. [RESERVED].................................................. A-11
2.03. Closing; Effective Time..................................... A-11
2.04. Closing Deliveries by Holdco................................ A-11
2.05. Closing Deliveries by Sauer................................. A-11
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDCO
3.01. Organization, Authority of Holdco........................... A-12
Organization and Qualification of the DFP Companies and the
3.02. DFP Subsidiaries.......................................... A-12
Capital Stock of the DFP Companies; Ownership of the
3.03. Shares.................................................... A-12
3.04. Subsidiaries................................................ A-12
3.05. No Conflict................................................. A-13
3.06. Governmental Consents and Approvals......................... A-13
3.07. DFP Financial Statements; DFP Year-End Balance Sheet........ A-13
3.08. Year 2000 Compliance........................................ A-14
Conduct in the Ordinary Course; Absence of Certain Changes,
3.09. Events and Conditions..................................... A-14
3.10. Litigation.................................................. A-15
3.11. Compliance with Laws........................................ A-15
3.12. Environmental Matters....................................... A-16
3.13. DFP Companies Material Contracts............................ A-16
3.14. Intellectual Property....................................... A-17
3.15. Real Property............................................... A-18
3.16. Tangible Personal Property.................................. A-18
3.17. DFP Assets.................................................. A-18
3.18. Employee Benefit Matters.................................... A-19
3.19. Labor Matters............................................... A-20
3.20. Taxes....................................................... A-21
3.21. Brokers..................................................... A-21
3.22. Investment Purposes......................................... A-21
3.23. Indebtedness................................................ A-21
3.24. Reorganization.............................................. A-22
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SAUER
4.01. Organization, Authority of Sauer............................ A-22
4.02. Organization and Qualification of Sauer Subsidiaries........ A-22
4.03. Capitalization.............................................. A-22
4.04. Sauer Subsidiaries.......................................... A-23
4.05. No Conflict................................................. A-23
4.06. Governmental Consents and Approvals......................... A-23
4.07. Sauer Financial Statements; Sauer Year-End Balance Sheet.... A-24
A-i
SECTION PAGE
- --------------------- --------
4.08. Year 2000 Compliance........................................ A-24
Conduct in the Ordinary Course; Absence of Certain Changes,
4.09. Events and Conditions..................................... A-24
4.10. Litigation.................................................. A-25
4.11. Compliance with Laws........................................ A-26
4.12. Environmental Matters....................................... A-26
4.13. Sauer Material Contracts.................................... A-26
4.14. Intellectual Property....................................... A-27
4.15. Real Property............................................... A-28
4.16. Tangible Personal Property.................................. A-28
4.17. Sauer Assets................................................ A-28
4.18. Employee Benefit Matters.................................... A-29
4.19. Labor Matters............................................... A-30
4.20. Taxes....................................................... A-31
4.21. SEC Filings................................................. A-31
4.22. Investment Purpose.......................................... A-32
4.23. Brokers..................................................... A-32
4.24. Investment Company Status................................... A-32
Termination of Silent Partnership Agreement; Conversion of
4.25. Silent Partnership Interests.............................. A-32
4.26. Indebtedness................................................ A-32
ARTICLE V
ADDITIONAL AGREEMENTS
5.01. Conduct of Business Prior to the Closing.................... A-32
5.02. Access to Information....................................... A-33
5.03. Confidentiality............................................. A-34
5.04. Regulatory and Other Authorizations; Notices and Consents... A-34
5.05. Notice of Developments...................................... A-34
5.06. Name Change................................................. A-35
5.07. Delayed Subsidiaries........................................ A-35
5.08. Release of Indemnity Obligations............................ A-35
5.09. Proxy Statement............................................. A-35
5.10. Stockholders' Meeting....................................... A-36
5.11. Leverage Ratio Adjustment................................... A-36
5.12. Transfer Restriction........................................ A-37
5.13. Asset Acquisition........................................... A-37
5.14. Credit Facility............................................. A-38
5.15. Indebtedness................................................ A-38
5.16. Name of Sauer Subsidiaries.................................. A-38
5.17. Amendment Resulting from U.S. Withholding Taxes............. A-38
Amendment Resulting from Lack of Danish Tax Authority
5.18. Approval.................................................. A-38
5.19. Further Action.............................................. A-38
ARTICLE VI
[RESERVED]
ARTICLE VII
TAX MATTERS
7.01. Tax Indemnity............................................... A-39
7.02. Returns and Payments........................................ A-40
7.03. Assistance and Cooperation.................................. A-41
7.04. Contests.................................................... A-41
A-ii
SECTION PAGE
- --------------------- --------
7.05. Miscellaneous............................................... A-42
7.06. Additional Covenants........................................ A-43
ARTICLE VIII
CONDITIONS TO CLOSING
8.01. Conditions to Obligations of Sauer and Holdco............... A-43
8.02. Conditions to Obligations of Holdco......................... A-44
8.03. Conditions to Obligations of Sauer.......................... A-44
ARTICLE IX
INDEMNIFICATION
9.01. Survival of Representations and Warranties.................. A-45
9.02. Indemnification............................................. A-46
9.03. Limits on Indemnification................................... A-48
9.04. Transfer of Danish Shares................................... A-48
9.05. Silent Partnership.......................................... A-48
9.06. Tax Matters................................................. A-48
9.07. No Duplicative Liability.................................... A-48
ARTICLE X
TERMINATION AND WAIVER
10.01. Termination................................................. A-49
10.02. Effect of Termination....................................... A-50
10.03. Waiver A-50
ARTICLE XI
GENERAL PROVISIONS
11.01. Expenses.................................................... A-50
11.02. Notices..................................................... A-50
11.03. Public Announcements........................................ A-52
11.04. Headings.................................................... A-52
11.05. Severability................................................ A-52
11.06. Entire Agreement............................................ A-53
11.07. Assignment.................................................. A-53
11.08. No Third Party Beneficiaries................................ A-53
11.09. Amendment................................................... A-53
11.10. Governing Law............................................... A-53
11.11. Arbitration................................................. A-53
11.12. Specific Performance........................................ A-53
Schedule I Schedule of Sauer Applied U.S. GAAP
Schedule II Schedule of Sauer Expenses
Schedule III Schedule of DFP Expenses
Schedule IV Term Sheet
A-iii
STOCK EXCHANGE AGREEMENT, dated as of January 22, 2000, between DANFOSS
MURMANN HOLDING A/S, a corporation organized under the laws of Denmark
("HOLDCO"), and SAUER INC., a Delaware corporation ("SAUER").
W I T N E S S E T H:
WHEREAS, Holdco owns, or prior to the Closing Date will own, all of the
issued and outstanding shares of (a) common stock, par value DKR100 per share
(the "DANISH SHARES"), of DANFOSS FLUID POWER A/S, a corporation organized under
the laws of Denmark ("DFP") and (b) common stock, no par value per share (the
"U.S. SHARES" and, together with the Danish Shares, the "SHARES"), of DANFOSS
FLUID POWER INC., an Illinois corporation ("USCO." and, together with DFP, the
"DFP COMPANIES");
WHEREAS, Holdco owns, or prior to the Closing Date will own, 10,362,500
shares of common stock, par value $.01 per share, of Sauer ("SAUER COMMON
STOCK");
WHEREAS, Holdco wishes to exchange the Danish Shares and the U.S. Shares for
16,149,812 of Sauer Common Stock, and Sauer wishes to exchange 16,149,812 shares
of Sauer Common Stock for the Danish Shares and the U.S. Shares, upon the terms
and subject to the conditions set forth herein;
WHEREAS, Sauer Common Stock is listed on the NYSE and the FSE;
WHEREAS, pursuant to the rules and regulations of the NYSE, the issuance of
the Sauer Common Stock in exchange for the Shares (the "STOCK ISSUANCE")
requires the approval of the stockholders of Sauer;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
and covenants hereinafter set forth, Sauer and Holdco hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings:
"ACTION" means any claim, action, suit, arbitration, inquiry, proceeding or
investigation by or before any Governmental Authority.
"AFFILIATE" means, with respect to any specified Person, any other Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person.
"AGREEMENT" or "THIS AGREEMENT" means this Stock Exchange Agreement, dated
as of January 22, 2000, between Holdco and Sauer (including the Exhibits and
Schedules hereto, the Sauer Disclosure Schedule and the DFP Disclosure Schedule)
and all amendments hereto made in accordance with the provisions of
Section 11.09.
"BUSINESS" means the business of designing, manufacturing and selling
highly engineered hydraulic systems and components for use primarily in
demanding applications of off-highway mobile equipment and all other business
which prior to the date hereof has been conducted by the DFP Companies and the
DFP Subsidiaries and by Danfoss with respect to the Business.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday or other day
on which banks are required or authorized by law to be closed in The City of
New York.
A-1
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended through the date hereof.
"CODE" means the Internal Revenue Code of 1986, as amended through the date
hereof.
"CONFIDENTIALITY AGREEMENT" means the letter agreement dated as of
September 21, 1999 between Danfoss and Sauer.
"CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL
WITH"), with respect to the relationship between or among two or more Persons,
means the possession, directly or indirectly or as trustee or executor, of the
power to direct or cause the direction of the affairs or management of a Person,
whether through the ownership of voting securities, as trustee or executor, by
contract or otherwise, including, without limitation, the ownership, directly or
indirectly, of securities having the power to elect a majority of the board of
directors or similar body governing the affairs of such Person.
"CREDIT FACILITY" means the credit facility entered into by DFP prior to
Closing pursuant to the terms of a credit agreement, in form and substance
reasonably satisfactory to both Danfoss and Sauer.
"DANFOSS" means Danfoss A/S, a corporation organized under the laws of
Denmark.
"DANFOSS SHARED SERVICES AGREEMENT" means the Shared Services Agreement,
dated the Closing Date, between Danfoss and the DFP Companies, substantially in
the form of Exhibit C attached hereto.
"DANISH ANTITRUST NOTIFICATION" means the notification required by the
Danish Antitrust Code.
"DANISH GAAP" means Danish generally accepted accounting principles and
practices in effect from time to time and as applied by Danfoss consistently
throughout the periods involved.
"DEBT" of any Person means, without duplication, on a consolidated basis as
shown on any specified consolidated balance sheet of such Person prepared in
accordance with Sauer Applied U.S. GAAP, (a) all indebtedness of such Person for
borrowed money, (b) all obligations of such Person for the deferred purchase
price of property or services (other than trade payables incurred in the
ordinary course of such Person's business unless such trade payables are past
due in excess of such Person's customary payment practices), (c) all obligations
of such Person evidenced by notes, bonds, debentures or other similar
instruments, (d) all obligations of such Person created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (e) all obligations of such Person as lessee under
leases that have been or should be, in accordance with Sauer Applied U.S. GAAP,
recorded as capital leases, (f) all obligations, contingent or otherwise, of
such Person in respect of acceptances, letters of credit or similar extensions
of credit, (g) all obligations of such Person in respect of hedge agreements,
(h) all Debt of others referred to in clauses (a) through (g) above or clause
(i) below guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement
(1) to pay or purchase such Debt or to advance or supply funds for the payment
or purchase of such Debt, (2) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of enabling
the debtor to make payment of such Debt or to assure the holder of such Debt
against loss, (3) to supply funds to or in any other manner invest in the debtor
(including any agreement to pay for property or services irrespective of whether
such property is received or such services are rendered) or (4) otherwise to
assure a creditor against loss, and (i) all Debt referred to in clauses
(a) through (h) above secured by (or for which the holder of such Debt has an
existing right, contingent or otherwise, to be secured by) any lien on property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Debt.
A-2
"DFP ADJUSTED DEBT" means an amount equal to the difference between
(a) Debt and (b) cash and cash equivalents. For the purposes of this definition,
Debt and cash and cash equivalents shall be each determined by reference to the
DFP Year-End Balance Sheet.
"DFP DISCLOSURE SCHEDULE" means the DFP Disclosure Schedule, to be dated on
or before the date which is five Business Days after the date hereof, forming a
part of this Agreement and to be acceptable, in form and substance, in the good
faith judgment of Sauer.
"DFP ADJUSTED EQUITY" shall mean an amount equal to the sum of (a) Equity
and (b) the product of (i) any quarterly dividend per share declared and paid in
respect of Sauer Common Stock for the quarter ended March 31, 2000 and
(ii) 16,149,812. For the purposes of this definition, Equity shall be determined
by reference to the DFP Year-End Balance Sheet.
"DFP FINANCIAL STATEMENTS" means true and complete copies of (a) the
audited consolidated balance sheet of the DFP Companies prepared in accordance
with Danish GAAP and reconciled to Sauer Applied U.S. GAAP (i) as of
December 31, 1997 and (ii) as of December 31, 1998, (b) the related audited
consolidated statements of income and cash flows of the DFP Companies for
(i) the year ended September 30, 1996, (ii) the fifteen months ended
December 31, 1997, and (iii) the year ended December 31, 1998, each prepared in
accordance with Danish GAAP and reconciled to Sauer Applied U.S. GAAP, together
with all related notes and schedules thereto, accompanied by reports thereon by
Holdco's Accountants, and (c) the unaudited consolidated balance sheet of the
DFP Companies as of June 30, 1999 prepared in accordance with Danish GAAP
reconciled to Sauer Applied U.S. GAAP, and the related consolidated statements
of income and cash flows of the DFP Companies for the six months ended June 30,
1999, together with all related notes and schedules thereto.
"DFP LEVERAGE RATIO" means the ratio of (a) DFP Adjusted Debt to (b) an
amount equal to the sum of (i) DFP Adjusted Equity and (ii) DFP Adjusted Debt.
"DFP SHARED SERVICES AGREEMENT" means the Shared Services Agreement, dated
the Closing Date, between Danfoss and the DFP Companies, substantially in the
form of Exhibit H attached hereto.
"DFP SUBSIDIARIES" means the subsidiaries of DFP, whether now existing or
to be created, organized or incorporated in connection with the Reorganization,
including, without limitation, Danfoss Hydraulik A/S, Danfoss Fluid Power AB,
Danfoss Fluid Power AS, Oy Danfoss Fluid Power Ab, Danfoss Fluid Power Ltd.,
Danfoss Fluid Power GmbH, Danfoss Fluid Power S.a.r.l., Danfoss Fluid
Power S.r.l., Danfoss Fluid Power Z.o.o. and any and all corporations,
partnerships, joint ventures, associations and other entities controlled by DFP
directly or indirectly through one or more intermediaries.
"DFP SYSTEMS" shall mean all computer, hardware, software, systems and
equipment (including embedded microcontrollers in noncomputer equipment) used,
sold or licensed by the DFP Companies or any DFP Subsidiary and material to or
necessary for any DFP Company or any DFP Subsidiary to carry on its business as
currently conducted.
"DFP YEAR-END BALANCE SHEET" means the audited consolidated balance sheet
of the DFP Companies and the DFP Subsidiaries, to be dated as of December 31,
1999 and prepared in accordance with Danish GAAP and reviewed and reconciled to
Sauer Applied U.S. GAAP, without taking into consideration the effect of the
transactions contemplated by this Agreement other than the Schedule III
Expenses.
"DISTRIBUTOR AGREEMENT" means the Distributor Agreement, dated on or before
the Closing Date, between Danfoss and DFP, substantially in the form of
Exhibit D attached hereto.
A-3
"ENCUMBRANCE" means any security interest, pledge, mortgage, lien
(including, without limitation, environmental and tax liens), charge,
encumbrance, adverse claim, preferential arrangement or restriction of any kind,
including, without limitation, any restriction on the use, voting, transfer,
receipt of income or other exercise of any attributes of ownership.
"ENVIRONMENT" means surface waters, groundwaters, soil, subsurface strata
and ambient air.
"ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or violation, investigations, proceedings, consent orders or
consent agreements relating in any way to any Environmental Law or any
Environmental Permit (hereafter "CLAIMS"), including, without limitation,
(a) any and all Claims by Governmental Authorities for enforcement, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law and (b) any and all Claims by any Person seeking
damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Materials or arising from alleged
injury or threat of injury to health, safety or the Environment.
"ENVIRONMENTAL CONDITION" means a condition relating to or arising or
resulting from a failure to comply with any applicable Environmental Law or
Environmental Permit or a Release of Hazardous Materials into the Environment.
"ENVIRONMENTAL LAWS" means any Law, as amended, now in effect and any
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to the environment,
health, safety or Hazardous Materials, including, without limitation, the
CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901
ET SEQ.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 6901
ET SEQ.; the Clean Water Act, 33 U.S.C. Sections 1251 ET SEQ.; the Toxic
Substances Control Act, 15 U.S.C. Sections 2601 ET SEQ.; the Clean Air Act,
42 U.S.C. Sections 7401 ET SEQ.; the Safe Drinking Water Act, 42 U.S.C.
Sections 300F ET SEQ.; the Atomic Energy Act, 42 U.S.C. Sections 2011 ET SEQ.;
the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136
ET SEQ.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C. Sections 301
ET SEQ.
"ENVIRONMENTAL PERMITS" means all permits, approvals, identification
numbers, licenses and other authorizations required under any applicable
Environmental Law.
"ENVIRONMENTAL REPORTS" means, with respect to any Person, all
environmental assessment, audit or compliance reports, including, without
limitation, such reports or other memoranda that are internally generated or
generated by outside consultants, concerning any aspect of such Person, any
subsidiary of such Person or the business or operations of such Person or in
connection with any Real Property currently or formerly owned or leased by such
Person or any subsidiary of such Person.
"EQUALIZATION CONTRIBUTION" means the capital contribution (if any) of
Danfoss to either DFP or USCo. (in Danfoss' sole discretion) to be made prior to
the Closing Date in an amount equal to the amount by which Debt included on the
DFP Year-End Balance Sheet must be decreased (if any) in order for the DFP
Leverage Ratio to equal to the Sauer Leverage Ratio.
"EQUALIZATION DIVIDEND" means the special dividend (if any) of either DFP
or USCo. to be paid to Danfoss prior to the Closing Date in an amount equal to
the amount by which Debt included on the DFP Year-End Balance Sheet must be
decreased (if any) in order for the DFP Leverage Ratio to equal to the Sauer
Leverage Ratio, net of any applicable United States withholding taxes.
"EQUITY" means, with respect to any Person, the amount calculated by
subtracting from the total consolidated assets shown on any specified
consolidated balance sheet of such Person prepared in accordance with Sauer
Applied U.S. GAAP the total consolidated liabilities shown on such
A-4
consolidated balance sheet, without taking into consideration the effect of the
transactions contemplated by this Agreement other than, in the case of Sauer,
the Schedule II Expenses, and, in the case of the DFP Companies, the
Schedule III Expenses.
"FACILITIES LEASE" means the Facilities Lease, dated on or before the
Closing Date, between Danfoss and DFP, substantially in the form of Exhibit I
attached hereto.
"FINANCIAL STATEMENTS" means the Sauer Financial Statements and the DFP
Financial Statements and "FINANCIAL STATEMENT" means the Sauer Financial
Statements or the DFP Financial Statements, as appropriate.
"FSE" means the Frankfurt Stock Exchange.
"GERMAN ANTITRUST ACT" shall mean the January 1, 1999 version of the Gesetz
gegen Wettbewerbsbeschrankungen.
"GERMAN ANTITRUST AUTHORITY NOTIFICATION" means the notification required
by the German Antitrust Act.
"GOVERNMENTAL AUTHORITY" means any governmental, regulatory or
administrative authority, agency or commission or any court, tribunal, or
judicial or arbitral body whatsoever, including, without limitation, the United
States federal, state or local or any foreign government.
"GOVERNMENTAL ORDER" means any order, writ, judgment, injunction, decree,
stipulation, determination or award entered by or with any Governmental
Authority.
"HAZARDOUS MATERIALS" means (a) petroleum and petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, transformers or other equipment that contain
polychlorinated biphenyls, and radon gas, (b) any other chemicals, materials or
substances defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances", "toxic pollutants",
"contaminants" or "pollutants", or words of similar import, under any applicable
Environmental Law, and (c) any other chemical, material or substance exposure to
which is regulated by any Governmental Authority.
"HOLDCO'S ACCOUNTANTS" means KPMG, independent accountants of the DFP
Companies and the DFP Subsidiaries.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"INTELLECTUAL PROPERTY" means, with respect to any Person, (a) all domestic
and foreign patents and applications therefor and all reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof; (b) all
inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know-how, technology, technical data and
customer lists, and documentary materials (including, without limitation,
documents, manuals, blueprints, specifications, computer records, discs, tapes,
other electronic, magnetic or optical storage media, and things constituting,
containing, documenting, describing, disclosing or embodying the foregoing)
relating to any of the foregoing; (c) all copyrights, copyright registrations
and applications therefor, and all other rights corresponding thereto throughout
the world; (d) all mask works, mask works registrations and applications
therefor; (e) all industrial designs and any registrations and applications
therefor; (f) all trade names, logos, common law trademarks and service mark,
trademark and service mark registrations and applications therefor; (g) all
computer software (including, without limitation, all source codes, object
codes, firmware, development tools, files, records and data, all media on which
any of the foregoing is recorded and all documentation related to the foregoing)
and any
A-5
proprietary rights in such computer software; (h) all income, royalties, damages
and payments now and hereafter due and/or payable with respect to any of the
foregoing (including, without limitation, damages and payments for past, present
and future infringements or misappropriations thereof); and (i) all rights to
sue past, present and future infringements or misappropriations of the
foregoing.
"INVENTORIES" means, with respect to any Person, all inventory,
merchandise, purchased components, semi-finished goods, finished goods, and raw
materials related to the business of such Person and its subsidiaries
maintained, held or stored by or for such Person or any of its subsidiaries on
the Closing Date and any prepaid deposits for any of the same.
"IRS" means the Internal Revenue Service of the United States.
"JOINT VENTURE AGREEMENT" means the Joint Venture Agreement, dated
January 22, 2000 by and between Murmann, Danfoss and Holdco.
"KNOWLEDGE" means, with respect to any Person, the best actual knowledge,
after due inquiry, of the Chief Executive Officer, the President and each Vice
President of such Person; PROVIDED, HOWEVER, that, with respect to Holdco,
Knowledge shall be deemed to be the Knowledge of Danfoss only.
"LAW" means any federal, state, local or foreign statute, law, ordinance,
regulation, rule, code, order, other requirement or rule of law.
"LEASED REAL PROPERTY" means, with respect to any Person, the real property
leased by such Person or any of its subsidiaries, as tenant, together with, to
the extent leased by such Person or any of its subsidiaries, all buildings and
other structures, facilities or improvements currently or hereafter located
thereon, all fixtures, systems, equipment and items of personal property of such
Person or any of its subsidiaries attached or appurtenant thereto, and all
easements, licenses, rights and appurtenances relating to the foregoing.
"LIABILITIES" means any and all debts, liabilities and obligations, whether
accrued or fixed, absolute or contingent, matured or unmatured or determined or
determinable, including, without limitation, those arising under any Law
(including, without limitation, any Environmental Law), Action or Governmental
Order and those arising under any contract, agreement, arrangement, commitment
or undertaking.
"LICENSED INTELLECTUAL PROPERTY" means, with respect to any Person, all
Intellectual Property licensed or sublicensed to such Person or any of its
subsidiaries from a third party.
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, any
circumstance, change in, or effect on such Person or the business, financial
condition or results of operations of such Person or any subsidiary of such
Person that, individually or in the aggregate with any other circumstances,
changes in or effects on such Person or the business and operations of such
Person or any subsidiary of such Person, is, or reasonably would be expected to
be, materially adverse to the business, financial condition or results of
operations of such Person, other than any effect arising out of or attributable
to general economic conditions, the securities markets in general or changes
affecting the Mobile Hydraulics industry.
"MOBILE HYDRAULICS" means the design, manufacture and sale of highly
engineered hydraulic systems and components used primarily in demanding
applications of off-highway mobile equipment.
"MURMANN" means K. Murmann Verwaltungsgesellschaft mbH.
"NON-COMPETITION AGREEMENT" means the letter agreement dated the Closing
Date, hereof between Murmann, Sauer and Danfoss, substantially in the form of
Exhibit B attached hereto.
A-6
"NYSE" means The New York Stock Exchange, Inc.
"OWNED INTELLECTUAL PROPERTY" means, with respect to any Person, all
Intellectual Property in and to which such Person or any of its subsidiaries
holds, or has a right to hold, right, title and interest.
"OWNED REAL PROPERTY" means, with respect to any Person, the real property
owned by such Person or any of its subsidiaries, together with all buildings and
other structures, facilities or improvements currently or hereafter located
thereon, all fixtures, systems, equipment and items of personal property owned
by such Person or any of its subsidiaries attached or appurtenant thereto and
all easements, licenses, rights and appurtenances relating to the foregoing.
"PATENT LICENSE AGREEMENT" means the Patent License Agreement, dated on or
before the Closing Date, between Danfoss and DFP, substantially in the form of
Exhibit A attached hereto.
"PENSION DEBT" means the net amount equal to the amount of pension
liabilities and post-retirement liabilities, less the amount of pension assets,
as reflected on, in the case of Sauer, the Sauer Year-End Balance Sheet, and, in
the case of the DFP Companies, the DFP Year-End Balance Sheet. For illustrative
purposes only, the pension liabilities and the pension assets of Sauer for the
year ended Decembe 31, 1998 were $(32,847) and $3,490, respectively, each
determined by reference to footnote 7 of the Sauer Annual Report, and the
post-retirement liabilities of Sauer for the year ended December 31, 1998 were
$(13,608), determined by reference to footnote 8 of the Sauer Annual Report.
"PERMITTED ENCUMBRANCES" means such of the following as to which no
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced: (a) liens for Taxes, assessments and governmental charges or
levies not yet due and payable; (b) Encumbrances imposed by law, such as
materialmen's, mechanics', carriers', workmen's and repairmen's liens and other
similar liens arising in the ordinary course of business securing obligations
that (i) are not overdue for a period of more than 30 days and (ii) are not in
excess of $5,000 in the case of a single property or $50,000 in the aggregate at
any time; (c) pledges or deposits to secure obligations under workers'
compensation laws or similar legislation or to secure public or statutory
obligations; and (d) minor survey exceptions, reciprocal easement agreements and
other customary encumbrances on title to real property that do not, individually
or in the aggregate, materially adversely affect the value or use of such
property for its current and anticipated purposes.
"PERSON" means any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity, as well as any syndicate or
group that would be deemed to be a person under Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended.
"REAL PROPERTY" means the Leased Real Property and the Owned Real Property.
"RECEIVABLES" means, with respect to any Person, any and all accounts
receivable, notes and other amounts receivable by such Person or any of its
subsidiaries from third parties or from any Affiliates of such Person,
including, without limitation, customers, arising from the conduct of the
business or otherwise before the Closing Date, whether or not in the ordinary
course, together with all unpaid financing charges accrued thereon.
"REGULATIONS" means the Treasury Regulations (including Temporary
Regulations) promulgated by the United States Department of Treasury with
respect to the Code or other federal tax statutes.
"RELEASE" means disposing, discharging, injecting, spilling, leaking,
leaching, dumping, emitting, escaping, emptying, seeping, placing and the like
into or upon any land or water or air or otherwise entering into the
Environment.
"REMEDIAL ACTION" means all action reasonably necessary and required under
any applicable Environmental Law or Environmental Permit and all action required
by a Governmental Authority to
A-7
(i) clean up, remove, treat or handle in any other way Hazardous Materials in
the Environment; (ii) prevent the Release of Hazardous Materials so that they do
not migrate, endanger or threaten to endanger public health or the Environment;
or (iii) perform remedial investigations, feasibility studies, corrective
actions, closures, and postremedial or postclosure studies, investigations,
operations, maintenance and monitoring on, about or in any Real Property.
"REORGANIZATION" shall mean the reorganization by Danfoss of its operations
such that certain manufacturing facilities and certain sales operations of the
DFP Companies and DFP Subsidiaries shall be segregated from the overall
operations of Danfoss.
"SAUER ADJUSTED DEBT" means the amount equal to the difference between
(a) the sum of (i) Debt and (ii) fifty percent of the amount of Pension Debt and
(iii) fifty percent of the difference between the Silent Partnership Tax
Liability and $1.2 million and (b) cash and cash equivalents. For the purposes
of this definition, Debt, Pension Debt and cash and cash equivalents shall be
each determined by reference to the Sauer Year-End Balance Sheet.
"SAUER APPLIED U.S. GAAP" means United States generally accepted accounting
principles and practices as in effect from time to time and applied consistently
throughout the periods involved by Sauer in the preparation of the Sauer
Financial Statements and set forth in Schedule I to this Agreement.
"SAUER DISCLOSURE SCHEDULE" means the Sauer Disclosure Schedule, to be
dated on or before the date which is five Business Days after the date hereof,
forming a part of this Agreement and to be acceptable, in form and substance, in
the good faith judgment of Holdco.
"SAUER ADJUSTED EQUITY" means the amount equal to Equity less the Silent
Partnership Tax Liability. For the purpose of this definition, Equity shall be
determined by reference to the Sauer Year-End Balance Sheet.
"SAUER FINANCIAL STATEMENTS" means true and complete copies of (a) the
audited consolidated balance sheet of Sauer prepared in accordance with Sauer
Applied U.S. GAAP (i) as of December 31, 1997 and (ii) as of December 31, 1998,
(b) the related audited consolidated statements of income and cash flows of
Sauer for (i) the year ended December 31, 1997 and (ii) the year ended
December 31, 1998, each prepared in accordance with Sauer Applied U.S. GAAP,
together with all related notes and schedules thereto, accompanied by the
reports thereon of Sauer's Accountants and (c) the unaudited consolidated
balance sheet of Sauer as of July 4, 1999, and the related consolidated
statements of income and cash flows of Sauer for the six months ended July 4,
1999, together with all related notes and schedules thereto.
"SAUER LEVERAGE RATIO" means the ratio of (a) Sauer Adjusted Debt to
(b) an amount equal to the sum of (i) Sauer Adjusted Equity and (ii) Sauer
Adjusted Debt.
"SAUER SUBSIDIARIES" means Sauer-Sundstrand Company, SUSA Holding of
LaSalle County, Inc., SUSA Holding of Story County, Inc., SUSA Holding of
Stephenson County, Inc., Control Concepts, Inc., Hydro-Gear, Inc., Hydro-Gear
Limited Partnership, Sauer-Sundstrand SpA, Sauer-Sundstrand Ltd.,
Sauer-Sundstrand GB Ltd., Sauer-Sundstrand Ltda., Sauer-Sundstrand GmbH & Co.,
Sauer-Sundstrand Benelux BV, Sauer-Sundstrand Benelux NV, Sauer-Sundstrand
Iberica SA, Sauer-Sundstrand Hydraulique SA, Sauer-Sundstrand Svenska AB,
Sauer-Sundstrand (cs) s.r.o., Sauer Informatik GmbH, Sauer Bibus GmbH,
Sauer-Sundstrand GmbH, Sauer-Sundstrand a.s., Sauer-Sundstrand Hydratec GmbH,
Sauer ZTS a.s., and Sauer Shanghai Hydrostatic Transmission Co. Ltd.
"SAUER SYSTEMS" means all computer hardware, software, systems and
equipment (including embedded microcontrollers in noncomputer equipment) used,
sold or licensed by Sauer or any Sauer
A-8
Subsidiary and material to or necessary for Sauer or any Sauer Subsidiary to
carry on its business as currently conducted.
"SAUER YEAR-END BALANCE SHEET" means the audited consolidated balance sheet
(including related notes and schedules thereto) of Sauer and the Sauer
Subsidiaries, to be prepared in accordance with Sauer Applied U.S. GAAP and to
be dated as of December 31, 1999, for this purpose, without taking into
consideration the effect of the transactions contemplated by this Agreement
other than the Schedule II Expenses and the dividend declared by the board of
directors of Sauer on December 16, 1999.
"SAUER'S ACCOUNTANTS" means Arthur Andersen LLP, independent accountants of
Sauer.
"SILENT PARTNERSHIP" means the partnership operated pursuant to and in
accordance with the Silent Partnership Agreement.
"SILENT PARTNERSHIP AGREEMENT" means the Amended and Restated Agreement
Regarding the Establishment of a Silent Partnership between Sauer-Sundstrand
GmbH & Co., Sauer GmbH & Co. Hydraulik KG, Sauer GmbH, Sauer Inc. and Sauer
- -Sundstrand GmbH.
"SILENT PARTNERSHIP INTERESTS" means the interest granted to Sauer
GmbH & Co. Hydraulik KG and to Sauer GmbH pursuant to the Silent Partnership
Agreement which, upon termination of the Silent Partnership Agreement, convert
into shares of Sauer Common Stock.
"SILENT PARTNERSHIP TAX LIABILITY" means, in connection with the
termination of the Silent Partnership Agreement and the conversion of Silent
Partnership Interests into shares of Sauer Common Stock pursuant thereto, the
amount that would be required to be paid by Sauer to Murmann or any Affiliate
thereof in respect of German income tax liabilities pursuant to the Silent
Partnership Agreement if the Silent Partnership Agreement were to be terminated
on February 16, 2000; such amount to be calculated based upon the closing price
of Sauer Common Stock on the NYSE on such date.
"TAX" or "TAXES" means any and all taxes, fees, levies, duties, tariffs,
imposts, and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect thereto)
imposed by any government or taxing authority, including, without limitation:
taxes or other charges on or with respect to income, franchises, windfall or
other profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation,
or net worth; taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value added, or gains taxes; license, registration and
documentation fees; and customs duties, tariffs, and similar charges.
"TRADEMARK LICENSE AGREEMENT" means the Trademark License Agreement, dated
on or before the Closing Date, between Danfoss and Sauer, substantially in the
form of Exhibit E attached hereto.
"U.S. GAAP" means United States generally accepted accounting principles
and practices as in effect from time to time and applied consistently throughout
the periods involved.
"USTS" means underground storage tanks, as such term is defined in the
Resource Conservation and Recovery Act, as amended, and the regulations
promulgated thereunder.
"VENDORS" means, with respect to any Person, any and all vendors who are
unaffiliated with such Person or any Affiliate of such Person and who supply raw
materials, components, spare parts, supplies, goods, merchandise or services to
such Person or any of its subsidiaries.
A-9
"YEAR-END BALANCE SHEETS" means the Sauer Year-End Balance Sheet and the
DFP Year-End Balance Sheet, and "YEAR-END BALANCE SHEET" means the Sauer
Year-End Balance Sheet or the DFP Year-End Balance Sheet, as appropriate.
"YEAR 2000 COMPLIANT" means the ability of computer hardware, software,
systems and equipment (including embedded microcontrollers in noncomputer
equipment) to, prior to December 31, 1999, recognize the abbreviation "00" to
mean the year 2000.
SECTION 1.02. OTHER DEFINED TERMS. The following terms are defined in the
Section of this Agreement specified below:
TERM SECTION
- ---- -------
"Acquisition Documents" Section 9.01
"Closing" Section 2.03
"Closing Date" Section 2.03
"Danfoss Indemnified Party" Section 9.01
"Danfoss Loss" Section 9.02(b)
"Danish Shares" Recitals
"Delayed Subsidiaries" Section 5.07
"DFP" Recitals
"DFP Assets" Section 3.17(a)
"DFP Companies" Recitals
"DFP Foreign Benefit Plan" Section 3.18(b)
"DFP Material Contracts" Section 3.13(a)
"DFP Multiemployer Plan" Section 3.18(a)(ii)
"DFP Multiple Employer Plan" Section 3.18(a)(ii)
"DFP Plans" Section 3.18(a)(i)
"DFP Subsidiary Shares" Section 3.04(b)
"Disputing Party" Section 5.11(b)(ii)
"ERISA" Section 3.18(a)(i)
"Holdco" Preamble
"Independent Accounting Firm" Section 5.11(b)(ii)
"IRS" Section 3.18(a)(i)
"Leverage Ratio Adjustment" Section 5.11(c)
"Murmann Indemnified Party" Section 9.01
"Non-Disputing Party" Section 5.11(b)(ii)
"Proxy Statement" Section 5.09(a)
"Sauer" Preamble
"Sauer Assets" Section 4.17(a)
"Sauer Common Stock" Recitals
"Sauer-Danfoss" Section 5.06
"Sauer Loss" Section 9.02(a)
"Sauer Material Contracts" Section 4.13(a)
"Sauer Multiemployer Plan" Section 4.18(a)(ii)
"Sauer Multiple Employer Plan" Section 4.18(a)(ii)
"Sauer Foreign Benefit Plan" Section 4.18(b)
"Sauer Plans" Section 4.18(a)
"Sauer Preferred Stock" Section 4.03
"Sauer SEC Reports" Section 4.21(a)
"Sauer Subsidiary Shares" Section 4.04(b)
"Schedule II Expenses" Section 11.01
"Schedule III Expenses" Section 11.01
A-10
TERM SECTION
- ---- -------
"Share Exchange" Section 2.01
"Shares" Recitals
"Stock Issuance" Recitals
"Stockholders' Meeting" Section 5.10
"Third Party Claims" Section 9.02(d)
"U.S. Shares" Recitals
"USCo." Recitals
ARTICLE II
EXCHANGE OF SECURITIES
SECTION 2.01. SHARE EXCHANGE. Upon the terms and subject to the conditions
set forth in this Agreement, Holdco agrees to exchange the Danish Shares and the
U.S. Shares for 16,149,812 shares of Sauer Common Stock, and Sauer agrees to
exchange 16,149,812 shares of Sauer Common Stock for the Danish Shares and the
U.S. Shares (the "SHARE EXCHANGE").
SECTION 2.02. [RESERVED]
SECTION 2.03. CLOSING; EFFECTIVE TIME. Upon the terms and subject to the
conditions of this Agreement, the Share Exchange contemplated by this Agreement
shall take place at a closing (the "CLOSING") to be held at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York at 10:00 A.M.
New York time on the later to occur of (a) April 3, 2000 or (b) the fifth
Business Day following the later to occur of (i) expiration or termination of
all applicable waiting periods under the HSR Act, (ii) expiration or termination
of any applicable waiting period related to the German Antitrust Authority
Notification, (iii) the approval of the Stock Issuance by the stockholders of
Sauer and (iv) satisfaction or waiver of all other conditions to the obligations
of the parties set forth in Article VIII, or at such other place or at such
other time or on such other date as Holdco and Sauer may mutually agree upon in
writing (the day on which the Closing takes place being the "CLOSING DATE").
SECTION 2.04. CLOSING DELIVERIES BY HOLDCO. At the Closing, Holdco shall
deliver or cause to be delivered to Sauer:
(a) stock certificates evidencing the Danish Shares duly endorsed in the
name of Sauer, or accompanied by stock powers duly executed in the name of
Sauer, in form satisfactory to Sauer and with all required stock transfer
tax stamps affixed;
(b) stock certificates evidencing the U.S. Shares duly endorsed in the
name of Sauer, or accompanied by stock powers duly executed in the name of
Sauer, in form satisfactory to Sauer and with all required stock transfer
tax stamps affixed; and
(c) the certificates and other documents required to be delivered
pursuant to Section 8.03.
SECTION 2.05. CLOSING DELIVERIES BY SAUER. At the Closing, Sauer shall
deliver, or cause to be delivered, to Holdco:
(a) stock certificates representing 16,149,812 shares of Sauer Common
Stock issued in the name of Holdco;
(b) the certificates and other documents required to be delivered
pursuant to Section 8.02; and
(c) evidence in form and substance reasonably satisfactory to Holdco and
Danfoss of termination of the Silent Partnership Agreement and conversion of
the Silent Partnership Interests into shares of Sauer Common Stock.
A-11
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDCO
As an inducement to Sauer to enter into this Agreement, Holdco hereby
represents and warrants to Sauer as follows:
SECTION 3.01. ORGANIZATION, AUTHORITY OF HOLDCO. Holdco is a corporation
duly organized and validly existing under Danish law and has all necessary power
and authority to enter into this Agreement, to carry out its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Holdco, the performance by Holdco of its
obligations hereunder and the consummation by Holdco of the transactions
contemplated hereby have been duly authorized by all requisite action on the
part of Holdco. This Agreement has been duly executed and delivered by Holdco,
and (assuming due authorization, execution and delivery by Sauer) this Agreement
will constitute, a legal, valid and binding obligation of Holdco enforceable
against Holdco in accordance with its terms, subject to the effect of any
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and subject, as to enforceability, to the
effect of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
SECTION 3.02. ORGANIZATION AND QUALIFICATION OF THE DFP COMPANIES AND THE
DFP SUBSIDIARIES. Each DFP Company and each DFP Subsidiary, other than the
Delayed Subsidiaries, is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization and has all necessary power and authority to own, operate or lease
the properties and assets now owned, operated or leased by it and to carry on
its business as it has been and is currently conducted by such DFP Company or
such DFP Subsidiary. Each DFP Company and each DFP Subsidiary is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the properties owned or leased by it or the operation of its business
makes such licensing or qualification necessary. True and correct copies of the
certificate of incorporation and by-laws (or equivalent organizational
documents) of each DFP Company and each DFP Subsidiary, each as amended to the
date hereof and in effect on the date hereof, have been delivered by Holdco to
Sauer.
SECTION 3.03. CAPITAL STOCK OF THE DFP COMPANIES; OWNERSHIP OF THE
SHARES. The Danish Shares and the U.S. Shares constitute all the issued and
outstanding capital stock of DFP and USCo., respectively, and are owned, or
prior to the Closing will be owned, of record and beneficially solely by Holdco
free and clear of all Encumbrances. The Danish Shares and the U.S. Shares have
been duly authorized, validly issued, fully paid and are nonassessable and none
of the Danish Shares or the U.S. Shares were issued in violation of any
preemptive rights. There are no options, warrants, convertible securities or
other rights, agreements, arrangements or commitments of any character relating
to the capital stock of DFP or USCo. or obligating Holdco, DFP or USCo. to issue
or sell any shares of capital stock of, or any other interest in, DFP or USCo.
Upon consummation of the transactions contemplated by this Agreement and
registration of the Danish Shares and the U.S. Shares in the name of Sauer in
the stock records of DFP and USCo., respectively, Sauer will own all the issued
and outstanding capital stock of DFP and USCo. free and clear of all
Encumbrances. Upon consummation of the transactions contemplated by this
Agreement, the Danish Shares and the U.S. Shares will be fully paid and
nonassessable. There are no voting trusts, stockholder agreements, proxies or
other agreements or understandings in effect with respect to the voting or
transfer of any of the Danish Shares or the U.S. Shares.
SECTION 3.04. SUBSIDIARIES. (a) Except as set forth in
Section 3.04(a) of the DFP Disclosure Schedule and other than the DFP
Subsidiaries and the Delayed Subsidiaries, there are no other corporations,
partnerships, joint ventures, associations or other entities in which the DFP
Companies own, of record or beneficially, any direct or indirect equity or other
interest or any right (contingent or otherwise) to acquire the same. Except as
set forth in Section 3.04(a) of the DFP Disclosure Schedule,
A-12
neither the DFP Companies nor any DFP Subsidiary is (i) a member of (nor is any
part of the Business conducted through) any partnership or (ii) a participant in
any joint venture or similar arrangement.
(b) Section 3.04(b) of the DFP Disclosure Schedule sets forth the
jurisdiction and date of its incorporation or organization of each DFP
Subsidiary, its authorized capital stock, the number and type of its issued and
outstanding shares of capital stock and the current ownership of such shares
(collectively, the "DFP SUBSIDIARY SHARES"). The DFP Subsidiary Shares
constitute all the issued and outstanding shares of capital stock of the
respective DFP Subsidiaries. The DFP Subsidiary Shares have been duly
authorized, validly issued, fully paid and are nonassessable and none were
issued in violation of any preemptive rights. The DFP Subsidiary Shares are
owned by DFP, whether directly or indirectly, free and clear of all
Encumbrances. There are no options, warrants, convertible securities, or other
rights, agreements, arrangements or commitments of any character relating to the
capital stock of any DFP Subsidiary or obligating Holdco, DFP or any DFP
Subsidiary to issue or sell any shares of capital stock of, or any other
interest in, any DFP Subsidiary. Except as set forth in Section 3.04(b) of the
DFP Disclosure Schedule, there are no voting trusts, stockholder agreements,
proxies or other agreements or understandings in effect with respect to the
voting or transfer of any DFP Subsidiary Shares. USCo. has no subsidiaries.
SECTION 3.05. NO CONFLICT. Assuming that all consents, approvals,
authorizations and other actions described in Section 3.06 have been obtained
and all filings and notifications listed in Section 3.06 of the DFP Disclosure
Schedule have been made, other than as would not individually or in the
aggregate have a Material Adverse Effect, the execution, delivery and
performance of this Agreement by Holdco does not and will not (a) violate,
conflict with or result in the breach of any provision of the charter or by-laws
(or equivalent organizational documents) of Holdco, the DFP Companies or any DFP
Subsidiary, (b) conflict with or violate (or cause an event which could have a
Material Adverse Effect as a result of) any Law or Governmental Order applicable
to Holdco, the DFP Companies, any DFP Subsidiary or any of their respective
assets, properties or businesses, including, without limitation, the Business,
or (c) except as set forth in Section 3.05(c) of the DFP Disclosure Schedule,
conflict with, result in any breach of, constitute a default (or event which
with the giving of notice or lapse of time, or both, would become a default)
under, require any consent under, or give to others any rights of termination,
amendment, acceleration, suspension, revocation or cancellation of, or result in
the creation of any Encumbrance on any of the Shares or on any of the assets or
properties of Holdco, the DFP Companies or any DFP Subsidiary pursuant to, any
material note, bond, mortgage or indenture, contract, agreement, lease,
sublease, license, permit, franchise or other instrument or arrangement to which
Holdco, the DFP Companies or any DFP Subsidiary is a party or by which any of
the Shares or any of such assets or properties is bound or affected.
SECTION 3.06. GOVERNMENTAL CONSENTS AND APPROVALS. The execution, delivery
and performance of this Agreement by Holdco does not require any consent,
approval, authorization or other order of, action by, filing with or
notification to any Governmental Authority, except (a) as described in
Section 3.06 of the DFP Disclosure Schedule, (b) the notification requirements
of the HSR Act, (c) the filing requirements related to the German Antitrust
Authority Notification and (d) the notification requirements related to the
Danish Antitrust Notification.
SECTION 3.07. DFP FINANCIAL STATEMENTS; DFP YEAR-END BALANCE SHEET. Holdco
has caused, or will cause, to be prepared and delivered to Sauer (i) the DFP
Financial Statements and (ii) the DFP Year-End Balance Sheet. The DFP Financial
Statements and the DFP Year-End Balance Sheet were, or will be, prepared in
accordance with Danish GAAP reconciled to Sauer Applied U.S. GAAP and do not, or
will not, deviate therefrom. The DFP Financial Statements and the DFP Year-End
Balance Sheet fairly, or will fairly, present the financial position, results of
operations and cash flows of the Business as of each date and for the periods
covered thereby in conformity with Danish GAAP
A-13
reconciled to Sauer Applied U.S. GAAP, with only such deviations from Danish
GAAP reconciled to Sauer Applied U.S. GAAP as are referred to or will be
referred to in the notes thereto.
SECTION 3.08. YEAR 2000 COMPLIANCE. Holdco (i) has undertaken an
assessment of all DFP Systems that could be adversely affected by a failure to
be Year 2000 Compliant, (ii) have developed a plan and timeline for rendering
such DFP Systems Year 2000 Compliant and (iii) expect to comply with the plan
and timeline for rendering DFP Systems Year 2000 Compliant. The DFP Companies
and the DFP Subsidiaries have made available for review to Sauer copies of all
material documents related to such assessment and plan implementation efforts,
including communications to and from customers and material Vendors and
suppliers and all plans, time lines and cost estimates for rendering DFP Systems
Year 2000 Compliant. Based on such review and assessment, to the Knowledge of
Holdco, all DFP Systems presently are Year 2000 Compliant or, prior to
December 31, 1999, are expected to be Year 2000 Compliant.
SECTION 3.09. CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES,
EVENTS AND CONDITIONS. Since December 31, 1998, except as permitted under this
Section 3.09, disclosed in Section 3.09 of the DFP Disclosure Schedule, in
connection with the Reorganization or the establishment and use of the proceeds
of the Credit Facility, the Business has been conducted in the ordinary course
and consistent with past practice. As amplification and not limitation of the
foregoing, except as disclosed in Section 3.09 of the DFP Disclosure Schedule,
since December 31, 1998, neither any DFP Company nor any DFP Subsidiary has:
(a) permitted or allowed any of the assets or properties (whether
tangible or intangible) of the DFP Companies or any DFP Subsidiary to be
subjected to any Encumbrance, other than Permitted Encumbrances or
Encumbrances that will be released at or prior to the Closing;
(b) made any material changes in the customary methods of operations of
the DFP Companies or any DFP Subsidiary, including, without limitation,
practices and policies relating to manufacturing, purchasing, Inventories,
marketing, selling and pricing;
(c) except with respect to capital expenditures or commitments provided
for in the capital expenditure budget for the years ended December 31, 1999
and December 31, 2000, made any capital expenditure or commitment for any
capital expenditure in excess of $5.0 million;
(d) sold, transferred, leased, subleased, licensed or otherwise disposed
of any properties or assets, real, personal or mixed (including, without
limitation, leasehold interests and intangible assets) for an aggregate sale
price in excess of $5.0 million and other than the sale of Inventories in
the ordinary course of business consistent with past practice;
(e) entered into any agreement, arrangement or transaction with any of
its directors, officers, employees or shareholders (or with any relative,
beneficiary, spouse or Affiliate of such Person) or other Affiliates;
(f) written down or written up (or failed to write down or write up in
accordance with Danish GAAP) the value of any Inventories or Receivables or
revalued any DFP Assets other than in the ordinary course of business
consistent with past practice and in accordance with Danish GAAP;
(g) amended, terminated, canceled or compromised any material claims of
the DFP Companies or any DFP Subsidiary or waived any other rights of
substantial value to the DFP Companies or any DFP Subsidiary;
(h) made any change in any method of accounting or accounting practice
or policy used by the DFP Companies or any DFP Subsidiary, other than such
changes required by Danish GAAP or disclosed in Section 3.09 of the DFP
Disclosure Schedule;
A-14
(i) failed to maintain the DFP Assets in accordance with good business
practice and in good operating condition and repair;
(j) [RESERVED];
(k) except with respect to the Equalization Dividend (if any), paid,
declared or otherwise authorized any dividend or distribution to
stockholders with respect to any class or series of capital stock;
(l) amended, modified or consented to the termination of any DFP
Material Contract or any DFP Company's or any DFP Subsidiary's rights
thereunder;
(m) amended or restated the certificate of incorporation or the by-laws
(or other organizational documents) of any DFP Company or any DFP
Subsidiary, other than as a part of the Reorganization;
(n) acquired (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof);
(o) entered into any agreement, arrangement or transaction with any of
the Affiliates of the DFP Companies, other than in the ordinary course of
business consistent with past practice or on an arm's-length basis;
(p) suffered any Material Adverse Effect; or
(q) agreed, whether in writing or otherwise, to take any of the actions
specified in this Section 3.09, except as expressly contemplated by this
Agreement.
SECTION 3.10. LITIGATION. (a) Except as set forth in Section 3.10(a) of
the DFP Disclosure Schedule or which has not or will not have a Material Adverse
Effect, (i) there are no Actions by or against any DFP Company or any DFP
Subsidiary (or by or against Holdco or any Affiliate thereof and relating to the
Business, any DFP Company or any DFP Subsidiary), or affecting any of the DFP
Assets, pending before any Governmental Authority of which Holdco has received
notice or, to the Knowledge of Holdco, threatened to be brought by or before any
Governmental Authority and (ii) none of the DFP Companies, the DFP Subsidiaries
or any of the DFP Assets or Holdco is subject to any Governmental Order or, to
the Knowledge of Holdco, are there any such Governmental Orders threatened to be
imposed by any Governmental Authority. None of the matters disclosed in
Section 3.10(a) of the DFP Disclosure Schedule has or has had a Material Adverse
Effect or could affect the legality, validity or enforceability of this
Agreement or the consummation of the transactions contemplated hereby.
(b) Except as set forth in Section 3.10(b) of the DFP Disclosure Schedule,
no claim, action, proceeding or investigation is pending or, to the Knowledge of
Holdco, threatened, which seeks to delay or prevent the consummation of, or
which would be reasonably likely to materially adversely affect Holdco's ability
to consummate, the transactions contemplated by this Agreement.
SECTION 3.11. COMPLIANCE WITH LAWS. (a) Except as set forth in
Section 3.11(a) of the DFP Disclosure Schedule or which has not and will not
have a Material Adverse Effect with respect to the DFP Companies or the DFP
Subsidiaries, the DFP Companies and the DFP Subsidiaries have each conducted and
continue to conduct the Business in accordance with all Laws and Governmental
Orders applicable thereto or to any of the DFP Assets or to the Business, and
neither any DFP Company nor any DFP Subsidiary is in default or violation of any
such Law or Governmental Order.
(b) Section 3.11(b) of the DFP Disclosure Schedule sets forth a brief
description of each material Governmental Order applicable to any DFP Company or
any DFP Subsidiary or any of the DFP Assets or the Business, and no such
Governmental Order has or has had or will have a Material Adverse Effect.
A-15
SECTION 3.12. ENVIRONMENTAL MATTERS. Except with respect to the facilities
located in Nordborg, Denmark (for which Danfoss has prepared and provided to
Sauer a summary which is complete and accurate in all material respects in lieu
of providing to Sauer the Environmental Reports related thereto) and as set
forth in Section 3.12 of the DFP Disclosure Schedule, Holdco has provided to
Sauer all existing Environmental Reports prepared on or after September 1, 1996
related to each DFP Company and each DFP Subsidiary. To the Knowledge of Holdco,
no other Environmental Report prepared with respect to any DFP Company or any
DFP Subsidiary exists. To the Knowledge of Holdco, other than as reflected in
the Environmental Reports, none of any DFP Company or any DFP Subsidiary is
subject to any Environmental Claim that gives rise or will give rise to any
Liabilities and no Environmental Condition applicable to any DFP Company or any
DFP Subsidiary exists that requires or will require Remedial Action or that
gives rise or will give rise to any Liabilities.
SECTION 3.13. DFP COMPANIES MATERIAL CONTRACTS. (a) Section 3.13(a) of the
DFP Disclosure Schedule lists each of the following contracts and agreements
(including, without limitation, oral and informal arrangements) of the DFP
Companies and the DFP Subsidiaries (such contracts and agreements, together with
all contracts, agreements, leases and subleases concerning the management or
operation of any Real Property (including, without limitation, brokerage
contracts) listed or otherwise disclosed in Section 3.15(a) or 3.15(b) of the
DFP Disclosure Schedule to which any DFP Company or any DFP Subsidiary is a
party and all agreements relating to Intellectual Property set forth in
Section 3.14(a) of the DFP Disclosure Schedule, being "DFP MATERIAL CONTRACTS"):
(i) each contract and agreement for the purchase of Inventory, spare
parts, other materials or personal property with any supplier or for the
furnishing of services to any DFP Company, any DFP Subsidiary or otherwise
related to the Business under the terms of which any DFP Company or any DFP
Subsidiary: (A) is likely to pay or otherwise give consideration of more
than $1.0 million in the aggregate during the calendar year ended
December 31, 1999 and cannot be canceled by such DFP Company or such DFP
Subsidiary without penalty or further payment and without more than
30 days' notice, or (B) is likely to pay or otherwise give consideration of
more than $1.0 million in the aggregate over the remaining term of such
contract and cannot be canceled by such DFP Company or such DFP Subsidiary
without penalty or further payment and without more than 30 days' notice;
(ii) each contract and agreement for the sale of Inventory or other
personal property or for the furnishing of services by any DFP Company or
any DFP Subsidiary which: (A) is likely to involve consideration of more
than $1.0 million in the aggregate during the calendar year ended
December 31, 1999 and cannot be canceled by such DFP Company or such DFP
Subsidiary without penalty or further payment and without more than
30 days' notice, or (B) is likely to involve consideration of more than
$1.0 million in the aggregate over the remaining term of the contract and
cannot be canceled by such DFP Company or such DFP Subsidiary without
penalty or further payment and without more than 30 days' notice;
(iii) all contracts and agreements relating to Debt of any DFP Company
or any DFP Subsidiary in excess of $5.0 million;
(iv) all contracts and agreements in excess of $1.0 million or otherwise
material to the Business with any Governmental Authority to which any DFP
Company or any DFP Subsidiary is a party;
(v) all contracts and agreements that limit or purport to limit the
ability of any DFP Company or any DFP Subsidiary to compete in any line of
business or with any Person or in any geographic area or during any period
of time;
(vi) all contracts and agreements between or among any DFP Company or
any DFP Subsidiary and Holdco, Danfoss or any Affiliate of Danfoss other
than any contracts and
A-16
agreements between any DFP Company and any wholly owned DFP Subsidiary,
including, without limitation, any such contracts and agreements entered
into as part of the Reorganization;
(vii) all contracts and agreements providing for benefits under any DFP
Plan; and
(viii) all other contracts and agreements whether or not made in the
ordinary course of business, which are material to any DFP Company, any DFP
Subsidiary or the conduct of the Business or the absence of which would have
a Material Adverse Effect.
For purposes of this Section 3.13 and Sections 3.14 and 3.15, the term "LEASE"
shall include any and all leases, subleases, sale/leaseback agreements or
similar arrangements.
(b) Except as disclosed in Section 3.13(b) of the DFP Disclosure Schedule,
each DFP Material Contract: (i) is valid and binding on a DFP Company or a DFP
Subsidiary, as the case may be, and is in full force and effect and (ii) upon
consummation of the transactions contemplated by this Agreement, shall continue
in full force and effect without penalty or other material adverse consequence.
(c) Except as disclosed in Section 3.13(c) of the DFP Disclosure Schedule,
(i) neither any DFP Company nor any DFP Subsidiary is in breach of, or default
under, any DFP Material Contract, and (ii) to the Knowledge of Holdco, no other
party to any DFP Material Contract is in breach thereof or default thereunder.
SECTION 3.14. INTELLECTUAL PROPERTY. (a) Other than with respect to
blueprints and industrial designs, Section 3.14(a) of the DFP Disclosure
Schedule sets forth a true and complete list and a brief description, including
a complete identification of each patent and patent application and each
registration or application for registration thereof, of all Intellectual
Property owned by any DFP Company or any DFP Subsidiary or used in or material
to the operation of the Business. Except as disclosed in Section 3.14(a) of the
DFP Disclosure Schedule: (i) a DFP Company or a DFP Subsidiary owns free and
clear of all Encumbrances or possesses adequate licenses or other valid rights
to use all of the Intellectual Property used in or material to the operation of
the Business, and, to the Knowledge of Holdco, there is no assertion or claim
(or basis therefor) challenging the validity of any Intellectual Property used
in or material to the operation of the Business and (ii) no action, suit,
arbitration, inquiry, proceeding or investigation has been made or asserted or
is pending (nor, to the Knowledge of Holdco, has any such action, suit,
arbitration, inquiry, proceeding or investigation been threatened) against any
DFP Company or any DFP Subsidiary either (A) based upon or challenging or
seeking to deny or restrict the use by any DFP Company or any DFP Subsidiary of
any of the such Intellectual Property, (B) alleging that any services provided
by any DFP Company or any DFP Subsidiary are being provided in violation of any
patents or trademarks, or any other rights of any Person or (C) alleging
infringement by any DFP Company or any DFP Subsidiary with respect to the use of
any Intellectual Property used in or material to the operation of the Business
or alleging infringement of any Intellectual Property used in or material to the
operation of the Business. Except as disclosed in Section 3.14(a) of the DFP
Disclosure Schedule, none of Holdco, any DFP Company or any DFP Subsidiary has
granted any license or other right to any other Person with respect to the such
Intellectual Property. The consummation of the transactions contemplated by this
Agreement will not result in the termination or impairment of any such
Intellectual Property.
(b) Section 3.14(b) of the DFP Disclosure Schedule sets forth a true and
complete list and a brief description, including a description of any license or
sublicense thereof, of all Intellectual Property licensed by any DFP Company or
any DFP Subsidiary or used in the operation of the Business. Each such license
or sublicense, a true and complete copy of which together with all ancillary
documents have been delivered to Sauer, is valid and binding and in full force
and effect and represents the entire agreement between the respective licensor
and licensee with respect to the subject matter of such license or sublicense.
Except as otherwise set forth in Section 3.14(b) of the DFP Disclosure Schedule,
A-17
such license or sublicense will not cease to be valid and binding and in full
force and effect on terms identical to those currently in effect as a result of
the consummation of the transactions contemplated by this Agreement, nor will
the consummation of the transactions contemplated by this Agreement constitute a
breach or default under such license or sublicense or otherwise give the
licensor or sublicensor a right to terminate such license or sublicense. Neither
any DFP Company nor any DFP Subsidiary nor (to the Knowledge of Holdco) any
other party to such license or sublicense is in breach or default in any
material respect, and, to the Knowledge of Holdco, no event has occurred that,
with notice or lapse of time, would constitute such a breach or default or
permit termination, modification or acceleration under such license or
sublicense.
SECTION 3.15. REAL PROPERTY. (a) Section 3.15(a) of the DFP Disclosure
Schedule lists (i) each parcel of Owned Real Property, (ii) the current owner of
each such parcel of Owned Real Property, (iii) information relating to the
recordation of the deed pursuant to which each such parcel of Owned Real
Property was acquired and (iv) the current use of each such parcel of Owned Real
Property.
(b) Section 3.15(b) of the DFP Disclosure Schedule lists (i) each parcel of
Leased Real Property, (ii) the identity of the lessor, lessee and current
occupant (if different from lessee) of each such parcel of Leased Real Property,
(iii) the term (referencing applicable renewal periods) and rental payment terms
of the leases (and any subleases) pertaining to each such parcel of Leased Real
Property and (iv) the current use of each such parcel of Leased Real Property.
(c) Each parcel of real property, including, without limitation, those
properties set forth on Section 3.15(a) and 3.15(b) of the DFP Disclosure
Schedule, owned or leased by any DFP Company or any DFP Subsidiary is owned or
leased, free and clear of all liens, security interests, claims and other
charges and encumbrances, except: (a) as disclosed in Section 3.15(a) or in
Section 3.15(b) of the DFP Disclosure Schedule; (b) liens for Taxes and
assessments not yet payable; (c) liens for Taxes, assessments and charges and
other claims, the validity of which are being contested in good faith; (d)
imperfections of title, liens, security interests, claims and other charges and
encumbrances the existence of which, individually and in the aggregate, would
not have a Material Adverse Effect or interfere with property as currently used;
(e) inchoate mechanic's and materialmen's liens for construction in progress;
and (f) workmen's, repairmen's, warehousemen's and carrier liens arising in the
ordinary course of the Business.
SECTION 3.16. TANGIBLE PERSONAL PROPERTY. Except as disclosed in
Section 3.16 of the DFP Disclosure Schedule or as would not have a Material
Adverse Effect: the DFP Companies and the DFP Subsidiaries collectively own,
have a valid leasehold interest in or have legal right to use all of the
tangible personal property necessary to carry on the Business, free and clear of
all Encumbrances, except Permitted Encumbrances.
SECTION 3.17. DFP ASSETS. (a) Except as disclosed in Section3.17(a) of the
DFP Disclosure Schedule, either a DFP Company or a DFP Subsidiary, as the case
may be, owns, leases or has the legal right to use all the properties and
assets, including, without limitation, the Owned Intellectual Property, the
Licensed Intellectual Property, the Real Property and the Tangible Personal
Property, used in the conduct of the Business prior to the date hereof or
otherwise owned, leased or used by any DFP Company or any DFP Subsidiary prior
to the date hereof and, with respect to contract rights, is a party to and
enjoys the right to the benefits of all contracts, agreements and other
arrangements used by any DFP Company or any DFP Subsidiary prior to the date
hereof or in or relating to the conduct of the Business prior to the date hereof
(all such properties, assets and contract rights of the DFP Companies and the
DFP Subsidiaries being the "DFP ASSETS"). Either a DFP Company or a DFP
Subsidiary, as the case may be, has good and marketable title to, or, in the
case of leased or subleased DFP Assets, valid and subsisting leasehold interests
in, all the DFP Assets, free and clear of all Encumbrances, except (i) as
disclosed in Section 3.15, 3.16 or 3.17(a) of the DFP Disclosure Schedule and
(ii) Permitted Encumbrances.
A-18
(b) Except as disclosed in Section 3.17(b) of the DFP Disclosure Schedule,
the DFP Assets constitute all the properties, assets and rights forming a part
of, used, held or intended to be used in, or necessary to, the conduct of the
Business.
(c) Following the consummation of the transactions contemplated by this
Agreement, either a DFP Company or a DFP Subsidiary, as the case may be, will
continue to own, pursuant to good and marketable title, or lease, under valid
and subsisting leases, or otherwise retain its respective interest in the DFP
Assets without incurring any material penalty or other material adverse
consequence. Immediately following the Closing, either a DFP Company or a DFP
Subsidiary, as the case may be, shall own and possess all documents, books,
records, agreements and financial data of any sort used by such DFP Company or
such DFP Subsidiary in the conduct of the Business or otherwise.
SECTION 3.18. EMPLOYEE BENEFIT MATTERS. (a) U.S. LOCATIONS.
(i) PLANS AND MATERIAL DOCUMENTS. Section 3.18(a)(i) of the DFP
Disclosure Schedule lists (1) all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and all bonus, stock option, stock purchase, restricted
stock, incentive, deferred compensation, retiree medical or life insurance,
supplemental retirement, severance or other benefit plans, programs or
arrangements, and all employment, termination, severance or other contracts
or agreements, to which any DFP Company or any DFP Subsidiary is a party,
with respect to which any DFP Company or any DFP Subsidiary has any
obligation or which are maintained, contributed to or sponsored by any DFP
Company or any DFP Subsidiary for the benefit of any current or former
employee, officer or director of any DFP Company or any DFP Subsidiary and
(2) any contracts, arrangements or understandings between any DFP Company or
any of its Affiliates and any employee of or any DFP Subsidiary, including,
without limitation, any contracts, arrangements or understandings relating
to the sale of the DFP Companies (collectively, the "DFP PLANS"). Each DFP
Plan is in writing and Holdco has furnished Sauer with a complete and
accurate copy of each DFP Plan and a complete and accurate copy of each
material document prepared in connection with each such DFP Plan including,
without limitation, (1) a copy of each trust or other funding arrangement,
(2) each summary plan description and summary of material modifications,
(3) the most recently filed Internal Revenue Service ("IRS") Form 5500,
(4) the most recently received IRS determination letter for each such DFP
Plan, and (5) the most recently prepared actuarial report and financial
statement in connection with each such DFP Plan. Except as disclosed in
Section 3.18(a)(i) of the DFP Disclosure Schedule, there are no other
employee benefit plans, programs, arrangements or agreements, whether formal
or informal, whether in writing or not, to which any DFP Company or any DFP
Subsidiary is a party, with respect to which any DFP Company or any DFP
Subsidiary has any obligation or which are maintained, contributed to or
sponsored by any DFP Company or any DFP Subsidiary for the benefit of any
current or former employee, officer or director of any DFP Company or any
DFP Subsidiary. Neither any DFP Company nor any DFP Subsidiary has any
express or implied commitment to modify, change or terminate any DFP Plan,
other than with respect to a modification, change or termination required by
ERISA or the Code.
(ii) ABSENCE OF CERTAIN TYPES OF PLANS. Except as set forth in the DFP
Disclosure Schedule, none of the DFP Plans is a multiemployer plan (within
the meaning of Section 3(37) or 4001(a)(3) of ERISA) (a "DFP MULTIEMPLOYER
PLAN") or a single employer pension plan (within the meaning of
Section 4001(a)(15) of ERISA) for which any DFP Company or any DFP
Subsidiary could incur liability under Section 4063 or 4064 of ERISA (a "DFP
MULTIPLE EMPLOYER PLAN"). Except as set forth in Section 3.18(a)(ii) of the
DFP Disclosure Schedule, none of the DFP Plans provides for or promises
retiree medical, disability or life insurance benefits to any current or
former employee, officer or director of any DFP Company or any DFP
Subsidiary.
A-19
(iii) ABSENCE OF CERTAIN LIABILITIES AND EVENTS. There has been no
prohibited transaction (within the meaning of Section 406 of ERISA or
Section 4975 of the Code) with respect to any DFP Plan. To the Knowledge of
Holdco, neither any DFP Company nor any DFP Subsidiary has incurred any
liability for any penalty or tax arising under Section 4971, 4972, 4980,
4980B or 6652 of the Code or any liability under Section 502 of ERISA, and
no fact or event exists which could give rise to any such liability. Neither
any DFP Company nor any DFP Subsidiary has incurred any liability under,
arising out of or by operation of Title IV of ERISA (other than liability
for premiums to the Pension Benefit Guaranty Corporation arising in the
ordinary course), including, without limitation, any liability in connection
with (1) the termination or reorganization of any employee benefit plan
subject to Title IV of ERISA or (2) the withdrawal from any DFP
Multiemployer Plan or DFP Multiple Employer Plan, and no fact or event
exists which could give rise to any such liability. Except as set forth in
Section 3.18(a)(iii) of the DFP Disclosure Schedule, no complete or partial
termination has occurred within the five years preceding the date hereof
with respect to any DFP Plan. No reportable event (within the meaning of
Section 4043 of ERISA) has occurred or is expected to occur with respect to
any DFP Plan subject to Title IV of ERISA. To the Knowledge of Holdco, each
DFP Plan is now and always has been operated in all respects in accordance
with the requirements of all applicable Law, including, without limitation,
ERISA and the Code. No DFP Plan had an accumulated funding deficiency
(within the meaning of Section 302 of ERISA or Section 412 of the Code),
whether or not waived, as of the most recently ended plan year of such DFP
Plan. None of the assets of any DFP Company or any DFP Subsidiary is the
subject of any lien arising under Section 302(f) of ERISA or Section 412(n)
of the Code; neither any DFP Company nor any DFP Subsidiary has been
required to post any security under Section 307 of ERISA or
Section 401(a)(29) of the Code; and no fact or event exists which could give
rise to any such lien or requirement to post any such security.
(b) NON-U.S. LOCATIONS. Each DFP Company and each DFP Subsidiary located
outside the United States provides all employees with the employee benefits
required to be provided in such location. With respect to each DFP Plan that is
not subject to United States Law (a "DFP FOREIGN BENEFIT PLAN"):
(i) all employer and employee contributions to each DFP Foreign Benefit
Plan required by Law or by the terms of such DFP Foreign Benefit Plan have
been made or, if applicable, accrued in accordance with normal accounting
practices;
(ii) the fair market value of the assets of each funded DFP Foreign
Benefit Plan, the liability of each insurer for any DFP Foreign Benefit Plan
funded through insurance or the book reserve established for any DFP Foreign
Benefit Plan, together with any accrued contributions, is sufficient to
procure or provide for the accrued benefit obligations, as of the date of
this Agreement, with respect to all current and former participants in such
plan according to the actuarial assumptions and valuations most recently
used to determine employer contributions to such DFP Foreign Benefit Plan
and no transaction contemplated by this Agreement shall cause such assets or
insurance obligations to be less than such benefit obligations; and
(iii) each DFP Foreign Benefit Plan required to be registered has been
registered and has been maintained in good standing with applicable
regulatory authorities.
SECTION 3.19. LABOR MATTERS. Except as set forth in Section 3.19 of the
DFP Disclosure Schedule, (a) neither any DFP Company nor any DFP Subsidiary is a
party to any collective bargaining agreement or other labor union contract
applicable to persons employed by any DFP Company or any DFP Subsidiary;
(b) there are no controversies, strikes, slowdowns or work stoppages pending or,
to the Knowledge of any DFP Company, threatened between any DFP Company or any
DFP Subsidiary and any of their respective employees, and neither any DFP
Company nor any DFP Subsidiary has experienced any such controversy, strike,
slowdown or work stoppage within the past three years;
A-20
(c) neither any DFP Company nor any DFP Subsidiary has breached or otherwise
failed to comply with the provisions of any collective bargaining or union
contract and there are no grievances outstanding against any DFP Company or any
DFP Subsidiary under any such agreement or contract which could have a Material
Adverse Effect; (d) there are no unfair labor practice complaints pending
against any DFP Company or any DFP Subsidiary before the National Labor
Relations Board or any other Governmental Authority or any current union
representation questions involving employees of any DFP Company or any DFP
Subsidiary which could have a Material Adverse Effect; (e) each DFP Company and
each DFP Subsidiary is currently in compliance with all applicable Laws relating
to the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes and other sums as required
by the appropriate Governmental Authority and has withheld and paid to the
appropriate Governmental Authority or is holding for payment not yet due to such
Governmental Authority all amounts required to be withheld from employees of any
DFP Company or any DFP Subsidiary and is not liable for any arrears of wages,
taxes, penalties or other sums for failure to comply with any of the foregoing;
(f) each DFP Company and each DFP Subsidiary has paid in full to all their
respective employees or adequately accrued for in accordance with the generally
accepted accounting principles applicable thereto all wages, salaries,
commissions, bonuses, benefits and other compensation due to or on behalf of
such employees; (g) there is no claim with respect to payment of wages, salary
or overtime pay that has been asserted or is now pending or threatened before
any Governmental Authority with respect to any Persons currently or formerly
employed by any DFP Company or any DFP Subsidiary; (h) neither any DFP Company
nor any DFP Subsidiary is a party to, or otherwise bound by, any consent decree
with, or citation by, any Governmental Authority relating to employees or
employment practices; (i) there is no charge or proceeding with respect to a
violation of any occupational safety or health standards that has been asserted
or is now pending or threatened with respect to any DFP Company or any DFP
Subsidiary; and (j) there is no charge of discrimination in employment or
employment practices, for any reason, including, without limitation, age,
gender, race, religion or other legally protected category, which has been
asserted or is now pending or threatened before the United States Equal
Employment Opportunity Commission, or any other Governmental Authority in any
jurisdiction in which any DFP Company or any DFP Subsidiary has employed or
currently employs any Person.
SECTION 3.20. TAXES. (a) Except as set forth in Section 3.20(a) of the DFP
Disclosure Schedule, (i) each DFP Company and each DFP Subsidiary has timely
filed or been included in, or will timely file or be included in, all returns
required to be filed by it or in which it is to be included with respect to
Taxes for any period ending before the Closing Date, taking into account any
extension of time to file granted to or obtained on behalf of such DFP Company
or such DFP Subsidiary, (ii) all Taxes shown to be payable on such returns or
otherwise due have been or will be timely paid, and (iii) no deficiency for any
material amount of Tax has been asserted or assessed by a taxing authority
against any DFP Company or any DFP Subsidiary.
(b) Except as set forth in Section 3.20(b) of the DFP Disclosure Schedule,
there are no United States federal, state or local tax rulings, or tax rulings
of any other jurisdiction, applicable to any DFP Company or any DFP Subsidiary.
SECTION 3.21. BROKERS. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Holdco.
SECTION 3.22. INVESTMENT PURPOSES. Holdco is acquiring the Sauer Common
Stock for its own account solely for investment purposes and not for the account
of any other Person or entity and not with a view to, or for the offer or sale
in connection with, any distribution thereof.
SECTION 3.23. INDEBTEDNESS. As of December 31, 1999 neither any of the DFP
Companies nor any of the DFP Subsidiaries will have any Debt or will be
otherwise obligated to repay any
A-21
indebtedness, whether directly or on a contingent basis, whatsoever, other than
any Debt properly reflected on the DFP Year-End Balance Sheet.
SECTION 3.24. REORGANIZATION. Except as set forth in Section 3.24 of the
DFP Disclosure Schedule, the Reorganization (a) will have been completed in all
respects as of the Closing Date, (b) was conducted in a commercially reasonable
manner and (c) will not cause Sauer or Holdco to suffer or incur any losses,
Liabilities, claims, demands, damages, costs or expenses of any kind or nature
whatsoever as a result thereof (i.e., all expenses related to the period ending
on December 31, 1999 have been expensed or provided for by the DFP Companies or
the DFP Subsidiaries, and, accordingly, all such amounts will be reflected on
the DFP Year-End Balance Sheet, and all expenses related to periods subsequent
to December 31, 1999 will be borne by Danfoss).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SAUER
As an inducement to Holdco to enter into this Agreement, Sauer hereby
represents and warrants to Holdco as follows:
SECTION 4.01. ORGANIZATION, AUTHORITY OF SAUER. Sauer is a corporation
duly organized, validly existing and in good standing under Delaware law and has
all necessary power and authority to enter into this Agreement, to carry out its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by Sauer, the performance by Sauer
of its obligations hereunder and the consummation by Sauer of the transactions
contemplated hereby have been duly authorized by all requisite action on the
part of Sauer. This Agreement has been duly executed and delivered by Sauer, and
(assuming due authorization, execution and delivery by Holdco) this Agreement
will constitute, a legal, valid and binding obligation of Sauer enforceable
against Sauer in accordance with its terms, subject to the effect of any
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and subject, as to enforceability, to the
effect of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
SECTION 4.02. ORGANIZATION AND QUALIFICATION OF SAUER SUBSIDIARIES. Each
Sauer Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization and
has all necessary power and authority to own, operate or lease the properties
and assets now owned, operated or leased by it and to carry on its business as
it has been and is currently conducted by such Sauer Subsidiary. Each Sauer
Subsidiary is duly licensed or qualified to do business and is in good standing
in each jurisdiction in which the properties owned or leased by it or the
operation of its business makes such licensing or qualification necessary. True
and correct copies of the certificate of incorporation and by-laws (or
equivalent organizational documents) of each Sauer Subsidiary, each as amended
to the date hereof and in effect on the date hereof, have been delivered by
Sauer to Holdco.
SECTION 4.03. CAPITALIZATION. As of the date of this Agreement, the
authorized capital stock of Sauer consists of 45,000,000 shares of Sauer Common
Stock and 4,500,000 shares of Preferred Stock, par value $.01 per share ("SAUER
PREFERRED STOCK"). As of December 31, 1999, (a) 27,399,050 shares of Sauer
Common Stock were issued and outstanding, all of which were validly issued,
fully paid and nonassessable, (b) 675,000 shares of Sauer Common Stock were held
in the treasury of Parent, (c) no shares of Sauer Common Stock were held by the
Sauer Subsidiaries and (d) no shares of Sauer Common Stock were reserved for
future issuance pursuant to outstanding stock options or stock incentive rights
granted pursuant to Sauer's stock option plans. As of the date of this
Agreement, no shares of Sauer Preferred Stock were issued and outstanding. There
are no outstanding contractual obligations of Sauer or any Sauer Subsidiary to
repurchase, redeem or otherwise acquire any shares of Sauer Common Stock. The
shares of Sauer Common Stock to be issued pursuant to the Share
A-22
Exchange will be duly authorized, validly issued, fully paid and non-assessable
and not subject to preemptive rights.
SECTION 4.04. SAUER SUBSIDIARIES. (a) Except as set forth in
Section 4.04(a) of the Sauer Disclosure Schedule and other than the Sauer
Subsidiaries, there are no other corporations, partnerships, joint ventures,
associations or other entities in which Sauer owns, of record or beneficially,
any direct or indirect equity or other interest or any right (contingent or
otherwise) to acquire the same. Except as set forth in Section 4.04(a) of the
Sauer Disclosure Schedule, no Sauer Subsidiary is (i) a member of (nor is any
part of Sauer's business conducted through) any partnership or (ii) a
participant in any joint venture or similar arrangement.
(b) Section 4.04(b) of the Sauer Disclosure Schedule sets forth the
jurisdiction and date of its incorporation or organization of each Sauer
Subsidiary, its authorized capital stock, the number and type of its issued and
outstanding shares of capital stock and the current ownership of such shares
(collectively, the "SAUER SUBSIDIARY SHARES"). The Sauer Subsidiary Shares
constitute all the issued and outstanding shares of capital stock of the
respective Sauer Subsidiaries. The Sauer Subsidiary Shares have been duly
authorized, validly issued, fully paid and are nonassessable and none were
issued in violation of any preemptive rights. The Sauer Subsidiary Shares are
owned by Sauer, whether directly or indirectly, free and clear of all
Encumbrances. There are no options, warrants, convertible securities, or other
rights, agreements, arrangements or commitments of any character relating to the
capital stock of any Sauer Subsidiary or obligating Sauer or any Sauer
Subsidiary to issue or sell any shares of capital stock of, or any other
interest in, any Sauer Subsidiary. Except as set forth in Section 4.04(b) of the
Sauer Disclosure Schedule, there are no voting trusts, stockholder agreements,
proxies or other agreements or understandings in effect with respect to the
voting or transfer of any Sauer Subsidiary Shares.
SECTION 4.05. NO CONFLICT. Assuming that all consents, approvals,
authorizations and other actions described in Section 4.06 have been obtained
and all filings and notifications listed in Section 4.06 of the Sauer
Disclosure Schedule have been made, other than as would not individually or in
the aggregate have a Material Adverse Effect, the execution, delivery and
performance of this Agreement by Sauer do not and will not (a) violate, conflict
with or result in the breach of any provision of the charter or by-laws (or
equivalent organizational documents) of Sauer or any Sauer Subsidiary,
(b) conflict with or violate (or cause an event which could have a Material
Adverse Effect as a result of) any Law or Governmental Order applicable to
Sauer, any Sauer Subsidiary or any of their respective assets, properties or
businesses, including, without limitation, Sauer's business, or (c) except as
set forth in Section 4.05(c) of the Sauer Disclosure Schedule, conflict with,
result in any breach of, constitute a default (or event which with the giving of
notice or lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, or result in the
creation of any Encumbrance on any of the Sauer Common Stock or on any of the
assets or properties of Sauer or any Sauer Subsidiary pursuant to, any material
note, bond, mortgage or indenture, contract, agreement, lease, sublease,
license, permit, franchise or other instrument or arrangement to which Sauer or
any Sauer Subsidiary is a party or by which any of the Sauer Common Stock or any
of such assets or properties is bound or affected.
SECTION 4.06. GOVERNMENTAL CONSENTS AND APPROVALS. The execution, delivery
and performance of this Agreement by Sauer does not require any consent,
approval, authorization or other order of, action by, filing with or
notification to any Governmental Authority, except (a) as described in
Section 4.06 of the Sauer Disclosure Schedule, (b) the notification requirements
of the HSR Act, (c) the filing requirements related to the German Antitrust
Authority Notification and (d) the notification requirements related to the
Danish Antitrust Notification.
A-23
SECTION 4.07. SAUER FINANCIAL STATEMENTS; SAUER YEAR-END BALANCE
SHEET. Sauer has caused, or will cause, to be prepared and delivered to Holdco
(i) the Sauer Financial Statements and (ii) the Sauer Year-End Balance Sheet.
The Sauer Financial Statements and the Sauer Year-End Balance Sheet were, or
will be, prepared in accordance with Sauer Applied U.S. GAAP and do not, or will
not, deviate therefrom. The Sauer Financial Statements and the Sauer Year-End
Balance Sheet fairly, or will fairly, present the financial position, results of
operations and cash flows of the Sauer's business as of each date and for the
periods covered thereby in conformity with Sauer Applied U.S. GAAP, with only
such deviations from Sauer Applied U.S. GAAP as are referred to or will be
referred to in the notes thereto.
SECTION 4.08. YEAR 2000 COMPLIANCE. Sauer (i) has undertaken an assessment
of all Sauer Systems that could be adversely affected by a failure to be
Year 2000 Compliant, (ii) has developed a plan and timeline for rendering such
Sauer Systems Year 2000 Compliant and (iii) expects to comply with the plan and
timeline for rendering Sauer Systems Year 2000 Compliant. Sauer and the Sauer
Subsidiaries have made available for review to Holdco copies of all material
documents related to such assessment and plan implementation efforts, including
communications to and from customers and material Vendors and suppliers and all
plans, time lines and cost estimates for rendering Sauer Systems Year 2000
Compliant. Based on such review and assessment, to the Knowledge of Sauer, all
Sauer Systems presently are Year 2000 Compliant or, prior to December 31, 1999,
are expected to be Year 2000 Compliant.
SECTION 4.09. CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES,
EVENTS AND CONDITIONS. Since December 31, 1998, except as permitted under this
Section 4.09 or disclosed in Section 4.09 of the Sauer Disclosure Schedule,
Sauer's business has been conducted in the ordinary course and consistent with
past practice. As amplification and not limitation of the foregoing, except as
disclosed in Section 4.09 of the Sauer Disclosure Schedule, since December 31,
1998, neither Sauer nor any Sauer Subsidiary has:
(a) permitted or allowed any of the assets or properties (whether
tangible or intangible) of Sauer or any Sauer Subsidiary to be subjected to
any Encumbrance, other than Permitted Encumbrances or Encumbrances that will
be released at or prior to the Closing;
(b) made any material changes in the customary methods of operations of
Sauer or any Sauer Subsidiary, including, without limitation, practices and
policies relating to manufacturing, purchasing, Inventories, marketing,
selling and pricing;
(c) except with respect to capital expenditures or commitments provided
for in the capital expenditure budget for the years ended December 31, 1999
and December 31, 2000, made any capital expenditure or commitment for any
capital expenditure in excess of $5.0 million;
(d) sold, transferred, leased, subleased, licensed or otherwise disposed
of any properties or assets, real, personal or mixed (including, without
limitation, leasehold interests and intangible assets) for an aggregate sale
price in excess of $5 million and other than the sale of Inventories in the
ordinary course of business consistent with past practice;
(e) entered into any agreement, arrangement or transaction with any of
its directors, officers, employees or shareholders (or with any relative,
beneficiary, spouse or Affiliate of such Person) or other Affiliates;
(f) written down or written up (or failed to write down or write up in
accordance with Sauer Applied U.S. GAAP) the value of any Inventories or
Receivables or revalued any Sauer Assets other than in the ordinary course
of business consistent with past practice and in accordance with Sauer
Applied U.S. GAAP;
A-24
(g) amended, terminated, canceled or compromised any material claims of
Sauer or any Sauer Subsidiary or waived any other rights of substantial
value to Sauer or any Sauer Subsidiary;
(h) made any change in any method of accounting or accounting practice
or policy used by Sauer or any Sauer Subsidiary, other than such changes
required by Sauer Applied U.S. GAAP or disclosed in Section 4.09 of the
Sauer Disclosure Schedule;
(i) failed to maintain the Sauer Assets in accordance with good business
practice and in good operating condition and repair;
(j) [RESERVED];
(k) paid, declared or otherwise authorized any dividend or distribution
to stockholders with respect to any class or series of capital stock, other
than (i) a dividend in respect of Sauer Common Stock of $.07 per share of
Sauer Common Stock paid on January 15, 1999, April 15, 1999, July 15, 1999
and October 15, 1999 and no more than $.07 per share declared on
December 16, 1999 and payable January 14, 2000, (ii) a dividend in respect
of Sauer-Sundstrand Company common stock to be paid to its direct parent
during the quarter ended March 31, 2000 in an amount not to exceed
$4.0 million;
(l) amended, modified or consented to the termination of any Sauer
Material Contract or Sauer's or any Sauer Subsidiary's rights thereunder;
(m) amended or restated the certificate of incorporation or the by-laws
(or other organizational documents) of Sauer or any Sauer Subsidiary, except
as contemplated by this Agreement and the transactions contemplated hereby
or with respect to an increase in the number of authorized shares of Sauer
Common Stock to 75,000,000 shares;
(n) acquired (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof);
(o) entered into any agreement, arrangement or transaction with any
Affiliates of Sauer, other than in the ordinary course of business
consistent with past practice or on an arm's-length basis;
(p) suffered any Material Adverse Effect; or
(q) agreed, whether in writing or otherwise, to take any of the actions
specified in this Section 4.09, except as expressly contemplated by this
Agreement.
SECTION 4.10. LITIGATION. (a) Except as set forth in Section 4.10(a) of
the Sauer Disclosure Schedule or which has not or will not have a Material
Adverse Effect (i) there are no Actions by or against Sauer or any Sauer
Subsidiary (or by or against Sauer or any Affiliate thereof and relating to
Sauer's business of Sauer or any Sauer Subsidiary), or affecting any of the
Sauer Assets, pending before any Governmental Authority of which Sauer has
received notice or, to the Knowledge of Sauer, threatened to be brought by or
before any Governmental Authority and (ii) none of the Sauer Subsidiaries nor
any of the Sauer Assets nor Sauer is subject to any Governmental Order nor, to
the Knowledge of Sauer, are there any such Governmental Orders threatened to be
imposed by any Governmental Authority. None of the matters disclosed in
Section 4.10(a) of the Sauer Disclosure Schedule has or has had a Material
Adverse Effect or could affect the legality, validity or enforceability of this
Agreement or the consummation of the transactions contemplated hereby.
(b) Except as set forth in Section 4.10(b) of the Sauer Disclosure Schedule,
no claim, action, proceeding or investigation is pending or, to the Knowledge of
Sauer, threatened, which seeks to delay or prevent the consummation of, or which
would be reasonably likely to materially adversely affect Sauer's ability to
consummate, the transactions contemplated by this Agreement.
A-25
SECTION 4.11. COMPLIANCE WITH LAWS. (a) Except as set forth in
Section 4.11(a) of the Sauer Disclosure Schedule or which has not and will not
have a Material Adverse Effect with respect to Sauer or the Sauer Subsidiaries,
Sauer and the Sauer Subsidiaries have each conducted and continue to conduct
Sauer's business in accordance with all Laws and Governmental Orders applicable
thereto or to any of the Sauer Assets or to Sauer's business and neither Sauer
nor any Sauer Subsidiary is in default or violation of any such Law or
Governmental Order.
(b) Section 4.11(b) of the Sauer Disclosure Schedule sets forth a brief
description of each material Governmental Order applicable to Sauer or any Sauer
Subsidiary or any of the Sauer Assets or Sauer's business, and no such
Governmental Order has or has had or will have a Material Adverse Effect.
SECTION 4.12. ENVIRONMENTAL MATTERS. Except as set forth in Section 4.12
of the Sauer Disclosure Schedule, Sauer has provided to Holdco all existing
Environmental Reports prepared on or after September 1, 1996 related to Sauer
and each Sauer Subsidiary. To the Knowledge of Sauer, no other Environmental
Report prepared with respect to Sauer or any Sauer Subsidiary exists. To the
Knowledge of Sauer, other than as reflected in the Environmental Reports,
neither Sauer nor any Sauer Subsidiary is subject to any Environmental Claim
that gives rise or will give rise to any Liabilities and no Environmental
Condition applicable to Sauer or any Sauer Subsidiary exists that requires or
will require Remedial Action or that gives rise or will give rise to any
Liabilities.
SECTION 4.13. SAUER MATERIAL CONTRACTS. (a) Section 4.13(a) of the Sauer
Disclosure Schedule lists each of the following contracts and agreements
(including, without limitation, oral and informal arrangements) of Sauer and the
Sauer Subsidiaries (such contracts and agreements, together with all contracts,
agreements, leases and subleases concerning the management or operation of any
Real Property (including, without limitation, brokerage contracts) listed or
otherwise disclosed in Section 4.15(a) or 4.15(b) of the Sauer Disclosure
Schedule to which Sauer and any Sauer Subsidiary is a party and all agreements
relating to Intellectual Property set forth in Section 4.14(a) of the Sauer
Disclosure Schedule, being "SAUER MATERIAL CONTRACTS"):
(i) each contract and agreement for the purchase of Inventory, spare
parts, other materials or personal property with any supplier or for the
furnishing of services to Sauer, any Sauer Subsidiary or otherwise related
to Sauer's business under the terms of which Sauer or any Sauer Subsidiary:
(A) is likely to pay or otherwise give consideration of more than
$1.0 million in the aggregate during the calendar year ended December 31,
1999 and cannot be canceled by such Sauer Company or such Sauer Subsidiary
without penalty or further payment and without more than 30 days' notice, or
(B) is likely to pay or otherwise give consideration of more than
$1.0 million in the aggregate over the remaining term of such contract and
cannot be canceled by Sauer or such Sauer Subsidiary without penalty or
further payment and without more than 30 days' notice;
(ii) each contract and agreement for the sale of Inventory or other
personal property or for the furnishing of services by Sauer or any Sauer
Subsidiary which: (A) is likely to involve consideration of more than
$1.0 million in the aggregate during the calendar year ended December 31,
1999 and cannot be canceled by such Sauer Company or such Sauer Subsidiary
without penalty or further payment and without more than 30 days' notice, or
(B) is likely to involve consideration of more than $1.0 million in the
aggregate over the remaining term of the contract and cannot be canceled by
Sauer or such Sauer Subsidiary without penalty or further payment and
without more than 30 days' notice;
(iii) all contracts and agreements relating to Debt of Sauer or any
Sauer Subsidiary in excess of $5.0 million;
(iv) all contracts and agreements in excess of $1.0 million or otherwise
material to Sauer's business with any Governmental Authority to which Sauer
or any Sauer Subsidiary is a party;
A-26
(v) all contracts and agreements that limit or purport to limit the
ability of Sauer or any Sauer Subsidiary to compete in any line of business
or with any Person or in any geographic area or during any period of time;
(vi) all contracts and agreements between or among Sauer or any Sauer
Subsidiary and Sauer or any Affiliate of Sauer, other than any contract and
agreements between Sauer and any wholly owned Sauer Subsidiary;
(vii) all contracts and agreements providing for benefits under any
Sauer Plan; and
(viii) all other contracts and agreements whether or not made in the
ordinary course of business, which are material to Sauer or any Sauer
Subsidiary or the conduct of Sauer's business or the absence of which would
have a Material Adverse Effect.
For purposes of this Section 4.13 and Sections 4.14 and 4.15, the term "LEASE"
shall include any and all leases, subleases, sale/leaseback agreements or
similar arrangements.
(b) Except as disclosed in Section 4.13(b) of the Sauer Disclosure Schedule,
each Sauer Material Contract: (i) is valid and binding on Sauer or any Sauer
Subsidiary and is in full force and effect and (ii) upon consummation of the
transactions contemplated by this Agreement, shall continue in full force and
effect without penalty or other material adverse consequence.
(c) Except as disclosed in Section 4.13(c) of the Sauer Disclosure Schedule,
(i) neither Sauer nor any Sauer Subsidiary is in breach of, or default under,
any Sauer Material Contract, and (ii) to the Knowledge of Sauer, no other party
to any Sauer Material Contract is in breach thereof or default thereunder.
SECTION 4.14. INTELLECTUAL PROPERTY. (a) Other than with respect to
blueprints and industrial designs, Section 4.14(a) of the Sauer Disclosure
Schedule sets forth a true and complete list and a brief description, including
a complete identification of each patent and patent application and each
registration or application for registration thereof, of all Intellectual
Property owned by Sauer or any Sauer Subsidiary or used in and material to the
operation of Sauer's business. Except as disclosed in Section 4.14(a) of the
Sauer Disclosure Schedule: (i) Sauer or a Sauer Subsidiary owns free and clear
of all Encumbrances or possesses adequate licenses or other valid rights to use
all of the Intellectual Property used in or material to the operation of Sauer's
business, and, to the Knowledge of Sauer, there is no assertion or claim (or
basis therefor) challenging the validity of any Intellectual Property used in
and material to the operation of Sauer's business and (ii) no action, suit,
arbitration, inquiry, proceeding or investigation has been made or asserted or
is pending (nor, to the Knowledge of Sauer, has any such action, suit,
arbitration, inquiry, proceeding or investigation been threatened) against Sauer
or any Sauer Subsidiary either (A) based upon or challenging or seeking to deny
or restrict the use by Sauer or any Sauer Subsidiary of any of the such
Intellectual Property or (B) alleging that any services provided by Sauer or any
Sauer Subsidiary are being provided in violation of any patents or trademarks,
or any other rights of any Person. Except as disclosed in Section 4.14(a) of the
Sauer Disclosure Schedule, neither Sauer nor any Sauer Subsidiary has granted
any license or other right to any other Person with respect to such Intellectual
Property. The consummation of the transactions contemplated by this Agreement
will not result in the termination or impairment of any such Intellectual
Property.
(b) Section 4.14(b) of the Sauer Disclosure Schedule sets forth a true and
complete list and a brief description, including a description of any license or
sublicense thereof, of all Intellectual Property licensed by Sauer or any Sauer
Subsidiary or used in the operation of Sauer's business. Each such license or
sublicense, a true and complete copy of which together with all ancillary
documents have been delivered to Holdco, is valid and binding and in full force
and effect and represents the entire agreement between the respective licensor
and licensee with respect to the subject matter of such license or sublicense.
Except as otherwise set forth in Section 4.14(b) of the Sauer Disclosure
Schedule,
A-27
such license or sublicense will not cease to be valid and binding and in full
force and effect on terms identical to those currently in effect as a result of
the consummation of the transactions contemplated by this Agreement, nor will
the consummation of the transactions contemplated by this Agreement constitute a
breach or default under such license or sublicense or otherwise give the
licensor or sublicensor a right to terminate such license or sublicense. Neither
Sauer nor any Sauer Subsidiary nor (to the Knowledge of Sauer) any other party
to such license or sublicense is in breach or default in any material respect,
and, to the Knowledge of Sauer, no event has occurred that, with notice or lapse
of time, would constitute such a breach or default or permit termination,
modification or acceleration under such license or sublicense.
SECTION 4.15. REAL PROPERTY. (a) Section 4.15(a) of the Sauer Disclosure
Schedule lists (i) each parcel of Owned Real Property, (ii) the current owner of
each such parcel of Owned Real Property, (iii) information relating to the
recordation of the deed pursuant to which each such parcel of Owned Real
Property was acquired and (iv) the current use of each such parcel of Owned Real
Property.
(b) Section 4.15(b) of the Sauer Disclosure Schedule lists (i) each parcel
of Leased Real Property, (ii) the identity of the lessor, lessee and current
occupant (if different from lessee) of each such parcel of Leased Real Property,
(iii) the term (referencing applicable renewal periods) and rental payment terms
of the leases (and any subleases) pertaining to each such parcel of Leased Real
Property and (iv) the current use of each such parcel of Leased Real Property.
(c) Each parcel of real property, including, without limitation, those
properties set forth on Section 4.15(a) and 4.15(b) of the Sauer Disclosure
Schedule, owned or leased by Sauer or any Sauer Subsidiary is owned or leased,
free and clear of all liens, security interests, claims and other charges and
encumbrances, except: (a) as disclosed in Section 4.15(a) or in Section
4.15(b) of the Sauer Disclosure Schedule; (b) liens for Taxes and assessments
not yet payable; (c) liens for Taxes, assessments and charges and other claims,
the validity of which are being contested in good faith; (d) imperfections of
title, liens, security interests, claims and other charges and encumbrances the
existence of which, individually and in the aggregate, would not have a Material
Adverse Effect or interfere with property as currently used; (e) inchoate
mechanic's and materialmen's liens for construction in progress; and
(f) workmen's, repairmen's warehousemen's and carrier liens arising in the
ordinary course of Sauer's business.
SECTION 4.16. TANGIBLE PERSONAL PROPERTY. Except as disclosed in
Section 4.16 of the Sauer Disclosure Schedule or as would not have a Material
Adverse Effect: Sauer and the Sauer Subsidiaries collectively own, have a valid
leasehold interest in or have legal right to use all of the tangible personal
property necessary to carry on Sauer's business, free and clear of all
Encumbrances, except Permitted Encumbrances.
SECTION 4.17. SAUER ASSETS. (a) Except as disclosed in
Section 4.17(a) of the Sauer Disclosure Schedule, either Sauer or a Sauer
Subsidiary owns, as the case may be, leases or has the legal right to use all
the properties and assets, including, without limitation, the Owned Intellectual
Property, the Licensed Intellectual Property, the Real Property and the Tangible
Personal Property, used in the conduct of Sauer's business prior to the date
hereof or otherwise owned, leased or used by Sauer or any Sauer Subsidiary prior
to the date hereof and, with respect to contract rights, is a party to and
enjoys the right to the benefits of all contracts, agreements and other
arrangements used by Sauer or any Sauer Subsidiary prior to the date hereof or
in or relating to the conduct of Sauer's business prior to the date hereof (all
such properties, assets and contract rights of Sauer and the Sauer Subsidiaries
being the "SAUER ASSETS"). Either Sauer or a Sauer Subsidiary, as the case may
be, has good and marketable title to, or, in the case of leased or subleased
Sauer Assets, valid and subsisting leasehold interests in, all the Sauer Assets,
free and clear of all Encumbrances, except (i) as disclosed in Section 4.15,
4.16 or 4.17(a) of the Sauer Disclosure Schedule and (ii) Permitted
Encumbrances.
A-28
(b) Except as disclosed in Section 4.17(b) of the Sauer Disclosure Schedule,
the Sauer Assets constitute all the properties, assets and rights forming a part
of, used, held or intended to be used in, or necessary to, the conduct of
Sauer's business.
(c) Following the consummation of the transactions contemplated by this
Agreement, either Sauer or a Sauer Subsidiary, as the case may be, will continue
to own, pursuant to good and marketable title, or lease, under valid and
subsisting leases, or otherwise retain its respective interest in the Sauer
Assets without incurring any material penalty or other material adverse
consequence. Immediately following the Closing, either Sauer or a Sauer
Subsidiary, as the case may be, shall own and possess all documents, books,
records, agreements and financial data of any sort used by Sauer or such Sauer
Subsidiary in the conduct of Sauer's business or otherwise.
SECTION 4.18. EMPLOYEE BENEFIT MATTERS. (a) U.S. LOCATIONS
(i) PLANS AND MATERIAL DOCUMENTS. Section 4.18(a)(i) of the Sauer
Disclosure Schedule lists (1) all employee benefit plans (as defined in
Section 3(3) of ERISA) and all bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life
insurance, supplemental retirement, severance or other benefit plans,
programs or arrangements, and all employment, termination, severance or
other contracts or agreements, to which Sauer or Sauer Subsidiary is a
party, with respect to which Sauer or any Sauer Subsidiary has any
obligation or which are maintained, contributed to or sponsored by Sauer or
any Sauer Subsidiary for the benefit of any current or former employee,
officer or director of Sauer or any Sauer Subsidiary and (2) any contracts,
arrangements or understandings between Sauer or any of its Affiliates and
any employee of or any Sauer Subsidiary, including, without limitation, any
contracts, arrangements or understandings relating to the sale of Sauer
(collectively, the "SAUER PLANS"). Each Sauer Plan is in writing and Sauer
has furnished Holdco with a complete and accurate copy of each Sauer Plan
and a complete and accurate copy of each material document prepared in
connection with each such Sauer Plan including, without limitation, (1) a
copy of each trust or other funding arrangement, (2) each summary plan
description and summary of material modifications, (3) the most recently
filed IRS Form 5500, (4) the most recently received IRS determination letter
for each such Sauer Plan, and (5) the most recently prepared actuarial
report and financial statement in connection with each such Sauer Plan.
Except as disclosed on Section 4.18(a)(i) of the Sauer Disclosure Schedule,
there are no other employee benefit plans, programs, arrangements or
agreements, whether formal or informal, whether in writing or not, to which
Sauer or any Sauer Subsidiary is a party, with respect to which Sauer or any
Sauer Subsidiary has any obligation or which are maintained, contributed to
or sponsored by Sauer or any Sauer Subsidiary for the benefit of any current
or former employee, officer or director of Sauer or any Sauer Subsidiary.
Neither Sauer nor any Sauer Subsidiary has any express or implied commitment
to modify, change or terminate any Sauer Plan, other than with respect to a
modification, change or termination required by ERISA or the Code.
(ii) ABSENCE OF CERTAIN TYPES OF PLANS. Except as set forth in the Sauer
Disclosure Schedule, none of the Sauer Plans is a multiemployer plan (within
the meaning of Section 3(37) or 4001(a)(3) of ERISA) (a "SAUER MULTIEMPLOYER
PLAN") or a single employer pension plan (within the meaning of
Section 4001(a)(15) of ERISA) for which Sauer or any Sauer Subsidiary could
incur liability under Section 4063 or 4064 of ERISA (a "SAUER MULTIPLE
EMPLOYER PLAN"). Except as set forth in Section 4.18(a)(ii) of the Sauer
Disclosure Schedule, none of the Sauer Plans provides for or promises
retiree medical, disability or life insurance benefits to any current or
former employee, officer or director of Sauer or any Sauer Subsidiary.
(iii) ABSENCE OF CERTAIN LIABILITIES AND EVENTS. There has been no
prohibited transaction (within the meaning of Section 406 of ERISA or
Section 4975 of the Code) with respect to any Sauer Plan. To the Knowledge
of Sauer, neither Sauer nor any Sauer Subsidiary has incurred any
A-29
liability for any penalty or tax arising under Section 4971, 4972, 4980,
4980B or 6652 of the Code or any liability under Section 502 of ERISA, and
no fact or event exists which could give rise to any such liability. Neither
Sauer nor any Sauer Subsidiary has incurred any liability under, arising out
of or by operation of Title IV of ERISA (other than liability for premiums
to the Pension Benefit Guaranty Corporation arising in the ordinary course),
including, without limitation, any liability in connection with (1) the
termination or reorganization of any employee benefit plan subject to Title
IV of ERISA or (2) the withdrawal from any Sauer Multiemployer Plan or Sauer
Multiple Employer Plan, and no fact or event exists which could give rise to
any such liability. Except as set forth in Section 4.18(a)(iii) of the Sauer
Disclosure Schedule, no complete or partial termination has occurred within
the five years preceding the date hereof with respect to any Sauer Plan. No
reportable event (within the meaning of Section 4043 of ERISA) has occurred
or is expected to occur with respect to any Sauer Plan subject to Title IV
of ERISA. To the Knowledge of Sauer, each Sauer Plan is now and always has
been operated in all respects in accordance with the requirements of all
applicable Law, including, without limitation, ERISA and the Code. No Sauer
Plan had an accumulated funding deficiency (within the meaning of Section
302 of ERISA or Section 412 of the Code), whether or not waived, as of the
most recently ended plan year of such Sauer Plan. None of the assets of
Sauer or any Sauer Subsidiary is the subject of any lien arising under
Section 302(f) of ERISA or Section 412(n) of the Code; neither Sauer nor any
Sauer Subsidiary has been required to post any security under Section 307 of
ERISA or Section 401(a)(29) of the Code; and no fact or event exists which
could give rise to any such lien or requirement to post any such security.
(b) NON-U.S. LOCATIONS. Each Sauer Subsidiary located outside the United
States provides all employees with the employee benefits required to be provided
in such location. With respect to each Sauer Plan that is not subject to United
States Law (a "SAUER FOREIGN BENEFIT PLAN"):
(i) all employer and employee contributions to each Sauer Foreign
Benefit Plan required by Law or by the terms of such Sauer Foreign Benefit
Plan have been made or, if applicable, accrued in accordance with normal
accounting practices;
(ii) the fair market value of the assets of each funded Sauer Foreign
Benefit Plan, the liability of each insurer for any Sauer Foreign Benefit
Plan funded through insurance or the book reserve established for any Sauer
Foreign Benefit Plan, together with any accrued contributions, is sufficient
to procure or provide for the accrued benefit obligations, as of the date of
this Agreement, with respect to all current and former participants in such
plan according to the actuarial assumptions and valuations most recently
used to determine employer contributions to such Sauer Foreign Benefit Plan
and no transaction contemplated by this Agreement shall cause such assets or
insurance obligations to be less than such benefit obligations; and
(iii) each Sauer Foreign Benefit Plan required to be registered has been
registered and has been maintained in good standing with applicable
regulatory authorities.
SECTION 4.19. LABOR MATTERS. Except as set forth in Section 4.19 of the
Sauer Disclosure Schedule, (a) neither Sauer nor any Sauer Subsidiary is a party
to any collective bargaining agreement or other labor union contract applicable
to persons employed by Sauer or any Sauer Subsidiary; (b) there are no
controversies, strikes, slowdowns or work stoppages pending or, to the Knowledge
of Sauer, threatened between Sauer or any Sauer Subsidiary and any of their
respective employees, and neither Sauer nor any Sauer Subsidiary has experienced
any such controversy, strike, slowdown or work stoppage within the past three
years; (c) neither Sauer nor any Sauer Subsidiary has breached or otherwise
failed to comply with the provisions of any collective bargaining or union
contract and there are no grievances outstanding against Sauer or any Sauer
Subsidiary under any such agreement or contract which could have a Material
Adverse Effect; (d) there are no unfair labor practice complaints pending
against Sauer or any Sauer Subsidiary before the National Labor Relations Board
or any other
A-30
Governmental Authority or any current union representation questions involving
employees of Sauer or any Sauer Subsidiary which could have a Material Adverse
Effect; (e) Sauer and each Sauer Subsidiary is currently in compliance with all
applicable Laws relating to the employment of labor, including those related to
wages, hours, collective bargaining and the payment and withholding of taxes and
other sums as required by the appropriate Governmental Authority and has
withheld and paid to the appropriate Governmental Authority or is holding for
payment not yet due to such Governmental Authority all amounts required to be
withheld from employees of Sauer or any Sauer Subsidiary and is not liable for
any arrears of wages, taxes, penalties or other sums for failure to comply with
any of the foregoing; (f) Sauer and each Sauer Subsidiary has paid in full to
all their respective employees or adequately accrued for in accordance with the
generally accepted accounting principles applicable thereto all wages, salaries,
commissions, bonuses, benefits and other compensation due to or on behalf of
such employees; (g) there is no claim with respect to payment of wages, salary
or overtime pay that has been asserted or is now pending or threatened before
any Governmental Authority with respect to any Persons currently or formerly
employed by Sauer or any Sauer Subsidiary; (h) neither Sauer nor any Sauer
Subsidiary is a party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Authority relating to employees or employment
practices; (i) there is no charge or proceeding with respect to a violation of
any occupational safety or health standards that has been asserted or is now
pending or threatened with respect to Sauer or any Sauer Subsidiary; and (j)
there is no charge of discrimination in employment or employment practices, for
any reason, including, without limitation, age, gender, race, religion or other
legally protected category, which has been asserted or is now pending or
threatened before the United States Equal Employment Opportunity Commission, or
any other Governmental Authority in any jurisdiction in which Sauer or any Sauer
Subsidiary has employed or currently employs any Person.
SECTION 4.20. TAXES. (a) Except as set forth in Section 4.20(a) of the
Sauer Disclosure Schedule, (i) Sauer and each Sauer Subsidiary has timely filed
or been included in, or will timely file or be included in, all returns required
to be filed by it or in which it is to be included with respect to Taxes for any
period ending before the Closing Date, taking into account any extension of time
to file granted to or obtained on behalf of Sauer or such Sauer Subsidiary,
(ii) all Taxes shown to be payable on such returns or otherwise due have been or
will be timely paid, and (iii) no deficiency for any material amount of Tax has
been asserted or assessed by a taxing authority against Sauer or any Sauer
Subsidiary.
(b) Except as set forth in Section 4.20(b) of the Sauer Disclosure Schedule,
there are no United States federal, state or local tax rulings, or tax rulings
of any other jurisdiction, applicable to Sauer or any Sauer Subsidiary.
SECTION 4.21. SEC FILINGS. (a) Sauer has filed all forms, reports and
documents required to be filed by it with the SEC since May 12, 1998 (and prior
thereto was not subject to the reporting requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended), and has heretofore made available
to Holdco, in the form filed with the SEC, (i) its Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, (ii) its Quarterly Reports on
Form 10-Q for the periods ended April 4, 1999, July 4, 1999 and October 3, 1999,
(iii) all proxy statements relating to Sauer's meetings of stockholders (whether
annual or special) held since May 12, 1998 and (iv) all other forms, reports and
other registration statements (other than Quarterly Reports on Form 10-Q not
referred to in clause (ii) above) filed by Sauer with the SEC since May 12, 1998
and prior to the date hereof (the forms, reports and other documents referred to
in clauses (i), (ii), (iii) and (iv) above being referred to herein,
collectively, as the "SAUER SEC REPORTS"). To the Knowledge of Sauer, the Sauer
SEC Reports, as well as all forms, reports and documents to be filed by Sauer
with the SEC after the date hereof and prior to the Closing, (i) were or will be
prepared in accordance with the requirements of the Securities Act and the
Exchange Act, as the case may be, and the rules and regulations thereunder,
(ii) did not at the time they were filed, or will not at the time they are
filed, contain any untrue statement of a
A-31
material fact or omit to state a 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 were made, not misleading, and (iii) did not at
the time they were filed, or will not at the time they are filed, omit any
documents required to be filed as exhibits thereto.
(b) Each of the consolidated financial statements (including, in each case,
any notes thereto) contained in the Sauer SEC Reports, as well as all forms,
reports and documents to be filed by Sauer with the SEC after the date hereof
and prior to the Effective Time, was or will be prepared in accordance with
Sauer Applied U.S. GAAP (except as may be indicated in the notes thereto) and
each fairly presented or will fairly present the consolidated financial
position, results of operations and cash flows of Sauer and the Sauer
Subsidiaries as at the respective dates thereof and for the respective periods
indicated therein in accordance with Sauer Applied U.S. GAAP (subject, in the
case of unaudited statements, to normal and recurring year-end adjustments that
were not and are not expected to have a Material Adverse Effect).
(c) Sauer has heretofore furnished to Holdco complete and correct copies of
all amendments and modifications that have not been filed by Sauer with the SEC
to all agreements, documents and other instruments that previously had been
filed by Sauer with the SEC and are currently in effect.
SECTION 4.22. INVESTMENT PURPOSE. Sauer is acquiring the Shares for its
own account solely for investment purposes and not for the account of any other
Person or entity and not with a view to, or for offer or sale in connection
with, any distribution thereof.
SECTION 4.23. BROKERS. Except for Credit Suisse First Boston, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Sauer. Sauer shall be solely
responsible for payment of the fees and expenses of Credit Suisse First Boston.
SECTION 4.24. INVESTMENT COMPANY STATUS. Sauer is not, nor has Sauer ever
been, a company regulated by the Investment Company Act of 1940, as amended.
SECTION 4.25. TERMINATION OF SILENT PARTNERSHIP AGREEMENT; CONVERSION OF
SILENT PARTNERSHIP INTERESTS. Concurrent with the Closing, (a) the Silent
Partnership Agreement will be terminated in accordance with its terms and
(b) each Silent Partnership Interest granted pursuant to the Silent Partnership
Agreement will be converted into shares of Sauer Common Stock in accordance with
the terms of the Silent Partnership Agreement.
SECTION 4.26. INDEBTEDNESS. As of December 31, 1999, neither Sauer nor any
Sauer Subsidiary will have any Debt or will be otherwise obligated to repay any
indebtedness, whether directly or on a contingent basis, whatsoever, other than
any Debt properly reflected on the Sauer Year-End Balance Sheet.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. CONDUCT OF BUSINESS PRIOR TO THE CLOSING. (a) Holdco
covenants and agrees that, except as described in Section 5.01(a) of the DFP
Disclosure Schedule, between the date hereof and the time of the Closing,
neither any DFP Company nor any DFP Subsidiary shall conduct its business other
than in the ordinary course and consistent with such DFP Company's and such DFP
Subsidiary's prior practice.
(b) Except as described in Section 5.01(b) of the DFP Disclosure Schedule,
Holdco covenants and agrees that, prior to the Closing, without the prior
written consent of Sauer, neither any DFP Company nor any DFP Subsidiary will do
any of the things enumerated in the second sentence of Section 3.09 (including,
without limitation, clauses (a) through (q) thereof).
A-32
(c) Sauer covenants and agrees that, except as described in
Section 5.01(c) of the Sauer Disclosure Schedule, between the date hereof and
the time of the Closing, neither Sauer nor any Sauer Subsidiary shall conduct
its business other than in the ordinary course and consistent with Sauer's and
such Sauer Subsidiary's prior practice.
(d) Except as described in Section 5.01(d) of the Sauer Disclosure Schedule,
Sauer covenants and agrees that, prior to the Closing, without prior written
consent of Holdco, neither Sauer nor any Sauer Subsidiary will do any of the
things enumerated in the second sentence of Section 4.09 (including, without
limitation, clauses (a) through (q) thereof).
SECTION 5.02. ACCESS TO INFORMATION. (a) From the date hereof until the
final resolution of all claims made under Article IX hereof, upon reasonable
notice, Danfoss shall cause the DFP Companies and the DFP Subsidiaries and each
of the DFP Companies' and the DFP Subsidiaries', officers, directors, employees,
agents, representatives, accountants and counsel to: (i) afford the officers,
employees and authorized agents, accountants, counsel and representatives of
Sauer reasonable access, during normal business hours, to the offices,
properties, plants, other facilities, books and records (including, without
limitation, the audit workpapers of Danfoss' accountants, to the extent that
Danfoss' accountants permit access to such workpapers, for the year ended
December 31, 1999) of each DFP Company and of each DFP Subsidiary and to those
officers, directors, employees, agents, accountants and counsel of each DFP
Company and each DFP Subsidiary who have any knowledge relating to any DFP
Company, any DFP Subsidiary or the Business and (ii) furnish to the officers,
employees and authorized agents, accountants, counsel and representatives of
Sauer such additional financial and operating data and other information
regarding the assets, properties and goodwill of the DFP Companies, the DFP
Subsidiaries and the Business (or legible copies thereof) as Sauer may from time
to time reasonably request.
(b) From the date hereof until the final resolution of all claims made under
Article IX hereof, upon reasonable notice, Sauer shall cause its officers,
directors, employees, agents, representatives, accountants and counsel to:
(i) afford the officers, employees and authorized agents, accountants, counsel
and representatives of Danfoss reasonable access, during normal business hours,
to the offices, properties, plants, other facilities, books and records
(including, without limitation, the audit workpapers of Sauer's Accountants, to
the extent that Sauer's Accountants permit access to such workpapers, for the
year ended December 31, 1999) of Sauer and each subsidiary thereof and to those
officers, directors, employees, agents, accountants and counsel of Sauer and of
each subsidiary thereof who have any knowledge relating Sauer, any subsidiary
thereof or its business and (ii) furnish to the officers, employees and
authorized agents, accountants, counsel and representatives of Danfoss such
additional financial and operating data and other information regarding the
assets, properties and goodwill of Sauer, its subsidiaries and its business (or
legible copies thereof) as Danfoss may from time to time reasonably request.
(c) For the statutory period following the Closing required by local law,
Sauer covenants and agrees to (i) retain the books and records of the DFP
Companies and the DFP Subsidiaries relating to periods prior to the Closing and
(ii) upon reasonable notice, afford the officers, employees and authorized
agents and representatives of Holdco reasonable access, during normal business
hours, to such books and records.
(d) For the statutory period following the Closing required by local law,
Holdco covenants and agrees to (i) retain or cause to be retained the books and
records of Holdco or any Affiliate thereof which relate to the DFP Companies and
the DFP Subsidiaries and their operations for periods prior to the Closing and
which shall not otherwise have been delivered to Sauer, any DFP Company or any
DFP Subsidiary and (ii) upon reasonable notice, afford the officers, employees
and authorized agents and representatives of Sauer, DFP or any DFP Subsidiary
reasonable access, during normal business hours, to such books and records.
A-33
SECTION 5.03. CONFIDENTIALITY. Danfoss and Sauer shall comply with, and
each shall cause their respective agents, representatives, Affiliates,
employees, officers and directors to comply with, to the extent permitted by
applicable Law, all of the respective obligations of each under the
Confidentiality Agreement, dated September 21, 1999 between Sauer and Danfoss,
which shall remain in full force and effect in accordance with its terms.
SECTION 5.04. REGULATORY AND OTHER AUTHORIZATIONS; NOTICES AND
CONSENTS. (a) Each of Holdco and Sauer shall use its respective best efforts to
obtain all authorizations, consents, orders and approvals of all Governmental
Authorities and officials that may be or become necessary for its execution and
delivery of, and the performance of its obligations pursuant to, this Agreement
and will cooperate fully with the other party in promptly seeking to obtain all
such authorizations, consents, orders and approvals; PROVIDED, HOWEVER, that in
complying with this Section 5.04, Sauer shall not be required to divest any of
the Sauer Assets. Each party hereto agrees to make an appropriate filings, if
necessary, pursuant to the HSR Act, the German Antitrust Act (with respect to
the German Antitrust Authority Notification) and the Danish Antitrust Code (with
respect to the Danish Antitrust Notification) with respect to the transactions
contemplated by this Agreement within five Business Days of the date hereof and
to supply as promptly as practicable to the appropriate Governmental Authorities
any additional information and documentary material that may be requested
pursuant to the HSR Act, the German Antitrust Act (with respect to the German
Antitrust Authority Notification) and the Danish Antitrust Code (with respect to
the Danish Antitrust Notification).
(b) Holdco shall or shall cause the DFP Companies and the DFP Subsidiaries
to promptly give such notices to third parties and use its or their best efforts
to obtain such third party consents and estoppel certificates as Holdco may deem
necessary or desirable in connection with the transactions contemplated by this
Agreement.
(c) Sauer and Holdco shall each cooperate and use all reasonable efforts to
assist the other party in giving any such notices and obtaining such consents
and estoppel certificates; PROVIDED, HOWEVER, that neither Holdco nor Sauer
shall have any obligation to give any guarantee or other consideration of any
nature in connection with any such notice, consent or estoppel certificate or to
consent to any change in the terms of any agreement or arrangement which Sauer
or Holdco, as the case may be, in its sole and absolute discretion may deem
adverse to its interests.
(d) Neither Sauer nor Holdco knows of any reason why all the consents,
approvals and authorizations necessary for the consummation of the transactions
contemplated hereby will not be received.
(e) Holdco and Sauer agree that, in the event any consent, approval or
authorization necessary or desirable to preserve for the Business, any DFP
Company or any DFP Subsidiary any right or benefit under any lease, license,
contract, commitment or other agreement or arrangement to which Danfoss, any DFP
Company or any DFP Subsidiary is a party is not obtained prior to the Closing,
Holdco will, subsequent to the Closing, cooperate with Sauer and the DFP
Companies in attempting to obtain such consent, approval or authorization as
promptly thereafter as practicable. If such consent, approval or authorization
cannot be obtained within 6 months after Closing, Holdco shall use its best
efforts to provide such DFP Company or such DFP Subsidiary, as the case may be,
with the rights and benefits of the affected lease, license, contract,
commitment or other agreement or arrangement for the term of such lease,
license, contract or other agreement or arrangement, and, if Holdco provides
such rights and benefits, such DFP Company or such DFP Subsidiary, as the case
may be, shall assume the obligations and burdens thereunder.
SECTION 5.05. NOTICE OF DEVELOPMENTS. Prior to the Closing, Holdco and
Sauer shall promptly notify the other in writing of (i) all events,
circumstances, facts and occurrences arising subsequent to the date of this
Agreement which could result in any breach of a representation or warranty or
covenant of Holdco or Sauer, as the case may be, in this Agreement or which
could have the effect of
A-34
making any representation or warranty of Holdco or Sauer, as the case may be, in
this Agreement untrue or incorrect in any respect and (ii) all other material
developments affecting the assets, liabilities, business, financial condition,
operations, results of operations, customer or supplier relations, employee
relations, projections or prospects of, in the case of Sauer, any DFP Company,
any DFP Subsidiary or the Business and, in the case of each of Holdco, its
business or the business of any of its Affiliates.
SECTION 5.06. NAME CHANGE. As promptly as practicable following the
Closing, Sauer shall take all actions necessary, proper or desirable in order to
change the corporate name of Sauer to "Sauer-Danfoss Inc." ("SAUER-DANFOSS").
SECTION 5.07. DELAYED SUBSIDIARIES. Section 5.07 of the DFP Disclosure
Schedule lists all DFP Subsidiaries that, as of the date hereof, are not duly
organized or validly existing ("DELAYED SUBSIDIARIES"). On or before the Closing
Date, Danfoss shall form, or cause to be formed, the Delayed Subsidiaries and
take all necessary steps so that, on the Closing Date, each Delayed Subsidiary
shall be a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation or organization and will
have all necessary power and authority to own, operate and lease the properties
and assets then owned, operated or leased by it and to carry on its business in
the same manner as Danfoss prior to Closing had carried on the business to be
conducted thereby and that on the Closing Date, each Delayed Subsidiary shall be
duly licensed or qualified to do business and is in good standing in each
jurisdiction in which the properties owned or leased by it or the operation of
its business makes such licensing or qualification necessary. True and complete
copies of the certificate of incorporation and by-laws (or equivalent
organizational documents) of each Delayed Subsidiary, in effect on the Closing
Date shall be delivered by Danfoss to Sauer on the Closing Date. Any Delayed
Subsidiaries formed after February 23, 2000 shall have a ratio of (a) an amount
equal to Debt less cash and cash equivalents to (b) an amount equal to the sum
of (i) an amount equal to Debt less cash and cash equivalents plus (ii) Equity,
equal to the Sauer Leverage Ratio.
SECTION 5.08. RELEASE OF INDEMNITY OBLIGATIONS. Holdco covenants and
agrees, on or prior to the Closing, to execute and deliver to the DFP Companies,
for the benefit of each DFP Company and each DFP Subsidiary, a general release
and discharge, in form and substance satisfactory to Sauer releasing and
discharging each DFP Company and each DFP Subsidiary from any and all
obligations to indemnify either of Holdco or otherwise hold it harmless pursuant
to any agreement or other arrangement entered into prior to the Closing other
than to the extent, if any, an amount has been accrued for as a current payable
on the DFP Year-End Balance Sheet with respect to such obligations, agreements
or arrangements.
SECTION 5.09. PROXY STATEMENT. (a) As promptly as practicable after the
execution of this Agreement, Sauer shall prepare and file with the SEC a proxy
statement relating to the meeting of Sauer's stockholders to be held in
connection with the Stock Issuance (together with any amendments thereof or
supplements thereto, the "PROXY STATEMENT"). Sauer shall take all or any action
required under any applicable federal or state securities laws in connection
with the Stock Issuance pursuant to the Share Exchange. In the event that the
Closing shall occur on or before September 30, 2000, all costs and expenses
incurred by Sauer in connection with the Proxy Statement and Stockholder's
Meeting, including, without limitation, the fees and disbursements of its
counsel, accountants and other representatives, printing, filing and other fees
and expenses incurred in connection therewith shall be borne by Sauer. Holdco
shall furnish all information concerning Holdco and the DFP Companies as Sauer
may reasonably request in connection with such actions and the preparation of
the Proxy Statement. As promptly as practicable after the Proxy Statement shall
have become effective, Sauer shall mail the Proxy Statement to its stockholders.
The Proxy Statement shall include the recommendation of the Board of Directors
of Sauer in favor of the Stock Issuance, unless otherwise necessary due to the
applicable fiduciary duties of the Sauer directors, as determined by such
directors
A-35
in good faith after consultation with independent legal counsel (who may be such
party's regularly engaged independent legal counsel) and financial advisors.
No amendment or supplement to the Proxy Statement will be made by Sauer
without the approval of Holdco. Sauer will advise Holdco, promptly after it
receives any request by the SEC for amendment of the Proxy Statement or comments
thereon and responses thereto or requests by the SEC for additional information.
Sauer shall promptly prepare and submit to the NYSE a subsequent listing
application covering the shares of Sauer Common Stock issuable in the Share
Exchange, and shall use its reasonable best efforts to obtain, prior to the
Closing, approval for the listing of such Sauer Common Stock, subject to
official notice of issuance and Holdco shall cooperate with Sauer with respect
to such listing.
(b) The information supplied by Sauer for inclusion in the Proxy Statement
shall not, at (i) the time the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to the stockholders of Sauer, (ii) the time
of the Stockholder's Meeting (as hereinafter defined), and (iii) the Closing,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. If at any time prior to the Closing any event or
circumstance relating to Sauer or any subsidiary thereof, or their respective
officers or directors, should be discovered by Sauer which should be set forth
in an amendment or a supplement to the Proxy Statement, Sauer shall promptly
inform Holdco. All documents that Sauer is responsible for filing with the SEC
in connection with the transactions contemplated herein will comply as to form
and substance in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Exchange Act and
the rules and regulations thereunder.
(c) The information supplied by Holdco or the DFP Companies for inclusion in
the Proxy Statement shall not, at (i) the time the Proxy Statement (or any
amendment thereof or supplement thereto) is first mailed to the stockholders of
Sauer, (ii) the time of the Stockholder's Meeting, and (iii) the Closing,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. If at any time prior to the Closing any event or
circumstance relating to any DFP Company or any DFP Subsidiary, or their
respective officers or directors, should be discovered by Holdco or any DFP
Company which should be set forth in an amendment or a supplement to the Proxy
Statement, Holdco or such DFP Company shall promptly inform Sauer.
SECTION 5.10. STOCKHOLDERS' MEETING. Sauer shall call and hold a meeting
of its stockholders (the "STOCKHOLDERS' MEETING") as promptly as practicable for
the purpose of voting upon the approval of the Stock Issuance as soon as
practicable after the date on which the Proxy Statement becomes effective.
Subject to the fiduciary duties of the Sauer board of directors, Sauer shall use
its reasonable best efforts to solicit from its stockholders proxies in favor of
the approval of the Stock Issuance, and shall take all other action necessary or
advisable to secure the vote or consent of stockholders required by Delaware law
to obtain such approval, unless otherwise necessary under the applicable
fiduciary duties of the directors of Sauer, as determined by such directors in
good faith after consultation with independent legal counsel (who may be such
party's regularly engaged independent legal counsel).
SECTION 5.11. LEVERAGE RATIO ADJUSTMENT. (a) Danfoss and Sauer hereby
agree that on or before February 23, 2000, Sauer shall deliver to Danfoss its
calculation of the Sauer Leverage Ratio and Danfoss shall deliver to Sauer its
calculation of the DFP Leverage Ratio, in each instance, in sufficient detail to
fully support such calculation.
(b) (i) Subject to clause (ii) of this Section 5.11(b), the calculation
of the Sauer Leverage Ratio and the calculation of the DFP Leverage Ratio
shall each be deemed to be and shall be final, binding and conclusive on the
parties hereto.
A-36
(ii) Either Sauer or Danfoss (the "DISPUTING PARTY") may dispute the
calculation of the Leverage Ratio of the other (the "NON-DISPUTING PARTY");
PROVIDED, HOWEVER, that the Disputing Party shall have notified the
Non-Disputing Party in writing of each disputed item, specifying the amount
thereof in dispute and setting forth, in reasonable detail, the basis for
such dispute, within five Business Days of the Non-Disputing Party's
delivery of its Leverage Ratio to the Disputing Party. Sauer and Danfoss
shall endeavor to settle all disputes relating to the calculation of
Leverage Ratios amicably and in good faith within five Business Days of the
Disputing Party giving written notice to the Non-Disputing Party pursuant to
the immediately preceding sentence. Should those endeavors fail, all
disputes related thereto shall be jointly referred to KPMG and Sauer's
Accountants for resolution. Any resolution by KPMG and Sauer's Accountants
as to any disputed amounts shall be final, binding and conclusive on the
parties hereto. If KPMG and Sauer's Accountants are unable to reach a
resolution with such effect within five Business Days after the date on
which the dispute is submitted to them for resolution, KPMG and Sauer's
Accountants shall submit the items remaining in dispute for resolution to
PriceWaterhouseCoopers (or, if such firm shall decline to act or is not, at
the time of such submission, independent of Danfoss and Sauer, to another
independent accounting firm of international reputation mutually acceptable
to Sauer and Danfoss) (either PriceWaterhouseCoopers or such other
accounting firm being referred to herein as the "INDEPENDENT ACCOUNTING
FIRM"), which shall, within five Business Days after such submission,
determine and report to Sauer and Danfoss upon such remaining disputed
items, and such report shall be final, binding and conclusive on Danfoss and
Sauer. The fees and disbursements of the Independent Accounting Firm shall
be allocated between Danfoss and Sauer in the same proportion that the
aggregate amount of such remaining disputed items so submitted to the
Independent Accounting Firm that is unsuccessfully disputed by each such
party (as finally determined by the Independent Accounting Firm) bears to
the total amount of such remaining disputed items so submitted.
(iii) In acting under this Agreement, Sauer's Accountants, Danfoss'
Accountants and the Independent Accounting Firm shall be entitled to the
privileges and immunities of arbitrators.
(c) Danfoss and Sauer further agree that the DFP Leverage Ratio shall be
adjusted to equal the Sauer Leverage Ratio pursuant to Section 5.11(d) below
(the "LEVERAGE RATIO ADJUSTMENT").
(d) In the event that the Leverage Ratio Adjustment requires the Debt
included on the DFP Year-End Balance Sheet to be increased, then, prior to the
Closing, either DFP or USCo. shall pay the Equalization Dividend, PROVIDED,
HOWEVER, that in the event that DFP or USCo., as the case may be, has
insufficient funds to pay the Equalization Dividend, or the Equalization
Dividend otherwise cannot be paid to Danfoss, then the Equity of either DFP or
USCo. (in Danfoss' sole discretion) shall be reduced, in a manner reasonably
satisfactory to Sauer, by an amount equal to the amount of the Equalization
Dividend. In the event that the Leverage Ratio Adjustment requires the Debt
included on the DFP Year-End Balance Sheet to be decreased, then, prior to the
Closing, Danfoss shall, in its sole discretion, pay to either DFP or USCo. the
Equalization Contribution.
SECTION 5.12. TRANSFER RESTRICTION. Sauer hereby agrees with Holdco and
Danfoss that Sauer shall not transfer, sell, or otherwise dispose of (a) the
Danish Shares or (b) the shares of Danfoss Hydraulik A/S for a period of
37 months commencing on the Closing Date.
SECTION 5.13. ASSET ACQUISITION. Holdco and Sauer hereby agree that Sauer
shall acquire, on or before December 31, 2000, in one or more transactions, all
of the assets of Danfoss related to the Mobile Hydraulics operations of Danfoss
conducted on the date hereof in the countries of Holland, Belgium, Spain,
Portugal, Switzerland, Japan, Singapore (which also covers sales in other Asean
countries), Hong Kong, New Zealand, Australia, Brazil (which also covers sales
in other South American countries) and Mexico pursuant to one or more asset
acquisition agreements to be entered into by Holdco and Sauer and including, in
addition to standard and customary terms, terms
A-37
substantially similar to the terms described in the term sheet attached hereto
as Schedule IV (including, without limitation, the methodology for the
determination of the number of shares of Sauer Common Stock to be exchanged for
such assets).
SECTION 5.14. CREDIT FACILITY. Prior to Closing, Danfoss shall cause DFP
to enter into the Credit Facility. The terms of the Credit Facility shall
provide that the Credit Facility must remain in place for a period of no less
than six months after Closing.
SECTION 5.15. INDEBTEDNESS. From the date hereof until the Closing Date,
neither Sauer or any Sauer Subsidiary nor any DFP Company or any DFP Subsidiary
will incur any Debt, whether directly or on a contingent basis, whatsoever,
other than Debt incurred to fund such Person's working capital requirements or
capital expenditures.
SECTION 5.16. NAME OF SAUER SUBSIDIARIES. Sauer hereby agrees to use its
reasonable efforts to, within a reasonable time period after the Closing Date,
take all reasonable actions necessary to substitute in the corporate name of
each Sauer Subsidiary that, as of Closing Date, includes in its corporate name
the word "Sundstrand," the word "Danfoss" for the word "Sundstrand."
SECTION 5.17. AMENDMENT RESULTING FROM U.S. WITHHOLDING TAXES. In the
event that any of Murmann, Danfoss or Holdco reasonably determine that, under
the proposed Convention Between the Government of the United States of America
and the Government of the Kingdom of Denmark for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income,
signed at Washington, D.C. on August 19, 1999, Holdco will be subject to
withholding taxes on the dividends and the distributions paid by Sauer in an
amount in excess of 5% of any such dividend or distribution, Sauer, Danfoss,
Murmann and Holdco hereby agree to take all actions reasonably necessary to
amend this Agreement in order to replace all references to Holdco contained in
this Agreement with references to either a new holding company (organized in a
jurisdiction other than Denmark) or Danfoss, so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party hereto by such amendment.
SECTION 5.18. AMENDMENT RESULTING FROM LACK OF DANISH TAX AUTHORITY
APPROVAL. In the event that, within twenty Business Days after the date hereof,
the Danish tax authority does not approve Danfoss' application to treat the
Share Exchange as a tax free stock exchange, Sauer, Danfoss, Murmann and Holdco
hereby agree to take all actions necessary to amend this Agreement in order to
replace all references to Holdco contained in this Agreement with references to
Danfoss, so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party hereto by such amendment; PROVIDED, HOWEVER, that Danfoss shall not be
required to accept the Holdco structure.
SECTION 5.19. FURTHER ACTION. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things necessary, proper or advisable under applicable Law,
and execute and deliver such documents and other papers, as may be required to
carry out the provisions of this Agreement and consummate and make effective the
transactions contemplated by this Agreement.
ARTICLE VI
[RESERVED]
A-38
ARTICLE VII
TAX MATTERS
SECTION 7.01. TAX INDEMNITY. (a) (i) Other than to the extent, if any, an
amount is reflected on the DFP Year-End Balance Sheet, Danfoss agrees to
indemnify and hold harmless Sauer against any Taxes imposed on any DFP Company
or any DFP Subsidiary for any taxable period or any portion of a period ending
on or before December 31, 1999 and against any loss, damage, liability or
expense, including reasonable fees for attorneys and other outside consultants,
incurred in contesting or otherwise in connection with any such Taxes. Sauer
hereby agrees that the provisions of this Section 7.01(a) shall be the sole
remedy of Sauer and the DFP Companies with respect to a breach of the
representations and warranties contained in Section 3.20. Any payment under this
provision will be net of any Tax Benefit to Sauer, any DFP Company or any DFP
Subsidiary resulting from the payment of Taxes otherwise subject to
indemnification by Danfoss.
(ii) Other than to the extent, if any, an amount is reflected on the Sauer
Year-End Balance Sheet, Murmann agrees to indemnify and hold harmless Danfoss
against any Taxes imposed on Sauer or any Sauer Subsidiary for any taxable
period or any portion of a period ending on or before December 31, 1999 and
against any loss, damage, liability or expense, including reasonable fees for
attorneys and other outside consultants, incurred in contesting or otherwise in
connection with any such Taxes. Danfoss hereby agrees that the provisions of
this Section 7.01(a) shall be the sole remedy of Danfoss with respect to a
breach of the representations and warranties contained in Section 4.20. Any
payment under this provision will be net of any Tax Benefit to Sauer, any Sauer
Subsidiary, any DFP Company or any DFP Subsidiary resulting from the payment of
Taxes otherwise subject to indemnification by Murmann. Any indemnity of Murmann
under this Section 7.01(a)(ii) is limited to the amount of any Taxes and other
loss, damage, liability or expense otherwise payable by Murmann under this
Section 7.01(a)(ii) multiplied by .2821.
(b) In the case of Taxes that are payable with respect to a taxable period
that begins before December 31, 1999, and ends after December 31, 1999, the
portion of any such Tax that is allocable to the portion of the period ending on
December 31, 1999, shall be:
(i) in the case of Taxes that are either (x) based upon or related to
income or receipts, or (y) imposed in connection with any sale or other
transfer or assignment of property (real or personal, tangible or
intangible), other than conveyances pursuant to this Agreement, deemed equal
to the amount which would be payable if the taxable year ended with
December 31, 1999 (except that, solely for purposes of determining the
marginal Tax rate applicable to income or receipts during such period in a
jurisdiction in which such Tax rate depends upon the level of income or
receipts, annualized income or receipts may be taken into account to the
extent appropriate for an equitable sharing of such Taxes); and
(ii) in the case of Taxes not described in subparagraph (i) that are
imposed on a periodic basis and measured by the level of any item, deemed to
be the amount of such Taxes for the entire period multiplied by a fraction
the numerator of which is the number of calendar days in the period ending
on December 31, 1999, and the denominator of which is the number of calendar
days in the entire period.
(c) (i) Other than to the extent an amount has been paid on or before
December 31, 1999 or is reflected on the DFP Year-End Balance Sheet, Danfoss
agrees to indemnify and hold harmless Holdco against any Taxes imposed on
Holdco, and agrees to indemnify and hold harmless Sauer against any Taxes
imposed on Sauer, any Sauer Subsidiary, any DFP Subsidiary or any DFP
Company, related to the Reorganization, the transfer of any DFP Companies'
stock from Holdco to Sauer, the transfer of any DFP Companies' stock from
Danfoss to Holdco, or any Equalization Dividend, and against any loss,
damage, liability or expense, including reasonable fees for attorneys
A-39
and other outside consultants incurred in contesting or otherwise in
connection with any such Taxes. For this purpose, Taxes on or measured by
net income accrued in the ordinary course of business are not considered to
be related to the Reorganization. Any payment under this provision will be
net of any Tax Benefit to Sauer, any Sauer Subsidiary, any DFP Company, or
any DFP Subsidiary resulting from the payment of Taxes otherwise subject to
indemnification by Danfoss under this provision.
(ii) Other than to the extent that an amount has been paid on or before
December 31, 1999 or is reflected on the Sauer Year-End Balance Sheet,
Murmann agrees to indemnify and hold harmless Danfoss against any Taxes
imposed on Holdco with respect to the transfer of Murmann's Sauer Common
Stock from Murmann to Holdco, and any loss, damage, liability or expense,
including reasonable fees for attorneys and other outside consultants
incurred in contesting, or otherwise in connection with, any such Taxes. Any
payment under this provision will be net of any Tax Benefit to Holdco
resulting from the payment of any Taxes otherwise subject to indemnification
by Murmann under this provision. Any indemnity of Murmann under this
Section 7.01(c)(ii), including the amount of any Tax Benefit, shall be
limited to the amount otherwise determined under this provision multiplied
by .2821.
(d) All amounts for which an indemnity payment is required pursuant to
Section 7.01(a)(i), when added to any Sauer Loss which may be recovered from
Danfoss under Article IX, must be, in the aggregate, in excess of $5 million.
All amounts for which an indemnity payment is required pursuant to
Section 7.01(a)(ii), when added to any Danfoss Loss which may be recovered from
Murmann under Article IX, must be, in the aggregate, in excess of $5 million.
All indemnity payments required pursuant to Section 7.01(a)(i), when added to
any Sauer Loss which may be recovered from Danfoss under Article IX, shall not
exceed, in the aggregate, $50 million. All indemnity payments required pursuant
to Section 7.01(a)(ii), when added to any Danfoss Loss which may be recovered
from Murmann under Article IX, shall not exceed, in the aggregate, $50 million.
(e) The amount of Tax Benefit for purposes of Section 7.01 will be
determined at the time that the indemnification payment is made under this
section, will be based on a reasonable anticipation of such benefit determined
on a present value basis and will not take into account any reduction in gain,
or increase in loss, to be recognized upon the sale of an asset by virtue of any
increase in tax basis. In addition, for purposes of section 7.01(c), a Tax
Benefit will be considered to exist only to the extent that it is bookable under
U.S. GAAP, as determined by Sauer's accountants, in the case of an indemnity
paid to Sauer, or under International Accounting Standards (IAS), as determined
by Danfoss' accountants, in the case of any indemnity paid to Danfoss. In such
case, the amount of such Tax Benefit will be determined by the accountants for
Sauer and Danfoss, as the case may be, within 30 days after the claim for
indemnity is made. The net amount of the indemnity must be paid within 15 days
after the opinion of the accountants is delivered.
SECTION 7.02. RETURNS AND PAYMENTS. (a) Danfoss shall prepare and furnish
to Sauer (or cause to be prepared and so furnished) in a timely manner all Tax
returns relating to any DFP Company or any DFP Subsidiary that are due in
respect of any taxable period ending on or before December 31, 1999 or that are
required to be filed before the Closing Date. Danfoss will provide copies of
such returns (other than any Tax return that includes a corporation that is not
a DFP Company or a DFP Subsidiary) to Sauer within 30 days before the due date
for filing such returns. Sauer will prepare and file or cause to be prepared and
filed all Tax returns required to be filed with respect to any DFP Company or
any DFP Subsidiary that are due after the Closing Date other than any Tax return
that Danfoss is required to file pursuant to this Section 7.02(a). Returns not
yet filed for any taxable period that begins before December 31, 1999 shall be
prepared, and each item thereon treated, in a manner consistent with past
practices and treatment insofar as relates to any DFP Company or any DFP
Subsidiary.
A-40
(b) Any Tax refund (or equivalent benefit to Holdco or Danfoss or any
Danfoss subsidiary through a reduction in Tax liability) for a period before the
Closing Date arising out of the carryback of a loss or credit incurred by any
DFP Company or any DFP Subsidiary in a taxable year ending after the
December 31, 1999 shall be the property of Sauer and, if received by Holdco,
Danfoss, or any Danfoss Affiliate, shall be payable promptly to Sauer. Any such
refund or reduction of Tax will be considered to have been received by Holdco,
Danfoss or any Danfoss subsidiary only if and to the extent that such refund or
reduction would not have been so received but for such carryback.
(c) AMENDMENT OF TAX RETURNS. Sauer agrees not to amend any Tax return of
any DFP Company or DFP Subsidiary that includes any corporation other than a DFP
Company or a DFP Subsidiary that is filed on or before the Closing Date with
respect to any period ending prior to January 1, 2000; and Sauer agrees not to
amend any other Tax return of a DFP Company or a DFP Subsidiary with respect to
any such period without the prior written consent of Danfoss, which consent may
not be unreasonably withheld.
(d) REVIEW BY DANFOSS AND SAUER OF CERTAIN TAX RETURNS. With respect to any
Tax return that Sauer prepares and files, or causes to be prepared and filed,
and that includes any Tax attributable to the Reorganization, Sauer shall
deliver to Danfoss, at least twenty (20) business days before the last day for
timely filing of such Tax return, a copy of such completed Tax return. Sauer
will consider any comments made by Danfoss in good faith with a view toward
minimizing the Taxes attributable to the Reorganization. With respect to any Tax
return that Danfoss prepares and files, or causes to be prepared and filed,
(other than any return that includes a corporation that is not a DFP Company or
a DFP Subsidiary) and that includes any Tax attributable to any DFP Company or
any DFP Subsidiary for any period after December 31, 1999, Danfoss shall deliver
to Sauer, at least twenty (20) business days before the last day for timely
filing of such Tax return, a copy of such completed Tax return. Upon the request
of Sauer, Danfoss will prepare and provide to Sauer pro forma returns for the
DFP Companies and the DFP Subsidiaries with respect to any Tax return filed by
Danfoss that includes a corporation that is not a DFP Company or a DFP
Subsidiary. Danfoss will consider any comments made by Sauer with regard to such
Tax returns or pro forma returns in good faith with a view toward minimizing the
Taxes allocable to Sauer.
SECTION 7.03. ASSISTANCE AND COOPERATION. After the Closing Date, Danfoss
and Sauer shall use all reasonable efforts to:
(a) assist (and shall use all reasonable efforts to cause their
respective Affiliates to assist) the other party in preparing any returns
which such other party is responsible for preparing and filing in accordance
with this Article VII;
(b) cooperate fully in preparing for any audits of, or disputes with
taxing authorities regarding, any returns of any DFP Company or any DFP
Subsidiary;
(c) make available to the other and to any taxing authority as
reasonably requested all information, records, and documents relating to
Taxes of any DFP Company or any DFP Subsidiary;
(d) provide timely notice to the other in writing of any pending or
threatened Tax audits or assessments of any DFP Company or any DFP
Subsidiary for taxable periods for which the other may have a liability
under this Article VII; and
(e) furnish the other with copies of all correspondence received from
any taxing authority in connection with any Tax audit or information request
with respect to any such taxable period.
SECTION 7.04. CONTESTS. (a) Sauer will promptly notify Murmann and Danfoss
of an audit or administrative or judicial proceeding that relates to any amount
with respect to which Danfoss may be required to indemnify Sauer under this
Article VII. Provided that Danfoss acknowledges in writing its
A-41
liability under this Article VII to hold Sauer harmless against the amount of
any adjustment that may be made as a result of such audit or proceeding, Danfoss
shall have the right at its expense to be present in and control the conduct of
such audit or proceeding but only to the extent that such audit or proceeding
relates solely to a potential adjustment for which Danfoss has acknowledged its
liability and the issue underlying the proposed adjustment does not recur for
any period ending after December 31, 1999; Sauer also may be present in any such
audit or proceeding and, if Danfoss does not assume the defense of any such
audit or proceeding, Sauer may defend the same in such manner as it may deem
appropriate, including, but not limited to, settling such audit or proceeding
after giving five days' prior written notice to Danfoss setting forth the terms
and conditions of settlement. In the event that a potential adjustment as to
which Danfoss has acknowledged its liability is present in the same proceeding
as a potential adjustment for which Sauer would be liable, Sauer shall have the
right, at its expense, to control the audit or proceeding with respect to the
latter proposed adjustment.
(b) Sauer will notify Murmann and Danfoss of an audit or administrative or
judicial proceeding that relates to any amount with respect to which Murmann may
be required to indemnify Danfoss under this Article VII. Provided that Murmann
acknowledges in writing its liability under this Article VII to hold Danfoss
harmless against the amount of any adjustment that may be made as a result of
such audit or proceeding, Murmann shall have the right at its expense to be
present in and control the conduct of such audit or proceeding but only to the
extent that such audit or proceeding relates solely to a potential adjustment
for which Murmann has acknowledged its liability subject to the limitations
provided herein, and the issue underlying the proposed adjustment does not recur
for any period ending after December 31, 1999; Sauer also may be present in any
such audit or proceeding and, if Murmann does not assume the defense of any such
audit or proceeding, Sauer may defend the same in such manner as it may deem
appropriate, including, but not limited to, settling such audit or proceeding
after giving five days' prior written notice to Murmann setting forth the terms
and conditions of settlement. In the event that a potential adjustment as to
which Murmann has acknowledged its liability is present in the same proceeding
as a potential adjustment for which Murmann would not be liable, Sauer shall
have the right, at its expense, to control the audit or proceeding with respect
to the latter proposed adjustment.
(c) With respect to a proposed adjustment for which both Danfoss (as
evidenced by its acknowledgment under this Section 7.04) and Sauer or Murmann,
as the case may be, could be liable, or which involves an issue that recurs for
any period ending after December 31, 1999 (whether or not the subject of audit
at such time), (i) each party may participate in the audit or proceeding, and
(ii) the role of each party in the audit or proceeding shall be determined by
the relative magnitude of the amount at risk. The principle set forth in the
preceding sentence shall govern also for purposes of deciding any issue that
must be decided jointly (in particular, choice of judicial forum) in situations
in which separate issues are otherwise controlled hereunder by Sauer or Murmann
and Danfoss.
(d) Notwithstanding the foregoing provisions of this Section 7.04, the
parties to this Agreement shall endeavor to agree on a joint representative or
representatives in any proceeding in which each is entitled to and desires to be
represented.
(e) Except as provided in Section 7.04(a) above, neither Sauer, Danfoss nor
Murmann shall enter into any compromise or agree to settle any claim pursuant to
any Tax audit or proceeding that would adversely affect any of such other
parties for such year or a subsequent year without the written consent of such
other party, which consent may not be unreasonably withheld.
SECTION 7.05. MISCELLANEOUS. (a) Notwithstanding any provision herein to
the contrary, the obligations of Danfoss to indemnify and hold harmless Sauer,
any DFP Company and any DFP Subsidiary and the obligations of Murmann to
indemnify and hold harmless Danfoss pursuant to this Article VII, and the
representations and warranties contained in Section 3.20 and 4.20, respectively,
shall terminate at the close of business on the 120th day following the
expiration of the applicable statute of limitations with respect to the Tax
liabilities in question (giving effect to any waiver, mitigation or extension
thereof).
A-42
(b) Danfoss and Sauer agree to treat all payments made by Danfoss under this
Article VII, under other indemnity provisions of this Agreement and for any
misrepresentations or breaches of warranties or covenants as capital
contributions for Tax purposes or adjustments to purchase price, as appropriate.
(c) From and after the date of this Agreement, Danfoss and Holdco shall not
without the prior written consent of Sauer (which may, in its sole and absolute
discretion, withhold such consent) make, or cause or permit to be made or
revoke, any Tax election that would affect any DFP Company.
(d) Sauer agrees that it shall not, without the prior written consent of
Danfoss, make, or cause or permit to be made, a Tax election under
Section 338(h)(10) of the Code or under any similar provision of the Tax law of
any other jurisdiction with respect to this transaction.
SECTION 7.06. ADDITIONAL COVENANTS. (a)(i) Danfoss will not take, and will
not permit the DFP Companies or DFP Subsidiaries to take, any action to generate
taxable income or Taxes of the DFP Companies or the DFP Subsidiaries outside the
ordinary course of business after December 31, 1999 and on or before the Closing
Date, other than with respect to transactions contemplated by this Agreement,
without the prior consent of Sauer, which consent may not be unreasonably
withheld.
(ii) Sauer will not take, and will not permit the Sauer Subsidiaries to
take, any action to generate taxable income or Taxes of Sauer or the Sauer
Subsidiaries outside the ordinary course of business after December 31, 1999 and
on or before the Closing Date, other than with respect to transactions
contemplated by this Agreement without the prior consent of Danfoss, which
consent may not be unreasonably withheld.
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.01. CONDITIONS TO OBLIGATIONS OF SAUER AND HOLDCO. The
obligations of Sauer and Holdco to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, at or prior to the Closing,
of each of the following conditions:
(a) SAUER STOCKHOLDER APPROVAL. The Stock Issuance shall have been
authorized and approved by a majority of shares of Sauer Common Stock
entitled to vote thereon in accordance with the rules of the Nyse.
(b) NO PROCEEDING OR LITIGATION. No Action shall have been commenced by
or before any Governmental Authority against Holdco or Sauer, seeking to
restrain or materially and adversely alter the transactions contemplated by
this Agreement which, in the reasonable, good faith determination of any
party, is likely to render it impossible or unlawful to consummate such
transactions; PROVIDED, HOWEVER, that a party shall not be entitled to
receive the benefit of this Section 8.01(c) and this Section 8.01(c) shall
not apply with respect to a party if such party has directly or indirectly
solicited or encouraged any such Action;
(c) ANTITRUST APPROVAL. Any waiting period (and any extension thereof)
under (i) the HSR Act and (ii) the German Antitrust Act (with respect to the
German Antitrust Authority Notification), applicable to the purchase of the
Shares contemplated hereby shall have expired or shall have been terminated; and
(d) OTHER AGREEMENTS. Each party, to the extent a party thereto, shall have
duly executed and delivered the Joint Venture Agreement, the Shared Services
Agreement, the Non-Competition Agreement, the Distributor Agreement and the
Patent License Agreement and the Trademark License Agreement.
(e) FIRPTA STATEMENTS. Each of Sauer and Holdco shall deliver or cause to
be delivered to the other party hereto any and all statements and other
documents required by Section 1445 of the Code
A-43
and the regulations thereunder to preclude the application to the Share Exchange
of any obligation under Section 1445 of the Code to withhold or pay any Tax.
SECTION 8.02. CONDITIONS TO OBLIGATIONS OF HOLDCO. The obligations of
Holdco to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment, at or prior to the Closing, of each of the following
conditions:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Sauer contained in this Agreement shall have been true and
correct when made and shall be true and correct in all material respects as
of the Closing, with the same force and effect as if made as of the Closing
Date, other than such representations and warranties as are made as of
another date, the covenants and agreements contained in this Agreement to be
complied with by Sauer on or before the Closing shall have been complied
with in all material respects, and Holdco shall have received a certificate
from Sauer to such effect signed by a duly authorized officer thereof;
(b) RESOLUTIONS OF SAUER. Holdco shall have received a true and
complete copy, certified by a duly authorized senior officer of Sauer, of
the resolutions duly and validly adopted by (i) the Board of Directors of
Sauer evidencing its authorization of the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and
(ii) the stockholders of Sauer evidencing their authorization and approval
of the issuance of Sauer Common Stock;
(c) INCUMBENCY CERTIFICATE. Holdco shall have received a certificate of
the Secretary or a duly authorized senior officer of Sauer certifying the
names and signatures of the officers of Sauer authorized to sign this
Agreement and the other documents to be delivered hereunder;
(d) CONSENTS AND APPROVALS. Other than as would not individually or in
the aggregate have a Material Adverse Effect, Sauer shall have received,
each in form and substance satisfactory to Holdco, all authorizations,
consents, orders and approvals of all Governmental Authorities and officials
and all third party consents and estoppel certificates which Holdco in good
faith deem necessary or desirable for the consummation of the transactions
contemplated by this Agreement;
(e) NO MATERIAL ADVERSE EFFECT. No event or events shall have occurred,
or be reasonably likely to occur, which, individually or in the aggregate,
have, or could have, a Material Adverse Effect with respect to Sauer.
(f) CREDIT FACILITY. Sauer shall have delivered to the financial
institution providing the Credit Facility such documentation, if any,
required to cause such financial institution to release Danfoss from any and
all claims or potential liability in connection with the Credit Facility.
(g) AMENDED AND RESTATED CORPORATE GOVERNANCE DOCUMENTS. Sauer shall
have amended and restated its Certificate of Incorporation and its By-laws
to each read in its entirety substantially in the form of Exhibit F and
Exhibit G attached hereto, respectively.
SECTION 8.03. CONDITIONS TO OBLIGATIONS OF SAUER. The obligations of Sauer
to consummate the transactions contemplated by this Agreement shall be subject
to the fulfillment, at or prior to the Closing, of each of the following
conditions:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Holdco contained in this Agreement shall have been true and
correct when made and shall be true and correct in all material respects as
of the Closing with the same force and effect as if made as of the Closing,
other than such representations and warranties as are made as of another
date, the covenants and agreements contained in this Agreement to be
complied with by Holdco on or before the Closing shall have been complied
with in all material respects, and Sauer shall have received a certificate
of Holdco to such effect signed by a duly authorized officer of Holdco;
A-44
(b) RESOLUTIONS OF EACH OF HOLDCO. Sauer shall have received a true and
complete copy, certified by a duly authorized senior officer of Holdco, of
the resolutions duly and validly adopted by the Board of Directors of Holdco
and the shareholders of Holdco evidencing their authorization of the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby;
(c) INCUMBENCY CERTIFICATE OF HOLDCO. Sauer shall have received a
certificate of a duly authorized senior officer of Holdco certifying the
names and signatures of the officers of Holdco authorized to sign this
Agreement and the other documents to be delivered hereunder;
(d) CONSENTS AND APPROVALS. Other than as would not individually or in
the aggregate have a Material Adverse Effect, Holdco shall have received,
each in form and substance satisfactory to Sauer, all authorizations,
consents, orders and approvals of all Governmental Authorities and officials
and all third party consents and estoppel certificates which Sauer in good
faith deems necessary or desirable for the consummation of the transactions
contemplated by this Agreement;
(e) CERTIFICATE VERIFYING LEVERAGE RATIO. Sauer shall have received a
certificate from Holdco certifying that as of December 31, 1999, DFP
Leverage Ratio equals the Sauer Leverage Ratio;
(f) RELEASE OF INDEMNITY OBLIGATIONS. Sauer shall have received the
general release and discharge from Danfoss referred to in Section 5.08 in
form and substance satisfactory to Sauer in its sole and absolute
discretion;
(g) COMPLETION OF REORGANIZATION. Danfoss shall have completed in all
respects the Reorganization; and
(h) NO MATERIAL ADVERSE EFFECT. No event or events shall have occurred,
or be reasonably likely to occur, which, individually or in the aggregate,
have, or could have, a Material Adverse Effect with respect to DFP.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of Sauer and Holdco contained in this Agreement,
and all statements contained in this Agreement, the Exhibits to this Agreement,
the Schedules to this Agreement, and any certificate, any Financial Statement,
any Year-End Balance Sheet or report or other document delivered pursuant to
this Agreement or in connection with the transactions contemplated by this
Agreement (collectively, the "ACQUISITION DOCUMENTS"), shall survive the Closing
until the date which is 37 months after Closing Date; PROVIDED, HOWEVER, that
(a) the representations and warranties dealing with Tax matters which shall
survive as provided in Article VII and (b) insofar as any claim is made by
(i) Sauer or Sauer's Affiliates or their officers, directors, employees, agents,
successors and assigns (each, a "DANFOSS INDEMNIFIED PARTY") for the breach of
any representation or warranty of Holdco or (ii) Danfoss or Danfoss' Affiliates
or their officers, directors, employees, agents, successors or assigns (each, a
"MURMANN INDEMNIFIED PARTY") for the breach of any representation or warranty of
Sauer contained herein, which claim arises out of allegations of personal injury
or property damage suffered by any third party on or prior to the Closing Date
or attributable to products or Inventory sold or shipped, or activities or
omissions that occur, on or prior to the Closing Date, such representations and
warranties shall, for purposes of such claim by the Danfoss Indemnified Party or
the Murmann Indemnified Party, as the case may be, survive until thirty calendar
days after the expiration of the applicable statute of limitations governing
such claims. If written notice of a claim has been given prior to the expiration
of the applicable representations and warranties by (a) the Danfoss Indemnified
Party to Murmann or (b) the Murmann Indemnified Party to Danfoss, then the
relevant representations and warranties shall survive as to such claim, until
such claim has been finally resolved.
A-45
SECTION 9.02. INDEMNIFICATION. (a) Any Danfoss Indemnified Party shall be
indemnified and held harmless by Danfoss from any and all Liabilities, losses,
damages, claims, costs and expenses, interest, awards, judgments and penalties
(including, without limitation, attorneys' and consultants' fees and expenses)
actually suffered or incurred by such Danfoss Indemnified Party (including,
without limitation, any Action brought or otherwise initiated by any of them)
(hereinafter a "SAUER LOSS"), arising out of or resulting from:
(i) the breach of any representation or warranty made by Holdco
contained in the Acquisition Documents; or
(ii) the breach of any covenant or agreement by Holdco or Danfoss
contained in the Acquisition Documents; or
(iii) Liabilities of any DFP Company or any DFP Subsidiary not reflected
on the DFP Year-End Balance Sheet, whether arising before or after the
Closing Date, arising from or related to the ownership or actions or
inactions of any DFP Company or any DFP Subsidiary or, other than
Liabilities incurred by any DFP Company or DFP Subsidiary in the ordinary
course of business during the period commencing on the date hereof and
ending on the Closing Date, the conduct of their respective businesses prior
to the Closing; or
(iv) any and all Sauer Losses suffered or incurred by Sauer, any DFP
Company or any DFP Subsidiary by reason of or in connection with any claim
or cause of action of any third party to the extent arising out of any
action, inaction, event, condition, liability or obligation of any DFP
Companies or any DFP Subsidiary occurring or existing prior to the Closing;
PROVIDED, HOWEVER, that all such Sauer Losses suffered or incurred under
Section 9.02(a)(i), (iii) and (iv), when added to any amount for which an
indemnity payment is required pursuant to Section 7.01(a)(i), must be, in the
aggregate, in excess of $5.0 million.
(b) Any Murmann Indemnified Party shall be indemnified and held harmless by
Murmann from any and all Liabilities, losses, damages, claims, costs and
expenses, interest, awards, judgments and penalties (including, without
limitation, attorneys' and consultants' fees and expenses) actually suffered or
incurred by such Murmann Indemnified Party (including, without limitation, any
Action brought or otherwise initiated by any of them) (hereinafter a "DANFOSS
LOSS"), arising out of or resulting from:
(i) the breach of any representation or warranty made by Sauer contained
in the Acquisition Documents; or
(ii) except as provided for in Section 9.04 and Section 9.05, the breach
of any covenant or agreement by Sauer contained in the Acquisition
Documents; or
(iii) Liabilities of Sauer or any Sauer Subsidiary not reflected on the
Sauer Year-End Balance Sheet, whether arising from or related to the
ownership or actions or inactions of Sauer or any Sauer Subsidiary or, other
than Liabilities incurred by Sauer or any Sauer Subsidiary in the ordinary
course of business during the period commencing on the date hereof and
ending on the Closing Date, the conduct of their respective businesses prior
to the Closing; or
(iv) any and all Danfoss Losses suffered or incurred by Danfoss or Sauer
by reason of or in connection with any claim or cause of action of any third
party to the extent arising out of any action, inaction, event, condition,
liability or obligation of Sauer or any Sauer Subsidiary occurring or
existing prior to the Closing;
PROVIDED, HOWEVER, that all such Danfoss Losses suffered or incurred under
Section 9.02(b)(i), (iii) and (iv), when added to any amount for which an
indemnity payment is required pursuant to Section 7.01(a)(ii), must be, in the
aggregate, in excess of $5.0 million.
A-46
(c) To the extent that Danfoss' or Murmann's undertakings set forth in this
Section 9.02 may be unenforceable, Danfoss or Murmann, as the case may be, shall
contribute the maximum amount that it is permitted to contribute under
applicable law to the payment and satisfaction of all Sauer Losses incurred by
Sauer, the DFP Companies or the DFP Subsidiaries and all Danfoss Losses incurred
by Holdco or Sauer.
(d) A Murmann Indemnified Party shall give to Murmann and Sauer and a
Danfoss Indemnified Party shall give to Danfoss and Holdco notice of any matter
which an either a Danfoss Indemnified Party or a Murmann Indemnified Party as
the case may be, has determined has given or could give rise to a right of
indemnification under this Agreement, within 60 days of such determination,
stating the amount of the Sauer Loss or Danfoss Loss, as the case may be, if
known, and method of computation thereof, and containing a reference to the
provisions of this Agreement in respect of which such right of indemnification
is claimed or arises. The obligations and Liabilities of Murmann or Danfoss, as
the case may be, under this Article IX with respect to Danfoss Losses and Sauer
Losses, as the case may be, arising from claims of any third party which are
subject to the indemnification provided for in this Article IX ("THIRD PARTY
CLAIMS") shall be governed by and contingent upon the following additional terms
and conditions: if a Murmann Indemnified Party or a Danfoss Indemnified Party,
as the case may be, shall receive notice of any Third Party Claim, the Murmann
Indemnified Party or the Danfoss Indemnified Party, as the case may be, shall
give Murmann or Danfoss, as the case may be, notice of such Third Party Claim
within 30 days of the receipt of such notice of Third Party Claim; PROVIDED,
HOWEVER, that the failure to provide such notice shall not release Murmann or
Danfoss, as the case may be, from any of its obligations under this Article IX
except to the extent Murmann or Danfoss, as the case may be, is materially
prejudiced by such failure and shall not relieve the Murmann or Danfoss, as the
case may be, from any other obligation or Liability that it may have to any
Murmann Indemnified Party or any Danfoss Indemnified Party, as the case may be,
otherwise than under this Article IX. If Murmann or Danfoss, as the case may be,
acknowledges in writing its obligation to indemnify the Murmann Indemnified
Party or the Danfoss Indemnified Party, as the case may be, hereunder against
any Losses that may result from such Third Party Claim, then Murmann or Danfoss,
as the case may be, shall be entitled to assume and control the defense of such
Third Party Claim at its expense and through counsel of its choice if it gives
notice of its intention to do so to the Murmann Indemnified Party or the Danfoss
Indemnified Party, as the case may be, within ten calendar days of the receipt
of such notice from the Murmann Indemnified Party or the Danfoss Indemnified
Party, as the case may be; PROVIDED, HOWEVER, that if there exists or is
reasonably likely to exist a conflict of interest that would make it
inappropriate in the judgment of the Murmann Indemnified Party or the Danfoss
Indemnified Party, as the case may be, in its sole and absolute discretion, for
the same counsel to represent both the Murmann Indemnified Party or the Danfoss
Indemnified Party, as the case may be, then the Murmann Indemnified Party or the
Danfoss Indemnified Party, as the case may be, shall be entitled to retain its
own counsel, in each jurisdiction for which the Murmann Indemnified Party or the
Danfoss Indemnified Party, as the case may be, determines counsel is required,
at the expense of Murmann or Danfoss, as the case may be. In the event Murmann
or Danfoss, as the case may be, exercises the right to undertake any such
defense against any such Third Party Claim as provided above, the Murmann
Indemnified Party or the Danfoss Indemnified Party, as the case may be, shall
cooperate with Murmann or Danfoss, as the case may be, in such defense and make
available to Murmann or Danfoss, as the case may be, at Murmann's or Danfoss',
as the case may be, expense, all witnesses, pertinent records, materials and
information in the Murmann Indemnified Party or the Danfoss Indemnified Party's,
as the case may be, possession or under the Murmann Indemnified Party or the
Danfoss Indemnified Party's, as the case may be, control relating thereto as is
reasonably required by the Murmann or Danfoss, as the case may be. Similarly, in
the event the Murmann Indemnified Party or the Danfoss Indemnified Party, as the
case may be, is, directly or indirectly, conducting the defense against any such
Third Party Claim, Murmann or Danfoss, as the case may be, shall cooperate with
the Murmann Indemnified Party or the Danfoss Indemnified Party, as the case may
be, in such defense and
A-47
make available to the Murmann Indemnified Party or the Danfoss Indemnified
Party, as the case may be, at Murmann's or Danfoss', as the case may be,
expense, all such witnesses, records, materials and information in Murmann's or
Danfoss', as the case may be, possession or under the Murmann's or Danfoss', as
the case may be, control relating thereto as is reasonably required by the
Murmann Indemnified Party or the Danfoss Indemnified Party, as the case may be.
No such Third Party Claim may be settled by the Murmann or Danfoss, as the case
may be, without the prior written consent of the Murmann Indemnified Party or
the Danfoss Indemnified Party, as the case may be.
SECTION 9.03. LIMITS ON INDEMNIFICATION. Subject to Sections 9.04
and 9.05 below, anything to the contrary contained in this Agreement
notwithstanding, the maximum amount of indemnifiable (a) Sauer Losses which may
be recovered from Danfoss, arising out of or resulting from the causes
enumerated in Section 9.02, when added to any amount which may be recovered from
Danfoss under Section 7.01(a)(i), shall be, in the aggregate, an amount equal to
$50.0 million and (b) Danfoss Losses which may be recovered from Murmann arising
out of or resulting from the causes enumerated in Section 9.02 shall be an
amount equal to the product of the amount of any Danfoss Loss multiplied
by .2821, with the amount of all such Danfoss Losses, when added to any amount
which may be recovered from Murmann under Section 7.01(a)(ii), not to exceed, in
the aggregate, $50.0 million.
SECTION 9.04. TRANSFER OF DANISH SHARES. Sauer hereby agrees to indemnify
Danfoss and to hold Danfoss harmless from and against all Liability related to
Danish taxes (net of any benefit derived therefrom) arising out of the transfer,
sale or other disposition by Sauer of (a) the Danish Shares or (b) the shares of
Danfoss Hydraulic A/S in violation of Section 5.12; PROVIDED, HOWEVER, that the
aggregate amount payable by Sauer under this Section 9.04 shall not exceed a
maximum of $100.0 million.
SECTION 9.05. SILENT PARTNERSHIP. Sauer hereby agrees to indemnify Danfoss
and to hold Danfoss harmless from and against any and all losses, liabilities,
claims, demands, damages, costs and expenses of any and every kind, nature and
description suffered or incurred by Danfoss or Sauer and (including, without
limitation reasonable legal fees and disbursements) arising out of the operation
or termination of the Silent Partnership; PROVIDED, HOWEVER, that all such
losses, liabilities, claims, demands, damages, costs and expenses must be in the
aggregate in excess of the Silent Partnership Tax Liability recomputed as of the
Closing Date; PROVIDED, FURTHER, that no person shall be deemed to have suffered
such a loss, liability, claim, demand, damage, cost or expense as a result of
the dilution caused by the issuance of Sauer Common Stock in connection with the
conversion of Silent Partnership Interests pursuant to the termination of the
Silent Partnership Agreement.
SECTION 9.06. TAX MATTERS. Anything in this Article IX (except for the
specific reference to Tax matters in Section 9.01, Section 9.04 and
Section 9.05) to the contrary notwithstanding, the rights and obligations of the
parties with respect to indemnification for any and all Tax matters shall be
governed by Article VII.
SECTION 9.07. NO DUPLICATIVE LIABILITY. With respect to any Danfoss Loss
giving rise to an indemnity obligation of Murmann, Murmann shall be obligated
under this Article IX to indemnify Danfoss only; in no event shall either
(a) Murmann be obligated to indemnify both Holdco and Danfoss for the same Loss
or (b) Sauer be obligated to indemnify Holdco or Danfoss for any Loss. With
respect to any Sauer Loss giving rise to an indemnity obligation of Danfoss,
Danfoss shall be obligated under this Article IX to indemnify Sauer only; in no
event shall Holdco be obligated to indemnify Sauer for any Loss. The sole remedy
for breaches of representation, warranties or covenants under this Agreement
shall be indemnification under this Article IX.
A-48
ARTICLE X
TERMINATION AND WAIVER
SECTION 10.01. TERMINATION. This Agreement may be terminated:
(a) by Sauer at any time prior to the Closing if, between the date
hereof and the time scheduled for the Closing: (i) an event or condition
occurs that has resulted in a Material Adverse Effect with respect to the
DFP Companies and the DFP Subsidiaries, taken as a whole, (ii) any
representation or warranty of Holdco contained in this Agreement shall not
have been true and correct when made such that the condition set forth in
Section 8.03(a) would not be satisfied, (iii) Holdco shall not have complied
with any covenant or agreement to be complied with by either and contained
in this Agreement such that the condition set forth in
Section 8.03(a) would not be satisfied, or (iv) Holdco, any DFP Company or
any DFP Subsidiary makes a general assignment for the benefit of creditors,
or any proceeding shall be instituted by or against Holdco, DFP or any DFP
Subsidiary seeking to adjudicate any of them a bankrupt or insolvent, or
seeking liquidation, winding up or reorganization, arrangement, adjustment,
protection, relief or composition of its debts under any Law relating to
bankruptcy, insolvency or reorganization; PROVIDED, HOWEVER, that Holdco
shall have a period of 30 calendar days to cure any defect under
subclauses (i), (ii) and (iii) of this Section 10.01(a) commencing on the
day after the date on which Holdco receives notice from Sauer of Sauer's
intent to terminate; or
(b) by Holdco at any time prior to the Closing if, between the date
hereof and the time scheduled for the Closing: (i) an event or condition
occurs that has resulted in a Material Adverse Effect with respect to Sauer
and the Sauer Subsidiaries, taken as a whole, (ii) any representation or
warranty of Sauer contained in this Agreement shall not have been true and
correct when made such that the condition set forth in
Section 8.02(a) would not be satisfied, (iii) Sauer shall not have complied
with any covenant or agreement to be complied with by it and contained in
this Agreement such that the condition set forth in Section 8.02(a) would
not be satisfied or (iv) Sauer or any Sauer Subsidiary makes a general
assignment for the benefit of creditors, or any proceeding shall be
instituted by or against Sauer or any Sauer Subsidiary seeking to adjudicate
any of them a bankrupt or insolvent, or seeking liquidation, winding up or
reorganization, arrangement, adjustment, protection, relief or composition
of its debts under any Law relating to bankruptcy, insolvency or
reorganization; PROVIDED, HOWEVER, that Sauer shall have a period of
30 calendar days to cure any defect under subclause (i), (ii) and (iii) of
this Section 10.01(b) commencing on the day after the date on which Sauer
receives notice from Holdco of Holdco's intent to terminate; or
(c) by either Holdco or Sauer at any time prior to the Closing if the
Closing shall not have occurred by September 30, 2000; PROVIDED, HOWEVER,
that the right to terminate this Agreement under this
Section 10.01(c) shall not be available to any party whose failure to
fulfill any obligation under this Agreement shall have been the cause of, or
shall have resulted in, the failure of the Closing to occur on or prior to
such date; or
(d) by either Sauer or Holdco at any time prior to the Closing in the
event that any Governmental Authority shall have issued an order, decree or
ruling or taken any other action 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) by the mutual written consent of Holdco and Sauer at any time prior
to the Closing; or
(f) by Holdco within five Business Days after receipt of the Sauer
Disclosure Schedule if, in the good faith judgment of Holdco, either the
form or substance of the Sauer Disclosure Schedule is unacceptable to
Holdco; or
A-49
(g) by Sauer within five Business Days after receipt of the DFP
Disclosure Schedule if, in the good faith judgment of Sauer, either the form
or substance of the DFP Disclosure Schedule is unacceptable to Sauer.
SECTION 10.02. EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 10.01, this Agreement shall forthwith become
void and there shall be no liability on the part of either party hereto except
(a) as set forth in Sections 5.03, 10.02(b) and 11.01 and (b) that nothing
herein shall relieve either party from liability for any breach of this
Agreement.
SECTION 10.03. WAIVER. Either party to this Agreement may (a) extend the
time for the performance of any of the obligations or other acts of the other
party, (b) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document delivered by the other party
pursuant hereto or (c) waive compliance with any of the agreements or conditions
of the other party contained herein. Any such extension or waiver shall be valid
only if set forth in an instrument in writing signed by the party to be bound
thereby. Any waiver of any term or condition shall not be construed as a waiver
of any subsequent breach or a subsequent waiver of the same term or condition,
or a waiver of any other term or condition, of this Agreement. The failure of
any party to assert any of its rights hereunder shall not constitute a waiver of
any of such rights.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.01. EXPENSES. Except as otherwise specified in this Agreement,
all costs and expenses, including, without limitation, fees and disbursements of
counsel, financial advisors and accountants, incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses, whether or not the Closing shall have
occurred; PROVIDED, HOWEVER, that with respect to, in the case of Sauer and the
Sauer Subsidiaries, the expenses listed on Schedule II ("SCHEDULE II EXPENSES"),
and, in the case of the DFP Companies and the DFP Subsidiaries, the expenses
listed on Schedule III ("SCHEDULE III EXPENSES"), the Sauer Year-End Balance
Sheet shall reflect the Schedule II Expenses as assets and the DFP Year-End
Balance Sheet reflect the Schedule III Expenses as assets.
SECTION 11.02. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by 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
11.02):
(a) if to Holdco:
Danfoss A/S
Dk 6430
Nordborg
Denmark
Telecopy: 45-7488-5995
Attention: Ole Steen Andersen
and
Danfoss A/S
Dk 6430
Nordborg
Denmark
A-50
Telecopy: 45-7449-0949
Attention: J. Bo Jorgensen
and
Haight Gardner Holland & Knight
195 Broadway
New York, NY 10007
Telecopy: (212) 385-9010
Attention: Oliver Edwards, Esq.
and
K. Murmann Verwaltungsgesellschaft mbH
Krokamp 35
24539 Neumunster
Germany
Telecopy: 49-4321-871-121
Attention: Dr. K. Murmann
and
Gruter
Rechtsanwalte und Notare
Angerstrasse 14-16
47051 Duisburg
Telecopy: 49-203-343331
Attention: Dr. Erich Gruter
(b) if to Sauer:
Sauer Inc.
2800 East 13th Street
Ames, IA 50010
Telecopy: (515) 956-5364
Attention: Kenneth D. McCuskey
with copies to:
Sauer-Sundstrand GmbH & Co.
Krokamp 35
24539 Neumunster
Germany
Telecopy: 49-4321-871-121
Attention: Tonio P. Barlage
and
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Telecopy: (212) 848-7179
Attention: Peter D. Lyons, Esq.
and
A-51
Spencer Fane Britt & Browne LLP
100 Walnut Street
Suite 1400
Kansas City, Missouri 64106
Telecopy: (816) 474-3216
Attention: James W. Kapp, Esq.
(c) if to Danfoss A/S:
Danfoss A/S
Dk 6430
Nordborg
Denmark
Telecopy: 45-7488-5995
Attention: Ole Steen Andersen
and
Danfoss A/S
Dk 6430
Nordborg
Denmark
Telecopy: 45-7449-0949
Attention: J. Bo Jorgensen
and
Haight Gardner Holland & Knight
195 Broadway
New York, NY 10007
Telecopy: (212) 385-9010
Attention: Oliver Edwards, Esq.
SECTION 11.03. PUBLIC ANNOUNCEMENTS. Except as required by any applicable
Law or regulation or stock exchange rule or by legal process, in which case, the
disclosing party shall use its best efforts to provide prior notification to the
other party, no party to this Agreement shall make, or cause to be made, any
press release or public announcement in respect of this Agreement or the
transactions contemplated hereby or otherwise communicate with any news media
without the prior written consent of the other party, and the parties shall
cooperate as to the timing and contents of any such press release or public
announcement.
SECTION 11.04. HEADINGS. The descriptive headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 11.05. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any Law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
A-52
SECTION 11.06. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersede all prior agreements and undertakings, both written and oral, between
Holdco and Sauer with respect to the subject matter hereof.
SECTION 11.07. ASSIGNMENT. This Agreement may not be assigned by operation
of law or otherwise without the express written consent of Holdco and Sauer
(which consent may be granted or withheld in the sole discretion of Holdco or
Sauer); PROVIDED, HOWEVER, that, other than with respect to the shares of DFP
and the shares of Danfoss Hydraulik A/S, Sauer may assign its rights under this
Agreement, in whole or in part, to any wholly owned Sauer Subsidiary without the
consent of Holdco; PROVIDED FURTHER that any such assignment by Sauer shall not
relieve Sauer of any of its obligations hereunder.
SECTION 11.08. NO THIRD PARTY BENEFICIARIES. Except for the provisions of
Article IX relating to Indemnified Parties, this Agreement shall be binding upon
and inure solely to the benefit of the parties hereto and their permitted
assigns and nothing herein, express or implied, is intended to or shall confer
upon any other Person any legal or equitable right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
SECTION 11.09. AMENDMENT. This Agreement may not be amended or modified
except (a) by an instrument in writing signed by, or on behalf of, Holdco and
Sauer or (b) by a waiver in accordance with Section 10.03.
SECTION 11.10. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, applicable to
contracts executed in and to be performed entirely within that state.
SECTION 11.11. ARBITRATION. The parties to this Agreement shall endeavor
to settle all disputes and conflicts arising out of or in connection with this
Agreement amicably and in good faith. Should those attempts fail, all disputes
between the parties to this Agreement arising out of or in connection with this
Agreement, including, without limitation, disputes concerning the validity of
this Agreement, shall be finally settled under the Arbitration Rules of the
International Chamber of Commerce, Paris, by three arbitrators to be appointed
in accordance with said Rules. The place of arbitration shall be Copenhagen. The
language of arbitration shall be English. The jurisdiction of ordinary courts
shall be excluded except for the right of the parties to this Agreement to seek
a preliminary injunctions or similar release and to seek execution of an
arbitration award pursuant to this Section 11.11. The parties hereby agree that,
notwithstanding the venue in Copenhagen and application of the Arbitration
Rules of the International Chamber of Commerce, Paris, each party shall, in any
arbitration proceeding, make full disclosure to the other party consistent with
the United States federal court discovery procedures.
SECTION 11.12. SPECIFIC PERFORMANCE. The parties to this Agreement agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
A-53
IN WITNESS WHEREOF, Holdco and Sauer have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
DANFOSS MURMANN HOLDING A/S
By: /s/ KLAUS MURMANN
-----------------------------------------
Name: Klaus Murmann
Title: Officer
SAUER INC.
By: /s/ KLAUS MURMANN
-----------------------------------------
Name: Klaus Murmann
Title: Chairman and Chief Executive
Officer
DANFOSS A/S
For the purposes of Section 5.02,
Section 5.03, Section 5.07, Section 5.11,
Section 5.12, Section 5.14, Section 5.17,
Section 5.18, Article VII, Article IX and
Schedule IV of this Agreement only
By: /s/ JRGEN M. CLAUSEN
-----------------------------------------
Name: Jrgen M. Clausen
Title: Chairman and Chief Executive
Officer
By: /s/ HANS KIRK
-----------------------------------------
Name: Hans Kirk
Title: Executive Vice President
K. MURMANN
VERWALTUNGSGESELLSCHAFT MBH
For the purposes of Section 5.17,
Section 5.18, Article VII and Article IX of
this Agreement only
By: /s/ KLAUS MURMANN
-----------------------------------------
Name: Klaus Murmann
Title: Officer
A-54
SCHEDULE I
SCHEDULE OF SAUER APPLIED U.S. GAAP
The following represents a summary of significant accounting policies
applied by Sauer under U.S. GAAP:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accounts of Sauer are stated in accordance with generally accepted
accounting principles in the U.S. The consolidated financial statements include
the accounts of Sauer Inc. and subsidiaries on a consolidated basis for all
periods presented. All significant intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRINCIPLES
During 1998, Sauer adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." Total comprehensive income,
consisting of net income and adjustments for minimum pension liability and
foreign currency translation is disclosed on the face of the Statements of
Stockholders' Equity and Comprehensive Income.
Sauer also adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," which revises the disclosures made with respect
to pension and other postretirement benefit plans. SFAS No. 132 does not change
the measurement or recognition of those plans.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position, ("SOP"), 98-5, "Reporting on the Costs
of Start-up Activities," which requires that costs of start-up activities be
expensed as incurred. These costs are defined, among others, as one-time
activities relating to opening a new facility, introducing a new product or
initiating a new process in an existing facility. Sauer currently expenses these
types of costs and therefore, does not believe that this statement will have a
material impact on Sauer's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999, which requires an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and to measure those instruments at fair value. As Sauer does not currently have
any such instruments outstanding, Sauer does not believe that this statement
will have any material effect on Sauer's financial position or results of
operations.
RECLASSIFICATION
Sauer, from time to time, reclassifies certain previously reported amounts
to conform with the current period presentation.
A-55
MINORITY INTEREST
Minority interest in net assets and income of subsidiaries is reflected in
the consolidated financial statements of Sauer in accordance with the equity
method of consolidation.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of consolidated foreign subsidiaries are translated
into U. S. dollars at exchange rates in effect at year-end, while revenues and
expenses are translated at average exchange rates prevailing during the year.
The resulting translation adjustments are included in stockholders' equity.
Gains or losses on transactions denominated in foreign currencies and the
related tax effects, which are not material, are reflected in net income.
Intercompany loans are treated in accordance with Statement of Financial
Accounting Standards No. 52--Foreign Currency Translation.
CASH AND CASH EQUIVALENTS
Cash equivalents are considered by Sauer to be all highly liquid instruments
purchased with original maturities of three months or less.
INVENTORIES
Inventories are valued at the lower of cost or market, using various cost
methods such as average cost, last-in, first-out ("LIFO"), and first-in,
first-out ("FIFO"), and include the cost of material, labor and all direct and
indirect factory overhead. When applicable, Sauer charges excess capacity costs
directly to the income statement as period costs. Manufacturing variances are
capitalized into inventory wherever inventory turns justify such treatment.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at historical cost, net of
accumulated depreciation. Assets under capital lease are stated at the lower of
fair market value or the present value of future minimum lease payments, net of
accumulated depreciation. Significant purchased software packages are
capitalized and depreciated over the useful life. Depreciation is generally
computed on the straight-line method for building equipment and buildings over
10-37 years and for machinery and equipment over 3-12 years. Additions and
improvements that substantially extend the useful life of a particular asset are
capitalized. Repair and maintenance costs are charged to expense. Upon the sale
of property, plant and equipment, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is included in income.
The estimated useful lives used in computing depreciation are as follows:
DESCRIPTION LIFE
- ----------- --------
Land improvements........................................... 20 years
Buildings................................................... 37 years
Building improvements....................................... 10 years
Building equipment.......................................... 20 years
Machinery and equipment..................................... 12 years
Durable tools............................................... 3 years
Automobiles and trucks...................................... 4 years
Office equipment............................................ 10 years
Information systems, software and data-handling systems..... 5 years
A-56
INTANGIBLE ASSETS AND AMORTIZATION
Intangible assets include goodwill, patents and other intangibles. These
assets are stated at cost, net of accumulated amortization, and are being
amortized over the lesser of 20 years or the specific remaining identifiable
life on a straight-line basis.
IMPAIRMENT OF LONG-LIVED ASSETS
Consistent with the requirements of SFAS 121, Sauer periodically assesses
whether events or circumstances have occurred that may indicate the carrying
value of its long-lived tangible and intangible assets may not be recoverable.
The carrying value of long-lived tangible and intangible assets is evaluated
based on the expected future non-discounted operating cash flows. When such
events or circumstances indicate the carrying value of an asset may be impaired,
Sauer recognizes an impairment loss.
REVENUE RECOGNITION
Net sales are recorded at the time of shipment to customers along with
related expenses including estimates for warranty expense. Cash discounts and
other selling discounts are deducted.
COST OF SALES
Cost of sales are recorded at the time of shipment to customers and includes
the direct costs of material and labor as well as production overhead.
Production overhead includes indirect factory labor, manufacturing tools and
supplies, building and equipment depreciation, and scrap.
INCOME TAXES
The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of Sauer's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred taxes when it
is more likely than not that a tax benefit will not be realized.
RELATED PARTIES
Transactions between related parties are recorded on an arms-length
transaction basis. Transactions such as the sales of buildings or machinery are
recorded at the respective historical cost basis. Any excess of fair market
value over the historical cost basis is recorded as a reduction in equity.
PENSION BENEFITS
Sauer has noncontributory defined benefit plans covering substantially all
employees. The benefits under these plans are based primarily on years of
service and compensation levels. Sauer records its annual pension expense and
related liabilities in accordance with Statement of Financial Accounting
Standard No. 87--Employers' Accounting for Pensions.
POSTRETIREMENT BENEFITS OTHER THEN PENSIONS
Sauer provides health benefits for retired employees and certain dependents
when the employee becomes eligible for these benefits by satisfying plan
provisions which include certain age and/or service requirements. Health
benefits for retirees of non-U.S. operations, where applicable, are provided
A-57
through government sponsored plans to which contributions by Sauer are required.
The health benefit plans covering substantially all U.S. employees are
contributory, with contributions reviewed annually and adjusted as appropriate.
These plans contain other cost-sharing features such as deductibles and
coinsurance. Sauer does not pre-fund these plans and has the right to modify or
terminate any of these plans in the future. Sauer accounts for its annual
expense and related liabilities in accordance with Statement of Financial
Accounting Standard No. 106--Employer's Accounting for Postretirement Benefits
Other Than Pensions.
A-58
SCHEDULE II
Schedule of Sauer Expenses in Connection with this Transaction which will be
Capitalized
(a) Fees and expenses of Gruter (or specialists instructed by
Gruter)
(b) Fees and expenses of Spencer Fane Britt & Browne LLP
(c) Fees and expenses of Shearman & Sterling
(d) Fees and expenses of Arthur Andersen (or any specialists
instructed by Arthur Andersen)
(e) Proxy solicitation costs
A-59
SCHEDULE III
Schedule of DFP Expenses in Connection with this Transaction which will be
Capitalized
(a) Fees and expenses of Haight Gardner Holland & Knight (or
specialists instructed by Haight Gardner Holland Knight)
(b) Fees and expenses of KPMG (or any specialists instructed by
KPMG)
(c) Fees and expenses of advisors in countries required for due
diligence regarding Sauer and Sauer Subsidiaries and in
countries in which there are or will be DFP Subsidiaries
A-60
SCHEDULE IV
TERM SHEET
ASSET ACQUISITION AGREEMENT
PARTIES: Sauer Inc. ("Sauer")
Danfoss A/S ("Danfoss")
DATE: Prior to December 31, 2000
SUBJECT: Sauer and Danfoss agree that Danfoss will contribute its
mobile hydraulic activities through Holdco to Sauer in the
following countries earliest from April 3, 2000 and latest
December 31, 2000:
- Holland, Belgium, Spain, Portugal, Switzerland;
- Japan, Singapore (which also covers sales in other ASEAN
countries), Hong Kong, New Zealand, Australia
- Brazil (which also covers sales in other South American
countries), Mexico
VALUATION
FORMULA: In the following table the relative value of the Danfoss
contribution (DFP relative value) is calculated:
USD (IN MILLIONS) DFP(1) + DELTA(2) SAUER(3) SUM(4) DFP(5) SAUER(6)
- ----------------- ----------------- -------- -------- -------- --------
Net Sales............... 819.1 + 34.0 1348.6 2201.7 38.75% 61.25%
EBITDA.................. 118.1 + 13.0 218.1 349.2 37.54% 62.46%
EBIT.................... 71.4 + 12.0 145.8 229.2 36.39% 63.61%
Total (average)(7) ..... 37.56% 62.44%
- ------------------------
1. Figures based on reference period from January 1, 1997 until June 30, 1999
plus correction until July 4, 1999.
2. Figures based on reference period from January 1, 1998 until June 30, 1999
multiplied by 30/18, where Net Sales for DFP products only include the
additional sales value to third parties less the eliminated related
intercompany purchase. Those figures are unaudited and preliminary.
3. Figures based on reference period from January 1, 1997 until July 4, 1999.
4. Sum of footnote 1) + 2) + 3).
5. DFP relative value equal to (1) + 2))/ 4) x 100.
6. Sauer relative value equal to 3)/4) x 100.
7. Arithmetical average of Net Sales, EBITDA and EBIT.
The relative value of Danfoss' contribution of 37.56% will
correspond to X(2) shares of Sauer Inc., when X =
29,649,050:
X(2) = X/((100/37.56)-1) = 17,835,015
A-61
NUMBER OF SAUER
SHARES: Therefore, the additional new shares of Sauer (X(3)) to be
issued to Holdco in connection with the above contribution
of assets will be:
X(3) = X(2) - X(1) - 17,835,015 - 16,149,812 = 1,685,203
where X(1) = 16,149,812 are the number of shares issued at
Closing Date.
Sauer and Danfoss agree that Danfoss will hand over through
Holdco to Sauer Inc. assets and liabilities with the same
adjusted debt/(debt + equity) ratio (R) as calculated on
December 31, 1999 for Sauer Inc.
The balance sheet reflecting such assets and liabilities can
be expressed in the following format:
ASSETS LIABILITIES
------ -----------
Inventories Non interest bearing debt (NIBD)
+ Acc. Receivable + Interest bearing debt (IBD)*
+ Other assets + Equity (EQ)*
- Total Assets (A ) = Total Liabilities
----------------------
* R = IBD / (IBD + EQ )
Instead of transferring the above balance sheet(s) for each
country, the parties have agreed to transfer Net Assets (NA
-A-NIBD), and then issue some additional shares (X(4)) equal
to the interest bearing debt (IBD), which Sauer does not
take over.
The Net Assets will most likely be transferred directly from
Danfoss to Sauer through Holdco (Danfoss acquires these Net
Assets from the local Danfoss companies) to Sauer.
Thereafter, Sauer will have to transfer said Net Assets to
local Sauer companies.
Since, IBD = R x NA; then,
R x NA
X(4) = Sp
where Sp is agreed to be the Sauer publicly traded share
price on the Closing Date at NYSE.
As an example X4 can be calculated using the following
assumptions where R = 0.478, NA = 14,800,000 U.S. Dollars
and Sp - 13 U.S. Dollars:
X(4) = 0.478 x 14,800,000 = 544,185 shares
13
Therefore Danfoss will receive extra Sauer Inc. shares for
contributing its hydraulic activities in the above mentioned
countries equal to:
Extra Sauer shares - X(3) + X(4) = 1,685,203 + 544,185 = 2,229,388
SHARED SERVICES
AGREEMENT: Should the need for a shared service agreement with the
local Danfoss house arise for a limited time, the parties
will agree upon such an agreement.
A-62
ANNEX B
[LOGO]
January 22, 2000
Board of Directors
Sauer Inc.
2800 East 13th Street
Ames, IA 50010
Members of the Board:
You have asked us to advise you with respect to the fairness from a financial
point of view to Sauer Inc. ("Sauer") and the holders of the outstanding shares
of common stock, par value $.01 per share ("Sauer Common Stock"), of Sauer other
than Danfoss Murmann Holding A/S ("Holdco") and its affiliates of the
Consideration (as defined below) to be issued in the Share Exchange (as defined
below) pursuant to the terms of the Stock Exchange Agreement, dated as of
January 22, 2000 (the "Stock Exchange Agreement"), between Holdco and Sauer. The
Stock Exchange Agreement provides for the exchange (the "Share Exchange") of all
the issued and outstanding shares of (i) common stock, par value DKR100 per
share of Danfoss Fluid Power A/S ("DFP") and (ii) common stock, no par value, of
Danfoss Fluid Power Inc. ("USCo") for 16,149,812 shares of Sauer Common Stock
(the "Consideration") pursuant to which DFP and USCo. (together, the "DFP
Companies") will become wholly-owned subsidiaries of Sauer.
In arriving at our opinion, we have reviewed certain publicly available business
and financial information relating to Sauer and certain business and financial
information relating to the DFP Companies, as well as the Stock Exchange
Agreement. We have also reviewed certain other information, including financial
forecasts, provided to us by the DFP Companies and Sauer, and have met with the
respective managements of the DFP Companies, Danfoss A/S ("Danfoss") and Sauer
to discuss the business and prospects of the DFP Companies and Sauer.
We have also considered certain financial data of the DFP Companies and certain
financial and stock market data of Sauer, and we have compared those data with
similar data for other publicly held companies in businesses similar to those of
the DFP Companies and Sauer and we have considered the financial terms of
certain other business combinations and other transactions which have recently
been effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which we
deemed relevant. We have also relied upon the views of the respective
managements of the DFP Companies, Danfoss and Sauer concerning the business,
operational and strategic benefits and implications of the Share Exchange,
including financial forecasts provided to us by the DFP Companies and Sauer
relating to the synergistic values and operating cost savings expected to be
achieved through the combination of the operations of the DFP Companies and
Sauer.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the DFP
Companies' and Sauer's management as to the future financial performance of the
DFP Companies and Sauer, respectively, and as to the cost savings and other
potential synergies (including the amount, timing and achievability thereof)
anticipated to result from the transactions contemplated by the Stock
B-1
[LOGO]
Exchange Agreement. You also have informed us, and we have assumed, that the
Share Exchange will be non-taxable for U.S. federal income tax purposes. In
addition, we have not been requested to make, and have not made, an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the DFP Companies, nor have we been furnished with any such evaluations or
appraisals. Our opinion is necessarily based upon financial, economic, market
and other conditions as they exist and can be evaluated on the date hereof. We
are not expressing any opinion as to the actual value of Sauer Common Stock when
issued to Holdco pursuant to the Share Exchange or the prices at which such
Sauer Common Stock will trade subsequent to the Share Exchange.
We have acted as financial advisor to Sauer in connection with the Share
Exchange and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Share Exchange. In the past, we have
performed certain investment banking services for Sauer and have received
customary fees for such services.
In the ordinary course of our business, we and our affiliates may actively trade
the debt and equity securities of Sauer for our and such affiliates' own
accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities. As of the date hereof, Credit
Suisse First Boston Corporation owns a long position of approximately 1.4
million shares of Sauer Common Stock.
It is understood that this opinion is for the information of the Board of
Directors of Sauer in connection with its consideration of the Share Exchange
and such opinion does not constitute a recommendation as to how any holder of
shares of Sauer Common Stock should vote with respect to the Share Exchange and
is not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without our prior written consent; provided, that,
this letter may be included in its entirety in any required communication by
Sauer or its Board of Directors to the stockholders of Sauer so long as we have
had an opportunity to review such communication prior to its filing with the
Securities and Exchange Commission and prior to its dissemination to
stockholders.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the consideration to be issued in Share Exchange is fair from a
financial point of view to Sauer and the holders of the outstanding shares of
Sauer Common Stock other than Holdco and its affiliates.
Very truly yours,
CREDIT SUISSE FIRST BOSTON
CORPORATION
B-2