EXHIBIT (d)(1)
OFFER TO PURCHASE FOR CASH BY
GLOBAL MOTORSPORT GROUP, INC.
Up to 4,820,000 Outstanding Shares
of Its Common Stock
(Including the Associated Rights)
at
$21.75 NET PER SHARE
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON WEDNESDAY, AUGUST 12, 1998, UNLESS THE OFFER IS EXTENDED.
GLOBAL MOTORSPORT GROUP, INC., A DELAWARE CORPORATION (THE "COMPANY"), IS
OFFERING TO PURCHASE UP TO 4,820,000 OUTSTANDING SHARES (SUCH AMOUNT ALSO
REFERRED TO HEREIN AS THE "TENDER OFFER NUMBER") OF COMMON STOCK, PAR VALUE
$0.001 PER SHARE ("COMMON STOCK" OR "SHARES"), OF THE COMPANY FOR $21.75 PER
SHARE, NET TO THE SELLER IN CASH (SUCH AMOUNT, OR ANY GREATER AMOUNT PER SHARE
AS MAY BE PAID PURSUANT TO THE OFFER, BEING REFERRED TO HEREIN AS THE "PER
SHARE AMOUNT"), UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THIS
OFFER TO PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL, WHICH TOGETHER
CONSTITUTE THE "OFFER."
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER THAT NUMBER OF
SHARES THAT REPRESENTS AT LEAST A MAJORITY OF THE SHARES OUTSTANDING ON A
FULLY DILUTED BASIS, THE COMPANY OBTAINING THE DEBT FINANCING (AS DEFINED
HEREIN) AND THE OTHER CONDITIONS SET FORTH IN THIS OFFER TO PURCHASE. SEE "THE
TENDER OFFER--SECTION 12. CERTAIN CONDITIONS OF THE OFFER."
THE OFFER IS BEING MADE PURSUANT TO THAT CERTAIN AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER, DATED AS OF JUNE 28, 1998, AMONG THE COMPANY,
FREMONT ACQUISITION COMPANY III, LLC ("PURCHASER") AND GMS ACQUISITION CORP.
(THE "MERGER AGREEMENT"). THE BOARD OF DIRECTORS OF THE COMPANY HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE OFFER AND THE MERGER (AS DEFINED HEREIN),
(COLLECTIVELY, THE "TRANSACTIONS" OR THE "RECAPITALIZATION"), AND DETERMINED
THAT THE TERMS OF THE OFFER, THE STOCK PURCHASE (AS DEFINED HEREIN) AND THE
MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS OF THE COMMON
STOCK AND UNANIMOUSLY RECOMMENDS THAT SUCH HOLDERS ACCEPT THE OFFER AND TENDER
THEIR SHARES.
---------------
Cleary Gull Reiland & McDevitt, Inc. has delivered to the Board of Directors
of the Company its written opinion, dated June 28, 1998, that as of the date
of such opinion and based upon and subject to certain factors and assumptions
stated therein, the consideration to be received by the Company's stockholders
pursuant to the Offer and/or the consideration to be received by the Company's
stockholders (other than Purchaser and the Management Stockholders (each, as
defined herein)) pursuant to the Merger is fair from a financial point of view
to such stockholders. See "SPECIAL FACTORS-- Certain Considerations--Section
11. Opinion of Cleary Gull Reiland & McDevitt, Inc."
IMPORTANT
Any stockholder who desires to tender all or any portion of such
stockholder's Shares should either (i) complete and sign the Letter of
Transmittal (or a facsimile thereof) in accordance with the instructions in
the Letter of Transmittal, mail or deliver it and any other required documents
to the Depositary and either deliver the certificates for such Shares to the
Depositary or tender such Shares pursuant to the procedures for book-entry
transfer set forth in "THE TENDER OFFER--Section 3. Procedure for Tendering
Shares" or (ii) request such stockholder's broker, dealer, commercial bank,
trust company or other nominee to effect the transaction for such stockholder.
Any stockholder whose Shares are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee must contact such person to
tender such Shares.
Any stockholder who desires to tender Shares and whose certificates
representing such Shares are not immediately available, or who cannot comply
with the procedures for book-entry transfer on a timely basis, may tender such
Shares by following the procedures for guaranteed delivery set forth in "THE
TENDER OFFER--Section 3. Procedure for Tendering Shares."
The shares are listed and traded on the Nasdaq National Market ("Nasdaq").
On June 26, 1998, the last full day of trading prior to the announcement of
the Offer, the closing sale price of Shares on Nasdaq was $21 per Share.
Stockholders are urged to obtain current market quotations for the Shares.
Questions and requests for assistance relating to the Offer may be directed
to the Information Agent at the location and telephone numbers set forth on
the back cover of this Offer to Purchase. Requests for additional copies of
this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed
Delivery may be directed to the Information Agent, or the Depositary, or to
brokers, dealers, commercial banks or trust companies. A stockholder also may
contact brokers, dealers, commercial banks or trust companies for assistance
relating to the Offer.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------
THE INFORMATION AGENT FOR THE OFFER IS:
[LOGO OF GLOBAL MOTORSPORT, INC. APPEARS HERE]
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July 13, 1998
TABLE OF CONTENTS
PAGE
----
INTRODUCTION............................................................ 1
SPECIAL FACTORS......................................................... 5
Certain Considerations................................................. 5
1. Golden Cycle Offer.............................................. 5
2. Market Price for the Shares..................................... 5
3. Recapitalization................................................ 5
4. Proration....................................................... 6
5. Substantial Indebtedness; Liquidity and Capital Resources....... 6
6. Management Stockholder Arrangements............................. 7
7. Fees Payable to Purchaser and Purchaser Affiliates.............. 7
8. Delisting of Common Stock....................................... 7
9. Termination of Exchange Act Reporting........................... 7
10. Recommendation of the Board of Directors; Fairness of the Offer
and Merger..................................................... 8
11. Opinion of Cleary Gull Reiland & McDevitt, Inc.................. 9
12. Purposes and Reasons of the Company for the Offer and Merger.... 15
13. Purposes and Reasons of Purchaser and Management Stockholders
for the Offer and Merger....................................... 15
The Offer and Merger .................................................. 16
1. Background of the Offer and Merger.............................. 16
2. Interests of Certain Persons in the Offer and Merger............ 20
3. Cautionary Statement concerning Forward-Looking Statements...... 20
4. Company Financial Projections................................... 20
5. Selected Historical and Pro Forma Consolidated Financial Data... 21
6. Plans for the Company; Certain Effects of the Offer and Merger.. 25
7. Rights of the Stockholders in the Offer and Merger.............. 26
THE MERGER AGREEMENT AND CERTAIN RELATED MATTERS........................ 27
1. The Agreement and Plan of Merger; Stockholder Agreement......... 27
2. Related Party Transactions...................................... 39
3. Beneficial Ownership of Common Stock............................ 40
THE TENDER OFFER........................................................ 41
1. Terms of the Offer.............................................. 41
2. Acceptance for Payment and Payment.............................. 42
3. Procedure for Tendering Shares.................................. 43
4. Withdrawal Rights............................................... 45
5. Certain Federal Income Tax Consequences......................... 46
6. Price Range of the Shares; Dividends on the Shares.............. 48
7. Effect of the Offer on the Market for the Shares; Stock Listing;
Exchange Act Registration; Margin Regulations.................. 48
8. Certain Information concerning the Company...................... 49
9. Source and Amount of Funds...................................... 50
10. Other Matters................................................... 52
11. Dividends and Distributions..................................... 53
12. Certain Conditions of the Offer................................. 53
13. Certain Legal Matters........................................... 54
14. Fees and Expenses............................................... 55
15. Certain Information concerning Purchaser........................ 56
16. Recapitalization................................................ 56
17. Miscellaneous................................................... 56
Schedule I--Directors and Executive Officers of the Company
Schedule II--Executive Officers of Fremont Acquisition Company III, LLC
Annex A--Opinion of Cleary Gull Reiland & McDevitt, Inc.
Annex B--Section 262 of the General Corporation Law of the State of Delaware
Annex C--Audited Consolidated Financial Statements (and Related Notes) of the
Company as of January 31, 1998 and 1997 and for the Three Year Period
Ended January 31, 1998
Annex D--Unaudited Condensed Consolidated Financial Statements (and Related
Notes) of the Company as of April 30, 1998 and for the Three Month
Periods Ended April 30, 1998 and 1997
Annex E--Unaudited Pro Forma Consolidated Financial Data (and Related Notes)
of the Company
i
TO THE HOLDERS OF COMMON STOCK OF GLOBAL MOTORSPORT GROUP, INC.:
INTRODUCTION
GLOBAL MOTORSPORT GROUP, INC., a Delaware corporation (the "Company"),
hereby offers to purchase up to 4,820,000 issued and outstanding shares (such
amount also referred to herein as the "Tender Offer Number") of its common
stock, par value $0.001 per share ("Common Stock" or "Shares"), at a price of
$21.75 per Share net to the seller in cash, upon the terms and subject to the
conditions set forth in this Offer to Purchase and in the related Letter of
Transmittal (which, together with any amendments or supplements hereto or
thereto, collectively constitute the "Offer"). Subject to the conditions of
the Offer and provided that the number of Shares validly tendered and not
withdrawn is less than the Tender Offer Number (which is equal to
approximately 93% of the total number of Shares issued and outstanding as of
June 25, 1998), each tendering stockholder will receive $21.75 per Share
tendered pursuant to the Offer. In the event, however, the number of Shares
validly tendered and not withdrawn exceeds the Tender Offer Number, then each
holder of tendered Shares will receive $21.75 per Share for a portion of its
Shares tendered pursuant to the Offer and will retain a certain number of such
tendered Shares as a result of the proration procedures more fully described
herein. (For example, if approximately 95% of the Shares issued and
outstanding as of June 25, 1998 are validly tendered and not withdrawn, a
stockholder tendering 100 Shares in the Offer would receive approximately
$2,153 in cash and would retain one Share upon completion of the Offer.) See
"SPECIAL FACTORS--Certain Considerations--Section 4. Proration." Tendering
stockholders will not be obligated to pay brokerage fees or commissions or,
except as set forth in Instruction 6 of the Letter of Transmittal, transfer
taxes on the sale of Shares pursuant to the Offer. The Company will pay all
fees and expenses of MacKenzie Partners, Inc., which is acting as the
Information Agent (the "Information Agent"), and American Stock Transfer &
Trust Company, which is acting as the Depositary (the "Depositary") incurred
in connection with the Offer.
The Shares are currently listed and traded on Nasdaq under the symbol
"CSTM." On June 26, 1998, the last full day of trading prior to the
announcement of the Offer, the closing sale price of the Shares on Nasdaq was
$21. On July 10, 1998, the last full trading day prior to the commencement of
the Offer, the closing sale price of the Shares on Nasdaq was $20.81.
Stockholders are urged to obtain a current market quotation for the Shares.
The consummation of the Offer and the Merger, if required, will result in: (i)
the delisting of the Shares from Nasdaq, (ii) the Shares continuing to be
eligible for termination of registration pursuant to Section 12(g)(4) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii) a
change in the composition of the present Board of Directors and executive
officers of the Company and (iv) a change in the capitalization of the
Company.
The Company, Fremont Acquisition Company III, LLC, a Delaware limited
liability company ("Purchaser"), and GMS Acquisition Corp., a newly formed
Delaware corporation and a wholly-owned subsidiary of the Company
("Acquisition Sub"), entered into that certain Agreement and Plan of Merger,
dated as of June 28, 1998, which was amended and restated by the parties
thereto pursuant to that certain Amended and Restated Agreement and Plan of
Merger, dated as of June 28, 1998 (as amended, the "Merger Agreement").
Pursuant to the Merger Agreement, Purchaser has agreed to purchase from the
Company (the "Stock Purchase") 2,666,667 newly-issued Shares on the day after
the expiration of the Offer (or at such other time as the Company and
Purchaser mutually agree) at a price per Share equal to the Per Share Amount.
The Stock Purchase will provide the Company with a portion of the funds needed
to consummate the Offer and the Merger, if required, and it is anticipated
that the remainder of the funds needed to consummate the Offer and, if
required, the Merger and to pay certain fees and expenses will be obtained by
the Company through a combination of (i) borrowings of approximately $25
million by GMG Operating Corp. (the "Operating Company"), a wholly-owned
subsidiary of the Company to be formed prior to the consummation of the Offer
to hold all of the assets and liabilities of the Company, under a $55 million
senior secured credit facility, (ii) proceeds from the sale of senior notes by
the Operating Company in the aggregate amount of $80 million and (iii) gross
proceeds of $25 million from the sale of senior discount notes by the Company
(collectively, the "Debt Financing"). See "THE TENDER OFFER--Section 9. Source
and Amount of Funds" and "THE MERGER AGREEMENT AND CERTAIN RELATED MATTERS--
Section 1. The Agreement and Plan of Merger; Stockholder Agreement."
The purposes of the Offer and the Merger, if required, are: (i) to enable
Purchaser to obtain majority ownership in the Company and (ii) to provide the
Company's stockholders with liquidity for their Shares by enabling them to
sell potentially all of their Shares at a fair price and at a premium over the
price offered by Golden Cycle, LLC in its offer
1
to purchase all Shares for $18.00 per share and recent market prices. See
"SPECIAL FACTORS--Certain Considerations--Section 1. Golden Cycle Offer" and
"THE TENDER OFFER--Section 6. Price Range of the Shares; Dividends on Shares."
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER THAT NUMBER OF
SHARES THAT REPRESENTS AT LEAST A MAJORITY OF THE SHARES OUTSTANDING ON A
FULLY DILUTED BASIS (THE "MINIMUM CONDITION"). SEE "THE TENDER OFFER--
SECTION 1. TERMS OF THE OFFER."
TERMS OF THE OFFER. As used in this Offer to Purchase, "fully diluted basis"
takes into account the conversion or exercise of all outstanding options and
other rights and securities exercisable or convertible into shares of Common
Stock. The Company has represented to Purchaser that, as of June 25, 1998,
there were (i) 5,173,077 Shares issued and outstanding and (ii) 1,016,129
Shares reserved under the Company's employee and director stock incentive
plans in respect of outstanding awards. The Merger Agreement provides, among
other things, that the Company will not, without the prior written consent of
Purchaser, issue any additional Shares except for the Stock Purchase and upon
the exercise of outstanding options and other rights and securities. Based on
the foregoing and giving effect to the exercise of all outstanding options and
warrants, the Company believes that the Minimum Condition will be satisfied if
approximately 3.1 million Shares are validly tendered and not withdrawn prior
to the expiration of the Offer.
As a condition and inducement to Purchaser's entering into the Merger
Agreement and incurring the liabilities therein, each of Joseph Piazza, Sr.,
James J. Kelly, Jr., Lionel M. Allan, Joseph F. Keenan, R. Steven Fisk, Joseph
P. Piazza, Jr., David Clark, Lee Katsuda, Frances Mora, Dennis Navarra, Audy
Sisk, Nate Stewart and Rick Saunders (collectively, the "Management
Stockholders") has entered into a Stockholder Agreement, dated as of June 28,
1998, with Purchaser (the "Stockholder Agreement"). Pursuant to the
Stockholder Agreement, the Management Stockholders have agreed, among other
things, to retain and not to tender in the Offer an aggregate of 87,979 Shares
held by them or acquired by them upon exercise of outstanding stock options
prior to the consummation of the Offer pursuant to the Stockholder Agreement.
Shares to be retained by the Management Stockholders represent, in the
aggregate, approximately 1.7% of the Shares outstanding as of June 28, 1998,
after giving effect to the exercise of 52,191 outstanding options necessary
for the Management Stockholders to obtain, net, 87,979 Shares.
In addition, pursuant to the Stockholder Agreement, Purchaser and each of
the Management Stockholders who is an employee of the Company have agreed to
use their good faith to negotiate and enter into agreements with respect to
any Shares retained by such Management Stockholder. See "SPECIAL FACTORS--
Certain Considerations--Section 6. Management Stockholder Arrangements" and
"THE MERGER AGREEMENT AND CERTAIN RELATED MATTERS--Section 1. The Agreement
and Plan of Merger; Stockholder Agreement." Pursuant to such arrangements,
following consummation of the Offer and the Merger, if required, such
Management Stockholders will have the right under certain circumstances to
sell their Shares to the Company, and the Company will have the right, under
certain circumstances, to repurchase the Shares held by the Management
Stockholders.
Subject to the conditions to the Offer more fully described herein (see "THE
TENDER OFFER--Section 12. Certain Conditions of the Offer"), in the event that
the number of Shares validly tendered and not withdrawn prior to the
expiration of the Offer is equal to the Tender Offer Number, the Company will
accept for payment, purchase and pay for all such tendered Shares, which will
then be cancelled and retired. Shares held by Purchaser or any of its
affiliates, 87,979 Shares held or acquired upon the exercise of outstanding
options by the Management Stockholders and Shares held by any stockholders of
the Company who do not tender their Shares in the Offer will remain
outstanding, the Merger will not be effected, and each of such holders of
Shares will remain stockholders of the Company. See "SPECIAL FACTORS--Certain
Considerations--Section 4. Proration."
Subject to the conditions of the Offer and the proration more fully
described herein (see "SPECIAL FACTORS--Certain Considerations--Section 4.
Proration"), the Company will not accept for payment,
2
purchase or pay for Shares tendered pursuant to the Offer in excess of the
Tender Offer Number. In the event the number of Shares validly tendered and
not withdrawn exceeds the Tender Offer Number, then each holder of tendered
Shares will (i) receive an amount in cash equal to the product obtained by
multiplying the number of Shares tendered by such stockholder by the Per Share
Amount and a fraction whose numerator is the Tender Offer Number and whose
denominator is the number of Shares tendered in the Offer and (ii) retain that
number of Shares of the Company rounded up to the nearest whole share equal to
the product obtained by multiplying the number of Shares tendered by such
stockholder and a fraction whose numerator is the difference between the
number of Shares tendered and the Tender Offer Number and whose denominator is
equal to the number of Shares tendered in the Offer. The tendering
stockholders will thus retain an equity stub, the holders of the remaining
untendered Shares of the Company also will remain stockholders of the Company,
and the Merger will not be effected. See "SPECIAL FACTORS--Certain
Considerations--Section 4. Proration."
In the event that the number of Shares validly tendered and not withdrawn
prior to the expiration of the Offer is equal to or greater than the Minimum
Condition but less than the Tender Offer Number, then the Company will accept
for payment, purchase and pay for all such Shares, and all such Shares will
thereupon be cancelled and retired. Shares held by Purchaser or any of its
affiliates, 87,979 Shares held or acquired upon the exercise of outstanding
options by Management Stockholders and Shares held by any stockholders of the
Company who do not tender their Shares in the Offer will remain outstanding.
All tendering stockholders will receive the Per Share Amount for each Share
tendered, and the Merger will be effected pursuant to the terms of the Merger
Agreement. See "SPECIAL FACTORS--Certain Considerations--Section 4. Proration"
and "THE MERGER AGREEMENT AND CERTAIN RELATED MATTERS--Section 1. The
Agreement and Plan of Merger; Stockholder Agreement."
Further, in the event that the number of Shares validly tendered and not
withdrawn prior to the expiration of the Offer is greater than the Minimum
Condition but less than the Tender Offer Number, then after satisfaction or
waiver, if permissible, of all conditions to the Merger, Acquisition Sub will
be merged with and into the Company and the corporate existence of Acquisition
Sub will thereupon cease. Such merger, as effected pursuant to the immediately
preceding sentence, is referred to herein as the "Merger," and the Company as
the surviving corporation of the Merger is sometimes herein referred to as the
"Surviving Corporation." At the effective time of the Merger (the "Effective
Time"), the outstanding shares held by each holder of Shares (other than (i)
Shares held by Purchaser, (ii) 87,979 Shares held or acquired upon the
exercise of outstanding options by the Management Stockholders and (iii)
Shares held by stockholders who properly perfect their appraisal rights under
Delaware law) will be converted into the right to receive (i) an amount in
cash (the "Cash Merger Consideration") equal to the product obtained by
multiplying the number of Shares owned by such stockholder by the Per Share
Amount and an amount equal to one (1) minus the Merger Proration Factor (as
defined below) and (ii) a number of shares of identical common stock of the
Company as the Surviving Corporation (the "Stock Merger Consideration" and,
together with the Cash Merger consideration, the "Merger Consideration") equal
to the product obtained by multiplying the number of Shares owned by such
stockholder by the Merger Proration Factor. The Merger Proration Factor is a
fraction whose numerator is equal to the Public Rollover Shares (as defined
herein), and whose denominator is equal to the number of Shares issued and
outstanding immediately following the acceptance and payment for all validly
tendered and not withdrawn Shares, less (i) Shares held by Purchaser, (ii)
Dissenting Shares, if any, as of the Effective Time and (iii) 87,979 Shares.
The Company's stockholders will thus receive a combination of cash and stock
(based on a purchase price equal to the Per Share Amount) adjusted so that
following consummation of the Merger, the Company's existing stockholders
other than the Purchaser, dissenting stockholders, and Management Stockholders
will continue to own approximately 10.3% of the Shares then currently
outstanding, or approximately 6.1% of the Shares outstanding before the
Transactions. Public Rollover Shares means the total number of Shares
outstanding prior to the Offer and Stock Purchase less 4,907,979 Shares. See
"SPECIAL FACTORS--Certain Considerations--Section 4. Proration" and "THE
MERGER AGREEMENT AND CERTAIN RELATED MATTERS--Section 1. The Agreement and
Plan of Merger; Stockholder Agreement."
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY DETERMINED THAT THE
MERGER AGREEMENT, AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
OFFER AND THE MERGER, ARE FAIR TO, AND IN THE
3
BEST INTERESTS OF, THE HOLDERS OF COMMON STOCK, AND UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES.
Cleary Gull Reiland & McDevitt, Inc., the Company's financial advisor
("Cleary Gull" or the "Financial Advisor"), has delivered to the Company's
Board of Directors its written opinion, dated June 28, 1998 (the "Fairness
Opinion"), that, as of the date of such opinion and based upon and subject to
certain factors and assumptions stated therein, the consideration to be
received by the Company's stockholders pursuant to the Offer and/or the
consideration to be received by the Company's stockholders (other than
Purchaser and the Management Stockholders) pursuant to the Merger is fair from
a financial point of view to such stockholders. See "SPECIAL FACTORS--Certain
Considerations--Section 11. Opinion of Cleary Gull Reiland & McDevitt, Inc."
The Fairness Opinion is set forth in full as Annex A to this Offer to
Purchase.
The Merger Agreement provides that the initial scheduled expiration date of
the Offer will be August 12, 1998, but that if all conditions to the Offer
have not been satisfied or waived by such date, the Company will not be
required to accept for payment or pay for, and may delay the acceptance for
payment of, or the payment for, any Shares; provided, however, that the
Company cannot assert failure of, or waive, any condition to the Offer without
the prior written consent of Purchaser. In addition, the Merger Agreement
provides that the Company will, on the terms and subject to the prior
satisfaction or waiver of the conditions of the Offer, accept for payment and
purchase, as soon as permitted under the terms of the Offer, all Shares
validly tendered and not withdrawn prior to the expiration of the Offer;
provided, however, that the consideration to be received by tendering
stockholders may be subject to proration, depending upon the number of Shares
validly tendered and not withdrawn prior to the expiration of the Offer. See
"SPECIAL FACTORS--Certain Considerations--Section 4. Proration" and "THE
MERGER AGREEMENT AND CERTAIN RELATED MATTERS-- Section 1. The Agreement and
Plan of Merger, Stockholder Agreement." The Offer will not remain open
following the time Shares are accepted for payment.
Consummation of the Merger is conditioned upon, among other things, the
approval and adoption by the requisite vote of stockholders of the Company of
the Merger Agreement, if required by applicable law in order to consummate the
Merger. See "THE MERGER AGREEMENT AND CERTAIN RELATED MATTERS--Section 1. The
Agreement and Plan of Merger, Stockholder Agreement." Under the Delaware
General Corporation Law (the "DGCL"), except as otherwise provided below, the
affirmative vote of a majority of the outstanding Shares is required to
approve the Merger Agreement and the Merger.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION AND SHOULD BE READ IN THEIR ENTIRETY BEFORE ANY DECISION
IS MADE WITH RESPECT TO THE OFFER.
4
SPECIAL FACTORS
CERTAIN CONSIDERATIONS
1. GOLDEN CYCLE OFFER. On March 23, 1998, the Company received a written
proposal by Golden Cycle, L.L.C., a Delaware limited liability company
("Golden Cycle"), for a business combination between Golden Cycle and the
Company pursuant to which Golden Cycle proposed that the stockholders of the
Company would receive cash consideration in the amount of $18.00 per Share. On
April 7, 1998, Golden Cycle commenced a tender offer for all of the issued and
outstanding Shares for an amount equal to $18.00 per Share, net to the seller
in cash (the "Golden Cycle Offer"). In addition, Golden Cycle commenced a
consent solicitation to remove the members of the Board of Directors of the
Company and replace them with directors selected by Golden Cycle. Such consent
solicitation expired without change to the composition of the Company's Board
of Directors. At meetings on April 9 and 11, 1998, the Board of Directors
considered the Company's business, financial condition, results of operations,
business strategy and future prospects, recent and historical market prices
for the Common Stock, the terms of Golden Cycle's original proposal, the
Golden Cycle Offer and certain other matters, including the advice of Cleary
Gull and the Company's legal advisors. In addition and as a potential
alternative to the Golden Cycle Offer, the Board considered a significant
share repurchase by the Company not involving a third party such as Purchaser.
The Board concluded, however, that such a transaction would not create higher
stockholder value than the Offer. At the April 11, 1998 meeting, the Board of
Directors unanimously determined that the Golden Cycle Offer was inadequate
and not in the best interests of the Company or its stockholders and further
determined that the interests of the stockholders and the Company would be
best served by exploring alternatives available to it to maximize stockholder
value. Golden Cycle and a number of other third parties have filed lawsuits in
connection with Golden Cycle's tender offer and consent solicitation.
The Offer allows holders of Common Stock to receive the Per Share Amount
which is $3.75 higher (or approximately 21%) than the Golden Cycle Offer. In
addition, the Per Share Amount is higher than any price at which the Common
Stock has traded for at least six weeks prior to the announcement of the
Offer. The Per Share Amount represents a premium of 3.5% over the closing
sales price of the Shares on Nasdaq on June 26, 1998, the last trading day
prior to the public announcement of the Offer. If the number of Shares
tendered pursuant to the Offer is greater than the Tender Offer Number, all
tendering stockholders will receive an amount of cash for their Shares as well
as retain an equity interest in the Company after the Offer and Merger, which
equity interest will allow such stockholders to participate in the future
performance of the Company. There will be certain Federal income tax
consequences to stockholders tendering Shares pursuant to the Offer. See "THE
TENDER OFFER--Section 5. Certain Federal Income Tax Consequences."
2. MARKET PRICE FOR THE SHARES. Since January 1, 1998, the Company's high
and low per Share sales prices, as reported on Nasdaq, were $22 3/8 and $11,
respectively, as shown in the following table.
MONTH HIGH LOW
----- ------- -------
January 1998................................................. $13 1/4 $11
February 1998................................................ 14 12 1/4
March 1998................................................... 19 12 1/4
April 1998................................................... 21 1/4 18 1/8
May 1998..................................................... 22 3/8 19 3/4
June 1998.................................................... 21 1/2 20 1/2
July 1998 (through July 10, 1998)............................ 21 1/4 20 3/4
3. RECAPITALIZATION. The Offer is being made as part of a comprehensive plan
to recapitalize the Company through the Company's purchase of the Shares and
the Stock Purchase by Purchaser. Following consummation of the Offer and the
Merger, if required, approximately 7.8% of the Shares outstanding prior to the
Recapitalization (including 87,979 Shares held or acquired upon the exercise
of 52,191 outstanding options by Management Stockholders) will remain
outstanding and will represent approximately 13.2% of the shares of common
stock of the Company as the Surviving Corporation in the event the Merger is
effected, outstanding
5
after the Offer and Merger, assuming in both cases no additional stock options
are exercised. Following consummation of the Offer, Purchaser will be able, by
virtue of its majority equity interest in the Company, to direct and control
the policies of the Company, including decisions relating to mergers, sales of
assets and similar transactions. The Offer and Merger have been structured so
as to provide (i) the Company with recapitalization treatment for financial
reporting purposes and (ii) the Company's stockholders with an attractive
alternative to the Golden Cycle Offer.
4. PRORATION. If the aggregate number of Shares tendered pursuant to the
Offer is greater than the Tender Offer Number, each tendering stockholder will
be required to retain a certain number of its tendered Shares as a result of
the proration procedures more fully described herein (see "THE MERGER
AGREEMENT AND CERTAIN RELATED MATTERS--Section 1. The Agreement and Plan of
Merger; Stockholder Agreement").
If the aggregate number of Shares tendered pursuant to the Offer is equal to
the Minimum Condition or greater but less than the Tender Offer Number, all
tendering stockholders will receive in cash the Per Share Amount for each
Share tendered. Acquisition Sub and the Company would then effect the Merger,
pursuant to which Shares held by non-tendering stockholders (other than (i)
Shares held by Purchaser or its affiliates, (ii) 87,979 Shares held by
Management Stockholders and (iii) Shares held by dissenting stockholders, if
any) would be converted into the right to (a) receive an amount in cash
prorated and (b) retain shares of common stock of the Company as the Surviving
Corporation as described herein under "THE MERGER AGREEMENT AND CERTAIN
RELATED MATTERS--Section 1. The Agreement and Plan of Merger; Stockholder
Agreement." The amount of cash to be received and the number of Shares
retained will be calculated on a pro rata basis, based on the ratio of the
number of Shares required to be retained by stockholders for recapitalization
accounting purposes and the number of Shares outstanding immediately following
consummation of the Offer (other than Shares held by Purchaser, 87,979 Shares
held or acquired upon the exercise of outstanding options by Management
Stockholders and Shares held by dissenting stockholders, if any). Following
consummation of the Offer and the Merger, if required, approximately 7.8% of
the Shares outstanding prior to the Transactions (including 87,979 Shares held
or acquired upon the exercise of 52,191 outstanding options by Management
Stockholders) will remain outstanding and will represent approximately 13.2%
of the shares of common stock of the Company as the Surviving Corporation in
the event the Merger is effected, outstanding after the Offer and Merger,
assuming in both cases no additional stock options are exercised.
5. SUBSTANTIAL INDEBTEDNESS; LIQUIDITY AND CAPITAL RESOURCES. In connection
with consummating the Offer and Merger as contemplated by the Merger
Agreement, the Company will enter into the Debt Financing to (i) fund payment
of the cash consideration in the Offer and the Merger, if effected, (ii) repay
or repurchase certain indebtedness of the Company, (iii) make cash payments in
cancellation of stock options, (iv) pay fees and expenses incurred in
connection with the Offer and the Merger and (v) fund working capital
requirements of the Company. Although the definitive terms of certain of the
financing agreements have not been finalized as of the date of this Offer, the
Company expects that such terms will include significant operating and
financial restrictions, such as limits on the Company's ability to incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
make investments and pay dividends.
As of April 30, 1998, after giving effect to the recapitalization and the
Debt Financings, the Company would have had $133 million of total indebtedness
on a pro forma consolidated basis, consisting of borrowings of up to
$28 million by the Operating Company under a $55 million senior secured credit
facility, $80 million in senior notes issued by the Operating Company, and $25
million in senior discount notes issued by the Company. See "--The Offer and
Merger--Section 5. Selected Historical and Pro Forma Consolidated Financial
Data," "THE TENDER OFFER--Section 9. Sources and Amount of Funds" and "Annex
E. Unaudited Pro Forma Consolidated Financial Data."
The Company's level of indebtedness could have important consequences for
the Company, including the following: (i) the ability of the Company to obtain
additional financing for working capital, capital expenditures, acquisitions,
debt service requirements or other purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations will be
required to pay the Company's interest expense and principal
6
repayment obligations and will not be available for its general corporate
needs; (iii) the Company's flexibility to adjust to changing market conditions
may be limited, and its ability to compete against its competitors may be
reduced; (iv) certain indebtedness under the Debt Financing will be at
variable rates of interest, which will cause the Company to become vulnerable
to increases in interest rates; and (v) a portion of the indebtedness
outstanding under the Debt Financing will be secured by substantially all the
assets of the Company.
6. MANAGEMENT STOCKHOLDER ARRANGEMENTS. Pursuant to the Stockholder
Agreement, the Management Stockholders have agreed not to tender 87,979 of the
Shares held by them or acquired by them upon exercise of outstanding stock
options prior to the consummation of the Offer pursuant to the Stockholder
Agreement. Pursuant to the terms of the Stockholder Agreement, Purchaser and
each of the Management Stockholders who is an employee of the Company have
agreed to use their good faith to negotiate and enter into agreements with
respect to the 87,979 Shares that will be retained by them, which agreements
will provide for "put" and "call" rights exercisable by the Management
Stockholder and the Company, respectively, in the event that the Management
Stockholder's employment with the Company is terminated. Stockholders should
be aware in considering their decision to participate in the Offer that the
contemplated put and call rights with respect to Shares retained by Management
Stockholders will provide such Management Stockholders with liquidity for
their Shares in the event their employment with the Company is terminated
following the consummation of the Offer. The put and call rights provided to
Management Stockholders are not and will not be available to other
stockholders of the Company. See "THE MERGER AGREEMENT AND CERTAIN RELATED
MATTERS--Section 1. The Agreement and Plan of Merger; Stockholder Agreement."
In addition, it is contemplated that each of James J. Kelly, R. Steven Fisk,
Joseph P. Piazza, Jr. and Gus Kuelbs (each, an "Executive") will enter into a
severance agreement with the Company before the consummation of the Offer
(each, a "Severance Agreement"). The Severance Agreement will generally
provide that if, during the first year following consummation of the Offer,
the Company terminates the Executive's employment with the Company without
Cause (to be defined in the Severance Agreement), then the Executive will
receive an amount equal to fifty percent of the Executive's annual cash
compensation (including bonuses) at the highest rate paid during his
employment with the Company.
7. FEES PAYABLE TO PURCHASER AND PURCHASER AFFILIATES. Pursuant to the
Merger Agreement, upon the consummation of the Offer, all costs and expenses
incurred by each of Purchaser, the Company and Acquisition Sub in connection
with the Merger Agreement (including the fees and disbursements of counsel,
financial advisors and accountants) and a transaction fee of $2,380,000 (to be
paid to Purchaser or its affiliates) will be paid by the Company, or the
Company will reimburse such party, as the case may be. See "THE MERGER
AGREEMENT AND CERTAIN RELATED MATTERS--Section 1. The Agreement and Plan of
Merger; Stockholder Agreement" and "THE TENDER OFFER--Section 14. Fees and
Expenses." In addition, Fremont Partners, L.P. ("Fremont Partners") or one of
its affiliates typically receives an annual management fee from Fremont
Partners' portfolio companies in exchange for financial advisory services and
other advice rendered to such companies. The amount of the fee varies
depending upon a number of factors, including the level of services expected
to be rendered. It has not yet been determined if a management fee will be
requested from the Company or, if one is requested, what the amount of the fee
would be. If a fee is sought, however, Fremont Partners has indicated to the
Company that it does not expect the fee to exceed $300,000 in the first year
following the consummation of the Offer.
8. DELISTING OF COMMON STOCK. As a result of the Offer and the Merger, if
required, it is likely that the Common Stock will no longer meet the listing
requirements of Nasdaq and that Nasdaq may unilaterally act to delist the
Common Stock. Even if Nasdaq does not act unilaterally to delist the Common
Stock, it is Purchaser's intention that, after the consummation of the Offer
or the Effective Time, the Common Stock will not be listed on Nasdaq or any
national securities exchange. The delisting of the Common Stock is likely to
have a material adverse effect on the trading market for, and the value of,
the Common Stock, and there can be no assurance that any trading market will
exist for the Common Stock after the consummation of the Offer or the Merger,
if required.
9. TERMINATION OF EXCHANGE ACT REPORTING. As a result of the Offer and the
Merger, if required, it is expected that the Shares will be held by fewer than
300 stockholders of record. In such case, the Company will
7
deregister the Common Stock under Section 12 of the Exchange Act. If the
Common Stock is so deregistered, the Company will not be required to comply
with the proxy or periodic reporting requirements of the Exchange Act and does
not plan to provide any reports or information to its stockholders, other than
pursuant to the right to inspect the books and records of the Company, as
required by Delaware law. As a result of such deregistration, the information
available to stockholders on the business and financial condition of the
Company will be reduced, which could have a material adverse effect on the
value of the Common Stock.
10. RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE OFFER AND
MERGER. The Company's Board of Directors met on June 26 and 28, 1998 to
consider the terms of the Merger Agreement. On June 28, 1998, the Board of
Directors unanimously (i) determined that the Merger Agreement and the
Transactions, including the Offer and the Merger, are fair to, and in the best
interests of, the stockholders of the Company and (ii) approved the Merger
Agreement and the Transactions, including the Offer and Merger, in all
respects and that such approval constitutes approval for purposes of Sections
203 and 251 of the DGCL and (iii) resolved to recommend that the stockholders
of the Company accept the Offer, and approve and adopt the Merger Agreement
and the Merger.
In reaching its conclusion, the Board of Directors considered a number of
factors, including, but not limited to, the following:
1. The Board's belief that the Offer and the Merger represent the most
attractive financial alternative available to the Company's stockholders
based upon the efforts of management and its financial advisors to explore
alternatives to the Golden Cycle Offer, and the Board's judgment, after
consultation with its financial advisors, that under existing circumstances
the likelihood of receiving a more attractive offer from any other party
(including Golden Cycle) was low.
2. The Fairness Opinion to the effect that, as of the date of such
opinion and based upon and subject to certain factors and assumptions
stated therein, the consideration to be received by the Company's
stockholders (including unaffiliated stockholders) pursuant to the Offer
and/or the consideration to be received by the Company's stockholders
(other than Purchaser and the Management Stockholders) pursuant to the
Merger is fair from a financial point of view to such stockholders. See "--
Section 11. Opinion of Cleary Gull Reiland & McDevitt, Inc."
3. The relationship of the Per Share Amount to the historical market
prices for the Common Stock (see "--Section 2. Market Price for the
Shares"), and the valuation of the Company as analyzed by Cleary Gull (see
"--Section 11. Opinion of Cleary Gull Reiland & McDevitt, Inc."). In this
regard, the Board noted that Cleary Gull's discounted cash flow analysis
indicated a valuation as of the year ended January 31, 1998 ranging from
approximately $23.73 per share to $30.15 per share and that Cleary Gull's
analysis of the implied future trading values of the Common Stock indicated
a range of $23.52 to $23.93 per share. In addition, the Board noted that
both the discounted cash flow analysis and the implied future trading value
analysis were based upon 100% achievement of the Company's forecasted
operating results and thus were subject to uncertainty and future events,
and that, in light of the Company's current financial and competitive
circumstances, the Per Share Amount is nonetheless fair.
4. The fact that in rejecting the Golden Cycle Offer as inadequate on
April 13, 1998, the Board announced that it had instructed management and
its advisors to explore a possible sale of the Company, that the Company
then engaged in a thorough process of soliciting indications of interest
from prospective purchasers and that none of the prospective purchasers
that had been contacted and that continued to express an interest in
acquiring the Company had made a proposal for a transaction with a price
equal to or in excess of the Per Share Amount. See "--The Offer and
Merger--Section 1. Background of the Offer and Merger."
5. The view of the Board of Directors, after consultation with its
financial and legal advisors, that the terms of the Merger Agreement,
including the amounts payable to Purchaser in the event of termination,
would not materially deter bona fide acquisition proposals by third
parties.
8
6. The availability of appraisal rights under Section 262 of the DGCL to
stockholders of the Company who dissent from the Merger. See "--The Offer
and Merger--Section 7. Rights of the Stockholders in the Offer and Merger."
The Board of Directors also considered and rejected the alternative of
remaining independent of Purchaser and engaging in a significant share
repurchase, but concluded that such a transaction would not create higher
stockholder value than the Offer and Merger.
In addition to the foregoing, the Board considered certain negative factors
relating to the Offer and the Merger, including (i) the reduced liquidity of
the Shares remaining outstanding following consummation of the Offer and the
Merger, if required, (ii) the need for Purchaser to arrange for substantial
financing in order to consummate the proposed transactions and (iii) the fact
that the Merger can be approved without the vote of unaffiliated stockholders.
The Board of Directors did not consider the fairness of the Per Share Amount
in relation to the net book value or liquidation value of the Company because
it did not view such valuations as reliable indicators of the value of the
Company since such an analysis would not consider the significantly higher
value of the Company as a going concern.
The foregoing discussion of the information and factors considered by the
Board of Directors is not meant to be exhaustive but includes the material
factors considered by the Board in reaching its conclusions and
recommendations. In view of the variety of factors considered in its reaching
a determination, the Board of Directors did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its conclusions and recommendations. In addition,
individual members of the Board of Directors may have placed different
emphasis on different factors.
The Board of Directors was aware that all of its members and certain members
of management of the Company have been requested by Purchaser not to tender
certain of their Shares pursuant to the Offer (see "--Section 6. Management
Stockholder Arrangements"). The Board of Directors did not consider this fact
as weighing either in favor of or against approving the Merger Agreement but
did note that such retention of Shares by management was a condition to the
execution of the Merger Agreement by Purchaser. The Board of Directors also
determined that it was not necessary to appoint a committee of independent
directors or an unaffiliated representative to act solely on behalf of the
Company's unaffiliated stockholders for the purpose of negotiating the terms
of the Merger Agreement. Because the terms of the Merger Agreement were the
result of arm's-length negotiations with Purchaser, because each stockholder
can elect whether or not to participate in the Offer and because management
does not control a significant percentage of the outstanding Shares, the Board
believed it was in a position to evaluate the fairness of the Merger Agreement
without interests that differed in any material respect from the interests of
the Company's unaffiliated stockholders. All of the members of the Board of
Directors, including those who are not employees of the Company, voted to
approve the transactions contemplated by the Merger Agreement.
11. OPINION OF CLEARY GULL REILAND & MCDEVITT, INC. The Company has retained
Cleary Gull to act as its investment banker with respect to the Offer, the
Merger and related matters. At a meeting of the Company's Board of the
Directors held on June 28, 1998, Cleary Gull delivered the Fairness Opinion to
the Board to the effect that, as of that date, and based upon the assumptions
contained therein, the consideration to be received by the Company's
stockholders pursuant to the Offer and/or the consideration to be received by
the Company's stockholders pursuant to the Merger (other than Purchaser and
the Management Stockholders) is fair from a financial point of view to such
stockholders.
The full text of the Fairness Opinion, which sets forth the assumptions
made, matters considered and limits of the review undertaken in connection
with the opinion, is attached to this Offer to Purchase as Annex A and is
incorporated herein by reference. The Fairness Opinion was delivered to the
Board for its use in connection with its consideration of the Offer and the
Merger Agreement and is not intended to be, and does not constitute, a
recommendation to any stockholder of the Company as to whether such
stockholder should tender Shares in the Offer or vote in favor of the Merger,
if it occurs. The summary of the Fairness Opinion set forth herein is
qualified in its entirety by reference to the full text of the opinion.
HOLDERS OF COMMON STOCK ARE URGED TO, AND SHOULD, READ THE FAIRNESS OPINION
CAREFULLY IN ITS ENTIRETY.
9
In connection with its opinion, Cleary Gull reviewed and analyzed, among
other things, the financial terms and conditions of the Merger Agreement and
certain related documents as set forth in the draft Merger Agreement dated
June 28, 1998; analyzed certain historical business and financial information
relating to the Company; reviewed various financial forecasts and schedules
and other data provided by the Company; reviewed and discussed the business
and prospects of the Company and its subsidiaries with representatives of the
Company's management; reviewed public information with respect to certain
other companies in lines of business believed to be generally comparable to
the business of the Company; reviewed the historical prices and trading
volumes of the Common Stock; calculated the unleveraged after-tax discounted
cash flow of the Company; calculated the value a financial investor might be
willing to pay to acquire all or, as in the case of the Merger or other
recapitalization transactions, a controlling and substantial portion of the
Company's equity if it were interested in pursuing such a transaction;
computed the present value of future hypothetical implied trading values based
upon earnings estimates provided by the Company and based on analyst
expectations for future growth; compared the purchase price premium to be paid
for the Common Stock to premiums paid in recent transactions; and considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria that Cleary Gull deemed appropriate.
In connection with its review, Cleary Gull has not assumed any
responsibility for or independently verified any of the foregoing information
and has relied on such information being complete and accurate in all material
respects. Cleary Gull has not made an independent evaluation or appraisal of
any assets or liabilities (contingent or otherwise) of the Company or any of
its subsidiaries, nor has Cleary Gull been furnished with any such evaluation
or appraisal that has not been publicly disclosed. With respect to the
financial plans, estimates and analyses provided to Cleary Gull by the
Company, Cleary Gull has assumed, with the Board's permission, that all such
information was reasonably prepared on a basis reflecting the best currently
available estimates and judgments of management of the Company as to future
financial performance of the Company, based upon the historical performance of
the Company and certain estimates and assumptions which were reasonable at the
time made. Cleary Gull has also assumed, at the Board's direction, that the
number of Shares to be retained by the Management Stockholders after the
consummation of the Merger, or if the Merger is not consummated, then after
the consummation of the Offer, will not exceed 125,000 Shares. Finally, Cleary
Gull has assumed that the executed Merger Agreement will be in the same form
as the draft Merger Agreement reviewed by Cleary Gull, and that the Merger
will be consummated on the terms described in the Merger Agreement, without
any waiver of any material term or condition, and that obtaining any necessary
regulatory or third party approval for the Merger will not have an adverse
effect on the Company. Cleary Gull's opinion is based on economic, monetary
and market conditions existing on the date thereof. Cleary Gull is not opining
or providing any advice with respect to the impact of the Transactions on the
solvency, viability or the financial condition of the Company or its ability
to satisfy its obligations as they become due.
The opinion does not address or imply any conclusion as to the likely
trading range or value of the Common Stock following the Effective Time, which
may vary depending upon, among other factors, changes in interest rates,
dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities as well as the terms
of the financing for the Transactions, the operating and financial results and
prospects of the Company and other factors relating to the Company and its
lines of business.
In connection with the opinion, Cleary Gull performed certain financial and
comparative analyses. In connection with the Board's consideration of
proposals involving a change of control of the Company, including the
Transactions, financial and comparative analyses generally conducted as part
of the financial review of acquisition transactions were considered relevant.
These analyses were (i) public company trading analysis, (ii) selected
transactions analysis, (iii) unleveraged after-tax discounted cash flow
valuation analysis, (iv) leveraged buy-out/recapitalization analysis (which is
intended to determine the value a financial investor might be willing to pay
to acquire all or, as in the case of the Transactions or other
recapitalization transactions, a controlling and substantial portion of the
Company's equity if it were interested in pursing such a transaction), (v)
hypothetical implied trading values based upon earnings and (vi) premiums paid
in the Transactions compared to average premiums paid. Each of these analyses
were considered relevant to a financial review of the terms of the Merger
Agreement and the strategic alternatives available to the Company. At a number
of meetings of the Board, these analyses were reviewed with the Board. The
material analyses and their findings are summarized below.
10
Comparable Public Company Trading Analysis. Cleary Gull reviewed certain
publicly available financial and stock market information relating to nine
selected companies in lines of business believed to be somewhat similar to
those of the Company. The companies selected were in related businesses such
as distribution, catalog retailing or motorcycle parts and consist of (i)
Brylane, Inc., (ii) Coldwater Creek, Inc., (iii) Henry Shein, Inc., (iv)
Lillian Vernon Corp., (v) Patterson Dental, Inc., (vi) Grainger (WW) Inc.,
(vii) Genuine Parts Company, (viii) Harley-Davidson, Inc. and (ix) Lands End,
Inc. (collectively, the "Selected Companies"), although it was noted that
there were no public companies with precisely the same mix of businesses or
financial condition as the Company. This analysis indicated that (i) the price
multiples, based on latest twelve months earnings per share, ranged from 15.8x
to 35.7x for the Selected Companies, with a median of 21.7x , as compared to
19.7x for the Company, based upon an Offer price of $21.75 per share for the
entire equity interest (as noted below, the actual value of the non-cash
consideration in the Transactions may vary, but variations in the value of any
retained shares should not significantly impact the analysis), (ii) based on
1998 year-end estimated earnings per share (based on estimates of First Call
Corporation, a data service that monitors and publishes compilations of
earnings estimates produced by selected research analysts regarding companies
of interest to investors, for the Selected Companies and management estimates
for the Company), the 1998 estimated price earnings multiples ranged from
13.0x to 31.1x for the Selected Companies, with a median of 19.8x, as compared
to 14.1x for the Company's fiscal year ended January 31, 1999, (iii) the ratio
of firm value to latest twelve months revenues ranged from 0.52x to 3.37x,
with a median of 1.08x, compared to 1.31x for the Company, and (iv) the ratio
for firm value to latest twelve months earnings before interest, taxes,
depreciation and amortization (as used in this Section 11, "EBITDA") for the
Selected Companies ranged from 7.4x to 21.6x, with a median of 10.6x, compared
to 10.1x for the Company. Based on this analysis, Cleary Gull derived an
equity value range for the Company of $16.00 to $24.00 per fully diluted
share. Cleary Gull noted that the Offer price of $21.75 was within the
indicated range.
Selected Transactions Analysis. Cleary Gull reviewed and analyzed selected
publicly available financial, operating and stock market information relating
to 20 acquisition transactions in the distribution and catalog industries
since 1996 (collectively, the "Selected Transactions"), including three
recapitalization transactions in the distribution and manufacturing
industries. The Selected Transactions consist of the acquisition of (i) a 40%
interest in Brylane, Inc. by Pinault Printemps-Redoute, S.A., (ii) Dynatech
Corp. by Clayton, Dubilier & Rice, (iii) Fisher Scientific International by
Thomas H. Lee Company, (iv) Sterling Electronics Corp. by Marshall Industries,
(v) Rexel, Inc. by Rexel S.A., (vi) Shelter Components Corp. by Revco Inc.,
(vii) Sullivan Dental Products, Inc. by Henry Shein, Inc., (viii) J. Crew
Group, Inc. by Texas Pacific Group, (ix) Branco Supply Corporation by Cameron
Ashley Building Products, Inc., (x) Chrome Specialties, Inc. by Global
Motorsport Group, Inc., (xi) Wyle Electronics, Inc. by Raab Karcher AG, (xii)
Temple, Inc. by Code Hennessy Simmons II, Ltd., (xiii) Invetech Company by
Applied Industrial Technologies, (xiv) Amphenol Corp. by Kohlberg Kravis
Roberts & Co., (xv) Eastbay, Inc. by Woolworth Corp., (xvi) Milgray
Electronics, Inc. by Bell Industries, (xvii) Chadwick's of Boston, Ltd. by
Code Hennessy Simmons II, Ltd., (xviii) Acklands Limited by W.W. Grainger,
Inc., (xix) Marsh Electronics, Inc. by Sterling Electronics, Inc. and (xx)
Salton/Maxim Housewares, Inc. by Windmere-Durable Holdings, Inc. This analysis
indicated that (i) the price multiples, based on latest twelve months net
income, ranged from 9.2x and 31.1x, with a median of 17.4x, as compared to
19.7x for the Company, based upon an Offer price of $21.75 per share for the
entire equity interest, (ii) the ratio of firm value to latest twelve months
revenues ranged from 0.27x to 1.76x for the Selected Transactions, with a
median of 0.61x, compared to 1.31x for the Company, and (iii) the ratio of
firm value to latest twelve months EBITDA for the Selected Transactions ranged
from 6.3x to 15.1x, with a median of 9.5x, compared to 10.1x for the Company.
Based on this analysis, Cleary Gull derived an equity value range for the
Company of $15.00 to $22.00 per fully diluted share. Cleary Gull noted that
the Offer price of $21.75 was toward the top end of the indicated range.
Discounted Cash Flow Analysis. Cleary Gull analyzed the Company's fully
diluted per share value based on an unleveraged after-tax discounted cash flow
analysis of the projected five-year financial performance of the Company.
Cleary Gull estimated the net present value of the future cash flows of the
Company using the financial plan prepared by the Company for the fiscal year
ended January 31, 1999 and extrapolations therefrom for the fiscal years ended
January 31, 2000 through January 31, 2003 and the fiscal year-end January 31,
2003 terminal
11
value of the Company based upon a range of multiples of projected fiscal year
2003 EBITDA. In conducting this analysis, Cleary Gull applied discount rates
ranging from 10% to 12% and terminal value multiples ranging from 7.0x to
8.0x. This analysis indicated a discounted cash flow valuation as of year-
ended January 31, 1998 ranging from approximately $23.73 per share to $30.15
per share. Cleary Gull noted that the Offer price of $21.75 was below the
indicated range.
Leveraged Buy-out/Recapitalization Analysis. Cleary Gull prepared an
analysis based on the same projections utilized in the discounted cash flow
analysis as to the value paid pursuant to a recapitalization transaction. A
range of possible acquisition prices was derived by reviewing the estimated
return on equity investment which would result from a leveraged buy-out based
upon various assumptions, including the financial ratios required by the bank
financing and high yield debt markets, and interest rates. Assuming terminal
values at the end of the fifth year following a buy-out transaction ranging
from 8.0x to 10.0x EBITDA and required internal rates of return on equity of
20.0% to 30.0%, this methodology indicated that a recapitalization transaction
could earn Purchaser a market return on their investment at the Offer price of
$21.75 per share. Cleary Gull cautioned the Board that the actual price which
a party would be willing to pay in a leveraged buy-out or recapitalization
transaction was dependent on various factors not included in this methodology
and, therefore, that this analysis was not necessarily indicative of actual
prices realizable or of rates of return on Shares retained in the
Transactions, which rates of return may be more or less favorable than those
indicated in this analysis, are dependent on many contingencies and,
therefore, are speculative.
Hypothetical Implied Trading Values Based upon Earnings. Cleary Gull
calculated the present value of the implied hypothetical future trading values
of the Common Stock obtained by multiplying projected stand-alone earnings per
share for the years ending January 31, 1999, 2000, and 2001 based upon
analysts' estimates of the Company's long-term earnings per share growth rate
by the Company's historic 5-year average forward price/earnings ratio of
14.7x. The Company's implied forward stock price was discounted at an equity
discount rate of 14.0%. The present value of such implied hypothetical future
trading values ranged from $23.52 to $23.93 per share. In connection with this
presentation, Cleary Gull advised the Board that this analysis was not
necessarily indicative of future trading ranges and that any estimate of
future market prices is speculative and subject to significant uncertainties
and contingencies, all of which are difficult to predict and beyond the
control of Cleary Gull. Therefore, the actual trading prices of the Common
Stock might be outside the estimated range and would depend upon, and
fluctuate with, changes in interest rates, market conditions, the condition,
results of operations, and prospects, financial and otherwise, of the Company
and other factors which generally influence the prices of securities. Cleary
Gull noted that the Offer price of $21.75 was below the indicated range.
Premium Analysis. Cleary Gull analyzed the closing price of the Common Stock
over the one-day, one-week, one-month, six-month periods and the 52-week
average and 52-week low prices preceding the announcement date of the Golden
Cycle Offer (the "Announcement Date") and the premiums implied by the Merger
Consideration as of such dates. This analysis resulted in a range of purchase
price premiums for the Common Stock of (i) 45.6% based upon the last trade of
the Common Stock prior to the Announcement Date ($14.94 per share on March 24,
1998), (ii) 67.3% based upon the last trade of the Common Stock one-week prior
to the Announcement Date ($13.00 per share on March 16, 1998), (iii) 59.6%
based upon the last trade of the Common Stock one-month prior to the
Announcement Date ($13.63 per share on February 20, 1998), (iv) 35.9% based
upon the last trade of the Common Stock six months prior to the Announcement
Date ($16.00 per share on September 24, 1997), (v) 56.5% based upon the
average closing price during the 52-week period prior to the Announcement
Date, and (vi) 97.7% based upon the lowest closing price during the 52-week
period prior to the Announcement Date ($11.00 per share on May 29, 1997).
Cleary Gull compared the premium paid in the Transactions to those paid in all
transactions during the 1993 to 1997 time period, as compiled by the
Securities Data Corporation. Premiums over the closing stock price four weeks
prior to the announcement date ranged from 46.8% to 39.0% during the period,
with 1997 average premiums of 42.2%. Premiums over the closing stock price one
week prior to the announcement date ranged from 41.6% to 32.7% during the
period, with 1997 average premiums of 36.3%. Premiums over the closing stock
price one day prior to the announcement date ranged from 27.5% to 36.4% during
the period, with 1997 average premiums of 33.0%. Cleary Gull noted that the
premiums paid in the Transactions were above the top end of the range in every
case.
12
Stub Analysis/Review of Post-Transaction Common Stock. Cleary Gull reviewed
the implied public market trading values for shares of Common Stock to be
outstanding following the Effective Time derived from an application of
various multiples to the Company's pro forma earnings per share and EBITDA
giving effect to the Transactions and based upon management's projections and
extrapolations therefrom. This calculation indicated that (i) applying price-
earnings multiples ranging from 14.7x to 21.0x to pro forma earnings per share
in the fiscal years ending January 31, 2000 through 2003 and a range of equity
discount rates from 14.0% to 17.0%, the resulting hypothetical stock price in
such years resulted in a net present value implied market per share trading
value of $16.36 to $30.09, (ii) applying a range of EBITDA multiples from 8.0x
to 10.0x to pro forma EBITDA in fiscal year ending January 31, 2000 resulted
in an implied per share trading value of $20.29 to $35.64, and (iii) using the
present value of the unleveraged cash flows at discount rates ranging from
10.0% to 12.0% resulted in an implied trading price of $26.50 to $39.31 per
share.
Cleary Gull further applied a 30% discount to these implied per share prices
to reflect the reduced liquidity and increased leverage of the business. On a
per share basis, after applying the 30% discount, the range of implied value
per retained Share would be $0.84 to $1.34 per share. Assuming that holders of
the Common Stock receive 94% of their consideration in cash ($20.45 per share)
and retain 6% of their shares in the Company, holders of the Common Stock
would receive consideration pursuant to the Transactions (on a fully diluted
basis) having an implied valuation ranging from approximately $21.29 to
approximately $21.79 for each Share.
In connection with this analysis, it was concluded that following the
Effective Time, the market valuation of the Common Stock would be
significantly influenced by estimates of the forward-looking pro forma
earnings and EBITDA forecasts, if available. In arriving at these estimates of
possible implied trading values for Shares following the Effective Time,
Cleary Gull advised the Board that trading in the post-Transactions Common
Stock for a period following the Effective Time could be characterized by a
redistribution of such securities among the stockholders of the Company
immediately preceding the Merger and other investors and, accordingly, such
securities may be subject to downward price pressures during this period
resulting in trading prices below the estimated ranges. In addition, in
connection with this presentation, Cleary Gull advised the Board that any
estimate of trading ranges is speculative and subject to uncertainties and
contingencies, all of which are difficult to predict and beyond the control of
Cleary Gull. Therefore, the actual trading prices of the post-Transactions
Common Stock may be outside the estimated range and will depend upon, and
fluctuate with, changes in interest rates, market conditions, the terms of
financing for the Transactions, the condition and prospects, financial and
otherwise, of the Company and other factors which generally influence the
prices of securities. In addition, the reduced float of Shares, the lack of a
public market for the securities and the fact that the Company may not be
required to publicly disclose its financial statements to investors may
adversely affect the liquidity of the Shares and result in greater volatility
in trading prices following the Effective Time, in addition to the increased
volatility resulting from the increased leverage of the Company, as compared
to trading prices prior to the Effective Time.
The summary set forth above does not purport to be a complete description of
the analyses performed by Cleary Gull, although it is a summary of the
material financial and comparative analyses performed by the investment bank
in arriving at its opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying the Fairness Opinion. In arriving at its fairness
determination, Cleary Gull considered the results of all such analyses and did
not assign relative weights to any of the analyses.
The analyses were prepared for the purpose of providing the Board an opinion
as to the fairness from a financial point of view of the consideration to be
received in the Offer and/or the Merger and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold, which are inherently subject to uncertainty and may be significantly
more or less favorable than as set forth in these analyses. Similarly, any
estimates incorporated in the analyses performed by Cleary Gull are not
necessarily
13
indicative of actual past or future values or results, which may be
significantly more or less favorable than any such estimates. No company
utilized as a comparison is identical to the Company or the business segment
for which a comparison is being made, and none of the comparable acquisition
transactions or other business combinations utilized as a comparison is
identical to the Transactions. Accordingly, an analysis of publicly traded
comparable companies and comparable business combinations resulting from the
transactions is not mathematical; rather it involves complex considerations
and judgments concerning differences in financial and operating
characteristics of the value of the comparable companies or company to which
they are being compared. The discount rates, terminal values and multiples
used in the analyses were considered appropriate after consideration of
current economic and financial market conditions, including price earnings
multiples and capital structures of selected public companies and rates of
return on debt and equity investments in public and private companies and a
qualitative judgment as to the most relevant information and its application
to the Company. In connection with the analyses, Cleary Gull made, and was
provided with estimates and forecasts by the Company's management based upon
numerous assumptions with respect to the industry performance, general
business and economic conditions and other matters, many of which are beyond
the control of the Company and its advisors. Similarly, analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the Company
or its advisors, none of the Company, its investment banker or any other
person assumes responsibility if future results or actual values are
materially different from these forecasts or assumptions. The Fairness Opinion
necessarily was based on the economic, market and other conditions as in
effect on, and the information made available to Cleary Gull as of, the date
of the opinion. The foregoing summary is qualified by reference to the written
opinion of Cleary Gull set forth in Annex A to this Offer to Purchase.
As described above, the opinions and presentation of Cleary Gull to the
Board were only one of many factors taken into consideration by the Board in
making its determination to approve the Merger Agreement. In addition, the
terms of the Merger Agreement were determined through negotiations between the
Company and Purchaser and were approved by the Board. Although Cleary Gull
provided advice to the Company during the course of these negotiations, the
decision to enter into the Merger Agreement and to accept the consideration to
be received in the Transactions was solely that of the Board.
Cleary Gull was selected by the Company as its financial advisor in
connection with the Merger because of Cleary Gull's reputation and expertise
as an investment banking firm and its expertise and familiarity with the
distribution and motorcycle industries. Clearly Gull is continually engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements, leveraged buyouts,
recapitalizations, and valuations for estates, corporate and other purposes.
In connection with the services of Cleary Gull as investment bankers to the
Company with respect to the Transactions and related matters, the Company has
agreed to pay Cleary Gull (i) a quarterly retainer of $50,000 payable in
connection with their retention as investment bankers to the Company in
connection with the Transactions, (ii) an offer fee of $250,000 was paid upon
the execution of the letter of intent, and (iii) a transaction fee of $2.23
million payable upon consummation of the Transactions. The retainer and offer
fees, which have totaled $350,000 to date, are credited against the
transaction fee.
In addition, the Company has agreed to reimburse Cleary Gull for their
reasonable out-of-pocket expenses (including the fees and disbursements of
their attorneys) and to indemnify them and certain related persons against
certain liabilities, including certain liabilities under the federal
securities laws, arising out of its engagement.
Cleary Gull has from time to time in the past provided investment banking
services to the Company for which it has received fees. In the ordinary course
of business, Cleary Gull and their respective affiliates may actively trade in
the securities of the Company for their own account and for the accounts of
their customers and, accordingly, may at any time hold a long or short
position in such securities. Cleary Gull currently makes a market in the
Common Stock on the Nasdaq National Market.
14
12. PURPOSES AND REASONS OF THE COMPANY FOR THE OFFER AND MERGER. The
purpose of the Offer and Merger is to provide the Company's stockholders with
an alternative to the Golden Cycle Offer by enabling such stockholders to sell
significantly all, if not all of their Shares at a fair price and at a premium
over the market price of the Common Stock prior to the Golden Cycle Offer. The
primary benefits of the Offer and the Merger to the stockholders of the
Company are that such stockholders are being afforded an alternative to the
Golden Cycle Offer and an opportunity to sell significantly all, if not all of
their Shares for cash at a price that represents a premium of approximately
21% over the Golden Cycle Offer and a premium of approximately 3.5% over the
closing market price of the Common Stock on the last full trading day prior to
the public announcement of the Offer, and a more substantial premium over
recent historical trading prices. See "--Section 1. Golden Cycle Offer" and
"THE TENDER OFFER--Section 6. Price Range of the Shares; Dividends on the
Shares."
13. PURPOSES AND REASONS OF PURCHASER AND MANAGEMENT STOCKHOLDERS FOR THE
OFFER AND MERGER. Purchaser's purpose for entering into the Merger Agreement
and engaging in the Offer and Merger is to enable Purchaser, through the Stock
Purchase, the Offer and the Merger (if required), to obtain a majority
ownership interest in the Company, thereby becoming entitled to all benefits
that result from such ownership, including management and investment
discretion with regard to the future conduct of the business of the Company,
the benefits of the profits generated by operations and any increase in the
Company's value. Similarly, Purchaser will also bear the risk of any decrease
in the value of the Company.
The Management Stockholders' purpose for engaging in the Offer and Merger is
to be able to obtain the Per Share Amount with respect to a portion of their
respective holdings of the Shares or Shares issuable upon exercise of
outstanding stock options while also maintaining an ownership position in the
Company.
15
THE OFFER AND MERGER
1. BACKGROUND OF THE OFFER AND MERGER. The following description was
prepared by the Company and Purchaser. Information about Purchaser was
provided to the Company, and the Company takes no responsibility for the
accuracy or completeness of any information regarding meetings or discussions
in which the Company or its representatives did not participate.
On March 23, 1998, the Company received a written proposal from Golden Cycle
for a business combination between Golden Cycle and the Company in which
stockholders of the Company would receive $18.00 per share in cash. On March
25, 1998, Cleary Gull met with the Board of Directors to discuss Cleary Gull's
capabilities, the Golden Cycle proposal, as well as other available strategic
options. The Golden Cycle Offer was commenced on April 7, 1998.
On April 2, 1998, David Lorsch of Fremont Partners called the Company and
spoke to a Company representative who referred Mr. Lorsch to David Prokupek of
Cleary Gull. Mark Williamson of Fremont Partners called Mr. Prokupek on April
2, 1998 and briefly introduced Fremont Partners and described the firm's
background and its interest in the motorsports industry. Mr. Williamson also
asked Mr. Prokupek whether he believed the Company would be receptive to a
friendly offer to acquire all, or a substantial portion of, the Company. Mr.
Prokupek indicated that he believed the Company would be interested in such an
offer and he and Mr. Williamson agreed to speak again on April 6, 1998 after
Mr. Prokupek had a chance to review some literature regarding Fremont Partners
that Mr. Williamson had committed to send to Mr. Prokupek on April 3, 1998.
Messrs. Williamson and Lorsch called Mr. Prokupek on April 6, 1998, and Mr.
Prokupek indicated that he had had a chance to review the Fremont Partners'
literature that had been sent to him by Mr. Williamson. The parties discussed
Fremont Partners in more detail and talked at some length about the Company.
Mr. Prokupek stated that the Company was exploring all of its alternatives and
that it was compiling some material regarding the Company that Cleary Gull
hoped to share, following the execution of appropriate confidentiality and
standstill agreements, with a number of parties that had expressed an interest
in the Company or who Mr. Prokupek believed might have an interest in the
Company. Following the call, Mr. Prokupek sent a confidentiality and
standstill agreement to Fremont Partners which Fremont Partners executed and
returned to Mr. Prokupek on April 8, 1998.
On April 9, 1998, Cleary Gull presented to the Board a valuation analysis of
the Company as well as a variety of strategic alternatives available to the
Company. On that day, the Board of Directors formally ratified the retention
of Cleary Gull as its investment banker to assist in its evaluation of the
Golden Cycle Offer as well as other strategic alternatives available to the
Company. Cleary Gull discussed various types of transaction structures, such
as a sale of the entire Company, leveraged buyout/recapitalization, leveraged
share repurchases, and financial valuation analyses that, in Cleary Gull's
opinion, would be relevant in evaluating proposals, including the Golden Cycle
Offer. The analyses reviewed were similar to those reviewed in connection with
the evaluation of the Offer and Merger, are described in "--Certain
Considerations--Section 11. Opinion of Cleary Gull Reiland & McDevitt, Inc.,"
and included comparable public company trading analysis, selected acquisition
transactions analysis, dilution analyses, a leveraged buy-out/recapitalization
analysis, a leveraged share repurchase analysis and a discounted cash flow
valuation analysis.
Following this presentation, the Board of Directors discussed the
appropriate long-term strategy for the Company and, at a meeting held on April
11, 1998, concluded that the Golden Cycle Offer was inadequate and that Cleary
Gull should conduct a more formal investigation of third-party interest in
order to provide additional information for ongoing evaluation by the Board of
Directors of alternatives to maximize stockholder value.
Thereafter, Cleary Gull contacted a number of potential strategic and
financial buyers (including motorcycle part distributors and manufacturers,
auto part distributors, and other leisure product distributors and
manufacturers) to determine their interest in executing a customary
confidentiality agreement with the Company, in order to receive non-public
information concerning the Company so that they could more fully evaluate the
Company.
16
Subsequently, Mr. Prokupek called Mr. Williamson and stated that he was
planning to meet with the Company in Morgan Hill, California on April 23, 1998
and that he would be interested in coming to San Francisco to meet with
Fremont Partners while he was in California for his meeting with the Company.
Mr. Prokupek and Mr. Williamson met in the offices of Fremont Partners on
April 23, 1998. Mr. Williamson indicated that he had reviewed some of the
Company's public filings with the Securities and Exchange Commission (the
"Commission") and that he believed Fremont Partners may be able to offer a
higher price than the $18.00 per share price that was currently being offered
by Golden Cycle. During the meeting, Mr. Prokupek brought to Mr. Williamson's
attention certain operating initiatives that management had undertaken and
additional opportunities that Mr. Prokupek believed the Company had available
to it. Mr. Prokupek also provided Mr. Williamson with certain background
information with respect to the management changes that had occurred at the
Company, and he also shared with Mr. Williamson some company projections which
were prepared for inclusion in a confidential offering memorandum that the
Company was in the process of finalizing. Mr. Prokupek stated that the
confidential offering memorandum would be available on April 27, 1998 to every
interested party that had executed a confidentiality and standstill agreement
with the Company.
Fremont Partners received the confidential offering memorandum on April 27,
1998. Mr. Williamson spoke to Mr. Prokupek on that day and expressed Fremont
Partners' interest in a possible transaction and emphasized Fremont Partners'
ability to move forward quickly. Mr. Prokupek indicated that the Company would
need a period of time before any meetings with management could be held in
order to put together a management presentation. Mr. Prokupek indicated that
he believed management meetings could be scheduled during the week of May 11,
1998.
On May 4, 1998, Mr. Williamson sent a letter to Cleary Gull reiterating
Fremont Partners' interest in a transaction with the Company. The indication
of interest stated that Fremont Partners' preliminary range of value for the
Company's Common Stock was $20 to $22 per share, but that such prices were
subject to confirmatory due diligence and assumed the transaction would take
the form of a leveraged recapitalization with management rolling over some or
all of its equity in the Company. The indication of interest also had attached
to it a proposed letter of intent from Purchaser, which is an affiliate of
Fremont Partners.
On May 12, 1998, Robert Jaunich of Fremont Partners and Mr. Williamson
attended a management meeting in Morgan Hill, California. Messrs. Jaunich and
Williamson were accompanied by certain consultants and associates of Purchaser
as well as by representatives of Bank of America and Bankers Trust
Corporation, as potential financing sources. Following the management
presentations, Messrs. Jaunich and Williamson met with certain directors of
the Company (James Kelley, Lionel Allan and Joseph Keenan). Certain officers
of the Company (Rick Saunders, Joe Piazza, Jr., Dennis Navarra and Steve Fisk)
also attended the meeting. At this meeting, Purchaser again expressed its
ability and willingness to move forward quickly and its preliminary belief,
subject to confirmatory due diligence, that it could offer a price in the
range of $20 to $22 per share. Mr. Williamson indicated that Purchaser would
need to perform customary due diligence and the parties discussed what the
next step might be in the due diligence process.
Between May 13 and May 18, 1998, the Company's management made formal
presentations to three other parties, concerning the operations and financial
condition of the Company. In the course of these meetings (including those
with Purchaser), members of the Company's management made clear to each
potential buyer management's desire to seek a transaction that maximized
stockholder value. Prior to these meetings, two of the three parties had
provided Cleary Gull with draft letters of intent indicating the type of
transaction such party would be willing to pursue and the range of values such
party would be willing to consider. One of the buyers proposed a merger
transaction structured in a manner similar to the Transactions, including the
ability of existing stockholders to retain a minority equity stake in the
Company.
All four transactions presented to the Company (including Purchaser's)
contemplated the incurrence by the Company of a substantial amount of
indebtedness. In addition, each potential buyer told Cleary Gull that the
ranges of values indicated were very preliminary, were subject to completion
of their respective due diligence
17
investigations of the Company, and were subject to revision or complete
withdrawal for any reason. Following the meetings with management and Cleary
Gull, each party was requested to resubmit its proposal.
On May 19, 1998, Mr. Prokupek and Tom Magill of Gibson, Dunn & Crutcher LLP,
counsel to the Company, met with certain members of Purchaser at Fremont
Partners' offices in San Francisco to discuss an appropriate valuation for the
Company and Purchaser's proposed form of letter of intent. The parties
negotiated various provisions of the proposed letter of intent other than
price. These provisions included an exclusivity provision, a termination fee
provision and an expense reimbursement clause. Cleary Gull requested that
Purchaser consider making its best and final offer. Mr. Williamson then
indicated his belief that an appropriate value of the Company was in the
$21.00 to $22.00 per share range but that such prices were premised on
receiving recapitalization accounting treatment for the transaction and would
need to be confirmed in detailed due diligence to be conducted by Purchaser.
Mr. Williamson also stated that it was critical from Purchaser's point of view
that management retain an equity stake in the Company following consummation
of a transaction. Mr. Prokupek indicated that he would discuss the proposed
range with the Board, but requested Mr. Williamson to determine if a price in
excess of $22.00 per share could be paid. The meeting was then terminated.
Following the meeting on May 19, 1998, Purchaser continued to refine its
financial models to see if it would be possible for it to pay more than $22.00
per share for the Company. On May 21, 1998, Mr. Williamson telephoned Mr.
Prokupek and indicated that Purchaser might be able to pay $23.00 per share
for the Company. Mr. Williamson indicated that such price represented
Purchaser's highest possible price and final offer and that it was based upon
management's expectations regarding various items in management's business
plan, which expectations Purchaser indicated it would have to determine are
reasonable during its due diligence. These expectations included the ability
to achieve inventory level reductions, increase inventory turns, improve gross
margins, achieve projected revenue growth and earnings estimates, sell certain
parcels of real estate and lease more appropriately sized facilities and
similar matters. Mr. Prokupek indicated that he would discuss the proposal
with the Board at the Board's nightly conference call and would call Purchaser
back with the Board's response. That night, the Board of Directors met to
review the status of the discussions with third parties and the indications of
interest received. The Board of Directors, after consultation with its legal
counsel and Cleary Gull, determined that in light of the indications of
interest received from other parties, Purchaser's proposal represented the
best available course of action for the Company.
Following the Board meeting, Mr. Prokupek called Mr. Williamson to inform
him that the Board had agreed to move forward with Purchaser's proposal on the
terms outlined in the proposed letter of intent that had been negotiated. On
May 22, 1998, following the closing of the market, Purchaser executed the
letter of intent with the Company. The letter of intent contemplated a $23.00
per share price, which was expressly subject to confirmatory due diligence to
be conducted by Purchaser during the period from May 22, 1998 to June 27,
1998. Following its execution, the Company made a public announcement
regarding the execution of the letter of intent.
During the ensuing four weeks, a draft merger agreement was negotiated
between the Company and Purchaser, and Purchaser conducted extensive due
diligence along with its advisors, Skadden, Arps, Slate, Meagher & Flom LLP,
Arthur Andersen LLP, Environ and AON. Purchaser also retained an outside
consulting firm, Fletcher Spaght to assist Purchaser in connection with its
due diligence. In connection with its due diligence, Purchaser visited
facilities, interviewed Company personnel, spoke with suppliers and customers
and performed an analysis of the market in which the Company operates.
Early in the week of June 22, 1998, Mr. Williamson called Mr. Prokupek and
informed him that in connection with Purchaser's due diligence Purchaser was
questioning some of the assumptions underlying management's projections as
being overly aggressive. Mr. Williamson requested that Mr. Prokupek and the
Company provide Purchaser with a reasonable explanation of how management's
projections would be achieved.
On June 22, 23 and 24, 1998, Purchaser received due diligence reports from
its various advisors. In light of the results of the due diligence, Purchaser
determined that it could proceed but only at a price of $21.00 per
18
share. In the afternoon of June 24, 1998, Mr. Williamson again telephoned Mr.
Prokupek and requested that Cleary Gull and the Company provide Purchaser with
a reasonable explanation of how management's projections might be achieved.
Subsequently, Mr. Lorsch spoke with Mr. Prokupek, who explained to Mr. Lorsch
that management was preparing additional analyses to demonstrate how
management's projections might be achieved.
On June 25, 1998, Messrs. Jaunich, Williamson and Lorsch met with Mr.
Prokupek and Ron Miller of Cleary Gull in the San Francisco offices of Fremont
Partners to discuss the achieveability of management's projections and other
findings in Purchaser's due diligence review of the Company. After hearing
Cleary Gull's explanation with respect to the manner in which management's
projections might be achieved, Mr. Williamson indicated that Purchaser did not
feel comfortable proceeding at any price other than $21.00 per share. The
meeting then concluded to enable Mr. Prokupek to attend a Board meeting that
was scheduled to be held by conference call.
On June 26, 1998, Mr. Prokupek informed Mr. Williamson that the Board
requested Purchaser to increase the per share price above $21.00 and to
eliminate from the Merger Agreement the non-solicitation provision and the
termination fee. Mr. Williamson stated that Purchaser would not be willing to
proceed at any price or on any basis without a termination fee of some amount
and the obligation on the part of the Company to reimburse Purchaser for up to
$1 million of out-of-pocket expenses in the event the transaction with the
Company did not close. After speaking again with the Board, Mr. Prokupek
telephoned Mr. Williamson and informed him that the Company would only agree
to a termination fee (which had to be a lesser amount than the $5 million
amount agreed to in the previously executed letter of intent) if Purchaser
were willing to raise its per share offer. In the afternoon on June 26, 1998,
Mr. Williamson telephoned Mr. Prokupek and informed him that Fremont Partners'
final offer would be $21.75 per share, with a $3.5 million termination fee, a
$1 million expense reimbursement provision and a non-solicitation provision,
subject to a "fiduciary out" in certain circumstances. Mr. Prokupek then
telephoned the Board members which agreed to move forward on that basis
provided that the other open issues with the merger agreement could be
resolved to the Company's satisfaction.
During June 27 and 28, 1998, the Company and its advisors negotiated the
remaining terms of the merger agreement with Purchaser and its advisors. On
June 28, 1998, after the Company's and Purchaser's legal counsel had finalized
the form of the Merger Agreement, the Board of Directors reconvened by
telephone, was updated on developments since June 26, 1998 and received the
written and oral opinion of Cleary Gull that, as of the date of such opinion
and based upon and subject to certain factors and assumptions stated therein,
the consideration to be received by the Company's stockholders pursuant to the
Offer and/or the consideration to be received by the Company's stockholders
(other than Purchaser and the Management Stockholders) pursuant to the Merger
is fair from a financial point of view to such stockholders. In presenting its
opinion, Cleary Gull reviewed financial and comparative analyses as described
in "--Certain Considerations--Section 11. Opinion of Cleary Gull Reiland &
McDevitt, Inc.," including comparable public company trading analysis,
selected acquisition transaction analysis, a leveraged buy-
out/recapitalization analysis, and a discounted cash flow valuation analysis,
and compared these analyses to the proposed Transaction. The Company's legal
counsel reviewed with the Board of Directors the legal standards applicable to
its review of the proposed transaction, including the duties of care and
loyalty owed to the Company and its stockholders, and also reviewed for the
Board of Directors the regulatory process that would apply to the transaction,
including required filings with the Commission. Following such presentations,
the Board of Directors determined that the Offer and Merger are fair to and in
the best interests of the Company and its stockholders and, by a unanimous
vote, approved and adopted the Merger Agreement and the transactions
contemplated thereby, and unanimously recommended that stockholders accept the
Offer and tender their Shares. Later, on the evening of June 28, 1998, the
parties entered into the Merger Agreement, and a public announcement of the
execution of the Merger Agreement was made before the open of market on
June 29, 1998.
On July 13, 1998, the Company commenced the Offer.
19
2. INTERESTS OF CERTAIN PERSONS IN THE OFFER AND MERGER. Stockholders should
be aware in considering their decision to participate in the Offer that each
member of the Board has, to some degree, interests which may present such
directors with an actual or potential conflict of interest in connection with
the Offer and the Merger. Pursuant to the Offer, the directors and executive
officers of the Company will receive an aggregate of approximately
$4.4 million in cash for their Shares and Shares issuable upon exercise of
outstanding stock options, excluding the 87,979 Shares being retained. As of
June 28, 1998, the directors and executive officers of the Company as a group
beneficially owned 381,632 shares, or approximately 6.9% of the Shares, which
includes Shares that would be issued upon exercise of stock options
exercisable within 60 days of such date. The Company has been informed by its
directors and executive officers that they intend to tender all of the Shares
(except for 87,979 shares they have agreed to retain following consummation of
the Offer pursuant to the Stockholder Agreement) owned by them pursuant to the
Offer. Moreover, following consummation of the Offer and the Merger (if
required), such Management Stockholders will have "put" and "call" rights with
respect to such retained Shares providing liquidity otherwise unavailable to
other stockholders. See "--Certain Considerations--Section 6. Management
Stockholder Arrangements" and "THE MERGER AGREEMENT AND CERTAIN RELATED
MATTERS--Section 1. The Agreement and Plan of Merger; Stockholder Agreement."
3. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS. Certain
matters discussed herein are forward-looking statements that involve risks and
uncertainties. When used in this Offer to Purchase, the words "estimate,"
"anticipate," "expect," "intend," "believe," "may," "will," "continue" (or the
negative thereof or variations thereon) and similar expressions are intended
to identify forward-looking statements. Forward-looking statements include the
financial projections set forth below. Information of this type is based on
estimates and assumptions that are inherently subject to significant economic
and competitive risks, uncertainties and contingencies, all of which are
difficult to predict and many of which are beyond the Company's control.
Important factors that could cause actual results to differ materially from
estimates and projections included in the forward-looking statements include
those factors described under the caption "Additional Factors That May Affect
Future Results" in Item 1 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1998, which is available from the Commission
(see "THE TENDER OFFER--Section 8. Certain Information concerning the
Company"). Accordingly, undue reliance should not be placed upon such forward-
looking statements. No assurance can be given that any of such projections or
statements will be realized or that actual results will not be significantly
higher or lower than those set forth in such projections and statements.
4. COMPANY FINANCIAL PROJECTIONS. The Company does not as a matter of course
make public projections as to its future performance or earnings. However, in
connection with the preliminary discussions concerning the feasibility of the
Offer and Merger, the Company prepared and furnished Purchaser with the
Projections. The Projections have been included in this Offer to Purchase for
the limited purpose of giving the Company's stockholders access to financial
projections made by the Company's management in connection with the Offer, the
Merger and the Debt Financing. The Projections were based on assumptions
concerning the Company's products and business prospects for fiscal year 1998
through fiscal year 2003. The Projections were not prepared with a view to
public disclosure or compliance with published guidelines of the Commission or
the guidelines established by the American Institute of Certified Public
Accountants regarding projections or forecasts. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from the Projections. The Projections
reflect numerous assumptions (not all of which were provided to Purchaser),
all made by management of the Company, with respect to industry performance,
general business, economic, market and financial conditions and other matters,
including assumed interest expense and effective tax rates consistent with
historical levels for the Company, all of which are difficult to predict, many
of which are beyond the Company's control and none of which were subject to
approval by Purchaser. Accordingly, there can be no assurance that the
assumptions made in preparing the Projections will prove accurate, and actual
results may be materially greater or less than those contained in the
Projections. The inclusion of the Projections herein should not be regarded as
an indication that any of Purchaser, the Company or their respective
affiliates or representatives considered or consider the Projections to be a
reliable prediction of future events, and the Projections should not be relied
upon as such. The Company's independent auditors
20
have not examined, compiled or otherwise applied procedures to the financial
forecast presented herein and, accordingly, do not express an opinion or any
other form of assurance on it. None of Purchaser, the Company and any of their
respective affiliates or representatives has made, or makes any representation
to any person regarding the information contained in the Projections and none
of them intends to update or otherwise revise the Projections to reflect
circumstances existing after the date when made or to reflect the occurrence
of future events even in the event that any or all of the assumptions
underlying the Projections are shown to be in error. See "--Section 3.
Cautionary Statement concerning Forward-Looking Statements."
Projections. In April 1998, the Financial Advisor delivered to Purchaser the
Company's projections of anticipated future operating performance for the five
fiscal years ending January 31, 2003. The projections for fiscal year 1999
exclude costs associated with the Golden Cycle Offer and the Transactions, as
these projections were prepared before such events occurred or were
anticipated. The projections are summarized below:
PROJECTED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDING JANUARY 31,
----------------------------------
1999E 2000E 2001E 2002E 2003E
------ ------ ------ ------ ------
Total Revenue.............................. $159.3 $177.0 $196.6 $218.5 $242.9
Gross Profit............................... 60.6 70.9 78.8 87.6 97.5
Earnings before Interest and Taxes......... 19.3 25.5 29.8 34.6 40.2
Pre-Tax Income............................. 14.4 21.9 27.6 33.9 41.1
Net Income................................. 8.7 13.2 16.6 20.4 24.7
Diluted Earnings per Share................. $ 1.60 $ 2.44 $ 3.07 $ 3.77 $ 4.58
Average Shares Outstanding................. 5.39 5.39 5.39 5.39 5.39
Earnings before Interest, Taxes, Deprecia-
tion and Amortization..................... 23.9 30.3 34.7 39.7 45.5
5. SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA.
The following tables present selected financial data for the three months
ended April 30, 1998 and April 30, 1997, and for each of the years in the
five-year period ended January 31, 1998. The historical financial data for the
years ended January 31, 1996, 1997 and 1998 are derived from, and should be
read in conjunction with, the audited financial statements of the Company and
the related notes thereto attached as annexes to this Offer to Purchase. The
selected financial data for the Company for the years ended January 31, 1994
and 1995 are derived from audited financial statements of the Company
available from the Commission (see "THE TENDER OFFER--Section 8. Certain
Information concerning the Company"). The historical financial data of the
Company for the three months ended April 30, 1998 and April 30, 1997 are
derived from, and should be read in conjunction with, the Company's unaudited
financial statements and the related notes thereto which are attached as
annexes to this Offer to Purchase which, in the opinion of management of the
Company, contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of this data. The results for
the three month period ended April 30, 1998 are not necessarily indicative of
the results for the full year or for any future period.
The unaudited pro forma consolidated balance sheet data is based on the
unaudited consolidated balance sheet of the Company as of April 30, 1998, and
is adjusted to give effect to the Recapitalization as if it had occurred on
April 30, 1998. The unaudited pro forma consolidated statements of operations
are based on the audited consolidated statement of operations of the Company
for the year ended January 31, 1998, the unaudited consolidated statements of
operations of the Company for the three months ended April 30, 1998 and 1997,
and are adjusted to give effect to the Recapitalization as though it had
occurred as of February 1, 1997, excluding
21
certain one time costs of the Transactions as described in Note (d). In
addition, the consolidated statements of operations for the year ended January
31, 1998 and the three months ended April 30, 1997 are adjusted to give effect
to the Company's acquisition of Chrome Specialities, Inc. ("CSI") on September
15, 1997 (which transaction was accounted for by the Company as a purchase),
as if it had occurred as of February 1, 1997. The unaudited pro forma
consolidated financial data do not purport to represent what the Company's
financial condition or the results of operations would actually have been had
the acquisition of CSI and Recapitalization in fact occurred on the assumed
dates, nor do they project the Company's financial condition or results of
operations for any future period or date.
22
The financial data set forth below should be read in conjunction with the
historical financial statements, and the related notes thereto, and the
unaudited pro forma consolidated financial data set forth in Annexes C, D and
E to this Offer to Purchase.
TWELVE
MONTHS
ENDED
APRIL 30,
YEAR ENDED JANUARY 31, THREE MONTHS ENDED APRIL 30, 1998
-------------------------------------------------------- ------------------------------------- ------------
PRO FORMA PRO FORMA PRO FORMA
1994 1995 1996 1997 1998 1998(d) 1997 1997(d) 1998 1998(d) PRO FORMA(e)
------- ------- ------- -------- -------- --------- ------- --------- ------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF
OPERATIONS DATA:
Net Sales........ $67,252 $74,904 $93,906 $108,557 $122,725 $146,694 $31,707 $41,575 $44,796 $44,796 $149,915
Cost of Sales... 38,583 43,333 54,779 64,834 77,716 92,769 19,872 26,006 28,029 28,029 94,792
------- ------- ------- -------- -------- -------- ------- ------- ------- ------- --------
Gross Profit..... 28,669 31,571 39,127 43,723 45,009 53,925 11,835 15,569 16,767 16,767 55,123
Selling, General
and
Administrative
Expenses....... 17,497 18,695 23,522 27,039 33,114 39,808 7,166 9,780 10,337 10,337 40,365
Other Operating
Expenses....... -- -- -- -- 3,127 3,127 -- -- 437 437 3,564
Product
Development.... 1,165 1,535 1,652 1,723 1,407 1,407 363 363 252 252 1,296
------- ------- ------- -------- -------- -------- ------- ------- ------- ------- --------
Operating
Income.......... 10,007 11,341 13,953 14,961 7,361 9,583 4,306 5,426 5,741 5,741 9,898
Interest
Expense........ 827 701 1,637 1,915 2,964 14,226 457 3,556 1,508 3,556 14,226
------- ------- ------- -------- -------- -------- ------- ------- ------- ------- --------
Income (Loss)
Before Income
Taxes........... 9,180 10,640 12,316 13,046 4,397 (4,643) 3,849 1,870 4,233 2,185 (4,328)
Income Tax
Provision
(Benefit)...... 3,672 4,224 4,395 5,174 2,114 (1,857) 1,506 748 1,772 874 (1,731)
Cumulative
effect of
accounting
change......... 1,600 -- -- -- -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- ------- ------- ------- ------- --------
Net Income
(Loss).......... $ 7,108 $ 6,416 $ 7,921 $ 7,872 $ 2,283 $ (2,786) $ 2,343 $ 1,122 $ 2,461 $ 1,311 $ (2,597)
======= ======= ======= ======== ======== ======== ======= ======= ======= ======= ========
PER SHARE DATA:
Net income
Basic........... $ 1.46 $ 1.28 $ 1.57 $ 1.49 $ 0.45 $ (0.91) $ 0.45 $ 0.37 $ 0.48 $ 0.43 $ (0.85)
Diluted......... $ 1.42 $ 1.27 $ 1.52 $ 1.48 $ 0.44 $ (0.91) $ 0.45 $ 0.37 $ 0.46 $ 0.43 $ (0.85)
Shares used in
per share
calculation
Basic........... 4,855 5,001 5,048 5,272 5,094 3,072 5,218 3,072 5,111 3,072 3,072
Diluted......... 5,006 5,052 5,209 5,327 5,233 3,072 5,224 3,072 5,393 3,072 3,072
OTHER FINANCIAL
DATA:
Depreciation and
amortization.... $ 1,513 $ 1,561 $ 1,612 $ 1,896 $ 3,087 $ 4,120 $ 583 $ 986 $ 1,047 $ 1,047 $ 4,180
EBITDA(a)........ $11,490 $12,872 $15,535 $ 16,827 $ 15,696 $ 18,951 $ 5,205 $ 6,729 $ 7,303 $ 7,303 $ 19,525
EBITDA
margin(b)....... 17.1% 17.2% 16.5% 15.5% 12.8% 12.9% 16.4% 16.2% 16.3% 16.3% 13.0%
Capital
expenditures.... $ 1,544 $ 3,331 $ 4,659 $ 3,601 $ 3,992 $ 3,992 $ 991 $ 991 $ 1,602 $ 1,602 $ 4,603
Cash interest
expense......... $ 827 $ 701 $ 1,637 $ 1,915 $ 2,964 $ 10,314 $ 457 $ 2,579 $ 1,508 $ 2,579 $ 10,314
Ratio of EBITDA
to cash interest
expense......... 13.9 18.4 9.5 8.8 5.3 1.8 11.4 2.6 4.8 2.8 1.9
Ratio of EBITDA
minus capital
expenditures to
cash interest
expense......... 12.0 13.6 6.6 6.9 3.9 1.5 9.2 2.2 3.8 2.2 1.4
Ratio of earnings
to fixed
charges(c)...... 10.4 12.3 7.1 6.7 2.2 -- 5.1 1.3 2.5 1.4 --
AS OF APRIL 30, 1998
--------------------
HISTORICAL PRO FORMA
---------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 72 $ 72
Working capital............................................ 61,112 75,872
Total assets............................................... 142,306 151,942
Total debt................................................. 62,081 133,220
Shareholder's equity....................................... 62,799 1,296
Book value per share....................................... 12.14 0.42
23
NOTES TO SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(a) EBITDA represents earnings before (i) interest expense, (ii) income
taxes, (iii) depreciation and amortization, (iv) the provision for the
remaining benefits to be paid under an employment agreement with the Company's
past Chairman, President and Chief Executive Officer, who ceased to be
employed by or related to the Company on November 5, 1997, which provided for
a bonus ranging from 3% to 5% of operating earnings before non-recurring
charges (similar benefits are not being provided to any of the Company's
current employees or members of the Board of Directors (the "Employment
Agreement Provision")), (v) operating cash losses recognized in the Company's
historical financial statements related to its investment in Bikers Discount
Supply ("BDS") which the Company intends to sell or shut-down (the "BDS
Losses"), (vi) the provision for the closure of the Custom Chrome, Inc.
Dallas-Fort Worth, Texas distribution facility (the "Dallas Warehouse Closure
Costs"), (vii) the provision for the settlement of $307,000 with the State of
Kentucky for personal property taxes related to the Company's operation of its
Louisville, Kentucky facility, net of expenses of $30,000 for each of the
years ended January 31, 1994, 1995, 1996, 1997 and 1998 and $7,500 for the
three months ended April 30, 1997, which adjusts historical property tax
expense to normalized amounts for the respective periods. (the "PPT Settlement
Expense"), and (viii) costs associated with the Golden Cycle Offer.
EBITDA data is included because management understands that such information
is considered by certain investors as an additional basis on which to evaluate
the Company's ability to pay interest, repay debt and make capital
expenditures. Items excluded from EBITDA could significantly affect the
Company's results of operations and liquidity and should be considered in
evaluating the Company's financial performance. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, measures of operating performance as determined in accordance with
generally accepted accounting principles.
EBITDA was derived as follows (in thousands):
TWELVE MONTHS
ENDED
APRIL 30,
YEAR ENDED JANUARY 31, THREE MONTHS ENDED APRIL 30, 1998
----------------------------------------------------- ---------------------------------- -------------
PRO FORMA PRO FORMA PRO FORMA
1994 1995 1996 1997 1998 1998 1997 1997 1998 1998 PRO FORMA
------- ------- ------- ------- ------- --------- ------ --------- ------ --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (Loss)
Before Income
Taxes............. $ 9,180 $10,640 $12,316 $13,046 $ 4,397 $ (4,643) $3,849 $1,870 $4,233 $2,185 $ (4,328)
Interest expense... 827 701 1,637 1,915 2,964 14,226 457 3,556 1,508 3,556 14,226
Depreciation and
amortization...... 1,513 1,561 1,612 1,896 3,087 4,120 583 986 1,047 1,047 4,180
Employment
Agreement
Provision......... -- -- -- -- 3,127 3,127 -- -- -- -- 3,127
BDS Losses......... -- -- -- -- 1,225 1,225 324 324 78 78 979
Dallas Warehouse
Closure Costs..... -- -- -- -- 619 619 -- -- -- -- 619
Property Tax
Settlement
Expense........... (30) (30) (30) (30) 277 277 (8) (8) -- -- 285
Costs Associated
with the Golden
Cycle Offer....... -- -- -- -- -- -- -- -- 437 437 437
------- ------- ------- ------- ------- -------- ------ ------ ------ ------ --------
EBITDA............. $11,490 $12,872 $15,535 $16,827 $15,696 $ 18,951 $5,205 $6,729 $7,303 $7,303 $ 19,525
======= ======= ======= ======= ======= ======== ====== ====== ====== ====== ========
(b) Represents EBITDA as a percentage of net sales.
(c) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed charges
for this purpose include interest expense, amortization of deferred financing
costs and one third of operating lease payments (the portion deemed to be
representative of the interest factor). On a pro forma basis, earnings were
insufficient to cover fixed charges by $4,643,000 and $4,328,000 for the years
ended January 31, 1998 and April 30, 1998, respectively.
(d) The pro forma adjustments do not reflect (i) estimated transaction fees
and expenses of approximately $9,140,000, (ii) a non-cash compensation expense
of approximately $1,135,000 related to management's "cashless" exercise of
certain stock options, (iii) a cash compensation expense of $8,564,000 to be
recognized in connection with the repurchase of the remaining stock options,
(iv) the write-off of deferred financing costs of $964,000 associated with the
Company's existing debt obligations, and (v) deferred tax benefits of
approximately $4,000,000 related to (ii), (iii) and (iv), which management
believes are more likely, than not, to be realized based on anticipated future
earnings, all of which are expected to be incurred in connection with the
Recapitalization. Such amounts will be recorded in the consolidated statement
of operations for the period in which the Recapitalization occurs.
(e) Reflects the pro forma results of operations for the year ended January
31, 1998, plus the pro forma results of operations for the three months ended
April 30, 1998, less the pro forma results of operations for the three months
ended April 30, 1997.
24
6. PLANS FOR THE COMPANY; CERTAIN EFFECTS OF THE OFFER AND MERGER. Pursuant
to the Merger Agreement, upon completion of the Offer, Purchaser and the
Company intend to effect the Merger only in the event that the number of
Shares tendered is equal to or greater than the Minimum Condition but less
than the Tender Offer Number.
Except as otherwise described in this Offer to Purchase, the Company has no
current plans or proposals that relate to or would result in: (a) other than
the Offer and Merger, an extraordinary corporate transaction, such as a
merger, reorganization or liquidation involving the Company; (b) a sale or
transfer of a material amount of assets of the Company; (c) any change in the
management of the Company or any material change in the employment contract of
any executive officer; (d) any other material change in the Company's
corporate structure or business; or (e) any changes in the Company's charter,
bylaws or instruments corresponding thereto or other actions that may impede
the acquisition of control of the Company by any person. As discussed
elsewhere herein, the Merger Agreement imposes certain limitations on the
Company and its subsidiaries, including limitations on the payment of
dividends and distributions. See "THE MERGER AGREEMENT AND CERTAIN RELATED
MATTERS-- Section 1. The Agreement and Plan of Merger" and "THE TENDER OFFER--
Section 11. Dividends and Distributions."
Nevertheless, Purchaser may initiate a review of the Company and its assets,
corporate structure, capitalization, operations, properties, policies,
management and personnel to determine what changes, if any, would be desirable
following consummation of the Offer and the Merger in order to best organize
the activities of the Company. Purchaser expressly reserves the right to make
any changes that it deems necessary or appropriate in light of its review or
in light of future developments. The Merger Agreement provides that, promptly
after the Stock Purchase and the purchase and payment for no more than the
number of Shares equal to Tender Offer Number and the Minimum Condition having
been satisfied, Purchaser will have the right to designate such number of
directors, rounded up to the next whole number, on the Company's Board of
Directors as is equal to the product of the total number of directors on the
Company's Board of Directors (giving effect to the directors designated by
Purchaser) multiplied by the percentage that the number of Shares beneficially
owned by Purchaser or any affiliate of Purchaser bears to the total number of
Shares then outstanding. See "THE MERGER AGREEMENT AND CERTAIN RELATED
MATTERS--Section 1. The Agreement and Plan of Merger; Stockholder Agreement."
The Merger Agreement provides that the directors and officers of the Company
at the Effective Time of the Merger will, from and after the Effective Time,
be the initial directors and officers, respectively, of the Surviving
Corporation. Thereafter the Board of Directors will be elected annually by a
vote of all stockholders.
Successful consummation of the Offer and the Merger, if required, will make
Purchaser and the Management Stockholders, in the aggregate, owners of more
than 85%, but less than 90%, of the Shares. As such, Purchaser and the
Management Stockholders will be entitled to all benefits resulting from such
ownership, including management and investment direction with regard to the
future conduct of the business of the Company, the benefits of any profits
generated by the Company's operations and any increase in the Company's value.
Similarly, Purchaser and the Management Stockholders will also bear the risk
of any losses generated by operations and any decrease in the value of the
Company. In addition, pursuant to the terms of the Stockholder Agreement,
Purchaser and each of the Management Stockholders who is an employee of the
Company have agreed to use their good faith to negotiate and enter into
agreements with respect to the Shares that will be retained by each of them
following consummation of the Offer, which agreements will provide for "put"
and "call" rights exercisable by the Management Stockholder and the Company,
respectively, in the event that the Management Stockholder's employment with
the Company is terminated. See "THE MERGER AGREEMENT AND CERTAIN RELATED
MATTERS--Section 1. The Agreement and Plan of Merger; Stockholder Agreement."
Upon consummation of the Offer and the Merger, if required, the Company will
become a corporation with a minority of public stockholders. The minority
interest held by stockholders will have the opportunity to participate in the
future performance of the Company and will retain the right to vote on
corporate matters.
IMMEDIATELY FOLLOWING CONSUMMATION OF THE OFFER AND THE MERGER, IF REQUIRED,
PURCHASER INTENDS TO CAUSE THE SHARES TO CEASE TO BE QUOTED ON NASDAQ. In
addition, the registration of the Shares under the Exchange Act will be
terminated as soon as permissible.
25
Accordingly, following consummation of the Offer, there will be no publicly-
traded Shares outstanding. See "THE TENDER OFFER--Section 7. Effect of the
Offer on the Market for the Shares; Stock Listing; Exchange Act Registration;
Margin Regulation."
7. RIGHTS OF THE STOCKHOLDERS IN THE OFFER AND MERGER. Under the DGCL, the
approval of the Board of Directors of the Company and the affirmative vote of
the holders of a majority of the outstanding Shares are required to adopt and
approve the Merger Agreement and the Merger. The execution and delivery of the
Merger Agreement by the Company and the consummation by the Company of the
transactions contemplated by the Merger Agreement have been duly authorized by
all necessary corporate action on the part of the Company, subject to the
approval of the Merger by the Company's stockholders in accordance with the
DGCL. In addition, the affirmative vote of the holders of a majority of the
outstanding Shares is the only vote of the holders of any class or series of
the Company's capital stock necessary to approve the Merger Agreement and the
transactions contemplated thereby, including the Merger. Therefore, the only
remaining required corporate action of the Company will be the approval of the
Merger Agreement and the transactions contemplated thereby by the affirmative
vote of the holders of a majority of the Shares. As a result of the Stock
Purchase, Purchaser will acquire in the aggregate at least a majority of the
Shares. Each outstanding Share will be entitled to one vote in any such vote
of the stockholders of the Company. Accordingly, upon consummation of the
Offer, the vote of no other stockholder of the Company will be required to
approve the Merger Agreement and the Merger, if it is required to be effected.
DELAWARE BUSINESS COMBINATION STATUTE. Section 203 of the DGCL, in general,
prohibits a Delaware corporation such as the Company, from engaging in a
"Business Combination" (defined as a variety of transactions, including
mergers, as set forth below) with an "Interested Stockholder" (defined
generally as a person that is the beneficial owner of 15% or more of a
corporation's outstanding voting stock) for a period of three years following
the date that such person became an Interested Stockholder unless (a) prior to
the date such person became an Interested Stockholder, the board of directors
of the corporation approved either the Business Combination or the transaction
that resulted in the stockholder becoming an interested Stockholder, (b) upon
consummation of the transaction that resulted in the stockholder becoming an
Interested Stockholder, the Interested Stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding stock held by directors who are also officers of the
corporation and employee stock ownership plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer or (c) on or subsequent to
the date such person became an Interested Stockholder, the Business
Combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders, and not by written consent, by the
affirmative vote of the holders of a least 66 2/3% of the outstanding voting
stock of the corporation not owned by the Interested Stockholder.
Under Section 203, the restrictions described above do not apply if, among
other things (a) the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203; (b)
the corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or by-laws expressly electing not to be governed
by Section 203, provided that, in addition to any other vote required by law,
such amendment of the certificate of incorporation or by-laws must be approved
by the affirmative vote of a majority of the shares entitled to vote, which
amendment would not be effective until 12 months after the adoption of such
amendment and would not apply to any Business Combination between the
corporation and any person who became an Interested Stockholder of the
corporation on or prior to the date of such adoption; (c) the corporation does
not have a class of voting stock that is (1) listed on a national securities
exchange, (2) authorized for quotation on an inter-dealer quotation system of
a registered national securities association or (3) held of record by more
than 2,000 stockholders, unless any of the foregoing results from action
taken, directly or indirectly, by an Interested Stockholder or from a
transaction in which a person became an Interested Stockholder; or (d) a
stockholder become an Interested Stockholder "inadvertently" and thereafter
divests itself of a sufficient number of shares so that such stockholder
ceases to be an Interested Stockholder. Under Section 203, the restrictions
described above also do not apply to certain Business Combinations proposed by
an Interested Stockholder following the announcement or notification or one of
certain extraordinary transactions
26
involving the corporation and a person who had not been an Interested
Stockholder during the previous three years or who became an Interested
Stockholder with the approval of a majority of the corporation's directors.
Section 203 provides that, during such three-year period, the corporation
may not merge or consolidate with an Interested Stockholder or any affiliate
or associate thereof, and also may not engage in certain other transactions
with an Interested Stockholder or any affiliate or associate thereof,
including, without limitation, (a) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets (except proportionately as a
stockholder of the corporation) having an aggregate market value equal to 10%
or more of the aggregate market value of all assets of the corporation
determined on a consolidated basis or the aggregate market value of all the
outstanding stock of a corporation; (b) any transaction which results in the
issuance or transfer by the corporation or by certain subsidiaries thereof of
any stock of the corporation or such subsidiaries to the Interested
Stockholder, except pursuant to a transaction that effects a pro rata
distribution to all stockholders of the corporation; (c) any transaction
involving the corporation or certain subsidiaries thereof which has the effect
of increasing the proportionate share of the stock of any class or series, or
securities convertible into the stock of any class or series, of the
corporation or any such subsidiary which is owned directly or indirectly by
the Interested Stockholder (except as a result of immaterial changes due to
fractional share adjustments); or (d) any receipt of the Interested
Stockholder of the benefit (except proportionately as a stockholder of such
corporation) of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
The provisions of Section 203 are not applicable to any of the Transactions
as a result of the approval by the Company's Board of Directors of the Merger
Agreement and each of the transactions contemplated thereby prior to the
execution of the Merger Agreement.
APPRAISAL RIGHTS. Holders of the Shares do not have appraisal rights as a
result of the Offer. However, if the Merger is consummated, holders of the
Shares at the effective time of the Merger will have certain rights pursuant
to the provisions of Section 262 of the DGCL. Dissenting stockholders of the
Company who comply with the applicable statutory procedures will be entitled
to receive a judicial determination of the fair value of their Shares
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) and to receive payment of such fair value in cash,
together with a fair rate of interest thereon, if any. Any such judicial
determination of the fair value of the Shares could be based upon factors
other than, or in addition to, the price per share of Common Stock, as the
case may be, to be paid in the Merger or the market value of the Shares. The
value so determined could be more or less than the price per Share to be paid
in the Merger.
THE FOREGOING SUMMARY OF THE RIGHTS OF DISSENTING STOCKHOLDERS DOES NOT
PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY
STOCKHOLDERS DESIRING TO EXERCISE ANY AVAILABLE DISSENTERS' RIGHTS. THE
PRESERVATION AND EXERCISE OF DISSENTERS' RIGHTS REQUIRE STRICT ADHERENCE TO
THE APPLICABLE PROVISIONS OF THE DGCL.
THE MERGER AGREEMENT AND CERTAIN RELATED MATTERS
1. THE AGREEMENT AND PLAN OF MERGER; STOCKHOLDER AGREEMENT.
AGREEMENT AND PLAN OF MERGER. As of June 28, 1998, Purchaser, Acquisition
Sub and the Company entered into the Merger Agreement, pursuant to which the
Company agreed to make the Offer. The following description of the Merger
Agreement does not purport to be complete and is qualified by reference to the
text of the Merger Agreement, a copy of which has been filed as Exhibit(c)(1)
to the Company's Issuer Tender Offer Statement on Schedule 13E-4 (the
"Schedule 13E-4"). Capitalized terms not otherwise defined herein have the
meanings set forth in the Merger Agreement. The Merger Agreement may be
examined and copies may be obtained at the places and in the manner set forth
in "THE TENDER OFFER--Section 8. Certain Information concerning the Company."
The Offer. The Merger Agreement provides that the Company will commence the
Offer and that, upon the terms and subject to the prior satisfaction or waiver
of the conditions of the Offer, the Company will purchase all Shares validly
tendered and not withdrawn pursuant to the Offer. The obligation of the
Company to accept
27
for payment and pay for Shares tendered is subject to (i) there being
tendered, and not withdrawn prior to the expiration of the Offer, that number
of Shares that represents not less than a majority of the Shares then
outstanding on a fully diluted basis (after giving effect to the conversion or
exercise of all outstanding options, warrants and other rights and securities
exercisable or convertible in Shares) (the "Minimum Condition"), (ii) the
Stock Purchase Closing (as defined in Section 2.3 of the Merger Agreement)
having occurred and (iii) the Company or the Operating Company, as the case
may be, having obtained certain debt financing described in Annex A to the
Merger Agreement; (iv) certain proration conditions described below and in
Article III of the Merger Agreement and (v) to the satisfaction of the other
conditions described in Annex A to the Merger Agreement. Pursuant to the terms
of the Merger Agreement, the Company will make no other changes to the Offer
or waive any conditions to the Offer or take changes any other action,
including, without limitation, notice of acceptance of tendered Shares to the
depositary, with respect to the Offer without Purchaser's prior written
consent.
Purchase and Sale of Shares. Pursuant to the Merger Agreement, Purchaser
will purchase from the Company 2,666,667 Shares (the "Purchaser Shares"). The
aggregate purchase price for the Purchaser Shares will be the number of
Purchaser Shares multiplied by the Per Share Amount.
Pursuant to the Merger Agreement and subject to the conditions set forth
therein the Stock Purchase will take place at a closing (the "Stock Purchase
Closing") on the day after the Offer is scheduled to expire, or at such other
time or on such other date as the Company and Purchaser may mutually agree
upon in writing (the day on which the Stock Purchase Closing takes place being
the "Stock Purchase Closing Date").
Conditions to the Stock Purchase. The Merger Agreement provides that the
respective obligations of each party to effect the Stock Purchase are subject
to the satisfaction (or waiver) at or prior to the Stock Purchase Closing Date
of the following conditions: (i) no United States or state governmental
authority or other agency or commission or United States or state court of
competent jurisdiction will have enacted, issued, promulgated, enforced or
entered any law, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is then in
effect and has the effect of making the acquisition of Shares by Purchasers or
any affiliate of any of them illegal or otherwise restricting, preventing or
prohibiting consummation of the Transactions.
The Merger Agreement provides that the obligation of the Company to effect
the Stock Purchase is also subject to the satisfaction (or waiver) at or prior
to the Stock Purchase Closing Date of each of the following additional
conditions: all representations and warranties made by Purchaser in the Merger
Agreement will be true and correct in all material respects (except for
representations qualified by materiality or Purchaser Material Adverse Effect
(as defined in the Merger Agreement) which will be correct in all respects) on
the Stock Purchase Closing Date, with the same force and effect as though such
representations and warranties had been made on and as of the Stock Purchase
Closing Date, except for changes permitted or contemplated by the Merger
Agreement and except for representations and warranties that are made as of a
specified date or time, which will be true and correct in all material aspects
(except for representations qualified by materiality or Purchaser Material
Adverse Effect which will be correct in all respects) only as of such specific
date or time; Purchaser will have performed in all material respects all
obligations and agreements, and complied in all material respects with all
covenants, contained in the Merger Agreement to be performed or complied with
by it prior to or on the Stock Purchase Closing Date; and the Company will
have received such certificates of Purchaser, dated as of the Stock Purchase
Closing Date, signed by an executive officer of Purchaser to evidence
satisfaction of the conditions set forth in the previous two sentences as may
be reasonably requested by the Company.
The Merger Agreement provides that the obligation of Purchaser to effect the
Stock Purchase is also subject to the satisfaction (or waiver) at or prior to
the Stock Purchase Closing Date of each of the following additional
conditions: all representations and warranties made by the Company in the
Merger Agreement will be true and correct in all material respects (except for
representations qualified by materiality or Company Material Adverse Effect
which will be correct in all respects) on the Stock Purchase Closing Date,
except for changes permitted or contemplated by the Merger Agreement and
except for representations and warranties that are made as of a specified date
or time, which will be true and correct in all material respects (except for
representations qualified
28
by materiality or Company Material Adverse Effect which will be correct in all
respects) only as of such specific date or time; the Company will have
performed in all material respects all obligations and agreements, and
complied in all material respects with covenants contained in the Merger
Agreement to be performed or complied with by it prior to or on the Stock
Purchase Closing Date; Purchaser will have received such certificate of the
Company, dated as of the Stock Purchase Closing Date, signed by an executive
officer of the Company to evidence satisfaction of the conditions set forth in
the previous two sentences. The conditions to the Offer set forth in Annex A
to the Merger Agreement will have been satisfied and the Company will,
simultaneously with the Stock Purchase Closing, but subject to Article III of
the Merger Agreement, purchase all Shares validly tendered and not withdrawn
pursuant to the Offer.
Designation of Directors. The Merger Agreement provides that, promptly upon
consummation of the Stock Purchase and the purchase of and payment for no more
than that number of Shares equal to the Tender Offer Number by the Company
pursuant to the Offer, the Minimum Condition having been satisfied, and from
time to time thereafter as Shares are acquired by the Company, Purchaser will
be entitled to designate such number of directors, subject to compliance with
Section 14(f) of the Exchange Act, rounded up to the next whole number, on the
Board as is equal to the product of the total number of directors on such
Board (giving effect to the directors designated by Purchaser pursuant to this
sentence) multiplied by the percentage that the number of Shares which
Purchaser or any affiliate of Purchaser owns beneficially bears to the total
number of Shares then outstanding. In furtherance thereof, the Company will,
upon the request of Purchaser, promptly either increase the size of its Board
of Directors or use its best efforts to secure the resignations of such
directors as requested by Purchaser in writing, or both, as is necessary to
enable Purchaser's designees to be elected to the Board in accordance with the
above sentence and will cause Purchaser's designees to be so elected. At such
time, the Company will, if requested by Purchaser, also cause persons
designated by Purchaser to constitute at least the same percentage (rounded up
to the next whole number) as is on the Board of (i) each committee of the
Board, (ii) each board of directors (or similar body) of each Subsidiary of
the Company and (iii) each committee (or similar body) of each such board. In
future years the Board of Directors will be elected annually by a vote of all
stockholders.
The Merger Agreement also provides that, subject to applicable law, the
Company will promptly take all actions required pursuant to Section 14(f) of
the Exchange Act and Rule 14f-l promulgated thereunder in order to fulfill its
obligations under the previous paragraph and will include in the Schedule 13E-
4 mailed to stockholders promptly after the commencement of the Offer (or an
amendment thereof or an information statement pursuant to Rule 14f-1 if
Purchaser has not theretofore designated directors) such information with
respect to the Company and its officers and directors as is required under
Section 14(f) and Rule 14f-1 in order to fulfill its obligations under Section
2.6(a) of the Merger Agreement. Purchaser will supply the Company information
with respect to it and its nominees, officers, directors and affiliates
required by such Section 14(f) and Rule 14f-1.
The Merger Agreement further provides that in the event that the Merger is
effected and Purchaser's designees are elected to the Board and until the
Effective Time, the Board will have at least one director who is a director on
the date of the Merger Agreement and who may be Joseph Keenan, or otherwise is
neither an officer of the Company nor a designee, stockholder, affiliate or
associate (within the meaning of the Federal securities laws) of Purchaser
(one or more of such directors, the "Independent Directors"), provided that,
in such event, if the number of Independent Directors will be reduced below
two for any reason whatsoever, any remaining Independent Director will be
entitled to, or, if no Independent Director then remains, the other directors
will designate one person to fill one of the vacancies who will not be a
stockholder, affiliate or associate of Purchaser and such person will be
deemed to be an Independent Director for purposes of the Merger Agreement.
Notwithstanding anything in the Merger Agreement to the contrary, in the event
that Purchaser's designees are elected to the Board, after the acceptance for
payment of Shares pursuant to the Offer and prior to the Effective Time (as
defined in The Merger Agreement), the affirmative vote of a majority of the
Independent Directors will be required to (a) amend or terminate the Merger
Agreement on behalf of the Company, (b) exercise or waive any of the Company's
rights, benefits or remedies thereunder, (c) extend the time for performance
of Purchaser's
29
obligations thereunder or (d) take any other action by the Board under or in
connection with the Merger Agreement; provided, however, that if there will be
no such directors, such actions may be effected by unanimous vote of the
entire Company Board of Directors.
Effects of Tender Offer on the Merger. The Merger Agreement provides that,
subject to Annex A and Article III of the Merger Agreement, in the event that
the number of Shares representing not less nor more than the Tender Offer
Number have been validly tendered and not withdrawn prior to the expiration of
the Offer, then the Company will accept for payment, purchase and pay for all
such Shares as provided in the Offer Documents. All such Shares so accepted
for payment, purchased and paid for will then be cancelled, retired and cease
to exist. Shares held by Purchaser or any of its affiliates, Management
Stockholders and any stockholders of the Company who did not tender their
Shares pursuant to the Offer will remain outstanding, and the Merger (as
defined and described in the Merger section below) will not be effected.
The Merger Agreement also provides that, in the event that the number of
Shares representing more than the Tender Offer Number will have been validly
tendered and not withdrawn prior to the expiration of the Offer, then each
holder of Shares so tendered will receive the following consideration in
accordance with the terms of Section 3.2 of the Merger Agreement in the
following manner, and the Merger will not be effected.
(a) (i) A cash proration factor (the "Cash Proration Factor") will be a
fraction whose numerator is the Tender Offer Number and whose denominator is
the total number of Shares tendered pursuant to the Offer, and (ii) a stock
proration factor (the "Stock Proration Factor") will be a fraction whose
numerator is the amount equal to the difference between the number of Shares
tendered pursuant to the Offer and the Tender Offer Number, and whose
denominator is the number of Shares tendered pursuant to the Offer. All
fractions will be carried out to four decimal places.
(b) Each tendering stockholder will be entitled to (A) receive an amount in
cash equal to the product obtained by multiplying (i) the number of Shares
tendered by such stockholder, (ii) the Per Share Amount and (iii) the Cash
Proration Factor, and (B) retain that number of Shares (the "Stock Tender
Offer Consideration") rounded up to the nearest whole share equal to the
product obtained by multiplying (i) the number of Shares tendered by such
stockholder, and (ii) the Stock Proration Factor. No fraction of a share of
Stock Tender Offer Consideration will be issued in exchange for Shares subject
to the Stock Proration Factor, no dividend or distribution of the Company will
relate to such fractional share interests and such fractional share interests
will not entitle the owner thereof to vote or to any rights of a Stockholder
of the Company. In lieu of fractional shares of Stock Tender Offer
Consideration, each holder who would otherwise be entitled to receive a
fraction of a share of Stock Tender Offer Consideration (after aggregating all
fractional shares of Stock Tender Offer Consideration to be received by such
holder) will receive from the Company an amount of cash (rounded down to the
nearest whole cent) equal to the product of (x) such fraction, multiplied by
(y) the Per Share Amount.
The Merger Agreement further provides that in the event that the number of
Shares validly tendered and not withdrawn prior to the expiration of the Offer
is equal to the Minimum Condition or greater but less than the Tender Offer
Number, then the Company will accept for payment, purchase and pay for all
such Shares as provided in the Offer Documents. All such Shares so accepted
for payment, purchased and paid for will then be cancelled, retired and cease
to exist. Shares held by Purchaser or any of its affiliates, Management
Stockholders and any stockholders of the Company who did not tender their
Shares pursuant to the Offer will remain outstanding. Subject to the terms and
conditions of the Merger Agreement, following the consummation of the Offer,
Acquisition Sub and the Company will effect the Merger as set forth below and
in Article IV of the Merger Agreement.
The Merger. The Merger Agreement provides that, in the event that the number
of Shares validly tendered and not withdrawn prior to the expiration of the
Offer is equal to the Minimum Condition or greater but less than the Tender
Offer Number, then at the Effective Time and upon the terms and subject to the
conditions of the Merger Agreement and in accordance with the DGCL, the
Company and Acquisition Sub will consummate the Merger pursuant to which (a)
Acquisition Sub will merge with and into the Company and the separate
30
corporate existence of Acquisition Sub will thereupon cease, (b) the Company
will be the Surviving Corporation in the Merger and will continue to be
governed by the laws of the State of Delaware, and (c) the corporate existence
of the Company with all of its rights, privileges, immunities, powers and
franchises will continue unaffected by the Merger. Purchaser may, upon notice
to the Company, modify the structure of the Merger if Purchaser determines it
advisable to do so because of tax or other considerations, and the Company
will promptly enter into any amendment to the Merger Agreement necessary or
desirable to accomplish such structure modification, provided that no such
amendment will reduce the Merger Consideration.
As of the Effective Time, by virtue of the Merger:
(a) Shares held by each stockholder (other than (i) Shares held by
Purchaser, (ii) 87,979 Shares held by Management Stockholders and (iii) Shares
held by stockholders who properly perfect their appraisal rights under
Delaware law) will be converted into the right to receive (i) an amount in
cash (the "Cash Merger Consideration") equal to the product obtained by
multiplying the number of Shares held by such stockholder by the Per Share
Amount and an amount equal to one (1) minus the Merger Proration Factor (as
defined below) and (ii) a number of shares of identical common stock of the
Company as the Surviving Corporation (the "Stock Merger Consideration" and,
together with the Cash Merger consideration, the "Merger Consideration") equal
to the product obtained by multiplying the number of Shares owned by such
stockholder by the Merger Proration Factor. The Merger Proration Factor will
be a fraction, the numerator of which is equal to the Public Rollover Shares,
and the denominator of which is equal to the number of Shares issued and
outstanding as of immediately following the acceptance and payment for all
Shares validly tendered pursuant to the Offer less (i) Shares held by
Purchaser, (ii) Dissenting Shares if any, as of the Effective Time and (iii)
87,979 Shares. The Cash Merger Consideration will be payable to the holders of
Shares, without interest thereon, upon the surrender of the certificate
formerly representing such Shares and less any required withholding of taxes.
No fraction of a share of Stock Merger Consideration will be issued in
exchange for Shares subject to the Merger Proration Factor, no dividend or
distribution of the Surviving Corporation will relate to such fractional share
interests and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a stockholder of the Surviving
Corporation. In lieu of fractional shares, each holder of Shares subject to
the Merger Proration Factor who would otherwise be entitled to a fraction of a
share will receive from the Surviving Corporation in the Merger an amount of
cash (rounded down to the nearest whole cent) equal to the product of (x) such
fraction, multiplied by (y) the Per Share Amount. From and after the Effective
Time, all such Shares will no longer be outstanding and will be deemed to be
cancelled and retired and will cease to exist, and each holder of a
certificate representing any such Shares will cease to have any rights with
respect thereto, except the right to receive the Merger Consideration therefor
upon the surrender of such certificate in accordance with Section 5.2 of the
Merger Agreement, or the right, if any, to receive payment from the Surviving
Corporation of the "fair value" of such Shares as determined in accordance
with Section 262 of the DGCL.
(b) Each Share held in the treasury of the Company and each Share owned by
any Subsidiary of the Company immediately prior to the Effective Time will, by
virtue of the Merger and without any action on the part of Acquisition Sub,
the Company or the holder thereof, be cancelled, retired and cease to exist
and no payment or distribution will be made with respect thereto. In no event
will Shares purchased or to be purchased by Purchaser be deemed to be Shares
held in the treasury of the Company.
(c) Each Share held by Purchaser or any affiliate thereof, and 87,979 Shares
held or acquired upon the exercise of 52,191 outstanding options by Management
Stockholders will not be cancelled as provided above, but will remain
outstanding.
(d) Each issued and outstanding share of common stock, par value $0.01 per
share, of Acquisition Sub will be cancelled, retired and will cease to exist.
Certificate of Incorporation, By-laws, Directors and Officers. The Merger
Agreement provides that the Certificate of Incorporation and By-laws of the
Company will be the Certificate of Incorporation and By-laws of the Surviving
Corporation unless otherwise determined by the Company prior to the Effective
Time. The Merger Agreement also provides that the directors of the Company
immediately prior to the Effective Time will be the
31
initial directors of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation, and the officers of the Company immediately prior to the
Effective Time will be the initial officers of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed and
qualified.
Conditions to the Merger. The Merger Agreement provides that the respective
obligations of each party thereto to effect the Merger is subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any and all of which may be waived in whole or in part by
Purchaser or the Company, as the case may be, to the extent permitted by
applicable law: (i) the Merger and the Merger Agreement will have been
approved and adopted by the affirmative vote of the stockholders of the
Company by the requisite vote; (ii) no statute, rule, regulation, executive
order, decree, ruling or injunction will have been enacted, entered,
promulgated or enforced by any court or governmental authority of competent
jurisdiction which prohibits, restrains, enjoins or restricts the consummation
of the Merger; and there will be no order or injunction of a court of
competent jurisdiction in effect precluding consummation of the Merger; (iii)
any waiting period applicable to the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the regulations thereunder
(the "HSR Act") will have terminated or expired; (iv) Purchaser will have
purchased the Purchaser Shares; and (v) the Company will have received from a
nationally recognized accounting firm a letter in form and substance
reasonably satisfactory to Purchaser to the effect that the Transactions will
receive recapitalization accounting treatment and such letter has not been
withdrawn or modified.
The Merger Agreement provides that the obligation of the Company and
Acquisition Sub to effect the Merger is also subject to the satisfaction (or
waiver) at or prior to the Merger Closing Date of each of the following
additional conditions: all representations and warranties made by Purchaser in
the Merger Agreement will be true and correct in all material respects (except
for representations qualified by materiality or Purchaser Material Adverse
Effect (as defined in the Merger Agreement) which will be correct in all
respects) at the Effective Time, with the same force and effect as though such
representations and warranties had been made on and as of the Effective Time,
except for representations and warranties that are made as of a specified date
or time, which will be true and correct in all material respects (except for
representations qualified by materiality or Purchaser Material Adverse Effect
which will be correct in all respects) only as of such specific date or time.
Purchaser will have performed in all material respects all obligations and
agreements, and complied in all material respects with covenants, contained in
the Merger Agreement to be performed or complied with by it prior to or as of
the Effective Time. The Company will have received certificates of Purchaser
dated as of the Effective Time, signed by an executive officer of Purchaser to
evidence satisfaction of the conditions set forth above.
The Merger Agreement provides that the obligation of Purchaser to effect the
Merger is also subject to the satisfaction (or waiver) at or prior to the
Merger Closing Date of each of the following additional conditions: All
representations and warranties made by the Company herein will be true and
correct in all material respects (except for representations qualified by
materiality or Company Material Adverse Effect (as defined in the Merger
Agreement) which will be correct in all respects) as of the Effective Time,
with the same force and effect as though such representations and warranties
had been made on and as of the Effective Time, except for representations and
warranties that are made as of a specified date or time, which will be true
and correct in all material respects (except for representations qualified by
materiality or Company Material Adverse Effect which will be correct in all
respects) only as of such specific date or time; the Company will have
performed in all material respects all obligations and agreements and complied
in all material respects with covenants, contained in the Merger Agreement to
be performed or complied with by it prior to or as of the Effective Time;
Purchaser will have received certificates of the Company, dated as of the
Effective Time, signed by an executive officer of the Company to evidence
satisfaction of the conditions set forth in the above two sentences, and the
Company will have purchased no more than 4,656,400 Shares pursuant to the
Offer.
Cancellation of Stock Options. Under the Merger Agreement, the Company will
take all actions necessary to provide that immediately prior to consummation
of the Offer (or, if the Merger is required, immediately prior to consummation
of the Merger), all outstanding employee and director options to acquire
Shares will be cancelled (except 52,191 options to be exercised by the
Management Stockholders pursuant to the Stockholder
32
Agreement), and in consideration thereof option holders will receive, subject
to applicable withholding obligations, a payment in cash equal to the net
"spread" on such options based on the Per Share Amount. At the same time, all
outstanding options under the Company's Employee Stock Purchase Plan will also
be cancelled, and participants will receive in lieu of certificates an amount
in cash, subject to applicable withholding obligations, equal to the value of
the Shares otherwise issuable upon the exercise of such options, also based on
the Per Share Amount. Upon consummation of the Offer (or, if the Merger is
required, upon consummation of the Merger), other than with respect to those
options to be exercised by the Management Stockholders pursuant to the
Stockholder Agreement, no holder of options will have any right to receive any
shares of capital stock of the Company (or, if applicable, the Surviving
Corporation), upon the exercise of such options.
Company Stockholder Meeting. If required by applicable law, the Company has
agreed to: (i) hold a special meeting of its stockholders (the "Special
Meeting") as soon as practicable following the acceptance for payment and
purchase of Shares pursuant to the Offer for the purpose of considering and
taking action upon the approval of the Merger and adoption of the Merger
Agreement; (ii) prepare and file with the Commission a preliminary proxy or
information statement relating to the Merger and the Merger Agreement and use
its best efforts (A) to obtain and furnish the information required to be
included by it in the Proxy Statement (as hereinafter defined) and, after
consultation with Purchaser, respond promptly to any comments made by the
Commission with respect to the preliminary proxy or information statement, and
cause a definitive proxy or information statement, including any amendment or
supplement thereto (the "Proxy Statement") to be mailed to its stockholders at
the earliest practicable time following the expiration or termination of the
Offer and (B) subject to its fiduciary duties as unanimously determined in
good faith by the Board, based as to legal matters on the written advice of
legal counsel, to obtain the necessary approvals by its stockholders of the
Merger, the Merger Agreement and the Transactions. At such meeting, Purchaser
and its affiliates will vote, or cause to be voted, all Shares owned by them
in favor of approval and adoption of the Merger and the Merger Agreement and
the Transactions, and include in the Proxy statement (as hereinafter defined)
(i) the recommendation of the Board of the Company that stockholders of the
Company vote in favor of the approval of the Merger and the approval and
adoption of the Merger Agreement and (ii) the written opinion of the Financial
Advisor that the cash or combination of cash and retained Shares to be
received by the holders of Shares (other than Purchaser and the Management
Stockholders) pursuant to the Merger Agreement is fair from a financial point
of view to such holders.
Recommendation. The Company represents in the Merger Agreement that the
Board of Directors of the Company has (i) determined that the Merger Agreement
and the Transactions, including the Offer and the Merger, are fair to, and in
the best interests of, the stockholders of the Company, (ii) approved the
Merger Agreement and the Transactions, including the Offer and the Merger, in
all respects, (iii) has taken all action under the Rights Agreement to make
the representations and warranties contained in Section 6.13 of the Merger
Agreement true and correct in all respects, and (iv) resolved to recommend
that the stockholders of the Company accept the Offer, and approve and adopt
the Merger Agreement and the Merger. The recommendation of the Board may be
withdrawn, modified or amended to the extent that the Board by a majority vote
determines in its good faith judgment, based as to legal matters on the advice
of legal counsel, that the Board is required to do so in the exercise of its
fiduciary duties. The Company has further represented that the Financial
Advisor has delivered to the Board of Directors its written opinion that the
consideration to be received by the Company's stockholders pursuant to the
Offer and/or the consideration to be received by the Company's stockholders
pursuant to the Merger (other than Purchaser and the Management Stockholders)
is fair from a financial point of view to such stockholders.
Interim Operations; Covenants. Pursuant to the Merger Agreement, the Company
has agreed that, except (i) as expressly contemplated by the Merger Agreement,
(ii) as agreed to in writing by Purchaser or (iii) for the consummation of the
financing of the Transactions pursuant to and in accordance with the terms of
the Financing Documents (as defined in the Merger Agreement), during the
period from the date of the Merger Agreement to the time persons designated or
elected by Purchaser or any of its respective affiliates will constitute a
majority of the Board, the Board will not permit the Company or any of its
Subsidiaries (as defined in the Merger Agreement) to conduct its operations
otherwise than in the ordinary course of business consistent with past
33
practice, and the Board will not, without the prior written consent of
Purchaser, permit the Company or any of its Subsidiaries to: (a) amend or
propose to amend its certificate of incorporation or by-laws; (b) authorize
for issuance, issue, sell, deliver, or agree or commit to issue, sell or
deliver, dispose of, encumber or pledge (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase
or otherwise) any stock of any class or any securities, except as required by
agreements with the Company's employees under the benefit plans as in effect
as of the date of the Merger Agreement or pursuant to the Rights Agreement, or
amend any of the terms of any such securities or agreements outstanding as of
the date of the Merger Agreement, except as specifically contemplated by the
Merger Agreement; (c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution (whether
in cash, stock or property or any combination thereof) in respect of its
capital stock, or redeem or otherwise acquire any of its securities or any
securities of its Subsidiaries; (d)(i) incur or assume any long-term or short-
term debt or issue any debt securities except for borrowings under existing
lines of credit in the ordinary course of business and in amounts not material
to the Company and its Subsidiaries taken as a whole; (ii) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person except in
the ordinary course of business consistent with past practice and in amounts
not material to the Company and its Subsidiaries, taken as a whole, and except
for obligations of wholly owned Subsidiaries of the Company to the Company or
to other wholly owned Subsidiaries of the Company; (iii) make any loans,
advances or capital contributions to, or investments in, any other person
(other than to wholly owned Subsidiaries of the Company or customary loans or
advances to employees in the ordinary course of business consistent with past
practice and in amounts not material to the maker of such loan or advance) or
make any change in its existing borrowing or lending arrangements for or on
behalf of any such person, whether pursuant to an employee benefit plan or
otherwise; (iv) pledge or otherwise encumber shares of capital stock of the
Company or any of its Subsidiaries; or (v) mortgage or pledge any of its
material assets, tangible or intangible, or create or suffer to exist any
material Lien thereupon; (e) adopt a plan of complete or partial liquidation
or adopt resolutions providing for the complete or partial liquidation,
dissolution, consolidation, merger, restructuring or recapitalization of the
Company or any of its Subsidiaries; (f) (i) except as may be required by law
or as contemplated by the Merger Agreement, enter into, adopt or pay, agree to
pay, grant, issue, accelerate or accrue salary or other payments or benefits
pursuant to, or amend or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase agreement, pension,
retirement, deferred compensation, employment, severance, welfare, insurance
or other employee benefit agreement, trust, plan, fund or other arrangement
for the benefit or welfare of any director, officer or employee in any manner;
or (ii) (except for normal increases in the ordinary course of business
consistent with past practice that, in the aggregate, do not result in a
material increase in benefits or compensation expense to the Company, and as
required under existing agreements or in the ordinary course of business
consistent with past practice) increase in any manner the compensation or
fringe benefits of any director, officer or employee or pay any benefit not
required by any plan and arrangement as in effect as of the date of the Merger
Agreement (including, without limitation, the granting of stock appreciation
rights or performance units); (g) acquire, sell, transfer, lease, encumber or
dispose of any assets outside the ordinary course of business or any assets
which in the aggregate are material to the Company and its Subsidiaries taken
as a whole, or enter into any commitment or transaction outside the ordinary
course of business consistent with past practice which would be material to
the Company and its Subsidiaries taken as a whole; (h) except as may be
required as a result of a change in law or in generally accepted accounting
principles, change any of the accounting principles or practices used by it;
(i) revalue in any material respect any of its assets, including, without
limitation, writing down the value of inventory or writing-off notes or
accounts receivable other than in the ordinary course of business; (j)(A)
acquire (by merger, consolidation, or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof or
any equity interest therein; (B) enter into any contract or agreement other
than in the ordinary course of business consistent with past practice which
would be material to the Company and its Subsidiaries taken as a whole; (C)
authorize any new capital expenditure or expenditures which, individually, is
in excess of $50,000 or, in the aggregate, are in excess of $100,000; or (D)
enter into or amend any contract, agreement, commitment or arrangement
providing for the taking of any action that would be prohibited hereunder; (k)
make any tax election (unless required by law) or settle or compromise any
income tax liability of the Company or any of its Subsidiaries,
34
except if such action is taken in the ordinary course of business, and, in any
event, the Company will consult with Purchaser before filing or causing to be
filed any tax return of the Company or before executing or causing to be
executed any agreement or waiver extending the period for assessment or
collection of any taxes of the Company; (l) pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business of liabilities reflected or reserved against
in, or contemplated by, the consolidated financial statements (or the notes
thereto) of the Company and its Subsidiaries or incurred in the ordinary
course of business consistent with past practice; (m) permit any insurance
policy naming it as a beneficiary or a loss payable payee to be cancelled or
terminated without notice to Purchaser except in the ordinary course of
business and consistent with past practice unless the Company will have
obtained a comparable replacement policy; (n) settle or compromise any pending
or threatened suit, action or claim relating to the Transactions; or (o) take,
or agree in writing or otherwise to take, any of the actions described in
clauses (a) through (n) above or any action which would make any of the
representations or warranties of the Company contained in the Merger Agreement
untrue or incorrect as of the date when made or would result in any of the
conditions set forth in Annex A to the Merger Agreement not being satisfied.
Acquisition Proposals. Under the Merger Agreement, neither the Company nor
any of its Subsidiaries will, directly or indirectly, through any officer,
director, employee, agent or otherwise, solicit, initiate or encourage the
submission of any proposal or offer from any Person (as defined in the Merger
Agreement) relating to any acquisition or purchase of all or (other than in
the ordinary course of business) any portion of the assets of, or any equity
interest in, the Company or any of its Subsidiaries or any recapitalization,
business combination or similar transaction with the Company or any of its
Subsidiaries (any communication with respect to the foregoing being an
"Acquisition Proposal") or participate in any negotiations regarding, or
furnish to any other Person any information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate or
encourage any effort or attempt by any other Person to do or seek any of the
foregoing; provided, however, that, at any time prior to the purchase of
Shares by the Company pursuant to the Offer, the Company may furnish
information to, and negotiate or otherwise engage in discussions with, any
party who delivers a written Acquisition Proposal which was not solicited or
encouraged after the date of the Merger Agreement if the Board by majority
vote determines in good faith (i) after consultation with and receipt of
advice from its outside legal counsel, that failing to take such action is
reasonably determined to constitute a breach of the fiduciary duties of the
Board under applicable law, (ii) after consultation with and receipt of
written advice from the Financial Advisor or another nationally recognized
investment banking firm, that such proposal is more favorable to the Company's
stockholders from a financial point of view than the Transactions (including
any adjustment to the terms and conditions proposed by Purchaser in response
to such Acquisition Proposal), (iii) that sufficient commitments have been
obtained with respect to such Acquisition Proposal that the Board reasonably
expects a transaction pursuant to such Acquisition Proposal could be
consummated and (iv) that such Acquisition Proposal is not subject to any
regulatory approvals that could reasonably be expected to prevent
consummation. In connection with any party's Acquisition Proposal, the Company
will enter into a confidentiality agreement with such party, which
confidentiality agreement will have terms and conditions that will be no less
favorable to the Company than the terms and provisions contained in that
certain Confidentiality Agreement by and between the Company and Purchaser or
its affiliate. From and after the execution of the Merger Agreement, the
Company will promptly advise Purchaser of the receipt, directly or indirectly,
of any inquiries, discussions, negotiations, or proposals relating to an
Acquisition Proposal (including the material terms thereof and the identity of
the other party or parties involved) and furnish to Purchaser within 48 hours
of such receipt an accurate description of all material terms (including any
changes or adjustments to such terms as a result of negotiations or otherwise)
of any such written proposal. The Company will promptly provide to Purchaser
any material non-public information regarding the Company provided to any
other party, which information was not previously provided to Purchaser. In
addition, the Company will promptly advise Purchaser, in writing, if the Board
makes any determination as to any Acquisition Proposal as contemplated by the
proviso to the first sentence of this paragraph and will keep Purchaser
informed, on a current basis, of the status of any Acquisition Proposal.
Notwithstanding the foregoing, the Company will be permitted to take such
actions as may be required to comply with Rule 14e-2 of the Exchange Act.
35
Indemnification and Insurance. Pursuant to the Merger Agreement, Purchaser
agrees that all rights to indemnification or exculpation now existing in favor
of the directors, officers, employees and agents of the Company and its
Subsidiaries as provided in their respective charters or by-laws or otherwise
in effect as of the date of the Merger Agreement with respect to matters
occurring prior to the consummation of the last to occur of any of the
Transactions will survive such consummation and will continue in full force
and effect. To the maximum extent permitted by the DGCL, such indemnification
will be mandatory rather than permissive and the Company or the Surviving
Corporation, as the case may be, will advance expenses in connection with such
indemnification. Purchaser will cause the Company or the Surviving
Corporation, as the case may be, to maintain in effect for not less than six
years from the consummation of the last to occur of any of the Transactions,
the policies of the directors' and officers' liability and fiduciary insurance
most recently maintained by the Company (provided that the Surviving
Corporation may substitute therefor policies of at least the same coverage
containing terms and conditions which are no less advantageous to the
beneficiaries thereof so long as such substitution does not result in gaps or
lapses in coverage) with respect to matters occurring prior to the
consummation of the last to occur of any of the Transactions to the extent
available, provided that in no event will the Company or the Surviving
Corporation, as the case may be, be required to expend more than an amount per
year equal to 150% of the current annual premiums paid by the Company (the
"Premium Amount") to maintain or procure insurance coverage pursuant hereto
and further provided that if the Surviving Corporation is unable to obtain the
required insurance, the Surviving Corporation will obtain as much comparable
insurance as is available for the Premium Amount per year. The Company agrees
to indemnify and hold harmless Purchaser and its affiliates (as that term is
defined in the Securities Act of 1933, as amended (the "Securities Act")),
successors, assigns, and the agents (including, without limitation, financing
sources and their affiliates) and employees of any of them (collectively, the
"Purchaser Indemnified Parties"), from and against any and all costs,
expenses, losses, damages and liabilities (including, without limitation,
reasonably attorneys' fees and expenses) suffered by any of the Purchaser
Indemnified Parties (other than with respect to (i) a claim arising directly
from the gross negligence or willful misconduct of a Purchaser Indemnified
Party or (ii) a claim of breach by Purchaser of the Merger Agreement or any
confidentiality agreement with the Company to which Purchaser is a party) to
the extent resulting from, arising out of, or incurred with respect to, any
litigation, legal action, arbitration proceeding, material demand, material
claim or investigation against any of the Purchaser Indemnified Parties in
connection with Purchaser's proposal to acquire Shares of the Company as set
forth in the Merger Agreement, or in connection with any Acquisition Proposal
relating to Purchaser or any circumstances related thereto.
Representations and Warranties. The Merger Agreement contains various
representations and warranties of the parities thereto, including
representations by the Company as to, among other things, corporate existence
and good standing, organization, capitalization, corporate authorization,
financial statements, public filings, consents and approvals, conduct of
business, employee benefit plans, intellectual property, labor matters,
compliance with laws, tax matters, litigation, environmental matters, material
contracts, potential conflicts of interest, brokers' fees, real property and
leases, title and conditions of properties, insurance, accounts receivable and
inventory, undisclosed liabilities, certain business practices, product
liability, information in the Proxy Statement and the absence of any material
adverse effect on the Company since January 31, 1998. In addition, the Company
has represented that, since January 1, 1998, no material licensor, vendor,
supplier, licensee or customer of the Company or any of its Subsidiaries has
cancelled or otherwise modified (in a manner materially adverse to the
Company) its relationship with the Company or its Subsidiaries and, to the
Company's knowledge, (i) no such person has notified the Company of its
intention to do so, and (ii) the consummation of the Transactions will not
adversely affect any of such relationships. In addition, Purchaser represented
as to, among other things, corporate existence and good standing, corporate
authorization, consents and approvals, information to be included in public
filings, the financing commitments referred to in Section 7.5 of the Merger
Agreement and brokers' fees.
Termination. The Merger Agreement may be terminated and the Transactions may
be abandoned at any time before the Effective Time notwithstanding any
requisite approval and adoption of the Merger Agreement and the Transactions
by the stockholders of the Company:
36
(a) by mutual written consent duly authorized by the Board of Managers of
Purchaser and the directors of each of Acquisition Sub and the Company;
(b) by Purchaser or the Company if (i) any court or other governmental
body of competent jurisdiction will have issued a final order, decree or
ruling (which order, decree or ruling the parties will use their best
efforts to lift) or taken any other final action restraining, enjoining or
otherwise prohibiting the Offer or the Merger and such order, decree,
ruling or other action is or will have become final and nonappealable or
(ii) the Effective Time will not have occurred on or before December 31,
1998; provided, however, that the right to terminate the Merger Agreement
under this provision will not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such
date;
(c) by Purchaser if due to an occurrence or circumstance which would
result in a failure to satisfy any of the conditions set forth in Annex A
to the Merger Agreement, the Company will have (A) failed to commence the
Offer within two (2) business days of Purchaser's request, but in no event
later than ten business days from the date of the Merger Agreement, (B)
terminated the Offer without having accepted any Shares for payment
thereunder, or (C) failed to pay for Shares pursuant to the Offer by
October 31, 1998, unless, in each case, such failure to commence the Offer
or pay for Shares (whether before or after termination of the Offer) will
have been caused by or resulted from a material breach of any of
Purchaser's representations, warranties or covenants, which breach cannot
be or has not been cured within thirty (30) days following receipt of
written notice of such breach;
(d) by the Company if (i) due to an occurrence or circumstance which
would result in a failure to satisfy any of the conditions set forth in
Annex A to the Merger Agreement, the Company will have (A) failed to
commence the Offer within the time period prescribed in clause (c) above,
(B) terminated the Offer without having accepted any Shares for payment or
(C) failed to pay for Shares pursuant to the Offer by October 31, 1998,
unless, in each case, such failure to commence the Offer or pay for Shares
(whether before or after termination of the Offer) will have been caused by
or resulted from a material breach of any of the Company's representations,
warranties or covenants, or (ii) prior to the purchase of Shares pursuant
to the Offer, a corporation, partnership, person or other entity or group
will have made a bona fide offer that the Board by majority vote in good
faith determines (A) after consultation with and receipt of advice from its
outside legal counsel, that failing to take such action is reasonably
determined to constitute a breach of the fiduciary duties of the Board
under applicable law, and (B) after consultation with and receipt of
written advice from the Financial Advisor or another nationally recognized
investment banking firm, that such proposal is more favorable to the
Company's stockholders from a financial point of view than the Offer and
the Merger (including any adjustment to the terms and conditions proposed
by Purchaser in response to such bona fide offer), provided that such
termination under clause (ii) will not be effective until payment of the
fee required by Section 10.3(a) of the Merger Agreement;
(e) by Purchaser prior to the purchase of Shares pursuant to the Offer,
if (i) there has been a material breach of any of the Company's
representations, warranties or covenants which breach (A) would give rise
to the failure of a condition set forth in Annex A to the Merger Agreement
and (B) cannot be or has not been cured within thirty (30) days following
receipt of written notice of such breach, (ii) the Company Board of
Directors has withdrawn, modified, or changed (including by amendment of
the Schedule 13E-4) its recommendation or approval in respect of the Merger
Agreement or the Offer in a manner adverse to Purchaser, or has adopted any
resolution to effect any of the foregoing, (iii) the Board has recommended
any proposal other than Purchaser's in respect of an Acquisition Proposal,
(iv) the Company has exercised a right with respect to an Acquisition
Proposal and has, directly or through its representatives, continued
discussions with any third party concerning an Acquisition Proposal for
more than ten business days after the date of receipt of such Acquisition
Proposal, (v) an Acquisition Proposal that is publicly disclosed has been
commenced, publicly proposed or communicated to the Company which contains
a proposal as to price (without regard to whether such proposal specifies a
specific price or a range of potential prices) and the Company has not
rejected such proposal within ten business days of the earlier to occur of
(A) the Company's receipt of such Acquisition Proposal and (B) the date
such Acquisition Proposal first becomes
37
publicly disclosed, (vi) any Person or group (as defined in Section
13(d)(3) of the Exchange Act) other than Purchaser or any of their
respective subsidiaries or affiliates has become the beneficial owner of
more than 15% of the outstanding Shares (either on a primary or a fully
diluted basis); provided, however, that such provision does not apply to
any Person that owns more than 15% of the outstanding Shares on the date of
the Merger Agreement; provided, further, that such Person does not increase
its beneficial ownership beyond the number of Shares such Person
beneficially owned on the date of the Merger Agreement, or (vii) the
Minimum Condition has not been satisfied by the expiration date of the
Offer and on or prior to such date an entity or group (other than
Purchaser) has made and not withdrawn a proposal with respect to an
Acquisition Proposal; or
(f) by the Company if there has been a material breach of any of
Purchaser's representations, warranties or covenants which breach cannot be
or has not been cured within thirty (30) days of the receipt of written
notice thereof.
Termination Fee and Expenses. (a) In the event that (i) Purchaser has
terminated the Merger Agreement pursuant to (e) or (f) of Section 10.1 thereof
and within 12 months following the date of any such termination the Company
enters into an Acquisition Proposal with a third party or an Acquisition
Proposal with respect to the Company is consummated; or (ii) the Company has
terminated the Merger Agreement pursuant to clause (d)(ii) of the Termination
section above, then the Company will pay to Purchaser, within one business day
following the execution and delivery of such agreement or such occurrence, as
the case may be, or simultaneously with such termination pursuant to (d)(ii)
of the Termination section above, a termination fee (the "Termination Fee"),
in cash, of $3,500,000; provided, however, that the Company in no event will
be obligated to pay more than one such Termination Fee with respect to all
such agreements and occurrences and such termination.
(b) Upon the termination of the Merger Agreement for any reason prior to the
purchase of Shares by the Company pursuant to the Offer (other than
termination by the Company pursuant to Section 10.1(f) of the Merger
Agreement) the Company will reimburse Purchaser and its affiliates (not later
than one business day after submission of statements therefor) for all actual
documented out-of-pocket fees and expenses, not to exceed $1,000,000, actually
and reasonably incurred by any of them or on their behalf in connection with
the Offer and the Merger and the consummation of all transactions contemplated
by the Merger Agreement (including, without limitation, fees payable to
financing sources, investment bankers, counsel to any of the foregoing, and
accountants).
Fees and Expenses. The Merger Agreement provides that upon the consummation
of the Offer, all costs and expenses incurred by each party thereto in
connection with the Merger Agreement and the transactions contemplated thereby
(including, without limitation, fees and disbursements of counsel, financial
advisors and accountants) and a transaction fee of $2,380,000 to Purchaser (or
such lesser amount as Purchaser will consent to in writing) will be paid by
the Company or the Company will promptly reimburse such party, as the case may
be. Except as specifically provided in Section 10.3 of the Merger Agreement,
the Merger Agreement provides that each party thereto will bear its own
expenses in connection with the Merger Agreement and the Transactions.
Amendments and Modifications. Subject to applicable law, the Merger
Agreement may be amended by action taken by the Company, Purchaser at any time
before or after approval of the Merger by the stockholders of the Company (if
required by applicable law) but, after any such approval, no amendment will be
made which requires the approval of such stockholders under applicable law
without such approval.
STOCKHOLDER AGREEMENT.
The following is a summary of the Stockholder Agreement, the form of which
is attached as an exhibit to the Merger Agreement, which is filed as an
exhibit to the Schedule 13E-4 filed by the Company with the Commission in
connection with the Offer. Such summary is qualified in its entirety by
reference to the Stockholder Agreement.
As a condition and inducement to Purchaser's entering into the Merger
Agreement and incurring the obligations therein, each of Joseph Piazza, Sr.,
James J. Kelly, Jr., Lionel M. Allan, Joseph F. Keenan, R. Steven Fisk, Joseph
P. Piazza, Jr., David Clark, Lee Katsuda, Frances Mora, Dennis Navarra, Audy
Sisk, Nate Stewart
38
and Rick Saunders (collectively, the "Management Stockholders") has entered
into a Stockholder Agreement, dated as of the date of the Merger Agreement,
with Purchaser in the form attached to the Merger Agreement as Exhibit A (the
"Stockholder Agreement"). Under the Stockholder Agreement, (a) not later than
immediately prior to consummation of the Offer, each Management Stockholder
will exercise (or will be deemed to have exercised) certain of his Stock
Options as set forth on Annex I to the Stockholder Agreement pursuant to a
cashless exercise procedure whereby that number of Shares set forth in Column
D of Annex I to the Stockholder Agreement will be issued by the Company to
such Management Stockholder (individually and collectively, the "Management
Option Shares"). With respect to any Stock Option not so exercised, each
Management Stockholder agrees and consents to the cancellation of such Stock
Option in exchange for certain consideration as set forth in Section 4.9 of
the Merger Agreement; (b) each Management Stockholder will not tender into the
Offer the number of Shares set forth opposite his name in Column D of Annex I
to the Stockholder Agreement; (c) each Management Stockholder will tender into
the Offer all remaining Shares set forth on Annex I as being owned by or
issuable to such Management Stockholder.
The Stockholder Agreement also provides that, prior to consummation of the
Offer, each of the Management Stockholders who is an employee of the Company
and Purchaser agree to use their good faith to negotiate and enter into
agreements with respect to the Shares that will be retained by such Management
Stockholders following the consummation of the Transactions, substantially in
accordance with the terms and conditions set forth in Exhibit A to the
Stockholder Agreement. Pursuant to such agreements, in the event of a
termination of the executive's service for any reason prior to an initial
public offering of the Company's common stock, all shares and options owned by
the executive are to be subject to a right exercisable by the executive to
cause the Company to purchase such Shares and options (a "put") and a right
exercisable by the Company to cause the executive to sell such Shares and
options to the Company (a "call"), in each case within 90 days of the relevant
termination date. If such termination occurs on or prior to the first
anniversary of the closing of the acquisition (the "Closing"), then the price
per share paid upon the exercise of a put right or a call right will be $21.75
(less the exercise price in the case of a put or a call of an option). If a
termination of an executive's service occurs after the first anniversary of
the Closing but prior to the third anniversary and was a result of executive's
resignation or executive's termination for cause by the Company, then the
price per share paid upon exercise of a put right or call right will be the
lesser of (x) $21.75 plus 7% compounded annually from the Closing or (y) fair
market value as determined in good faith by the Board based upon the
enterprise value of the Company divided by its fully diluted shares
outstanding ("Fair Market Value") (less the exercise price in the case of a
put or call of an option). If a termination of an executive's service occurs
after the first anniversary of the Closing and was a consequence of death,
permanent disability or a termination by the Company other than for cause or
occurs for any reason on or after the third anniversary of the Closing, then
the price per share paid upon the exercise of a put right or call right will
be Fair Market Value (less the exercise price in the case of a put or call of
an option).
2. RELATED PARTY TRANSACTIONS. Commencing in February 1997, Joseph Piazza,
Sr., currently President and Chief Executive Officer of the Company, served as
a consultant to the Company to oversee the operations of its German
subsidiary, Custom Chrome Europe GmbH. For his services, Mr. Piazza was paid
$10,000 per month in consulting fees plus reimbursement of his living
expenses. Such consulting fees totaled $75,000 in the year ended January 31,
1998. Mr. Piazza ceased to serve as a consultant to the Company in October
1997.
Lionel M. Allan served as a legal consultant for the Company during the
fiscal year ended January 31, 1998. For his services, Mr. Allan received fees
of $5,000 per month through October 31, 1997 and $6,750 per month from
November 1, 1997 through January 31, 1998. In addition, he received a $1,000
per month office allowance. Such fees and office allowance totaled $77,250 for
the year ended January 31, 1998. Mr. Allan continues to serve as a legal
consultant to the Company.
In January 1998, the Company hired Joseph P. Piazza, Jr., the son of the
President and Chief Executive Officer, as Director of Outside Sales. In
February 1998 he was named Vice President, Sales. Mr. Piazza, Jr.'s annual
salary is $100,000.
The Company provides coverage under its group medical plan for both of the
Company's non-employee directors, Lionel M. Allan and Joseph F. Keenan, at a
cost of approximately $700 per month per director.
39
3. BENEFICIAL OWNERSHIP OF COMMON STOCK. The following table sets forth
information known to the Company regarding the beneficial ownership of the
outstanding Common Stock as of June 28, 1998, by (i) all persons who are
beneficial owners of 5% or more of the Common Stock, (ii) each director, (iii)
each senior executive officer and (iv) all current directors and executive
officers as a group.
SHARES
BENEFICIALLY
OWNED
---------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ ------- -------
Golden Cycle, L.L.C.(1)
4025 Crooked Hill Road
Harrisburg, PA 17110......................................... 528,100 10.21%
FMR Corp.(2)
82 Devonshire Street
Boston, MA 02109............................................. 526,100 10.17
State of Wisconsin Investment Board(3)
121 E. Wilson Street
Madison, WI 53702............................................ 470,300 9.09
Heartland Advisors, Inc.(4)
790 North Milwaukee Street
Milwaukee, WI 53202.......................................... 452,000 8.74
Dimensional Fund Advisors Inc.(5)
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401............................... 302,600 5.85
Investment Counselors of Maryland, Inc.(6)
803 Cathedral Street
Baltimore, MD 21201-5297..................................... 257,900 4.98
Joseph Piazza(7).............................................. 102,655 1.95
James J. Kelly, Jr.(8)........................................ 88,073 1.67
R. Steven Fisk(9)............................................. 77,628 1.48
Lionel M. Allan(10)........................................... 41,373 *
Joseph F. Keenan(11).......................................... 31,415 *
All current directors and executive officers as a group (nine
persons)(12)................................................. 387,520 6.9
- --------
* Less than one percent (1%)
(1) Based on Schedule 13D, dated March 23, 1998, filed by Golden Cycle,
L.L.C.
(2) Based on Schedule 13G/A, dated February 14, 1998, filed by FMR Corp.
("FMR"). Represents shares beneficially owned by Fidelity Management &
Research Company, a wholly-owned subsidiary of FMR, as a result of its
serving as an investment advisor to various investment accounts.
(3) Based on Schedule 13G, dated January 20, 1998, filed by the State of
Wisconsin Investment Board.
(4) Based on Schedule 13G, dated January 23, 1998 filed by Heartland
Advisors, Inc.
(5) Based on Schedule 13G, dated February 6, 1997, filed by Dimensional Fund
Advisors Inc.
(6) Based on Schedule 13G, dated March 19, 1998 filed by Investment
Counselors of Maryland, Inc.
(7) Includes 102,655 Shares issuable upon the exercise of options which are
currently exercisable or which will become exercisable within 60 days
after June 28, 1998, without giving effect to the Transactions.
(8) Includes 84,176 Shares issuable upon the exercise of options which are
currently exercisable or which will become exercisable within 60 days
after June 28, 1998, without giving effect to the Transactions.
(9) Includes 62,933 Shares issuable upon exercise of options which are
currently exercisable or which will become exercisable within 60 days
after June 28, 1998, without giving effect to the Transactions.
(10) Represents 41,373 Shares issuable upon the exercise of options which are
currently exercisable or which will become exercisable within 60 days
after June 28, 1998, without giving effect to the Transactions.
(11) Includes 28,915 Shares issuable upon the exercise of options which are
currently exercisable or which will become exercisable within 60 days
after June 28, 1998, without giving effect to the Transactions.
(12) Includes 365,732 Shares issuable upon the exercise of options which are
currently exercisable or which will become exercisable within 60 days
after June 28, 1998, without giving effect to the transactions. A total
of 52,191 of the options are expected to be exercised prior to the
consummation of the Offering.
40
THE TENDER OFFER
1. TERMS OF THE OFFER. Upon the terms and subject to the conditions of the
Offer, the Company will accept for payment and pay for all Shares validly
tendered prior to the Expiration Date and not theretofore withdrawn in
accordance with "--Section 4. Withdrawal Rights." The term "Expiration Date"
will mean 5:00 p.m., New York City time, on Wednesday, August 12, 1998, unless
and until the Company, with Purchaser's prior written consent, in accordance
with the terms of the Merger Agreement, will have extended the period of time
for which the Offer is open, in which event the term "Expiration Date" will
mean the latest time and date at which the Offer, as so extended by the
Company, will expire.
The Offer is conditioned upon, among other things, the satisfaction of the
Minimum Condition, and the expiration or termination of all waiting periods
imposed by the HSR Act. See "--Section 12. Certain Conditions of the Offer"
and "--Section 13. Certain Legal Matters." If such conditions are not
satisfied prior to the Expiration Date, the Company, subject to the prior
written consent of Purchaser, reserves the right (but will not be obligated)
to (i) decline to purchase any of the Shares tendered and terminate the Offer,
subject to the terms of the Merger Agreement, (ii) waive any of the conditions
to the Offer, to the extent permitted by applicable law and the provisions of
the Merger Agreement, and, subject to complying with applicable rules and
regulations of the Commission, purchase all Shares validly tendered or (iii)
subject to the terms of the Merger Agreement, extend the Offer and, subject to
the right of stockholders to withdraw Shares until the Expiration Date, retain
the Shares which will have been tendered during the period or periods for
which the Offer is open or extended.
Subject to the terms of the Merger Agreement, the Company expressly reserves
the right, in its sole discretion (but subject to the terms of the Merger
Agreement), at any time or from time to time, (i) to extend the period of time
during which the Offer is open and thereby delay acceptance for payment of,
and the payment for, any Shares, by giving oral or written notice of such
extension to the Depositary and (ii) to amend, with Purchaser's prior written
consent, the Offer in any respect (including, without limitation, by
decreasing or increasing the consideration offered in the Offer (the "Offer
Price") to holders of Shares and/or by decreasing the number of Shares being
sought in the Offer), by giving oral or written notice of such amendment to
the Depositary. The rights reserved by the Company in this paragraph are in
addition to the Company's rights to terminate the Offer as described in "--
Section 12. Certain Conditions of the Offer." Any extension, amendment or
termination will be followed as promptly as practicable by public announcement
thereof, the announcement in the case of an extension to be issued no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date in accordance with the public
announcement requirements of Rule 14d-4(c) under the Exchange Act. Without
limiting the obligation of the Company under such Rule or the manner in which
the Company may choose to make any public announcement, the Company currently
intends to make announcements by issuing press releases to the Dow Jones News
Service. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE OFFER PRICE TO BE
PAID BY THE COMPANY FOR THE SHARES, REGARDLESS OF ANY EXTENSION OF THE OFFER
OR ANY DELAY IN MAKING SUCH PAYMENT.
The Merger Agreement provides that, at Purchaser's request, the Company will
increase the Per Share Amount and make such other changes to the Offer as
Purchaser may request; provided, however, that the Company will not be
required to make any changes that decrease the Per Share Amount, change the
form of consideration payable in the Offer or reduce the maximum number of
Shares to be purchased in the Offer.
If the Company extends the Offer, or if the Company (whether before or after
its acceptance for payment of Shares) is delayed in its purchase of or payment
for Shares or is unable to pay for Shares pursuant to the Offer for any
reason, then, without prejudice to the Company rights under the Offer, the
Depositary may retain tendered Shares on behalf of the Company and such Shares
may not be withdrawn except to the extent tendering stockholders are entitled
to withdrawal rights as described in "--Section 4. Withdrawal Rights."
However, the ability of the Company to delay the payment for Shares which the
Company has accepted for payment is limited by Rule 14e-l(c) under the
Exchange Act, which requires that a bidder pay the consideration offered or
return the securities deposited by or on behalf of holders of securities
promptly after the termination or withdrawal of the Offer.
41
If the Company makes a material change in the terms of the Offer or the
information concerning the Offer or waives a material condition of the Offer,
the Company will disseminate additional tender offer materials and extend the
Offer to the extent required by Rules 13e-3, 13e-4, and 14e-1 under the
Exchange Act. The minimum period during which the Offer must remain open
following material changes in the terms of the Offer or information concerning
the Offer, other than a change in price or a change in percentage of
securities sought, will depend upon the facts and circumstances then existing,
including the relative materiality of the changed terms or information. In a
public release, the Commission has stated that in its view an offer must
remain open for a minimum period of time following a material change in the
terms of the Offer and that waiver of a material condition, such as the
Minimum Condition, is a material change in the terms of the Offer. The release
states than an offer should remain open for a minimum of five business days
from the date a material change is first published, sent or given to security
holders and that, if material changes are made with respect to information not
materially less significant than the offer price and the number of shares
being sought, a minimum of ten business days may be required to allow adequate
dissemination and investor response. The requirement to extend the Offer will
not apply to the extent that the number of business days remaining between the
occurrence of the change and the then-scheduled Expiration Date equals or
exceeds the minimum extension period that would be required because of such
amendment. As used in this Offer to Purchase, "business day" has the meaning
set forth in Rule 14d-1 under the Exchange Act.
This Offer to Purchase and the related Letter of Transmittal will be mailed
by the Company to record holders of Shares and will be furnished by the
Company to brokers, dealers, banks and similar persons whose names, or the
names of whose nominees, appear on the stockholder lists or, if applicable,
who are listed as participants in a clearing agency's security position
listing, for subsequent transmittal to beneficial owners of Shares.
In the event that proration of tendered Shares is required, the Company will
determine the final proration factor as promptly as practicable after the
Expiration Date. Although the Company does not expect to be able to announce
the final results of such proration until approximately seven Nasdaq trading
days after the Expiration Date, it will announce preliminary results of
proration by press release as promptly as practicable after the Expiration
Time. Stockholders may obtain such preliminary information from the
Information Agent and may be able to obtain such information from their
brokers.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT. Upon the terms and subject to the
conditions of the Offer (including, if the Offer is extended or amended, the
terms and conditions of any such extension or amendment), the Company will
accept for payment and will pay, promptly after the Expiration Date, for all
Shares validly tendered prior to the Expiration Date and not properly
withdrawn in accordance with "--Section 4. Withdrawal Rights." Subject to
Purchaser's consent, all determinations concerning the satisfaction of such
terms and conditions will be within the Company's discretion, which
determinations will be final and binding. See "--Section 1. Terms of the
Offer" and "--Section 12. Certain Conditions of the Offer." The Company
expressly reserves the right, with Purchaser's prior written consent, to delay
acceptance for payment of or payment for Shares in order to comply in whole or
in part with any applicable law, including, without limitation, the HSR Act.
Any such delays will be effected in compliance with Rule 14e-l(c) under the
Exchange Act (relating to a bidder's obligation to pay the consideration
offered or return the securities deposited by or on behalf of holders of
securities promptly after the termination or withdrawal of such bidder's
offer).
In all cases, payment for Shares accepted for payment pursuant to the Offer
will be made only after timely receipt by the Depositary of (i) certificates
for such Shares (or a timely Book-Entry Confirmation (as defined below) with
respect thereto), (ii) a Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees,
or, in the case of a book-entry transfer, an Agent's Message (as defined
below), and (iii) any other documents required by the Letter of Transmittal.
The per share consideration paid to any holder of Common Stock pursuant to the
Offer will be the highest per Share consideration paid to any other holder of
such shares pursuant to the Offer.
42
For purposes of the Offer, the Company will be deemed to have accepted for
payment, and thereby purchased, Shares properly tendered to the Company and
not withdrawn as, if and when, with Purchaser's prior written consent, the
Company gives oral or written notice to the Depositary of the Company's
acceptance for payment of such Shares. Payment for Shares accepted for payment
pursuant to the Offer will be made by deposit of the purchase price therefor
with the Depositary, which will act as agent for tendering stockholders for
the purpose of receiving payment from the Company and transmitting payment to
tendering stockholders. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE
PURCHASE PRICE TO BE PAID BY THE COMPANY FOR THE SHARES, REGARDLESS OF ANY
EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT.
If the Company is delayed in its acceptance for payment of, or payment for,
Shares or is unable to accept for payment or pay for Shares pursuant to the
Offer for any reason, then, without prejudice to the Company's rights under
the Offer (including such rights as are set forth in "--Section 1. Terms of
the Offer" and "--Section 12. Certain Conditions of the Offer") (but subject
to compliance with Rule 14e-1(c) under the Exchange Act), the Depositary may,
nevertheless, on behalf of the Company, retain tendered Shares, and such
Shares may not be withdrawn except to the extent tendering stockholders are
entitled to exercise, and duly exercise, withdrawal rights as described in "--
Section 4. Withdrawal Rights."
If any tendered Shares are not purchased pursuant to the Offer for any
reason, certificates for any such Shares will be returned, without expense to
the tendering stockholder (or, in the case of Shares delivered by book-entry
transfer of such Shares into the Depositary's account at the Book-Entry
Transfer Facility (as defined below) pursuant to the procedures set forth in
"--Section 3. Procedure for Tendering Shares," such Shares will be credited to
an account maintained at the Book-Entry Transfer Facility), as promptly as
practicable after the expiration or termination of the Offer.
3. PROCEDURE FOR TENDERING SHARES.
Valid Tender. For Shares to be validly tendered pursuant to the Offer,
either (i) a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), together with any required signature guarantees, or in the
case of a book-entry transfer, an Agent's Message, and any other required
documents, must be received by the Depositary at its address set forth on the
back cover of this Offer to Purchase prior to the Expiration Date and either
certificates for tendered Shares must be received by the Depositary at such
address or such Shares must be delivered pursuant to the procedures for book-
entry transfer set forth below (and a Book-Entry Confirmation received by the
Depositary), in each case, prior to the Expiration Date or (ii) the tendering
stockholder must comply with the guaranteed delivery procedures set forth
below.
The Depositary will establish an account with respect to the Shares at The
Depositary Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Offer within two business days after the date of this Offer to Purchase.
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Shares by causing the Book-
Entry Transfer Facility to transfer such Shares into the Depositary's account
in accordance with the Book-Entry Transfer Facility's procedure for such
transfer. However, although delivery of Shares may be effected through book-
entry transfer into the Depositary's account at the Book-Entry Transfer
Facility, the Letter of Transmittal (or facsimile thereof), properly completed
and duly executed, with any required signature guarantees, or an Agent's
Message, and any other required documents must, in any case, be transmitted
to, and received by, the Depositary at its address set forth on the back cover
of this Offer to Purchase prior to the Expiration Date, or the tendering
stockholder must comply with the guaranteed delivery procedures described
below. The confirmation of a book-entry transfer of Shares into the
Depositary's account at the Book-Entry Transfer Facility as described above is
referred to herein as a "Book-Entry Confirmation." DELIVERY OF DOCUMENTS TO
THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH THE BOOK-ENTRY TRANSFER
FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
The term "Agent's Message" means a message transmitted by the Book-Entry
Transfer Facility to, and received by, the Depositary and forming a part of a
Book-Entry Confirmation, which states that the Book-Entry Transfer Facility
has received an express acknowledgment from the participant in the Book-Entry
Transfer
43
Facility tendering the Shares that such participant has received and agrees to
be bound by the terms of the Letter of Transmittal and that the Purchaser may
enforce such agreement against the participant.
THE METHOD OF DELIVERY OF SHARES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER
FACILITY, IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. SHARES
WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY
(INCLUDING, IN THE CASE OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION).
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ENSURE TIMELY DELIVERY.
Signature Guarantees. No signature guarantee is required on the Letter of
Transmittal (i) if the Letter of Transmittal is signed by the registered
holder(s) (which term, for purposes of this Section, includes any participant
in the Book Entry Transfer Facility's systems whose name appears on a security
position listing as the owner of the Shares) of Shares tendered therewith and
such registered holder has not completed either the box entitled "Special
Delivery Instructions" or the box entitled "Special Payment Instructions" on
the Letter of Transmittal or (ii) if such Shares are tendered for the account
of a financial institution (including most commercial banks, savings and loan
associations and brokerage houses) that is a participant in the Security
Transfer Agent's Medallion Program, the New York Stock Exchange Medallion
Signature Guarantee Program or the Stock Exchange Medallion Program (each, an
"Eligible Institution" and, collectively, "Eligible Institutions"). In all
other cases, all signatures on Letters of Transmittal must be guaranteed by an
Eligible Institution. See Instructions 1 and 5 to the Letter of Transmittal.
If the certificates for Shares are registered in the name of a person other
than the signer of the Letter of Transmittal, or if payment is to be made, or
certificates for Shares not tendered or not accepted for payment are to be
returned, to a person other than the registered holder of the certificates
surrendered, then the tendered certificates for such Shares must be endorsed
or accompanied by appropriate stock powers, in either case, signed exactly as
the name or names of the registered holders or owners appear on the
certificates, with the signatures on the certificates or stock powers
guaranteed as aforesaid. See Instructions 1 and 5 to the Letter of
Transmittal.
Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to
the Offer and such stockholder's certificates for Shares are not immediately
available or the procedures for book-entry transfer cannot be completed on a
timely basis or time will not permit all required documents to reach the
Depositary prior to the Expiration Date, such stockholder's tender may be
effected if all the following conditions are met:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company, is received by
the Depositary, as provided below, prior to the Expiration Date; and
(iii) the certificates for (or a Book-Entry Confirmation with respect to)
such Shares, together with a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees
or, in the case of a book-entry transfer, an Agent's Message, and any other
required documents are received by the Depositary within three Nasdaq
trading days after the date of execution of such Notice of Guaranteed
Delivery.
The Notice of Guaranteed Delivery may be delivered by hand to the Depositary
or transmitted by telegram, facsimile transmission or mail to the Depositary
and must include a guarantee by an Eligible Institution in the form set forth
in such Notice of Guaranteed Delivery.
Notwithstanding any other provision hereof, payment for Shares accepted for
payment pursuant to the Offer will in all cases be made only after timely
receipt by the Depositary of (i) certificates for (or a timely Book-Entry
Confirmation with respect to) such Shares, (ii) a Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees or, in the case of a book-entry transfer, an Agent's
Message, and (iii) any other documents required by the Letter of Transmittal.
Accordingly, tendering stockholders may be paid at different times depending
upon when certificates for Shares or Book-Entry
44
Confirmations with respect to Shares are actually received by the Depositary.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE TO BE PAID
BY THE COMPANY FOR THE SHARES, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY
DELAY IN MAKING SUCH PAYMENT.
The valid tender of Shares pursuant to one of the procedures described above
will constitute a binding agreement between the tendering stockholder and the
Company upon the terms and subject to the conditions of the Offer.
Appointment. By executing the Letter of Transmittal as set forth above, the
tendering stockholder will irrevocably appoint designees of the Company, and
each of them, as such stockholder's attorneys-in-fact and proxies in the
manner set forth in the Letter of Transmittal, each with full power of
substitution, to the full extent of such stockholder's rights with respect to
the Shares tendered by such stockholder and accepted for payment by the
Company and with respect to any and all other Shares or other securities or
rights issued or issuable in respect of such Shares. All such proxies will be
considered coupled with an interest in the tendered Shares. Such appointment
will be effective when, and only to the extent that, the Company accepts for
payment Shares tendered by such stockholder as provided herein. Upon such
appointment, all prior powers of attorney, proxies and consents given by such
stockholder with respect to such Shares or other securities or rights will,
without further action, be revoked and no subsequent powers of attorney,
proxies, consents or revocations may be given by such stockholder (and, if
given, will not be deemed effective). The designees of the Company will
thereby be empowered to exercise all voting and other rights with respect to
such Shares and other securities or rights, including, without limitation, in
respect of any annual, special or adjourned meeting of the Company's
stockholders, actions by written consent in lieu of any such meeting or
otherwise, as they in their sole discretion deem proper.
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any tender of Shares
will be determined by the Company, in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject
any or all tenders of any Shares determined by it not to be in proper form or
the acceptance for payment of, or payment for which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right,
in its sole discretion, subject to the provisions of the Merger Agreement, to
waive, subject to prior written consent of Purchaser, any of the conditions of
the Offer or any defect or irregularity in the tender of any Shares of any
particular stockholder, whether or not similar defects or irregularities are
waived in the case of other stockholders. No tender of Shares will be deemed
to have been validly made until all defects or irregularities relating thereto
have been cured or waived. None of the Purchaser, the Depositary, the
Information Agent, the Company or any other person will be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification. Subject to the terms of
the Merger Agreement, the Company's interpretation of the terms and conditions
of the Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding.
Backup Federal Income Tax Withholding. Under the "backup withholding"
provisions of federal income tax law, unless a tendering registered holder, or
his assignee (in either case, the "Payee"), satisfies the conditions described
in Instruction 9 of the Letter of Transmittal or is otherwise exempt, the cash
payable as a result of the Offer may be subject to backup withholding tax at a
rate 31% of the gross proceeds. To prevent backup withholding, each Payee
should complete and sign the Substitute Form W-9 provided in the Letter of
Transmittal. See Instruction 9 of the Letter of Transmittal.
4. WITHDRAWAL RIGHTS. Except as otherwise provided in this Section, tenders
of Shares are irrevocable. Shares tendered pursuant to the Offer may be
withdrawn pursuant to the procedures set forth below at any time prior to the
Expiration Date and, unless theretofore accepted for payment and paid for by
the Company pursuant to the Offer, may also be withdrawn at any time after
September 4, 1998.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Depositary at
its address set forth on the back cover of this Offer to Purchase and must
45
specify the name of the person who tendered the Shares to be withdrawn, the
number of Shares to be withdrawn and the name of the registered holder of the
Shares to be withdrawn, if different from the name of the person who tendered
the Shares. If certificates for Shares have been delivered or otherwise
identified to the Depositary, then, prior to the physical release of such
certificates, the serial numbers shown on such certificates must be submitted
to the Depositary and, unless such Shares have been tendered by an Eligible
Institution, the signatures on the notice of withdrawal must be guaranteed by
an Eligible Institution. If Shares have been delivered pursuant to the
procedures for book-entry transfer as set forth in "--Section 3. Procedure for
Tendering Shares," any notice of withdrawal must also specify the name and
number of the account at the Book-Entry Transfer Facility to be credited with
the withdrawn Shares and otherwise comply with the Book-Entry Transfer
Facility's procedures. Withdrawals of tenders of Shares may not be rescinded,
and any Shares properly withdrawn will thereafter be deemed not validly
tendered for purposes of the Offer. However, withdrawn Shares may be
retendered by again following one of the procedures described in "--Section 3.
Procedure for Tendering Shares" any time prior to the Expiration Date.
All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Company, in its sole
discretion, which determination will be final and binding. None of the
Purchaser, the Company, the Depositary, the Information Agent, or any other
person will be under any duty to give notification of any defects or
irregularities in any notice of withdrawal or incur any liability for failure
to give any such notification.
5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following is a summary of
certain Federal income tax consequences to stockholders tendering Shares
pursuant to the Offer. This summary is based upon existing Federal income tax
law, which is subject to change, possibly retroactively. This summary does not
discuss all aspects of Federal income tax law that may be important to a
particular stockholder in light of such stockholder's personal investment
circumstances or to stockholders subject to special tax rules (e.g., financial
institutions, insurance companies, broker-dealers, tax-exempt organizations
and foreign taxpayers). In addition, this summary does not discuss any
foreign, state or local tax considerations. This summary assumes that
stockholders hold their Shares as capital assets (generally, property held for
investment) under the Internal Revenue Code of 1986, as amended (the "Code").
Each stockholder is urged to consult a tax advisor as to the specific tax
consequences of such stockholder's tendering Shares pursuant to the Offer,
including the application and effect of Federal, state, local and foreign
income and other tax laws.
The sale of Shares pursuant to the Offer will be a taxable transaction for
Federal income tax purposes. If any one of the three tests of section 302 of
the Code described below is satisfied, the sale of Shares will be treated as a
sale or exchange and the stockholder will generally recognize capital gain or
loss equal to the difference between the cash proceeds received for the Shares
pursuant to the Offer and the adjusted tax basis of such Shares sold pursuant
to the Offer. If the sale of Shares does not qualify as a sale or exchange,
the entire cash proceeds received by a stockholder for his Shares pursuant to
the Offer will be treated as a distribution taxable as a dividend to the
extent of the Company's current and accumulated earnings and profits as
determined for Federal income tax purposes. It is anticipated, as described
below, that most stockholders should qualify for sale or exchange treatment.
Under section 302 of the Code, a sale of Shares pursuant to the Offer will,
as a general rule, be treated as a sale or exchange if the sale (i) results in
a complete termination of the stockholder's interest in the Company, (ii) is
"substantially disproportionate" with respect to the stockholder or (iii) is
"not essentially equivalent to a dividend" with respect to the stockholder. In
determining whether any of these tests is satisfied, a stockholder must take
into account both the Shares actually owned by such stockholder and Shares
considered owned by reason of certain constructive ownership rules set forth
in section 318 of the Code. Under section 318, a stockholder will generally be
considered to own Shares that such stockholder has the right to acquire (e.g.,
pursuant to options) and Shares actually (and in some cases constructively)
owned by certain members of the stockholder's family and by certain entities
(such as corporations, partnerships, trusts and estates) in which such
stockholder, a member of such stockholder's family, or a related entity has an
interest.
46
A sale of Shares pursuant to the Offer will result in a complete termination
of a stockholder's interest in the Company if, immediately following the
disposition of Shares by the stockholder pursuant to the Offer, the
stockholder does not actually or constructively own any Shares.
The sale of Shares pursuant to the Offer will generally be "substantially
disproportionate" with respect to a stockholder if, immediately after
consummation of the Offer, such stockholder's actual and constructive
percentage ownership of Shares is less than 80% of the stockholder's actual
and constructive percentage ownership of such Shares immediately before the
sale of Shares pursuant to the Offer.
If a stockholder's sale of Shares fails to satisfy the "substantially
disproportionate" test and also fails to satisfy the "complete termination"
test, such stockholder may nevertheless satisfy the "not essentially
equivalent to a dividend" test, if the stockholder's disposition of Shares
pursuant to the Offer results in a "meaningful reduction" of the stockholder's
proportionate interest in the Company. Whether the receipt of cash by a
stockholder is "not essentially equivalent to a dividend" depends on the
particular stockholder's facts and circumstances. The Internal Revenue Service
has indicated in published rulings that even a small reduction in the
proportionate interest of a small minority stockholder in a publicly held
corporation may constitute such a "meaningful reduction" where the stockholder
exercises no control over corporate affairs. Any stockholder intending to rely
upon the "not essentially equivalent to a dividend" test should consult a tax
advisor as to its application in the stockholder's particular situation.
Because of the contemporaneous investment by Purchaser, it is anticipated
that stockholders whose Shares are purchased pursuant to the Offer should
generally satisfy the "substantially disproportionate" or "not essentially
equivalent to a dividend" test and would thus qualify for capital gain or loss
treatment.
For purposes of the foregoing tests, any acquisition or disposition of
Shares substantially contemporaneous with the Offer may be taken into account
in determining whether any of the three tests described above is satisfied.
If none of the tests described above is satisfied with respect to a
stockholder, such stockholder's receipt of cash for Shares pursuant to the
Offer will be treated as a distribution taxable as a dividend to the extent of
the current and accumulated earnings and profits of the Company. Any cash
received in excess of such earnings and profits will be treated, first, as a
return of capital to the extent of the stockholder's adjusted basis, which
will not be subject to tax, and, thereafter, as capital gain.
If all Shares tendered by a stockholder are purchased, the adjusted tax
basis of the Shares sold will be the adjusted tax basis of those that are
tendered at such price. If less than all such tendered Shares are accepted for
purchase, the adjusted tax basis will depend on adequate identification of the
Shares sold. In the absence of adequate identification, applicable regulations
provide that the Shares sold will be charged against the earliest of such
shares purchased or acquired by the stockholder.
Net capital gain (i.e., generally, capital gain in excess of capital loss)
recognized by an individual upon the sale of a capital asset that has been
held for (i) more than 18 months will generally be subject to tax at a rate
not to exceed 20%, (ii) more than 12 months but not more than 18 months will
be subject to tax at a rate not to exceed 28% and (iii) 12 months or less will
be subject to tax at ordinary income tax rates. If the Internal Revenue
Service Restructuring and Reform Act of 1998 passed by Congress is enacted
into law, the minimum holding period required to qualify for the 20% rate of
tax imposed upon net capital gain would be reduced from 18 months to 12
months. In addition, capital gain recognized by a corporate holder will be
subject to tax at the ordinary income tax rates applicable to corporations.
47
6. PRICE RANGE OF THE SHARES; DIVIDENDS ON THE SHARES. The Shares are traded
on Nasdaq under the symbol "CSTM." The following table sets forth, for each of
the calendar quarters indicated, the high and low reported sales price per
share of Common Stock on Nasdaq based on published financial sources. The
Company has never paid a cash dividend on the Common Stock.
COMMON STOCK
---------------
HIGH LOW
------ -----
Year Ended January 31, 1997
First Quarter.......................................... $ 27 1/2 $24
Second Quarter......................................... 27 7/8 22
Third Quarter.......................................... 22 5/8 16 1/4
Fourth Quarter......................................... 21 3/8 18 1/4
Year Ended January 31, 1998
First Quarter.......................................... $13 3/4 11 1/2
Second Quarter......................................... 17 15
Third Quarter.......................................... 16 13
Fourth Quarter......................................... 13 1/4 11
Year Ending January 31, 1999
First Quarter.......................................... $21 1/4 12 1/4
Second Quarter (through July 10, 1998)................. 22 3/8 19 3/4
On June 26, 1998, the last full trading day prior to the announcement of the
Offer, the last reported sales price of the Shares on Nasdaq was $21 per
Share. On July 10, 1998, the last full trading day prior to the commencement
of the Offer, the last reported sales price of the Shares on Nasdaq was $20.81
per Share. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
SHARES.
The Company's credit agreement with its lenders precludes it from declaring
or making any dividend payment or other distribution of assets on account of
any shares of any class of its capital stock except that the Company and any
wholly-owned subsidiary may declare and make dividend payments or other
distributions payable solely in Common Stock. In addition, under the terms of
the Merger Agreement, the Company is not permitted to declare or pay dividends
on the Common Stock.
7. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; STOCK LISTING; EXCHANGE
ACT REGISTRATION; MARGIN REGULATIONS.
Market for the Shares. The purchase of Shares by the Company pursuant to the
Offer is expected to reduce the number of holders of Shares and will reduce
the number of Shares that might otherwise trade publicly and, depending upon
the number of Shares so purchased, could adversely affect the liquidity and
market value of the remaining Shares held by the public.
Stock Listing. The Common Stock is quoted on Nasdaq. Depending upon the
aggregate market value and the per share price of any Shares not purchased
pursuant to the Offer, the Common Stock may no longer meet the requirements of
the National Association of Securities Dealers, Inc. (the "NASD") for
continued inclusion on Nasdaq, which requires that an issuer either (i) have
at least 750,000 publicly held shares, held by at least 400 shareholders, with
a market value of at least $5,000,000, capital and surplus (total
shareholders' equity) of at least $4 million and have a minimum bid price of
$1 or (ii) have at least 1,000,000 publicly held shares, held by at least 400
shareholders with a market value of at least $15,000,000, have a minimum bid
price of $5 and have either (A) a market capitalization of at least
$50,000,000 or (B) total assets and revenues each of at least $50,000,000. If
the Nasdaq National Market and the Nasdaq Smallcap Market were to cease to
publish quotations for the Shares, it is possible that the Shares would
continue to trade in the over-the-counter market and that price or other
quotations would be reported by other sources. The extent of the public market
for such Shares and the availability of such quotations would depend, however,
upon such factors as the number of stockholders and/or the aggregate market
value of such securities remaining at such time, the interest in maintaining a
market in the
48
Shares on the part of securities firms, the possible termination of
registration under the Exchange Act as described below, and other factors. The
Company cannot predict whether the reduction in the number of Shares that
might otherwise trade publicly would have an adverse or beneficial effect on
the market price for, or marketability of, the Shares or whether it would
cause future market prices to be greater or lesser than the Per Share Amount.
As of June 25, 1998, there were approximately 243 holders of record of Shares
and a total of 5,173,077 Shares issued and outstanding.
If Nasdaq were to delist the Common Stock, the market therefor could be
adversely affected. It is possible that such Shares would continue to trade on
other securities exchanges, or in the over-the-counter market and that price
quotations would be reported by such exchanges or through other sources. The
extent of the public market for the Common Stock and the availability of such
quotations would, however, depend upon the number of stockholders and/or the
aggregate market value of such Shares remaining at such time, the interest in
maintaining a market in such Shares on the part of securities firms, the
possible termination of registration of such Shares under the Exchange Act and
other factors. If, as a result of the purchase of the Shares pursuant to the
Offer or otherwise, the Shares no longer meet the requirement of the NASD for
continued inclusion in the Nasdaq and the Shares are no longer included in
Nasdaq, the market for, and value of, the Shares could be adversely affected.
Exchange Act Registration. The Shares are currently registered under the
Exchange Act. Registration of the Shares under the Exchange Act may be
terminated upon application of the Company to the Commission if the Shares are
neither listed on a national securities exchange nor held by 300 or more
holders of record. Termination of registration of the Shares under the
Exchange Act, assuming there are no other securities of the Company subject to
registration, would substantially reduce the information required to be
furnished by the Company to its stockholders and to the Commission and would
make certain provisions of the Exchange Act, such as the short-swing profit
recovery provisions of Section 16(b), the requirement of furnishing a proxy
statement pursuant to Section 14(a) in connection with stockholders' meetings
and the related requirement of furnishing an annual report to stockholders and
the requirements of Rule 13e-3 under the Exchange Act with respect to "going
private" transactions, no longer applicable to the Company. Furthermore, the
ability of "affiliates" of the Company and persons holding "restricted
securities" of the Company to dispose of such securities pursuant to Rule 144
or Rule 144A promulgated under the Securities Act may be impaired or
eliminated. If registration of the Common Stock under the Exchange Act were
terminated, such Shares would no longer be "margin securities" or be eligible
for continued listing on any stock exchange or for Nasdaq reporting. Purchaser
intends to cause the Company to apply for termination of registration of the
Shares under the Exchange Act as soon after the completion of the Offer as the
requirements for such termination are met.
Margin Regulations. The Shares presently are "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), which status has the effect, among other things, of
allowing brokers to extend credit on the collateral of such securities.
Depending upon factors similar to those described above regarding listing and
market quotations, it is possible that, following the Offer, the Shares would
no longer constitute "margin securities" for the purposes of the margin
regulations of the Federal Reserve Board and therefore could no longer be used
as collateral for loans made by brokers. If registration of the Shares under
the Exchange Act were terminated, the Shares would no longer be "margin
securities."
8. CERTAIN INFORMATION CONCERNING THE COMPANY.
General. The Company is the largest independent designer and supplier of
aftermarket parts and accessories for Harley-Davidson motorcycles. The
Company's organization includes its Custom Chrome division, which supplies
aftermarket parts and accessories for Harley-Davidson motorcycles, located in
Morgan Hill, California; Chrome Specialties, Inc., an aftermarket supplier of
Harley-Davidson motorcycle parts and accessories located in Fort Worth, Texas;
Custom Chrome Far East, Ltd., a product development, engineering, tooling
management and warehouse of proprietary products for the Company, located in
Taiwan; Custom Chrome Europe GmbH, a distribution company located in Germany
that specializes in aftermarket accessories
49
for Harley-Davidson motorcycles and other "cruiser" motorcycles, and Custom
Chrome Manufacturing, Inc., d/b/a Santee Industries, a manufacturer of frames
and exhaust systems and other aftermarket components for Harley-Davidson
motorcycles, located in Sylmar, California. The Company currently distributes
over 18,500 products used for customization, repair and maintenance, and
performance enhancement, including chassis, controls, dashes, fuel tanks,
seats, suspensions, tires and wheels, transmission and other parts and
accessories. The Company distributes its products to over 4,700 customers
including independent after-market retailers, Harley-Davidson franchises,
mail-order houses, motorcycle builders and foreign distributors and retailers
through six distribution centers.
The Company distributes its own products, as well as products offered by
other recognized manufacturers, such as Dunlop, Champion, Hastings, Accel,
S&S, Crane and Russell. C.C. Rider(R), Chrome Specialties(R), Custom
Chrome(R), Dallas Premium Leather(R), Dyno Power(R), Motor Factory(R),
Premium(R), RevTech(R) and Tour Ease(R) are registered trademarks of the
Company. Bullskins(TM), Highway One(TM), Jammer Cycle Products(TM),
Premium(TM), Spare Parts(TM), Texas Saddles(TM) and Global Motorsport
Group(TM) are trademarks of the Company. Harley-Davidson(R) is a registered
trademark of Harley-Davidson. All other trademarks, service marks or trade
names referred to in this Offer to Purchase are the property of their
respective owners.
Available Information. The Company is subject to the informational filing
requirements of the Exchange Act and, in accordance therewith, is obligated to
file reports, proxy statements and other information with the Commission
relating to its business, financial condition and other matters. Information
as of particular dates concerning the Company's directors and officers, their
remuneration, options granted to them, the principal holders of the Company's
securities and any material interests of such persons in transactions with the
Company is required to be disclosed in proxy statements distributed to the
Company's stockholders and filed with the Commission. Such reports, proxy
statements and other information should be available for inspection at the
public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located
at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such information should be obtainable by mail, upon payment of the
Commission's customary charges, by writing to the Commission's principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a website at http://www.sec.gov that contains reports, proxy
statements and other information.
9. SOURCE AND AMOUNT OF FUNDS.
The total amount of funds required to consummate the Offer and Merger, if
required, and to pay all related fees and expenses is approximately $188.4
million, which will be provided through a combination of (i) the approximately
$58.0 million in proceeds from the Stock Purchase, (ii) borrowings by the
Operating Company of approximately $25.4 million under new senior secured
credit facilities with aggregate availability of $55 million (the "New Credit
Facilities"), (iii) proceeds of approximately $80.0 million from the offering
of senior notes by the Operating Company (the "Senior Notes") in a private
placement and (iv) proceeds of approximately $25.0 million from the offering
of senior discount notes by the Company (the "Discount Notes" and, together
with the Senior Notes, the "Notes") in a private placement. Prior to
consummation of the Offer, the Company will form the Operating Company to hold
all of the assets and liabilities of the Company. Accordingly, upon the
consummation of the Offer, the Company will become a holding company.
The New Credit Facilities. In connection with the Offer, Purchaser has
received a commitment from Bank of America National Trust and Savings
Association and Bankers Trust Company to provide the Operating Company with
the New Credit Facilities pursuant to a bank credit agreement (the "Credit
Agreement"). Loans under the New Credit Facilities will consist of (i) a $25
million seven-year term loan facility (the "Term Facility") and (ii) a $30
million five-year revolving credit facility (the "Revolving Facility").
Borrowings of $25 million under the Term Facility are expected to be
dividended or otherwise distributed from the Operating Company to the Company
and used to repay existing indebtedness of the Company. The Revolving Facility
is expected to be used in the future for general working capital purposes and
general corporate expenses. This information relating to the
50
New Credit Facilities is qualified in its entirety by reference to the
complete text of the documents to be entered into in connection therewith. The
following is a description of the general terms of the New Credit Facilities.
Indebtedness of the Operating Company under the New Credit Facilities will
be guaranteed by the Company and each of its subsidiaries (each, in such
capacity, a "Credit Facility Guarantor") and will be secured by a first
priority security interest in all of the Operating Company's and each Credit
Facility Guarantor's respective tangible and intangible assets, including,
without limitation, intellectual property, real property and all capital stock
of the Operating Company and each of its direct and indirect subsidiaries
(limited to 65% of such capital stock in the case of foreign subsidiaries, to
the extent a pledge of a greater percentage would result in material adverse
tax consequences) and rights under the Merger Agreement and other related
documentation.
Indebtedness under the New Credit Facilities will initially bear interest at
a rate based upon (i) the Base Rate (defined as the higher of (a) the rate of
interest publicly announced by Bank of America as its "reference rate" and (b)
the federal funds effective rate from time to time plus 0.5%), plus 1.25% in
the case of loans under the Revolving Facility and 1.50% in the case of
borrowings under the Term Facility, or (ii) the Eurodollar Rate (defined as
the rate (adjusted for statutory reserve requirements for eurocurrency
liabilities) at which eurodollar deposits for one, two, three or six months
(as selected by the Issuers) are offered to Bank of America in the interbank
eurodollar market, plus 2.25% in the case of loans under the Revolving
Facility and 2.50% in the case of borrowings under the Term Facility.
Performance-based adjustments of the interest rates under the Term Facility
and the Revolving Facility are available, provided no event of default has
occurred and is continuing.
The New Credit Facilities are subject to mandatory prepayment by the
Operating Company. Subject to certain exceptions, (i) 50% of net proceeds from
a sale or issuance of equity (reducible to 0% if certain performance measures
are met) and 100% of net proceeds from the incurrence of certain indebtedness
after the Consummation of the Offer by the Operating Company or its
subsidiaries and (ii) 100% of the net proceeds from any sale or any other
disposition by the Operating Company or its subsidiaries of any assets, except
for the sale of inventory or obsolete or worn-out property in the ordinary
course of business and subject to certain other exceptions, will be applied to
prepay scheduled principal payments under the Term Loan until the Term Loan is
repaid in full, then to prepay loans under the Revolving Facility until paid
in full and then to reduce commitments under the Revolving Facility.
The Term Loan will be subject to quarterly amortization payments beginning
on December 31, 1998. The Term Loan may be prepaid by the Operating Company;
such prepayments may not be reborrowed.
A portion of the Revolving Facility will be available for standby letters of
credit. The issuance of letters of credit will reduce the amount available for
direct borrowings under the Revolving Facility. Loans under the Revolving
Facility may be repaid and reborrowed. Loans under the Revolving Facility may
be prepaid and commitments relating thereto may be reduced by the Operating
Company. The Operating Company will be required to pay a commitment fee
initially equal to 0.50% per annum on the average daily unused portion of the
Revolving Facility, payable quarterly in arrears and subject to performance-
based adjustments provided no event of default has occurred and is continuing.
The Operating Company will also be required to pay a commission on all
outstanding letters of credit issued under the Revolving Facility equal to the
applicable margin then in effect with respect to Eurodollar loans under the
Revolving Facility and to the Bank issuing a letter of credit a fronting fee
of 0.25% per annum, quarterly in arrears, in each case on the face amount of
each letter of credit outstanding.
The Credit Agreement will require the Operating Company to meet certain
financial tests, including minimum interest coverage ratios, minimum fixed
charge coverage ratios and maximum leverage ratios. The Credit Agreement will
also contain covenants which, among other things, limit indebtedness, liens,
guarantee obligations, mergers, consolidations, liquidations and dissolutions,
asset sales, leases, dividends and other payments in respect of capital stock
and payments in respect of other debt (including the Notes), capital
expenditures, investments, loans and advances, optional payments and
modifications of subordinated and other debt instruments (including the Notes
and the Indenture), transactions with affiliates, sale-leasebacks, other
matters customarily restricted in such agreements and modifications to the
holding company status of the Company.
51
The Credit Agreement will contain customary events of default, including
payment defaults; material inaccuracies in representations and warranties;
covenant defaults; cross-defaults to certain other indebtedness; certain
bankruptcy events; certain ERISA events; judgment defaults; invalidity of any
guaranty, security document or security interest provision and change of
control.
The availability of the New Credit Facilities is subject to, among other
things, the satisfactory completion of the Stock Purchase and the Offer.
The Notes. Purchaser has retained BT Alex. Brown Incorporated and
BancAmerica Robertson Stephens to act as initial purchasers or placement
agents for the Notes. It is currently anticipated that the Notes would be
issued in a Rule 144A transaction pursuant to a customary purchase agreement.
The Senior Notes, to be issued by the Operating Company, would mature in 2008,
would be unsecured and would be guaranteed by the Company and certain of the
Operating Company's domestic subsidiaries. The Discount Notes, to be issued by
the Company, would mature in 2009, would be unsecured and would not be subject
to any guarantee. The interest rates applicable to the Notes will be
determined by market factors when the Notes are sold. It is also anticipated
that the indentures governing the Notes would contain provisions with respect
to redemption and affirmative and negative covenants customary for a
transaction of this nature.
The following table has been prepared by the Company and Purchaser and sets
forth the anticipated amounts of sources and uses of funds necessary to
consummate the Offer, the Merger and related Debt Financing at the scheduled
expiration date of the Offer or consummation of the Merger:
$ IN THOUSANDS
--------------
SOURCES OF FUNDS:
New Credit Facilities (1)..................................... $ 25,379
Senior Notes.................................................. 80,000
Discount Notes................................................ 25,000
Rolled Equity................................................. 8,815
Stock Purchase by Purchaser................................... 58,000
--------
Total Sources............................................... $197,194
========
USES OF FUNDS:
Purchases of Shares in Tender Offer and Merger................ $104,835
Net purchases of Options...................................... 8,564
Repayment of existing debt.................................... 59,240
Estimated fees and expenses................................... 15,740
Rolled Equity................................................. 8,815
--------
Total Uses.................................................. $197,194
========
- --------
(1) The New Credit Facilities have total commitments of $55.0 million.
The sources and uses as of April 30, 1998 on a pro forma basis are included
in the Company's unaudited pro forma consolidated financial data (and related
notes) attached as Annex E hereto.
10. OTHER MATTERS.
Director Designation. The Merger Agreement provides that, promptly after the
purchase by the Purchaser of any Shares pursuant to the Offer, Purchaser has
the right to designate such number of directors, rounded up to the next whole
number, on the Company's Board of Directors as is equal to the product of the
total number of directors on the Company's Board of Directors (giving effect
to the directors designated by Purchaser) multiplied by the percentage that
the number of Shares beneficially owned by the Purchaser or any affiliate of
the Purchaser (including such Shares as are accepted for payment pursuant to
the Offer) bears to the total number of Shares then outstanding. See "THE
MERGER AGREEMENT AND CERTAIN RELATED MATTERS--Section 1.
52
The Agreement and Plan of Merger; Stockholder Agreement." The Merger Agreement
provides that the directors of the Purchaser and the officers of the Company
at the Effective Time of the Merger will, from and after the Effective Time,
be the initial directors and officers, respectively, of the Surviving
Corporation.
11. DIVIDENDS AND DISTRIBUTIONS.
The Merger Agreement provides that, subject to certain exceptions, including
in connection with the consummation of the financing of the transactions,
neither the Company nor any of its subsidiaries will: (i) declare, set aside
or pay any dividend or other distribution payable in cash, stock or property
with respect to its capital stock; (ii) issue, sell, pledge, dispose of or
encumber any additional shares of, or securities convertible into or
exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire (or stock appreciation rights with respect to), any shares of
capital stock of any class of the Company or its Subsidiaries, other than
Shares reserved for issuance on the date hereof pursuant to the exercise of
options outstanding on the date hereof; or (iii) redeem, purchase or otherwise
acquire, directly or indirectly, any of its capital stock.
12. CERTAIN CONDITIONS OF THE OFFER.
The Company's obligation to accept for payment, purchase and pay for the
Shares tendered pursuant to the Offer is subject to certain conditions,
including (i) the valid tender of at least a majority of the outstanding
Shares on a fully diluted basis, (ii) the expiration or termination of any
applicable waiting period under the HSR Act, (iii) the closing of the Stock
Purchase, and (iv) the absence of any of the following conditions:
(a) there will be threatened or pending any action, suit or proceeding or
any statute, rule, regulation, judgment, order or injunction proposed,
sought, promulgated, enacted, entered, enforced or deemed applicable to the
Offer, or any other action will have been taken, proposed or threatened, by
any state or federal government or governmental authority or by any court
of competent jurisdiction, other than the routine application to the Offer,
the Merger or other subsequent business combination of waiting periods
under the HSR Act, (1) seeking to prohibit or impose any material
limitations on Purchaser's ownership or operation (or that of any of its
subsidiaries or affiliates) of all or a material portion of its or the
Company's businesses or assets, or to compel Purchaser or its subsidiaries
and affiliates to dispose of or hold separate any material portion of the
business or assets of the Company or Purchaser and their respective
subsidiaries, in each case taken as a whole, (2) seeking to make the
acceptance for payment of, or the payment for, some or all of the Shares
illegal or otherwise prohibiting, restricting or significantly delaying
consummation of the Offer or the Merger or the performance of any of the
other transactions contemplated by the Merger Agreement, or seeking to
obtain from the Company or Purchaser any damages that are material in
relation to the Company and its subsidiaries as taken as a whole, (3)
seeking to impose material limitations on the ability of Purchaser, or
render Purchaser unable, to acquire or hold or to exercise effectively all
rights of ownership of the Shares, including, without limitation, the right
to vote any Shares purchased by Purchaser on all matters properly presented
to the stockholders of the Company, or effectively to control in any
material respect the business, assets or operations of the Company, its
subsidiaries or Purchaser or any of their respective affiliates, or (4)
seeking to impose circumstances under which the purchase or payment for
some or all of the Shares pursuant to the Offer and Merger could result in
any change or effect that is materially adverse to the business, results of
operations or condition (financial or otherwise) of Purchaser and its
subsidiaries, taken as a whole, other than any change or effect arising out
of general economic conditions unrelated to any businesses in which
Purchaser and its subsidiaries are engaged, or (5) which otherwise is
reasonably likely to have a Company Material Adverse Effect;
(b) there will have occurred any event, change in or effect on the
business of the Company or its subsidiaries, taken as a whole, that is or
can reasonably be expected to be materially adverse to (1) the business,
operations, properties (including intangible properties), condition
(financial or otherwise), assets, liabilities, or prospects of the Company
and its subsidiaries, taken as a whole, or (2) the ability of the Company
to consummate any of the Transactions or to perform its obligations under
the Merger Agreement;
(c) there will have occurred (1) any general suspension of trading in, or
limitation on prices for, securities on the New York Stock Exchange or the
Nasdaq for a period in excess of 24 hours (excluding
53
suspensions or limitations resulting solely from physical damage or
interference with such exchanges not related to market conditions), (2) the
declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States (whether or not mandatory), (3) the
commencement of a war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, (4) any
limitation (whether or not mandatory), by any U.S. governmental authority
or agency, likely to materially adversely affect, the extension of credit
by banks or other financial institutions, (5) a change in general
financial, bank or capital market conditions which materially and adversely
affects the ability of financial institutions in the United States to
extend credit or syndicate loans, (6) from the date of the Merger Agreement
through the date of termination or expiration of the Offer, a decline of at
least 15 percent in the Standard & Poor's 500 Index, or (7) in the case of
any of the foregoing, existing at the date of the execution of the Merger
Agreement, a material acceleration or worsening thereof;
(d) any person (which includes a "person" as such term is defined in
Section 13(d)(3) of the Exchange Act) other than Purchaser, any of its
affiliates, or any group of which any of them is a member will have
acquired beneficial ownership of more than 15 percent of the outstanding
Shares or will have entered into a definitive agreement or an agreement in
principle with the Company with respect to a tender offer or exchange offer
for any Shares or a merger, consolidation or other business combination
with or involving the Company or any of its subsidiaries;
(e) the Merger Agreement will have been terminated in accordance with its
terms;
(f) (1) the Board will have withdrawn or modified (including by amendment
of the Schedule 13E-4) in a manner adverse to Purchaser its approval or
recommendation of the Offer, the Merger Agreement or the Merger or will
have recommended another offer, or will have adopted any resolution to
effect any of the foregoing, or (2) the Company will have entered into an
agreement with respect to an Acquisition Proposal in accordance with the
Merger Agreement;
(g) all consents, permits and approvals of Governmental Authorities (as
defined therein) and certain other persons will not have been obtained with
no material adverse conditions attached and no material expense imposed on
the Company or any of its subsidiaries;
(h) the Company or the Operating Company, as the case may be, will have
failed to consummate (i) a private placement offering of debt securities
which will result in the Company receiving gross proceeds of not less than
$25 million at an interest rate not in excess of 15% (after giving effect
to the anticipated returns, as determined in the reasonable judgment of
Purchaser, with respect to any equity securities of the Company issued to
holders of such debt securities in connection therewith), (ii) a private
placement offering of debt securities in the aggregate principal amount of
$80 million (which will result in the Operating Company receiving gross
proceeds of not less than $80 million at an interest rate not in excess of
12% (after giving effect to the anticipated returns, as determined in the
reasonable judgment of Purchaser, with respect to any equity securities of
the Company issued to holders of such debt securities in connection
therewith), or (iii) the closing of a senior secured credit facility in the
aggregate amount of $55 million, of which at least $25 million is available
for immediate drawdown in connection with the Transactions;
(i) A nationally recognized accounting firm will have failed to deliver
to the Company a letter, in form and substance reasonably satisfactory to
Purchaser, to the effect that the Transactions will receive
recapitalization accounting treatment or such letter has been withdrawn or
modified.
13. CERTAIN LEGAL MATTERS.
Except as described in this Section, the Company is not aware of any license
or regulatory permit that appears to be material to the business of the
Company that might be adversely affected by the Offer or of any approval or
other action by a domestic or foreign governmental, administrative or
regulatory agency or authority that would be required in connection with the
Offer. Should any such approval or other action be required, the Company
presently contemplates that such approval or other action will be sought,
except as described below under "State Takeover Laws." While, except as
otherwise described in this Offer to Purchase, the Company does not presently
intend to delay the acceptance for payment of or payment for Shares tendered
pursuant to the
54
Offer pending the outcome of any such matter, there can be no assurance that
any such approval or other action, if needed, would be obtained or would be
obtained without substantial conditions or that failure to obtain any such
approval or other action might not result in consequences adverse to the
Company's business or that certain parts of the Company's business might not
have to be disposed of or other substantial conditions complied with in the
event that such approvals were not obtained or such other actions were not
taken or in order to obtain any such approval or other action. If certain
types of adverse action are taken with respect to the matters discussed below,
the Company could decline to accept for payment or pay for any Shares
tendered. See "--Section 12. Certain Conditions of the Offer" for certain
conditions to the Offer, including conditions with respect to governmental
actions.
State Takeover Laws. The Company conducts business in a number of other
states throughout the United States, some of which have enacted takeover laws
and regulations. The Company does not know whether any or all of these
takeover laws and regulations will by their terms apply to the Offer, and,
except as set forth above with respect to Section 203 of the DGCL, the Company
has not currently complied with any other state takeover statute or
regulation. The Company reserves the right to challenge the applicability or
validity of any state law purportedly applicable to the Offer and nothing in
this Offer to Purchase or any action taken in connection with the Offer is
intended as a waiver of such right. If it is asserted that any state takeover
statute is applicable to the Offer and an appropriate court does not determine
that it is inapplicable or invalid as applied to the Offer, the Company might
be required to file certain information with, or to receive approvals from,
the relevant state authorities, and the Company might be unable to accept for
payment or pay for Shares tendered pursuant to the Offer, or may be delayed in
consummating the Offer. In such case, the Company may not be obligated to
accept for payment or pay for any Shares tendered pursuant to the Offer. See
"--Section 2. Acceptance for Payment and Payment."
Antitrust. The Federal Trade Commission (the "FTC") and the Antitrust
Division of the Department of Justice (the "Antitrust Division") frequently
scrutinize the legality under the antitrust laws of transactions such as
Purchaser's acquisition of Shares pursuant to the Merger Agreement. At any
time before or after Purchaser's acquisition of Shares, the Antitrust Division
or the FTC could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin the
acquisition of Shares pursuant to the Merger Agreement or otherwise seeking
divestiture of Shares acquired by Purchaser or divestiture of substantial
assets of Purchaser or any subsidiaries. Private parties, as well as state
governments, may also bring legal action under the antitrust laws under
certain circumstances. Based upon an examination of publicly available
information relating to the businesses in which Purchaser and the Company are
engaged, Purchaser and the Company believe that the acquisition of Shares by
Purchaser will not violate the antitrust laws. Nevertheless, there can be no
assurance that a challenge to the Offer or other acquisition of Shares by
Purchaser on antitrust grounds will not be made or, if such a challenge is
made, of the result. See "--Section 12. Certain Conditions of the Offer" for
certain conditions to the Offer, including conditions with respect to
litigation and certain governmental actions.
Federal Reserve Board Regulations. Regulations U and X (the "Margin
Regulations") of the Federal Reserve Board restrict the extension or
maintenance of credit for the purpose of buying or carrying margin stock,
including the Shares, if the credit is secured directly or indirectly by
margin stock. Such secured credit may not be extended or maintained in an
amount that exceeds the maximum loan value of all the direct and indirect
collateral securing the credit, including margin stock and other collateral.
All financing for the Offer will be structured so as to be in full compliance
with the Margin Regulations.
14. FEES AND EXPENSES.
The Company has retained MacKenzie Partners, Inc. to act as the Information
Agent and American Stock Transfer & Trust Company to act as the Depositary in
connection with the Offer. Such firms each will receive reasonable and
customary compensation for their services. The Company has also agreed to
reimburse each such firm for certain reasonable out-of-pocket expenses and to
indemnify each such firm against certain liabilities in connection with their
services, including certain liabilities under federal securities laws.
55
The Company will not pay any fees or commissions to any broker or dealer or
other person (other than the Information Agent) for making solicitations or
recommendations in connection with the Offer. Brokers, dealers, banks and
trust companies will be reimbursed by the Company for customary mailing and
handling expenses incurred by them in forwarding material to their customers.
Estimated costs and fees in connection with the Offer and Merger, all of
which are the obligation of the Company upon consummation of the Offer, are as
follows:
Financing and commitment costs.................................. $ 6,515,000
Legal, accounting and other professional fees................... 2,675,000
Financial advisory fees......................................... 1,980,000
Filing fees..................................................... 21,000
Printing and distribution costs................................. 200,000
Transaction Fee................................................. 2,380,000
Miscellaneous................................................... 1,969,000
-----------
Total......................................................... $15,740,000
===========
15. CERTAIN INFORMATION CONCERNING PURCHASER
Purchaser. Purchaser is a Delaware entity, newly formed by Fremont Partners
for the purpose of effecting the Stock Purchase. It is not anticipated that
Purchaser will have any significant assets or liabilities or will engage in
any activities other than those incident to the Stock Purchase and the
financing thereof prior to the consummation of the Offer. The offices of
Purchaser are located at 50 Fremont Street, Suite 3700, San Francisco,
California 94105-1895.
Except as set forth in this Offer to Purchase, there have never been any
contacts, negotiations or transactions between Purchaser, any of its
affiliates or any of the persons listed on Schedule II and the Company or its
affiliates concerning a merger, consolidation or acquisition, tender offer or
other acquisition of securities, election of directors or a sale or other
transfer of a material amount of assets.
16. RECAPITALIZATION.
The Offer, the Merger and the other transactions contemplated by the Merger
Agreement will be accounted for as a recapitalization, consisting of Debt
Financing, equity investment by Purchaser of $58 million and the cancellation
of certain Shares in the Offer for the Per Share Amount and in the Merger in
exchange for the Merger Consideration.
17. MISCELLANEOUS.
The Offer is being made to all holders of Shares other than Purchaser and
the Management Stockholders with respect to 87,979 shares held or acquired
upon the exercise of 52,191 outstanding options by them. The Company is not
aware of any jurisdiction in which the making of the Offer or the tender of
Shares in connection therewith would not be in compliance with the laws of
such jurisdiction. If the Company becomes aware of any jurisdiction in which
the making of the Offer would not be in compliance with applicable law, the
Company will make a good faith effort to comply with any such law. If, after
such good faith effort, the Company cannot comply with any such law, the Offer
will not be made to (nor will tenders be accepted from or on behalf of) the
holders of Shares residing in such jurisdiction. In any jurisdiction where the
securities, blue sky or other laws require the Offer to be made by a licensed
broker or dealer, the Offer will be deemed to be made on behalf of the Company
by or one or more registered brokers or dealers licensed under the laws of
such jurisdiction.
No person has been authorized to give any information or to make any
representation on behalf of the Company not contained herein or in the Letter
of Transmittal and, if given or made, such information or representation must
not be relied upon as having been authorized.
56
Pursuant to Section 13(e)(1), the Company has filed with the Commission the
Schedule 13E-4 under the Exchange Act furnishing certain additional
information with respect to the Offer. The Company has filed a statement on
Schedule 13E-3 with respect to the Offer and may file amendments to the
Schedule 13E-3. Such statements, including exhibits and any amendments
thereto, may be examined and copies may be obtained from the offices of the
Commission and Nasdaq in the manner set forth in "--Section 8. Certain
Information concerning the Company" (except that they will not be available at
regional offices of the Commission).
Global Motorsport Group, Inc.
July 13, 1998
57
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is information regarding the present directors and executive
officers of the Company and their respective ages and positions:
NAME AGE POSITION
- ---- --- --------
Joseph F. Keenan....... 56 Chairman of the Board of Directors
Joseph Piazza, Sr...... 62 President, Chief Executive Officer and Director
James J. Kelly, Jr..... 47 Executive Vice President--Finance, Chief Financial Officer, Secretary and
Director
Lionel M. Allan........ 54 Director
R. Steven Fisk......... 47 Senior Vice President, Purchasing, Product Development and Operations
Dennis B. Navarra...... 43 Vice President, Administration and Assistant Secretary
Joseph P. Piazza, Jr... 32 Vice President, Sales
Frederick Saunders,
Jr. .................. 46 Vice President, Marketing
Frances Jimenez-Mora... 41 Vice President, Human Resources
Joseph F. Keenan has served as Chairman of the Company since November 1997
and as a Director of the Company since July 1993. Mr. Keenan is currently in
private law practice in San Francisco, California. Mr. Keenan served as
President and Chief Executive Officer of Data East U.S.A. Inc., a privately
owned manufacturer of coin operated and home video electronic games, from 1989
to 1992. Since 1984, he has been a principal and director of Wilkes Bashford
Ltd., a specialty retailer of clothing and accessories in Northern California.
Mr. Keenan has also held the positions of President and Chief Executive
Officer at Pizza Time Theater, Inc. and Atari, Inc.
Joseph Piazza, Sr. has served as President and Chief Executive Officer since
November 1997 and as a Director of the Company since April 1996. From 1989
until October 1992, Mr. Piazza served as Executive Vice President of Lacy
Diversified industries, a privately-owned holding company, which owns Rocky
Cycle Company, a motorcycle parts and accessory distribution company. From
1975 to 1986, Mr. Piazza served as President and Chief Executive Officer of
Rocky Cycle Company.
James J. Kelly, Jr. has served as Executive Vice President, Finance of the
Company since November 1995, Vice President, Finance and Chief Financial
Officer of the Company since March 1992, Secretary of the Company since June
1992 and as a Director of the Company since July 1993. Prior to joining the
Company in March 1992, Mr. Kelly served as Vice President, Finance and Chief
Finance Officer of Canadian Marconi Company for eight years. Mr. Kelly is a
member of the American Institute of Certified Public Accountants, the
California Society of Certified Public Accountants and the Financial
Executives Institute.
Lionel M. Allan has served as a director of the Company since June 1994. For
more than five years, Mr. Allan has been President of Allan Advisors, Inc., a
board and legal consulting firm. Mr. Allan is a director and past Chairman of
the Board of KTEH Public Television Channel 54, in San Jose, California, a
director of Accom, Inc., a digital video systems company, and a director of
Catalyst Semiconductor, Inc., a semiconductor company.
R. Steven Fisk has served as Senior Vice President, Purchasing, Product
Development and Operations since November 1995. Mr. Fisk joined the Company as
Director of Purchasing in January 1986. In 1988, Mr. Fisk received additional
responsibilities in the area of product development. Prior to joining the
Company, Mr. Fisk spent 10 years in Taiwan managing the operations of Zodiac
Enterprises Ltd., one of the Company's significant vendors.
Dennis B. Navarra has served as Vice President, Administration since
November 1995. Before that, he served as Director of Administration since June
1991. Before that, he served in various senior management
SI-1
positions since joining the Company in May 1984. Mr. Navarra has also served
as Assistant Secretary since August 1989. Prior to joining the Company, Mr.
Navarra was employed as a senior auditor with KPMG Peat Marwick LLP.
Joseph P. Piazza, Jr. has been with the Company since February 1998. Prior
to joining the Company, Mr. Piazza Jr. served as General Manager for Helmet
House in Calabasas Hills, California from 1996 to 1998 and was Regional
Sales/Branch Manager for Tucker Rocky Distributing from 1992 to 1996.
Frederick Saunders, Jr. has been with the Company since 1995. Mr. Saunders
joined the Company in 1995 as Associate Director of Marketing and Sales. Mr.
Saunders was promoted to Director of Marketing and Sales in July 1997 and to
Vice President, Marketing in February 1998. Prior to joining the Company, Mr.
Saunders was employed from 1979 to 1995 as Director, Corporate Marketing, for
Tab Products Co. in Palo Alto, California.
Frances Jimenez-Mora joined the Company in September 1997 as Director, Human
Resources and was promoted to Vice President, Human Resources in February
1998. Prior to joining the Company, Ms. Jimenez-Mora was employed as Regional
Human Resources Manager for Modine Aftermarket Holdings for five years.
Except between Joseph Piazza, Sr. and Joseph P. Piazza, Jr., who are father
and son, there are no family relationships among the executive officers and
directors of the Company.
SI-2
SCHEDULE II
EXECUTIVE OFFICERS OF
FREMONT ACQUISITION COMPANY III, LLC
1. FREMONT ACQUISITION COMPANY III, LLC. Set forth below is the name and
present principal occupation or employment, and material occupations,
positions, offices or employments for the past five years, of each executive
officer of Fremont Acquisition Company III, LLC ("Purchaser"). Except for
Mr. Williamson, who is a citizen of the United Kingdom, each such person is a
citizen of the United States of America. The business address of each such
person is c/o Fremont Partners, L.P., Fifty Fremont Street, Suite 3700, San
Francisco, California 94105.
NAME AGE PRESENT POSITION AT PURCHASER
---- --- -----------------------------
Robert Jaunich II............... 57 President and Chief Executive Officer
Mark N. Williamson.............. 35 Vice President and Treasurer
Kevin R. Baker.................. 37 Vice President and Secretary
Robert Jaunich II has served as President and Chief Executive Officer of
Purchaser since May 1998, as a Managing Director of Fremont Partners, L.P. and
a member of FP Advisors, L.L.C. since 1996, and as a Managing Director and a
member of the Board of Directors and Executive Committee of The Fremont Group
since 1991. Prior to joining The Fremont Group in 1991, he was Executive Vice
President and a member of the Chief Executive Office of Swiss-based Jacobs
Suchard AG. Previously, he was President of Osborne Computer Corporation,
President of Sara Lee Corporation, and Executive Vice President of Memorex
Corporation. Among the various board positions he holds, Mr. Jaunich is
Chairman of the Board of Directors of Kinetic Concepts, Inc., a director of
Kerr Group, Inc., a director of CNF Transportation, Inc. and Chairman of the
Managing General Partner of Crown Pacific Partners, L.P. His previous board
associations include Coldwell Banker Corporation, Petro Stopping Centers,
L.P., Sara Lee Corporation, Douwe Egberts, The Wine Group, Brach Van Houten
Holding, Inc. and Nabob Foods.
Mark N. Williamson has served as Vice President and Treasurer of Purchaser
since May 1998 and as a Managing Director of Fremont Partners and a member of
FP Advisors, L.L.C. since 1996. Prior to joining Fremont Partners in May 1996,
Mr. Williamson served as a Managing Director at the Harvard Private Capital
Group, Inc. from August 1991. Prior to that time, he was an Associate at ESL
Partners, Inc., a private investment partnership pursuing value-oriented
investments in private and public equity and debt securities.
Kevin R. Baker has served as Vice President and Secretary of Purchaser since
May 1998 as General Counsel of Fremont Partners and a member of FP Advisors,
L.L.C. since February 1998. Prior to joining Fremont Partners in February
1998, Mr. Baker was an attorney for approximately nine years with O'Melveny &
Myers, LLP, where he was elected partner in 1997. Prior to that time, he was a
Certified Public Accountant with Arthur Andersen & Co.
SII-1
ANNEX A
June 28, 1998
The Board of Directors
Global Motorsport Group, Inc.
16100 Jacqueline Court
Morgan Hill, CA 95037
Members of the Board:
We understand that Fremont Acquisition Company III, LLC ("Purchaser"), an
entity formed by Fremont Group, Inc. ("Fremont"); Global Acquisition Corp.
("Acquisition Sub"), a newly formed wholly owned subsidiary of Global
Motorsport Group, Inc. ("Global Motorsport" or the "Company"); and the Company
propose to enter into an Agreement and Plan of Merger (the "Merger
Agreement"). Capitalized terms used herein and not otherwise defined have the
meanings assigned such terms in the Merger Agreement. The Merger Agreement
provides that, subject to the terms and conditions set forth therein, (i) the
Company will make a cash tender offer to all of the stockholders of the
Company (the "Offer") for shares of the Company's common stock, par value
$0.001 per share, including the Common Stock Purchase Rights associated
therewith (the "Common Stock") for $21.75 per share (the "Per Share Amount"),
(ii) immediately prior to the consummation of the Offer, the Purchaser will
purchase from the Company 2,666,667 shares of Common Stock at a price per
share equal to the Per Share Amount (the "Share Purchase"), and (iii) under
certain circumstances as specified in the Merger Agreement, the Acquisition
Sub will merge with and into the Company (the "Merger"). Additionally, certain
stockholders of the Company that are officers of the Company (the "Management
Stockholders") have entered into a Stockholder Agreement with Purchaser
concurrently with the execution of the Merger Agreement pursuant to which,
among other things, the Management Stockholders will agree not to tender
certain of their shares in the Offer. The Merger Agreement provides that if
more than approximately 94% of the outstanding shares of Common Stock are
tendered pursuant to the Offer, shares will be purchased on a prorated basis
and, in addition to a portion of the Per Share Amount, stockholders will
retain an equity interest in the Company equal to the number of shares not
purchased as a result of such proration (the cash or combination of cash and
retained shares of Common Stock received pursuant to the Offer is referred to
herein as the "Tender Consideration"). If fewer than approximately 90%, but
greater than 51% of the outstanding shares of Common Stock are tendered
pursuant to the Offer, then the Merger will be consummated and the holders of
shares of Common Stock outstanding after the Offer (excluding the shares of
Common Stock issued pursuant to the Share Purchase and the shares of Common
Stock owned by the Management Stockholders) will receive pursuant to the
Merger a combination of cash and shares of Common Stock based on the Per Share
Amount (the combination of cash and retained shares of Common Stock received
pursuant to the Merger is referred to herein as the "Merger Consideration").
Any stockholder tendering their shares of Common Stock in the Offer will
receive at least approximately 92% of their Tender Consideration in cash and
no more than approximately 8% of their Tender Consideration in retained shares
of Common Stock.
You have requested our opinion as to the fairness, from a financial point of
view, to the holders (the "Stockholders") of the Common Stock (other than the
Purchaser and the Management Stockholders) of the Tender Consideration and the
Merger Consideration. In connection with this opinion, we have:
(i) Reviewed the financial terms and conditions of the Merger Agreement
as set forth in draft Merger Agreement dated June 28, 1998;
(ii) Analyzed certain historical business and financial information
relating to the Company;
(iii) Reviewed various financial forecasts and schedules and other data
provided to us by the Company;
(iv) Reviewed and discussed the business and prospects of Global
Motorsport and its subsidiaries with representatives of the Global
Motorsport's management;
A-1
Global Motorsport Group, Inc.
June 28, 1998
Page 2
(v) Reviewed public information with respect to certain other companies
in lines of business we believed to be generally comparable to the business
of the Company;
(vi) Reviewed the historical prices and trading volumes of the Common
Stock;
(vii) Calculated the unleveraged after-tax discounted cash flow of the
Company;
(viii) Calculated the range of values a financial investor might be
willing to pay to acquire all or, as in the case of the Merger or other
recapitalization transactions, a controlling and substantial portion of the
Company's equity if it were interested in pursuing such a transaction;
(ix) Computed the present value of future hypothetical implied trading
values based upon earnings estimates provided by the Company;
(x) Compared the purchase price premium to be paid for the Common Stock
to premiums paid in certain other transactions in lines of business we
believe to be generally comparable to the business of the Company; and
(xi) Considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that we deemed
appropriate.
In connection with our review, we have not assumed any responsibility for or
independently verified any of the foregoing information and have relied on
such information being complete and accurate in all material respects. We have
not made an independent evaluation or appraisal of any assets or liabilities
(contingent or otherwise) of Global Motorsport or any of its subsidiaries, nor
have we been furnished with any such evaluation or appraisal that has not been
publicly disclosed. With respect to the financial plans, estimates and
analyses provided to us by Global Motorsport, we have assumed, with your
permission, that all such information was reasonably prepared on a basis
reflecting the best currently available estimates and judgments of management
of Global Motorsport as to future financial performance of the Company, based
upon the historical performance of the Company and certain estimates and
assumptions which were reasonable at the time made. We have also assumed, at
your direction, that the number of shares of Common Stock to be retained by
the Management Stockholders after the consummation of the Merger, or if the
Merger is not consummated, then after the consummation of the Offer, will not
exceed 125,000 shares of Common Stock. Finally, we have assumed that the
executed Merger Agreement will be in the same form as the draft Merger
Agreement reviewed by us, and that the Merger will be consummated on the terms
described in the Merger Agreement, without any waiver of any material term or
condition, and that obtaining any necessary regulatory or third party approval
for the Merger will not have an adverse effect on the Company. Our opinion is
based on economic, monetary and market conditions existing on the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Tender Consideration to be received by the Stockholders
pursuant to the Offer and/or the Merger Consideration to be received by the
Stockholders pursuant to the Merger (other than the Purchaser and the
Management Stockholders) is fair, from a financial point of view, to such
Stockholders.
We are acting as financial advisor to the Board of Directors of the Company
in this transaction and will receive a fee for our services, a significant
portion of which is contingent upon the approval and consummation of the
transaction. Our firm has in the past provided investment banking services to
the Company and has received fees for rendering such services. In the ordinary
course of business, we actively trade the Common Stock for our own account and
for the accounts of our customers and, accordingly, may at any time hold a
long or short position in the Common Stock. We currently make a market in the
Common Stock on the Nasdaq National Market.
A-2
Global Motorsport Group, Inc.
June 28, 1998
Page 3
This opinion is for the use and benefit of the Board of Directors of Global
Motorsport and is rendered to the Board of Directors of Global Motorsport in
connection with its consideration of the Offer and the Merger and shall not be
used for any purpose or disclosed to any other party without our prior written
consent; provided, however, that this letter may be reproduced in full, and
may be described and referred to in a form reasonably acceptable to us and our
counsel, in the tender offer materials and proxy or information statement to
be filed with the Securities and Exchange Commission and provided to the
Stockholders in connection with the Offer and the Merger, respectively. We are
not making any recommendation regarding whether or not it is advisable for
Stockholders to tender their shares of Common Stock in the Offer or vote their
shares of Common Stock in favor of the Merger. We have not been requested to
opine as to, and our opinion does not in any manner address, the Company's
underlying business decision to proceed with or effect the Offer or Merger.
Very truly yours,
/s/ Cleary Gull Reiland & McDevitt Inc.
Cleary Gull Reiland & McDevitt Inc.
A-3
ANNEX B
SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE
262 APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S)228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of
a nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or
more shares, or fractions thereof, solely of stock of a corporation, which
stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)251 (other than a merger effected pursuant to
(S)251(g) of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
B-1
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior
to the meeting, shall notify each of its stockholders who was such on
the record date for such meeting with respect to shares for which
appraisal rights are available pursuant to subsections (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal
of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by
a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in
such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to
all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may,
and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date
of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more
than 10 days prior to the date the notice is given; provided, that if
B-2
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the
merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
B-3
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such stockholder,
in the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section
or thereafter with the written approval of the corporation, then the right
of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be
dismissed as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation. (Last
amended by Ch.120, L. '97, eff. 7-1-97.)
B-4
ANNEX C
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Global Motorsport Group, Inc.
We have audited the balance sheets of Global Motorsport Group, Inc. (the
Company) and subsidiaries as of January 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three year period ended January 31, 1998. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Global
Motorsport Group, Inc. and subsidiaries as of January 31, 1998, and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 31, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Mountain View, California
March 20, 1998
C-1
GLOBAL MOTORSPORT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31,
----------------
1998 1997
-------- -------
ASSETS
------
Current assets:
Cash and cash equivalents................................... $ 1,432 $ 40
Accounts receivable, net.................................... 12,958 11,349
Merchandise inventories..................................... 66,338 49,522
Deferred income taxes....................................... 3,079 1,334
Prepaid income taxes........................................ 1,926 2,378
Deposits and prepaid expenses............................... 2,614 2,851
-------- -------
Total current assets...................................... 88,347 67,474
Property and equipment, net................................... 18,408 15,802
Other assets.................................................. 35,327 8,221
-------- -------
$142,082 $91,497
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt and capital lease
obligations................................................ $ 4,176 $ 3,293
Bank borrowings............................................. 13,741 4,878
Accounts payable............................................ 6,757 4,600
Accrued expenses and other liabilities...................... 4,775 1,912
-------- -------
Total current liabilities................................. 29,449 14,683
Long-term debt and capital lease obligations.................. 52,302 16,154
Deferred income taxes......................................... 988 817
Shareholders' equity:
Common stock, $.001 par value; 20,000,000 shares authorized;
5,358,312 and 5,082,312 shares issued and outstanding
as of January 31, 1998 and 5,290,189 issued and outstanding
as of January 31, 1997..................................... 5 5
Additional paid-in capital.................................. 28,977 31,760
Retained earnings........................................... 30,361 28,078
-------- -------
Total shareholders' equity................................ 59,343 59,843
Commitments and contingencies
-------- -------
$142,082 $91,497
======== =======
See accompanying notes to consolidated financial statements.
C-2
GLOBAL MOTORSPORT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JANUARY 31,
-------------------------
1998 1997 1996
-------- -------- -------
Sales, net........................................... $122,725 $108,557 $93,906
Cost of sales........................................ 77,716 64,834 54,779
-------- -------- -------
Gross profit....................................... 45,009 43,723 39,127
Operating expenses:
Selling, general and administrative................ 33,114 27,039 23,522
Provision for benefits related to employment
agreement......................................... 3,127 -- --
Product development................................ 1,407 1,723 1,652
-------- -------- -------
37,648 28,762 25,174
-------- -------- -------
Operating income................................... 7,361 14,961 13,953
Interest expense..................................... 2,964 1,915 1,637
-------- -------- -------
Income before income taxes......................... 4,397 13,046 12,316
Income taxes......................................... 2,114 5,174 4,395
-------- -------- -------
Net income......................................... $ 2,283 $ 7,872 $ 7,921
======== ======== =======
Net income per share (basic)......................... $ 0.45 $ 1.49 $ 1.57
======== ======== =======
Net income per share (diluted)....................... $ 0.44 $ 1.48 $ 1.52
======== ======== =======
Shares used in per share calculation
Basic.............................................. 5,094 5,272 5,048
Diluted............................................ 5,233 5,327 5,209
See accompanying notes to consolidated financial statements.
C-3
GLOBAL MOTORSPORT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
Balance as of January 31, 1995..... 5,001 $ 5 $26,283 $12,285 $38,573
Exercise of stock options.......... 89 -- 1,478 -- 1,478
Net income......................... -- -- -- 7,921 7,921
----- --- ------- ------- -------
Balance as of January 31, 1996..... 5,090 $ 5 $27,761 $20,206 $47,972
----- --- ------- ------- -------
Exercise of stock options.......... 200 -- 3,999 -- 3,999
Net income......................... -- -- -- 7,872 7,872
----- --- ------- ------- -------
Balance as of January 31, 1997..... 5,290 $ 5 $31,760 $28,078 $59,843
----- --- ------- ------- -------
Exercise of stock options.......... 68 -- 705 -- 705
Repurchase of common stock......... (276) -- (3,488) -- (3,488)
Net income......................... -- -- -- 2,283 2,283
----- --- ------- ------- -------
Balance as of January 31, 1998..... 5,082 $ 5 $28,977 $30,361 $59,343
===== === ======= ======= =======
See accompanying notes to consolidated financial statements.
C-4
GLOBAL MOTORSPORT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JANUARY 31,
---------------------------
1998 1997 1996
-------- ------- --------
Cash flows from operating activities:
Net income...................................... $ 2,283 $ 7,872 $ 7,921
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization................. 3,087 1,896 1,612
Deferred income taxes......................... (1,575) 1,031 (749)
Changes in items affecting operations:
Accounts receivable......................... 1,409 (1,820) (1,221)
Merchandise inventories..................... (6,572) 1,643 (26,923)
Deposits and prepaid expenses............... 932 (956) (2,021)
Accounts payable, accrued expenses and other
liabilities................................ 4,848 (143) 1,589
-------- ------- --------
Net cash provided (used) by operating
activities............................... 4,412 9,523 (19,792)
-------- ------- --------
Cash flows from investing activities:
Purchase of intangible assets in connection with
acquisition.................................... (26,889) -- --
Purchase of equipment in connection with
acquisition.................................... (770) -- --
Purchase of net assets in connection with
acquisition.................................... (13,333) -- --
Acquisition costs............................... (1,147) -- --
Additions to property and equipment............. (3,992) (3,601) (4,659)
-------- ------- --------
Net cash used by investing activities..... (46,131) (3,601) (4,659)
-------- ------- --------
Cash flows from financing activities:
Bank borrowings, net............................ 8,863 (9,888) 14,366
Issuance of long-term debt...................... 53,500 375 276
Repayment of long-term debt and capital lease
obligations.................................... (16,469) (680) (314)
Repurchase of common stock...................... (3,488) -- --
Issuance of common stock........................ 705 3,999 1,478
-------- ------- --------
Net cash provided (used) by financing
activities............................... 43,111 (6,194) 15,806
-------- ------- --------
Net change in cash and cash equivalents... 1,392 (272) (8,645)
Cash and cash equivalents at beginning of year.. 40 312 8,957
-------- ------- --------
Cash and cash equivalents at end of year........ $ 1,432 $ 40 $ 312
======== ======= ========
Supplemental disclosures:
Cash paid during the year:
Interest...................................... $ 3,009 $ 2,110 $ 1,758
======== ======= ========
Income taxes.................................. $ 3,370 $ 4,493 $ 5,148
======== ======= ========
Noncash investing and financing activities:
Equipment acquired under capital leases....... $ -- $ 375 $ --
======== ======= ========
See accompanying notes to consolidated financial statements.
C-5
GLOBAL MOTORSPORT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Global Motorsport Group, Inc., formerly Custom Chrome, Inc., (the Company)
is engaged in the development, manufacture, and wholesale distribution of
aftermarket parts and accessories for Harley-Davidson motorcycles.
The accompanying consolidated financial statements include the Company and
its wholly owned subsidiaries. All intercompany transactions have been
eliminated.
(a) Cash and cash equivalents
The Company considers all highly liquid investments with original maturities
of 3 months or less to be cash equivalents.
(b) Revenue Recognition
The Company recognizes revenue when products are shipped. Export sales
represented 17%, 19%,and 20%, of net sales for the years ended January 31,
1998, 1997 and 1996, respectively.
(c) Merchandise Inventories
Merchandise inventories are stated at the lower of first-in, first-out cost
or market. The Company continually evaluates and adjusts the overhead
components of inventory, as necessary.
(d) Advertising
The Company expenses the costs of advertising the first time the advertising
takes place except for direct response advertising which is capitalized and
amortized over periods not exceeding one year.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Assets under capital leases are stated at the present value of minimum lease
payments at the inception of the lease. Depreciation is provided over the
estimated useful lives of the respective assets, generally 5 to 30 years, on a
straight-line basis. Amortization of assets under capital leases and leasehold
improvements is calculated using the straight line method over the lesser of
the estimated useful life of the asset or the term of the respective leases.
(f) Other Assets
Other assets consist primarily of goodwill arising from the application of
purchase accounting. Goodwill is amortized on a straight-line basis over its
estimated useful lives which range from 25 to 40 years. Management assesses
the carrying value of other assets annually by reference to the operating
performance and projected future cash flows.
(g) Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets and certain
identifiable intangibles for impairment. If events or changes indicate that
the carrying amount of an asset may not be recoverable, the Company will
reduce the amount of the asset determined not to be recoverable.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
C-6
(i) Per Share Data
Effective for the year ended January 31, 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS).
This statement requires that presentation of both primary and diluted EPS be
shown on the face of the income statement. Basic EPS excludes dilution and is
computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS includes dilution and net income per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Common equivalent shares include the effect of the exercise
of stock options. All prior period EPS have been restated. The adoption of
this new accounting standard did not have a material effect on the Company's
reported EPS amounts.
(j) Stock Option and Stock Purchase Plan Accounting
Prior to February 1, 1996, the Company accounted for its stock option plans
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, together with its related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On February 1, 1996 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which permits the Company to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows the Company to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma net income per share disclosures for stock option grants and stock
purchase plan purchases made in 1996 and future years as if the fair-value-
based method defined in SFAS No. 123 was applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
(k) Treasury Stock
Treasury stock is reported at par value and constructively retired. The
excess of fair value over par value is first charged to paid-in-capital, if
any, and then to retained earnings.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) CHROME SPECIALTIES, INC. ACQUISITION
On September 16, 1997, the Company acquired substantially all the assets and
assumed certain liabilities of Chrome Specialties, Inc. ("CSI") for $38.5
million. CSI is based in Dallas, Texas, and is engaged in the wholesale
distribution of aftermarket parts and accessories for Harley Davidson
motorcycles. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of CSI subsequent to
the acquisition date have been included in the Company's consolidated
financial statements.
The excess of the purchase price over the fair value of assets acquired is
being amortized on a straight line basis over 25 years.
C-7
The following unaudited pro forma financial information presents the
combined of operations of the Company and CSI as if the acquisition had
occurred as of the beginning of 1998 and 1997, after giving effect to certain
expenses, increased interest on debt, and related income tax effects. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and CSI constituted a
single entity during such periods.
YEAR ENDED JANUARY 31,
-----------------------
1998 1997
----------- -----------
(IN THOUSANDS)
Net sales......................................... $ 146,694 $ 142,378
Net income........................................ $ 2,681 $ 8,378
Net income per share, basic....................... $ 0.53 $ 1.59
Net income per share, diluted..................... $ 0.51 $ 1.57
(3) ACCOUNTS RECEIVABLE
JANUARY 31,
---------------
1998 1997
------- -------
(IN THOUSANDS)
Trade accounts receivable................................. $13,667 $11,852
Less allowance for doubtful accounts...................... 709 503
------- -------
$12,958 $11,349
======= =======
(4) PROPERTY AND EQUIPMENT
JANUARY 31,
---------------
1998 1997
------- -------
(IN THOUSANDS)
Trade accounts receivable................................. $13,830 $11,852
Land...................................................... 1,402 1,402
Buildings and improvements................................ 10,182 9,764
Machinery and equipment................................... 15,585 11,357
Vehicles.................................................. 1,268 1,255
------- -------
28,710 23,778
Less accumulated depreciation............................. 10,302 7,976
------- -------
$18,408 $15,802
======= =======
(5) OTHER ASSETS
JANUARY 31,
--------------
1998 1997
------- ------
(IN THOUSANDS)
Goodwill................................................... $35,923 $9,679
Other...................................................... 2,037 282
------- ------
37,960 9,961
Less accumulated amortization.............................. 2,633 1,740
------- ------
$35,327 $8,221
======= ======
(6) BANK BORROWINGS
The Company has a $53.5 million term loan and a $20 million line of credit,
with its bank. The loan and line of credit are secured by the assets of the
Company and the loan expires in August 2002. Borrowings bear
C-8
interest, payable monthly, at a floating rate which at present is LIBOR plus
1.75%. In addition the Company has converted a portion of the term loan into a
fixed rate debt utilizing swaps which have interest rates on the various
tranches ranging from 8.13% to 8.24%.
The credit agreement covering the working capital line contains covenants,
including the maintenance of a minimum current ratio, indebtedness to earnings
ratio, pricing leverage ratio, as well as cash flow and profitability
requirement. As of January 31, 1998, the Company was in compliance with such
covenants or had received waivers from the lender with respect to non-
compliance.
As of January 31, 1998, the Company was contingently liable for issued and
open letters of credit to foreign vendors aggregating approximately $11,000.
In order to hedge future commitments, the Company enters into contracts with
its bank to buy foreign currencies at fixed forward exchange rates. As of
January 31, 1998 there were $2,200,000 foreign currency contracts outstanding.
(7) ACCRUED EXPENSES AND OTHER LIABILITIES
JANUARY 31,
---------------
1998 1997
------- -------
(IN THOUSANDS)
Payroll-related expenses.................................... $ 3,725 $ 1,086
Other....................................................... 1,050 826
------- -------
$ 4,775 $ 1,912
======= =======
(8) LONG-TERM DEBT
JANUARY 31,
---------------
1998 1997
------- -------
(IN THOUSANDS)
7.47% to 8.24% term loan due in quarterly installments
ranging from $975,000 in the fiscal year ended January 31,
1999 to $2,050,000 in the fiscal quarter ending July 31,
2002. Final installment of $25,000,000 due August 31,
2002....................................................... $53,500 --
8.01% senior secured notes, retired in 1998................. -- $15,000
7.31% mortgage loan, payable in semi-annual installments of
$100,153 through June 2011................................. 2,704 2,904
10.625% mortgage loan, retired in 1998...................... -- 1,217
Capital lease obligations and other......................... 274 326
------- -------
Long-term debt.............................................. 56,478 19,447
Less current maturities..................................... 4,176 3,293
------- -------
Long-term debt, excluding current maturities................ $52,302 $16,154
======= =======
The aggregate maturities of long-term debt for the years subsequent to
January 31, 1999 are as follows: 2000, $6,250,000; 2001, $7,050,000; 2002,
$7,950,000; 2003, $29,348,000; thereafter $1,704,000.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
Except for long term debt, the amounts recorded for financial instruments in
the Company's consolidated financial statements approximate fair value as
defined in Financial Accounting Standards Board Statement No. 107. The fair
value of long term debt is estimated by discounting the future cash flows of
each instrument at rates currently offered to the Company for debt instruments
of comparable maturities by the Company's bankers. At January 31, 1998 and
1997 the fair value of long term debt exceeded the amounts recorded in the
Company's consolidated financial statements by approximately $1,073,000 and
$390,000, respectively.
C-9
(10) INCOME TAXES
Income tax expense consists of:
CURRENT DEFERRED TOTAL
------- -------- ------
(IN THOUSANDS)
Year ended January 31, 1998
Federal.......................................... $3,074 $(1,290) $1,784
State and local.................................. 614 (284) 330
------ ------- ------
$3,688 $(1,574) $2,114
====== ======= ======
CURRENT DEFERRED TOTAL
------- -------- ------
(IN THOUSANDS)
Year ended January 31, 1997
Federal.......................................... $3,412 $ 803 $4,215
State and local.................................. 731 228 959
------ ------- ------
$4,143 $ 1,031 $5,174
====== ======= ======
Year ended January 31, 1996:
Federal.......................................... $4,631 $ (520) $4,111
State and local.................................. 513 (229) 284
------ ------- ------
$5,144 $ (749) $4,395
====== ======= ======
Included in current income tax expense for the years ended January 31, 1997
and 1996, is the effect of compensation expense for tax purposes in excess of
amounts reported for financial statement purposes of $709,000, and 369,000,
respectively.
Income tax expense for the years ended January 31, 1998, 1997, and 1996,
differed from the amounts computed by applying the Federal income tax rate of
35% to pretax income as a result of the following:
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Computed "expected" tax expense......................... $1,539 $4,566 $4,311
Increase (reduction) in income taxes resulting from:
State and local taxes, net of federal tax benefit..... 214 636 158
Amortization of goodwill.............................. 93 104 96
Effect of graduated income tax rate................... (87) (100) (100)
Effect of foreign net operating loss carryforward..... -- (101) --
Other, net............................................ 355 69 (70)
------ ------ ------
$2,114 $5,174 $4,395
====== ====== ======
C-10
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
JANUARY 31,
---------------
1998 1997
------- ------
(IN THOUSANDS)
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts.......................................... $ 362 $ 209
Inventories, principally due to additional costs inventoried
for tax purposes in excess of amounts for financial
reporting purposes......................................... 1,143 513
Bonuses and compensated absences, principally due to accrual
for financial reporting purposes........................... 1,441 337
State income taxes.......................................... 128 171
Accrued liabilities and other deferred assets............... 18 11
Foreign net operating loss carryforwards.................... 105 105
State enterprise zone credit carry forwards................. 37 37
------- ------
Total deferred tax assets..................................... 3,234 1,383
------- ------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation............................................... (857) (668)
State income taxes.......................................... (198) (198)
Goodwill, principally due to differences in amortization
period..................................................... (88) --
------- ------
Total deferred tax liabilities................................ (1,143) (866)
------- ------
Net deferred tax assets....................................... $ 2,091 $ 517
======= ======
Based on the Company's historical operating earnings, management believes it
is more likely than not that the Company will realize the benefit of the
deferred income tax asset recorded, and accordingly, has established no
valuation allowance. Certain factors beyond management's control can affect
future levels of taxable income, and therefore, no assurances can be given
that sufficient taxable income will be generated to fully realize recorded tax
benefits.
In March 1996 the Company received a Notice of Deficiency from the Internal
Revenue Service (IRS) arising out of an examination of its income tax returns
for the years ended January 31, 1992, 1993 and 1994. The Notice asserted that
the Company had underpaid its income taxes in those years by approximately
$4.3 million due to the IRS disallowance of deductions primarily for
compensation related issues. Based on the advice of outside tax counsel, the
Company has petitioned the U.S. Tax Court for a redetermination of these
alleged deficiencies citing numerous errors in the IRS's allegations. In
addition, the Company has asserted that it is due additional tax deductions
totaling at least $3.1 million in the tax periods which were examined. While
the outcome of this matter cannot be predicted with certainty, management
believes, based on their review and the opinion of outside experts, that any
liability resulting from this proceeding is not reasonably likely to have a
material effect on the Company's liquidity, financial condition or results of
operations. In February 1997 the Company received a Notice of Personal
Assessment related to the same compensation related issues in its tax returns
for the years ended January 31, 1995 and 1996. In March 1998, the Company was
notified by the IRS that it had revised its position with respect to the
matters contained in the Notice of Proposed Assessment and would not be
issuing an assessment for the years ended January 31, 1995 and 1996.
C-11
(11) SHAREHOLDERS' EQUITY
(a) Common Stock
The Company has reserved an aggregate of 1,576,000 shares of common stock
for issuance under its 1991, 1995, and 1997 Stock Option Plans. Under these
plans, the Company may issue options to purchase shares of common stock to
eligible employees, officers, directors, independent contractors and
consultants at prices determined by the Board of Directors on the grant date.
Options can be granted for terms of up to ten years and vesting will be set by
the Board of Directors.
Details of stock option activity under these plans are as follows:
WEIGHTED- WEIGHTED- WEIGHTED-AVERAGE
AVERAGE AVERAGE OPTIONS FAIR VALUE OF
OPTION EXERCISE GRANT DATE EXERCISABLE OPTIONS GRANTED
OUTSTANDING PRICE FAIR VALUE* AT YEAR END DURING YEAR
----------- --------- ----------- ----------- ----------------
January 31, 1996........ 756,159 17.596 247,956 $7.692
======= ======
Granted............... 360,365 18.367 $7.312
======
Exercised............. (199,804) 16.369
Canceled or expired... (53,490) 19.625
----------
January 31, 1997........ 863,230 18.076 328,613 $7.312
======= ======
Granted............... 1,976,939 12.00 $3,427
======
Exercised............. (67,604) 11.742
Canceled or expired... (1,726,872) 15.019
----------
January 31, 1998........ 1,045,693 12.009 207,020 $3.427
========== ======= ======
Shares available for
future grant........... 110,000
==========
- --------
* Fair value assumptions: BLACK-SCHOLES OPTION-PRICING MODEL
WEIGHTED-AVERAGE AVERAGE DIVIDEND
RISK FREE RATE EXPECTED LIFE VOLATILITY YIELD
---------------- ------------- ---------- -----
1996......................... 6.79% 3.00 50% 0%
1997......................... 6.31% 3.00 50% 0%
1998--Granted................ 6.97% 3.00 50% 0%
--Repriced............... 6.49% 3.00 50% 0%
The following table summarizes information about the Company's stock options
outstanding at January 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT 1/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 1/31/98 EXERCISE PRICE
----------- ---------------- -------------- ----------- --------------
$10.00.................. 3,248 4.39 $10.000 3,248 $10.000
$11.75--$16.00.......... 1,024,445 9.44 11.850 194,681 11.75
$18.00--$26.00.......... 18,000 7.91 21.690 9,091 22.14
--------- ---- ------- ------- -------
$10.00--$26.00.......... 1,045,693 9.39 $12.010 207,020 $ 12.18
========= ==== ======= ======= =======
C-12
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the Company's shareholders
in September, 1996. A total of 150,000 shares of common stock are reserved for
issuance under the Purchase Plan. The Purchase Plan is administered by the
Board of Directors. The Purchase Plan permits eligible employees, as defined,
to purchase common stock through payroll deductions, which may not exceed 15%
of the employee's base compensation. No employee may purchase more than
$25,000 worth of stock in any calendar year. The price of shares purchased
under the Purchase Plan is 85% of the lower of the fair market value of the
common stock on (i) the first day of the offering period; or (ii) the last day
of the offering period. Employees may end their participation in the offering
at any time during the offering period, and participation ends automatically
on termination of employment with the Company. In March 1998 and 1997
employees purchased 8,015 and 8,280 shares, respectively under this plan.
The Company applies APB Opinion No. 25 in accounting for its various stock
option plans and Employee Stock Purchase Plan (the "stock plans").
Accordingly, no compensation cost has been recognized for the stock plans.
However, if the Company had determined compensation costs pursuant to SFAS No.
123 for its stock plans, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below for the years
noted:
1998 1997 1996
------ ------ ------
Net income............................... As reported $2,283 $7,872 $7,921
====== ====== ======
Pro forma $1,275 $7,132 $7,484
====== ====== ======
Net income per share, basic.............. As reported $ 0.45 $ 1.49 $ 1.57
====== ====== ======
Pro forma $ 0.25 $ 1.35 $ 1.48
====== ====== ======
Net income per share, diluted............ As reported $ 0.44 $ 1.48 $ 1.52
====== ====== ======
Pro forma $ 0.24 $ 1.34 $ 1.44
====== ====== ======
Pro forma net income reflects only options granted in 1996 through 1998.
Therefore the full impact of calculating compensation cost for the Company's
stock option plans under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above as compensation cost is reflected over a stock
options' vesting period and compensation cost for options granted prior to
February 1, 1995 is not considered.
In October 1996 the Board of Directors authorized the repurchase of up to
the 300,000 common shares of the Company in the open market. In April and May
of 1997 the Company repurchased 276,000 common shares for $3,488,000.
(b) Preferred Stock
The Company has the authority to issue up to 1,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions of the shares, including dividend rights, voting rights, terms of
redemption and liquidation preferences. There are no shares of preferred stock
outstanding.
(c) Preferred Share Purchase Rights
In November 1996 the Board of Directors declared a dividend distribution on
November 13, 1996 of one Preferred Shares Purchase Right on each outstanding
share of the Company's Common Stock. Each Right will entitle stockholders to
buy 1/1000th share of the Company's Series A Participating Preferred Stock at
an exercise price of $80.00. The Board of Directors has initially reserved
100,000 shares for issuance upon exercise of the Rights. The Rights will
become exercisable following the tenth day after a person or group announces
acquisition of 15% or more of the Company's Common Stock or announces
commencement of a tender offer the consummation of which would result in
ownership by the person or group of 15% or more of the Common Stock.
C-13
The Company will be entitled to redeem the Rights at $.01 per Right at any
time on or before the tenth day following acquisition by a person or group of
15% or more of the Company's Common Stock.
If, prior to redemption of the Rights, a person or group acquires 15% or
more of the Company's Common Stock, each Right not owned by a holder of 15% or
more of the Common Stock will entitle its holder to purchase, at the Right's
then current exercise price, that number of shares of Common Stock of the
Company (or, in certain circumstances as determined by the Board, cash, other
property or other securities) having a market value at that time of twice the
Right's exercise price. If, after the tenth day following acquisition by a
person or group of 15% or more of the Company's Common Stock, the Company
sells more than 50% of its assets or earning power or is acquired in a merger
or other business combination transaction, the acquiring person must assume
the obligations under the Rights and the Rights will become exercisable to
acquire Common Stock of the acquiring person at the discounted price. At any
time after an event triggering exercisability of the Rights at a discounted
price and prior to the acquisition by the acquiring person of 50% or more of
the outstanding Common Stock, the Board of Directors of the Company may
exchange the Rights (other than those owned by the acquiring person or its
affiliates) for Common Stock of the Company at an exchange ratio of one share
of Common Stock per Right.
(12) COMMITMENTS AND CONTINGENCIES
(a) Bonus Agreements
The Company has an agreement with the past Chairman, President and Chief
Executive Officer, who was terminated as an employee on November 5, 1997,
which provides for a bonus ranging from 3 to 5% of operating income, as
adjusted. The agreement terminates when $6,093,000 has been paid or the
officer voluntarily resigns or is terminated for cause. As of January 31,
1998, $3,127,000 has been accrued under this agreement for potential future
payments.
The Company also has a bonus agreement with a consultant which provides for
annual payments based upon defined operating results up to a limit of
$2,031,000. As of January 31, 1998, $1,421,000 remains to be paid or accrued
under this agreement.
Both of these agreements provide for a lump-sum payment, less amounts
already paid, in the event that the Company sells all or substantially all of
its assets.
(b) Operating Leases
The Company leases certain facilities and equipment under noncancelable
operating leases. Certain facilities leases include renewal options and rent
escalation clauses to reflect changes in price indices, real estate taxes and
maintenance costs. Future minimum lease payments are as follows:
YEAR ENDING JANUARY 31, (IN THOUSANDS)
----------------------- --------------
1999....................................................... $1,834
2000....................................................... 1,701
2001....................................................... 1,392
2002....................................................... 1,260
2003....................................................... 416
Thereafter................................................. 2,190
Rental expense under operating leases for the years ended January 31, 1998,
1997 and 1996 was $1,836,000, $1,150,000 and $1,183,000, respectively.
C-14
(c) Litigation
The Company is involved in potential claims or legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
(13) NUMBER OF SHARES PER SHARE COMPUTATION
There was no adjustment to net income for purposes of computing net income
per share. The following table reconciles the number of shares used in the
basic net income per share computation and the number of shares used in the
diluted net income per share computation:
JANUARY 31,
-----------------
1998 1997 1996
----- ----- -----
(IN THOUSANDS)
Basic:
Weighted average common shares used in computing basic
net income per share.................................... 5,094 5,272 5,048
Diluted:
Weighted average common shares outstanding............... 5,094 5,272 5,048
Diluted options outstanding.............................. 139 55 161
----- ----- -----
Shares used in computing diluted net income per share.... 5,233 5,327 5,209
===== ===== =====
Options to purchase shares of common stock were outstanding during each of
the three fiscal years ended January 31, 1998, 1997, and 1996 which were not
included in the computation of diluted net income (loss) per share because the
options' exercise price's were greater than the average market price of the
common shares. Excluded shares for each year are as follows:
EXCLUDED
OPTIONS EXERCISE PRICE
-------- ---------------
Year ended January 31,
1998............................................ 18,000 $18.00 - $26.00
1997............................................ 133,500 $22.50 - $26.00
1996............................................ 7,500 $ - $26.00
Common stock in the amount of 71,409 shares was issued in the quarter
following the fiscal year end under the Company's stock options plans.
C-15
(14) UNAUDITED QUARTERLY FINANCIAL DATA
1998
--------------------------------------
THREE MONTHS ENDED
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
-------- ------- ---------- ----------
(IN THOUSANDS)
Sales, net.............................. $31,707 $32,297 $30,450 $28,270
------- ------- ------- -------
Gross profit............................ 11,166 12,333 10,952 9,888
------- ------- ------- -------
Operating income/(loss)................. 4,306 4,642 962 (2,550)
------- ------- ------- -------
Net income/(loss)....................... $ 2,343 $ 2,524 $ 82 $(2,667)
------- ------- ------- -------
Basic net income (loss) per share....... $ 0.45 $ 0.50 $ 0.20 $ (0.53)
------- ------- ------- -------
Diluted net income (loss) per share..... $ 0.45 $ 0.49 $ 0.02 $ (0.52)
======= ======= ======= =======
1997
--------------------------------------
THREE MONTHS ENDED
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
-------- ------- ---------- ----------
(IN THOUSANDS)
Sales, net.............................. $30,627 $30,357 $26,193 $21,380
------- ------- ------- -------
Gross profit............................ 11,612 12,224 10,454 8,053
------- ------- ------- -------
Operating income........................ 5,668 5,021 3,104 1,168
------- ------- ------- -------
Net income.............................. $ 3,008 $ 2,776 $ 1,574 $ 514
------- ------- ------- -------
Basic net income per share.............. $ 0.59 $ 0.54 $ 0.30 $ 0.10
------- ------- ------- -------
Diluted net income per share............ $ 0.58 $ 0.52 $ 0.30 $ 0.10
======= ======= ======= =======
(15) SUBSEQUENT EVENT
On March 23, 1998 the Company received a written proposal from Golden Cycle,
L.L.C. ("Golden") for a business combination between Golden and the Company in
which Golden Cycle proposed that the Company's shareholders would receive cash
consideration of $18.00 per share. Shortly thereafter Golden Cycle commenced a
tender offer for all the issued and outstanding shares of the Company for
$18.00 per share. In addition Golden Cycle commenced a consent solicitation to
remove the current Board of Directors and replace them with Directors selected
by Golden Cycle. Golden Cycle and a number of third parties have filed
lawsuits in connection with the abovementioned tender offer and consent
solicitation. The Company has retained investment and legal advisors to advise
it in connection with the tender offer, consent solicitation and lawsuits as
well as to explore other acquisition proposals and other alternatives.
C-16
ANNEX D
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL MOTORSPORT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL JANUARY 31,
30, 1998 1998
-------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 72 $ 1,432
Accounts receivable, net................................ 16,194 12,958
Merchandise inventories................................. 64,677 66,338
Deferred income taxes................................... 3,111 3,079
Prepaid income taxes.................................... 1,076 1,926
Deposits and prepaid expenses........................... 2,886 2,614
-------- --------
88,016 88,347
Property and equipment, net............................. 19,162 18,408
Other assets............................................ 35,128 35,327
-------- --------
$142,306 $142,082
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt and capital lease
obligations............................................ $ 4,160 $ 4,176
Bank borrowings......................................... 6,600 13,741
Accounts payable........................................ 9,350 6,757
Accrued expenses and other liabilities.................. 6,794 4,775
-------- --------
26,904 29,449
Long-term debt and capital lease obligations............ 51,321 52,302
Deferred income taxes................................... 1,282 988
Shareholders' equity:
Common stock, $.001 par value; 20,000,000 shares
authorized; 5,437,736 issued and 5,161,736 shares
outstanding as of April 30, 1998, and 5,298,755 issued
and 5,037,755 shares outstanding as of April 30, 1997.. 5 5
Additional paid-in capital.............................. 29,972 28,977
Retained earnings....................................... 32,822 30,361
-------- --------
62,799 59,343
Commitments and contingencies
$142,306 $142,082
======== ========
See accompanying notes to unaudited condensed consolidated financial
statements.
D-1
GLOBAL MOTORSPORT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED APRIL 30,
---------------------
1998 1997
---------- ----------
Sales, net............................................... $ 44,796 $ 31,707
Cost of sales............................................ 28,029 19,872
---------- ----------
Gross profit........................................... 16,767 11,835
---------- ----------
Operating expenses:
Selling, general and administrative.................... 10,337 7,166
Costs associated with unsolicited tender offer......... 437 --
Product development.................................... 252 363
---------- ----------
11,026 7,529
---------- ----------
Operating income....................................... 5,741 4,306
Interest expense......................................... 1,508 457
---------- ----------
Income before income taxes............................. 4,233 3,849
Income taxes............................................. 1,772 1,506
---------- ----------
Net income............................................... $ 2,461 $ 2,343
========== ==========
Net income per share, basic.............................. $ 0.48 $ 0.45
========== ==========
Net income per share, diluted............................ $ 0.46 $ 0.45
========== ==========
Shares outstanding:
Basic.................................................. 5,111,000 5,218,000
Diluted................................................ 5,393,000 5,224,000
See accompanying notes to unaudited condensed consolidated financial
statements.
D-2
GLOBAL MOTORSPORT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
APRIL 30,
--------------
1998 1997
------ ------
Cash flows from operating activities:
Net income.................................................... $2,461 $2,343
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization................................ 1,047 583
Deferred income tax.......................................... 262 --
Changes in items affecting operations:
Accounts receivable......................................... (3,236) (1,079)
Merchandise inventories..................................... 1,661 2,383
Deposits and prepaid expenses............................... 578 381
Accounts payable, accrued expenses and other liabilities.... 4,612 1,166
------ ------
Net cash provided by operating activities...................... 7,385 5,777
------ ------
Cash flows from investing activities:
Additions to property and equipment........................... (1,602) (991)
Cash flows from financing activities:
Bank repayment, net........................................... (7,141) (1,066)
Repayment on capital lease obligations and long-term debt..... (997) (22)
Issuance of common stock...................................... 995 106
Repurchase of common stock.................................... -- (3,199)
------ ------
Net cash used in financing activities.......................... (7,143) (4,181)
------ ------
Net change in cash and cash equivalents........................ (1,360) 605
Cash and cash equivalents at beginning of period............... 1,432 40
------ ------
Cash and cash equivalents at end of period..................... $ 72 $ 645
====== ======
Supplemental disclosures of cash paid during the period:
Interest...................................................... $1,508 $ 145
====== ======
Income taxes (refund).......................................... $ (990) $ --
====== ======
See accompanying notes to unaudited condensed consolidated financial
statements.
D-3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles, consistent with those applied in, and should be read in
conjunction with, the audited consolidated financial statements for the fiscal
year ended January 31, 1998 included in the Annual Report on Form 10-K filed
by Global Motorsport Group, Inc. (the "Company") with the Securities and
Exchange Commission.
The interim financial information is unaudited, but reflects all normal
recurring adjustments which are, in the opinion of management, necessary to
provide a fair statement of results for the interim periods presented. The
results for the interim periods are not necessarily indicative of results to
be expected for the fiscal year.
NOTE 2--EARNINGS PER SHARE CALCULATION
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
128, Earnings Per Share. In accordance with SFAS No. 128, basic net income per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period, using the treasury stock method for options and
warrants, after giving effect to contingently issuable shares under
acquisition agreements. The Company has restated net income per share for all
periods presented in accordance with SFAS No. 128.
Reconciliation of basic and diluted net income per share and pro forma net
income per shares (in thousands, except per share data):
THREE MONTHS ENDED THREE MONTHS ENDED
APRIL 30, 1998 APRIL 30, 1997
----------------------- -----------------------
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ ----- ---------- ------ -----
Basic net income............ $2,461 5,111 $0.48 $2,343 3,218 $0.45
Effect of dilutive shares... -- 282 -- -- 6 --
------ ----- ----- ------ ----- -----
Diluted net income.......... $2,461 5,393 $0.46 $2,343 5,224 $0.45
D-4
ANNEX E
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated financial statements of the Company
(the "Pro Forma Consolidated Financial Statements"), include the unaudited pro
forma consolidated statements of operations for the year ended January 31,
1998 and for the three months ended April 30, 1998 and 1997 (the "Pro Forma
Consolidated Statements of Operations"), and the unaudited pro forma
consolidated balance sheet as of April 30, 1998 (the "Pro Forma Consolidated
Balance Sheet").
The Pro Forma Consolidated Balance Sheet is based on the unaudited
consolidated balance sheet of the Company as of April 30, 1998 and is adjusted
to give effect to the Recapitalization as if it had occurred on April 30,
1998.
The Pro Forma Consolidated Statements of Operations are based on the audited
consolidated statement of operations of the Company for the year ended January
31, 1998, the unaudited consolidated statements of operations of the Company
for the three months ended April 30, 1998 and 1997, and are adjusted to give
effect to the Recapitalization as though it had occurred as of February 1,
1997, excluding certain one time costs of the Transactions as described in the
notes herein. In addition, the consolidated statements of operations for the
year ended January 31, 1998 and the three months ended April 30, 1997 are
adjusted to give effect to the Company's acquisition of Chrome Specialities,
Inc. ("CSI") on September 15, 1997 (which transaction was accounted for by the
Company as a purchase), as if it had occurred as of February 1, 1997.
The Pro Forma Consolidated Financial Statements and the accompanying notes
should be read in conjunction with the Company's historical financial
statements and related notes thereto included elsewhere in this Offer to
Purchase.
The Pro Forma Consolidated Financial Statements do not purport to represent
what the Company's financial condition or the results of operations would
actually have been had the acquisition of CSI and Recapitalization in fact
occurred on the assumed dates, nor do they project the Company's financial
condition or results of operations for any future period or date.
E-1
GLOBAL MOTORSPORT GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 1998
(IN THOUSANDS)
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
Current Assets:
Cash and Cash Equivalents................. $ 72 $ -- (a) $ 72
Accounts Receivable, net.................. 16,194 -- 16,194
Inventories............................... 64,677 -- 64,677
Deferred Income Taxes..................... 3,111 4,000 (b) 7,111
Income Taxes Receivable................... 1,076 -- 1,076
Prepaid Expenses.......................... 2,886 -- 2,886
-------- -------- --------
Total Current Assets.................... 88,016 4,000 92,016
Property and Equipment, net................. 19,162 -- 19,162
Deferred Financing Costs.................... 964 5,636 (c) 6,600
Other Assets, net........................... 34,164 -- 34,164
-------- -------- --------
Total Assets............................ $142,306 $ 9,636 $151,942
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt and
Capital Lease Obligations................ $ 4,160 $ (4,160)(d) $ --
Bank Borrowings........................... 6,600 (6,600)(d) --
Accounts Payable.......................... 9,350 -- 9,350
Accrued Expenses.......................... 6,794 -- 6,794
-------- -------- --------
Total Current Liabilities............... 26,904 (10,760) 16,144
Long-Term Debt and Capital Lease
Obligations................................ 51,321 (51,321)(d) --
Revolving Facility.......................... -- 3,220 (e) 3,220
Term Facility............................... -- 25,000 (e) 25,000
Senior Notes................................ -- 80,000 (e) 80,000
Senior Discount Notes....................... -- 25,000 (e) 25,000
Deferred Income Taxes....................... 1,282 -- 1,282
Shareholders' Equity:
Common Stock.............................. 5 (5)(f) 3
3 (g)
Additional Paid-In Capital................ 29,972 (27,926)(f) 61,178
57,997 (g)
1,135 (h)
Retained Earnings......................... 32,822 (76,904)(f) (59,885)
(15,803)(i)
-------- -------- --------
Total Shareholders' Equity.............. 62,799 (61,503) 1,296
-------- -------- --------
Total Liabilities and Shareholders'
Equity................................. $142,306 $ 9,636 $151,942
======== ======== ========
See notes to unaudited pro forma consolidated balance sheet.
E-2
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Sources and uses of cash for the Recapitalization are anticipated to be as
follows (in thousands):
Sources of cash:
Revolving facility............................................... $ 3,220
Term facility.................................................... 25,000
Senior notes..................................................... 80,000
Senior discount notes............................................ 25,000
Equity investment by the Purchaser............................... 58,000
--------
$191,220
========
Uses of cash:
Repurchase of shares............................................. $104,835
Repayment of existing long-term obligations...................... 62,081
Net consideration payable upon cancellation of options........... 8,564
Estimated fees and expenses...................................... 15,740
--------
$191,220
========
(b) Reflects the tax benefit to be realized in connection with (i) a non-cash
compensation expense of approximately $1,135,000 related to management's
"cashless" exercise of certain stock options, (ii) a cash compensation
expense of $8,564,000 to be recognized in connection with the repurchase
of the remaining stock options, and (iii) the write-off of the unamortized
portion of deferred financing costs described in note (c). Management
believes it is more likely, than not, that the Company will realize such
benefits based on anticipated future earnings.
(c) Reflects estimated deferred financing costs of approximately $6,600,000
associated with the Debt Financing, net of the unamortized portion of
deferred financing costs of $964,000 associated with the Company's
existing debt obligations that will be written off in connection with the
Recapitalization.
(d) Reflects the elimination of debt obligations to be repaid in connection
with the Recapitalization.
(e) Reflects the proceeds from the Debt Financing, consisting of (i)
borrowings under a new credit facility consisting of $25,000,000 under the
term facility and $3,220,000 under the revolving facility, (ii) proceeds
of $80,000,000 from the sale of senior notes, and (iii) proceeds of
$25,000,000 from the sale of senior discount notes.
(f) Reflects the redemption of 4,820,000 shares for $104,835,000 at $21.75 per
share.
(g) Reflects the proceeds from the sale of 2,666,667 newly-issued shares to
the Purchaser for $58,000,000 at $21.75 per share.
(h) Reflects the issuance of 52,191 new shares in connection with the
"cashless" exercise of certain stock options held by management.
(i) Reflects deductions for (i) estimated transaction fees and expenses of
approximately $9,140,000, (ii) a non-cash compensation expense of
approximately $1,135,000, related to management's "cashless" exercise of
certain stock options, (iii) a cash compensation expense of $8,564,000, to
be recognized in connection with the repurchase of the remaining stock
options, and (iv) the write-off of deferred financing costs of $964,000
associated with the Company's existing debt obligations. Such amounts are
net of deferred tax benefits of approximately $4,000,000 related to (ii),
(iii) and (iv) which management believes are more likely, than not, to be
realized based on anticipated future earnings.
E-3
UNAUDITED PRO FORMA GLOBAL MOTORSPORT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RECAPITALIZATION
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- ---------------- ---------
Net Sales................................ $44,796 $ -- $44,796
Cost of Sales.......................... 28,029 -- 28,029
------- ------- -------
Gross Profit............................. 16,767 -- 16,767
Selling, General and Administrative
Expenses.............................. 10,337 -- 10,337
Costs Associated with Unsolicited
Tender Offer.......................... 437 -- 437
Product Development.................... 252 -- 252
------- ------- -------
Operating Income......................... 5,741 -- 5,741
Interest Expense....................... 1,508 (1,508)(b) 3,556
3,556 (c)
------- ------- -------
Income Before Income Taxes............... 4,233 (2,048) 2,185
Income Tax Provision (Benefit)......... 1,772 (898)(d) 874
------- ------- -------
Net Income............................... $ 2,461 $(1,150) $ 1,311
======= ======= =======
Per Share Data
Net income
Basic................................ $ 0.48 $ 0.43
Diluted.............................. $ 0.46 $ 0.43
Shares used in per share calculation
Basic................................ 5,127 3,072
Diluted.............................. 5,350 3,072
Other Data
Depreciation and Amortization.......... $ 1,047 $ 1,047
EBITDA(e).............................. $ 7,303 $ 7,303
EBITDA Margin(f)....................... 16.3% 16.3%
See notes to unaudited pro forma consolidated statements of operations.
E-4
UNAUDITED PRO FORMA GLOBAL MOTORSPORT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACQUISITION OF CSI(g)
----------------------
CSI RECAPITALIZATION
HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED ADJUSTMENTS(A) PRO FORMA
---------- ---------- ----------- ----------- ---------------- ---------
Net Sales............... $122,725 $23,969 $ -- $146,694 $ -- $146,694
Cost of Sales......... 77,716 15,053 -- 92,769 -- 92,769
-------- ------- ------- -------- ------- --------
Gross Profit............ 45,009 8,916 -- 53,925 -- 53,925
Selling, General and
Administrative
Expenses............. 33,114 6,216 478 (h) 39,808 -- 39,808
Provision for Benefits
Related to Employment
Agreement............ 3,127 -- -- 3,127 -- 3,127
Product Development... 1,407 -- -- 1,407 -- 1,407
-------- ------- ------- -------- ------- --------
Operating Income........ 7,361 2,700 (478) 9,583 -- 9,583
Interest Expense...... 2,964 511 1,048 (i) 4,523 (4,523)(b) 14,226
14,226 (c)
-------- ------- ------- -------- ------- --------
Income (Loss) Before
Income Taxes........... 4,397 2,189 (1,526) 5,060 (9,703) (4,643)
Income Tax Provision
(Benefit)............ 2,114 -- 265 (j) 2,379 (4,236)(d) (1,857)
-------- ------- ------- -------- ------- --------
Net Income (Loss)....... $ 2,283 $ 2,189 $(1,791) $ 2,681 $(5,467) $ (2,786)
======== ======= ======= ======== ======= ========
Per Share Data
Net income
Basic............... $ 0.45 $ (0.91)
Diluted............. $ 0.44 $ (0.91)
Shares used in per
share calculation
Basic............... 5,094 3,072
Diluted............. 5,233 3,072
Other Data
Depreciation and
Amortization......... $ 3,088 $ 199 $ 833 $ 4,120 $ -- $ 4,120
EBITDA(e)............. $ 15,697 $ 18,951
EBITDA Margin(f)...... 12.8% 12.9%
See notes to unaudited pro forma consolidated statements of operations.
E-5
UNAUDITED PRO FORMA GLOBAL MOTORSPORT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACQUISITION OF CSI(g)
----------------------
CSI RECAPITALIZATION
HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED ADJUSTMENTS(A) PRO FORMA
---------- ---------- ----------- ----------- ---------------- ---------
Net Sales............... $31,707 $9,868 $ -- $41,575 $ -- $41,575
Cost of Sales......... 19,872 6,134 -- 26,006 -- 26,006
------- ------ ----- ------- ------- -------
Gross Profit............ 11,835 3,734 -- 15,569 -- 15,569
Selling, General and
Administrative
Expenses............. 7,166 2,475 139 (h) 9,780 -- 9,780
Product Development... 363 -- -- 363 -- 363
------- ------ ----- ------- ------- -------
Operating Income........ 4,306 1,259 (139) 5,426 -- 5,426
Interest Expense...... 457 208 419 (i) 1,084 (1,084)(b) 3,556
3,556 (c)
------- ------ ----- ------- ------- -------
Income (Loss) Before
Income Taxes........... 3,849 1,051 (558) 4,342 (2,472) 1,870
Income Tax Provision
(Benefit)............ 1,506 -- 321 (j) 1,737 (989)(d) 748
------- ------ ----- ------- ------- -------
Net Income (Loss)....... $ 2,343 $1,051 $(879) $ 2,605 $(1,483) $ 1,122
======= ====== ===== ======= ======= =======
Per Share Data
Net income
Basic............... $ 0.45 $ 0.37
Diluted............. $ 0.45 $ 0.37
Shares used in per
share calculation
Basic............... 5,207 3,072
Diluted............. 5,207 3,072
Other Data
Depreciation and
Amortization......... $ 583 $ 69 $ 334 $ 986 $ -- $ 986
EBITDA(e)............. $ 5,205 $ 6,729
EBITDA Margin(f)...... 16.4% 16.2%
See notes to unaudited pro forma consolidated statements of operations.
E-6
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(a) The pro forma adjustments do not reflect (i) estimated transaction fees
and expenses of approximately $9,140,000, (ii) a non-cash compensation
expense of approximately $1,135,000 related to management's "cashless"
exercise of certain stock options, (iii) a cash compensation expense of
$8,564,000 to be recognized in connection with the repurchase of the
remaining stock options, (iv) the write-off of deferred financing costs of
$964,000 associated with the Company's existing debt obligations and (v)
deferred tax benefits of approximately $4,000,000 related to (ii), (iii)
and (iv), which management believes are more likely, than not, to be
realized based upon anticipated future earnings, all of which are expected
to be incurred in connection with the Recapitalization. Such amounts
described in Note (i) to the Unaudited Pro Forma Consolidated Balance
Sheet represent items which the Company anticipates will be recorded in
the consolidated statement of operations for the period in which the
Recapitalization occurs.
(b) Reflects the elimination of interest expense associated with the debt
obligations repaid in connection with the Recapitalization.
(c) Reflects interest expense associated with the financing for the
Recapitalization as follows (in thousands):
THREE MONTHS YEAR ENDED THREE MONTHS
ENDED APRIL 30, JANUARY 31, ENDED APRIL 30,
1998 1998 1997
--------------- ----------- ---------------
Interest expense related to the
following:
Revolving credit facility at
an assumed interest rate of
8.20%....................... $ 65 $ 264 $ 65
Senior Secured Term Loan at
an assumed interest rate of
8.20%....................... 513 2,050 513
Senior Notes at an assumed
interest rate of 10.00%..... 2,000 8,000 2,000
Senior Discount Notes at an
assumed interest
rate of 12.75%............. 797 3,188 797
Amortization of deferred
financing costs related to
the above................... 181 724 181
------ ------- ------
$3,556 $14,226 $3,556
====== ======= ======
A 0.5% increase or decrease in the assumed weighted average interest rate
on the Debt Financing would change pro forma interest expense by $265,000
for the year ended January 31, 1998, and by $66,000 for each of the three
months ended April 30, 1998 and 1997.
(d) Reflects the adjustment necessary to state the pro forma income tax
provision (benefit) associated with the pro forma adjustments at an
assumed effective tax rate of 40%.
(e) EBITDA represents earnings before (i) interest expense, (ii) income taxes,
(iii) depreciation and amortization, (iv) the provision for the remaining
benefits to be paid under an employment agreement with the Company's past
Chairman, President and Chief Executive Officer who left the Company on
November 5, 1997 which provided for a bonus ranging from 3% to 5% of
operating earnings before non-recurring charges; similar benefits are not
being provided to any of the Company's current employees or members of the
Board of Directors (the "Employment Agreement Provision") (v) operating
cash losses recognized in the Company's historical financial statements
related to its investment in Bikers Discount Supply ("BDS") which the
Company intends to sell or shut-down (the "BDS Losses"), (vi) the
provision for the closure of the Custom Chrome, Inc. Dallas-Fort Worth
distribution facility (the "Dallas Warehouse
E-7
Closure Costs"), (vii) the provision for the settlement of $307,000 with
the State of Kentucky for personal property taxes related to the Company's
operation of its Louisville, Kentucky facility, net of expenses of $30,000
and $7,500 for the year ended January 31, 1998 and for the three months
ended April 30, 1997, respectively, which adjusts historical property tax
expense to normalized amounts for the respective periods. (the "PPT
Settlement Expense"), and (viii) costs associated with the Golden Cycle
Offer.
EBITDA data is included because management understands that such
information is considered by certain investors as an additional basis on
which to evaluate the Company's ability to pay interest, repay debt and
make capital expenditures. Items excluded from EBITDA could significantly
affect the Company's results of operations and liquidity and should be
considered in evaluating the Company's financial performance. EBITDA is not
intended to represent and should not be considered more meaningful than, or
an alternative to, measures of operating performance as determined in
accordance with generally accepted accounting principles.
EBITDA was derived as follows (in thousands):
THREE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
APRIL 30, JANUARY 31, APRIL 30,
--------------------- ----------------- ----------------------
PRO FORMA PRO FORMA PRO FORMA
1998 1998 1998 1998 1997 1997
--------- ----------- ------- --------- --------- -----------
Income (Loss) Before
Income Taxes........... $ 4,233 $ 2,185 $ 4,397 $(4,643) $ 3,849 $ 1,870
Interest expense........ 1,508 3,556 2,964 14,226 457 3,556
Depreciation and
amortization........... 1,047 1,047 3,088 4,120 583 986
Employment Agreement
Provision.............. -- -- 3,127 3,127 -- --
BDS Losses.............. 78 78 1,225 1,225 324 324
Dallas Warehouse Closure
Costs.................. -- -- 619 619 -- --
Property Tax Settlement
Expense................ -- -- 277 277 (8) (8)
Costs Associated With
The Golden Cycle
Offer.................. 437 437 -- -- -- --
--------- --------- ------- ------- --------- ---------
EBITDA................ $ 7,303 $ 7,303 $15,697 $18,951 $ 5,205 $ 6,729
========= ========= ======= ======= ========= =========
(f) Represents EBITDA as a percentage of net sales.
(g) Reflects the historical results of CSI and the related pro forma
adjustments associated with the Company's acquisition of CSI, which was
accounted for by the Company as a purchase. Results of CSI after September
15, 1997, the date of acquisition are included in the Company's historical
financial statements.
(h) The net adjustment to selling, general and administrative expenses
consists of the following (in thousands):
THREE MONTHS YEAR ENDED THREE MONTHS
ENDED APRIL 30, JANUARY 31, ENDED APRIL 30,
1998 1998 1997
--------------- ----------- ---------------
Goodwill amortization for the
periods prior to the
CSI Acquisition not included
in the historical
financial statements.......... $-- $ 833 $ 334
Salaries, bonuses and benefits
provided to former owners no
longer being paid............. -- (355) (195)
---- ----- -----
Net reduction in selling,
general and administrative
expenses...................... $-- $ 478 $ 139
==== ===== =====
(i) Reflects interest expense incurred for net borrowings associated with the
acquisition of CSI.
(j) Reflects the adjustment necessary to state the pro forma income tax
expense at the Company's effective tax rate during the respective periods.
E-8
Facsimile copies of the Letter of Transmittal, properly completed and duly
signed, will be accepted. The Letter of Transmittal, certificates for Shares
and any other required documents should be sent or delivered by each
stockholder of the Company or by such stockholder's broker, dealer, commercial
bank, trust company or other nominee to the Depositary, at the address set
forth below:
The Depositary for the Offer is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
BY MAIL OR OVERNIGHT DELIVERY: BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY)
40 Wall Street, 46th Floor (718) 234-5001
New York, New York 10005
CONFIRM RECEIPT OF FACSIMILE BY
TELEPHONE:
(718) 921-8200
Questions and requests for assistance or additional copies of this Offer to
Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and the
Guidelines for Certification of Taxpayer Identification on Substitute Form W-9
may be directed to the Information Agent at the location and telephone numbers
set forth below. Stockholders may also contact their broker, dealer,
commercial bank or trust company for assistance concerning the Offer.
The Information Agent for the Offer is:
[LOGO OF MACKENZIE PARTNERS, INC. APPEARS HERE]
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
CALL TOLL-FREE (800) 322-2885