- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
----------------
PEERLESS INDUSTRIAL GROUP, INC.
(NAME OF SUBJECT COMPANY)
PEERLESS INDUSTRIAL GROUP, INC.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, NO PAR VALUE
CLASS B COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS OF SECURITIES)
254680-10-1
(CUSIP NUMBER OF COMMON STOCK)
----------------
WILLIAM H. SPELL
CHIEF EXECUTIVE OFFICER
PEERLESS INDUSTRIAL GROUP, INC.
2430 METROPOLITAN CENTRE
333 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402
(612) 371-9650
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED
TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF
THE PERSON(S) FILING STATEMENT)
----------------
COPY TO:
BRIAN D. WENGER, ESQ.
BRIGGS AND MORGAN, PROFESSIONAL ASSOCIATION
2400 IDS CENTER
MINNEAPOLIS, MINNESOTA 55402
(612) 334-8400
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is Peerless Industrial Group, Inc., a
Minnesota corporation (the "Company"). The address of the principal executive
offices of the Company is 2430 Metropolitan Centre, 333 South Seventh Street,
Minneapolis, Minnesota 55402. The classes of equity securities to which this
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9")
relates are the Common Stock, no par value (the "Common Stock"), and Class B
Common Stock, no par value (the "Class B Common Stock") (hereinafter the
Common Stock and the Class B Common Stock shall be collectively referred to as
the "Shares"), of the Company.
ITEM 2. TENDER OFFER OF THE BIDDER.
This Schedule 14D-9 relates to the tender offer disclosed in the Tender
Offer Statement on Schedule 14D-1 dated April 17, 1997 (the "Schedule 14D-1"),
by R-B Acquisition Corporation, a Minnesota corporation (the "Purchaser") and
a wholly owned subsidiary of R-B Capital Corporation, a Delaware corporation
("Parent"), to purchase all outstanding Shares at a price of $1.67 per Share,
net to the seller thereof in cash, upon the terms and subject to the
conditions set forth in the Offer to Purchase dated April 17, 1997 (the "Offer
to Purchase") and the related Letter of Transmittal (which together constitute
the "Offer" and are filed as Exhibit 1 hereto). Parent and Purchaser are
corporations formed by Ridge Capital Corporation, Pandora Capital Corporation
and their affiliates (collectively, "Ridge") and William Blair Mezzanine
Capital Fund II, L.P. ("Blair Mezzanine Fund") in connection with the Offer
and the transactions contemplated thereby. The Offer is being made pursuant to
the terms of the Agreement and Plan of Merger dated as of April 11, 1997 (the
"Merger Agreement"), among the Company, Parent and the Purchaser. The Merger
Agreement provides, among other things, that after completion of the Offer,
subject to the terms and conditions of the Merger Agreement, the Purchaser and
the Company will be merged (the "Merger") and each outstanding Share (other
than those held by Parent, the Purchaser, any other direct or indirect
subsidiary of Parent or by shareholders of the Company who dissent from the
Merger and comply with all of the provisions of the Minnesota Business
Corporation Act ("MBCA") concerning dissenters' rights) will be converted at
the effective time of the Merger (the "Effective Time") into the right to
receive $1.67 in cash, without interest. The terms of the Merger Agreement are
described more fully below in Item 3. The purpose of the Offer and the Merger
is for Parent to acquire the entire equity interest in the Company. The Offer
is intended to increase the likelihood that such acquisition will be effected
and to permit Parent to acquire control of the Company at the earliest
practicable date. The purpose of the Merger is to permit Parent to acquire all
outstanding Shares not tendered and purchased pursuant to the Offer.
The Offer is conditioned upon, among other things, at least a majority of
the Shares and a number of outstanding Shares entitled to elect a majority of
the Company's Board of Directors, in each case on a fully-diluted basis (or,
if the Purchaser so elects in its sole discretion, on the basis of the number
of Shares outstanding at the expiration date of the Offer) being validly
tendered and not withdrawn prior to the expiration of the Offer ("Minimum
Condition").
The address of the principal executive offices of the Purchaser, as set
forth in the Schedule 14D-1, is 257 East Main Street, Barrington, Illinois,
60010.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and address of the Company, which is the person filing this
Schedule 14D-9, are set forth in Item 1 above.
(b) The Merger Agreement
The following is a brief summary of the Merger Agreement, and is qualified
in its entirety by reference to the text of the Merger Agreement, a copy of
which has been filed by Parent as an exhibit to the Schedule 14D-l.
1
THE OFFER
Pursuant to the Merger Agreement, the Purchaser was required to commence the
Offer as promptly as practicable, but in any event within five business days
after the public announcement of the Merger Agreement. Subject to the prior
satisfaction or waiver of the conditions to the Offer described in Section 13
of the Offer to Purchase, the Purchaser is obligated to accept for payment all
Shares validly tendered pursuant to the Offer, and not withdrawn, as soon as
legally permissible and to pay for all such Shares as soon as practicable
thereafter; provided, however, that, subject to the terms of the Merger
Agreement, the Offer may be extended by the Purchaser, in its sole discretion,
for not more than ten business days beyond the initially scheduled expiration
date thereof. Without the prior written consent of the Company, the Purchaser
may not decrease the price per Share, decrease the number of Shares being
sought in the Offer, change the form of consideration payable in the Offer,
add additional conditions to the Offer, or, subject to the preceding sentence,
make any other change in the terms of the Offer which is materially adverse to
the holders of Shares. The Merger Agreement provides that the Offer will be
subject only to the conditions described in Section 13 of the Offer to
Purchase, which are for the benefit of the Purchaser and may be asserted or
waived by the Purchaser in whole or in part at any time and from time to time,
in its sole discretion; provided, however, that the Purchaser may not waive
the Minimum Condition without the prior written consent of the Company.
The Merger Agreement requires that, as soon as practicable on the date of
commencement of the Offer, (i) Parent and the Purchaser shall file with the
Commission a Tender Offer Statement on Schedule 14D-1 with respect to the
Offer (the "Schedule 14D-1"), which will contain the offer to purchase and
form of the related letter of transmittal and (ii) the Company will file with
the Commission, and mail to its shareholders, this Schedule 14D-9 containing
the recommendation of the Board of Directors of the Company that the Company's
shareholders accept the Offer and tender their Shares.
BOARD OF DIRECTORS
Promptly upon the purchase by Purchaser of Shares pursuant to the Offer and
from time to time thereafter, Purchaser shall be entitled to designate up to
such number of directors, rounded up to the next whole number, on the
Company's Board of Directors that equals the product of (i) the total number
of directors on the Company's Board of Directors and (ii) the percentage that
the number of Shares owned by Purchaser and its affiliates (including any
Shares purchased pursuant to the Offer) bears to the total number of
outstanding Shares. The Company will either increase the size of its Board of
Directors or use its best efforts to secure the resignation of such number of
directors as is necessary to enable Purchaser's designees to be elected to
such Board of Directors, and shall cause Purchaser's designees to be so
elected.
Following the election or appointment of Purchaser's designees, any
amendment of the Merger Agreement or the Restated Articles of Incorporation or
By-Laws of the Company, any termination of the Merger Agreement by the
Company, any extension by the Company of the time for the performance of any
of the obligations or other acts of Parent or Purchaser or any waiver of any
of the Company's rights under the Merger Agreement will require the
concurrence of a majority of the directors of the Company then in office who
are not designees of Purchaser or employees of the Company.
THE MERGER
The Merger Agreement provides that, promptly after the purchase of Shares
pursuant to the Offer and the receipt of any required approval by the
Company's shareholders of the Merger Agreement and the satisfaction or waiver
of certain other conditions, the Purchaser and the Company will be merged.
Upon consummation of the Merger (the "Effective Time"), each then outstanding
Share (other than Shares owned by the Purchaser or Shares held by shareholders
of the Company who have exercised their dissenters' rights in accordance with
Section 473 of the MBCA) will be converted into the right to receive an amount
in cash (the "Merger Consideration") equal to the per Share price paid
pursuant to the Offer.
2
Following consummation of the Merger, the Company will be the surviving
corporation. The Merger Agreement also provides that the Articles of
Incorporation and the Bylaws of the Purchaser at the Effective Time will be
the Articles of Incorporation and Bylaws of the surviving corporation and that
the directors and officers of the Purchaser at the Effective Time will be the
directors and officers of the surviving corporation.
The Merger Agreement provides that at or prior to the Effective Time, each
option and warrant granted pursuant to the Company's stock option plans and
other agreements (the "Stock Purchase Rights"), whether or not then
exercisable, which was outstanding as of the date of the Merger Agreement and
which has not been exercised prior to the acquisition of Shares pursuant to
the Offer, shall be cancelled and each holder of a cancelled Stock Purchase
Right shall be entitled to receive from the Company, in cancellation and
settlement of the Stock Purchase Right, an amount in cash (less applicable
withholding taxes) equal to the product of (x) the number of Shares previously
subject to the Stock Purchase Right and (y) the excess, if any, of the
purchase price paid pursuant to the Offer over the exercise price per Share
provided for in the Stock Purchase Right.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of the Company, including representations by the Company as to (i)
organization, qualification and similar corporate matters of the Company and
its subsidiaries (ii) the capitalization of the Company and its subsidiaries,
(iii) the authorization, execution, delivery and enforceability of the Merger
Agreement, (iv) the lack of required consents and approvals in connection with
the Merger Agreement, and the non-contravention by the Merger Agreement and
the related transactions of any article provision, by-law, material contract,
order, law or regulation to which the Company or its subsidiaries is a party
or by which it is bound or obligated, (v) the filing of required Commission
reports, the absence of untrue statements of material facts or omissions of
material facts in such reports, and the absence of other undisclosed
liabilities, (vi) the absence of changes or events which have had a material
adverse effect on the Company, and the absence of casualty losses,
declarations of dividends, certain compensation arrangements, material
commitments or transactions and certain other events, (vii) the absence of
payments to any intermediary other than Coopers & Lybrand Securities L.L.C.
and of any finder's or other fee or commission, (viii) the absence of untrue
statements of material facts or omissions of material facts in the Schedule
14D-9 and the proxy statement to be sent to shareholders in connection with
the Merger, (ix) possession of all necessary rights and licenses in
intellectual property, (x) the absence of claims and litigation, (xi) labor
matters, (xii) the filing of tax returns and the payment of taxes, (xiii) the
absence of environmental claims and compliance with all environmental laws and
regulations, (xiv) employee benefits matters, (xv) compliance with laws,
rules, statutes, orders, ordinances or regulations, and material notes, bonds,
mortgages, indentures, contracts, agreements, leases, licenses, permits,
franchise or other instruments or obligations of the Company or any of its
subsidiaries which would result in a material adverse effect, (xvi) real
property ownership and the possession and enforceability of all real property
leases, (xvii) the absence of notices, citations or decisions of governmental
or regulatory bodies and recalls with respect to any product produced,
manufactured, marketed or distributed by the Company, (xviii) applicable
voting requirements and (xix) inapplicability of certain state takeover laws.
The Merger Agreement also contains various customary representations and
warranties of the Parent and the Purchaser, including representations by
Parent and Purchaser as to (i) organization, qualification and similar
corporate matters of Parent and Purchaser, (ii) the authorization, execution,
delivery, and enforceability of the Merger Agreement, (iii) the absence of
untrue statements of material facts or omissions of material facts in any
documents related to the Offer or in the Schedule 14D-1, (iv) the absence of
untrue statements of material facts or omissions of material facts in any
information provided to the Company in connection with the proxy statement,
(v) the lack of required consents and approvals in connection with the Merger
Agreement, and the non-contravention by the Merger Agreement and the related
transactions of any charter provision, by-law, material contract, order, law
or regulation to which Parent or Purchaser is a party or by which it is bound
or obligated and (vi) the possession of all funds necessary to satisfy
Purchaser's obligations under the Merger Agreement.
3
In general, the representations and warranties in the Merger Agreement do
not survive the payment for shares in the Offer.
COVENANTS
No Solicitation. The Merger Agreement requires the Company to immediately
cease any existing discussions or negotiations with any third parties
conducted prior to the date of the Merger Agreement with respect to any
Acquisition Proposal (as defined below). The Company shall not, directly or
indirectly, through any officer, director, employee, representative or agent,
or any of its subsidiaries, or otherwise (i) solicit, initiate, continue or
encourage any inquiries, proposals or offers that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, sale of
shares of capital stock (including, without limitation, by way of a tender
offer), liquidation, reorganization or similar transactions involving the
Company or any of its subsidiaries or divisions, other than the transactions
contemplated by the Merger Agreement (any of the foregoing inquiries or
proposals being referred to as an "Acquisition Proposal"), (ii) solicit,
initiate, continue or engage in negotiations or discussions concerning, or
provide any information or data to any person or entity relating to, or
otherwise cooperate in any way with, or assist or participate in, or
facilitate or encourage any Acquisition Proposal or (iii) agree to, approve or
recommend any Acquisition Proposal; provided, that the foregoing does not
prevent the Company from, prior to the acceptance for payment by the Purchaser
of Shares pursuant to the Offer, furnishing non-public information to, or
entering into discussions or negotiations with, any person or entity in
connection with an unsolicited Acquisition Proposal by such person or entity
(including a new and unsolicited Acquisition Proposal received by the Company
after the execution of the Merger Agreement from a person or entity whose
initial contact with the Company may have been solicited by the Company prior
to the execution of the Merger Agreement), and may recommend such an
unsolicited bona fide written Acquisition Proposal to the shareholders of the
Company, if and only to the extent that (i) the Board of Directors of the
Company determines in good faith (after consultation with and based upon the
advice of its financial advisor and considering the affect of such Acquisition
Proposal upon the employees, customers and the community) that such
Acquisition Proposal would, if consummated, result in a transaction more
favorable to the shareholders of the Company than the Offer and Merger and
that the person or entity making such Acquisition Proposal has the financial
means, or the ability to obtain the necessary financing, to conclude such
transaction (any such more favorable Acquisition Proposal being referred to as
a "Superior Proposal"), (ii) the Board of Directors of the Company determines
in good faith (after consultation with and based upon the advice of its
outside legal counsel) that the failure to take such action would be
inconsistent with the fiduciary duties of such Board of Directors to its
shareholders under applicable law and (iii) prior to furnishing such non-
public information to, or entering into discussions or negotiations with, such
person or entity, such Board of Directors receives from such person or entity
an executed confidentiality agreement with confidentiality provisions not
materially less favorable to the Company than those contained in the
confidentiality agreement between the Company and Ridge. The Company's
exercise of the rights described above may create an obligation to pay a fee
to Parent as described below. See "The Merger Agreement--Termination Fee;
Expenses."
The Company has also agreed not to release any third party from, and to
enforce strictly any confidentiality or standstill agreement to which the
Company and such third party are parties. The Company will promptly notify
Parent in writing if any proposal or offer, or any inquiry or contact with any
person with respect thereto, is made, or if any information is provided to any
person, and any such notice shall include a description of the terms of any
proposal or offer, or the nature of any inquiry or contact, which is made.
Termination of Stock Plans. Prior to the consummation of the Offer, the
Company's Board of Directors (or, if appropriate, any committee thereof) will
adopt resolutions or take other actions necessary to ensure that, following
the Effective Time, no participant in any stock, stock option, stock
appreciation or other benefit plan of the Company or any of its subsidiaries
or any holder of any option will have any right thereunder to acquire any
capital stock of the surviving corporation or any subsidiary thereof.
4
Conduct of Business of the Company. From the date of the Merger Agreement to
the Effective Time, the Company and its subsidiaries will each conduct its
operations in the ordinary course of business consistent with past practice,
and the Company and its subsidiaries will each use its reasonable best efforts
to preserve intact its business organization, to keep available the services
of its officers and employees and to maintain existing relationships with
licensors, licensees, suppliers, contractors, distributors, customers and
others having business relationships with it.
Accordingly, prior to the Effective Time, neither the Company nor any of its
subsidiaries may, without prior written consent of Purchaser, engage or agree
to engage in an enumerated list of transactions generally characterized as
being outside the ordinary course of business. Transactions requiring
Purchaser's prior approval include actions by the Company or its subsidiaries
to (i) amend its articles of organization or by-laws, (ii) issue, pledge or
sell any capital stock or any other securities, except as required by option
agreements and option plans as in effect as of the date of the Merger
Agreement, or split, combine or reclassify any shares of its capital stock,
(iii) declare, set aside, pay or make any dividend or other distribution or
payment (whether in cash, stock, or property) in respect of its capital stock,
or repurchase or redeem any of its capital stock or any capital stock of its
subsidiaries, (iv) subject to certain exceptions, enter into, adopt, amend or
terminate any bonus, compensation, severance, termination, or employee benefit
arrangement, (v) waive any provision of any confidentiality agreement, (vi)
other than ordinary course borrowings under existing lines of credit, incur
any debt or assume, guarantee or endorse the obligations of any other person,
make any loans, advances or capital contributions to, or investments in, any
other person (other than to wholly owned subsidiaries of the Company), pledge
or otherwise encumber shares of capital stock of the Company or any of its
subsidiaries or mortgage or pledge any of its assets or create any Lien
thereupon, (vi) acquire, sell, lease, license, encumber, transfer or dispose
of any assets of the Company and its subsidiaries, (vii) change any of the
accounting principals or practices used by it, except as may be required as a
result of a change in law or in generally accepted accounting principles, or
make any tax election, (viii) acquire any corporation, partnership or other
business organization or division thereof, authorize any new capital
expenditures exceeding $100,000 in the aggregate or settle any litigation for
amounts in excess of $25,000 individually or $50,000 in the aggregate, (ix)
pay, discharge or satisfy any claims, liabilities or obligations outside the
ordinary course or not in accordance with their terms, except where such
action would not result in a material adverse effect, (x) enter into any
transaction or amend any existing transaction with any affiliate of the
Company or (xi) take or agree to take any action which would make any of the
representations or warranties of the Company contained in the Merger Agreement
untrue or incorrect or would result in any of the conditions to the Offer not
being satisfied.
Access to Information. The Company will give Parent and Purchaser and their
representatives reasonable access to all necessary information, subject to a
confidentiality agreement.
Certain Filings, Etc. Parent, the Purchaser and the Company shall cooperate
with one another (i) in promptly determining whether any filings are required
to be made or consents, approvals, permits or authorizations are required to
be obtained under any federal, state or foreign law or regulation or any
consents, approvals or waivers are required to be obtained from other parties
to loan agreements or other contracts material to the business of the Company
and its wholly owned operating subsidiary, Peerless Chain Company, a Minnesota
corporation ("Peerless"), in connection with the consummation of the Offer or
the Merger and (ii) in promptly making any such filings, furnishing
information required in connection therewith and seeking timely to obtain any
such consents, permits, authorizations, approvals or waivers.
Proxy Statement. If necessary to consummate the Merger, promptly after the
termination or expiration of the Offer, the Company shall prepare the Proxy
Statement, file it with the Commission and mail it to all holders of Shares.
Parent, the Purchaser and the Company shall cooperate with each other in the
preparation of the Proxy Statement.
State Takeover Statutes. The Company shall (i) take all action, if any,
necessary to exempt the Offer and the Merger from the effects of any state
takeover law and (ii) upon the request and at the expense of the
5
Purchaser, take all reasonable steps to assist in any challenge by the
Purchaser to the validity, or applicability to the Offer or the Merger, of any
such state takeover law.
Best Efforts. Subject to the terms and conditions of the Merger Agreement,
each of the parties will use its best efforts to take all actions and do all
things necessary to consummate and make effective the transactions
contemplated by the Merger Agreement.
Indemnification. The surviving corporation will assume the indemnification
and expense advancement obligations of the Company and its subsidiaries to
present and former directors, officers, employees and agents (i) pursuant to
certain indemnification agreements between the Company and each of such
individuals, as described in this Item 3 under the caption "Indemnification
Agreements" and (ii) as provided in the Articles of Incorporation and by-laws
of the Company and its subsidiaries as in effect at the time of execution of
the Merger Agreement (the "Indemnification Obligations"). From and after the
Effective Time, Parent will guarantee and cause the surviving corporation to
perform all of the Indemnification Obligations.
Consulting Agreement. At the Effective Time, Parent shall cause the Company,
as the surviving corporation in the Merger, and Peerless to enter into a
consulting agreement with Mr. William H. Spell, as described in this Item 3
under the caption "Consulting Agreement."
Notification of Certain Matters. The Company will give prompt notice to
Parent or Purchaser, and Parent or Purchaser will give prompt notice to the
Company, as the case may be, of the occurrence, or non-occurrence of any event
which would cause any representation or warranty contained in this Agreement
to be untrue or inaccurate.
Public Announcements. Parent and Purchaser, on the one hand, and the
Company, on the other hand, will consult with each other before issuing any
press release or otherwise making any public statements with respect to the
transactions contemplated by the Merger Agreement.
CONDITIONS
The obligations of the Company, the Purchaser and Parent to effect the
Merger are subject to the satisfaction of certain conditions set forth in the
Merger Agreement, including (i) the acceptance and purchase by the Purchaser
of Shares pursuant to the Offer, (ii) the receipt of shareholder approval of
the Company, if required, and (iii) there being no order, decree or injunction
of a court of competent jurisdiction which prohibits consummation of the
Merger and there shall not have been any action taken or any statute, rule, or
regulation enacted, promulgated or deemed applicable to the Merger by any
governmental or regulatory authority, agency, commission or other entity,
domestic or foreign, that makes consummation of the Merger illegal.
TERMINATION
According to its terms, the Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether prior
to or after approval by the shareholders of the Company, by the mutual written
consent of Parent, the Purchaser and the Company. In addition, the Merger
Agreement may be terminated by the Company if (i) the Offer shall not have
been commenced within five business days from the date of public announcement
of the Merger Agreement or the Offer shall have expired and the Purchaser
shall not have accepted for payment Shares pursuant to the Offer (provided,
that the right to terminate the Merger Agreement thereby shall not be
available if the Company's failure to fulfill any obligation under the Merger
Agreement has been the cause of, or results in, the Offer not being so
commenced or consummated) or (ii) there has been a material breach by Parent
or the Purchaser of any representation, warranty, covenant or agreement as set
forth in the Merger Agreement on the part of Parent or the Purchaser and which
Parent or the Purchaser, as the case may be, fails to cure within 10 days
after notice thereof is given by the Company. The Merger Agreement may be
terminated by either Parent or the Company if (i) the Offer terminates or
expires pursuant to its terms on account of the failure of any condition to
the Offer described in Section 13 of the Offer to Purchase
6
to have been satisfied without the Purchaser having purchased any Shares
thereunder (provided, that the right to so terminate the Merger Agreement
shall not be available to any party whose failure to fulfill any obligation
under the Merger Agreement has been the cause of, or results in, the failure
of any such condition), (ii) either Parent or the Company (or any permitted
assignee) is prohibited by an order or injunction of a court of competent
jurisdiction from consummating the Merger and all means of appeal and all
appeals from such order or injunction have been finally exhausted; (iii) prior
to the purchase of Shares pursuant to the Offer (x) the Company shall have
received (other than in violation of the Company's non-solicitation covenant)
a Superior Proposal (as defined in the Merger Agreement), and (y) Parent does
not make, within five business days of receipt of written notice of the
Company's desire to accept such Superior Proposal, an offer that the Board of
Directors believes, in good faith after consultation with its financial
advisors, is at least as favorable, from a financial point of view, to the
shareholders of the Company, as the Superior Proposal or (iv) the Purchaser
has not accepted Shares for payment on or before July 11, 1997, provided that
the right to terminate the Merger Agreement as described in this clause (iv)
shall not be available to any party whose failure to fulfill any obligation
under the Merger Agreement has been the cause of or resulted in such failure
to accept Shares for payment or the failure to satisfy any condition set forth
in the Merger Agreement, and shall not be available to the Company if any
shareholder of the Company shall have breached any provision of the Tender
Agreement. The Merger Agreement may be terminated by Parent if (i) there has
been a material breach by the Company of any representation, warranty,
covenant or agreement set forth in the Merger Agreement on the part of the
Company and which the Company fails to cure within 10 days after notice
thereof is given by the Parent, (ii) prior to the purchase of Shares pursuant
to the Offer, any person, corporation, entity or "group," as defined in
Section 13(d)(3) of the Exchange Act (other than Parent or the Purchaser)
shall have acquired beneficial ownership of 25% or more of the outstanding
Shares or (iii) the Board of Directors of the Company shall have withdrawn or
modified, or resolved to withdraw or modify, in any manner which is materially
adverse to Parent or the Purchaser, its recommendation or approval of the
Offer, the Merger or the Merger Agreement.
TERMINATION FEE; EXPENSES
If (i) the Merger Agreement is terminated after the occurrence of a
Triggering Event (as defined below), and (ii) within six months after such
termination the Company either (a) consummates any Alternative Transaction (as
defined below) or (b) becomes a party to any agreement relating to an
Alternative Transaction that is thereafter consummated, then upon the
consummation of such Alternative Transaction the Company shall pay Parent a
non-refundable fee of $900,000 (the "Termination Fee") which amount shall be
payable by wire transfer of same day funds on the date such Alternative
Transaction is consummated. The Company shall reimburse the Parent in
connection with any legal or other fees incurred by the Parent in connection
with the collection of the Termination Fee from the Company.
A "Triggering Event" shall mean any of the following:
(i) the Board of Directors of the Company shall have withdrawn or
modified its recommendation of the Offer or shall have resolved or publicly
announced its intention to do so; or
(ii) an Alternative Transaction shall have taken place or the Board of
Directors of the Company shall have recommended such an Alternative
Transaction to shareholders, or shall have resolved or publicly announced
its intention to recommend or engage in an Alternative Transaction; or
(iii) a tender offer or exchange offer with respect to shares of the
Company shall have been commenced or a registration statement with respect
thereto shall have been filed (other than by Parent and its affiliates),
and the Board of Directors of the Company shall have (1) recommended (or
shall have resolved or publicly announced its intention to recommend) that
the shareholders of the Company tender their shares in such tender or
exchange offer or (2) resolved or publicly announced its intention to take
no position with respect to such offer; or
(iv) the Offer shall have expired without satisfaction of the Minimum
Condition, and at any time during the Offer an Alternative Transaction
shall have been publicly announced and not absolutely and unconditionally
withdrawn and abandoned; or
7
(v) a material breach by the Company of the Merger Agreement shall have
occurred, and at the time of such breach or any termination based thereon
an Alternative Transaction shall have been publicly announced and not
absolutely and unconditionally withdrawn and abandoned; or
(vi) the Company shall have negotiated with, furnished information to,
entered into any agreement with, or consummated or recommended any
transaction with, any person other than Parent or its affiliates, based on
a determination regarding a "Superior Proposal"; or
(vii) the Company shall have breached its non-solicitation covenant.
An "Alternative Transaction" shall mean (i) any transaction or series of
transactions by which any person or group (other than Parent and its
affiliates) acquires or would acquire shares (or securities exercisable or
convertible into shares) representing 20% or more of the outstanding shares of
the Company, pursuant to a tender offer, exchange offer or otherwise, (ii) a
merger, consolidation, share exchange, sale of substantial assets or other
business combination involving the Company, (iii) any other transaction or
series of transactions whereby any person acquires or would acquire control of
the board of directors, business or assets of the Company, or (iv) any
agreement with respect to any of the foregoing, which in the case of any
transaction or agreement described in clauses (i) through (iv) above, involves
a greater value (considering the amounts payable to shareholders and all
payments under employment, consulting and other arrangements in connection
therewith) than the value of the Offer and the Merger and the other
arrangements related thereto.
Except as described above and except as described below in Item 6, each of
the Company, Parent and the Purchaser shall bear its own expenses in
connection with the Merger Agreement and the transactions contemplated
thereby.
AMENDMENT
Subject to the applicable provisions of the MBCA, the Merger Agreement may
be amended by action taken by the Company, Parent and the Purchaser at any
time prior to the Effective Time.
Tender and Stock Option Agreement
In connection with the Merger Agreement, certain shareholders of the Company
have executed and delivered a Tender and Stock Option Agreement, pursuant to
which such shareholders have (1) agreed to tender in the Offer an aggregate of
approximately 4.45 million Shares (approximately 71% of the Shares outstanding
on the date hereof), together with additional Shares under certain
circumstances and (2) granted to Purchaser an option to purchase, under
certain circumstances, Shares equal to 19.9% of the outstanding Shares. The
Tender and Stock Option Agreement is described more fully in Item 6 below.
Employment Agreements
Peerless entered into employment agreements effective December 13, 1995
(hereinafter collectively referred to as the "Employment Agreements") with the
Company's executive officers (hereinafter collectively referred to as the
"Executives"), as identified below.
PARTICIPATION
IN EXECUTIVE
NAME POSITION WITH PEERLESS ANNUAL SALARY BONUS POOL
---- ---------------------- ------------- -------------
William H. Spell........ Chairman $ 96,000 None
Jan C. van Osnabrugge... President and Chief Executive Officer $192,000 22.9%
Robert Deter............ Chief Financial Officer $ 76,000 11.8%
Each Employment Agreement defines the respective Executive's position, base
salary (to be reviewed and, in the sole discretion of Peerless' board of
directors, increased on an annual basis) and level of participation in the
executive bonus pool as outlined above. Mr. Spell is not eligible to
participate in the executive bonus pool. The actual amount of the executive
bonus pool to be paid out to the Executive is based upon Peerless' actual
year-end EBITDA compared to its projected year-end EBITDA for the relevant
year.
The term of employment for each Executive pursuant to the Employment
Agreements is four years, subject to earlier termination upon resignation by
the Executive, disability of the Executive, violation of the Employment
8
Agreement or certain types of misconduct or illegal acts by the Executive. Each
Executive is entitled to severance pay equivalent to twelve months of his or
her base salary in effect at the time of termination in the event Peerless
terminates the Executive's employment for any reason other than those
identified in the Employment Agreement. Pursuant to the Employment Agreements,
each Executive agrees to keep confidential during and after Executive's
employment with Peerless certain proprietary information and to refrain from
competing with Peerless for a period of two years following the termination of
Executive's employment, whether voluntary or involuntary, with Peerless.
The Employment Agreement with Mr. Spell will be terminated at the Effective
Time. Mr. Spell will enter into a consulting agreement with the Company and
Peerless described more fully below. The other Employment Agreements will
remain in effect following the Effective Time. The Employment Agreements are
filed as Exhibit 3 and Exhibit 4 hereto and are incorporated herein by
reference.
Indemnification Agreements
The Company has indemnification agreements (collectively, the
"Indemnification Agreements") with each of its directors and executive
officers. Each Indemnification Agreement provides that the Company will defend,
hold harmless and indemnify the director or executive officer party thereto to
the full extent permitted by its Articles of Incorporation, Bylaws and the
provisions of the MBCA, as it may be amended from time to time. Pursuant to
each Indemnification Agreement, the Company will indemnify and hold harmless
the director or executive officer party thereto against all reasonable
expenses, liability and loss actually incurred or suffered by such director or
executive officer in connection with any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal (i) to which
such director or executive officer is or was a party or is threatened to be
made a party by reason of any action or inaction in his or her capacity as a
director or executive officer of the Company, (ii) with respect to which such
director or executive officer is otherwise involved by reason of the fact that
he or she is or was serving as a director, officer, employee or agent of the
Company, or of any subsidiary or division of the Company, or while a director
of a corporation, is or was serving at the request of the Company as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
The Company is not liable under the Indemnification Agreements to make any
payment for any liability incurred in a proceeding in which a director or
executive officer is adjudged liable to the Company or is subjected to
injunctive relief in favor of the Company (i) for any appropriation, in
violation of his or her duties, of any business opportunity of the Company,
(ii) for acts or omissions which involve intentional misconduct or a knowing
violation of law, (iii) for the types of liability set forth in the MBCA, as
the same exists or may hereafter be amended, or (iv) for any transaction from
which he or she received any improper personal benefit. Also, the Company is
not liable under the Indemnification Agreements to make any payment in
connection with any claim made against a director or executive officer (i) for
which payment is actually made to such director or executive officer under a
valid and collectible insurance policy, except in respect of any excess beyond
the amount of payment under such insurance, (ii) for which payment is actually
made to such director or executive officer by the Company otherwise than
pursuant to the Indemnification Agreement, except in respect of any excess
beyond the amount of such payment, or (iii) for an accounting of profits made
from the purchase or sale by such director or executive officer of securities
of the Company within the meaning of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or similar provision of any state statutory law.
In addition, pursuant to each Indemnification Agreement, unless the director
or executive officer otherwise elects, the Company shall pay for or reimburse
all reasonable expenses incurred in defending any civil or criminal action,
suit or proceeding in advance of the final disposition of such action, suit or
proceeding upon receipt of (i) a written agreement from such director or
executive officer in form and substance satisfactory to the Company to repay
such amount if it shall be ultimately determined that he or she is not entitled
to be indemnified by the Company under the Indemnification Agreement and (ii) a
written affirmation of his or her good faith belief that he or she has met the
standard of conduct required under the MBCA to enable the Company to indemnify
such director or executive officer.
9
The form of Indemnification Agreement is attached as Exhibit 5 hereto and is
incorporated by reference herein.
The Merger Agreement provides that from and after the Effective Time, the
corporation which survives the Merger will assume the indemnification and
expense advancement obligations of the Company and its subsidiaries (i)
pursuant to the Indemnification Agreement and (ii) as provided in the Articles
of Incorporation and Bylaws of the Company and its subsidiaries to present and
former directors, officers, employees and agents.
Stock Options
The Company has granted stock options to its officers and directors pursuant
to the Company's stock option plan (the "Stock Option Plan"). Outstanding
options for executive officers and directors pursuant to the Stock Option Plan
are identified below.
NAME TITLE OUTSTANDING OPTIONS
---- ----- -------------------
Harry Spell........... Director, Chairman of the Board 129,000
William Spell......... Director, Chief Executive Officer 405,000
Jan C. van Osnabrugge. President 60,000
Robert Deter.......... Chief Financial Officer 33,000
Reynold Anderson...... Director 92,000
Richard Perkins....... Director 129,000
Michael Platt......... Director 50,000
Bruce Richard......... Director 123,000
Brian Smith........... Director 50,000
According to the terms of the Stock Option Plan, in the event of a merger of
the Company, the Board of Directors shall, in its sole discretion, in
connection with the Board's adoption of the plan of merger, provide for one or
more of the following: (i) the acceleration of the exercisability of any or all
outstanding options; (ii) the complete termination of the Stock Option Plan and
cancellation of outstanding options not exercised prior to a date specified by
the Board; and (iii) the continuance of the Stock Option Plan with respect to
the exercise of options outstanding as of the date of adoption by the Board of
the plan of merger. Pursuant to the terms of the Merger Agreement, the
outstanding options will be cancelled and each holder of outstanding options
will receive an amount in cash equal to the product of the number of shares
subject to the option times the excess, if any, of the consideration to be paid
per Share pursuant to the Merger Agreement over the exercise price of such
option.
The Company issued warrants to purchase Common Stock at a purchase price of
$1.10 per share (the "Warrants") to each of Harry W. Spell and Richard W.
Perkins for 15,000 shares and to each of Reynold Anderson, Bruce Richard and
William Spell for 10,000 shares. The Warrants become fully exercisable
immediately upon issuance and delivery, and are exercisable in whole or in part
upon 20 days written notice to the Company. The Warrants expire March 12, 2001.
Pursuant to the terms of the Merger Agreement, the outstanding warrants will be
cancelled and each warrant holder will receive an amount in cash equal to the
product of the number of shares subject to the warrant times the excess, if
any, of the consideration to be paid per share pursuant to the Merger Agreement
over the exercise price of such warrant.
Consulting Agreement
Pursuant to the terms of the Merger Agreement, at the Effective Time Parent
will cause the Company and Peerless to enter into a consulting agreement with
the Company's Chief Executive Officer, William H. Spell (the "Consulting
Agreement"). Pursuant to the terms of the Consulting Agreement, Mr. Spell will
provide consulting services to the Company and Peerless as requested by the
Company for a two year period following the Effective Time. In exchange for
such consulting services, the Company and Peerless, jointly and severally, will
pay Mr. Spell $120,000 within seven days of the execution of the Consulting
Agreement, $25,000 per quarter for the first four quarters of the Consulting
Agreement, payable quarterly in arrears, and $22,500 per quarter for the second
four quarters of the Consulting Agreement, payable quarterly in arrears. The
Company and Peerless, jointly and severally, will reimburse Mr. Spell for all
expenses incurred by Mr. Spell with the prior approval of the Company
10
in connection with the performance of services pursuant to the Consulting
Agreement. The Consulting Agreement also includes confidentiality and non-
competition provisions.
Except as set forth above, to the best knowledge of the Company, there are
no contracts, agreements or understandings or any actual or potential
conflicts of interest between the Company or its affiliates and (i) the
Company's executive officers, directors or affiliates or (ii) the Parent or
the Purchaser or their respective executive officers, directors or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
Recommendation of the Board of Directors
At a special meeting held on April 7, 1997, the Board of Directors of the
Company and a special committee of the Board of Directors unanimously approved
the Merger Agreement and the transactions contemplated thereby and determined
that the Merger Agreement and the transactions contemplated thereby, including
the Offer and the Merger, are fair to and in the best interests of the holders
of Shares. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS ACCEPT THE
OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER. Copies of a press release
and a letter to the Company's shareholders communicating such approval and
recommendation are filed as Exhibit 8 and Exhibit 9, respectively, and are
incorporated herein by reference.
Background of the Merger and the Offer
In early 1996, the Board of Directors of the Company began analyzing
alternative ways of expanding and furthering the Company's business. As a
result of this analysis, the Company considered the possibility of acquiring
another entity. Throughout 1996, the Company evaluated potential acquisition
targets and discussed the possibility of acquisition with several such
targets. Such discussions were discontinued when the Company's continued
analysis and evaluation indicated that such acquisitions would not further the
Company's financial or strategic expansion objectives.
On September 17, 1996, the Company's Board of Directors approved the
engagement of Coopers & Lybrand Securities L.L.C. ("Coopers & Lybrand") to
explore and evaluate financial and strategic expansion alternatives for the
Company. Coopers & Lybrand analyzed various equity financing alternatives and
entered into discussions with several entities identified by the Company as
potentially desirable strategic partners. Additional evaluation of these
possibilities led the Company to conclude that neither the financing
alternatives nor the proposed relationships with potential strategic partners
met with the Company's expansion objectives.
During the fall of 1996, the Company received unsolicited expressions of
interest concerning the acquisition of the Company. In October 1996, the
Company's Board of Directors authorized Coopers & Lybrand to explore such
expressions of interest, and to actively solicit other potential acquirors of
the Company. From late October 1996 through mid-November 1996, Coopers &
Lybrand met with senior management of the Company for the purpose of gathering
information about the Company and compiled information for distribution to
potential acquirors. From late October 1996 through December 15, 1996, Coopers
& Lybrand contacted potential acquirors and negotiated confidentiality and
non-disclosure agreements with certain potential acquirors, including Ridge.
By December 16, 1996, the Company had received several preliminary
expressions of interest to acquire the Company, including that of Ridge. On
December 18, 1996, the Company's Board of Directors met to discuss the
expressions of interest received. The Board of Directors authorized Coopers &
Lybrand and the Board's Executive Committee to continue negotiations with six
potential acquirors offering the highest prices for the acquisition of the
Company. The Board of Directors further authorized senior management of the
Company to schedule interview and due diligence sessions with such potential
acquirors at the Company's manufacturing facilities in Winona, Minnesota.
For a two-week period from late January 1997 through early February 1997,
Coopers & Lybrand and senior management of the Company met with potential
acquirors at the Company's facilities in Winona, Minnesota for
11
the interview and due diligence process. Such meetings included: (i)
discussions with senior management of the Company; (ii) a tour of the
Company's facilities in Winona, Minnesota and (iii) presentation of various
financial and strategic plans of the Company. Senior executives of Ridge
participated in the Company's interview and due diligence process on January
24, 1997. Subsequently, Ridge selected Blair Mezzanine Fund as its equity
partner and source of subordinated debt financing. The Ridge executives
requested that Blair Mezzanine Fund be invited to participate in the due
diligence process in early February 1997. Executives of Blair Mezzanine Fund
participated in such process in Winona, Minnesota on February 4 and 5, 1997.
A total of six potential acquirors participated in the interview and due
diligence process. Some potential acquirors visited the Company's facilities
in Winona, Minnesota on two separate occasions. The Company informed all six
potential acquirors that it would consider written acquisition offers
delivered to the Company no later than February 21, 1997. Four of the
potential acquirors provided the Company with acquisition proposals by such
date.
The Board of Directors of the Company met on February 26, 1997 to discuss
the four acquisition proposals received, including the proposal received from
Ridge. The members of the Board of Directors, representatives from Coopers &
Lybrand and other advisors to the Company discussed the advantages and
disadvantages of each offer, focusing on the two most attractive offers, the
Ridge offer and an offer from an alternative buyer (the "Alternative Buyer").
Factors considered included the price differential between the offers, the
possible delays in consummating the transaction with Alternative Buyer
resulting from the necessity of receiving approval for such proposed
transaction under the Hart-Scott-Rodino Act as well as the more comprehensive
due diligence Alternative Buyer desired to perform, the risk that the proposed
transaction with Alternative Buyer would not be consummated due to the
significant contingencies related to Alternative Buyer's offer, the likelihood
of retention of current management by the potential acquirors and other
factors. The Board of Directors also considered a fairness opinion presented
by Summit Investment Corporation concerning the fairness of the proposals to
the Company's shareholders from a financial point of view and described more
fully below. As a result of these deliberations, the Board of Directors
authorized Mr. Spell to continue negotiating with Ridge regarding its most
recent offer. On February 28, 1997, Ridge, joined by Blair Mezzanine Fund,
submitted a revised bid to acquire the Company at a price of $1.67 per share.
Negotiations continued over March 2, 1997 and March 3, 1997.
On March 4, 1997, the Company received a revised version of the Ridge and
Blair Mezzanine Fund offer. On the same date, the Board of Directors held
another meeting at which Mr. Spell provided an update on the status of
negotiations and the Board reviewed the offer from Ridge and Blair Mezzanine
Fund along with the final offers received from all potential acquirors.
Alternative Buyer proposed to conduct a tender offer for all of the
outstanding Shares of Company at $1.695 per share.
At its March 4, 1997 meeting, the Board of Directors again considered the
advantages and disadvantages of the offers from Ridge and Blair Mezzanine Fund
and from Alternative Buyer, focusing on the price differential between the
offers, the impact from a financial perspective of the possible delays in
consummating the transaction with Alternative Buyer resulting from the
necessity of receiving approval for such proposed transaction under the Hart-
Scott-Rodino Act as well as the more comprehensive due diligence Alternative
Buyer desired to perform and the risk that the proposed transaction with
Alternative Buyer would not be consummated due to the significant
contingencies related to Alternative Buyer's offer. After considering the
advantages and disadvantages of each offer, the Board of Directors authorized
the Company to enter into a letter of intent with Ridge and Blair Mezzanine
Fund whereby the Company agreed to negotiate exclusively with Ridge and Blair
Mezzanine Fund through April 7, 1997 (later extended through April 11, 1997)
for the acquisition of the Company at a price of $1.67 per share, subject to
satisfactory completion of Ridge's due diligence investigation of the Company,
the negotiation of definitive agreements, and the availability of financing.
From March 4 through April 11, 1997, Ridge and Blair Mezzanine Fund
continued their due diligence investigations of the Company. Ridge and Blair
Mezzanine Fund also met with operating management of the Company to discuss
the terms of their continued employment by the Company, and the prospect that
certain members of management might be invited to invest in the Parent. During
this period, counsel for Ridge, Blair
12
Mezzanine Fund and the Company exchanged drafts of and comments on a form of
Agreement and Plan of Merger and related disclosure schedules, a form of
Tender and Stock Option Agreement, and the documents required to be filed and
disseminated in connection with the Offer. Also during this period, Parent and
Purchaser were organized.
On April 7, 1997, the Company's Board of Directors gave final approval to
the Merger and the Offer, and authorized execution and delivery of the Merger
Agreement. On April 11, 1997 the Company, Parent and Purchaser executed and
delivered the Merger Agreement, and Parent, Purchaser and the shareholders
party thereto executed and delivered the Tender Agreement.
Reasons for the Recommendation of the Company's Board of Directors
In reaching its conclusion and making its determinations as outlined in
paragraph (a) above, the Board of Directors considered a number of factors,
including, without limitation, the following:
(i) the consideration to be paid by Ridge and the other terms of the
Offer and the Merger relative to (A) the offers made by other potential
acquirors, (B) the Company's historical sales, earnings and book value, (C)
management's internal forecast of sales, earnings and book value, and (D)
the recent and historic market prices of the Shares;
(ii) the superiority of Ridge's offer, taken as a whole, over other
offers received by the Company;
(iii) the necessity of receiving approval under the Hart-Scott-Rodino Act
for the proposed transaction with Alternative Buyer as well as the more
comprehensive due diligence Alternative Buyer desired to perform and the
likelihood of delays and risk of non-consummation of the transaction as a
result thereof;
(iv) the Board of Directors' belief that the consideration proposed to be
paid by Parent pursuant to the Offer and the Merger reflects the values
inherent in the Company;
(v) the Board of Directors' familiarity with the business, financial
condition and prospects of the Company, the nature of the Company's
industry and markets, including the Board of Directors' belief that in
order to be competitive in its industry, the Company would require
substantial capital resources and expansion;
(vi) the opinion of Summit Investment Corporation (described below) to
the effect that the consideration to be received by shareholders of the
Company pursuant to the Offer and the Merger is fair, from a financial
point of view, to such shareholders (the full text of the fairness opinion
received by the Company from Summit Investment Corporation is filed as an
exhibit to this Schedule 14D-9 and is also attached hereto as Annex A, and
the Board of Directors of the Company urges shareholders to read such
opinion in its entirety);
(vii) the fact that although the Merger Agreement does not permit the
Company, any of its officers, directors, employees, representatives or
agents, or any of its subsidiaries to solicit, initiate, continue or
encourage any inquiries, proposals or offers that constitute, or could
reasonably be expected to lead to an Acquisition Proposal (as defined in
the Merger Agreement), the Company may, in response to an unsolicited
Acquisition Proposal, furnish non-public information to, or enter into
discussions or negotiations with, the maker of such an unsolicited
Acquisition Proposal, provided that (i) the Board of Directors determines
in good faith (after consultation with and based upon the advice of its
financial advisor and considering the effect of such Acquisition Proposal
upon the employees, customers and the community) that such Acquisition
Proposal would constitute a Superior Proposal (as defined in the Merger
Agreement), (ii) the Board of Directors determines in good faith (after
consultation with and based upon the advice of its outside legal counsel)
that the failure to take such action would be inconsistent with the
fiduciary duties of the Board of Directors under applicable law, and (iii)
the party making such unsolicited Acquisition Proposal enters into an
appropriate confidentiality agreement; and
(viii) the fact that the Board of Directors may terminate the Merger
Agreement if the Company has received (other than in violation of the
Company's non-solicitation covenant) a Superior Proposal (as defined in the
Merger Agreement), and Parent does not make, within five business days of
receipt of written
13
notice of the Company's desire to accept such Superior Proposal, an offer
that the Board of Directors believes, in good faith after consultation with
its financial advisors, is at least as favorable, from a financial point of
view, to the shareholders of the Company, as the Superior Proposal;
provided, however, the Company would be required to pay a fee of $900,000
if within six months after such termination the Company either (i)
consummates any Alternative Transaction (as defined in the Merger
Agreement) or (ii) becomes a party to any agreement relating to an
Alternative Transaction that is thereafter consummated.
The Board of Directors did not assign relative weights to the above factors
or determine that any factor was of particular importance. Rather, the Board
viewed its position and recommendations as being based on the totality of the
information presented to and considered by it.
The Board of Directors recognized that tendering in the Offer would
eliminate the opportunity for shareholders to participate in future growth and
profits of the Company. The Board of Directors believes that such loss of
opportunity is reflected in the Offer price of $1.67 per share. The Board of
Directors also recognized that there can be no assurance as to the level of
growth or profits, if any, to be attained by the Company in the future.
It is expected that, if the shares are not purchased by Purchaser in
accordance with the terms of the Offer, the Company will continue to seek an
alternative purchaser of the Company.
OPINION OF FINANCIAL ADVISOR
The Company retained Summit Investment Corporation ("Summit") to act as its
financial advisor in connection with the Company's consideration of the
possible business combination with Parent. Summit was selected as the
Company's financial advisor because of its previous associations with the
Company, its familiarity with the Company and its operations, and its standing
as a recognized investment banking firm which is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes.
Summit has delivered its written opinion to the Board of Directors of the
Company dated March 20, 1997 and reaffirmed as of April 7, 1997, to the effect
that the consideration to be received by the holders of the Company's Shares
in the Offer and the Merger is fair to the shareholders from a financial point
of view.
The full text of Summit's opinion is attached hereto as Annex A and is
incorporated by reference herein. While the Company believes the description
of the opinion set forth herein is accurate, shareholders are urged to read
the opinion in its entirety.
Summit's opinion is directed to the Company's Board of Directors only and
relates solely to the consideration in the Offer and the Merger and does not
constitute a recommendation to any shareholder of the Company.
In connection with its opinion, Summit (i) reviewed certain publicly
available financial statements and other information of the Company, (ii)
reviewed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of the
Company, (iii) analyzed certain financial projections prepared by the
management of the Company, (iv) discussed the past and current operations and
financial condition and the prospects of the Company with senior executives of
the Company, (v) reviewed the reported prices and trading activity for the
Company's Common Stock, (vi) compared the financial performance of the Company
and the prices and trading activity of the Common Stock with that of certain
other comparable publicly-traded companies and their securities, (vii)
reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions, (viii) reviewed the Merger Agreement and
(ix) performed such other analyses as it deemed appropriate. No limitations
were imposed by the Board of Directors upon Summit with respect to the
investigations made or procedures followed by it in rendering its opinion.
14
In its review and analysis, and in arriving at its opinion, Summit relied
upon and assumed the completeness and accuracy of all the factual, historical,
financial and other information and data publicly available or furnished to it
by the Company. Summit also assumed that the financial projections provided to
it were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the senior management of the Company. In addition,
Summit did not make nor was it provided with an independent evaluation or
appraisal of the assets of the Company.
The following is a summary of the analyses performed and factors considered
by Summit in connection with rendering its opinion.
HISTORICAL FINANCIAL POSITION. In rendering its opinion, Summit reviewed and
analyzed the historical and current financial condition of the Company which
included among other things (i) an assessment of recent financial statements,
(ii) an analysis of revenue growth, margin trends and other operating
performance indicators and (iii) an analysis of capital structure.
COMPARATIVE STOCK PRICE PERFORMANCE. In rendering its opinion, Summit
reviewed and analyzed the daily market (bid) prices and trading volume for the
Company's Common Stock from the beginning of 1996 to February 25, 1997,
separately and in relation to the market prices of (i) the Nasdaq Industrial
Index and (ii) a composite index of publicly traded companies which Summit
judged to be similar to the business of the Company (the "Comparable Public
Companies"). The Comparable Public Companies consisted of the following:
Columbus McKinnon Corporation; Federal Screw Works, Inc.; Giddings & Lewis,
Inc.; Greenfield Industries, Inc.; Knape & Vogt Manufacturing, Inc.; Raymond
Corporation and LS Starrett Company. Summit observed that over such period,
the market price of the Company's Common Stock underperformed the Nasdaq
Industrial Index and the composite index of Comparable Public Companies.
ANALYSIS OF COMPARABLE PUBLIC COMPANIES. This analysis examines a company's
financial condition, operating performance and outlook relative to a group of
publicly traded peers to determine an implied unaffected market trading value.
Summit compared certain financial data of the Company to corresponding data
for the Comparable Public Companies. Summit calculated equity market values as
multiples to latest twelve months ("LTM") net income, current fiscal year
estimated net income (estimates of future net income were compiled by
Institutional Brokers Estimate System) and book value. The respective
multiples of the Comparable Public Companies were between the following
ranges: (i) LTM net income: 8.0x to 33.0x (with a median of 12.4x); (ii)
current fiscal year estimated net income: 9.3x to 16.6x (with a median of
9.3x); and book value: .9x to 2.0x (with a median of 1.5x). Summit calculated
enterprise value (defined as market value of common equity plus book value of
total debt less cash) as multiples to LTM revenue, LTM earnings before
interest and taxes ("EBIT") and LTM earnings before interest, taxes,
depreciation and amortization ("EBITDA") of the Comparable Public Companies.
The respective multiples of the Comparable Public Companies were between the
following ranges: (i) LTM revenue: .5x to 1.6x (with a median of .7x); LTM
EBIT: 5.8x to 23.4x (with a median of 12.0x); and (ii) LTM EBITDA: 4.3x to
12.8x (with a median of 7.0x).
Summit also analyzed operating statistics of the Comparable Public Companies
including, among other things, operating margins, net profit margins, three-
year historical revenue growth, return on equity, and debt capitalization
ratios, in each case as compared to the Company. Summit then derived from this
and other data (based on the relative comparability of the Comparable Public
Companies to that of the Company) the ranges of these multiples deemed most
meaningful for its analysis and applied these multiples to the Company. This
analysis resulted in equity values per share for the Company of between $0.36
to $1.46 with a median of $0.96. Summit noted that its comparable public
company analysis did not give effect to any change-of-control premium that may
arise in connection with a transaction such as the Offer and the Merger.
COMPARABLE MERGER AND ACQUISITION TRANSACTIONS. This analysis provides
indications of value based upon financial information of companies in the same
or similar industries as the target which have been acquired in recent
transactions. Summit reviewed publicly available financial information for
merger and acquisition transactions consummated since 1994 involving similar
metal fabrication companies. Such analysis resulted in
15
four transactions as follows (acquiror/target): Textron, Inc./Elco Industries,
Inc; Greenfield Industries, Inc./Rule Industries, Inc.; Vista 2000,
Inc./American Consumer Products, Inc.; and Park-Ohio Industries, Inc./RB&W
Corporation. Summit compared selected financial data including enterprise
value as a multiple of LTM revenue, LTM EBIT, LTM EBITDA and the premium paid
over the market price ten days prior to the announcement of the transaction
("acquisition premium paid"). The respective multiples of the comparable
merger and acquisition transactions were between the following ranges: LTM
revenue: .12x to .70x (with a median of .50x); LTM EBIT: 10.6x to 20.0x (with
a median of 12.4x); LTM EBITDA: 5.4x to 13.6x (with a median of 6.4x); and
acquisition premium paid: 17.8% to 104.0% (with a median of 67.0%). Summit
applied a range of multiples derived from such analysis to the corresponding
financial data of the Company (based on the relative comparability of the
Company to the comparable companies acquired in the transactions) and arrived
at an estimated range of equity values per share for the Company of between
$0.95 to $1.66 with a median of $1.45. Summit noted that its comparable merger
and acquisition transaction analysis did give effect to a change-of-control
premium.
ACQUISITION PREMIUM ANALYSIS. Summit analyzed the $1.67 per share cash
consideration to be received by the holders of the Company's Common Stock
pursuant to the Offer and the Merger in relation to the February 25, 1997
market price of the Company's Common Stock and the ten-day, three-month and
six-month average market prices of the Company's Common Stock. Such analysis
indicated that the $1.67 per share consideration to be received represented a
premium of (i) 33.6% based on the February 25, 1997 market price of $1.25 and
the ten-day average market price of $1.25 and (ii) 36.9% based on the three-
month average market price of $1.22 and the six-month average market price of
$1.22. Summit noted that foregoing premiums were within the 17.8% to 104.0%
range of acquisition premiums paid and below the 67.0% median acquisition
premium paid in the four comparable merger and acquisition transactions. Using
industry sources which compile information from merger and acquisition
transactions of publicly held corporations across all industry categories,
Summit reviewed the mean and median purchase price premiums paid for 965
corporate acquisitions occurring from 1994 to 1996. Summit indicated that the
annual mean premium ranged from 36.6% to 44.7% and the annual median premium
ranged from 27.3% to 35.0%. Due to the small number of comparable merger and
acquisition transactions, Summit considered the mean and median acquisition
premiums observed in the 965 corporate acquisitions from 1994 to 1996 to be
more meaningful for the purpose of its fairness determination.
DISCOUNT CASH FLOW ANALYSIS. This analysis is a traditional valuation
methodology used to derive a valuation of a corporate entity by capitalizing
the estimated future earnings and calculating the estimated future free cash
flow of such corporate entity and discounting such aggregated results back to
the present. Summit performed a discounted cash flow analysis of the Company
based upon estimates of projected financial performance for the five-year
period ending December 31, 2001 as prepared by the management of the Company.
Summit calculated a range of implied equity values of the Company based upon
the discounted present value of the sum of (i) the projected five-year stream
of unleveraged free cash flow and (ii) the projected terminal value at the
year 2001 based upon a range of unleveraged free cash flow growth rates in
perpetuity and then subtracted the current net debt. In conducting this
analysis, Summit applied discount rates ranging from 14% to 16% and assumed
unleveraged free cash flow growth rates, in perpetuity, ranging from 2.0% to
4.0%. Based on this analysis, Summit derived implied equity values per share
ranging from a low of $0.68 to a high of $1.75 with a median value of $1.07.
Summit noted that its discounted cash flow analysis did not give effect to any
change-of-control premium that may arise in connection with a transaction such
as the Offer and the Merger.
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 Summit's opinion. In arriving at its fairness
determination, Summit considered the results of all such analyses. No company
or transaction used in the above analyses as a comparison is directly
comparable to the Company. The analyses were prepared solely for purposes of
Summit providing its opinion to the Company's Board of Directors as to the
fairness of the consideration to be received by the holders of the Company's
Shares in the Offer and the Merger and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual
16
future results, which may be significantly more or less favorable than
suggested by such analyses. As described above, Summit's opinion to the Board
of Directors was one of many factors taken into consideration by the Company's
Board of Directors in making its determination to approve the Merger
Agreement.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The Company retained Coopers & Lybrand to provide financial advisory
services to the Company in connection with a possible sale or merger of the
Company, strategic alliance, joint venture or purchase of another entity by
the Company. This engagement was confirmed by a letter agreement dated
September 17, 1996 and later modified by oral agreement (the "Coopers
Agreement"). Pursuant to the Coopers Agreement, the Company agreed to pay
Coopers (i) a non-refundable retainer of $10,000 upon execution of the Letter
Agreement and (ii) $300,000, less retainer, upon sale of all or part of the
Company with the non-refundable retainer to be applied to any payments made
pursuant to either a sale of all or part of the Company. In addition, the
Company agreed to reimburse Coopers for out-of-pocket expenses, including
reasonable fees and disbursements of legal counsel, incurred in connection
with its engagement, and agreed to indemnify Coopers against certain
liabilities.
The Company retained Summit to render a fairness opinion with respect to the
Company's consideration of a possible business combination with Parent. Under
the terms of the Company's engagement letter with Summit, the Company has paid
Summit a fee of $32,500 for the preparation and delivery of its fairness
opinion. If, after submitting its fairness opinion, the Company requests
Summit to expand upon, elaborate or update such opinion, or provide expert
testimony or give depositions related to such opinion, the Company will
compensate Summit at an hourly rate of $165. In addition, the Company has
agreed to indemnify Summit against certain liabilities.
Neither the Company, nor, to the best of the Company's knowledge, any person
acting on its behalf intends to employ, retain or compensate any person to
make solicitations or recommendations to shareholders in connection with the
Offer and the Merger.
ITEM 6. RECENT TRANSACTIONS.
(a) To the best knowledge of the Company, no transactions in Shares have
been effected within the last 60 days by the Company or by any executive
officer, director, affiliate or subsidiary of the Company.
(b) To the best knowledge of the Company, each of the Company's executive
officers, directors and affiliates presently intends to tender all of the
Shares held of record or beneficially owned by them. Certain of such persons
have entered into a Tender and Stock Option Agreement dated April 11, 1997
among R-B Acquisition Corporation, R-B Capital Corporation and certain
shareholders of the Company (the "Tender and Stock Option Agreement"). The
shareholders who are parties to the Tender and Stock Option Agreement have
each severally agreed (i) to validly tender (or cause the record owner of any
Shares to tender) pursuant to the Offer all outstanding Shares beneficially
owned by such shareholder and his or its affiliates, not later than the fifth
business day after commencement of the Offer, (ii) to validly tender pursuant
to the Offer all Shares thereafter acquired by such shareholder or his or its
affiliates, within one business day following the acquisition thereof and
(iii) to the maximum extent permitted by law, not to withdraw any Shares so
tendered without the prior written consent of Purchaser. Such shareholders
have further agreed that if Parent or Purchaser shall notify the shareholders
at any time after the commencement of the Offer that additional Shares are
required to be tendered so that at least (x) 50% or (y) 90%, as specified by
Parent or Purchaser, of all outstanding Shares shall have been validly
tendered in the Offer, then each such shareholder shall (and shall cause his,
her or its affiliates to), exercise such options, warrants and other rights to
acquire additional shares in such amounts as may be specified by Parent or
Purchaser in order to cause at least (x) 50% or (y) 90%, as specified by
Parent or Purchaser, of all outstanding Shares to have been validly tendered
in the Offer, and shall tender or cause to be tendered in the Offer all Shares
acquired by such shareholder (or his, her or its affiliates) upon exercise of
such options, warrants and other rights. Parent and Purchaser have agreed that
(i) they shall not make any such request except to the extent required to
cause at least (x) 50% or (y) 90% of all outstanding Shares to have been
validly tendered in the Offer, and (ii) to the extent practicable, such
request shall be made to all shareholders pro rata,
17
on the basis of the Shares owned by all such shareholders and their respective
affiliates on a fully-diluted basis. The shareholders that are parties to the
Tender and Stock Option Agreement have further granted to Purchaser an
irrevocable option (the "Stock Option") to purchase a certain number of Shares
owned by such shareholder or its affiliates at a purchase price equal to $1.67
per share in cash net to the seller; provided that in no event shall the
aggregate number of such Shares subject to the Stock Options granted by all
shareholders pursuant to the Tender and Stock Option Agreement exceed an
amount equal to 19.9% of the outstanding Shares, and if the aggregate number
of such Shares subject to the Stock Options granted by all such shareholders
would otherwise exceed 19.9% of the outstanding Shares, then the number of
such Shares subject to the Stock Options granted by all such shareholders
shall be reduced, on a pro rata basis, so that the aggregate number of Shares
subject to the Stock Options granted by all such shareholders will not exceed
an amount equal to 19.9% of the outstanding Shares of Company Common Stock.
The shareholders who are parties to the Tender and Stock Option Agreement have
further agreed, jointly and severally, that if (i) the Offer and the Merger
shall be consummated and (ii) the total transaction expenses (including,
without limitation, legal and accounting expenses and fees and commissions
payable to Coopers & Lybrand and other investment bankers and financial
advisors to the Company) incurred by the Company in connection with the Offer,
the Merger, the Merger Agreement and the transactions contemplated thereby and
not reflected on the Company's audited balance sheet as of December 31, 1996
shall exceed $502,000, then such shareholders, jointly and severally, shall
reimburse Parent for all such transaction expenses in excess of $502,000
promptly upon demand made within 60 days after the Effective Time of the
Merger. The Tender and Stock Option Agreement is attached as Exhibit 7 hereto
and is incorporated by reference herein.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as described in Items 2 and 3(b) hereof, no negotiation is
underway or is being undertaken by the Company in response to the Offer which
relates to or could result in (i) an extraordinary transaction, such as a
merger or reorganization, involving the Company or any of its subsidiaries,
(ii) a purchase, sale or transfer of a material amount of assets by the
Company or any of its subsidiaries, (iii) a tender offer for or other
acquisition of securities by or of the Company or (iv) any material change in
the present capitalization or dividend policy of the Company.
(b) Except as described in Items 3(b) and 4 hereof, there are no
transactions, board resolutions, agreements in principle or signed contracts
in response to the Offer, which relate to or would result in one or more of
the matters referred to in Item 7(a).
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
The opinion of Summit dated March 20, 1997 and reaffirmed as of April 7,
1997 is attached hereto as Annex A and incorporated by reference herein. The
Information Statement attached hereto as Annex B is being furnished in
connection with the contemplated designation by Purchaser, pursuant to Merger
Agreement, of certain persons to be appointed to the Board of Directors of the
Company other than at a meeting of the Company's shareholders, following the
purchase by Purchaser of the number of Shares pursuant to the Offer and the
Tender and Stock Option Agreement necessary to satisfy the Minimum Condition.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1--Offer to Purchase of R-B Acquisition Corporation dated April 17,
1997 and related Letter of Transmittal.
Exhibit 2--Agreement and Plan of Merger dated as of April 11, 1997 among the
Company, R-B Acquisition Corporation and R-B Capital Corporation. The
Schedules to the Agreement and Plan of Merger have been omitted. The
Company agrees to furnish supplementally a copy of any Schedule to
the Commission.
18
Exhibit 3--Employment Agreement dated December 13, 1995 between Peerless and
Jan C. van Osnabrugge (incorporated by reference to Exhibit No. 10.31
to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
Exhibit 4--Employment Agreement dated December 13, 1995 between Peerless and
Robert Deter (incorporated by reference to Exhibit No. 10.32 to the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1995).
Exhibit 5--Form of Indemnification Agreement between the Company and each of
its directors and executive officers.
Exhibit 6--Opinion of Summit Investment Corporation dated March 20, 1997 and
reaffirmed as of April 7, 1997 (attached as Annex A).*
Exhibit 7--Tender and Stock Option Agreement dated April 11, 1997 among R-B
Acquisition Corporation, R-B Capital Corporation and certain
Stockholders of the Company.
Exhibit 8--Joint press release issued by the Company and Ridge Capital
Corporation on April 14, 1997.
Exhibit 9--Letter to Company's shareholders dated April 17, 1997 from the
Company's Chairman and Chief Executive Officer.*
Exhibit10--Information Statement Pursuant to Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 thereunder. (attached as Annex
B).*
- --------
*Included in copies being mailed to the shareholders.
19
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Peerless Industrial Group, Inc.
Dated: April 17, 1997 /s/ William H. Spell
By: _________________________________
William H. Spell
Chief Executive Officer
20
[Letterhead of Summit Investment Corporation]
April 7, 1997
Board of Directors
Peerless Industrial Group, Inc.
333 South Seventh Street, Suite 2430
Minneapolis, MN 55402
Members of the Board:
We understand that Peerless Industrial Group, Inc. ("Peerless" or the
"Company"), R-B Capital Corporation ("Parent") and R-B Acquisition Corporation
("Purchaser") propose to enter into an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which Purchaser will acquire all of the
common stock and outstanding options to purchase common stock of Peerless.
Under the terms of the Merger Agreement, Purchaser will offer to purchase all
of the outstanding shares of Peerless common stock for $1.67 per share cash in
a tender offer (the "Offer"). As more fully described therein, the Merger
Agreement also provides for the merger of Purchaser with and into the Company
(the "Merger") following expiration of the Offer, subject to certain
conditions. At the effective time of the Merger, the remaining shares of
Peerless common stock will be converted into the right to receive
consideration of $1.67 per share in cash.
You have requested our opinion as to whether the consideration to be
received by the holders of the shares of Peerless common stock is fair from a
financial point of view to such holders.
Summit Investment Corporation ("Summit"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, initial and secondary
underwritings, private placements and valuations for estate, corporate and
other purposes.
In developing our opinion, we have, among other things:
1. Reviewed certain publicly available financial statements and other
information of the Company;
2. Reviewed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of
the Company;
3. Analyzed certain financial projections prepared by the management of
the Company;
4. Discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
5. Reviewed the reported prices and trading activity for the Peerless
common stock;
6. Compared the financial performance of the Company and the prices and
trading activity of the common stock with that of certain other
comparable publicly-traded companies and their securities;
7. Reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
8. Reviewed a draft of the Merger Agreement dated April 2, 1997; and
9. Performed such other analyses as we deemed appropriate.
In our review and analysis, and in arriving at our opinion, we have relied
upon and assumed the completeness and accuracy of all the factual, historical,
financial and other information and data publicly available or furnished to us
by Peerless. We have assumed that the financial projections provided to us
were reasonably prepared on bases reflecting the best currently available
estimates and judgements of the senior management of Peerless. In addition, we
have not made nor been provided with an independent evaluation or appraisal of
the assets of Peerless. Our opinion is necessarily based on economic, stock
market and other conditions as they exist and can be evaluated as of the date
hereof.
This opinion has been prepared for the use of the Board of Directors of
Peerless and does not constitute a recommendation to any stockholder with
respect to whether to tender shares of Peerless common stock pursuant to the
Offer or whether to vote in favor of the Merger. We hereby consent, however,
to the inclusion of this opinion as an exhibit to Parent's Tender Offer
Statement on Schedule 14D-1, the Peerless Solicitation/Recommendation
Statement on Schedule 14D-9 or to any proxy statement distributed in
connection with the Offer and the Merger.
Based on the foregoing, we are of the opinion as of the date hereof that the
consideration to be received by the Peerless stockholders pursuant to the
Offer and the Merger is fair from a financial point of view to such holders.
Very truly yours,
Summit Investment Corporation
2
ANNEX B
PEERLESS INDUSTRIAL GROUP, INC.
2430 METROPOLITAN CENTRE
333 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402
(612) 371-9650
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND
RULE 14f-1 THEREUNDER
April 17, 1997
This information is being furnished by Peerless Industrial Group, Inc., a
Minnesota corporation (the "Company"), to its shareholders in connection with
the possible designation by R-B Acquisition Corporation, a Minnesota
corporation (the "Purchaser"), a wholly owned subsidiary of R-B Capital
Corporation, a Delaware corporation ("Parent"), pursuant to the Agreement and
Plan of Merger dated as of April 11, 1997 (the "Merger Agreement") among the
Company, Parent and the Purchaser of persons to be elected to the Board of
Directors of the Company other than at a meeting of the Company's
shareholders.
Pursuant to the Merger Agreement, the Purchaser commenced a tender offer
(the "Offer"), disclosed in the Tender Offer Statement on Schedule 14D-1 dated
April 17, 1997 to purchase all of the outstanding shares of Common Stock, no
par value (the "Common Stock"), and Class B Common Stock, no par value (the
"Class B Common Stock") (hereinafter the Common Stock and Class B Common Stock
shall be collectively referred to as the "Shares") of the Company at a price
of $1.67 per share, net to the seller in cash. The terms and conditions of the
Offer are set forth in the Offer to Purchase dated April 17, 1997 (the "Offer
to Purchase") and related Letter of Transmittal (which together constitute the
"Offer"), which are being mailed by the Purchaser to the Company's
shareholders concurrently herewith. The Merger Agreement also provides, among
other things, that after completion of the Offer, subject to the terms and
conditions of the Merger Agreement, the Purchaser and the Company will be
merged (the "Merger") as more fully described in the Offer to Purchase and in
the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") to which this statement is appended.
The Company had 5,045,151 shares of Common Stock and 1,227,273 shares of
Class B Common Stock issued and outstanding as of April 15, 1997. Each holder
of Common Stock is entitled to that number of votes equal to the number of
shares of Common Stock held by the shareholder. Each holder of Class B Common
Stock is entitled to that number of votes equal to the number of shares of
Common Stock into which such holder's shares of Class B Common Stock are
convertible as provided in the Company's Articles of Incorporation.
THE BOARD OF DIRECTORS
GENERAL
The Company's Articles of Incorporation provide that, so long as Northland
Business Capital, L.L.P. or its affiliates continue to own at least 100,000
shares of Class B Common Stock (i) the Board of Directors shall consist of not
more than nine members, (ii) the holders of Class B Common Stock, exclusively
and voting as a single class, shall be entitled, by a vote of a majority of
the outstanding shares of Class B Common Stock held by such holders, to elect
one director of the Company and to exercise any right of removal or
replacement of such director, and (iii) the holders of Common Stock,
exclusively and voting as a single class, shall be entitled, by a vote of a
majority of the outstanding shares of Common Stock held by such holders, to
elect not more than eight of the directors of the Company and to exercise any
right of removal or replacement of such directors. As of the date hereof,
Northland Business Capital, L.L.P. owns in excess of 100,000 shares of Class B
Common Stock and the Board of Directors consists of seven members.
B-1
CURRENT DIRECTORS
The persons named below are the current members of the Board of Directors
and serve for a term of one year expiring at the 1997 Annual Meeting of
Shareholders and upon the election and qualification of their successors or
until earlier resignation or removal.
POSITION WITH
NAME AGE COMPANY
- ---- --- -------------
Harry W. Spell......................... 73 Chairman of the Board and Director
William H. Spell....................... 40 Chief Executive Officer and Director
Bruce A. Richard....................... 67 Secretary and Director
Reynold M. Anderson.................... 66 Director
Michael E. Platt....................... 55 Director
Richard W. Perkins..................... 66 Director
Brian K. Smith......................... 37 Director
BUSINESS EXPERIENCE
Harry W. Spell. Harry W. Spell has been a Director of the Company since 1994
and is the father of William H. Spell. He has been Chairman of the Board and
Chief Executive Officer of Eagle Pacific Industries, Inc. ("Eagle Pacific")
since 1992. Eagle Pacific manufactures PVC pipe and polyethylene tubing in
plants in Nebraska, Oregon and Utah. He was employed by Northern States Power
from 1949 until August 1988, when he retired from all positions. From April
1988 through August 1988, Mr. Spell was a Senior Vice President of Northern
States Power Company. From November 1980 through August 1988, he served as a
Director of Northern States Power Company--Wisconsin (a subsidiary of Northern
States Power Company). Mr. Spell was Senior Vice President--Finance and Chief
Financial Officer of Northern States Power Company from May 1983 until April
1988. Mr. Spell currently serves as a Director of Appliance Recycling Centers
of America, Inc.
William H. Spell. William H. Spell has been a Director of the Company since
1994 and is the son of Harry W. Spell, a Director of the Company. He has been
President and Chief Operating Officer of Eagle Pacific and a member of its
Board of Directors since January 1992. From October 1990 through May 1993, Mr.
Spell was a founder, President and Chairman of the Board of National
Acquisition Corp., a public company which merged with Garment Graphics, Inc. a
designer, producer and marketer of silkscreen imprinted, embroidered and
decorative activewear. From 1981 to May of 1988, Mr. Spell was Vice President
and Director of Corporate Finance for John G. Kinnard and Company,
Incorporated, a regional investment banking firm. Mr. Spell holds a BS degree
and an MBA from the University of Minnesota.
Bruce A. Richard. Bruce A. Richard has been a Director of the Company since
1994 and currently serves as the Company's Secretary. He has been a Director
of Eagle Pacific since March 1992 and has served as its Vice
B-2
Chairman, Secretary, Treasurer and a Director since September 1993. From 1985
through October 1986, he was President and Chief Operating Officer of Northern
States Power Company, from which duties he retired. From July 1954 through
1984, Mr. Richard held various management and other positions with Northern
States Power Company.
Reynold M. Anderson. Reynold M. Anderson has been a Director of the Company
since 1984, is a founder of the Company and served as Executive Vice President
from April 1985 through November 1991. The Company acquired Peerless Chain
Company in December 1995. See "Certain Transactions." He also served as the
Company's Chief Financial Officer and Secretary between 1983 and April 1985.
Since 1985, he has been a general partner of Zaeco Associates Limited
Partnership, which engages in the ownership and management of real estate.
From 1984 to June 1992, Mr. Anderson served as a Director and executive
officer of Mintesota, Inc., which operated two Perkins Restaurants in Florida.
From 1986 to May 1992, he served as a Director and executive officer of
T.H.I.S. Corporation ("T.H.I.S."), which operated seven Perkins Restaurants in
the Palm Beach County, Florida area. In November 1991, T.H.I.S. filed a
Petition for Reorganization under Chapter 11 of the Bankruptcy Code of 1978 in
the United States Bankruptcy Court for the Southern District of Florida.
T.H.I.S. was subsequently liquidated. Mr. Anderson is a professional civil
engineer registered in the State of Minnesota and received a degree in civil
engineering from the University of Minnesota.
Michael E. Platt. Michael E. Platt has been a Director of the Company since
1983, is a founder of the Company and was employed as its Chief Executive
Officer from August 1983 through June 1994, and served as the Company's
President from June 1994 through January 1996. The Company acquired Peerless
Chain Company in December 1995. See "Certain Transactions." He currently
serves as President and Chief Executive Officer of Fresh Food Ventures, Inc.,
which operates several Mexican-style restaurants. He is also President and a
Director of Regal One Corporation, which is engaged in the development of an
automatic emission control product. Between 1976 and July 1983, he held
various marketing positions with The Pillsbury Company and was its Director of
Acquisitions between 1980 and 1983. Prior to joining Pillsbury, he was Vice
President of Marketing with Steak & Shake, Inc., from October 1975 to May
1976. He served as Director of New Products and New Programs with Kentucky
Fried Chicken Corporation, from November 1972 to September 1975. He received a
BS degree from Massachusetts Institute of Technology and an MBA degree from
Harvard University.
Richard W. Perkins. Richard W. Perkins has been a Director of the Company
since 1993. He has been President, Chief Executive Officer and a Director of
Perkins Capital Management, Inc. since December 1985. He has over 30 years
experience in the investment business. Prior to establishing Perkins Capital
Management, Inc., Mr. Perkins was a Senior Vice President at Piper Jaffray
Incorporated, where he was involved in corporate finance and venture capital
activities, as well as rendering investment advice to domestic and
international investment managers. He held various positions with Piper
Jaffray from May 1966 through December 1984. Mr. Perkins is also a Director of
the following public companies: Bio-Vascular, Inc., LifeCore Biomedical, Inc.,
Children's Broadcasting Corporation, Garment Graphics, Inc., CNS, Inc., Eagle
Pacific, Nortech Systems, Inc. and Quantech Ltd.
Brian K. Smith. Brian K. Smith has been a Director of the Company since
January 1996. Since 1994, he has been a General Partner of Northland Business
Capital, L.L.P., a provider of mezzanine and equity funds. Northland Business
Capital, L.L.P. is a subsidiary of the Northern Company, a $1 billion private
financial services company. From 1990 through 1994, Mr. Smith served as Vice
President of Norwest Bank Minnesota, N.A., working in their Structured Finance
Group providing senior and subordinate debt for leveraged buy-outs. Norwest
Bank Minnesota, N.A. is a subsidiary of Norwest Corp.
PURCHASER DIRECTOR DESIGNEES
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of Shares pursuant to the Offer and from time to time thereafter, Purchaser
will be entitled to designate up to such number of directors ("Purchaser
Designees"), rounded up to the next whole number, on the Company's Board of
Directors that equals the product of (i) the total number of directors on the
Board (giving effect to the election of any additional
B-3
directors pursuant to such provision), and (ii) the percentage that the number
of Shares owned by Purchaser and its affiliates (including any Shares
purchased pursuant to the Offer) bears to the total number of outstanding
Shares, and the Company will, upon request by Purchaser, subject to the
provisions of the Merger Agreement, promptly either increase the size of the
Board (and will, if necessary, amend the Company's Bylaws to permit such an
increase) or use its best efforts to secure the resignation of such number of
directors as is necessary to enable Purchaser Designees to be elected to the
Board and will cause Purchaser Designees to be so elected.
Information concerning the Purchaser Designees is set forth in Exhibit A
hereto. Such information was provided by the Purchaser and the Company does
not assume any responsibility for the accuracy or completeness thereof. To the
best knowledge of the Company, other than as disclosed on Exhibit A hereto,
none of the Purchaser Designees beneficially owns any equity securities of the
Company.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company receive no additional
compensation for their services as directors. Non-employee directors receive a
fee of $6,000 per year for their services as members of the Board of
Directors.
Pursuant to the Company's Stock Option Plan, non-employee directors are
entitled to options to purchase 18,000 shares of Company Common Stock at a
price equal to the fair market value of the Company's Common Stock. The
options vest up to 6,000 shares on the first, second and third anniversary
dates of the options, if the person is a director as of such vesting date.
Directors will also receive options for 18,000 shares on the same terms
described above upon such director being re-elected for his or her fourth,
seventh, tenth and thirteenth one-year terms. The Stock Option Plan further
provides that options automatically granted to non-employee directors elected
after January 1, 1994 and prior to January 1, 1996 will be increased from
18,000 shares to 62,000 shares, and that options granted to outside directors
first elected after January 1, 1996 will be increased from 18,000 shares to
50,000 shares.
The Purchaser Designees will not receive options under the Company's Stock
Option Plan.
MEETINGS AND COMMITTEES
The Board of Directors held seven meetings during the fiscal year ended
December 31, 1996 (fiscal 1996). The Board of Directors has an Audit
Committee, a Compensation Committee, an Executive Committee and a Nomination
Committee. No director attended fewer than 75% of the total number of the
meetings of the Board and of the Committees on which such member served.
The Audit Committee is composed of Richard W. Perkins, Michael E. Platt,
Brian K. Smith and Bruce A. Richard. The function of the Audit Committee is to
recommend the selection of independent auditors, review the scope and results
of the audit and make inquiries as to the adequacy of the Company's
accounting, financial and operating controls. The Audit Committee did not have
any formal meetings in fiscal 1996.
The Compensation Committee consists of Bruce A. Richard, Richard W. Perkins,
Brian K. Smith and Reynold M. Anderson. The Compensation Committee, which
considers and makes recommendations concerning executive compensation, did not
have any formal meetings in fiscal 1996.
The Executive Committee consists of William H. Spell, Bruce A. Richard and
Harry W. Spell. The Executive Committee met informally throughout 1996.
The Nomination Committee consists of Reynold M. Anderson, William H. Spell
and Harry W. Spell. The Nomination Committee did not have any formal meetings
in fiscal 1996. The Nomination Committee does not consider nominees
recommended by shareholders.
B-4
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Harry W. Spell................... 73 Chairman and Director
William H. Spell................. 40 Chief Executive Officer and Director
Jan C. van Osnabrugge............ 54 President
Robert E. Deter.................. 52 Chief Financial Officer
Bruce A. Richard................. 67 Secretary and Director
Harry W. Spell. See "The Board of Directors--Current Directors."
William H. Spell. See "The Board of Directors--Current Directors."
Jan C. van Osnabrugge. Jan C. van Osnabrugge has been employed by the
Company's operating subsidiary, Peerless Chain Company ("Peerless") since
January 1994 and served as President of Peerless since December 1995. Prior to
joining Peerless, he served as Chief Executive Officer of Wolfking Belam BV
(NL) from September 1992 through September 1993. Between November 1990 and
September 1992 he was employed by Stork RMS BV and Stork NON BV in various
executive capacities, including Chief Executive Officer and Vice President of
Sales and Marketing. Mr. van Osnabrugge is subject to an employment agreement
with Peerless dated December 13, 1995.
Robert E. Deter. Robert E. Deter has been employed by Peerless since 1979.
Mr. Deter served as Peerless' Controller from 1987 to April 1995 and as its
Chief Financial Officer from April 1995 to December 1995, when he was named
Chief Financial Officer of the Company. Mr. Deter is subject to an employment
agreement with Peerless dated December 13, 1995.
Bruce A. Richard. See "The Board of Directors--Current Directors."
All executive officers are elected by the Company's Board of Directors and
serve subject to termination, resignation or until their successors are duly
elected.
EXECUTIVE COMPENSATION
The following table sets forth certain information about compensation paid
to or accrued by the Company's Chief Executive Officer and each of the
Company's executive officers receiving in excess of $100,000 for services
rendered to the Company during the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------------
NAME AND ANNUAL COMPENSATION SECURITIES
PRINCIPAL --------------------------- UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) OTHER OPTIONS (#) COMPENSATION ($)
- --------- ---- --------- -------- ------ ----------- ----------------
Jan C. van
Osnabrugge 1996 192,000 12,210 17,455 -- --
President 1995 192,000(1) 37,082 -- 60,000 --
1994 32,493(2) -- -- -- --
William H. Spell 1996 96,000 -- 2,400 -- --
Chief Executive
Officer 1995 60,000 125,000 -- 175,000 --
1994 35,000 -- -- 230,000 --
The Company did not grant any options to the persons named in the table
above during the fiscal year ended December 31, 1996. The following table
summarizes stock option exercises during the fiscal year ended December 31,
1996 to or by such executive officers and certain other information relative
to such options.
B-5
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS AT
AT FY-END (#) FY-END ($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ------------ ------------------- -------------------
Jan C. van Osnabrugge... -- -- 0/60,000 0/12,750
William H. Spell........ -- -- 300,000/105,000 37,375/22,313
BENEFICIAL OWNERSHIP OF SHARES
The following table contains certain information as of March 3, 1997,
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director, nominee for director and executive officer
of the Company, (iii) each of the named executive officers as defined in Item
402(a)(2), and (iv) the executive officers of the Company and directors as a
group, and as to the percentage of the outstanding shares held by them on such
date. Any shares which are subject to an option or a warrant exercisable
within 60 days are reflected in the following table and are deemed to be
outstanding for the purpose of computing the percentage of Common Stock owned
by the option or warrant holder but are not deemed to be outstanding for the
purpose of computing the percentage of Common Stock owned by any other person.
Unless otherwise noted, each person identified below possesses sole voting and
investment power with respect to such shares.
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE PERCENTAGE OF
OWNER OF BENEFICIAL OWNERSHIP OUTSTANDING STOCK(1)
- ------------------------------ ----------------------- --------------------
Richard W. Perkins............... 2,294,949(2) 36.0%
730 East Lake Street
Wayzata, Minnesota 55391
Perkins Capital Management, Inc.. 1,368,500 21.8%
730 East Lake Street
Wayzata, Minnesota 55391
Northland Business Capital
L.L.P........................... 1,247,273(3) 19.8%
1285 Northland Lane
St. Paul, Minnesota 55120
Brian K. Smith................... 1,247,273(3) 19.8%
1285 Northland Lane
St. Paul, Minnesota 55120
Reynold M. Anderson.............. 1,108,220(4) 17.5%
4130 Burton Lane
Minneapolis, Minnesota 55406
William H. Spell................. 857,266(5) 13.0%
2430 Metropolitan Centre
333 South Seventh Street
Minneapolis, Minnesota 55402
Harry W. Spell................... 646,902(6) 10.1%
2430 Metropolitan Centre
333 South Seventh Street
Minneapolis, Minnesota 55402
B-6
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE PERCENTAGE OF
OWNER OF BENEFICIAL OWNERSHIP OUTSTANDING STOCK(1)
- ------------------------------ ----------------------- --------------------
Bruce A. Richard.................. 602,630(7) 9.5%
2458 Farrington Circle
Roseville, Minnesota 55113
Michael E. Platt.................. 542,500(8) 8.6%
7173 Oak Pointe Curve
Bloomington, Minnesota 55438
Z. Albin E. Anderson Irrevocable
Trust............................ 370,000 5.9%
c/o Reynold M. Anderson
4130 Burton Lane
Minneapolis, Minnesota 55406
Jan C. van Osnabrugge............. 109,090(9) 1.7%
1416 East Sanborn Street
Winona, Minnesota 55987
Robert E. Deter................... 59,090(9) 0.9%
1416 East Sanborn Street
Winona, Minnesota 55987
All Directors and Officers as a
Group (9 Persons)................ 4,211,263(10) 60.4%
- --------
(1) Calculated assuming the conversion of all Class B Common Stock into Common
Stock.
(2) Includes: (i) 1,368,500 shares owned by Perkins Capital Management, Inc.
("PCM") over which Mr. Perkins, President of PCM, disclaims beneficial
ownership, (ii) 72,000 shares owned by the Richard W. Perkins Trust dated
6/14/78, (iii) 25,000 owned by the Perkins Capital Management, Inc. Profit
Sharing Plan & Trust dated 12/15/86, (iv) 50,000 shares owned by Quest
Venture Partners, (v) 250,000 shares owned by Pyramid Partners, LP, (vi)
89,000 shares purchasable upon the exercise of vested stock options, (vii)
15,000 shares purchasable pursuant to warrants, and (viii) 425,449 shares
owned by the management of Peerless Chain Company over which Mr. Perkins
holds shared voting power.
(3) Includes 1,227,273 shares of Class B Common Stock, which is convertible
into an equal number of shares of Common Stock, and 10,000 shares
purchasable upon the exercise of vested stock options granted to Brian K.
Smith. Also includes 10,000 shares purchasable pursuant to a warrant owned
by Northland Business Capital, L.L.P., of which Mr. Smith is a General
Partner.
(4) Includes 370,000 shares owned by the Z. Albin E. Anderson Irrevocable
Trust, of which Mr. Anderson is a trustee and a beneficiary, 771 shares
owned by Mr. Anderson's spouse, 52,000 shares purchasable upon the
exercise of vested stock options, 10,000 shares purchasable pursuant to a
warrant, and 425,449 shares owned by the management of Peerless Chain
Company over which Mr. Anderson holds shared voting power.
(5) Includes 18,181 shares owned by the Spell Family Foundation of which Mr.
Spell is a director, 300,000 shares purchasable upon the exercise of
vested stock options, 10,000 shares purchasable pursuant to a warrant, and
425,449 shares owned by the management of Peerless Chain Company over
which Mr. Spell holds shared voting power.
(6) Includes 18,181 shares owned by the Spell Family Foundation of which Mr.
Spell is a director, 89,000 shares purchasable upon the exercise of vested
stock options, 15,000 shares purchasable pursuant to warrants, and 425,449
shares owned by the management of Peerless Chain Company over which Mr.
Spell holds shared voting power.
(7) Includes 83,000 shares purchasable upon the exercise of vested stock
options, 10,000 shares purchasable pursuant to a warrant, and 425,449
shares owned by the management of Peerless Chain Company over which Mr.
Richard holds shared voting power.
B-7
(8) Includes 14,000 shares owned by Mr. Platt's spouse and 10,000 shares
purchasable upon the exercise of vested stock options.
(9) Represents shares over which Messrs. Richard W. Perkins, Reynold M.
Anderson, William H. Spell, Harry W. Spell and Bruce A. Richard hold
shared voting power.
(10) Includes: (i) 1,227,273 shares of Class B Common Stock, which is
convertible into an equal number of shares of Common Stock, owned by
Northland Business Capital, L.L.P., of which Mr. Smith is a General
Partner, (ii) 633,000 shares purchasable upon the exercise of vested
stock options, (iii) 70,000 shares purchasable pursuant to warrants, (iv)
18,181 shares owned by the Spell Family Foundation of which Messrs. Harry
W. Spell and William H. Spell are directors, (v) 425,449 shares owned by
the management of Peerless Chain Company over which Messrs. Harry W.
Spell, William H. Spell, Bruce A. Richard, Richard W. Perkins and Reynold
M. Anderson hold shared voting power, (vi) 72,000 shares owned by the
Richard W. Perkins Trust dated 6/14/78, (vii) 25,000 shares owned by the
Perkins Capital Management, Inc. Profit Sharing Plan & Trust dated
12/15/86, (viii) 50,000 shares owned by Quest Venture Partners, (ix)
250,000 shares owned by Pyramid Partners, LP, (x) 370,000 shares owned by
the Z. Albin E. Anderson Irrevocable Trust of which Mr. Reynold M.
Anderson is a trustee and a beneficiary, (xi) 771 shares owned by Mr.
Reynold M. Anderson's spouse, and (xii) 14,000 shares owned by Mr.
Michael E. Platt's spouse.
CERTAIN TRANSACTIONS
In June 1994, Discus Acquisition Corporation, now the Company, sold to
Fuddruckers Inc. nine of its franchised Fuddruckers(R) restaurants for a
purchase price of approximately $5.5 million. In 1995 the Company disposed of
its remaining operations and property consisting of a Fuddruckers(R)
restaurant operated in Cottage Grove, Minnesota and a limited partnership
interest in a non-Fuddruckers restaurant facility. The Company used the major
portion of the net proceeds from these sales, after payment of obligations,
together with other equity and debt financing raised in 1995 and 1996, to
acquire Peerless in December of 1995.
In connection with the Company's acquisition of Peerless in December 1995,
the Company sold an aggregate of 2,388,874 shares of Common Stock for a
purchase price of $2,627,761, or $1.10 per share, to a group of investors in a
private placement transaction, including five of the Company's directors or
their affiliates. The proceeds from such private placement of Common Stock
were used to partially fund the acquisition of Peerless. The following
officers/directors participated in the private placement, individually or
indirectly through other entities in which they had beneficial interests,
purchasing the number of shares indicated: William H. Spell, Chief Executive
Officer and a Director (81,817 shares); Harry W. Spell, Chairman and a
Director (95,453 shares); Reynold M. Anderson, Director (100,000 shares);
Bruce A. Richard, Director (68,181 shares); and Richard W. Perkins, Director
(375,000 shares). Pursuant to negotiations which commenced immediately prior
to the acquisition of Peerless, Northland Business Capital, L.L.P.
("Northland"), of which Brian K. Smith is a General Partner, acquired
1,227,273 shares of Class B Common Stock pursuant to the terms of a Stock
Purchase Agreement entered into between the Company and Northland in January
1996. The Common Stock sold to the foregoing persons was issued directly by
the Company to the purchasers in a private placement transaction without
registration of such shares under the Securities Act of 1933, as amended (the
"Act"), pursuant to a claimed exemption therefrom. The shares constitute
"restricted securities" as that term is defined under Rule 144 of the Act and
may not be resold unless registered under the Act or an exemption from
registration becomes available under Rule 144 or another provision under the
Act.
On November 1, 1995 the Board of Directors of the Company authorized the
sale of the shares as a part of the plan to acquire Peerless and finance that
acquisition, subject to receiving a fairness opinion. The Board of Directors
engaged Summit Investment Corporation ("Summit"), an investment banking firm,
to provide an opinion to the Company as to the fairness of the purchase price
for the Common Stock. On November 29, 1995, Summit rendered its opinion that
the financing involving the sale of the Company's equity securities was fair
from a financial point of view to the Company and its shareholders. On that
date the bid and ask prices for the
B-8
Company, based upon information available from the NASD Bulletin Board, were
$1.375 and $1.75 per share, respectively. In establishing the price for the
Common Stock to be sold, the Board of Directors also took into account the
market price for the Common Stock of the Company and the fact that the shares
to be sold were not registered under the Act and would be restricted as to
sale, transfer and disposition.
In connection with the acquisition of Peerless, the Company determined that
it was desirable to permit certain members of the Peerless management to
participate in the acquisition, by providing them the opportunity to acquire a
proprietary interest in the Company through the purchase of Common Stock. The
Company arranged for loans to nine members of the Peerless management from
American Commercial Bank totalling $468,000. The Company has guaranteed the
repayment of such loans. To induce the American Commercial Bank to make such
loan, and as a condition of such financing, the Bank required additional
credit enhancements in the form of personal guarantees from certain directors
of the Company. Accordingly, and in consideration of the issuance of warrants
to them, William H. Spell, Harry W. Spell, Reynold M. Anderson, Richard W.
Perkins, and Bruce A. Richard personally guaranteed payment of such
obligations, in consideration for which the Company issued to each of them
warrants to purchase 10,000 shares of the Company's Common Stock at $1.10 per
share. As security for the guarantees by the Company and the directors, the
nine members of the Peerless management (along with their wives if stock was
issued to them jointly) pledged their shares of Common Stock to the Company
and the directors to secure payment of the obligations guaranteed.
In connection with the Peerless acquisition, Pyramid Partners, L.P., an
affiliate of Richard W. Perkins, and Harry W. Spell loaned the Company
$125,000 and $100,000, respectively, in December 1995, on the basis of short-
term unsecured promissory notes bearing interest at the rate of 20 percent per
annum. The notes were repaid in January, February and March 1996.
The Purchaser Designees are affiliates of Parent and Purchaser. The
relationship among Purchaser Designees, Parent and Purchaser are described
more fully under the caption "Certain Information Concerning Ridge, Blair
Mezzanine Fund, the Purchaser and Parent" in the Offer to Purchase and such
description is incorporated by reference herein.
CHANGE IN CONTROL
The Offer, if consummated, will result in a change in control of the
Company. See the Offer to Purchase for additional information concerning the
Offer, Parent and the Purchaser.
B-9
EXHIBIT A
PURCHASER DIRECTOR DESIGNEES
The following table sets forth the name, business address, age, principal
occupation or employment at the present time and during the last five years and
business background of each of the Purchaser Designees.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS ADDRESS AGE AND FIVE YEAR EMPLOYMENT HISTORY
------------------------- --- ------------------------------------------
Harrington Bischof.......... 62 President, sole director and sole
257 East Main Street shareholder of Pandora Capital Corporation
Barrington, Illinois 60010 since July 1996 and Senior Advisor to Ridge
Capital Corporation and its affiliates
since January 1, 1997. Mr. Bischof served
as Senior Advisor to Prudential Securities,
Inc. from 1991 through June 1996.
J. Bradley Davis............ 57 President, sole director and sole
257 East Main Street shareholder of Ridge Capital Corporation,
Barrington, Illinois 60010 Ridge Advisors, Inc. and affiliated
companies since 1989.
Clark F. Davis.............. 30 Vice President, Ridge Capital Corporation
257 East Main Street since 1992. Manager, Flint Creek Farm,
Barrington, Illinois 60010 Inc., Barrington, Illinois since May 1989.
Terrance M. Shipp........... 38 General Partner of William Blair Mezzanine
222 West Adams Street Capital Partners, L.P., a private
Chicago, Illinois 60606 investment firm, and a managing director of
William Blair Mezzanine Capital Partners
II, L.L.C., the general partner of Blair
Mezzanine Fund, since its organization in
September 1996.
Marc J. Walfish............. 44 General Partner of William Blair Mezzanine
222 West Adams Street Capital Partners, L.P., a private
Chicago, Illinois 60606 investment firm, and a managing director of
William Blair Mezzanine Capital Partners
II, L.L.C., the general partner of Blair
Mezzanine Fund, since its organization in
September 1996.