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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14A
Proxy Statement Pursuant To Section 14(A)
Of The Securities Exchange Act Of 1934 (Amendment No. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential,for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-12
KATY INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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PRELIMINARY COPY
KATY INDUSTRIES, INC.
6300 S. Syracuse Way, Suite 300,
Englewood, Colorado 80111
(303) 290-9300
To our Stockholders:
We will be holding the Annual Meeting of Stockholders at the Hotel Inter-
Continental New York, located at 111 East 48th Street, New York, New York, on
May 23, 2001 at 10:00 a.m. local time.
At the Annual Meeting we will ask you to consider and vote upon a proposed
investment in Katy Industries, Inc. by an affiliate of an investment fund
managed by Kohlberg & Co., L.L.C., a private investment firm. Specifically, we
need your approval to sell 400,000 shares of convertible preferred stock, $100
par value per share, to this investor. We also need your approval to amend
Katy's Restated Certificate of Incorporation to authorize 600,000 shares of
convertible preferred stock. At the Annual Meeting you will also be asked to
vote upon the election of nine members of the Board of Directors, including
certain nominees designated by Kohlberg's affiliate, and to vote on a proposal
to classify the Board into two classes with staggered terms.
The enclosed Notice of Annual Meeting of Stockholders and Proxy Statement
provides details of the proposed investment and related information. Your Board
has determined that the terms of the investment are fair to and in the best
interests of Katy and its stockholders. YOUR BOARD OF DIRECTORS HAS APPROVED
AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSALS AT THE ANNUAL MEETING.
The investment is part of a series of transactions that your Board has
approved. This series of transactions includes a tender offer by Kohlberg's
affiliate to purchase from Katy stockholders up to 2,500,000 shares of Katy's
common stock. As explained in this Proxy Statement, the Board of Directors
believes that this series of transactions is in the best interests of
stockholders.
We have enclosed with this letter a Notice of Annual Meeting, a Proxy
Statement, a proxy card and a return envelope. A copy of Katy's annual report
on Form 10-K is also enclosed. We urge you to read all of the enclosed
materials carefully.
Please sign, date and promptly return the enclosed proxy card in the
enclosed, prepaid return envelope. Your shares will be voted at the Annual
Meeting in accordance with your proxy instructions.
On behalf of the Board of Directors and the employees of Katy, we cordially
invite all stockholders to attend the Annual Meeting. If you plan to attend the
meeting, please mark the appropriate box on the enclosed proxy card.
Sincerely,
Robert M. Baratta
President and Chief Executive
Officer
YOUR VOTE IS IMPORTANT
Please Sign, Date and Return Your Proxy Card by May 23, 2001
If you have questions about voting your shares, please contact our proxy
solicitor, Innisfree M&A Incorporated, toll-free at 1-888-750-5834.
PRELIMINARY COPY
KATY INDUSTRIES, INC.
6300 S. Syracuse Way, Suite 300,
Englewood, Colorado 80111
(303) 290-9300
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Katy Industries, Inc.:
We are holding an Annual Meeting of Stockholders of Katy on May 23, 2001 at
10:00 a.m., local time. The meeting will be held at the Hotel Inter-Continental
New York, located at 111 East 48th Street, New York, New York. At the meeting,
you will be asked to vote on the following:
1. A proposal to sell 400,000 shares of Katy's convertible preferred
stock, $100 par value per share, to KKTY Holding Company, L.L.C., an
affiliate of an investment fund managed by Kohlberg & Co., L.L.C., a
private investment firm.
2. A proposal to approve an amendment to Katy's Restated Certificate of
Incorporation to authorize 600,000 shares of convertible preferred stock.
3. A proposal to approve an amendment to Katy's Restated Certificate of
Incorporation authorizing the classification of the Board of Directors into
two classes with staggered terms.
4. The election of nine members of the Board of Directors to serve for
the staggered terms specified in the enclosed Proxy Statement or, if
Proposals 1, 2 and 3 are not adopted by the stockholders, the election of
nine members of the Board of Directors to serve for a term of one year.
5. The ratification of the selection by the Board of Directors of the
firm of Arthur Andersen LLP as independent auditors of Katy for the current
year.
6. The transaction of such other business as may properly come before
the Annual Meeting or any adjournment thereof.
As part of Proposal 1, we are also asking you to approve at this time the
issuance of shares of common stock to the holder of the convertible preferred
stock upon conversion of the convertible preferred stock in accordance with the
terms of the convertible preferred stock. The effectiveness of each of
Proposals 1, 2 and 3 is contingent upon the approval of the others. No action
will be taken by Katy on Proposals 1, 2 or 3 unless all three proposals are
approved.
The Proxy Statement that we are delivering with this Notice contains
important information concerning the proposals to be considered at the Annual
Meeting. You will be able to vote your shares at the Annual Meeting if you were
a stockholder of Katy at the close of business on April 23, 2001.
By order of the Board of Directors:
Arthur R. Miller
Secretary
Dated: April 23, 2001
YOUR VOTE AT THE ANNUAL MEETING IS IMPORTANT.
PLEASE INDICATE YOUR VOTE ON THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE, EVEN IF YOU PLAN TO ATTEND THE MEETING.
IF YOU HAVE QUESTIONS ABOUT VOTING YOUR SHARES, PLEASE CONTACT OUR PROXY
SOLICITOR, INNISFREE M&A INCORPORATED, TOLL-FREE AT 1-888-750-5834.
IF YOU ATTEND THE MEETING, YOU WILL BE ABLE TO REVOKE YOUR PROXY AND VOTE IN
PERSON.
PRELIMINARY COPY
KATY INDUSTRIES INC.
6300 S. Syracuse Way, Suite 300,
Englewood, Colorado 80111
(303) 290-9300
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PROXY STATEMENT FOR ANNUAL MEETING
This Proxy Statement provides information that you should read before you
vote on five proposals that will be presented to the stockholders of Katy at an
Annual Meeting to be held at 10:00 a.m. local time on May 23, 2001 at the Hotel
Inter-Continental New York, located at 111 East 48th Street, New York, New
York.
For convenience, we first provide a question-and-answer summary of important
information. The remainder of this Proxy Statement provides specific
information about the Annual Meeting, the proposals on which you will be asked
to vote at the Annual Meeting, the investment that is the subject of the first
two proposals you will be asked to consider, and other relevant information.
We began mailing this Proxy Statement to stockholders on or about April 24,
2001.
TABLE OF CONTENTS
SUMMARY.................................................................... 1
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING............................ 4
THE ANNUAL MEETING....................................................... 4
THIS PROXY SOLICITATION.................................................. 4
VOTING YOUR SHARES....................................................... 4
VOTE REQUIRED FOR APPROVAL............................................... 5
OTHER MATTERS............................................................ 5
PROPOSAL 1--SALE OF CONVERTIBLE PREFERRED STOCK............................ 6
INTRODUCTION............................................................. 6
REQUIRED VOTE............................................................ 6
RECOMMENDATION OF THE BOARD OF DIRECTORS................................. 6
THE TRANSACTION.......................................................... 7
INFORMATION ABOUT THE PURCHASE AGREEMENT................................. 7
The Tender Offer....................................................... 7
The Preferred Stock Issuance........................................... 7
Corporate Governance................................................... 7
Conditions to Accepting Shares Tendered into the Tender Offer and
Purchasing the Preferred Stock........................................ 8
No Solicitation........................................................ 9
Termination............................................................ 10
Termination Fees....................................................... 10
Transaction and Monitoring Fee......................................... 11
VOTING AGREEMENT......................................................... 11
TERMS OF THE CONVERTIBLE PREFERRED STOCK................................. 11
Conversion Rights...................................................... 12
Registration Rights.................................................... 12
Liquidation Preference................................................. 12
Redemption............................................................. 12
No Dividends........................................................... 12
No Voting Rights....................................................... 12
No Preemptive Rights................................................... 12
Special Rights......................................................... 12
USE OF PROCEEDS.......................................................... 13
INFORMATION ABOUT THE RELATED TRANSACTIONS............................... 13
The Tender Offer....................................................... 13
Bankers Trust Credit Facility.......................................... 14
Partial Redemption of Preferred Interest in Contico International...... 15
BACKGROUND OF THE TRANSACTION............................................ 15
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS............................. 23
i
OPINION OF BEAR STEARNS................................................. 25
Overview.............................................................. 25
Bear Stearns Opinion.................................................. 26
Summary of Analysis................................................... 27
Other Considerations.................................................. 33
INFORMATION ABOUT PURCHASER AND KOHLBERG................................ 34
PROPOSAL 2--TO AUTHORIZE 600,000 SHARES OF CONVERTIBLE PREFERRED STOCK.... 34
GENERAL................................................................. 34
REQUIRED VOTE........................................................... 34
RECOMMENDATION OF THE BOARD OF DIRECTORS................................ 34
PROPOSAL 3--ESTABLISHING A CLASSIFIED BOARD OF DIRECTORS.................. 34
REQUIRED VOTE........................................................... 36
RECOMMENDATION OF THE BOARD OF DIRECTORS................................ 36
PROPOSAL 4--ELECTION OF DIRECTORS......................................... 36
NOMINEES................................................................ 36
REQUIRED VOTE........................................................... 37
RECOMMENDATION OF THE BOARD OF DIRECTORS................................ 37
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS................. 38
Nominees.............................................................. 38
Current Directors..................................................... 39
Executive Officers.................................................... 40
PROPOSAL 5--RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE
INDEPENDENT AUDITORS OF KATY............................................. 41
AUDIT FEES.............................................................. 41
ALL OTHER FEES.......................................................... 41
REQUIRED VOTE........................................................... 41
RECOMMENDATION OF THE BOARD OF DIRECTORS................................ 41
INFORMATION ABOUT KATY STOCK OWNERSHIP.................................... 42
OUTSTANDING SHARES...................................................... 42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS......................... 42
SECURITY OWNERSHIP OF MANAGEMENT........................................ 44
CHANGE OF CONTROL....................................................... 45
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE................. 45
EXECUTIVE COMPENSATION.................................................... 46
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.......................... 46
OPTION GRANT TABLE...................................................... 48
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE
TABLE.................................................................. 48
ii
TERMINATION OF EMPLOYMENT, CHANGE OF CONTROL AND OTHER ARRANGEMENTS....... 48
Compensation and Benefits Assurance Program............................. 48
Other Arrangements...................................................... 49
DIRECTORS' COMPENSATION................................................... 50
COMPENSATION COMMITTEE'S REPORT ON EXECUTIVE COMPENSATION................. 50
Compensation Philosophy................................................. 51
Compensation Program Components......................................... 51
Chief Executive Officer Compensation.................................... 51
Summary................................................................. 52
STOCK PRICE PERFORMANCE GRAPH............................................. 53
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION............... 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 54
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS......................... 54
AUDIT COMMITTEE REPORT.................................................... 55
PROPOSALS OF STOCKHOLDERS FOR 2002 ANNUAL MEETING........................... 55
FORWARD-LOOKING STATEMENTS.................................................. 55
WHERE TO GET ADDITIONAL INFORMATION......................................... 56
ANNUAL REPORT ON FORM 10-K.................................................. 56
OTHER MATTERS............................................................... 56
INCORPORATION OF DOCUMENTS BY REFERENCE..................................... 57
ANNEX A--Opinion of Bear, Stearns & Co. Inc. dated March 29, 2001
ANNEX B--Preferred Stock Purchase and Recapitalization Agreement dated as of
March 29, 2001 between KKTY Holding Company, L.L.C. and Katy
Industries, Inc.
ANNEX C--Stock Voting and Tender Agreement dated as of March 29, 2001
ANNEX D--Proposed Amendment to Katy's Restated Certificate of Incorporation to
authorize 600,000 shares of convertible preferred stock and to adopt a
classified board
ANNEX E--Charter of the Audit Committee of the Board of Directors of Katy
iii
SUMMARY
This summary answers basic questions about the proposals. Please read the
rest of the Proxy Statement for full information about the proposals.
This Proxy Statement contains forward-looking statements that involve risks
and uncertainties. The words "believe," "anticipate," "expect," "estimate,"
"intend" and similar expressions identify forward-looking statements. Actual
results could differ materially from those discussed in the forward-looking
statements as a result of certain factors. See "Forward-Looking Statements" on
page of the Proxy Statement.
What are we asking you to approve?
The first proposal for you to consider is the issuance and sale by Katy of
convertible preferred stock, $100 par value per share, to an affiliate of an
investment fund managed by Kohlberg & Co., L.L.C. ("Kohlberg"). (We will use
the term "convertible preferred stock" to refer to the convertible preferred
stock, $100 par value, that we are proposing to sell. We will use the term
"Purchaser" to refer to the buyer of the convertible preferred stock.) As part
of this proposal, we are also asking you to approve at this time the issuance
of shares of common stock to the holder of the convertible preferred stock upon
conversion of the convertible preferred stock in accordance with the terms of
the convertible preferred stock.
Purchaser will purchase, for $100 per share, 400,000 shares of convertible
preferred stock. Each share of convertible preferred stock is convertible into
12.5 shares of Katy common stock, so that the purchase price of convertible
preferred stock is equivalent to $8.00 per share of common stock into which the
preferred stock is convertible. 400,000 shares of convertible preferred stock
would be convertible into 5,000,000 shares of common stock.
The second proposal for you to consider, which is related to the first
proposal, is an amendment to Katy's Restated Certificate of Incorporation to
authorize 600,000 shares of convertible preferred stock. Katy does not
currently have any shares of preferred stock authorized or issued. If
stockholders do not approve this proposal, Katy will not be able to sell the
convertible preferred stock to Purchaser.
The third proposal, which is a condition to the completion of the
transactions with Kohlberg, is an amendment to Katy's Restated Certificate of
Incorporation authorizing the classification of the Board of Directors into two
classes with staggered terms.
You are also being asked to elect the members of your Board and to ratify
the selection of Arthur Andersen LLP as independent auditors of Katy. If the
first three proposals are adopted, the nominees for election to the Board
include five nominees designated by Purchaser, plus a new Chief Executive
Officer, who was also proposed by Purchaser, and directors will be elected in
two classes for staggered terms.
Why is Katy selling preferred stock to purchaser?
Your Board has approved the sale of convertible preferred stock to Purchaser
because such sale would provide Katy with significant increased cash resources
and would permit Katy to refinance its existing bank loans, which otherwise
would likely become due June 30, 2001, and to partially redeem a third party's
preferred interest in a Katy subsidiary. (We will sometimes refer to the sale
of convertible preferred stock to Purchaser as the "Preferred Stock Purchase.")
The amount outstanding under Katy's existing bank loans as of April 17, 2001 is
approximately $156 million. The Preferred Stock Purchase would decrease the
percentage of Katy's capitalization that consists of debt. The Board has
determined that the financial and other terms of the Preferred Stock Purchase
are fair to and in the best interests of Katy and its stockholders.
Kohlberg is a private merchant banking firm with offices in New York and
California. Founded in 1987, Kohlberg has completed more than 70 acquisitions
and recapitalization transactions in a variety of industries. It manages a pool
of capital in excess of $1.5 billion. It has substantial experience in
providing companies in which its affiliates invest with financial and
managerial advisory services aimed at building value and improving operational,
marketing and financial performance.
1
What are the related transactions?
The Preferred Stock Purchase is part of a series of transactions approved by
your Board. This series of transactions includes a tender offer by Purchaser
for 2,500,000 shares of Katy's common stock at $8.00 per share (the "Tender
Offer").
As part of the series of transactions, Purchaser has obtained a commitment
letter from Bankers Trust Company to provide up to $150 million of senior
secured term and revolving loans to Katy, which will replace Katy's existing
senior bank loans. In addition, a condition to the Preferred Stock Purchase and
the Tender Offer is the completion of the sale of Katy's subsidiary Hamilton
Metals, L.P. for gross proceeds in cash, net of liabilities retained by Katy,
of at least $20,000,000. Katy has entered into a non-binding letter of intent
with a potential buyer for a sale of substantially all of the assets of
Hamilton on terms that Katy believes will satisfy the condition.
Katy and its subsidiary Contico International, LLC have entered into an
agreement with Newcastle Industries, Inc for Contico to repurchase 165 of
Newcastle's 329 preferred units in Contico for a total of $9.9 million, plus
accrued and unpaid priority return and profit participation on those units, if
the transactions with Purchaser close. Katy and Newcastle have also agreed to
amendments to the Members Agreement relating to Contico and to Contico's
Limited Liability Company Agreement which take effect subject to the
transactions with Purchaser closing.
Your Board decided that the transaction with Kohlberg is in the best
interests of stockholders for several reasons. While the Preferred Stock
Purchase will permit a reduction in Katy's indebtedness and a restructuring of
Katy's existing bank loans, the Tender Offer will permit stockholders to choose
to receive cash in exchange for a portion of their Katy common stock. The
Preferred Stock Purchase and Tender Offer will also bring to Katy's business
the managerial assistance and support of Kohlberg.
What factors should you take into account in considering the proposed preferred
stock purchase?
Katy's Board unanimously approved the transactions with Kohlberg because it
believed they would be in the best interests of Katy and its stockholders. (We
will use the term "unanimously" in the Proxy Statement to refer to actions by
all current members of Katy's Board, except William F. Andrews, a principal of
Kohlberg, who did not take part in the discussions relating to the transactions
with Kohlberg.) You should consider the factors described at pages below.
Positive factors considered by the Board include:
--The Board received an opinion from Bear, Stearns & Co. Inc. that, as of
the date of such opinion, the Preferred Stock Purchase and Tender Offer,
taken as a whole, were fair from a financial point of view to Katy's
stockholders. A copy of the Bear Stearns opinion is attached as Annex A.
--Katy's cash resources and financial strength will be increased as a
result of the cash infusion by Purchaser and borrowing availability under
the new credit facility with Bankers Trust Company.
--The Tender Offer and Preferred Stock Purchase give stockholders the
opportunity to sell shares of Katy in the Tender Offer at a substantial
premium to the market price of Katy shares before the transaction with
Kohlberg was announced, and also to remain as stockholders in a company
that will be financially strengthened by the Purchaser's cash infusion.
In concluding that the premium offered was substantial, Katy's Board of
Directors considered the closing price of Katy shares on March 29, 2001,
the day the Board approved the Purchase Agreement. The $8.00 offer price
represents a premium of 30.1% over the closing sale price of $6.15 for
Katy shares on March 29, 2001.
--Katy's existing credit agreement must be refinanced by June 30, 2001. If
the transactions with Kohlberg are not completed, considering the current
market environment, a substantive risk exists that Katy will be unable to
obtain further waivers of the defaults under the current credit facility
and that Katy will be unable to obtain, on reasonable terms or at all,
financing necessary to replace its current credit facility. If Katy is
unable to refinance its existing bank loans, the entire amount under the
existing credit agreement could be declared due and payable not later
than June 30, 2001.
2
Negative factors considered by the Board include:
--The issuance of the convertible preferred stock will have a dilutive
effect on Katy's existing stockholders. If the 400,000 shares of
convertible preferred stock to be purchased by Purchaser are converted,
it will receive 5,000,000 shares of common stock, which would represent
approximately 35.3% of the outstanding shares (on a fully diluted basis)
after giving effect to the conversion. If the Preferred Stock Purchase
and the conversion were to have occurred as of December 31, 2000, this
would have had the pro forma effect of reducing the book value per share
of common stock from $17.91 to $14.21.
--If the transactions with Purchaser are completed, Purchaser's significant
ownership interests could effectively deter a third party from making an
offer to acquire Katy.
--Purchaser's nominees, if elected, will constitute a majority of the Board
of Directors, five of whom will serve an initial term of two years.
--Purchaser will nominate the proposed Chief Executive Officer, who is also
a nominee for director, and who, if elected as director, will serve for
an initial term of one year.
--Purchaser will have the right, so long as it retains any convertible
preferred stock, to nominate a majority of the members of the Board of
Directors in connection with future elections of directors.
--The holders of the convertible preferred stock will have preferential
rights with respect to distributions if Katy is liquidated.
--If the Purchase Agreement is terminated, then, under certain
circumstances, Katy will be obligated to pay to Purchaser a fee of
$2,000,000 and to reimburse Purchaser's expenses up to $1,000,000.
The Board believed that, on balance, the possible benefits to Katy
stockholders from the positive factors outweighed the possible detriments from
the negative factors.
3
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
The Annual Meeting
The Annual Meeting will be held on May 23, 2001 at the Hotel Inter-
Continental New York, located at 111 East 48th Street, New York, New York, at
10:00 a.m. local time.
This Proxy Solicitation
Katy is sending you this Proxy Statement because Katy's Board of Directors
is seeking your proxy to vote your shares at the Annual Meeting. This Proxy
Statement includes information that Katy is required to provide to you under
the rules of the Securities and Exchange Commission. It is intended to assist
you in voting your shares. On April , 2001, we began mailing information to
all people who, according to our stockholder records, owned shares at the close
of business on April 23, 2001.
Katy will pay the cost of requesting these proxies. Katy's directors,
officers and employees may request proxies in person or by telephone, mail,
telecopy or letter. Katy also has retained Innisfree M&A Incorporated to assist
in distributing proxy solicitation materials and seeking proxies. Katy will pay
Innisfree a fee of approximately $15,000, plus reasonable out-of-pocket
expenses, for this assistance. Katy will reimburse brokers and other nominees
their reasonable out-of-pocket expenses for forwarding proxy materials to
beneficial owners of stock.
Voting Your Shares
You are entitled to one vote at the Annual Meeting for each share of Katy's
common stock that you owned of record at the close of business on April 23,
2001. The number of shares you own (and may vote) is listed on the enclosed
proxy card.
You may vote your shares at the Annual Meeting in person or by proxy. To
vote in person, you must attend the Annual Meeting and obtain and submit a
ballot. We will give you a ballot at the Annual Meeting. To vote by proxy, you
must complete and return the enclosed proxy card. By completing and returning
the proxy card, you will be directing the persons designated on the proxy card
to vote your shares at the Annual Meeting in accordance with the instructions
you give on the proxy card.
Your proxy card will be valid only if you sign, date and return it before
the Annual Meeting. IF YOU COMPLETE THE PROXY CARD EXCEPT FOR THE VOTING
INSTRUCTIONS, THEN YOUR SHARES WILL BE VOTED FOR THE PROPOSED SALE OF
CONVERTIBLE PREFERRED STOCK TO PURCHASER AND FOR EACH OF THE OTHER PROPOSALS.
You may revoke your proxy at any time before it is voted by any of the
following means:
--Notifying the Secretary of Katy in writing that you wish to revoke your
proxy.
--Submitting a proxy dated later than your original proxy.
--Attending the Annual Meeting and voting. Merely attending the Annual
Meeting will not by itself revoke a proxy; you must vote your shares at
the Annual Meeting to revoke the proxy.
IF YOU WERE A HOLDER OF SHARES AT THE CLOSE OF BUSINESS ON APRIL 23, 2001,
YOU WILL BE ENTITLED TO VOTE YOUR SHARES WHETHER OR NOT YOU SUBSEQUENTLY TENDER
YOUR SHARES IN THE TENDER OFFER DESCRIBED ON PAGES OF THIS PROXY STATEMENT.
YOU SHOULD THEREFORE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD EVEN IF YOU
HAVE ALREADY TENDERED, OR INTEND TO TENDER, YOUR SHARES IN THE TENDER OFFER.
The Board of Directors does not expect any matter other than the proposals
that are discussed in this Proxy Statement to be presented at the Annual
Meeting. However, if any other matter properly comes before the Annual Meeting,
your proxies will act on such matter in their discretion.
4
Vote Required for Approval
We have agreed with Purchaser that we will ask you to approve the Preferred
Stock Purchase. Also, the rules of the New York Stock Exchange (where Katy
stock is traded) require stockholders to approve substantial sales of common
stock or of securities convertible into common stock.
Proposal 1, regarding the proposed sale of convertible preferred stock to
Purchaser, and Proposal 5, regarding the ratification and appointment of Arthur
Andersen LLP as the independent auditors of Katy, will be approved if a
majority of the votes cast on the proposal are cast in favor of the proposal.
Proposals 2 and 3, the proposed amendments to Katy's Restated Certificate of
Incorporation to authorize the convertible preferred stock and to classify the
Board of Directors, respectively, each require the affirmative vote of the
holders of a majority of the voting power of Katy's outstanding capital stock
entitled to vote at the Annual Meeting. With respect to Proposal 4, regarding
the election of directors, directors will be elected by a plurality of the
shares present in person or by proxy and entitled to vote on the election of
directors. "Plurality" means that the individuals who receive the largest
number of votes cast are elected as directors up to the maximum number of
directors to be elected at the Annual Meeting. Consequently, any shares not
voted (whether by abstention, broker non-vote or withholding authority) will
have no impact on the election of directors.
The effectiveness of each of Proposal 1, Proposal 2 and Proposal 3 is
contingent on the approval of the others. Katy will not take any action on
Proposal 1, Proposal 2 or Proposal 3 unless stockholders approve all three.
Therefore, if you vote against approving either of the two amendments to Katy's
Restated Certificate of Incorporation, this will have the same effect as voting
against the Preferred Stock Purchase.
Certain Katy stockholders have also entered into a Stock Voting and Tender
Agreement dated as of March 29, 2001 (the "Voting Agreement"). The Voting
Agreement provides, among other things, that those stockholders will tender, in
aggregate, at least 1,500,000 shares to Purchaser in the Tender Offer and will
vote, in the aggregate, 2,500,000 shares in favor of Proposals 1, 2, 3 and 4.
The 2,500,000 common shares subject to these voting obligations represent, as
of March 29, 2001, approximately 29.8% of the shares of Katy capital stock
entitled to vote at the Annual Meeting. The Voting Agreement is included as
Annex C to this Proxy Statement.
On the record date for the Annual Meeting, April 23, 2001, shares of
Katy's common stock, $1.00 par value per share, were issued and outstanding. In
addition, a "quorum" must be present at the Annual Meeting. Each share of
common stock is entitled to one vote. A quorum will be present if a majority of
the outstanding shares of common stock are represented at the Annual Meeting,
either in person (by the stockholders) or by proxy. If there is no quorum, a
vote cannot occur.
In deciding whether there is a quorum, abstentions and "broker non-votes"
will be counted as shares that are represented at the Annual Meeting. (A broker
non-vote can occur if you hold your shares with a broker and are asked to
instruct your broker how to vote your shares. If you do not tell your broker
how to vote, your broker will not be able to vote for or against the proposal.
If your broker returns a proxy card for your shares without any voting
instructions, your shares will be counted as "broker non-vote" shares.) In
deciding whether Proposal 1 or Proposal 5 has been approved, abstentions will
count as if they were votes against the proposal, but broker non-votes will not
count. Since Proposal 2 and Proposal 3 each requires the affirmative vote of
the holders of a majority of the voting power of Katy's outstanding capital
stock entitled to vote, broker non-votes will count as if they were votes
against such proposals. Neither abstentions nor broker non-votes will count in
electing directors.
Other Matters
Katy's stockholders are not entitled to appraisal rights under Section 262
of the Delaware General Corporation Law, whether or not they vote against the
sale of convertible preferred stock to Purchaser.
Arthur Andersen LLP is Katy's independent accountant. Representatives of
Arthur Andersen LLP will attend the Annual Meeting. They will have the
opportunity to make a statement if they wish, and to respond to appropriate
questions.
5
PROPOSAL 1--SALE OF CONVERTIBLE PREFERRED STOCK
Introduction
Katy is asking you to approve a sale of 400,000 shares of convertible
preferred stock to KKTY Holding Company, L.L.C. ("Purchaser"), an affiliate of
an investment fund managed by Kohlberg, for a price of $100 per share. Katy is
also asking you to approve at this time the issuance of shares of common stock
to the holder of the convertible preferred stock upon conversion of the
convertible preferred stock in accordance with the terms of the convertible
preferred stock. On March 29, 2001, Purchaser and Katy signed a Preferred Stock
Purchase and Recapitalization Agreement (the "Purchase Agreement") that sets
out the terms of the proposed sale of convertible preferred stock. The Purchase
Agreement is included as Annex B to this Proxy Statement. You should read the
entire Purchase Agreement including the Annexes and Exhibits included with the
Purchase Agreement.
Purchaser's purchase of the convertible preferred stock is part of a series
of transactions. Concurrently with Katy mailing this Proxy Statement, Purchaser
will offer to purchase from Katy stockholders 2,500,000 shares of Katy's common
stock, at a price of $8.00 per share, in a tender offer (the "Tender Offer")
provided that, among other things, at least 2,000,000 shares of Katy's common
stock are tendered. On the closing of the Tender Offer and assuming stockholder
approval, Katy will sell 400,000 shares of Katy's convertible preferred stock,
$100 par value per share, to Purchaser for a price of $100 per share, on the
terms and subject to the conditions in the Purchase Agreement. (We will
sometimes refer to the sale of the convertible preferred stock to Purchaser as
the "Preferred Stock Purchase.")
As part of the series of transactions, Purchaser has obtained a commitment
letter from Bankers Trust Company to provide up to $150 million of senior
secured term and revolving loans to Katy, which will replace Katy's existing
bank loans. In addition, the completion of the sale of Hamilton Metals, L.P.
("Hamilton") for cash proceeds, net of liabilities retained by Katy, of
$20,000,000 is a condition to Purchaser's obligation to consummate the
Preferred Stock Purchase and the Tender Offer. Katy has entered into a non-
binding letter of intent with a potential buyer for a sale of substantially all
of the assets of Hamilton on terms that Katy believes will satisfy this
condition. The completion of the sale of Hamilton is subject to completion of
due diligence and negotiation of a definitive agreement with the potential
buyer and satisfaction of any conditions to closing contained therein.
Purchaser will determine whether or not this condition is satisfied before the
expiration of the Tender Offer. Katy expects to complete the sale of Hamilton
before the expiration of the Tender Offer.
Katy engaged Bear Stearns to provide a fairness opinion in connection with
the transactions with Kohlberg. On March 29, 2001, Bear Stearns delivered an
opinion to the Board of Directors that, as of the date of such opinion, the
Preferred Stock Purchase and the Tender Offer, taken as a whole, were fair,
from a financial point of view, to Katy's stockholders. Bear Stearns' written
opinion is included as Annex A to this Proxy Statement. The opinion sets forth
the assumptions made, matters considered and limitations on the review
undertaken in connection with the opinion. The opinion of Bear Stearns does not
constitute a recommendation as to how any holder of Katy stock should vote with
respect to any matter described herein. You should read the entire opinion
carefully. Additional information about the opinion can be found at pages .
Required Vote
The affirmative vote of the holders of a majority of the outstanding shares
of common stock entitled to vote at the Annual Meeting that are present in
person or by proxy is required to approve Proposal 1. Approval of Proposal 1 is
contingent on approval of Proposal 2 and Proposal 3.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MATTERS SET FORTH IN
PROPOSAL 1 AND BELIEVES THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF KATY
AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF PROPOSAL 1.
6
The Transaction
Subject to the conditions in the Purchase Agreement, Katy has agreed to
issue and sell, and Purchaser has agreed to buy, 400,000 shares of newly-issued
convertible preferred stock, $100 par value per share, for a price of $100 per
share. The gross proceeds from the sale will be $40 million. 400,000 shares of
convertible preferred stock would be convertible into 5,000,000 shares of
common stock at an exchange ratio of 12.5 shares of common stock per share of
convertible preferred stock.
Information about the Purchase Agreement
The important terms of the Purchase Agreement are described below. The
Purchase Agreement is included as Annex B to this Proxy Statement. You should
read the entire Purchase Agreement including the Annexes and Exhibits included
with the Purchase Agreement.
The Tender Offer
Concurrently with the mailing of this Proxy Statement, Purchaser will offer
to purchase from Katy stockholders 2,500,000 shares of Katy's common stock, at
a price of $8.00 per share.
The Tender Offer will initially be open for 20 business days after its
commencement date, or until May , 2001, if such date is later. Purchaser can
extend the Tender Offer for up to an additional 20 business days (but not past
June 30, 2001). Purchaser must so extend the Tender Offer if Katy requests
this, provided the conditions to Purchaser's obligations to close the purchase
of shares pursuant to the Tender Offer are satisfied (with some exceptions,
including the condition that stockholders have tendered at least 2,000,000
shares of common stock).
Purchaser's obligation to accept for payment and to pay for shares of common
stock validly tendered into the Tender Offer is subject to various conditions
in the Purchase Agreement. In any event, Purchaser cannot purchase more than
29.9% of Katy's outstanding common stock. Therefore, if stockholders tender
more than 2,500,000 shares of common stock, Purchaser will buy shares from them
pro rata up to the 2,500,000 maximum.
The Preferred Stock Issuance
Subject to the conditions in the Purchase Agreement, Katy has agreed to
issue and sell, and Purchaser has agreed to buy, 400,000 shares of newly-issued
convertible preferred stock, $100 par value per share, for a price of $100 per
share. 400,000 shares of convertible preferred stock would be convertible into
5,000,000 shares of common stock at an exchange ratio of 12.5 shares of common
stock per share of convertible preferred stock (which, based on the $100
purchase price for a share of convertible preferred stock, is the equivalent of
$8.00 per share of common stock).
The terms and conditions of the convertible preferred stock are set out
below in the section entitled "Terms of the Convertible Preferred Stock."
Corporate Governance
Under the Purchase Agreement, Purchaser has the right to nominate five
directors for election at the Annual Meeting, subject to election by the
holders of common stock present in person or by proxy and voting at the Annual
Meeting. The Purchaser's designees have been unanimously approved by the
members of the Board currently in office (other than Mr. Andrews, who removed
himself from consideration of matters relating to the proposed transaction
because of his affiliation with Kohlberg). At any subsequent annual or special
meeting of the stockholders of Katy at which an election for members of Katy's
Board is held, Purchaser has the right, for so long as it retains any shares of
convertible preferred stock, to nominate a number of nominees such that, after
the election, the Purchaser's designees constitute a simple majority of the
members of Katy's Board, subject to election by vote of the holders of the
common shares.
7
If stockholders approve Proposal 1, Proposal 2 and Proposal 3, the directors
elected at the 2001 annual meeting of stockholders will be classified into two
classes as follows:
--One class will comprise three current directors who will continue in
office (Robert M. Baratta, Daniel B. Carroll and Wallace E. Carroll, Jr.)
plus C. Michael Jacobi, the proposed Chief Executive Officer nominated by
Purchaser. This class will initially be elected for a one year term
expiring at the annual meeting of stockholders to be held in 2002.
--The second class will comprise the five Purchaser designees, one of whom
is William F. Andrews, a current director. This class will initially be
elected for a two year term expiring at the annual meeting of
stockholders to be held in 2003.
Beginning with the election of directors to be held at the year 2002 annual
meeting, each class of directors would be elected for a two-year term.
Purchaser has agreed that it will not sell more than 20% of the Katy common
stock (on a fully diluted basis, including the shares of common stock issuable
upon the conversion of convertible preferred stock) in any transaction or
series of related transactions, unless all holders of Katy common stock except
Purchaser and its affiliates (the "Other Holders") have the right to
participate in such sale for the same consideration per share of common stock
(or common share equivalent) on a pro rata basis. In connection with any
merger, consolidation or other business combination involving Katy in which
Katy is not the surviving corporation, the Other Holders shall receive the same
consideration per share of common stock (or common share equivalent) as
Purchaser receives.
All fees paid by Katy to Purchaser (or its affiliates) and any transactions
between Katy and Purchaser (or its affiliates) shall be subject to approval of
the members of Katy's Board who are not designees of Purchaser or otherwise
affiliated with Purchaser (the "Other Directors").
The above governance provisions will be reflected in Katy's by-laws,
effective on the closing. Any amendment to Katy's by-laws modifying the terms
described above will be subject to approval by a majority of the Other
Directors and by a majority of the Other Holders.
Conditions to Accepting Shares Tendered into the Tender Offer and Purchasing
the Preferred Stock
Both Purchaser's and Katy's obligations to close the transactions are
subject to certain conditions including the absence of a law or judgment that
would prevent the transactions from closing and receipt of necessary approvals.
A party need not close if the other party has materially breached its
representations or warranties, or failed to comply with its obligations, under
the Purchase Agreement.
Also, Purchaser need not buy shares of common stock tendered into the Tender
Offer nor the convertible preferred stock to be issued by Katy unless certain
other conditions in the Purchase Agreement are satisfied. These conditions,
which must be satisfied or waived on or before the expiration of the Tender
Offer, include:
(1) there being validly tendered and not withdrawn prior to the expiration
of the Tender Offer at least 2,000,000 shares of Katy's common stock;
(2) the shares of common stock tendered in the Tender Offer, together with
the shares of common stock into which Purchaser's convertible
preferred stock is convertible, represent a majority of Katy's common
stock issuable and outstanding, calculated on a fully diluted basis
(excluding outstanding options). The estimated percentage of Katy's
common stock represented by the shares of common stock tendered in the
Tender Offer (assuming 2,500,000 shares are tendered) and the shares
of common stock issuable upon conversion of all of Purchaser's
convertible preferred stock is approximately 56% on a fully diluted
basis (excluding outstanding options);
(3) the shares of common stock tendered in the Tender Offer, after
proration, if any, represent less than 30% of the combined voting
power of the outstanding securities of Katy on the date the purchase
of tendered shares closes;
8
(4) there being no change in the financial condition, businesses,
operations, properties, results of operations, assets or prospects of
Katy and its subsidiaries that has a material adverse effect on Katy
and its subsidiaries;
(5) absence of a material adverse change after the commencement of the
Tender Offer in financial or credit agreement syndication markets that
results in Katy not obtaining funding under the Bankers Trust Company
loan commitment letter;
(6) the stockholders have elected the Purchaser's designees, amended
Katy's Restated Certificate of Incorporation to authorize the issue of
convertible preferred stock and to adopt a classified Board of
Directors, and authorized the sale of the convertible preferred stock
to Purchaser;
(7) Katy's board of directors has not withdrawn or materially modified its
recommendation of the transactions or approved a competing
transaction;
(8) Katy has obtained an unqualified audit opinion on its financial
statements for the year ended December 31, 2000;
(9) Katy has consummated the sale of its subsidiary Hamilton for gross
proceeds in cash, net of liabilities retained by Katy, of at least
$20,000,000;
(10) no person or group has, after the date of the Purchase Agreement,
acquired beneficial ownership of more than 20% of Katy's common stock;
(11) there shall not have occurred in the United States, a general
suspension of trading in securities markets, a banking moratorium or
suspension of payments by banks, a limitation by a governmental
authority on the extension of credit by banks or other financial
institutions, or a declaration of war or commencement of hostilities;
(12) Bear Stearns has not withdrawn its fairness opinion;
(13) Katy has entered into definitive documentation for the credit
facilities to be established under the terms and conditions of the
proposed refinancing with Bankers Trust Company in a term sheet signed
by Bankers Trust Company and Purchaser (including any modification of
the refinancing terms approved by Purchaser); and
(14) Certain members of the Wallace E. Carroll, Jr. family, trusts for the
benefit of members of the Carroll family and entities associated with
the Carroll family have entered into a stock voting agreement with
respect to electing Purchaser designees as directors at stockholder
meetings after the 2001 annual stockholder meeting.
The condition referred to in clause (8) has been satisfied. Katy does not
currently have notice that any of the other conditions referred to above will
not be satisfied on or before the expiration of the Tender Offer.
No Solicitation
Katy has agreed that, prior to closing, it will not solicit, initiate or
encourage inquiries or proposals, or participate in discussions or
negotiations, about competing transactions meeting certain criteria. However,
Katy can give information to, or enter into discussions or negotiations with,
anyone making an unsolicited enquiry and who gives Katy a written proposal if a
majority of Katy's directors determines that doing so would be reasonably
likely to result in a written proposal to acquire more than 50% of Katy's
outstanding equity securities that Katy's Board of Directors determines in good
faith (after consultation with an independent, nationally recognized investment
bank) to be superior to Katy's stockholders from a financial point of view
compared to Purchaser's proposal, and that failure to do so would not be
consistent with the directors' fiduciary duties.
Katy's Board of Directors cannot withdraw its approval or recommendation of
the transactions, approve or recommend certain types of competing transactions
or cause Katy to enter into a letter of intent or acquisition agreement for
such competing transactions except to comply with securities laws or stock
exchange requirements or if the board determines that not doing so would be
inconsistent with the directors' fiduciary duties.
9
Termination
Katy and Purchaser can terminate the Purchase Agreement at any time by
mutual agreement. Either party can terminate the Purchase Agreement if:
--the transactions have not closed by June 30, 2001 (unless this is due to
that party's breach);
--a law or judgment prevents the transactions; or
--the other party materially breaches its representations or does not
perform its covenants under the Purchase Agreement (and does not or
cannot remedy its breach).
Purchaser can terminate the Purchase Agreement if stockholders do not tender
at least 2,000,000 shares of common stock into the Tender Offer or if any of
the other conditions to purchasing shares tendered into the Tender Offer and
purchasing the convertible preferred stock are not satisfied.
Katy can terminate the Purchase Agreement, in furtherance of its directors'
fiduciary duties, to enter into an agreement with a third party relating to a
superior proposal to acquire more than 50% of Katy's outstanding equity
securities. Katy must have given Purchaser three business days' notice of the
competing proposal and negotiate with Purchaser during those three business
days if Purchaser wishes to do so.
Termination Fees
Katy must reimburse Purchaser for its documented expenses, up to $1,000,000,
if the Purchase Agreement is terminated because:
--the transactions have not closed by June 30, 2001;
--a law or judgment prevents the transactions;
--the stockholders do not tender at least 2,000,000 shares of common stock
into the Tender Offer;
--any of the other conditions to Purchaser closing the transactions are not
satisfied;
--Katy has materially breached its representations or not performed its
covenants under the Purchase Agreement (and did not or could not remedy
its breach); or
--in furtherance of the directors' fiduciary duties, Katy wishes to enter
into an agreement with a third party relating to a superior proposal to
acquire more than 50% of Katy's outstanding equity securities.
Also, Katy must pay Purchaser a fee of $2 million if:
--another person proposes to Katy or its stockholders, or publicly
proposes, a competing transaction under which that person would buy a
business constituting at least 40% of Katy's consolidated net revenues,
net income or assets, buy at least 40% of Katy's common stock or enter
into a merger, recapitalization or similar transaction involving Katy;
--the Purchase Agreement is terminated after that because:
. the stockholders do not tender at least 2,000,000 shares of common
stock into the Tender Offer;
. any of the other conditions to Purchaser completing the transactions
are not satisfied (except for a law or judgment preventing the
transactions; an adverse change in the financing or credit agreement
syndication markets that results in Katy not obtaining financing; a
general suspension of trading in securities markets (or various other
disruptions to financial markets); or merely that the Purchase
Agreement has been terminated);
. Katy has materially breached its representations or not performed its
covenants under the Purchase Agreement (and did not or could not remedy
its breach); or
10
. in furtherance of the directors' fiduciary duties, Katy wishes to enter
into an agreement with a third party relating to a superior proposal to
acquire more than 50% of Katy's outstanding equity securities.
--Katy enters into the competing transaction within 12 months of the
termination of the Purchase Agreement, and closes that competing
transaction within 18 months of the Purchase Agreement terminating.
Transaction and Monitoring Fee
Katy's Board of Directors has approved Katy paying a transaction fee of $3
million to Kohlberg if the transactions with Kohlberg are completed. Therefore,
if the stockholders pass Proposals 1, 2, 3 and 4 and the transactions are
completed, Katy will pay Kohlberg this $3 million fee.
Kohlberg has informed Katy that Kohlberg intends to propose an annual
monitoring fee of $500,000 for investment banking and advisory services on an
ongoing basis and in lieu of director fees for the Kohlberg designees. Kohlberg
and Katy are currently negotiating the terms and conditions of the management
agreement pursuant to which the monitoring fee would be payable.
Voting Agreement
Purchaser and certain members of the Wallace E. Carroll, Jr. family, trusts
for the benefit of family members, and entities associated with the Carroll
family (the "Agreement Shareholders") have entered into a Stock Voting and
Tender Agreement ("Voting Agreement") under which the Agreement Shareholders
have agreed to vote 2,500,000 shares, in the aggregate, in favor of, among
other things: the election of the directors nominated by Katy's Board of
Directors; the authorization and adoption of amendments to Katy's Amended
Certificate of Incorporation authorizing 600,000 shares of convertible
preferred stock and authorizing the classification of the Board of Directors
into two classes with staggered terms; the issuance of convertible preferred
stock; and the issuance of shares of common stock on the conversion of the
convertible preferred stock. Agreement Shareholders have also agreed to vote
2,500,000 shares, in the aggregate, against any actions intended, or that could
reasonably be expected, to impede or delay the transactions.
The Agreement Shareholders also agree to tender into the Tender Offer, in
aggregate, not less than 1,500,000 shares of common stock.
The Agreement Shareholders have agreed that, before the closing of the
transactions, they will not solicit, initiate or encourage inquiries or
proposals, or participate in discussions or negotiations, about competing
transactions meeting certain criteria (although an Agreement Shareholder can,
in his or her capacity as a Katy director or officer, take any action permitted
under the Purchase Agreement).
The 2,500,000 shares subject to being voted in accordance with the Voting
Agreement represent approximately 29.8% of Katy's common stock as of March 29,
2001.
A copy of the Voting Agreement is attached as Annex C to this Proxy
Statement. You should read the entire Voting Agreement.
Terms of the Convertible Preferred Stock
The complete text of the proposed amendment to Katy's Restated Certificate
of Incorporation, which establishes the convertible preferred stock, is
included in this Proxy Statement as Annex D. You should read Annex D in its
entirety.
The certificate of amendment establishing the convertible preferred stock
authorizes 600,000 shares of convertible preferred stock, par value $100 per
share. The convertible preferred stock will rank senior (with respect to
liquidation payments) to the common stock and any future preferred stock of
Katy.
11
Conversion Rights
Each share of convertible preferred stock is convertible, at the holder's
option, into 12.5 shares of common stock at any time after the earliest of:
--the fifth anniversary of the closing of the transactions;
--Katy's Board of Directors approving a merger, consolidation or other
business combination involving Katy (except where Katy is the surviving
entity and there is no change in control of Katy), or a sale or other
disposition of all or substantially all of Katy's assets;
--steps being taken to liquidate, dissolve or wind up Katy; and
--a solicitation of proxies, for a stockholder meeting or stockholder
consent, in respect of the election of directors, against the election of
a person nominated by the holders of the convertible preferred stock or
for the removal of any person nominated by the holders of the convertible
preferred stock for election as a director.
Registration Rights
In most cases where Katy registers shares of common stock under a
registration statement, holders of convertible preferred stock will have "piggy
back" rights to include in that registration their shares of common stock
issued on conversion of convertible preferred stock. Holders of shares of
common stock issued upon conversion of convertible preferred stock can also
require Katy to file a registration statement on up to three occasions.
Liquidation Preference
On liquidation, holders of convertible preferred stock are entitled to be
paid the par value ($100) for each share of convertible preferred stock before
holders of common stock receive a distribution.
Redemption
Shares of convertible preferred stock are redeemable in whole, at Katy's
option, after the 20th anniversary of the closing date of the transactions, at
the par value of $100 per share.
No Dividends
Convertible preferred stock carry no rights to dividends.
No Voting Rights
Holders of convertible preferred stock do not have the right to vote on any
matter to be voted on by stockholders or classes of stockholders, except where
this is required by law.
No Preemptive Rights
Holders of convertible preferred stock have no preemptive rights with
respect to any shares of Katy's capital stock.
Special Rights
Katy must obtain the approval of the holders of at least a majority of the
then outstanding shares of convertible preferred stock before undertaking
certain actions including:
--authorizing or issuing equity securities with equal or superior rights to
the convertible preferred stock on liquidation, dissolution or winding
up;
12
--amending Katy's Amended Certificate of Incorporation or by-laws in any
way or entering into a merger, consolidation, reorganization,
recapitalization or sale of all or substantially all of its assets, in
any case which adversely affects the rights of holders of convertible
preferred stock; and
--engaging in a transaction impairing the rights of holders of convertible
preferred stock.
Use of Proceeds
Purchaser will acquire 400,000 shares of convertible preferred stock at a
price of $100 per share. The gross proceeds from the sale will be $40 million.
Katy expects to use these funds, together with the proceeds of the new $150
million secured loan facility and the net proceeds of the sale of Hamilton
(estimated at $20 million), to refinance its existing bank debt (approximately
$156 million), to partially redeem a third party's preferred interest in a Katy
subsidiary for approximately $10 million and to pay approximately $8 million
towards the transaction costs of the transactions with Kohlberg. The costs of
the transactions with Kohlberg include expenses such as financing fees (in
connection with the refinancing), professional fees, printing costs and the
transaction fee payable to Kohlberg.
Information about the Related Transactions
The Tender Offer
Purchaser has agreed that, concurrently with the mailing of this Proxy
Statement, Purchaser will distribute to stockholders a Tender Offer Statement
on Schedule TO ("Tender Offer Statement"). Concurrently, Katy will distribute
to stockholders a Solicitation/Recommendation Statement on Schedule 14D-9
("Solicitation/Recommendation Statement"). The Tender Offer Statement and
Solicitation/Recommendation Statement contain additional information about the
Tender Offer. The section of this Proxy Statement titled "Where to Get
Additional Information" explains how to get copies of the Tender Offer
Statement and the Solicitation/Recommendation Statement.
In the Tender Offer, Purchaser will offer to purchase 2,500,000 shares of
common stock at a price of $8.00 per share. Purchaser has agreed to commence
the Tender Offer concurrently with the mailing of this Proxy Statement and that
the Tender Offer will expire on the 20(th) business day after the Tender Offer
is commenced or, if later, on May , 2001, unless Purchaser extends the
expiration date (but in no event past June 30, 2001). The Purchaser will be
required to extend the expiration date, at the request of Katy, if the
conditions (other than the minimum condition and specified other conditions)
have been satisfied.
The Board approved the Tender Offer to give stockholders the opportunity to
receive cash for a portion of their investment in Katy. The Tender Offer price
of $8.00 per share represented a substantial premium over the trading price of
Katy common stock immediately before the announcement of the Preferred Stock
Purchase and Tender Offer.
Purchaser will not be required to purchase shares of common stock in the
Tender Offer unless the following conditions, and other customary conditions,
are satisfied:
--there being validly tendered and not withdrawn prior to the expiration of
the Tender Offer at least 2,000,000 shares of Katy's common stock;
--the shares of common stock tendered into the Tender Offer, together with
the shares of common stock into which Purchaser's convertible preferred
stock is convertible, represent a majority of Katy's common stock
issuable and outstanding, calculated on a fully diluted basis (excluding
outstanding options);
--the shares of common stock tendered in the Tender Offer, after proration,
if any, represent less than 30% of the combined voting power of the
outstanding securities of Katy on the date the purchase of tendered
shares closes;
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--there being no change in the financial condition, businesses, operations,
properties, results of operations, assets or prospects of Katy and its
subsidiaries that has a material adverse effect on Katy and its
subsidiaries;
--absence of a material adverse change in financial or credit agreement
syndication markets after the commencement of the Tender Offer that
results in Katy not obtaining funding under the Bankers Trust Company
loan commitment letter;
--the stockholders have elected the Purchaser's designees, amended Katy's
Restated Certificate of Incorporation to authorize the issue of
convertible preferred stock and to adopt a classified Board of Directors,
and authorized the issuance of the convertible preferred stock to
Purchaser;
--Katy's Board of Directors has not withdrawn or materially modified its
recommendation of the transactions or approved a competing transaction;
--Katy has obtained an unqualified audit opinion with respect to its
financial statements for the year ended December 31, 2000;
--Katy has consummated the sale of its subsidiary Hamilton for gross
proceeds in cash, net of liabilities retained by Katy, of at least
$20,000,000;
--no person or group has, after the date of the Purchase Agreement,
acquired beneficial ownership of more than 20% of Katy's common stock;
--there shall not have occurred in the United States, a general suspension
of trading in securities markets, a banking moratorium or suspension of
payments by banks, a limitation by a governmental authority on the
extension of credit by banks or other financial institutions, or a
declaration of war or commencement of hostilities;
--Bear Stearns has not withdrawn its fairness opinion;
--Katy has entered into definitive documentation for the credit facilities
to be established under the terms and conditions of the proposed
refinancing with Bankers Trust Company in a term sheet signed by Bankers
Trust Company and Purchaser (including any modification of the
refinancing terms approved by Purchaser); and
--certain stockholders of Katy have entered into a stock voting agreement
with respect to electing Purchaser designees as directors at stockholder
meetings after the 2001 annual stockholder meeting.
Bankers Trust Credit Facility
Bankers Trust Company has entered into a commitment letter with Purchaser to
provide Katy with up to $150,000,000 of senior secured term and revolving loan
facilities, consisting of a term loan of up to $40,000,000 and a revolving loan
of up to $110,000,000 upon consummation of the Preferred Stock Purchase and the
Tender Offer. The commitment letter provides that Bankers Trust Company may
change the terms and conditions, pricing and structure of the facility if it is
advisable to ensure successful syndication of the facilities, provided that the
total amount of the facilities remains unchanged.
The term loan is proposed to have a final maturity of five years, with
mandatory amortization quarterly in annual amounts totaling $8,000,000. The
revolving credit facility would mature in five years. Both facilities would be
secured by a grant of security interests in all of the assets of Katy and its
subsidiaries, including a pledge of inter-company notes and subsidiary stock
(66% in the case of foreign subsidiaries) and by a pledge of all the stock of
Katy owned by Purchaser. The loans would bear interest at rates equal to the
base rate plus 1.5% or the Euro-Dollar rate plus 2.5% per annum, or at the base
rate plus 3.5% in the event of a default. Loans under the revolving credit
facility would be subject to a maximum availability determined by reference to
a borrowing base consisting of 65% of eligible inventory, not to exceed
$75,000,000, and 85% of eligible accounts receivable. Availability of loans
under the term loan would be subject to a maximum availability
14
determined by reference to a borrowing base equal to 90% of orderly liquidation
value of eligible machinery and equipment plus 60% of appraised fair market
value of eligible real property. The facilities would be subject to mandatory
prepayment and reduction of commitments equal to 100% of the net proceeds from
asset sales, and net proceeds of equity offerings and certain debt issuances
and 75% of excess annual cash flow. The facilities would be made under loan
agreements containing customary representations and warranties, covenants and
events of default, to be negotiated.
Bankers Trust Company's obligations to fund the commitment is subject to a
number of conditions, including, without limitation, negotiation of definitive
documentation satisfactory to Bankers Trust, the consummation of the Preferred
Stock Purchase and the Tender Offer on terms satisfactory to Bankers Trust,
receipt of financial statements and projections substantially consistent with
projected financial results for subsequent periods, no material adverse change
in Katy having occurred since December 31, 1999, no material disruption of the
syndication markets for credit facilities and no material adverse change in the
financial, banking or capital markets having occurred, in either case that
would have an adverse effect on such syndication market, as determined by
Bankers Trust Company in its sole discretion.
Bankers Trust Company would receive a financing fee of $3,750,000 for providing
the facilities and certain other fees for administering the facilities and
providing letters of credit under it. The commitment expires on June 30, 2001
unless the transactions are consummated by June 30, 2001.
Partial Redemption of Preferred Interest in Contico International
Katy and its subsidiary Contico International, L.L.C. have entered into an
agreement with Newcastle Industries, Inc for Contico to repurchase 165 of
Newcastle's 329 preferred units in Contico for a total of $9.9 million, plus
the accrued and unpaid priority return and profit participation on those units,
if the transactions with Purchaser close. Newcastle has agreed that the
transactions with Purchaser do not trigger Newcastle's put option (that is,
Newcastle's right to require Katy to buy its preferred units) under the Members
Agreement exercisable on a change of control.
Katy and Newcastle have also agreed to amendments to Contico's Limited
Liability Company Agreement and the Members Agreement to take effect subject to
the transactions with Purchaser closing. These include:
--Newcastle can exercise its put option during a period beginning on the
earlier of the fifth anniversary of the closing of the transactions with
Purchaser and the date Katy repays all outstanding indebtedness for
borrowed money Katy incurs in connection with those transactions;
--Newcastle has a new put option exercisable if Katy redeems or repurchases
preferred stock (or any securities into which it is convertible) or
declares a dividend or makes another distribution in respect of its
capital stock;
--Katy can require holders of preferred units to sell to Katy all or some
of their units (although Katy must buy at least 82 units when it
exercises this right);
--on the exercise of a put option, Katy must pay Newcastle in cash, rather
than in Katy stock; and
--Newcastle's put option exercisable on a change in control (previously
defined to include, among other things, the acquisition of beneficial
ownership by any person or group of 30% or more of Katy's common stock)
will not be triggered by the purchase by Purchaser or any of its
affiliates of up to an additional 1,000,000 shares of Katy common stock
(in addition to the shares purchased pursuant to the Tender Offer)
following the closing of the transactions with Purchaser.
--Contico is to keep available adequate reserves with respect to working
capital, taxes, future capital expenditures and mandatory distributions.
Background of the Transaction
In September 2000, Katy recognized that it would fall out of compliance with
its financial ratio covenant under its existing bank credit agreement governing
maximum leverage and commenced negotiations with its bank group with respect to
a waiver. On September 28, 2000, the bank group agreed to waive the covenant
defaults through October 27, 2000, to provide time to arrive at an amendment to
the credit agreement satisfactory to Katy and the bank group. Underlying the
waiver and the proposed amendment was an understanding that Katy
15
would consider strategic alternatives, including the potential sale of Katy or
one or more of its material subsidiaries. Unless the banks' waiver was extended
beyond October 27, 2000, Katy would have been in default under the credit
agreement, and the banks could have accelerated the debt and demanded immediate
payment from Katy.
In early October 2000, the Board of Directors retained Debevoise & Plimpton,
as legal counsel, to assist in negotiations with Katy's lenders and with the
consideration and negotiation of strategic alternatives.
On October 3, 2000, the Board of Directors determined that Katy should begin
exploring possible strategic alternatives, including alternatives to remaining
an independent company. The Board of Directors authorized senior management of
Katy to contact potential strategic and financial partners and to provide
confidential Katy information to such persons. In addition, the Board of
Directors requested senior management of Katy to continue to analyze Katy's
financial position in order to determine whether a stand-alone alternative,
with or without the sale of subsidiaries of Katy, was feasible in the context
of the financial covenants in the existing credit agreement.
After the October 3 Board of Directors meeting, management of Katy completed
preparation of an information package (the "Information Package") concerning
Katy which contained historical financial information, segment information, the
information memorandum sent to the Katy's bank group in connection with the
proposed amendment to the credit agreement and certain forecasts. The forecasts
included an estimate of earnings before interest, taxes, depreciation and
amortization ("EBITDA") (from continuing segments and before unusual items) for
the fourth quarter of 2000 and for the full year 2000 of $12.4 million and
$42.0 million, respectively. The forecasts also included an estimate of EBITDA
for 2001 of between $47.4 million and $50.6 million and EBITDA for 2002 of
between $63.0 million and $69.4 million.
In early October 2000, Katy contacted a number of potential strategic and
financial partners inquiring as to their interest in acquiring Katy. Kohlberg
was introduced to Katy by William F. Andrews, a director of Katy, who at that
time informed Katy that he was a principal of Kohlberg and received a
consulting fee from that company and also served as a director of several
companies affiliated with Kohlberg. The Information Package was transmitted to
those parties that expressed preliminary interest in Katy, once such parties
executed confidentiality agreements with Katy. In total, management contacted
16 potential buyers, including 11 strategic buyers--that is, companies engaged
in similar businesses--and 5 financial buyers. Of the parties contacted, 5
strategic buyers and 3 financial buyers expressed preliminary interest and
executed confidentiality agreements. These interested recipients included
Kohlberg, which signed a confidentiality agreement on October 11, 2000.
On or about October 12, 2000, representatives of Kohlberg met with John R.
Prann, Jr., then the Chief Executive Officer and a director of Katy, and with
other representatives of senior management at Katy's head office at Englewood,
Colorado.
At a meeting of the Board of Directors on October 13, Mr. Prann reported
that Kohlberg was interested in acquiring Katy in a transaction in which trusts
associated with members of the Carroll family would exchange a portion of their
shareholdings in Katy for shares of an affiliate that would acquire the
publicly held common shares at a price of $14.50.
In the second half of October, Kohlberg and two of its prospective financing
sources met with representatives of Katy for additional business due diligence
discussions.
In late October, of the potential purchasers that had initially expressed
interest, only two potential strategic buyers, Public Company 1 and Public
Company 2, remained interested in considering a transaction to purchase all or
part of Katy.
After negotiations throughout October with Katy's existing lenders on an
amendment to the existing credit agreement, on October 27, 2000, an amendment
to the credit agreement was signed. As a part of the
16
amendment, compliance with certain covenants required by the credit agreement
was waived as of September 30, 2000, and new ratio levels for certain covenants
were established for measurement at December 31, 2000. Also as part of the
amendment, Katy agreed to grant the lenders under the credit agreement a
security interest in all of Katy's and its subsidiaries' material assets on
March 31, 2001, if certain events did not occur before February 28, 2001. Under
the terms of the amendment, a security interest was not required if (1) on or
before February 28, 2001, a letter of intent (satisfactory to the bank group)
existed for the sale of (i) Katy as a whole or (ii) one or more of its material
subsidiaries if (in the case of clause (ii)) Katy demonstrates that following
such sale Katy would be in compliance with a specified leverage ratio, or (2)
Katy was in compliance with certain covenants at pre-amendment ratio levels.
On October 26, 2000, based on publicly available information and additional
information about Katy that Kohlberg received from Katy, including Katy's
estimates for its EBITDA for the fourth quarter and the full year 2000,
Kohlberg submitted a draft preliminary indication of interest to acquire Katy
for a purchase price of up to $14.50 per share in cash. At the request of Katy,
Kohlberg submitted a revised preliminary indication of interest on October 27,
2000, to provide for a firm purchase price of $14.50 per share in cash. This
signed indication of interest was accompanied by a letter from one of
Kohlberg's prospective financing sources indicating that it was confident that
it could arrange the financing needed to complete the transaction. The Kohlberg
proposal contemplated the entry into a letter of intent with an exclusivity
period and an expense reimbursement, together with, in the event that
negotiations with certain strategic partners are exempted from the exclusivity
covenant, a termination fee.
The Board of Directors considered the Kohlberg draft letter of intent with
respect to its proposal at a meeting on October 27, 2000. The proposal was for
the acquisition of all of Katy's outstanding shares. Part of the outstanding
shares owned by the Carroll trusts would be exchanged for shares of a Kohlberg
affiliate, which would acquire the balance of the outstanding shares for cash
at the price of $14.50 per share. Also at this meeting, the Board of Directors
authorized the retention of Bear Stearns to render a fairness opinion with
respect to a transaction with Kohlberg if requested to do so.
On October 31, 2000, the Board of Directors met with representatives of Bear
Stearns and Debevoise & Plimpton to consider the expressions of interest that
had been received, to be updated on discussions with the other potential buyers
still involved in the process and to consider the steps to be taken. At the
start of the meeting, Mr. Christopher Lacovara, a principal of Kohlberg, was
present and discussed and answered questions regarding Kohlberg's expression of
interest. At the October 31, 2000 meeting, William Andrews, one of the
directors, reminded the Board of Directors that he was a principal of Kohlberg,
was a director of several of their portfolio companies, had assisted them in
making a number of acquisitions and received a retainer for his services. In
light of Kohlberg's interest in sponsoring an acquisition of Katy, Mr. Andrews
excused himself from the meeting and stated that he would not participate in
future board meetings as long as a possible transaction with Kohlberg was under
consideration.
At the October 31 meeting, after Mr. Andrews excused himself, the Board of
Directors also reviewed other alternatives. While Public Company 1 had signed a
confidentiality agreement, it had not submitted an expression of interest. One
financial sponsor ("Financial Sponsor 1") which had done only limited due
diligence had submitted an expression of interest for an acquisition at a broad
indicated price range ($12 to $15.50 per share), in a transaction in which the
Carroll trusts and management would have the option of retaining a meaningful
equity interest in Katy. The expression of interest was unaccompanied by
expressions of interest from financing sources and contemplated a period of
exclusivity and a break-up fee.
On November 2, 2000, Kohlberg delivered a draft letter of intent to Katy,
which included a purchase price of $14.50 per Share. Representatives of Katy
and of Kohlberg negotiated the terms of the draft Letter of Intent between
November 2 and November 6, 2000.
On November 6, 2000, representatives of the Financial Sponsor 1, having been
informed earlier of the state of negotiations with Kohlberg, had indicated that
the timeline for a transaction was too rapid for it and that it had decided not
to proceed at that time.
17
On November 6, 2000, the Board of Directors was advised of the decision of
Financial Sponsor 1 not to proceed and that Public Company 1 had decided not to
make a proposal at that time. Public Company 2 had scheduled some due diligence
discussions with Katy. Another potential strategic buyer was interested only in
Katy's abrasives businesses. After review of the improvements in the letter of
intent since the initial draft received from Kohlberg, the Board of Directors
(without the participation of Arthur Miller, a trustee of the Carroll family
trusts, or of Wallace Carroll or Amelia Carroll) authorized the execution of
the letter of intent (the "First Letter of Intent"), which was executed that
day.
The First Letter of Intent provided for an acquisition of all of Katy's
common stock. The Carroll family trusts would be permitted to exchange all or
part of their shares of Katy common stock for shares of a newly formed Kohlberg
affiliate, which would acquire the other shares of common stock at a purchase
price of $14.50 per Share in cash. The First Letter of Intent contemplated a 30
day period during which Kohlberg would complete its due diligence and financing
arrangements. The First Letter of Intent provided for a 45 day exclusive
negotiation period with Kohlberg, but specifically exempted ongoing discussions
between Katy and two named strategic buyers and also permitted discussions with
unsolicited other bidders if the Board of Directors determined, after
consultation with its legal and financial advisors, that failure to participate
in such discussions would be inconsistent with the directors' fiduciary duties.
The First Letter of Intent provided for an expense reimbursement not to exceed
$250,000 and a termination fee of $1.5 million upon the consummation of a
competing transaction, if during the term of the First Letter of Intent Katy
did not enter into a definitive agreement despite Kohlberg's willingness to do
so at the price and substantially on the terms contained in the First Letter of
Intent.
Also on November 6, 2000, Katy issued a press release announcing that it was
exploring its strategic alternatives, including the possible sale of Katy, and
that it was in discussions with a potential purchaser relating to a transaction
involving the purchase of Katy at a premium to its then current price.
In mid-November 2000, representatives of Kohlberg and one of its prospective
financing sources toured the facilities and met with management of several Katy
subsidiaries. During this period, Kohlberg reviewed transaction financing
alternatives with five commercial banks and two mezzanine lenders.
In late November 2000, management of Katy informed Kohlberg that it was
revising downward its EBITDA forecast for the fourth quarter and for the year
2000 and provided Kohlberg with its revised forecast. The revised forecasts
estimated EBITDA (from continuing segments and before unusual items) for the
fourth quarter of 2000 and for the full year 2000 at $7.0 million and $37.2
million, respectively. The revised forecasts also estimated EBITDA for 2001 at
$47.5 million but did not include revised estimates for 2002.
Kohlberg thereafter revised its financial analysis based on the new
information provided by management. Kohlberg also continued discussions with
selected financing institutions to discuss financing for the transaction.
During this period, most of the commercial banks and both of the mezzanine
lenders declined to participate in the financing. Starting in late 2000, an
alternative financing source, an asset-backed lender (Bankers Trust Company),
commenced its due diligence efforts.
Following the completion of this revised analysis, Kohlberg informed Katy
that, primarily because of the decline in expected fourth quarter results, it
would not be able to complete a transaction at the price outlined in the First
Letter of Intent. On November 28, 2000, Kohlberg circulated a proposed
amendment to the First Letter of Intent, but without a specified price per
Share, for a transaction with Katy. Mr. Lacovara informed Katy that the offer
price would likely be between $9 and $10 a share. The Board of Directors on
November 30, 2000 decided not to extend the exclusivity period, but to keep
working towards a transaction with Kohlberg. The First Letter of Intent was
terminated by Katy in early December 2000.
On December 14, 2000, Mr. Lacovara telephoned Mr. Prann and confirmed that
Kohlberg had concluded that Katy's operating results and the results of
Kohlberg's review of Katy did not support the valuation provided in the First
Letter of Intent. At that time, Katy was estimating that its EBITDA (from
continuing segments and before unusual items) for the full year 2000 would be
approximately $37.5 million. It also had
18
increased its estimate of its highest expected total required borrowings during
2001 to $158 million. Based on this information and the results of Kohlberg's
due diligence review, including its estimate of payments required in the event
of a change of control of Katy, Mr. Lacovara expressed interest in acquiring
Katy for a purchase price of $8.25 per Share in cash.
That day, Mr. Lacovara delivered to Katy a first draft of a merger
agreement, and the Board of Directors met with representatives of Debevoise &
Plimpton and Bear Stearns. The Board of Directors considered the status of
discussions with Kohlberg, and also reviewed Katy's alternatives. There had
been discussions with another financial sponsor, which had indicated that
because of the current state of the financing markets it would not be able to
bid higher than the then trading price for Katy stock (then about $7.63 a
share). That financial buyer later decided it did not wish to proceed further.
Katy had not heard back from Public Company 2, which had undertaken some
preliminary due diligence with Katy after the November 6 meeting. The Board of
Directors also considered the alternative of continuing as an independent
company. The Board had real questions as to Katy's ability to restructure its
debt, and whether, if Katy sold businesses, the earnings of the remaining
businesses would be consistent with Katy remaining a public company.
Because the Kohlberg proposal provided for the possibility of allowing (but
not requiring) the Carroll family trusts to exchange their shares of Katy for
common stock of a newly formed Kohlberg affiliate that would be the acquisition
vehicle, the Board of Directors at the December 14 meeting formed a Special
Committee of directors who were not connected with the Carroll family trusts to
negotiate with Kohlberg. The members of the Special Committee were Charles W.
Sahlman, Jacob Saliba and Daniel B. Carroll. The Special Committee was
authorized to consider whether the Kohlberg proposal was in the best interests
of Katy stockholders who were not part of the buying group, to negotiate with
Kohlberg, and to consider and negotiate any alternatives it believed to be
available. It was also authorized to give instructions to Bear Stearns and to
Debevoise & Plimpton.
On December 20, 2000, Kohlberg submitted to Katy a draft of a second letter
of intent (the "Second Letter of Intent"), which included a purchase price of
$8.25 per Share, a renewed exclusivity period, and provision for expense
reimbursement and a termination fee. Kohlberg requested that this Second Letter
of Intent be executed prior to the commencement of negotiations on the
definitive merger agreement.
On December 21, 2000, the Special Committee, Bear Stearns and Debevoise &
Plimpton discussed with Mr. Lacovara Kohlberg's insistence on the Second Letter
of Intent, the various factors considered by Kohlberg in arriving at the price
reduction, and the state of Kohlberg's financing negotiations. Mr. Lacovara
indicated that Kohlberg had received an oral expression of interest from an
asset-based financing source, Bankers Trust Company, in financing the
transaction.
Before the Second Letter of Intent was executed, a member of the Special
Committee and subsequently a senior officer of Katy had contacted
representatives of Public Company 1, and had been advised that Public Company 1
might well never submit a proposal and in any event would not consider doing so
unless a transaction with another party were to be announced. The Special
Committee and the Board of Directors also considered the alternative of Katy
continuing on a stand-alone basis, with or without sales of businesses.
Following further negotiation of terms, and preliminary exchanges of
comments on a draft merger agreement provided by Kohlberg's counsel, on January
2, 2001, Kohlberg and Katy signed the Second Letter of Intent. The Second
Letter of Intent, as executed, provided for a renewed exclusivity period until
the letter was terminated. Either party could terminate the Second Letter of
Intent if, among other things, the definitive agreement was not signed by
January 15, 2001. The Second Letter of Intent also provided for an expense
reimbursement not to exceed $500,000 and, to the extent that Kohlberg was able
to sign a definitive merger agreement at $8.25, a termination fee of $1.5
million payable upon the consummation of a competing transaction.
19
By letter dated January 8, 2001, Bear Stearns was formally engaged to render
an opinion as to the fairness of the proposed transaction.
After counsel for the Special Committee gave its comments on a revised draft
merger agreement, representatives of Debevoise & Plimpton met on January 12,
2001 with Mr. Lacovara and representatives of Hunton & Williams to discuss the
outstanding issues associated with the draft merger agreement. At that meeting,
the Kohlberg representatives requested a one week extension of the specified
dates in the Second Letter of Intent.
In the evening of January 15, Mr. Lacovara telephoned Mr. Prann and counsel
to the Special Committee to inform them that Kohlberg had concerns with the
liquidity position of Katy post-closing, based on Katy's projected debt levels
(excluding severance and other change in control payments) reaching $165
million in May 2001, and that Kohlberg was considering an additional equity
investment in the transaction. Mr. Lacovara indicated that the Kohlberg
partnership would be meeting on January 17, 2001 to determine whether to
contribute an additional $15 million of equity, and that without that
contribution, Mr. Lacovara did not feel comfortable that Kohlberg could pursue
the transaction. Mr. Lacovara also expressed concern over Katy's debt levels
and the lower accounts receivable and inventory balance.
Given the uncertainty raised by Mr. Lacovara's update, on January 16, 2001,
the Board of Directors determined to postpone a decision on the proposed
amendment to the Second Letter of Intent.
On January 17, 2001, Mr. Lacovara informed Katy that the Kohlberg partners
had voted against the proposed additional $15 million equity investment and
that, as a result, Kohlberg would be unable to continue working on the
transaction unless an alternative solution to the liquidity concern was found.
On each of January 18, 2001 and January 19, 2001, the Special Committee and
representatives of Debevoise & Plimpton met with Mr. Lacovara to discuss
Kohlberg's concerns and to discuss possible solutions, including the
possibility of increasing the level of proposed subordinated debt financing,
negotiating a deferral of payments, which would be owed upon a change of
control, to the holder of preferred units in Contico, and proceeding with sales
of subsidiaries of Katy. On January 19, the Special Committee authorized Mr.
Prann to proceed with discussions in respect of the proposed sale of Hamilton,
and authorized representatives of Kohlberg to contact directly the holder of
the Contico preferred units.
In late January 2001, representatives of the Special Committee and of
Kohlberg negotiated the terms of the proposed amendment to the Second Letter of
Intent. Changes requested by representatives of the Special Committee included
exclusions from the exclusivity covenant for discussions with (i) Public
Company 1, (ii) potential purchasers of Contico's retail division, (iii)
potential purchasers of Hamilton and (iv) unsolicited bidders.
In January 2001, Katy began discussion with several potential buyers of
Hamilton.
In the second half of January 2001, Kohlberg representatives, seeking
additional post-closing liquidity for Katy, discussed with the holder of the
Contico preferred units the possible deferral of approximately $33 million
otherwise payable to the holder following the closing.
On January 31, 2001, Kohlberg and Katy executed an amended letter of intent
(the "Third Letter of Intent"). The Third Letter of Intent contemplated that
the Carroll family trusts would convert 727,273 of their shares for shares of a
newly formed Kohlberg affiliate, which would acquire the other shares of Katy
common stock at a price of $8.25 per share. The amended letter of intent
contained the requested carve-outs on exclusivity during the term of the
agreement, and provided for a termination fee of $1.5 million, if Kohlberg was
able to sign the merger agreement by February 5, 2001, payable upon the
consummation of a competing transaction.
On February 2, 2001, representatives of Kohlberg met with members of Katy's
senior management to provide an overview of the proposed transaction, to review
the proposed business plan and to discuss the proposed equity program.
20
In mid-February 2001, Mr. Lacovara informed counsel to Katy of additional
obstacles to the proposed transaction to acquire Katy, which consisted of the
need to obtain an additional $15 million in financing because of the reduction
in the amount Kohlberg's proposed asset-based lender (Bankers Trust Company)
was prepared to lend based on appraisals of the assets, the poor fourth quarter
results, the negative earnings outlook for the first quarter of 2001 and the
generally poor economic conditions. Based on these four factors, Kohlberg
thought it would be difficult to complete the transaction contemplated by the
Third Letter of Intent.
As a result of the above, Mr. Lacovara proposed as an alternative to the
proposed acquisition transaction with Katy ("Plan A"), a recapitalization
("Plan B") under which Kohlberg would buy new equity from Katy with proceeds
used to reduce existing debt to a level which could be financed by Bankers
Trust Company and would buy a portion of the existing shares. This proposal
eventually formed the basis for the Preferred Stock Purchase and Tender Offer.
On February 17, 2001, Mr. Lacovara sent to Katy Kohlberg's analysis of the
components of both Plan A and Plan B. On February 18, 2001, Mr. Lacovara
reviewed the terms of each of Plan A and Plan B with the Special Committee, and
reported on the status of efforts to find the additional financing for Plan A.
On February 21, 2001, Kohlberg sent a draft of a revised letter of intent
(the "Fourth Letter of Intent") reflecting Kohlberg's Plan B. The Fourth Letter
of Intent contained a proposed price of $7.50 per share. Kohlberg made clear
that its interest in exploring Plan B was conditioned on its acquiring, through
purchase of outstanding Katy common stock and through purchase of convertible
preferred stock, a majority of the equity interest in Katy, representing a
majority of Katy's common stock after giving effect to conversion of the
convertible preferred stock, and also acquiring the right to nominate a
majority of Katy's Board. Kohlberg informed Katy that it needed these rights to
comply with requirements in the partnerships comprising the investment fund
with which Purchaser is affiliated. As under Plan A, Kohlberg requested that
the Agreement Shareholders agree to support the transaction by entering into a
Voting Agreement.
On February 24, Katy responded to Kohlberg, indicating that Katy was
interested in exploring Plan B as set forth in the Fourth Letter of Intent, but
at a higher price, and provided comments on the Fourth Letter of Intent to
Kohlberg.
During February 2001, after the Third Letter of Intent was signed, Katy
carried on discussions with Public Company 1 and with a potential strategic
buyer of Contico's retail division. In February 2001, Public Company 1 said it
was not interested in an acquisition of Katy as a whole, but was interested in
Contico. Discussions with both potential buyers broke off by the end of
February 2001. While Public Company 1 indicated that it continued to be
interested in buying Contico, it concluded that it could not follow through on
such a transaction until the second half of 2001. The other company informed
Katy that it was not interested in exploring further the possible purchase of
part of Contico.
In the latter half of February, Kohlberg informed Katy representatives that
it could not complete Plan A because of the negative EBITDA trends, the
expected debt financing shortfall and the possibility that without adequate
liquidity coverage lenders might not provide financing at closing.
On March 2, 2001, after additional negotiation, Kohlberg and Katy executed
the Fourth Letter of Intent. The Fourth Letter of Intent, as executed,
incorporated many of the changes requested by Katy, including an increase in
the purchase price from $7.50 to $8.00 per share, the dropping of a request by
Kohlberg that entry into a definitive agreement trigger the reimbursement by
Katy of up to $750,000 of Kohlberg's expenses, and Kohlberg's agreement that
the definitive agreement would permit Katy to have discussions with unsolicited
competing bidders and to terminate the definitive agreement (upon payment of a
$2 million termination fee in addition to reimbursement of Kohlberg's
reasonably documented expenses), if the Katy Board determined after consulting
with counsel that failure to take these actions would be inconsistent with the
Board's fiduciary duties. The obligation to enter into a definitive agreement
was conditioned on, among other things, the execution of a letter of intent
relating to the divestiture of Hamilton and the negotiation of a term sheet for
the
21
refinancing of Katy's existing bank loans. The Fourth Letter of Intent provided
for expense reimbursement to Kohlberg of up to $750,000. The Fourth Letter of
Intent formed the basis for the Purchase Agreement and the Preferred Stock
Purchase and Tender Offer.
On March 2, Katy issued a press release announcing that it was engaged in
discussions with a potential purchaser of a substantial equity position in
Katy. The press release noted that the discussions contemplated a purchase of a
substantial minority stake in Katy. The press release also noted that the
discussions referred to in Katy's press release of November 6, 2000 had been
suspended by these discussions with the same potential purchaser.
In early March 2001, Katy management informed Kohlberg that it was revising
downward its EBITDA forecast for 2001 to $43.9 million.
In March 2001, Kohlberg and Katy engaged in discussions with Katy's existing
lenders and with Bankers Trust Company and other potential financing sources
concerning refinancing Katy's existing credit facilities.
On March 7, 2001, Katy entered into a non-binding letter of intent with
respect to the sale of substantially all of the assets of Hamilton.
On March 7, 2001, representatives of Hunton & Williams delivered to
Debevoise & Plimpton an initial draft of the Purchase Agreement. The draft
Purchase Agreement was based, in large part, on the merger agreement that had
previously been negotiated by Kohlberg and Katy in connection with Plan A. On
March 8, 2001, representatives of Debevoise & Plimpton, on behalf of Katy,
delivered to Hunton & Williams comments on the initial draft of the Purchase
Agreement.
On March 9, 2001, representatives of Katy discussed the Purchase Agreement
with representatives of Kohlberg and on March 12, 2001, counsel to Kohlberg
distributed a revised draft of the Purchase Agreement.
On March 12, 2001, Katy and Kohlberg extended from March 9 to March 26 the
date after which either party could terminate the Fourth Letter of Intent if a
definitive purchase agreement had not been executed by that date.
On March 13, 2001, counsel to Kohlberg distributed a first draft of the
Voting Agreement, based in large part on the stock voting and tender agreement
previously negotiated between Kohlberg and Katy in connection with Plan A.
During the period from March 12, 2001 through March 28, 2001 representatives
of Katy and its legal advisers finalized the terms of the Purchase Agreement
with representatives of Kohlberg and its legal advisers. Representatives of the
Agreement Shareholders also negotiated the terms of the Voting Agreement with
representatives of Kohlberg.
On March 17, 2001, the Board of Directors met with representatives of Bear
Stearns and Debevoise & Plimpton to review the status of discussions with
respect to the Purchase Agreement. On March 20, 2001, a revised draft of the
Purchase Agreement was prepared and distributed to the Board of Directors. A
proposed commitment letter from Bankers Trust Company to a Kohlberg affiliate
to refinance the existing loans of Katy on a secured basis was also distributed
to the Board of Directors.
On March 22, 2001, after meeting with representatives of Katy's senior
management for an update of information about Katy's operating results and
prospects, including the prospects of obtaining stand-alone financing without
an equity infusion, the Board of Directors and representatives of Bear Stearns
and Debevoise & Plimpton met to consider the terms of the Purchase Agreement,
as negotiated, and the transactions contemplated in the Purchase Agreement.
Bear Stearns presented its financial analyses to the Board of Directors.
Representatives of Debevoise & Plimpton reviewed the duties of the Board of
Directors and summarized the Purchase Agreement and the improvements, from the
perspective of Katy's stockholders, in the terms of the Purchase Agreement
negotiated since receiving the initial draft.
22
On March 25, 26, and 29, the Board of Directors met again with
representatives of Bear Stearns and Debevoise & Plimpton. At the March 29
meeting, Bear Stearns delivered to the Board of Directors its oral opinion,
later confirmed in writing, to the effect that, as of that date, and subject to
the matters stated in the opinion, the Preferred Stock Purchase and Tender
Offer, taken as a whole, were fair to the stockholders of Katy from a financial
point of view. Following further discussion and deliberation, the Board of
Directors of Katy, by the unanimous vote of all directors present (Mr. Andrews
was not present because of his relationship with Kohlberg): (i) approved the
Purchase Agreement, the Preferred Stock Purchase and Tender Offer and the other
transactions contemplated by the Purchase Agreement, (ii) determined that the
terms of the Preferred Stock Purchase and Tender Offer were fair to and in the
best interests of Katy's stockholders, (iii) approved amendments to Katy's
Restated Certificate of Incorporation to authorize 600,000 shares of
convertible preferred stock and to establish a classified Board of Directors
and recommended they be submitted to the stockholders for approval, (iv)
approved Purchaser's five designees, and Mr. Jacobi, who Purchaser has proposed
be appointed Chief Executive Officer, as nominees for director of Katy, subject
to election by the stockholders and (v) adopted an amendment to Katy's by-laws
fixing at nine the number of directors constituting the whole Board of
Directors.
Authorized representatives of Katy and Purchaser executed and delivered the
Purchase Agreement, and Purchaser and the Agreement Shareholders executed and
delivered the Voting Agreement, as of March 29, 2001. On March 30, 2001, the
execution of the Purchase Agreement was publicly announced through a press
release issued by Katy.
On April 20, 2001, the Board of Directors of Katy approved a proposed
amendment to Katy's certificate of incorporation creating the convertible
preferred stock to be purchased by Purchaser and recommended that Katy
shareholders approve this amendment.
We have included projections in this section of the Proxy Statement solely
because such projections were furnished to Kohlberg in the course of the
discussions that led to the execution of the Purchase Agreement. The inclusion
of such projections should not be regarded as an indication that Katy, Kohlberg
or any other person who received such information considers it a reliable
prediction of future events, and Kohlberg has informed Katy that it has not
relied (nor should any other person rely) on them as such.
Katy does not as a matter of course make public any projections as to future
performance or earnings. Katy's internal financial forecasts (upon which the
projections provided to Kohlberg were based in part) are, in general, prepared
solely for internal use and capital budgeting and other management decision-
making purposes and are subjective in many respects and thus susceptible to
various interpretations and periodic revision based on actual experience and
business developments.
The projections given to Kohlberg are based on estimates and assumptions
made by Katy's management with respect to industry performance, general
business, economic, market and financial conditions and other matters, all of
which are subject to significant contingencies and are difficult to predict,
and many of which are beyond the control of Katy, Kohlberg or their respective
advisors. These projections were prepared by Katy's management based on
numerous assumptions including, among others, projections of revenues,
operating income, benefits and other expenses, depreciation and amortization,
capital expenditures and working capital requirements. No assurances can be
given with respect to any such assumptions. These projections do not give
effect to the Preferred Stock Purchase and Tender Offer. Risks and
uncertainties faced by Katy are discussed in greater detail in Katy's periodic
filings with the SEC. Also, many of the assumptions upon which the projections
were based are dependent upon economic forecasting (both general and specific
to Katy's businesses) which is inherently uncertain and subjective.
Accordingly, there can be no assurance that the assumptions made in preparing
the projections will prove accurate and actual results may be materially
greater or less than those contained in the projections.
None of Katy, Kohlberg or any of their representatives has made, or makes,
any representation to any person regarding the information contained in the
projections, and none of them intends to update or otherwise
23
revise the projections to reflect circumstances existing after the date when
made or to reflect the occurrence of future events even in the event that any
or all of the assumptions underlying the projections are shown to be in error.
In addition, the projections given to Kohlberg were not prepared in accordance
with generally accepted accounting principles, and neither Katy's nor
Kohlberg's independent accountants has examined or compiled any of the
projections or expressed any conclusion or provided any other form of assurance
with respect to the projections and accordingly assume no responsibility for
these projections. The projections given to Kohlberg were prepared with a
limited degree of precision, and were not prepared with a view to public
disclosure or compliance with the published guidelines of the SEC or the
guidelines established by the American Institute of Certified Public
Accountants regarding projections, which would require a more complete
presentation of data than as shown above. The inclusion of the projections in
the Proxy Statement should not be regarded as a representation that the
projected results will be achieved. These projections should be read in
conjunction with Katy's historical financial information.
Factors Considered by the Board of Directors
The Board of Directors has approved the Purchase Agreement, the Preferred
Stock Purchase and the Tender Offer and recommends that stockholders approve
the Preferred Stock Purchase.
The material factors that the Board of Directors considered in connection
with the Purchase Agreement, the Preferred Stock Purchase and the Tender Offer
are described below. Except as noted below, the Board considered the following
factors to be positive factors supporting its determination that the Preferred
Stock Purchase and Tender Offer are fair to, and in the best interests of, the
stockholders. The material positive factors the Board considered were:
(1) Katy's cash resources and financial strength will increase as a
result of Purchaser's cash infusion and from borrowing availability under
the new credit facility with Bankers Trust Company, which would not have
been provided unless Katy entered into the Purchase Agreement and the
transactions contemplated by the Purchase Agreement.
(2) The Preferred Stock Purchase will decrease the percentage of Katy's
capitalization that consists of debt.
(3) The Tender Offer and Preferred Stock Purchase will give stockholders
the opportunity to sell Katy shares at a substantial premium to the market
price of Katy shares before the transactions with Purchaser were announced,
and also to remain as stockholders in a company that will be financially
strengthened by Purchaser's cash infusion. In concluding that the premium
offered was substantial, the Board considered the closing price of Katy
shares on March 29, 2001, the day the Board of Directors approved the
Purchase Agreement. The price offered in the Tender Offer represents a
premium of 30.1% over the closing price of $6.15 for Katy shares on March
29, 2001. The Board also considered that the Tender Offer price represented
a premium of 30.6% over the closing price ($6.125) of Katy shares on
November 6, 2000, the last trading day before Katy announced that it was
engaged in discussions with a potential purchaser of Katy, and a premium of
39.1% over the closing price ($5.75) of Katy shares on March 2, 2001, the
last trading day before Katy announced that it was engaged in discussions
with a potential purchaser of a substantial equity position in the company.
(4) Bear Stearns' oral opinion and supporting analysis, delivered to the
Board of Directors at the March 29, 2001 meeting and later confirmed in
writing, was that, as of the date of such opinion, the Preferred Stock
Purchase and the Tender Offer, taken as a whole, were fair from a financial
point of view to Katy's stockholders.
(5) Before committing itself to the transactions, Katy had solicited
indications of interest in acquiring Katy from a substantial number of
potential buyers (strategic and financial) and held discussions with
potential lenders about refinancing its indebtedness, and the Board of
Directors believed that the transactions with Purchaser were the only
readily available transactions that would give Katy the cash it needs to
fund its ongoing operations and offer a reasonable opportunity for Katy to
achieve its strategic objectives.
24
(6) Despite seeking indications of interest for a sale of Katy, a number
of potential acquirers visiting Katy or receiving information packages, and
Katy's public announcements on November 6 and March 2, only Kohlberg
submitted a written proposal after November 6, 2000.
(7) The initial discussions with Purchaser contemplated a range of
alternatives, including a sale of the entire company at $8.25 per share,
and the structure of the transaction ultimately agreed upon in negotiation
allows Katy stockholders to retain a stake in Katy, giving them upside
potential.
(8) It is expected that, unless the transactions with Kohlberg are
completed, Katy on June 30, 2001 will be in violation of financial
covenants of the present credit agreement. If the transactions with
Kohlberg are not completed, considering the current market environment, a
substantial risk exists that Katy will be unable to obtain further waivers
of the defaults under the current credit agreement and that Katy will be
unable to obtain, on reasonable terms or at all, financing necessary to
replace its current credit agreement. If Katy is unable to refinance its
existing bank loans, the entire amount under the existing credit agreement
could be declared due and payable not later than June 30, 2001.
(9) Under the terms of the Purchase Agreement:
--Katy is permitted to give information to and negotiate with third
parties in response to an unsolicited acquisition proposal if a
majority of the Board of Directors determines (after consultation
with counsel), that failure to do so would not be consistent with the
directors' fiduciary duties;
--the Board of Directors can terminate the Purchase Agreement if Katy
receives a superior proposal and the Board of Directors determines in
good faith (after consulting with outside legal counsel) that not
terminating the Purchase Agreement and entering into a new agreement
to effect the superior proposal would be inconsistent with its
fiduciary duties; and
--while Katy, in order to accept a superior proposal, must reimburse
Purchaser up to $1,000,000 of its expenses, and, on completing the
competing proposal, pay Purchaser a termination fee of $2,000,000,
and these fees and expense reimbursement would increase the cost to a
third party interested in acquiring Katy, they would not prevent a
third party from making a superior proposal or acquiring Katy.
(10) The Board expected that Katy and its stockholders would benefit
from Kohlberg's managerial assistance and support. Kohlberg has substantial
experience in providing companies in which its affiliates invest with
financial and managerial advisory services aimed at building value and
improving operational, marketing and financial performance.
The Board also considered the following negative factors in making its
determination. You should consider these in deciding whether to vote for the
Preferred Stock Purchase:
(11) The issuance of the convertible preferred stock will dilute the
holdings of Katy's existing stockholders. Following the closing of the
transactions with Purchaser under the Purchase Agreement, existing
stockholders will hold a lesser proportion of common equity (calculated on
a fully diluted basis). If the 400,000 shares of convertible preferred
stock to be purchased by Purchaser are converted, it will receive 5,000,000
shares of common stock, which would represent 35.3% of the outstanding
shares (on a fully diluted basis) after giving effect to the conversion. If
the Preferred Stock Purchase and the conversion were to have occurred as of
December 31, 2000, this would have had the pro forma effect of reducing the
book value per share of common stock from $17.91 to $14.21.
(12) Purchaser's significant stock ownership in Katy, its rights to
nominate directors and to convert its convertible preferred stock, and the
classified Board of Directors, could effectively deter a third party from
making an offer to acquire Katy, which might involve a premium stock price
or other benefits for stockholders, and could otherwise prevent changes in
control or management of Katy.
(13) The purchase of shares tendered into the Tender Offer will reduce
the number of shares of Katy common stock that are publicly held, which
could increase volatility in the price of Katy's stock and adversely affect
liquidity in Katy's stock.
25
(14) Purchaser's nominees will constitute a majority of the Board of
Directors, five of whom will serve an initial term of two years, (see
"Corporate Governance" on page of the Proxy Statement), preventing major
actions not supported by the Purchaser-nominated directors.
(15) Purchaser has proposed a new Chief Executive Officer, who is also a
nominee for director, and who, if elected as director, will serve for an
initial term of one year.
(16) Purchaser will have the right, so long as it retains any
convertible preferred stock, to nominate a majority of the members of the
Board of Directors in connection with future elections of directors.
(17) The holders of the convertible preferred stock will have
preferential rights on distributions if Katy is liquidated, which means
that holder of common stock will not receive any distribution on
liquidation until the holders of the convertible preferred stock receive
their liquidation preference.
(18) If the Purchase Agreement is terminated then, under certain
circumstances, Katy must reimburse Purchaser's expenses (up to $1,000,000)
and pay Purchaser a $2,000,000 termination fee. For example, Purchaser will
be entitled to reimbursement for expenses if stockholders do not approve
the sale of convertible preferred stock to Purchaser, and to the
termination fee under certain circumstances if, within 12 months after the
Purchase Agreement terminates, Katy enters into another transaction for the
sale of all or a major part of Katy's voting securities or assets and that
other transaction is completed within 18 months of the Purchase Agreement
terminating.
The Board of Directors believed that, on balance, the possible benefits to
Katy stockholders from the positive factors outweighed the possible detriments
from the negative factors summarized above.
In view of the variety of factors considered, the Board of Directors found
it impracticable to, and did not, quantify, rank or otherwise assign relative
weights to the above factors considered or determine that any factor was of
particular importance in reaching its determination. Rather, the Board of
Directors views this position and its recommendation as being based upon its
judgment, in light of the totality of the information presented and considered,
of the overall effect of the Preferred Stock Purchase and Tender Offer on the
stockholders compared to any reasonably available alternative transaction.
OPINION OF BEAR STEARNS
Overview
At the March 29, 2001 meeting of Katy's Board of Directors, Bear Stearns
presented the analysis of its opinion and then delivered its oral opinion,
subsequently confirmed in writing, that, as of March 29, 2001, and based upon
and subject to the assumptions, qualifications and limitations set forth in its
opinion, the Tender Offer and the Preferred Stock Purchase, taken as a whole,
were fair, from a financial point of view, to the stockholders of Katy.
THE FULL TEXT OF THE FAIRNESS OPINION DATED MARCH 29, 2001, WHICH SETS
FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE SCOPE OF THE REVIEW
UNDERTAKEN BY BEAR STEARNS IN RENDERING ITS FAIRNESS OPINION, IS ATTACHED AS
ANNEX A TO THIS DOCUMENT. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE
FAIRNESS OPINION CAREFULLY AND IN ITS ENTIRETY. THE FAIRNESS OPINION WAS
DELIVERED TO THE KATY BOARD OF DIRECTORS FOR ITS USE IN CONNECTION WITH ITS
CONSIDERATION OF THE TENDER OFFER AND PREFERRED STOCK PURCHASE AND ADDRESSES
ONLY, AS OF THE DATE OF THE FAIRNESS OPINION, THE FAIRNESS OF THE TENDER OFFER
AND THE PREFERRED STOCK PURCHASE, TAKEN AS A WHOLE, FROM A FINANCIAL POINT OF
VIEW, TO THE STOCKHOLDERS OF KATY. THE FAIRNESS OPINION IS NOT INTENDED TO BE,
AND DOES NOT CONSTITUTE, A RECOMMENDATION TO THE BOARD OF DIRECTORS OF KATY OR
TO ANY STOCKHOLDER OF KATY AS TO HOW TO VOTE THEIR SHARES OF COMMON STOCK
26
OF KATY OR WHETHER OR NOT TO TENDER THEIR SHARES OF COMMON STOCK OF KATY. THE
FAIRNESS OPINION DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION OF THE BOARD
OF DIRECTORS OF KATY TO RECOMMEND THE TENDER OFFER AND PREFERRED STOCK PURCHASE
TO THE STOCKHOLDERS OF KATY OR THE UNDERLYING BUSINESS DECISION OF KATY TO
ENTER INTO THE PURCHASE AGREEMENT, THE RELATIVE MERITS OF THE TENDER OFFER AND
PREFERRED STOCK PURCHASE AS COMPARED TO ANY ALTERNATIVE BUSINESS STRATEGIES
THAT MIGHT EXIST FOR KATY OR THE EFFECTS OF ANY OTHER TRANSACTION IN WHICH KATY
MIGHT ENGAGE. THE SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS DOCUMENT IS
QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE FAIRNESS OPINION.
The terms of the Tender Offer and the Preferred Stock Purchase and the form
of the consideration were determined by arm's-length negotiations between Katy
and Kohlberg and were not based on any recommendation by Bear Stearns. Katy did
not provide specific instructions or impose any limitations on Bear Stearns
with respect to the investigations made or the procedures followed by Bear
Stearns in rendering its opinion.
Bear Stearns Opinion
In connection with rendering its opinion, Bear Stearns, among other things:
. reviewed a draft of the Purchase Agreement dated March 28, 2001; reviewed
a draft of the Voting Agreement dated March 28, 2001;
. reviewed a commitment letter from Kohlberg Investors IV, L.P. to
Purchaser dated March 27, 2001, relating to the Tender Offer and the
Preferred Stock Purchase;
. reviewed the commitment letter from Bankers Trust Company to Purchaser
dated March 27, 2001 ("Commitment Letter");
. reviewed Katy's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended December 31, 1998 and 1999, its Quarterly Report
on Form 10-Q for the periods ended March 31, 2000, June 30, 2000 and
September 30, 2000, its preliminary results for the year ended December
31, 2000, its Proxy Statement on Schedule 14A dated March 31, 2000, its
Report on Form 8-K dated January 15, 1999 and its Report on Form 8-K/A
dated March 22, 1999;
. reviewed the Amended and Restated Credit Agreement dated as of December
11, 1998, among Katy, Bank of America National Trust and Savings
Association, as Administrative Agent and Issuing Bank, La Salle National
Bank, as Managing Agent, and the other financial institutions party
thereto;
. reviewed certain operating and financial information, including
projections for the seven years ended December 31, 2007, provided to Bear
Stearns by management relating to Katy's business and prospects;
. met with certain members of Katy's senior management to discuss Katy's
business, operations, historical and projected financial results and
future prospects;
. reviewed the historical prices, trading multiples and trading volumes of
the common shares of Katy;
. reviewed publicly available financial data, stock market performance data
and trading multiples of companies which Bear Stearns deemed generally
comparable to Katy;
. reviewed the terms of selected precedent merger and acquisition
transactions of, and investment transactions involving, companies which
Bear Stearns deemed generally comparable to Katy or situations which Bear
Stearns deemed generally comparable to the Tender Offer and the Preferred
Stock Purchase, taken as a whole;
. performed discounted cash flow analyses based on the projections for Katy
furnished to Bear Stearns by the management of Katy;
27
. reviewed the pro forma financial results, financial condition and
capitalization of Katy giving effect to the Tender Offer and the
Preferred Stock Purchase, taken as a whole, and the refinancing
contemplated by the Commitment Letter; and
. conducted such other studies, analyses, inquiries and investigations as
Bear Stearns deemed appropriate.
Bear Stearns has relied upon and assumed, without independent verification,
the accuracy and completeness of the financial and other information, including
without limitation the projections, provided to it by Katy. With respect to
Katy's projected financial results, Bear Stearns has assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the senior management of Katy as to the expected
future performance of Katy. Bear Stearns does not assume any responsibility for
the independent verification of any such information or of the projections
provided to it, and it has further relied upon the assurances of the senior
management of Katy that they are unaware of any facts that would make the
information or projections provided to Bear Stearns incomplete or misleading.
In arriving at its opinion, Bear Stearns has taken into account, with Katy's
consent, the risks inherent in Katy's current business plans, including the
view of the senior management of Katy that in the current capital markets
environment there exists a risk that Katy would be unable in the future to
obtain continued waivers of the defaults under its current credit facility and
that Katy would be unable to obtain, on reasonable terms, financing necessary
to replace its current credit facility. Bear Stearns has also considered that,
according to the senior management of Katy, (i) no other potential investor or
acquiror has made any investment or acquisition proposal to Katy since November
6, 2000 (the date of the public announcement by Katy that it was exploring its
strategic alternatives, including the possible sale of Katy, and that it was in
discussions with a potential purchaser relating to a possible purchase of Katy)
or since March 2, 2001 (the date of the public announcement by Katy that it was
engaged in discussions with a potential purchaser of a substantial equity
position in Katy) and (ii) the prospects for obtaining access to additional
financing in the public or private capital markets are limited.
In arriving at its opinion, Bear Stearns has not performed or obtained any
independent appraisal of the assets or liabilities (contingent or otherwise) of
Katy, nor has Bear Stearns been furnished with any such appraisals. In
connection with its engagement, Bear Stearns was not requested to, and it did
not, solicit third party indications of interest involving an investment in, a
recapitalization of, or acquisition of all or part of, Katy. Bear Stearns
assumed that the Tender Offer and the Preferred Stock Purchase and the
refinancing contemplated by the Commitment Letter will be consummated in a
timely manner and in accordance with the terms of the Purchase Agreement and
the Commitment Letter without any limitations, restrictions, conditions,
amendments or modifications that collectively would have a material effect on
Katy.
Bear Stearns did not express any opinion as to the price or range of prices
at which the shares of common stock of Katy may trade subsequent to the
announcement of the Tender Offer and the Preferred Stock Purchase and the
refinancing contemplated by the Commitment Letter or as to the price or range
of prices at which the shares of common stock of Katy may trade subsequent to
the consummation of the Tender Offer and the Preferred Stock Purchase and the
refinancing contemplated by the Commitment Letter.
Summary of Analysis
The following is a brief summary of all of the material valuation and
financial and comparative analyses considered by Bear Stearns in connection
with the rendering of its opinion. This summary is qualified in its entirety by
reference to the full text of its opinion.
In performing its analysis, Bear Stearns made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Bear Stearns, Katy and Kohlberg. Any estimates contained in the analysis
performed by Bear Stearns are not necessarily indicative of actual values or
future results, which may be significantly more or less
28
favorable than suggested by such analysis. In addition, as described above, the
Bear Stearns opinion was one among several factors taken into consideration by
the Katy Board of Directors in making its determination to approve the Tender
Offer and Preferred Stock Purchase.
Historical Stock Price Performance of Katy. Bear Stearns reviewed the
trading volume and price history of Katy's common stock on the New York Stock
Exchange for the period from March 28, 2000 through March 28, 2001 and for the
period from March 28, 1996 through March 28, 2001. Bear Stearns also reviewed
the relationship between movements in the closing prices of Katy's common
stock, the S&P 500 Index and an index of other selected industrial companies
(see Comparable Company Analysis below) for the period from March 28, 2000
through March 28, 2001 and for the period from March 28, 1996 through March 28,
2001. Bear Stearns noted that Katy's common stock had underperformed the S&P
500 Index for the period from March 28, 2000 through March 28, 2001 and for the
period from March 28, 1996 through March 28, 2001. Additionally, Bear Stearns
noted that Katy's common stock had underperformed the index of other selected
industrial companies for the period from March 28, 2000 through March 28, 2001
and for the period from March 28, 1996 through March 28, 2001.
Comparative Analysis of Tender Offer and Preferred Stock Purchase Versus
Status Quo. Bear Stearns compared the per share value of the Tender Offer and
Preferred Stock Purchase, taken as a whole, to the per share value of Katy's
common stock as of March 28, 2001. To estimate the value per share of the
Tender Offer and Preferred Stock Purchase, Bear Stearns analyzed (i) the cash
to be distributed in the Tender Offer and (ii) the pro forma value per share of
Katy's common stock after giving effect to the Tender Offer and Preferred Stock
Purchase and transaction-related fees and expenses and the sale of Hamilton.
Assuming full participation in the Tender Offer, Bear Stearns calculated the
value of the cash to be distributed in the Tender Offer to 29.8% of Katy's
common stock to be approximately $2.38 per share. The pro forma value per share
of Katy's common stock, after giving effect to the Tender Offer and Preferred
Stock Purchase and transaction related fees and expenses and the sale of
Hamilton, was calculated by using a range of multiples of enterprise
value/latest twelve month ("LTM") earnings before interest, taxes, depreciation
and amortization, referred to as EBITDA. Bear Stearns selected a range of
enterprise value/LTM EBITDA multiples of 5.25x to 6.25x based on its review of
the following: (i) an analysis of Katy's historical enterprise value/LTM EBITDA
multiples, (ii) an analysis of certain publicly traded companies deemed by Bear
Stearns to be generally comparable to Katy (see Comparable Company Analysis
below) and (iii) a theoretical discounted cash flow analysis, adjusted for the
Tender Offer and Preferred Stock Purchase and transaction-related fees and
expenses and the sale of Hamilton. This analysis resulted in an implied
reference range for the pro forma equity value of Katy's remaining common stock
of approximately $4.33 per share to $6.38 per share.
Bear Stearns added the cash value per share to be distributed in the Tender
Offer to the range of implied pro forma equity values per share to arrive at a
range of implied values per share for the Tender Offer and Preferred Stock
Purchase, taken as a whole, of approximately $6.71 per share to $8.76 per
share. Bear Stearns noted that this implied reference range represented a
premium of approximately 9.0% to 42.4% over the $6.15 closing price per share
of Katy's common stock on March 28, 2001.
29
Comparable Company Analysis. Bear Stearns analyzed selected historical and
projected operating information, stock market performance data and valuation
multiples for Katy and compared this data to that of certain publicly traded
companies that Bear Stearns deemed to be generally comparable to one or more of
Katy's businesses with respect to growth, profitability or size or are
diversified industrial micro-cap companies that Bear Stearns deemed to be
generally comparable to Katy given its size and diverse industrial profile.
Bear Stearns compared, among other things, (i) enterprise value/LTM EBITDA,
(ii) enterprise value/LTM earnings before interest and taxes, referred to as
EBIT, (iii) market value/LTM net income and (iv) closing stock price/2001
estimated earnings per share, referred to as EPS. All multiples were based on
closing stock prices for the comparable companies on March 28, 2001, and LTM is
as of September 30, 2000.
Comparable Trading Multiples
Enterprise Market
Value/LTM Value Price/2001
----------- LTM/Net Estimated
EBITDA EBIT Income EPS
------ ---- ------- ----------
Chart Industries, Inc........................ 7.7x 12.7x NM 13.6x
The Middleby Corporation..................... 4.5 5.9 12.5x 10.0
Myers Industries, Inc........................ 4.6 7.4 8.6 9.0
Park-Ohio Holdings Corporation............... 5.5 7.5 3.6 3.3
Standex International Corporation............ 5.8 7.1 9.5 NA
Harmonic Mean(1)............................. 5.4x 7.6x 6.9x 6.8x
Katy Industries, Inc.(2)..................... 5.8x 12.9x 12.4x 67.9x
--------
(1) Harmonic mean represents the reciprocal of the arithmetic mean of
reciprocals.
(2) Multiples calculated at the midpoint of the implied value of the Tender
Offer and Preferred Stock Purchase, taken as a whole (see Comparative
Analysis of Tender Offer and Preferred Stock Purchase Versus Status Quo
above).
It should be noted that companies with financial challenges, similar to
Katy, would be expected to trade at multiples close to the bottom end of the
range of comparable companies. Additionally, Katy's LTM EBITDA margin of 7.4%
is lower than that of all of the comparable companies. Companies with LTM
EBITDA margins materially below the comparable companies would be expected to
trade at multiples close to the bottom end of the range.
No company utilized in the peer group comparison is identical to Katy, and,
accordingly, Bear Stearns' analysis of comparable companies necessarily
involved complex considerations and judgments concerning differences in
financial and operating characteristics and other factors which would
necessarily affect the relative trading values of Katy compared to the
companies to which Katy was compared.
30
Selected Mergers and Acquisition Transactions of Comparable Companies. Using
publicly available information, Bear Stearns reviewed the purchase prices and
implied transaction multiples paid or proposed to be paid in 24 selected
transactions. The following 14 transactions were selected because the target
company's businesses were deemed by Bear Stearns to be generally comparable to
one or more of Katy's businesses with respect to growth, profitability or
relevant transaction size:
Comparable Business Transactions
Announcement
Target Company Acquiring Company Date
-------------- ----------------- ------------
L.E. Mason Company Thomas & Betts Corporation 09/01/1999
Easco Inc. Caradon PLC 07/28/1999
Belden Inc. (Cord Products Division) Volex Group PLC 04/22/1999
Noma Industries Limited General Chemical Group, Inc. 03/01/1999
American Safety Razor Company J.W. Childs Associates 02/15/1999
Contico International, Inc Katy Industries, Inc. 09/08/1998
Newell Plastics Home Products International Inc. 08/03/1998
Tenex Corporation (Consolidated Storage Line) Home Products International Inc. 08/03/1998
Wilen Companies, Inc. Katy Industries, Inc. 06/03/1998
Sun Coast Industries, Inc. Kerr Group, Inc. 01/28/1998
PureTec Corporation Tekni-Plex Inc. 11/12/1997
Seymour Housewares Home Products International Inc. 11/11/1997
Tamor Corporation Home Products International Inc. 11/04/1996
GC Thorsen, Inc. Katy Industries, Inc. 03/14/1995
The following 10 transactions were selected because the target companies
were diversified industrial micro-cap companies that Bear Stearns deemed to be
generally comparable to Katy, given their size and diverse industrial profile
and because each was acquired by a financial sponsor, similar to Kohlberg:
Diversified Industrial Micro-Cap Transactions
Announcement
Target Company Acquiring Company Date
-------------- ----------------- ------------
Cascade Corporation Lift Technologies, Inc./TD Capital 10/19/2000
Group Ltd./Ontario Municipal
Employees Retirement Board
Simpson Industries, Inc. Heartland Industrial Partners, L.P. 09/29/2000
General Bearing Corporation Management Group 07/14/2000
U.S. Can Corporation Berkshire Partners 03/22/2000
Jason Inc. Saw Mill Capital, LLC 01/31/2000
Transportation Technologies Industries, Inc. Management Group 12/14/1999
Gleason Corporation Vestar Capital Partners 12/09/1999
Autocam Corporation Aurora Capital Group 11/06/1999
Synthetic Industries, Inc. Investcorp SA 11/05/1999
Citation Corporation Kelso & Company 06/24/1999
31
Bear Stearns compared, among other things, (i) enterprise value/LTM EBITDA,
(ii) enterprise value/LTM EBIT and (iii) equity value/LTM net income. All
multiples were based on implied enterprise values and implied equity values of
each proposed transaction and LTM is based upon the most recently available
financial statements as of the announcement date of each proposed transaction.
Selected Mergers and Acquisition Transactions of Comparable Companies
Enterprise
Value/LTM Equity
----------- Value/LTM
EBITDA EBIT Net Income
------ ---- ----------
Comparable Business Transactions:
Harmonic Mean(1).................................. 6.5x 9.7x 13.0x
Diversified Industrial Micro-Cap Transactions:
Harmonic Mean(1).................................. 5.9 9.0 13.0
All Selected Mergers and Acquisition Transactions
of Comparable Companies:
High.............................................. 9.0 16.2 25.3
Harmonic Mean(1).................................. 6.2 9.3 13.0
Low............................................... 5.2 6.2 6.8
Katy Industries, Inc.(2)........................... 5.8x 12.9x 12.4x
--------
(1) Harmonic mean represents the reciprocal of the arithmetic mean of
reciprocals.
(2) Multiples calculated at the midpoint of the implied value of the Tender
Offer and Preferred Stock Purchase, taken as a whole (see Comparative
Analysis of Tender Offer and Preferred Stock Purchase Versus Status Quo
above).
It should be noted that a number of the 14 transactions involving a target
company with a business deemed generally comparable to one or more of Katy's
businesses were consummated at multiples above the Katy transaction. This is
not unexpected for the following reasons: (i) all of these transactions were
strategic in nature, and strategic transactions typically yield synergistic
benefits to the acquirer, (ii) all of the transactions were consummated in
better economic environments than exist today and (iii) Katy is experiencing a
number of financial challenges that were not present in a majority of the
target companies. Additionally, a number of the 10 transactions involving
target companies that were diversified industrial micro-cap companies were
consummated at multiples above the Katy transaction. This is not unexpected for
the following reasons: (i) all of the transactions were consummated by
financial buyers in significantly better financing environments, (ii) all of
the transactions were consummated in better economic environments than exist
today and (iii) Katy is experiencing a number of financial challenges that were
not present in the majority of the target companies.
Bear Stearns noted that none of the transactions reviewed were identical to
the Tender Offer and Preferred Stock Purchase. Bear Stearns further noted that
the analysis of mergers and acquisition transactions of comparable companies
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics and other factors that
would necessarily affect the acquisition value of Katy as compared to the
acquisition value of any other comparable company in general and the
transactions above in particular.
Theoretical Discounted Cash Flow Analysis. Bear Stearns performed a
discounted cash flow analysis for Katy in order to determine a range of equity
values per share for Katy. Projected financial data for Katy was based on
estimates provided to Bear Stearns by Katy's management assuming the Tender
Offer and Preferred Stock Purchase and the related transactions are not entered
into and no other comparable transaction is entered into by Katy. In performing
its theoretical discounted cash flow analysis, Bear Stearns calculated after-
tax cash flows for the seven-year period commencing January 1, 2001, and ending
on December 31, 2007. Katy's cash flows were discounted to present value using
discount rates ranging from 11.0% to 13.0%. Bear Stearns calculated a terminal
value for Katy by applying to Katy's projected EBITDA for 2007 a range of
multiples of
32
4.25x to 5.25x. Bear Stearns determined that this range of multiples was
appropriate for valuing Katy's business based on the implied perpetual growth
rates of free cash flow derived from such multiples. This analysis resulted in
an implied reference range for the equity value of approximately $3.16 per
share to $9.29 per share.
Bear Stearns noted that the theoretical discounted cash flow analysis was
highly dependent on growth rates and margin assumptions relating to the
underlying projections and that such projections were difficult to forecast due
to the rapidly changing nature of Katy's business plan and the capital markets
climate. Consequently, Bear Stearns observed that the resulting discounted cash
flow valuation is inherently theoretical due to the difficulty in forecasting
projected operating results as well as assumptions relating to, among other
factors, the availability of sufficient capital, the cost of such capital and
assessing implied perpetual growth rates beyond the forecast period.
Leveraged Buyout Analysis. Bear Stearns conducted two leveraged buyout
analyses assuming a 100% acquisition of Katy's common stock by a generic
financial buyer using the following two financing scenarios: (i) traditional
cash flow financing and (ii) asset-based financing. Projected financial data
for Katy was based on estimates provided to Bear Stearns by Katy's management.
Bear Stearns noted that the proposed transaction did not involve a 100%
acquisition of the outstanding common stock of Katy. Bear Stearns further
considered Katy's recent financial performance, the current state of the
financing markets and the required rates of return for participants in the
financial buyer community. Bear Stearns determined that a leveraged buyout
under the traditional cash flow financing scenario was not a viable alternative
for Katy given Katy's recent financial performance and the current state of the
financing markets and that a leveraged buyout under the asset-based financing
scenario was only viable at equity values significantly below the closing price
per share of Katy's common stock on March 28, 2001.
Theoretical Discounted Future Stock Price Analysis. Bear Stearns performed a
discounted future stock price analysis for Katy in order to determine a range
of equity values per share of Katy common stock. Projected financial data for
Katy was based on estimates provided to Bear Stearns by Katy's management. In
calculating its theoretical discounted future stock price, Bear Stearns
calculated a range of projected stock prices by using Katy's estimated EPS
figure ending December 31, 2003 and applying a range of forward price/earnings
ratios, referred to as P/E ratios. Bear Stearns used a range of forward P/E
ratios of 6.0x to 8.0x based on the harmonic mean (the reciprocal of the
arithmetic mean of reciprocals) of the estimated 2001 P/E ratios of comparable
companies ending December 31, 2001 of 6.8x (see Comparable Company Analysis
above). Katy's projected stock prices were discounted to present value using
discount rates ranging from 13.0% to 17.0%. The analysis resulted in an implied
reference range for the equity value of approximately $4.08 per share to $5.83
per share.
Bear Stearns noted that the theoretical discounted future stock price
analysis was highly dependent on growth rates and margin assumptions relating
to the underlying projections and that such projections were difficult to
forecast due to the rapidly changing nature of Katy's business plan.
Consequently, Bear Stearns observed that the resulting discounted future stock
price valuation is inherently theoretical due to the difficulty in forecasting
projected operating results as well as assumptions relating to, among other
factors, Katy's required rate of return on equity and estimated forward P/E
ratio.
Precedent Investment Transactions. Bear Stearns analyzed and summarized
three precedent investment transactions in which private equity investors
purchased significant equity stakes directly from publicly traded corporations
and were granted certain rights, including representation on the Board of
Directors of the issuing corporation. These three transactions were (i) the
investment by Haas Wheat & Harrison Incorporated in Playtex Products, Inc.,
(ii) the investment by Kohlberg Kravis Roberts & Co. in TW Holdings, Inc. and
(iii) the investment by E.M. Warburg Pincus Ventures, L.P. in Western
Publishing Group, Inc. (collectively, the "Precedent Investment Transactions").
33
Bear Stearns observed that the Precedent Investment Transactions involved
recapitalizations of three publicly traded corporations in which private equity
investors made meaningful equity investments in these corporations, that the
proceeds of these investments were used for the purpose of decreasing the
leverage or growing the business and that the existing shareholders of these
corporations continued to have equity stakes in them. Bear Stearns further
observed that the private equity investors obtained certain rights in
connection with the investments, including gaining control of the board of
directors of the relevant publicly traded corporation.
Bear Stearns noted that none of the Precedent Investment Transactions were
identical to the Tender Offer and Preferred Stock Purchase and that,
accordingly, any analysis of the Precedent Investment Transactions necessarily
involved complex considerations and judgments concerning differences in
transaction structures, financial and operating characteristics of the issuing
corporation and other factors that would necessarily affect the terms of the
Tender Offer and Preferred Stock Purchase versus the terms of the Precedent
Investment Transactions. Bear Stearns considered such differences to be
sufficiently numerous and significant to make the results of the Precedent
Investment Transactions of limited utility in reaching the conclusions set
forth in its opinion. Notwithstanding the numerous and significant differences
between the Tender Offer and Preferred Stock Purchase and the Precedent
Investment Transactions, this analysis provided some of the background for
evaluating certain of the structural, corporate governance and financial
aspects of such investment transactions and was believed to be useful in
evaluating some of their qualitative aspects.
Other Considerations
The preparation of a fairness opinion is a complex process that involves
various judgments and determinations as to the most appropriate and relevant
methods of financial and valuation analysis and the application of those
methods to the particular circumstances. The opinion is, therefore, not
necessarily susceptible to partial analysis or summary description. Bear
Stearns believes that its analysis must be considered as a whole and that
selecting portions of its analyses and the factors considered, without
considering all of the analyses and factors, would create a misleading and
incomplete view of the processes underlying its opinion. Bear Stearns did not
form any opinions as to whether any individual analysis or factor, whether
positive or negative, considered in isolation, supported or failed to support
its opinion. In arriving at its opinion, Bear Stearns did not assign any
particular weight to any analysis or factor considered, but rather made
qualitative judgments based upon its experience in providing such opinions and
on then-existing economic, monetary, market and other conditions as to the
significance of each analysis and factor. In performing its analyses, Bear
Stearns, at Katy's direction and with Katy's consent, made numerous assumptions
with respect to industry performance, general business conditions and other
matters, many of which are beyond the control of Bear Stearns, Katy and
Kohlberg. Any assumed estimates implicitly contained in Bear Stearns' opinion
or relied upon by Bear Stearns in rendering its opinion do not necessarily
reflect actual values or predict future results or values. Any estimates
relating to the value of a business or securities do not purport to be
appraisals or to necessarily reflect the prices at which companies or
securities may actually be sold.
Bear Stearns was retained by Katy based upon its qualifications, experience
and expertise. Bear Stearns is an internationally recognized investment banking
firm that regularly engages in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for estates, corporate and other purposes. In
the ordinary course of business, Bear Stearns may actively trade the equity
and/or debt securities of Katy for its own account and the account of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
Pursuant to an engagement letter, Katy agreed to pay to Bear Stearns a total
fee of $900,000 payable to Bear Stearns upon its rendering of its fairness
opinion to Katy's Board of Directors. In addition, Katy agreed to reimburse
Bear Stearns for all reasonable out-of-pocket expenses incurred by Bear Stearns
in connection with the Tender Offer and Preferred Stock Purchase including the
reasonable fees of and disbursements to its legal counsel. Katy has also agreed
to indemnify Bear Stearns against specific liabilities in connection with its
engagement, including liabilities under the federal securities laws.
34
Information about Purchaser and Kohlberg
Purchaser is a Delaware limited liability company formed by Kohlberg & Co.,
L.L.C. for the purpose of making the proposed Preferred Stock Purchase and
Tender Offer. As of the consummation of the Tender Offer and the Preferred
Stock Purchase, a majority of the outstanding membership interests of Purchaser
will be beneficially owned in the aggregate by Kohlberg Investors IV, L.P.,
Kohlberg TE Investors IV, L.P., Kohlberg Offshore Investors, IV, L.P. and
Kohlberg Partners IV, L.P. (collectively referred to as the "Kohlberg Fund
IV"). Kohlberg Fund IV has committed to fund Purchaser with $60 million, to
enable it to complete the Preferred Stock Purchase and Tender Offer. Kohlberg
is a private merchant banking firm with offices in New York and California that
manages a pool of capital of more than $1.5 billion. Kohlberg has substantial
experience in providing companies in which its affiliates invest with financial
and managerial advisory services aimed at building value and improving
operational, marketing and financial performance.
PROPOSAL 2--TO AUTHORIZE 600,000 SHARES OF CONVERTIBLE PREFERRED STOCK
General
On March 29, 2001, the Board of Directors approved an amendment to Katy's
Restated Certificate of Incorporation, subject to the stockholder's
authorization and adoption, to authorize 600,000 shares of convertible
preferred stock. The terms of the convertible preferred stock are more fully
described under "Terms of the Convertible Preferred Stock" on page of the
Proxy Statement. The full text of the amendment is included as Annex D to this
Proxy Statement.
No shares of preferred stock are currently authorized or outstanding. Katy
must authorize the convertible preferred stock in order to create the
convertible preferred stock and to consummate the Preferred Stock Purchase. We
are asking Katy shareholders to authorize 600,000 shares of convertible
preferred stock at this time (rather than just 400,000), in order to afford
flexibility in the event that Katy needed to obtain additional financing
through the sale of additional convertible preferred stock. Katy is not
contemplating additional convertible preferred stock financing at this time.
Required Vote
Under Delaware law, an amendment to Katy's Restated Certificate of
Incorporation requires the affirmative vote of the holders of a majority of
Katy's outstanding stock entitled to vote at the Annual Meeting. Approval of
this proposal is contingent on stockholders approving Proposal 1 (the Preferred
Stock Purchase) and Proposal 3 (establishing a classified Board of Directors).
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MATTERS SET FORTH IN
PROPOSAL 2 AND BELIEVES THAT THEY ARE ADVISABLE, FAIR TO AND IN THE BEST
INTERESTS OF KATY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF PROPOSAL 2.
PROPOSAL 3--ESTABLISHING A CLASSIFIED BOARD OF DIRECTORS
The Board of Directors has adopted a resolution proposing an amendment to
Katy's Restated Certificate of Incorporation classifying the Board of Directors
into two classes with staggered terms (the "Classified Board Amendment"). At
present, Katy's Board of Directors consists of a single class of nine
directors, all of whom are elected at each annual meeting of stockholders. The
Classified Board Amendment would classify the Board of Directors into two
separate classes as nearly equal in number as possible, with one class being
elected each year to serve a staggered two-year term.
35
Members in each class would be elected at the May 23, 2001 annual meeting.
Directors initially elected in Class I (C. Michael Jacobi, Robert M. Baratta,
Daniel B. Carroll and Wallace E. Carroll, Jr.) would serve until the annual
meeting of stockholders in 2002. Directors initially elected in Class II
(Christopher Anderson, William F. Andrews, Samuel P. Frieder, James A. Kohlberg
and Christopher Lacovara) would serve until the annual meeting of stockholders
in 2003. Beginning with the election of directors to be held at the year 2002
annual meeting, each class of directors would be elected for a two-year term.
To preserve the classified board structure, the proposed amendment to
establish a classified Board also provides that a director elected by the Board
of Directors to fill a vacancy holds office until the next election of the
class for which such director has been chosen, and until that director's
successor has been elected and qualified or until his or her earlier
resignation, removal and death.
Delaware law provides that, if a corporation has a classified board, unless
the corporation's certificate of incorporation specifically provides otherwise,
the directors may only be removed by the stockholders for cause. Proposal 3
does not provide for removal of directors other than for cause. Therefore, if
Proposal 3 is adopted, stockholders can remove directors of Katy for cause, but
not in other circumstances.
The approval of the Classified Board Amendment by Katy's stockholders is a
condition to Purchaser's obligations under the Preferred Stock Purchase and
Tender Offer. Unless a director is removed or resigns, two annual elections are
needed to replace all of the directors on the classified Board. The Classified
Board Amendment may, therefore, discourage an individual or entity other than
Purchaser from acquiring a significant position in Katy's stock with the
intention of obtaining immediate control of the Board of Directors.
The Classified Board Amendment is intended to assure Purchaser that its five
nominees will, if the transactions close, constitute a majority of the Board
for at least the next two years. It could also:
--encourage persons seeking to acquire control of Katy to initiate the
acquisition through arm's-length negotiations with Katy's management and
Board of Directors;
--discourage a third party from making a tender offer (or otherwise
attempting to obtain control of Katy), even though such an attempt might
benefit Katy and its stockholders;
--discourage accumulations of large blocks of Katy's stock and fluctuations
in the market price of Katy's stock caused by accumulations (so that
stockholders lose opportunities to sell their shares at temporarily
higher prices);
--entrench incumbent management by discouraging a proxy contest, a holder
of a substantial block of Katy's outstanding shares (other than
Purchaser) assuming control of Katy, or the removal of incumbent
directors or the change of control of the Board of Directors; and
--reduce the possibility that a third party could effect a sudden or
surprise change in control of the Board of Directors without the support
of the then incumbent Board of Directors.
At the same time, the Classified Board Amendment would ensure that the Board
of Directors and management, if confronted by a surprise proposal from a third
party who had acquired a block of Katy's stock, would have time to review the
proposal and appropriate alternatives to the proposal and possibly to attempt
to negotiate a better transaction.
Moreover, the Classified Board Amendment is a condition to Purchaser
completing the Preferred Stock Purchase and Tender Offer, and is an essential
part of the transactions with Kohlberg, which the Board of Directors has
determined are fair to and in the best interests of Katy and its stockholders.
In addition, one of the benefits to Katy and its stockholders the Board of
Directors expects from the Kohlberg transactions is access to Kohlberg's
managerial experience and talents, and the Classified Board Amendment should
help foster that access.
The complete text of the proposed amendment to Keystone's Restated
Certificate of Incorporation, which includes the Classified Board Amendment, is
attached as Annex D. You should read Annex D in its entirety.
36
Required Vote
Under Delaware law, an amendment to the Restated Certificate of
Incorporation requires the affirmative vote of the holders of a majority of
Katy's outstanding stock entitled to vote at the Annual Meeting. Approval of
this proposal is contingent on the stockholders approving Proposal 1 (the
Preferred Stock Purchase) and Proposal 2 (the authorization of the convertible
preferred stock).
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MATTERS SET FORTH IN
PROPOSAL 3 AND BELIEVES THAT THEY ARE ADVISABLE, FAIR TO AND IN THE BEST
INTERESTS OF KATY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF PROPOSAL 3.
PROPOSAL 4--ELECTION OF DIRECTORS
Nominees
Katy's business is managed under the direction of its Board of Directors.
There are currently nine directors. Stockholders will elect nine directors at
the Annual Meeting to serve for a one year term ending at the time of the 2002
annual meeting or, if stockholders adopt Proposals 1, 2 and 3, for the
staggered terms specified below.
If stockholders approve Proposal 1, Proposal 2 and Proposal 3, the persons
named in the accompanying proxy intend to vote the shares represented by the
proxy for the classification of the nine nominees identified below into two
classes and their election to serve as Katy directors for the terms set forth
below until their successors are elected and qualified.
Nominees for Election Whose Terms Will Expire 2002 (Class I):
C. Michael Jacobi
Robert M. Baratta
Daniel B. Carroll
Wallace E. Carroll, Jr.
Nominees for Election Whose Terms Will Expire 2003 (Class II):
Christopher Anderson
William F. Andrews
Samuel P. Frieder
James A. Kohlberg
Christopher Lacovara
If stockholders defeat Proposal 1, Proposal 2 or Proposal 3, the persons
named in the accompanying proxy intend to vote in favor of the current
directors of Katy to serve for a term of one year and until their successors
are elected and qualified. Accordingly, a vote against Proposal 1, Proposal 2
or Proposal 3 should be considered a vote against the above nominees and in
favor of the current directors of Katy. The current directors of Katy are:
William F. Andrews, Robert M. Baratta, Amelia M. Carroll, Daniel B. Carroll,
Wallace E. Carroll, Jr., Arthur R. Miller, Charles W. Sahlman, Jacob Saliba and
Glenn W. Turcotte.
If a nominee who has expressed an intention to serve if elected fails to
stand for election, the persons named in the proxy intend to vote for a
substitute nominee designated by the Board of Directors. For information
concerning the nominees for director and the current directors, see
"Information Concerning Directors and Executive Officers," "Security Ownership
of Management" and "Security Ownership of Certain Beneficial Owners."
Nominations are made in order to provide that directors are divided into two
classes, as nearly equal in number as possible.
37
As described above (see "Corporate Governance" on page of the Proxy
Statement), under the Purchase Agreement Purchaser has the right to nominate
five directors for election at the Annual Meeting, subject to their election by
the holders of common stock present in person or by proxy and voting at the
Annual Meeting. Christopher Anderson, William F. Andrews, Samuel P. Frieder,
James A. Kohlberg and Christopher Lacovara are the Purchaser's nominees. In
addition, Purchaser has proposed C. Michael Jacobi, the prospective Chief
Executive Officer if the transactions with Kohlberg are completed, to serve as
director as well. It is a condition of Purchaser's obligations under the
Preferred Stock Purchase and Tender Offer that stockholders elect the
Purchaser's nominees at the Annual Meeting.
Christopher Anderson, Samuel P. Frieder, James A. Kohlberg and Christopher
Lacovara, as well as C. Michael Jacobi, have indicated that they will not stand
for election if stockholders defeat any of Proposal 1, Proposal 2 or Proposal
3. If stockholders defeat Proposal 1, Proposal 2 or Proposal 3 the persons
named in the proxy intend to vote for the current directors.
If stockholders approve Proposals 1, 2 and 3, and the Kohlberg nominees and
Mr. Jacobi are elected to the Board of Directors in accordance with this
Proposal 4, but the Preferred Stock Purchase and Tender Offer do not close in
accordance with the terms of the Purchase Agreement, the Kohlberg nominees and
Mr. Jacobi have indicated that they will immediately resign from the Board of
Directors. The remaining directors are expected to fill the vacancies from the
other members of the current Board of Directors.
It is anticipated that Mr. Jacobi will become the Chief Executive Officer of
Katy effective upon closing. While no employment contract has been entered into
with Mr. Jacobi, there is a written understanding between Purchaser and Mr.
Jacobi that his annual base salary would be $500,000 with an annual bonus of up
to $200,000. In addition, Mr. Jacobi would be entitled to severance benefits
providing for continuing salary payments for (i) a period of one year in the
event of an involuntary termination other than for cause or (ii) for a period
of two years in the event of an involuntary termination as a result of or
within six months following a change in control (which is defined as (i) a sale
of 100% of the Company's outstanding capital stock, (ii) a sale of all or
substantially all of Katy's operating assets, or (iii) a transaction or
transactions in which any third party acquires a stock ownership greater than
that held by Purchaser and in which persons nominated by Purchaser cease to
constitute a majority of Katy's Board). As Chief Executive Officer, Mr Jacobi
would also be granted options to purchase 650,000 shares of Katy's common stock
which would have an exercise price of $8.00. The options would vest ratably
over three years, subject to the achievement of annual performance goals. All
options would be subject to accelerated vesting in the event of a sale of Katy
or a change in control (as defined above). Mr. Jacobi would also be paid a
bonus of $50,000 on commencement of employment. Purchaser intends to submit to
Katy's Board for approval the employment of Mr. Jacobi, commencing on the
closing of the transactions with Kohlberg, in accordance with these terms.
Purchaser has conditioned its understanding with Mr. Jacobi upon approval by
Katy's Board following approval of Proposals 1, 2 and 3.
Required Vote
Directors are elected by the affirmative vote of a plurality of the votes
cast at the Annual Meeting.
Recommendation of The Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MATTERS SET FORTH IN
PROPOSAL 4 AND BELIEVES THAT THEY ARE FAIR TO AND IN THE BEST INTEREST OF KATY
AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF PROPOSAL 4.
38
Information Concerning Directors and Executive Officers
The following table shows information with respect to nominees for director,
current directors, and executive officers of Katy:
Nominees
The following table shows information about the nominees to Katy's Board of
Directors who are not currently Katy directors. Such persons, all of whom have
been proposed by Kohlberg, are the Board's nominees subject to stockholders
first approving Proposal 1, Proposal 2 and Proposal 3. Kohlberg also proposed
Mr. Andrews, a current Katy director. Mr. Andrews is a nominee to the Board
irrespective of whether stockholders approve Proposal 1, Proposal 2 and
Proposal 3. All the Kohlberg nominees have been nominated as Class II
directors. In addition, Robert M. Baratta, Daniel B. Carroll and Wallace E.
Carroll, Jr., each of whom are current directors, are also nominees to the
Board irrespective of whether stockholders approve Proposal 1, Proposal 2 and
Proposal 3. If stockholders do not approve Proposal 1, Proposal 2 and Proposal
3, the Board's nominees are the current Katy directors, information on whom is
set out below under "Current Directors", and not the following nominees.
Principal Occupation and
Business Experience During the
Name Age Past Five Years Other Directorships
---- --- ------------------------------ -------------------
Christopher Anderson.... 26 1998 to present: Associate at
Kohlberg
1997 to 1998: Financial Analyst
at Warburg Dillon Read L.L.C.
Samuel P. Frieder....... 36 1989 to present: Principal of Color Spot Nurseries Inc.
Kohlberg Holley Performance Products
Inc.
C. Michael Jacobi....... 57 1999 to present: Consultant Corrections Corporation of
(proposed President and 1993 to 1999: Chief Executive America Webster Financial
Chief Executive Officer Officer, President, and a Corporation
upon closing of the director of Timex Corporation,
Preferred Stock Purchase a leading worldwide
and Tender Offer) manufacturer and marketer of
watches
1999 to 2000: Chairman of Timex
Watches Limited (India), a
publicly held company
headquartered in New Delhi,
India
1999 to 2000: Chairman and
Chief Executive Officer of
Beepwear Paging Products, LLC,
a company jointly owned by
Timex Corporation and
Motorola, Inc.
1993 to 1999: Chairman of
Callanen International, a
company engaged in the fashion
watch business
James A. Kohlberg....... 43 1987 to present: Co-Founder and Color Spot Nurseries Inc.
Managing Principal of Kohlberg Holley Performance Products
Inc.
Christopher Lacovara.... 36 1988 to present: Principal of Holley Performance Products
Kohlberg Inc. Northwestern Steel and
Wire Company
39
Current Directors
The following table shows information about the current Katy directors.
William F. Andrews, Robert M. Baratta, Daniel B. Carroll and Wallace E.
Carroll, Jr. are nominees to the Board irrespective of whether Proposal 1,
Proposal 2 and Proposal 3 are approved. Amelia M. Carroll, Arthur R. Miller,
Charles W. Sahlman, Jacob Saliba and Glenn W. Turcotte are nominees to the
Board only if Proposal 1, Proposal 2 or Proposal 3 have not been approved.
Principal Occupation Period
and Business Experience of Service
Name Age During the Past Five Years Other Directorships as Katy Director
---- --- -------------------------- ------------------- ----------------
William F. Andrews...... 69 2000 to Present: Chairman of Johnson Controls Inc. 1991 to
Corrections Corp. of Navistar Northwestern present
America, a private sector Steel & Wire Company
provider of detention and Black Box Corporation
corrections services Corrections Corporation
1997 to present: Principal of of America
Kohlberg & Co. Holly Performance
1998 to present: Chairman of Products Inc.
Northwestern Steel & Wire
Company, a manufacturer of
steel rods and beams
1995 to present: Chairman of
Scovill Fasteners, a
manufacturer of apparel and
industrial fasteners
Robert M. Baratta....... 71 2001 (February) to present: 2001
President and Chief (February)
Executive Officer and to present
director of Katy
1999 to 2000 (June): Senior
Vice President of Katy
1995 to 1999: Executive Vice
President of Katy
1990 to present: President of
Katy- Seghers, Inc., a
holding
company for a subsidiary
engaged in waste-to-energy
operations
Amelia M. Carroll....... 58 1991 to present: Investor 1996 to
present
Daniel B. Carroll....... 65 1998 to present: Member and 1994 to
Manager of Newgrange LLC, a present
components supplier to the
global footwear industry
1994 to present: Partner of
Newgrange LP, a holding
company for Newgrange LLC, a
components supplier to the
global footwear industry
1985 to present: Vice
President of ATP
Manufacturing, LLC, a
manufacturer of molded poly-
urethane components
40
Principal Occupation Period
and Business Experience of Service
Name Age During the Past Five Years Other Directorships as Katy Director
---- --- -------------------------- ------------------- ----------------
Wallace E. Carroll, Jr... 63 1992 to present: Chairman of 1991 to
CRL, Inc., a diversified present
holding company
1987 to present: Investor
Arthur R. Miller......... 50 1998 to present: Executive 1988 to
Vice Pesident, Corporate present
Development, Secretary and
General Counsel of Katy
1988 to 1998: Partner with
Holleb & Coff, attorneys at
law
Charles W. Sahlman....... 74 1987 to present: President, 1972 to
Sahlman Holding Company, present
Inc., a holding company (43%
owned by Katy) for
subsidiaries engaged in
seafood harvesting
Jacob Saliba............. 87 1997 to present: Chairman of RCM Dresdner Global 1968 to
the Board of Katy Funds present
Glenn W. Turcotte........ 60 2000 to present: Senior Vice 1995 to
President present
1998 to 2000: Executive Vice
President and Chief
Operating Officer of Katy
1993 to 1998: Executive Vice
President of Katy; President
of Glit Division of Hallmark
Holdings Inc., a
manufacturer of nonwoven
floor maintenance pads and
specialty abrasive products,
a Katy subsidiary
41
Executive Officers
Principal Occupation and Business During the Past Five Years
Name Age Experience
---- --- ------------------------------------------------------------
Roger G. Engle.......... 54 2000 to Present: Chief Information Officer
1999 to present: Chairman, Contico International, LLC
1998 to present: Vice President of Katy
1996 to 1998: President of Woods Industries, Inc., a Katy
subsidiary that manufactures and distributes electric corded
products, supplies and electrical/electronic accessories,
Waldom Electronics, Inc., a Katy subsidiary that distributed
electrical and electronic goods which has been subsequently
merged into GC/Waldom Electronics, Inc. and GC Thorsen, Inc.,
a Katy subsidiary that distributed hand tools which has
subsequently changed its name to GC/Waldom Electronics, Inc.
1990 to 1996: President of Waldom Electronics, Inc. a Katy
subsidiary that distributed electrical and electronic goods
which has been subsequently merged into GC/Waldom
Electronics, Inc.
Larry D. Hudson......... 53 1998 to present: Vice President, Operations of Katy
1997 to 1998: President of Hamilton Precision Metals, Inc., a
Katy subsidiary that produces metal strip and foil products
1993 to 1997: President of Beehive, Inc., a former Katy
subsidiary, a manufacturer of specialized meat and food
separation equipment
Michael H. Kane......... 46 2000 to present: Vice President, Maintenance--Retail
1999 to present: President, Contico Consumer Products Division
1997 to 1999: Executive Vice President of Woods Industries,
Inc., a Katy subsidiary that manufacturers and distributes
electric corded products, supplies and electrical/electronic
accessories
Stephen P. Nicholson.... 48 1996 to present: Vice President, Finance and Chief Financial
Officer of Katy
1996: Treasurer and Chief Financial Officer of Katy
William J. Wagner....... 51 2000 to Present: Vice President, Maintenance-Commercial of
Katy and President, Continental Manufacturing, a Katy
subsidiary
1982 to 2000: President, Pinnacle Sales and Marketing, Inc., a
manufacturers' representative agency.
Wallace E. Carroll, Jr. and Amelia M. Carroll are husband and wife. Wallace
E. Carroll, Jr. and Daniel B. Carroll are first cousins. Except where noted, no
corporation or organization mentioned in the above table is a parent,
subsidiary or other affiliate of Katy.
Officers holds office until their successors are chosen and qualify.
Officers elected or appointed by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors.
42
PROPOSAL 5--RATIFICATION OF THE APPOINTMENT OF ARTHUR
ANDERSEN LLP AS THE INDEPENDENT AUDITORS OF KATY
The firm of Arthur Andersen LLP, independent accountants, audited Katy's
financial statements for the year ended December 31, 2000. The Board of
Directors has reappointed, and recommends to the stockholders the ratification
of the appointment of, Arthur Andersen LLP as Katy's independent auditors for
the year ending December 31, 2001. If you do not ratify the appointment, the
Board of Directors may reconsider its recommendation.
A representative of Arthur Andersen LLP is expected to be available at the
Annual Meeting to respond to appropriate questions and will be given the
opportunity to make a statement if he or she so desires.
Audit Fees
Arthur Andersen LLP has billed Katy aggregate fees of $217,500 for
professional services rendered for the audit of Katy's annual financial
statements for the fiscal year 2000 and the review of the financial statements
included in Katy's Forms 10-Q filed during fiscal year 2000. Katy expects to be
billed an additional $100,000 in connection with these services.
All Other Fees
Arthur Andersen LLP has billed Katy aggregate fees of $80,000 for all other
services rendered to it during fiscal year 2000. All of these fees related to
audits of employee benefit plans. The Audit Committee of the Board of Directors
considered whether the provision of the services other than the audit services
referred to above is compatible with maintaining the auditors' independence.
Required Vote
The affirmative vote of a majority of the votes cast at the Annual Meeting
is required to approve this Proposal 5.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS REAPPOINTED, AND RECOMMENDS A VOTE "FOR" THE
RATIFICATION OF ARTHUR ANDERSEN LLP AS KATY'S INDEPENDENT AUDITORS.
43
INFORMATION ABOUT KATY STOCK OWNERSHIP
Outstanding Shares
The shares of common stock are the only outstanding class of Katy voting
securities. As of March 19, 2001, there were 8,394,058 shares of Katy common
stock outstanding and 495,975 options to acquire shares of common stock
exercisable within the next 60 days.
Security Ownership of Certain Beneficial Owners
The following table and notes show, as of March 19, 2001, information on the
beneficial ownership of those persons or entities (including certain members of
the family of Wallace E. Carroll, former Chairman of Katy's board, since
deceased (the "Carroll Family")), and related persons and entities, who are
known to Katy to be the beneficial owners of more than 5% of the shares of
common stock. The notes below the table describe the nature of that beneficial
ownership. Unless otherwise indicated, the nature of beneficial ownership is
that of sole voting power and sole investment power. In calculating percentages
for a given person, shares for which such person has the right to acquire
beneficial ownership within 60 days (e.g. through exercising options) are
deemed to be outstanding.
Amount and Nature of Percent
Name and Address Of Beneficial Owner Beneficial Ownership Notes of Class
------------------------------------ -------------------- ------ --------
Wallace E. Carroll, Jr. and the WEC Jr. 3,126,767 (1)(2) 35.2%
Trusts...................................
c/o CRL, Inc.
6300 S. Syracuse Way, Suite 300
Englewood, CO 80111
Amelia M. Carroll and the WEC Jr. Trusts.. 3,152,767 (1)(3) 35.5%
c/o CRL, Inc.
6300 S. Syracuse Way, Suite 300
Englewood, CO 80111
Dimensional Fund Advisors, Inc. .......... 590,800 (4) 6.6%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
GAMCO Purchasers, Inc. ................... 1,243,200 (5) 14.0%
One Corporate Center
Rye, NY 10580-1434
Gabelli Funds, LLC........................ 502,700 (6) 5.7%
One Corporate Center
Rye, NY 10580-1434
--------
(1) Wallace E. Carroll, Jr., Denis H. Carroll, Barry J. Carroll and Lelia
Carroll are the four children of Wallace E. Carroll and Lelia H. Carroll.
Wallace E. Carroll, Jr. is a Katy director. Daniel B. Carroll, who is also
a Katy director, is the first cousin of each of the four children of
Wallace E. Carroll and Lelia H. Carroll. Amelia M. Carroll is a Katy
director and the spouse of Wallace E. Carroll, Jr. In February 1996,
members of the Carroll Family reorganized their jointly held family assets.
The reorganization resulted in, among other things, the individual
reallocation of shares they formerly held jointly. The amounts shown above
for Carroll Family members reflect the reorganization, and do not reflect
multiple counting of shares (except for Wallace E. Carroll, Jr. and Amelia
M. Carroll who are husband and wife).
(2) Wallace E. Carroll, Jr. directly holds 180,239 shares and options to
acquire 12,000 shares. He is a trustee of trusts for his and his
descendants' benefit (the "WEC Jr. Trusts") which collectively hold 805,215
shares. He and certain of the WEC Jr. Trusts own all the outstanding shares
of CRL, Inc. which holds
44
2,073,436 shares. He is also a trustee of the Wallace Foundation which
holds 32,910 shares. Wallace E. Carroll, Jr. also reports that he
beneficially owns 8,729 shares and options to acquire 10,000 shares
directly owned by his wife Amelia M. Carroll, and 4,238 shares held by a
"rabbi trust" for him and his wife in connection with the Katy Industries,
Inc. Directors' Deferred Compensation Plan.
(3) Amelia M. Carroll directly holds 8,729 shares and options to acquire
10,000 shares. She is a trustee of the WEC Jr. Trusts which collectively
own 805,215 shares, and the Wallace Foundation which holds 32,910 shares.
Wallace E. Carroll, Jr. and certain of the WEC Jr. Trusts own all the
outstanding shares of CRL, Inc. which holds 2,073,436 shares. Amelia M.
Carroll is also trustee of trusts for Lelia Carroll and her descendants'
benefit holding 26,000 shares in the aggregate. Amelia M. Carroll also
reports that she beneficially owns 180,239 shares and options to acquire
12,000 shares directly owned by her husband Wallace E. Carroll, Jr., and
4,238 shares held by a "rabbi trust" for her and her husband in connection
with the Katy Industries, Inc. Directors' Deferred Compensation Plan.
(4) Information obtained from Schedule 13G dated February 2, 2001 filed by
Dimensional Fund Advisors, Inc. for the calendar year 2000.
(5) Information obtained from Schedule 13D/A dated September 28, 2000 filed by
Gabelli Asset Management, Inc. ("GAMI"). According to that Schedule 13D/A,
GAMCO Purchasers, Inc. ("GAMCO") holds these shares as agent, and Mario
Gabelli, Gabelli Group Capital Partners, Inc. ("Gabelli Partners") and
GAMI are deemed to beneficially own these shares. Also according to that
Schedule 13D/A, GAMCO has the sole power to vote (or direct the vote) and
sole power to dispose (or to direct the disposition) of these shares
except that (i) it does not have authority to vote 1,000 of the shares,
and (ii) the power of Mario Gabelli, GAMI and Gabelli Partners is indirect
with respect to these shares.
(6) Information obtained from Schedule 13D/A dated September 28, 2000 filed by
GAMI. According to that Schedule 13D/A, Gabelli Funds, LLC ("Gabelli
Funds") holds these shares as agent, and Mario Gabelli, Gabelli Partners
and GAMI are deemed to beneficially own these shares. Also according to
that Schedule 13D/A, Gabelli Funds has the sole power to vote (or direct
the vote) and sole power to dispose (or to direct the disposition) of
these shares, except that (i) Gabelli Funds has sole dispositive and
voting power with respect to shares held by the Funds so long as the
aggregate voting interest of all joint filers does not exceed 25% of their
total voting interest in Katy and, in that event, each Fund's Proxy Voting
Committee is to vote that Fund's shares, (ii) under special circumstances,
each Fund's Proxy Voting Committee may take and exercise in its sole
discretion the entire voting power with respect to the shares held by that
Fund, and (iii) the power of Mario Gabelli, GAMI and Gabelli Partners is
indirect with respect to these shares.
45
Security Ownership Of Management
The following table shows, as of March 19, 2001, the number of shares of
common stock that directors and certain executive officers beneficially own,
and that directors and executive officers as a group own. Unless otherwise
indicated, the nature of beneficial ownership is that of sole voting power and
sole investment power. In calculating percentages, shares for which a person
has the right to acquire beneficial ownership within 60 days (e.g. through
exercising options) are deemed to be outstanding.
Amount and
Nature of Percent
Name Beneficial Ownership Notes of Class
---- -------------------- --------------- --------
William F. Andrews.............. 17,000 (1) *
Robert M. Baratta............... 53,275 (4)(5) *
Amelia M. Carroll............... 3,152,767 (1)(2) 35.5%
Daniel B. Carroll............... 19,000 (1) *
Wallace E. Carroll, Jr.......... 3,126,767 (1)(2) 35.2%
Michael H. Kane................. 4,560 (4)(5) *
Arthur R. Miller................ 95,480 (3) 1.1%
John R. Prann, Jr............... 190,023 (4)(5) 2.1%
Charles W. Sahlman.............. 23,850 (1)(5) *
Jacob Saliba.................... 24,592 (1)(5) *
Glenn W. Turcotte............... 84,920 (4)(5) *
Roger G. Engle.................. 23,082 (4)(5) *
Larry D. Hudson................. 16,120 (4)(5) *
Stephen P. Nicholson............ 40,314 (4)(5) *
William J. Wagner............... 0 (4) *
All directors and executive
officers of Katy as a group
(15 persons)................... 3,744,983 (1)(2)(3)(4)(5) 42.1%
--------
* Indicates 1% or less
(1) Includes, for each individual, currently exercisable nonqualified stock
options to acquire shares granted to each non-employee director under the
Katy Industries, Inc. Non-employee Director Stock Option Plan:
William F. Andrews................................................ 12,000
Amelia M. Carroll................................................. 10,000
Daniel B. Carroll................................................. 12,000
Wallace E. Carroll, Jr............................................ 12,000
Charles W. Sahlman................................................ 12,000
Jacob Saliba...................................................... 12,000
(2) Includes shares deemed beneficially owned by Wallace E. Carroll, Jr. and
Amelia M. Carroll in their capacity as trustees of certain trusts for the
benefit of members of the Wallace E. Carroll, Jr. family. (See notes (2)
and (3) under "Security Ownership of Certain Beneficial Owners.") Amounts
shown for Amelia M. Carroll and Wallace E. Carroll, Jr., reflect multiple
counting of shares where more than one of them is a trustee of a particular
trust and is needed to report beneficial ownership of shares that these
trusts hold.
(3) Arthur R. Miller holds 30,724 shares directly and options to acquire 47,000
shares exercisable within 60 days, and 17,756 shares held in a "rabbi
trust" in connection with the Katy Industries, Inc. Supplemental Retirement
and Deferral Plan. Arthur R. Miller is a trustee of trusts for the benefit
of Denis H. Carroll and his descendants holding 360,620 shares in the
aggregate. He disclaims beneficial ownership of the shares that the trusts
beneficially own. Effective March 19, 2001 he resigned from his position as
a director of CRL, Inc. and as a trustee of trusts for the benefit of
Wallace E. Carroll, Jr. and his descendants.
46
(4) Includes, for each individual, options to acquire the following number of
shares within 60 days:
John R. Prann, Jr................................................. 98,500
Glenn W. Turcotte................................................. 53,000
Robert M. Baratta................................................. 34,000
Roger G. Engle.................................................... 17,400
Larry D. Hudson................................................... 12,125
Michael H. Kane................................................... 3,875
Stephen P. Nicholson.............................................. 13,500
William J. Wagner................................................. 0
(5) Includes shares beneficially owned by each individual, which are held by a
"rabbi trust" in connection with either the Katy Industries, Inc.
Supplemental Retirement and Deferral Plan or the Directors' Deferred
Compensation Plan:
Robert M. Baratta................................................. 3,927
Michael H. Kane................................................... 85
John R. Prann..................................................... 31,589
Charles W. Sahlman................................................ 8,350
Jacob Saliba...................................................... 7,376
Glenn A. Turcotte................................................. 8,420
Roger G. Engle.................................................... 1,681
Larry D. Hudson................................................... 995
Stephen P. Nicholson.............................................. 8,594
Change Of Control
The transactions contemplated by the Purchase Agreement may result in a
change of control of Katy if Purchaser were later to exercise its right to
convert the convertible preferred stock to be obtained in the Preferred Stock
Purchase, because the shares of common stock issuable upon conversion of all of
the convertible preferred stock, together with the shares of common stock
bought by Purchaser in the Tender Offer, would represent a majority of the
outstanding common stock on a fully diluted basis (exclusive of director and
employee stock options). Moreover, Purchaser's designees, if elected, will
represent a majority of the Board of Directors.
Section 16(A) Beneficial Ownership Reporting Compliance
Under Section 16 of the Exchange Act, Katy's directors, executive officers
and persons beneficially owning more than 10% of the shares must file reports
of ownership and changes in ownership with the SEC, and copies of these reports
with the New York Stock Exchange and Katy. One such report, which was not filed
by its due date, was filed in April 2001. Lester I. Miller, a Katy director
during part of 2000, reported purchases of 30 shares of Katy common stock in
2000 as a result of reinvested dividends received from shares held in the
Directors' Deferred Compensation Plan. Besides this exception, and based solely
on reviewing copies of the Section 16 reports, Katy believes that, during its
fiscal year ended December 31, 2000, its directors, executive officers and
greater than 10% beneficial owners complied with their Section 16 filing
requirements.
47
EXECUTIVE COMPENSATION
Summary Of Cash And Certain Other Compensation
The following table shows, for the years ending December 31, 2000, 1999 and
1998, the cash compensation paid by Katy and its subsidiaries (and certain
other compensation paid or accrued for those years) to Katy's Chief Executive
Officer ("CEO"), the four other most highly compensated executive officers and
one other executive officer whose employment terminated during 2000 (the "Named
Executive Officers").
Restricted Securities
Name and Principal Other Annual Stock Underlying Other
Position Year Salary Bonus(3) Compensation (4) Awards Options Compensation(6)
------------------ ---- -------- -------- ---------------- ---------- ---------- ---------------
John R. Prann, Jr. ..... 2000 $525,000 $ -- $ -- $ -- -- $15,234
Former President, 1999 525,000 -- -- 162,000 36,000 51,411
Chief Executive 1998 450,000 337,500 -- -- -- 67,973
Officer, and Chief
Operating Officer(1)
Arthur R. Miller........ 2000 $360,000 $ -- $ -- $ -- -- $ 8,424
Executive Vice 1999 360,000 -- -- 108,000 20,000 35,497
President, Corporate 1998 325,000 195,000 -- -- -- 49,759
Development,
Secretary and
General Counsel
Glenn W. Turcotte....... 2000 $330,000 $ -- $ -- $ -- -- $ 9,742
Senior Vice 1999 360,000 -- -- 108,000 20,000 33,313
President(2) 1998 325,000 195,000 -- -- -- 53,607
Roger G. Engle.......... 2000 $285,000 $ -- $130,664 $ -- 30,000 $ 5,757
Chief Information 1999 285,000 -- -- 54,000 10,000 21,969
Officer and Vice 1998 245,000 110,250 67,428 -- -- 36,852
President
Michael H. Kane......... 2000 $250,000 $ -- $ -- $ -- 30,000 $ 4,368
Vice President, 1999 230,000 -- -- 8,100 3,000 40,532
Maintenance- 1998 183,462 28,731 -- -- -- 14,446
Retail
Stephen P. Nicholson.... 2000 $230,000 $ -- $ -- $ -- 15,000 $ 8,890
Vice President, 1999 230,000 -- -- 54,000 10,000 25,085
Finance and Chief 1998 200,000 105,000 -- -- -- 31,088
Financial Officer
--------
(1) Mr. Prann resigned as President and Chief Executive Officer of Katy
effective February 19, 2001. Effective February 19, 2001, Robert M. Baratta
became President and Chief Executive Officer of Katy.
(2) Mr. Turcotte retired as Chief Operating Officer and Executive Vice
President on June 30, 2000 and remains an employee to assist Katy in an
advisory capacity.
(3) Katy paid bonuses for 1998 to the Named Executive Officers (except Michael
H. Kane who was paid entirely in cash), 75% in cash and 25% in shares of
Katy common stock. The share portion of the bonuses was based on the
average stock price on February 19, 1999 ($17.1875). Under this
arrangement, the following shares were granted for 1998:
John R. Prann, Jr.......................................... 4,909 shares
Arthur R. Miller........................................... 2,836 shares
Glenn W. Turcotte.......................................... 2,836 shares
Roger G. Engle............................................. 1,603 shares
Stephen P. Nicholson....................................... 1,527 shares.
(4) Katy reimbursed Roger G. Engle for the expenses incurred during 2000 in
connection with his move to Chicago, Illinois and, during 1998, in
connection with his move to Carmel, Indiana.
48
(5) The number and value of the Named Executive Officers' aggregated restricted
stock holdings at the end of the fiscal year, priced at Katy's closing
stock price at December 31, 2000, were:
John Prann..................... 7,500 non-vested shares valued at $45,000
Arthur Miller.................. 5,000 non-vested shares valued at $30,000
Glenn Turcotte................. 5,000 non-vested shares valued at $30,000
Roger Engle.................... 2,500 non-vested shares valued at $15,000
Michael H. Kane................ 375 non-vested shares valued at $2,250
Stephen Nicholson.............. 2,500 non-vested shares valued at $15,000
The values of awards of restricted stock granted during 1999 were
calculated at Katy's closing stock price on the dates of grant as set forth
in the following table:
Number of Katy's Stock Price
Name Shares Granted on the Grant Date Grant Date
---- -------------- ------------------ ----------
John R. Prann, Jr. ............. 6,000 $17.125 01/08/99
6,000 9.875 12/10/99
Arthur R. Miller................ 4,000 $17.125 01/08/99
4,000 9.875 12/10/99
Glenn W. Turcotte............... 4,000 $17.125 01/08/99
4,000 9.875 12/10/99
Roger G. Engle.................. 2,000 $17.125 01/08/99
2,000 9.875 12/10/99
Michael H. Kane................. 300 $17.125 01/08/99
300 9.875 12/10/99
Stephen P. Nicholson............ 2,000 $17.125 01/08/99
2,000 9.875 12/10/99
Awards of restricted stock that were granted on January 8, 1999 generally
vest in 25% increments on January 8 of 1999, 2000, 2001 and 2002. Awards of
restricted stock that were granted on December 10, 1999 generally vest in
25% increments on January 3 in each of 2000, 2001, 2002 and 2003. Dividends
will be paid on the restricted stock granted during 1999.
(6) The 2000, 1999 and 1998 figures include employer contributions to the Named
Executive Officers' 401(k) retirement accounts, and non-cash compensation
consisting of personal use of corporate automobiles and group term life
insurance. The 1999 and 1998 figures also include the dollar value set
aside for each Named Executive Officer under the Katy Industries, Inc.
Supplemental Retirement and Deferred Plan.
The 2000 figures include the following amounts:
Group
Auto Term Life 401(k)
Allowance Insurance Match
--------- --------- ------
John R. Prann, Jr. ................................ $10,091 $2,518 $2,625
Arthur R. Miller................................... 4,074 1,725 2,625
Glenn W. Turcotte.................................. 2,961 4,335 2,446
Roger G. Engle..................................... 5,225 532 --
Michael H. Kane.................................... 3,608 60 700
Stephen P. Nicholson............................... 5,561 704 2,625
49
Option Grant Table
The following table shows information on grants of stock options during 2000
to the Named Executive Officers.
Potential
Realized Value
at Assumed
Number of % of Total Annual Rates
Securities Options Stock of Price
Underlying Granted to Appreciation(2)
Options Employees Exercise Or Expiration ---------------
Name Granted(1) During 2000 Base Price Date 5% 10%
---- ---------- ----------- ----------- ---------- ------- --------
John R. Prann........... 0 0.0%
Arthur R. Miller........ 0 0.0%
Glenn W. Turcotte....... 0 0.0%
Roger G. Engle.......... 30,000 20.3% 10.250 09/12/10 40,407 84,956
Michael H. Kane......... 30,000 20.3% 10.250 09/12/10 40,407 84,956
Stephen P. Nicholson.... 15,000 10.1% 10.250 09/12/10 20,204 42,478
--------
(1) Options that were granted generally vest 25% per year beginning on the
first anniversary of the grant date. The options in this table expire ten
years after grant.
(2) These columns show the hypothetical value of the options granted at the end
of the option term if the price of the Katy common stock were to appreciate
annually by 5% and 10%, respectively, based on the grant date value of the
Katy common stock.
Aggregated Option/SAR Exercises and Fiscal Year-end Option/SAR Value Table
The following table shows the value of in-the-money options and stock
appreciation rights ("SARs") at December 31, 2000. No options or SARs were
exercised in 2000.
Aggregate Fiscal Year-End Option/SAR Value
---------------------------------------------------
Number of Securities
Underlying Unexercised Value of In-the-Money
Options/SARs at Year End Options/SARs at Year End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
John R. Prann, Jr. ......... 94,000 188,022 $ 0 $ 0
Arthur R. Miller............ 44,500 95,511 0 0
Glenn W. Turcotte........... 50,500 95,511 0 0
Roger G. Engle.............. 16,150 38,050 0 0
Michael H. Kane............. 3,500 32,250 0 0
Stephen P. Nicholson........ 12,250 45,504 0 0
Termination of Employment, Change of Control and Other Arrangements
Compensation and Benefits Assurance Program
On January 17, 1996, the Board of Directors adopted and approved a
compensation and benefits assurance program (the "Program") for Katy's key
officers to ensure that Katy retains personnel having particular experience
with and knowledge of Katy's business and affairs. As of December 31, 2000,
each of the Named Executive Officers, except Glenn W. Turcotte, were
participants in this program. The program provides for certain severance
benefits following: (a) an involuntary termination without "cause" (as defined
under the Program) in the two years after a "Change in Control" (as defined
below) of Katy; or (b) a deemed constructive termination in the two years after
a "Change in Control" of Katy. Katy believes that the transactions contemplated
by the Purchase Agreement will not constitute a "Change of Control" under the
Program unless and until the Purchaser exercises its right to convert the
convertible preferred stock obtained in the Preferred Stock Purchase, or the
occurrence of certain other events which include the acquisition by the
Purchaser of additional shares of Katy common stock.
50
Severance benefits include: (i) either three years of base salary for John
R. Prann Jr. and Arthur R. Miller or two years of base salary for Roger G.
Engle, Michael H. Kane, and Stephen P. Nicholson (increased to two and two-
thirds years' base salary for Mr. Nicholson under certain circumstances); (ii)
a lump sum payment of annual bonuses; (iii) continuation of health care
benefits; (iv) matching contributions under Katy's 401(k) savings plan (three
years for Messrs. Prann and Miller; two years for Messrs. Engle, Kane, and
Nicholson (increased to two and two-thirds years for Mr. Nicholson under
certain circumstances)); (v) advancement of legal fees incurred in enforcing
rights under the Program; (vi) out-placement assistance; and (vii) a "gross-up"
payment for any excise tax payments due by the officer as a result of receiving
these severance benefits. In the event of a "Change of Control," Katy is
required to establish and fund a "rabbi trust" in an amount equal to the sum of
the above severance benefits (not including health care benefit costs and
outplacement assistance).
A "Change in Control" is generally defined as: (i) any person (except
persons in control on the effective date) becoming the beneficial owner of Katy
securities with at least 30% of the combined voting power of Katy's then
outstanding shares; (ii) during any period of two consecutive years,
individuals who, at the beginning of that period constitute the board
(including any new director, whose election by Katy's stockholders was approved
by a vote of at least two-thirds ( 2/3) of the directors then still in office
at the beginning of the period or whose election or nomination for election was
so approved), ceasing to constitute a majority of the board; or (iii) Katy's
stockholders approving a plan of liquidation, an agreement to dispose of
substantially all Katy's assets, or a merger, consolidation, or reorganization
of Katy, other than a merger, consolidation, or reorganization that would
result in the voting securities of Katy outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of
the combined voting power of the voting securities of Katy (or such surviving
entity) outstanding immediately after such merger, consolidation, or
reorganization.
In connection with the Preferred Stock Purchase and Tender Offer, Katy
currently intends to enter into severance agreements with each of Arthur R.
Miller, Roger G. Engle, Michael H. Kane and Stephen P. Nicholson. These
severance agreements will generally provide for the substantially similar
severance benefits as currently provided under the Program in the event of such
individual's termination of employment except for the benefits and protections
particularly suited to a "Change of Control," which include the funding of the
severance benefits, the "gross up" payment for any excise taxes and the
specified amount of legal fees. These severance agreements will supersede the
rights of such individuals under the Program.
Other Arrangements
On December 15, 2000, as part of Katy's efforts to retain the services of
certain executives following a "Change of Control" (as defined under the Katy
Industries, Inc. 1997 Long Term Incentive Plan), Katy agreed to pay Roger G.
Engle and Michael H. Kane a bonus in connection with a "Change of Control"
which occurs on or prior to June 30, 2002 in the event that the pre-tax
proceeds received by such individual in connection with such "Change of
Control" from the exercise of all "in the money" options held by such
individual at the time of the "Change of Control" and the disposition of shares
of common stock issued pursuant to such exercise (or payment of the net value
thereof in lieu of such exercise and disposition) does not equal or exceed
seventy-five percent (75%) of the individual's then current base salary. The
bonus would be equal to the difference between proceeds received by such
individual and seventy-five (75%) percent of the individual's base salary.
Purchaser has indicated that it may give these individuals the choice either to
receive the payments specified above in exchange for the forfeiture of such
individual's options, or to retain such options subject to the terms and
conditions of the Katy stock incentive plan under which such options were
granted.
In connection with his resignation as President and Chief Executive Officer
as of February 19, 2001, Katy entered into a separation agreement with John R.
Prann, Jr. under which he will receive a payment of $525,000 and, if Katy
enters into a definitive agreement within 180 days of March 2, 2001 that would
result in a "Change of Control" of Katy (as defined in the separation
agreement) and such "Change of Control" occurs within 270 days of March 2,
2001, Katy will pay Mr. Prann an additional $1,050,000. In addition, Katy
agreed to pay Mr. Prann's account balance (excluding amounts deferred under
Katy's Prior Service Retirement Plan
51
(Frozen Plan)) under the Supplemental Plan (as described above), calculated
based on the price of Katy's common stock at the close of business on February
16, 2001, in a single lump sum in cash on January 2, 2002. Also, subject to Mr.
Prann cooperating with and assisting Katy in the transition of his duties and
responsibilities through April 15, 2001, the transfer and forfeiture
restrictions on the restricted stock held by Mr. Prann shall lapse on April 16,
2001. Notwithstanding Katy's belief that the transactions contemplated by the
Purchase Agreement will not constitute a "Change of Control" under the
Separation Agreement absent the occurrence of certain events (as described
under the Program), Purchaser has indicated that it may seek additional
concessions from Mr. Prann for which it would be willing to pay Mr. Prann the
amount under the separation agreement which is contingent upon the signing and
consummation of a "Change of Control."
In connection with his resignation as Chief Operating Officer and Executive
Vice President as of June 30, 2000, Katy entered into an executive retirement
agreement with Glenn W. Turcotte under which he will provide certain advisory
services to Katy as a Senior Vice President and receive, in accordance with
Katy's ordinary payroll policies, $300,000 for the period from July 1, 2000
through December 31, 2000, $100,000 per year for the period from January 1,
2001 through December 31, 2003 and $50,000 per year for the period from January
1, 2004 through December 31, 2005. In addition, Mr. Turcotte agreed to be bound
by customary confidentiality, non-competition and works for hire provisions.
Mr. Turcotte also relinquished his rights under the Program. The executive
retirement agreement generally expires on December 31, 2005.
Directors' Compensation
For 2000, directors who were not employed by Katy or its subsidiaries
received: (i) an annual retainer of $9,000 ($15,000 for the Chairman of the
Board); (ii) options to acquire 2,000 shares (see below); (iii) a stock grant
of 500 shares for service on the Board of Directors; and (iv) up to $2,000 for
attending each meeting of the Board or a Board committee.
For 2001, it is expected that directors will receive the same compensation.
Katy does not pay separate compensation to directors who are officers.
Under the Katy Industries, Inc. Non-Employee Director Stock Option Plan (the
"Directors' Stock Option Plan"), each non-employee director receives on the
date immediately following the annual meeting an annual grant of options to
acquire 2,000 shares of Katy common stock. The exercise price is the fair
market value on the date of grant. The director may exercise these options at
any time during the ten years from the date of grant.
Directors may also participate in the Directors' Deferred Compensation Plan
which became effective June 1, 1995 (the "Directors' Deferred Compensation
Plan"). Under this Plan a director may defer directors' fees, retainers and
other compensation paid for services as a director until the later of the
director's attainment of age 62 or ceasing to be a director. Each director has
30 days before the beginning of a Plan Year (as defined in the Directors'
Deferred Compensation Plan) in which to elect to participate in the Directors'
Deferred Compensation Plan. Directors may invest these amounts in one or more
investment alternatives offered by Katy. Directors may elect to receive
distributions of deferred amounts in a lump sum or five annual installments.
Compensation Committee's Report on Executive Compensation
The Compensation Committee of the Board of Directors (the "Compensation
Committee") presents the following executive compensation report for fiscal
2000:
The Compensation Committee consists of Charles W. Sahlman (Chairman), Jacob
Saliba and Daniel B. Carroll. It makes decisions on executive officer
compensation and reports its decisions to the board. It also seeks the board's
approval on the CEO's compensation. The following summarizes the compensation
practice and philosophy that was in effect at Katy for the fiscal year ended
December 31, 2000. Modifications to such philosophy have and may continue to be
made.
52
Compensation Philosophy
Katy's compensation program aims to align executive officers' economic
interests with those of stockholders (including Katy's financial objectives and
market performance). The Compensation Committee seeks to adjust compensation
levels (through competitive base salaries and bonus payments) based on
individual and Katy performance. It reviews the executive compensation program
annually in view of Katy's annual strategic and financial objectives and
performance.
Compensation Program Components
Annual compensation for Katy's CEO and executive officers (including the
Named Executive Officers) consists of two cash compensation components: base
salary and annual cash bonuses. A third component, stock options, is used for
executive retention, to attract new key people, and to align the long-term
interests of eligible executives with those of stockholders.
Salary and bonus levels reflect job responsibility, seniority, Compensation
Committee judgments of individual effort and performance, and Katy's financial
and market performance (in light of the competitive environment in which Katy
operates). Annual cash compensation is also influenced by comparable companies'
compensation practices so that Katy remains reasonably competitive in the
market. While competitive pay practices are important, the Compensation
Committee believes that the most important considerations are individual merit
and Katy's financial and market performance. In considering Katy's financial
and market performance, the Compensation Committee reviews, among other things,
net income, cash flow, working capital and revenues and share price performance
relative to comparable companies and historical performance.
The Annual Bonus Plan, effective as of January 1, 1995, compensates
employees based on target bonus opportunities established by the Compensation
Committee stated as a percentage of annual base salary for recommended key
employees each year (including the CEO and the Named Executive Officers). An
employee achieves the target bonus opportunity if [he or she/his or her
division meets] 100% of pre-established performance goals. He or she can earn a
higher or lower bonus if performance exceeds or falls short of targeted levels.
The performance goals for 2000 were based on two financial measures for each
division and for corporate: operating income and working capital management.
For 2000, the performance goals set by the Compensation Committee were not
satisfied and, therefore, no bonuses were earned.
The Supplemental Retirement and Deferral Plan (the "Supplemental Deferral
Plan"), among other things, allows participants to voluntarily defer up to 100%
of their annual bonus and up to 50% of their base salary until retirement or
termination of his or her employment. The Supplemental Deferral Plan allows
Katy to make a profit sharing allocation to participants' accounts of, in
aggregate, 2% of adjusted pre-tax income, as determined by the Compensation
Committee. For 2000, Katy did not make an allocation under the Supplemental
Deferral Plan. Katy invests voluntary deferrals and profit sharing allocations
at the employee's election in several investment alternatives offered by Katy.
The third compensation component is a stock option program. Under Katy's
stock option program, the board is allowed to provide compensation in the form
of incentive stock options, non-qualified stock options, stock appreciation
rights, restricted stock, performance units or shares, and other incentive
awards including cash bonuses, contingent on Katy's share price reaching
certain goals specified under the stock option program. The Compensation
Committee believes that the stock option program optimizes Katy's growth and
profitability through incentives to employees which are consistent with Katy's
goals and which link employees' personal interests to those of the
stockholders. The stock option program is also intended to give Katy
flexibility to attract, motivate, and retain the services of employees and
other individuals who contribute to its success. For 2000, no stock options
were granted.
Chief Executive Officer Compensation
John R. Prann, Jr. became President in April 1993 and CEO in December 1993.
Mr. Prann's salary for 2000 was based upon his experience and qualifications,
responsibilities, individual effort and performance and
53
Katy's performance. For 2000, Mr. Prann did not receive any additional
payments, awards or grants, including those based on the satisfaction of
performance goals.
Summary
The Compensation Committee believes that the total compensation program for
executive officers is appropriately related to individual performance and
Katy's performance (including Katy's financial results and stockholder value).
The Compensation Committee monitors the executive compensation of comparable
companies and believes that Katy's compensation program is competitive and
provides appropriate incentives for Katy's executive officers to work towards
continued improvement in Katy's overall performance.
Compensation Committee of the Board of Directors
Charles W. Sahlman, Chairman
Jacob Saliba
Daniel B. Carroll
54
Stock Price Performance Graph
The graph below compares the yearly percentage change in the cumulative
total stockholder return on the shares of Katy common stock with the cumulative
total return of the Russell 2000 and the cumulative total return of the S&P
Manufacturing Diversified for the fiscal years ending December 31, 1995 through
2000. The graph below assumes $100 invested, including reinvestment of
dividends, on December 31, 1995.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG KATY INDUSTRIES, INC. THE RUSSELL 2000 INDEX
AND THE S & P MANUFACTURING (DIVERSIFIED) INDEX
[GRAPH]
Comparison of Five Year Cumulative Total Return
Cumulative Total Return
-----------------------------------------
12/95 12/96 12/97 12/98 12/99 12/00
------ ------ ------ ------ ------ ------
Katy Industries, Inc................. 100.00 160.24 229.26 200.98 101.93 72.84
Russell 2000......................... 100.00 116.49 142.55 138.92 168.45 163.36
S&P Manufacturing (Diversified)...... 100.00 137.81 164.11 190.20 233.82 278.35
55
Compensation Committee Interlocks and Insider Participation
The Compensation Committee's members are Charles W. Sahlman, Jacob Saliba
and Daniel B. Carroll.
During 2000, Charles W. Sahlman was President of Sahlman Holding Company,
Inc. (43% owned by Katy and 57% owned by Sahlman Seafoods, Inc., a corporation
owned by Mr. Sahlman, his family members and various employees of Sahlman
Seafoods, Inc.) Mr. Sahlman is also a former Executive Vice President of Katy.
Jacob Saliba was Katy's CEO from 1988 to 1993.
Certain Relationships and Related Transactions
During 2000, Charles W. Sahlman served as President of Sahlman Holding
Company, Inc. (43% owned by Katy and 57% owned by Sahlman Seafoods, Inc.). Mr.
Sahlman is also a former Executive Vice President of Katy. William F. Andrews
is a principal of Kohlberg.
Meetings and Committees of the Board of Directors
The Board of Directors met four times during 2000. Each director then in
office attended at least 75% of those meetings and of the meetings of the
board committees of which he or she is a member.
Katy's By-laws provide for an Executive Committee to which the Board of
Directors has assigned all powers delegable by law. The Executive Committee
met informally through numerous telephone conferences at intervals between
meetings of the full Board of Directors, and acted by unanimous consent
without formal meetings. The Executive Committee consists of Wallace E.
Carroll, Jr. (Chairman), Arthur R. Miller, Robert M. Baratta, Charles W.
Sahlman and Jacob Saliba. William H. Murphy was a member of the Executive
Committee prior to his death in 2000 and John R. Prann, Jr. was a member of
the Executive Committee prior to his resignation as Chief Executive Officer
and director in February 2001.
The Board of Directors also has an Audit Committee and a Compensation
Committee. The Audit Committee consists of Daniel B. Carroll (Chairman),
Wallace E. Carroll, Jr. and Jacob Saliba, each of whom is independent (as
defined by Sections 303.01(B)(2)(a) and (3) of the New York Stock Exchange's
listing standards). The Board of Directors has adopted a written charter for
the Audit Committee, a copy of which is attached as Annex E. Prior to his
death in 2000, William H. Murphy was Chairman of the Audit Committee. This
Committee met one time during 2000, met informally throughout the year, and
held numerous telephone conferences during 2000. The Audit Committee reviews
the results of the annual audit with Katy's independent auditors, reviews the
scope and adequacy of Katy's internal auditing procedures and its system of
internal controls, reviews Katy's financial statements and related financial
issues with management and the independent auditors, and reports its findings
and recommendations to the Board of Directors.
The Compensation Committee consists of Charles W. Sahlman (Chairman), Jacob
Saliba and Daniel B. Carroll. This Committee, which reviews current and
deferred compensation for Katy officers and for some officers and key
employees of its subsidiaries, held one meeting, met informally throughout the
year, and held numerous telephone conferences during 2000. It makes decisions
on executive officer compensation and reports its decisions to the board. It
also seeks the board's approval on the CEO's compensation.
The entire Board of Directors considers and selects nominees for directors.
It does not have a separate nominating committee. On January 17, 1996, the
board adopted an advance notice bylaw provision requiring stockholder
nominations of directors to be received by Katy not less than 50 days nor more
than 90 days before the annual meeting.
56
Audit Committee Report
The Audit Committee has reviewed and discussed the audited financial
statements for the year ending 2000 with management, and has discussed with the
independent auditors the matters required to be discussed by SAS 61. The Audit
Committee has received the written disclosures and the letter from the
independent accountants required by Independence Standards Board Standard No.
1, and has discussed with the independent accountants the independent
accountants' independence. Based on the review and discussions, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in Katy's Annual Report on Form 10-K for 2000 filed with
the SEC.
Audit Committee of the Board of Directors:
Daniel B. Carroll (Chairman)
Wallace E. Carroll, Jr.
Jacob Saliba
PROPOSALS OF STOCKHOLDERS FOR 2002 ANNUAL MEETING
In order to be considered for inclusion in Katy's proxy materials for the
2002 annual meeting of stockholders, any stockholder proposal must be addressed
to Katy Industries, Inc., 6300 S. Syracuse Way, Suite 300, Englewood, Colorado
80111, Attention: Secretary, and must be received no later than December 24,
2001.
Katy's by-laws set forth additional requirements and procedures regarding
the submission by stockholders of matters for consideration at an annual
meeting of stockholders. A stockholder proposal or nomination intended to be
bought before the 2002 annual meeting must be received by the Secretary in
writing not less than 50 days nor more than 90 days prior to the 2002 annual
meeting. A nomination or proposal that does not comply with such requirements
and procedures will be disregarded.
FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, including statements regarding
the consummation of the equity transaction contemplated by the Purchase
Agreement with Purchaser. These forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The words "believe," "anticipate," "expect," "estimate," "intent" and
similar expressions identify forward-looking statements. Forward-looking
statements necessarily reflect numerous assumptions and involve risks and
uncertainties, and actual results could differ materially from those
anticipated in the forward-looking statements. There can be no assurance that
the sale of Hamilton or the new financing with Bankers Trust Company will be
consummated, or that the proposed transaction with Purchaser will be completed.
Factors that would cause actual results to differ materially from Katy's
current expectations include but are not limited to those factors set forth in
Katy's Annual Report on Form 10-K. The safe harbor provisions are not
applicable to the foregoing communications to the extent that they constitute
tender offer materials, and have not been judicially determined to be
applicable to such communications to the extent that they constitute soliciting
materials in connection with the tender offer.
57
WHERE TO GET ADDITIONAL INFORMATION
Additional information about the Tender Offer is set forth in a Tender Offer
Statement and a Solicitation/Recommendation Statement on Schedule 14D-9. The
Tender Offer Statement and Solicitation/Recommendation Statement is being
distributed concurrently with the distribution of this Proxy Statement. Every
person who is a stockholder of Katy when the Tender Offer Statement and
Solicitation/Recommendation Statement is distributed will receive a copy of the
Tender Offer Statement and Solicitation/Recommendation Statement. The Tender
Offer Statement is part of a statement on Schedule TO which will be filed by
Purchaser upon commencement of the Tender Offer. The
Solicitation/Recommendation Statement on Schedule 14D-9 will be filed by Katy
simultaneously with the filing by Purchaser of the Tender Offer Statement. You
can obtain copies of the statement on Schedule TO and of the statement on
Schedule 14D-9 as described below.
Katy files annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information Katy files at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. The SEC filings
of Katy are also available to the public through the SEC's website at
"http://www.sec.gov."
This Proxy Statement incorporates documents by reference which are not
presented in the Proxy Statement and which are not delivered with the Proxy
Statement. The information incorporated by reference is considered to be a part
of this Proxy Statement, and later information filed with the SEC will update
and supersede this information. If this Proxy Statement was delivered to you by
Katy, Katy will provide you without charge a copy of any document incorporated
by reference that you request (excluding exhibits, unless they are specifically
incorporated by reference). Written requests for such copies should be sent to
Secretary of Katy at its executive offices, 6300 S. Syracuse Way, Suite 300,
Englewood, Colorado 80111. Telephone requests for copies can be made to (303)
290-9300.
ANNUAL REPORT ON FORM 10-K
INCLUDED IN THIS MAILING IS A COPY OF KATY'S 2000 ANNUAL REPORT TO
STOCKHOLDERS, WHICH INCLUDES KATY'S 2000 ANNUAL REPORT ON FORM 10-K. KATY WILL
FURNISH WITHOUT CHARGE ADDITIONAL COPIES (WITHOUT EXHIBITS) OF ITS ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000, INCLUDING THE
FINANCIAL STATEMENTS AND THE SCHEDULES THERETO, UPON THE WRITTEN REQUEST OF ANY
STOCKHOLDER AS OF THE RECORD DATE. KATY WILL PROVIDE COPIES OF THE EXHIBITS TO
THE ANNUAL REPORT UPON PAYMENT OF A REASONABLE FEE THAT WILL NOT EXCEED KATY'S
REASONABLE EXPENSES INCURRED IN CONNECTION THEREWITH. REQUESTS FOR SUCH
MATERIALS SHOULD BE DIRECTED TO KATY INDUSTRIES, INC., 6300 S. SYRACUSE WAY,
SUITE 300, ENGLEWOOD, COLORADO 80111, ATTENTION: SECRETARY.
OTHER MATTERS
As of the date of this proxy statement, the Board of Directors does not know
of any matters to be presented to the meeting other than the proposals noted in
the Proxy Statement. However, if other matters come before the meeting, it is
the intention of the persons named on the accompanying proxy to vote on such
matters in accordance with their best judgment. On January 17, 1996, Katy's
Board of Directors adopted an advance notice bylaw provision requiring that
stockholder proposals to be made at any annual meeting be received by Katy not
less than 50 days nor more than 90 days prior to the annual meeting. No such
stockholder proposals were received for the 2001 Annual Meeting.
58
INCORPORATION OF DOCUMENTS BY REFERENCE
Katy's Annual Report on Form 10-K for the year ended December 31, 2000 is
being sent to stockholders along with this Proxy Statement and is incorporated
herein by reference.
All documents filed by Katy pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
Proxy Statement and prior to the Annual Meeting shall be deemed to be
incorporated by reference into this Proxy Statement and to be a part hereof
from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Proxy Statement, or
in any other subsequent filed document which is also incorporated herein by
reference, modified or supersedes such statement. Any such statement so
modified or superseded shall not be deemed to constitute a part of this Proxy
Statement except as so modified or superseded.
By Order of the Board of Directors
KATY INDUSTRIES, INC.
_____________________________________
Arthur R. Miller
Secretary
April 23, 2001
59
[ART]
ANNEX A
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Tel 212.272.2000
www.bearstearns.com
March 29, 2001
The Board of Directors
Katy Industries, Inc.
6300 South Syracuse Way, Suite 300
Englewood, CO 80111-6723
Ladies and Gentlemen:
We understand that Katy Industries, Inc. ("Katy") and KKTY Holding Company,
L.L.C., an affiliate of Kohlberg Investors IV, L.P. ("Purchaser") will enter
into a Preferred Stock Purchase and Recapitalization Agreement (the
"Recapitalization Agreement") pursuant to which Purchaser will (i) commence a
cash tender offer to purchase up to 2,500,000 outstanding shares of common
stock of Katy (the "Common Stock") at a price of $8.00 per share (the "Tender
Offer") and (ii) purchase from Katy 400,000 shares (the "Preferred Stock
Purchase") of newly issued preferred stock (the "Convertible Preferred Stock")
at $100 per share. We also understand that, pursuant to the Recapitalization
Agreement, the terms of the Convertible Preferred Stock as set forth in the
term sheet relating to the Convertible Preferred Stock (the "Preferred Term
Sheet") would provide that (i) each share of the Convertible Preferred Stock
would be convertible into Common Stock at a ratio of twelve and one-half shares
of Common Stock per share of Convertible Preferred Stock (equivalent to $8.00
per share of Common Stock), subject to certain adjustments, (ii) shares of the
Convertible Preferred Stock would not be entitled to receive any dividends, and
(iii) shares of the Convertible Preferred Stock would be non-voting, subject to
certain exceptions. We further understand that certain holders of Common Stock
(the "Participating Shareholders") will enter into a Stock Voting and Tender
Agreement with the Purchaser (the "Voting Agreement") pursuant to which the
Participating Shareholders will agree to vote certain of their shares of Common
Stock with respect to certain matters relating to the Tender Offer and the
Preferred Stock Purchase and other matters and to tender certain of their
shares of Common Stock in the Tender Offer.
We understand that, immediately upon the consummation of the transactions
contemplated by the Tender Offer and the Preferred Stock Purchase, Purchaser
and its affiliates will hold approximately 29.8% of the outstanding Common
Stock and at least a majority of Katy's common equity on a diluted basis,
assuming conversion of the Convertible Preferred Stock. We also note certain
governance arrangements contemplated by the Recapitalization Agreement,
including that, upon the consummation of the transactions contemplated by the
Tender Offer and the Preferred Stock Purchase, designees of Purchaser will
represent a majority of the Board of Directors of Katy.
In addition, we understand that, in connection with the Tender Offer and the
Preferred Stock Purchase, Purchaser will enter into senior secured credit
facilities with a syndicate of lenders pursuant to the commitment letter from
Bankers Trust Company to Purchaser dated March 27, 2001 (the "Commitment
Letter") and that the Commitment Letter will provide that, subject to certain
conditions, Katy would borrow up to $150.0 million under these credit
facilities (consisting of a term loan of up to $40.0 million and a revolving
loan of up to
[ART]
A-1
$110.0 million) on interest rates and other terms and conditions set forth in
the Commitment Letter (collectively, the "Refinancing"). We understand that,
upon consummation of the Tender Offer and the Preferred Stock Purchase and the
Refinancing, substantially all of the outstanding existing indebtedness of Katy
would be repaid in full and the only material outstanding indebtedness of Katy
immediately thereafter would be the indebtedness contemplated by the Commitment
Letter and certain capital leases of Katy.
You have provided us with copies of the Recapitalization Agreement
(including the Preferred Term Sheet), the Voting Agreement and the Commitment
Letter, and advised us that each of them is in substantially final form.
You have asked us to render our opinion as to whether the Tender Offer and
the Preferred Stock Purchase, taken as a whole, are fair, from a financial
point of view, to the shareholders of Katy.
In the course of performing our review and analyses for rendering this
opinion, we have:
. reviewed a draft of the Recapitalization Agreement dated March 28, 2001
(including the Preferred Term Sheet);
. reviewed a draft of the Voting Agreement dated March 28, 2001;
. reviewed a commitment letter from Kohlberg Investors IV, L.P. to
Purchaser dated March 27, 2001, relating to the Tender Offer and the
Preferred Stock Purchase;
. reviewed the Commitment Letter;
. reviewed Katy's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended December 31, 1998 and 1999, its Quarterly Report
on Form 10-Q for the periods ended March 31, 2000, June 30, 2000 and
September 30, 2000, its preliminary results for the year ended December
31, 2000, its Proxy Statement on Schedule 14A dated March 31, 2000, its
Report on Form 8-K dated January 15, 1999 and its Report on Form 8-K/A
dated March 22, 1999;
. reviewed the Amended and Restated Credit Agreement dated as of December
11, 1998, among Katy, Bank of America National Trust and Savings
Association, as Administrative Agent and Issuing Bank, La Salle National
Bank, as Managing Agent, and the other financial institutions party
thereto;
. reviewed certain operating and financial information, including
projections for the seven years ended December 31, 2007, provided to us
by management relating to Katy's business and prospects;
. met with certain members of Katy's senior management to discuss Katy's
business, operations, historical and projected financial results and
future prospects;
. reviewed the historical prices, trading multiples and trading volumes of
the common shares of Katy;
. reviewed publicly available financial data, stock market performance data
and trading multiples of companies which we deemed generally comparable
to Katy;
. reviewed the terms of selected precedent merger and acquisition
transactions of, and investment transactions involving, companies which
we deemed generally comparable to Katy or situations which we deemed
generally comparable to the Tender Offer and the Preferred Stock
Purchase, taken as a whole;
. performed discounted cash flow analyses based on the projections for Katy
furnished to us by the management of Katy;
. reviewed the pro forma financial results, financial condition and
capitalization of Katy giving effect to the Tender Offer and the
Preferred Stock Purchase, taken as a whole, and the Refinancing; and
. conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
A-2
We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information, including
without limitation the projections, provided to us by Katy. With respect to
Katy's projected financial results, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the senior management of Katy as to the expected future
performance of Katy. We have not assumed any responsibility for the independent
verification of any such information or of the projections provided to us, and
we have further relied upon the assurances of the senior management of Katy
that they are unaware of any facts that would make the information or
projections provided to us incomplete or misleading.
In arriving at our opinion, we have taken into account, with your consent,
the risks inherent in Katy's current business plans, including the view of the
senior management of Katy that in the current capital markets environment there
exists a risk that Katy would be unable in the future to obtain continued
waivers of the defaults under its current credit facility and that Katy would
be unable to obtain, on reasonable terms, financing necessary to replace its
current credit facility. We have also considered that, according to the senior
management of Katy, (i) no other potential investor or acquiror has made any
investment or acquisition proposal to Katy since November 6, 2000 (the date of
the public announcement by Katy that it was exploring its strategic
alternatives, including the possible sale of Katy, and that it was in
discussions with a potential purchaser relating to a possible purchase of Katy)
or since March 2, 2001 (the date of the public announcement by Katy that it was
engaged in discussions with a potential purchaser of a substantial equity
position in Katy) and (ii) the prospects for obtaining access to additional
financing in the public or private capital markets are limited.
In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities (contingent or otherwise) of
Katy, nor have we been furnished with any such appraisals. In connection with
our engagement, we were not requested to, and we did not, solicit third party
indications of interest involving an investment in, a recapitalization of, or
acquisition of all or part of, Katy. We have assumed that the Tender Offer and
the Preferred Stock Purchase and the Refinancing will be consummated in a
timely manner and in accordance with the terms of the Recapitalization
Agreement and the Commitment Letter without any limitations, restrictions,
conditions, amendments or modifications that collectively would have a material
effect on Katy.
We do not express any opinion as to the price or range of prices at which
the shares of common stock of Katy may trade subsequent to the announcement of
the Tender Offer and the Preferred Stock Purchase and the Refinancing or as to
the price or range of prices at which the shares of common stock of Katy may
trade subsequent to the consummation of the Tender Offer and the Preferred
Stock Purchase and the Refinancing.
In the ordinary course of business, Bear Stearns may actively trade the
equity and debt securities of Katy for our own account and for the account of
our customers and, accordingly, may at any time hold a long or short position
in such securities.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of Katy and does not constitute a recommendation to the
Board of Directors of Katy or any holders of Katy common stock as to how to
vote their shares of common stock of Katy in connection with the Tender Offer
and the Preferred Stock Purchase or whether or not to tender their shares of
common stock of Katy in connection with the Tender Offer. This opinion does not
address Katy's underlying business decision to pursue the Tender Offer and the
Preferred Stock Purchase and the Refinancing, the relative merits of the Tender
Offer and the Preferred Stock Purchase, taken as a whole, and the Refinancing,
as compared to any alternative business strategies that might exist for Katy or
the effects of any other transaction (including the Refinancing) in which Katy
might engage. This letter is not to be used for any other purpose, or be
reproduced, disseminated, quoted from or referred to at any time, in whole or
in part, without our prior written consent; provided, however, that this letter
may be included in its entirety in any statement on Schedule 14D-9 to be
distributed to the holders of shares of common stock of Katy in connection with
the Tender Offer and in any proxy statement to be distributed to the holders of
shares of common stock of Katy in connection with the Tender Offer and the
Preferred Stock
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Purchase. Our opinion is subject to the assumptions and conditions contained
herein and is necessarily based on economic, market and other conditions, and
the information made available to us, as of the date hereof. We assume no
responsibility for updating or revising our opinion based on circumstances or
events occurring after the date hereof.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Tender Offer and the Preferred Stock Purchase, taken as a
whole, are fair, from a financial point of view, to the shareholders of, Katy.
Very truly yours,
BEAR, STEARNS & CO. INC.
/s/ Marc R. Daniel
By: ______________________________
Senior Managing Director
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ANNEX B
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PREFERRED STOCK PURCHASE AND
RECAPITALIZATION AGREEMENT
by and among
KKTY HOLDING COMPANY, L.L.C.
and
KATY INDUSTRIES, INC.
Dated as of March 29, 2001
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TABLE OF CONTENTS
Page
----
ARTICLE I THE OFFER.................................................... 2
Section 1.1. The Offer............................................ 2
Section 1.2. Offer Documents...................................... 2
Section 1.3. Certain Actions...................................... 3
Section 1.4. Payment for Offer Shares Tendered and Accepted....... 5
ARTICLE II PREFERRED STOCK PURCHASE.................................... 6
Section 2.1. Purchase and Sale.................................... 6
Section 2.2. Closing.............................................. 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF KATY..................... 6
Section 3.1. Organization, Qualification, Etc..................... 6
Section 3.2. Capitalization....................................... 7
Corporate Authority Relative to this Agreement; No
Section 3.3. Violation........................................... 8
Section 3.4. Reports and Financial Statements..................... 8
Section 3.5. Accounts Receivable, Accounts Payable and Inventory.. 8
Section 3.6. Indebtedness; No Undisclosed Liabilities............. 9
Section 3.7. [Reserved]........................................... 9
Section 3.8. Customers and Suppliers.............................. 9
Section 3.9. No Violation of Law.................................. 10
Section 3.10. Transactions with Affiliates......................... 10
Section 3.11. [Reserved]........................................... 10
Environmental, Health and Safety Laws and
Section 3.12. Regulations......................................... 10
Section 3.13. Employee Benefit Matters............................. 11
Section 3.14. Absence of Certain Changes or Events................. 13
Section 3.15. Investigations; Litigation........................... 13
Section 3.16. Products............................................. 13
Section 3.17. Securities Filings................................... 14
Section 3.18. Tax Matters.......................................... 14
Section 3.19. Intellectual Property................................ 15
Section 3.20. Severance Payments................................... 15
Section 3.21. Title to Properties.................................. 15
Section 3.22. Licenses............................................. 16
Section 3.23. Insurance............................................ 16
Section 3.24. Material Contracts................................... 16
Section 3.25. Rights Agreement..................................... 17
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER................. 18
Section 4.1. Organization, Qualification, Etc..................... 18
Corporate Authority Relative to this Agreement; No
Section 4.2. Violation........................................... 18
Section 4.3. Litigation........................................... 18
Section 4.4. Ownership of Katy Stock.............................. 18
Section 4.5. No Required Vote of Purchaser Shareholders........... 19
Section 4.6. Securities Filings................................... 19
Section 4.7. Loan Commitments..................................... 19
Section 4.8. Purchase for Investment.............................. 19
ARTICLE V COVENANTS AND AGREEMENTS..................................... 19
Section 5.1. Conduct of Business by Katy and the Subsidiaries..... 19
Section 5.2. Investigation........................................ 21
i
Page
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Section 5.3. Cooperation.......................................... 21
Section 5.4. Employee Benefit Plans............................... 21
Section 5.5. Filings; Other Action................................ 22
Section 5.6. [Reserved]........................................... 22
Section 5.7. Anti-takeover Statute................................ 22
Section 5.8. No Solicitation by Katy.............................. 22
Section 5.9. Rights Agreement..................................... 23
Section 5.10. Public Announcements................................. 23
Section 5.11. Indemnification of Directors and Officers............ 24
Section 5.12. Additional Reports................................... 24
Section 5.13. Update Disclosure; Breaches.......................... 24
Section 5.14. Corporate Governance................................. 25
Section 5.15. Registration Rights.................................. 26
ARTICLE VI CONDITIONS TO CLOSING....................................... 26
Section 6.1. Conditions to Each Party's Obligation to Close....... 26
Section 6.2. Conditions to Obligations of Katy to Close........... 26
Section 6.3. Conditions to Obligations of Purchaser to Close...... 26
ARTICLE VII TERMINATION, WAIVER, AMENDMENT AND CLOSING................. 27
Section 7.1. Termination or Abandonment........................... 27
Section 7.2. Termination Fee...................................... 28
Section 7.3. Approval of Board of Directors Required.............. 29
ARTICLE VIII MISCELLANEOUS............................................. 29
Section 8.1. Non-Survival of Representations and Warranties;
Specific Enforcement; Limitation.................... 29
Section 8.2. Expenses............................................. 29
Section 8.3. Counterparts; Effectiveness.......................... 29
Section 8.4. Governing Law........................................ 29
Section 8.5. Notices.............................................. 29
Section 8.6. Assignment; Binding Effect........................... 30
Section 8.7. Severability......................................... 30
Section 8.8. Miscellaneous........................................ 30
Section 8.9. Headings............................................. 31
Section 8.10. Finders or Brokers................................... 31
Section 8.11. Amendment............................................ 31
Section 8.12. Waiver............................................... 31
ANNEX I
ANNEX II
EXHIBIT A
EXHIBIT B
EXHIBIT C
Schedule 3.1
Schedule 3.2(a)
Schedule 3.2(b)
Schedule 3.2(c)
Schedule 3.3
ii
Schedule 3.5(a)
Schedule 3.5(b)
Schedule 3.5(c)
Schedule 3.5(d)
Schedule 3.6
Schedule 3.8
Schedule 3.10
Schedule 3.12
Schedule 3.13(a)
Schedule 3.13(c)
Schedule 3.13(g)
Schedule 3.14
Schedule 3.15
Schedule 3.16
Schedule 3.19
Schedule 3.21
iii
PREFERRED STOCK PURCHASE AND RECAPITALIZATION AGREEMENT
THIS PREFERRED STOCK PURCHASE AND RECAPITALIZATION AGREEMENT, dated as of
March 29, 2001 (this "Agreement"), is among KKTY HOLDING COMPANY, L.L.C.
("Purchaser") and KATY INDUSTRIES, INC. ("Katy").
WHEREAS, Katy is a corporation duly organized and existing under the laws of
the State of Delaware, and Purchaser is a limited liability company duly
organized and existing under the laws of the State of Delaware;
WHEREAS, the respective Boards of Directors of Katy and Purchaser have
approved the transactions contemplated by this Agreement (the
"Recapitalization") on the terms and subject to the conditions set forth in
this Agreement, and the Board of Directors of Katy has determined that the
Offer (as defined in Section 1.1) and the Preferred Stock Purchase (as defined
below) are fair to and in the best interests of Katy's shareholders;
WHEREAS, Purchaser has simultaneously entered into a binding term sheet,
attached hereto as Exhibit B, with Bankers Trust Company to refinance the
existing loans of Katy (the "Refinancing");
WHEREAS, as a condition to Purchaser entering into this Agreement, Katy has
entered into a letter of intent dated March 6, 2001 with respect to the sale of
Hamilton Metals, L.P. ("Hamilton") for a cash purchase price equal to
$21,000,000, and such letter of intent remains in full force and effect as of
the date hereof;
WHEREAS, at Purchaser's request, certain members of Katy's management,
directors, officers and other shareholders (collectively the "Agreement
Shareholders") are simultaneously entering into a stock voting and tender
agreement with Purchaser (the "Voting Agreement") pursuant to which the
Agreement Shareholders have agreed to vote with respect to certain questions
that may be put to such Agreement Shareholders, in each case, in accordance
with the terms and conditions of the Voting Agreement and to tender certain of
their Common Shares in the Offer;
WHEREAS, to effectuate the Recapitalization, Katy and Purchaser each desire
that Purchaser (i) commence a cash tender offer to purchase up to 2,500,000
outstanding shares (the "Offer Shares") of common stock, $1.00 par value per
share, of Katy (the "Katy Common Stock"), inclusive of their respective
associated common stock purchase rights (the "Rights") issued pursuant to the
Rights Agreement, dated as of January 13, 1995, as amended (the "Rights
Agreement"), between Katy and La Salle National Bank, as Rights Agent (the
shares of Katy Common Stock and the associated Rights are referred to herein as
"Common Shares") and (ii) purchase from Katy not less than 400,000 shares of
newly issued preferred stock, $100.00 par value per share (the "Convertible
Preferred Stock"), convertible at a ratio of twelve and one-half Common Shares
per share of Convertible Preferred Stock (equivalent to $8.00 per Common Share)
into an aggregate of not less than 5,000,000 Common Shares, for a purchase
price of $100.00 per share (or an aggregate purchase price of $40,000,000) (the
"Preferred Stock Purchase"), in each case, on the terms and subject to the
conditions set forth in this Agreement and the Offer Documents (as defined in
Section 1.2 hereof), and the Board of Directors of Katy has approved such
tender offer and such Preferred Stock Purchase and has resolved to recommend to
its shareholders that they consider acceptance of the tender offer and the
tender of all or part of their Common Shares pursuant thereto and that they
authorize the Convertible Preferred Stock and the issuance of Common Shares
upon conversion of the Convertible Preferred Stock and approve the terms of the
Preferred Stock Purchase at a meeting of the shareholders of Katy (the
"Shareholder Meeting");
WHEREAS, simultaneously with entering into this Agreement, Purchaser and
Katy have executed a term sheet, attached hereto as Exhibit C, providing for
the terms and conditions of the Convertible Preferred Stock;
WHEREAS, Exhibit A to this Agreement sets forth the pages hereof on which
the capitalized terms are defined;
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WHEREAS, the parties desire to make certain representations, warranties,
covenants and agreements in connection with the Offer and the Preferred Stock
Purchase and also to prescribe various conditions to the Offer and the
Preferred Stock Purchase; and
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereby agree as follows:
ARTICLE I
The Offer
Section 1.1. The Offer.
(a) Concurrently with the date the definitive proxy statement for the
Shareholder Meeting is first mailed to Katy's shareholders (the "Offer
Commencement Date"), Purchaser shall commence (within the meaning of Rule 14d-2
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) an offer to purchase (the "Offer") the Offer Shares at a price
of $8.00 per Share, net to the seller of such Offer Shares in cash (such
amount, or any greater amount per Offer Share paid pursuant to the Offer, being
hereinafter referred to as the "Offer Consideration"), subject to the
provisions of this Agreement, provided that this Agreement shall not have been
terminated pursuant to Article VII and that no fact, occurrence or circumstance
shall exist which would result in a failure to satisfy any of the conditions
(to the extent not waived by Purchaser) set forth in Annex I (the "Purchaser
Closing Conditions"), and provided further that the Offer Shares shall in no
event represent more than 29.9% of the outstanding voting securities of Katy.
The obligation of Purchaser to consummate the Offer, accept for payment and to
pay for the Offer Shares validly tendered in the Offer and not withdrawn shall
be expressly subject to (i) satisfaction of the Purchaser Closing Conditions
(to the extent not waived by Purchaser), including, without limitation, the
condition that the number of Offer Shares (up to the maximum of 2,500,000)
which shall have been validly tendered and not withdrawn prior to the
expiration of the Offer, together with the Common Shares into which the
Convertible Preferred Stock to be purchased by Purchaser are convertible, shall
represent not less than a majority of the Katy Common Stock issuable and
outstanding, calculated on a fully diluted basis (exclusive of outstanding
Options), on the Closing Date, and (ii) pro rata acceptance for payment of
Common Shares tendered as specified in Section 1.4(b) if the total number of
Common Shares tendered exceeds the maximum of 2,500,000. The initial expiration
date of the Offer shall be midnight, New York City time, on the later of (i)
the date immediately succeeding the date of the Shareholder Meeting fixed in
the definitive proxy statement and (ii) the 20th Business Day after the Offer
Commencement Date; provided, however, that, subject to the requirements of
applicable law, the term of the Offer shall be extended by Purchaser if so
requested by Katy if the Purchaser Closing Conditions (other than the Minimum
Condition, the condition set forth in paragraph (ii) of the first paragraph of
Annex I and the conditions set forth in subclauses (j), (n) and (p) of Annex I)
shall have been satisfied as of the date of the request, and may in any case be
extended in the sole discretion of Purchaser, for a period of up to twenty (20)
Business Days, provided, however, that in no event shall the Offer be extended
beyond June 30, 2001. For purposes of this Agreement, the term "Business Day"
shall mean any day, other than Saturday, Sunday or a United States federal
holiday.
(b) [Reserved]
(c) Without the prior written consent of Katy, Purchaser shall not decrease
the Offer Consideration or change the form of consideration payable in the
Offer, reduce the minimum number of Offer Shares that is a condition to the
Offer, increase the maximum number of Offer Shares to be purchased pursuant to
the Offer, impose additional conditions to the Offer or amend any other term of
the Offer in any manner adverse to Katy or to the holders of Katy Common Stock.
Section 1.2. Offer Documents.
On the Offer Commencement Date, Purchaser shall file or cause to be filed
with the Securities and Exchange Commission (the "SEC") a Tender Offer
Statement on Schedule TO (the "Schedule TO") with
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respect to the Offer which shall contain the offer to purchase and related
letter of transmittal (such Schedule TO, letter of transmittal and other
ancillary Offer documents and instruments pursuant to which the Offer will be
made, including any other documents required to be filed with the SEC as part
of or incorporated by reference in the Schedule TO, together with any
supplements or amendments thereto, the "Offer Documents") and shall contain (or
shall be amended in a timely manner to contain) all information which is
required to be included therein in accordance with the Exchange Act and the
rules and regulations thereunder and other applicable law; provided, however,
that no agreement or representation is hereby made or shall be made by
Purchaser with respect to information supplied by Katy or with respect to Katy
information derived from the Katy SEC Reports which is included or incorporated
by reference in the Offer Documents. Purchaser and Katy each agrees promptly to
correct any information provided by them for use in the Offer Documents if and
to the extent that such information shall have become false or misleading in
any material respect and to promptly notify in writing each other party hereto
of the nature and cause of such changes. To the extent information in the Offer
Documents needs to be modified or corrected pursuant to applicable law, the
parties hereto agree to cooperate in good faith to make such modifications or
corrections and to file and disseminate them as required by applicable law.
Section 1.3. Certain Actions.
(a) Katy hereby approves of and consents to the Offer and represents and
warrants that Katy's Board of Directors (at a meeting duly called and held) has
(i) determined that each of this Agreement and the transactions contemplated
hereby, including the Offer and the Preferred Stock Purchase, are fair to and
in the best interests of Katy and its shareholders, (ii) Unanimously approved
(with all references to the term "Unanimously" being deemed to refer to actions
taken by all current members of Katy's Board of Directors, except for William
F. Andrews) this Agreement and the transactions contemplated hereby, including
the Offer and the Preferred Stock Purchase, so that section 203 of the General
Corporation Law of Delaware ("DGCL") shall not prevent any business combination
(as defined in section 203 of the DGCL) between Katy and any person that
becomes an interested stockholder (as defined in section 203 of DGCL) of Katy
as a result of the Offer, the Preferred Stock Purchase, or any other
transaction contemplated by the Agreement, (iii) Unanimously recommended that
the holders of Common Shares consider acceptance of the Offer and the tender of
all or part of their Common Shares pursuant to the Offer, (iv) taken all
actions necessary or appropriate so that the execution of this Agreement and
the consummation of the transactions contemplated hereby (including without
limitation the Offer, the Preferred Stock Purchase, the conversion of the
Convertible Preferred Stock and the Voting Agreement) do not and will not
result in the ability of any person to exercise any rights under the Rights
Agreement or enable or require the rights to separate from the Common Shares to
which they are attached or to be triggered or become exercisable, (v)
Unanimously nominated and recommended for election as directors of Katy the
nominees designated by Purchaser (the "Purchaser Designees"), who, if elected
by the shareholders, will constitute a majority of such Board of Directors,
(vi) Unanimously approved and recommended that the holders of Common Shares
approve and adopt an amendment to Katy's Certificate of Incorporation
authorizing (A) election of directors in two classes, with staggered terms of
office, and (B) 600,000 shares of Convertible Preferred Stock, on substantially
the terms and conditions set forth in Exhibit C, (vii) Unanimously recommended
that the holders of Common Shares approve the Preferred Stock Purchase and the
issuance of Common Shares upon the conversion of the Convertible Preferred
Stock in accordance with the terms of the Convertible Preferred Stock, (viii)
authorized Katy to prepare and file with the SEC within five (5) Business Days
after the date of this Agreement (and Katy shall use its reasonable best
efforts to cause such filing within five (5) Business Days) a preliminary proxy
statement with respect to the election of directors and the approvals by the
holders of Common Shares referred to in clauses (vi) and (vii) at the
Shareholder Meeting, directed the officers of Katy to use their reasonable best
efforts to have the proxy statement cleared by the SEC under the Exchange Act,
and authorized and directed the distribution of the definitive form of such
proxy statement to the holders of the Common Shares and the solicitation of
proxies from such holders (such definitive proxy statement, the accompanying
notice of the Shareholder Meeting and the form of proxy, and any documents,
instruments or other proxy materials used in the solicitation of proxies,
including any documents required to be filed with the SEC as part of or
incorporated by reference in such proxy materials, together with
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any supplements or amendments thereto, the "Proxy Statement"), and (ix)
Unanimously approved an amendment to the By-Laws of Katy reducing the number of
directors constituting the whole board of Katy to nine (9).
(b) Katy hereby consents to the inclusion in the Proxy Statement (unless the
Board of Directors, after consultation with outside legal counsel determines
that this would be inconsistent with the directors' fiduciary duties under
applicable law) of the recommendation of its Board of Directors referred to in
Section 1.3(a). Katy hereby agrees to use its reasonable best efforts to file
with the SEC, within five (5) Business Days of the date of this Agreement, the
preliminary Proxy Statement, which will contain (subject to the fiduciary
duties of the Board of Directors as advised by outside legal counsel) such
recommendation of the Board of Directors of Katy with respect to the election
of directors, the Recapitalization and the other transactions contemplated
hereby and otherwise comply with section 14(a) of the Exchange Act, the rules
and regulations thereunder and other applicable law. Katy covenants that the
Proxy Statement shall contain (or shall be amended in a timely manner to
contain) the information which is required to be included therein in accordance
with the Exchange Act and the rules and regulations thereunder and other
applicable law and shall otherwise comply in all material respects with the
Exchange Act and the rules and regulations thereunder and any other applicable
law. Katy and Purchaser each agree promptly to correct any information provided
by them for use in the Proxy Statement if and to the extent that such
information shall have become false or misleading in any material respect and
Katy further agrees to take all lawful action necessary to cause the Proxy
Statement as so corrected to be filed promptly with the SEC and disseminated to
the holders of Common Shares, in each case as and to the extent required by
applicable law. Purchaser and its counsel shall be given an opportunity to
review and comment upon the Proxy Statement and any amendments thereto prior to
the filing thereof with the SEC. In addition, Katy agrees to provide Purchaser
and its counsel in writing with any comments or other communications that Katy
or its counsel may receive from time to time from the SEC or its staff with
respect to the Proxy Statement promptly after the receipt of such comments or
other communications.
(c) Katy hereby consents to the inclusion in the Offer Documents (unless the
Board of Directors, after consultation with outside legal counsel determines
that this would be inconsistent with the directors' fiduciary duties under
applicable law) of the recommendation of its Board of Directors referred to in
Section 1.3(a). Katy hereby agrees to file with the SEC, simultaneously with
the filing by Purchaser of the Offer Documents, a Solicitation/Recommendation
Statement on Schedule 14D-9 (together with all amendments and supplements
thereto, the "Schedule 14D-9") which, in itself or by reference to the Offer
Documents, will contain (subject to the fiduciary duties of the Board of
Directors as advised by outside legal counsel) such recommendation of the Board
of Directors of Katy with respect to the Offer and otherwise comply with Rule
14d-9 under the Exchange Act. Katy covenants that the Schedule 14D-9 shall
contain (or shall be amended in a timely manner to contain) the information
which is required to be included therein in accordance with the Exchange Act
and the rules and regulations thereunder and other applicable law and shall
otherwise comply in all material respects with the Exchange Act and the rules
and regulations thereunder and any other applicable law. Katy and Purchaser
each agree promptly to correct any information provided by them for use in the
Schedule 14D-9 if and to the extent that such information shall have become
false or misleading in any material respect and Katy further agrees to take all
lawful action necessary to cause the Schedule 14D-9 as so corrected to be filed
promptly with the SEC and disseminated to the holders of Common Shares, in each
case as and to the extent required by applicable law. Purchaser and its counsel
shall be given an opportunity to review and comment upon the Schedule 14D-9 and
any amendments thereto prior to the filing thereof with the SEC. In addition,
Katy agrees to provide Purchaser and its counsel in writing with any comments
or other communications that Katy or its counsel may receive from time to time
from the SEC or its staff with respect to the Schedule 14D-9 promptly after the
receipt of such comments or other communications. In connection with the Offer,
Katy shall (or shall cause its transfer agent to) promptly furnish Purchaser
with mailing labels, security position listings and all available listings or
computer files containing the names and addresses of the record holders of
Common Shares as of the latest practicable date and shall furnish Purchaser
with such information and assistance (including updated lists of shareholders,
mailing labels and lists of security positions) as Purchaser or its agents may
reasonably request in communicating the Offer to the record and beneficial
holders of Common Shares. Subject to the requirements of applicable law, and
except for such actions as are necessary to
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disseminate the Offer Documents and any other documents necessary to consummate
the Offer, the Preferred Stock Purchase and the election of the directors,
Purchaser shall hold in confidence the information contained in such labels and
lists or other form, shall use such information only in connection with the
Offer, the Preferred Stock Purchase and the election of the directors, and, if
the Offer or this Agreement is terminated in accordance with its terms, shall
deliver promptly to Katy (or destroy and certify to Katy the destruction of)
all copies of such information then in its possession.
(d) Purchaser covenants that the Offer Documents shall contain (or shall be
amended in a timely manner to contain) the information which is required to be
included therein in accordance with the Exchange Act and the rules and
regulations thereunder and other applicable law and shall otherwise comply in
all material respects with the Exchange Act and the rules and regulations
thereunder and any other applicable law. Purchaser agrees promptly to correct
any information provided by it for use in the Offer Documents if and to the
extent that such information shall have become false or misleading in any
material respect and Purchaser further agrees to take all lawful action
necessary to cause the Offer Documents as so corrected to be filed promptly
with the SEC and disseminated to the holders of Katy Common Stock, in each case
as and to the extent required by applicable law. Katy and its counsel shall be
given an opportunity to review and comment upon the Offer Documents and any
amendments thereto prior to the filing thereof with the SEC. In addition,
Purchaser agrees to provide Katy and its counsel in writing with any comments
or other communications that Purchaser or its counsel may receive from time to
time from the SEC or its staff with respect to the Offer Documents promptly
after the receipt of such comments or other communications.
Section 1.4. Payment for Offer Shares Tendered and Accepted
(a) Depository. On the Closing Date, Purchaser shall deliver (or cause to be
delivered) to La Salle Bank N.A., or another bank or trust company designated
by it (the "Depository"), for the benefit of the holders of Common Shares who
have tendered pursuant to the Offer in accordance with this Article I, funds
sufficient to make payment of the Offer Consideration payable pursuant to
Section 1.1(a).
(b) Payment Procedures. Upon surrender of the certificates evidencing the
Offer Shares (the "Certificates") to the Depository, together with a letter of
transmittal, duly executed, and such other documents as may reasonably be
requested by the Depository in accordance with the terms of the Offer, and upon
the Purchaser's determination to accept the Offer Shares evidenced thereby,
subject to pro rata acceptance of tendered Common Shares as set forth below,
the holder of such Certificate shall be entitled to receive the Offer
Consideration for each such Offer Share and the Certificate so surrendered
shall forthwith be registered in the name of Purchaser. In the event of a
transfer of ownership of any Offer Share which is not registered in the
transfer records of Katy, cash may be paid to a person other than the person in
whose name the Certificate so surrendered is registered if such Certificate
shall be properly endorsed or otherwise be in proper form for transfer. In the
event the Common Shares tendered pursuant to the Offer exceed 2,500,000 Common
Shares and Purchaser has determined to accept the Offer Shares for payment, the
Depository shall reduce the number of Common Shares accepted for payment from
each holder of Common Shares so tendered on a pro rata basis, so that the
number of Offer Shares accepted for payment does not exceed 2,500,000.
(c) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Purchaser,
the posting by such person of a bond in such reasonable amount as the Purchaser
may direct as indemnity against any claim that may be made against Purchaser or
the Depository with respect to such Certificate, the Depository will issue in
exchange for such lost, stolen or destroyed Certificate the Offer Consideration
pursuant to this Agreement.
(d) Withholding Rights. Purchaser shall be entitled but not required to
deduct and withhold, or cause the Depository to deduct and withhold, from
consideration otherwise payable pursuant to this Agreement to any holder of
securities such amounts as are required to be deducted and withheld with
respect to the making of such payment under the Internal Revenue Code of 1986,
as amended (the "Code"), or any provision of state,
B-5
local or foreign tax law. To the extent that amounts are so withheld, (A) such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the Certificates in respect of which such deduction
and withholding was made, and (B) Purchaser shall provide, or cause the
Depository to provide, to the holders of such securities written notice of the
amounts so deducted or withheld.
ARTICLE II
Preferred Stock Purchase
Section 2.1. Purchase and Sale.
Subject to the terms and conditions set forth in this Agreement, Katy agrees
to sell to Purchaser and Purchaser agrees to purchase from Katy, subject to the
Purchaser Closing Conditions, 400,000 shares of Convertible Preferred Stock for
a purchase price of $100 per share or an aggregate of $40,000,000 in cash (the
"Preferred Purchase Price"). The Preferred Purchase Price shall be delivered on
the Closing Date by wire transfer of funds to the order of Katy. Katy will
deliver the Convertible Preferred Stock to Purchaser against payment of the
Preferred Purchase Price on the Closing Date. Delivery of the Convertible
Preferred Stock shall be deemed made upon delivery to Purchaser of a
certificate or certificates representing the Convertible Preferred Stock
together with evidence that such issuance and sale has been registered on the
records of Katy.
Section 2.2. Closing.
The consummation of the Preferred Stock Purchase will take place
concurrently with the acceptance for payment of the Offer Shares (collectively
referred to herein as the "Closing") at such time and date to be specified by
the parties (the "Closing Date"), which shall be no later than the second
Business Day after satisfaction or waiver of the conditions set forth in
Article VI, unless another time or date is agreed to by the parties hereto,
provided that in no event shall the Closing Date be later than June 30, 2001.
The Closing will be held at the offices of Hunton & Williams, 200 Park Avenue,
43rd Floor, New York, New York 10166-0136 or as otherwise agreed to by the
parties hereto.
ARTICLE III
Representations and Warranties of Katy
Except as set forth in the schedules hereto, in a manner that identifies by
section number or by the content of the disclosure each provision of this
Agreement to which such disclosure relates, Katy represents and warrants to
Purchaser that:
Section 3.1. Organization, Qualification, Etc.
Katy is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the corporate power and
authority to own and lease its properties and assets and to carry on its
business as it is now being conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which the ownership of its
properties or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect (as hereinafter defined) on the Katy Group. Except as set forth on
Schedule 3.2(a), Katy owns, directly or indirectly, all of the capital stock of
each of the corporations and all of the equity interest of each of the other
entities set forth on Schedule 3.1 (each a "Subsidiary" and collectively, the
"Subsidiaries"). Except as set forth on Schedule 3.1, each Subsidiary is duly
and validly organized and in good standing under the laws of the jurisdiction
listed on Schedule 3.1, and each Subsidiary is duly qualified as a foreign
corporation or other entity in good standing in each jurisdiction where the
conduct of its business requires such qualification, except where the failure
to be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on the Katy Group. Except as set forth in Schedule 3.2(a), Katy
does not own, and does not have any obligation to acquire, any equity interest
in any
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business enterprise other than the Subsidiaries. As used in this Agreement, any
reference to any state of facts, event, change or effect having a "Material
Adverse Effect" on or with respect to the Katy Group or Purchaser means such
state of facts, event, change or effect that has had, or would reasonably be
expected to have, a material adverse effect on the financial condition,
businesses, operations, properties (including tangible properties), results of
operations, assets (including, without limitation, any Material Contract) or
prospects of Katy and the Subsidiaries (collectively, the "Katy Group"), taken
as a whole, or of Purchaser, as the case may be; provided, however, that none
of the following shall be deemed in themselves, either alone or in combination,
to constitute, and none of the following shall be taken into account in
determining whether there has been or will be, a Material Adverse Effect on or
with respect to the Katy Group: any adverse circumstance, change in, or effect
relating to (i) the announcement or pendency of the Offer or the Preferred
Stock Purchase, (ii) compliance with the terms of, or the taking of any action
required or contemplated by, this Agreement or (iii) actions required to be
taken under applicable laws, rules or regulations, so long as any such action
does not disproportionately affect the Katy Group, taken as a whole; and
provided, further, that a change in the market price or trading volume of the
Katy Common Stock shall not, in itself, be deemed to constitute a Material
Adverse Effect on or with respect to the Katy Group.
Section 3.2. Capitalization.
(a) The authorized capital stock of Katy consists of Twenty-Five Million
(25,000,000) shares of Katy Common Stock, $1.00 par value per share. As of the
date of this Agreement, 9,822,204 shares of Katy Common Stock (of which
1,428,146 are treasury shares) are issued and 8,394,058 shares are outstanding.
All the outstanding shares of Katy Common Stock have been validly issued and
are fully paid and non-assessable. The issued and outstanding capital stock of
each Subsidiary is set forth on Schedule 3.2(a) hereto and, except as set forth
on Schedule 3.2(a), Katy or a Subsidiary owns and holds all such capital stock.
(b) Except as set forth on Schedule 3.2(b), neither Katy nor any Subsidiary
is a party to, or is aware of, any voting agreement, voting trust or similar
agreement or arrangement relating to any class or series of its capital stock,
or any agreement or arrangement providing for registration rights with respect
to any capital stock or other securities thereof.
(c) As of the date of this Agreement, there were outstanding options to
purchase an aggregate of 347,450 Common Shares under Katy's 1995 Long-Term
Incentive Plan, outstanding options to purchase an aggregate of 323,900 Common
Shares, stock appreciation rights covering 207,030 Common Shares and 31,350
Common Shares of unvested restricted stock outstanding under Katy's 1997 Long-
Term Incentive Plan, and outstanding options to purchase 88,000 Common Shares
under Katy's Nonemployee Director Stock Option Plan (such plans collectively
referred to as the "Katy Stock Option Plans", and each option under the Katy
Stock Option Plans referred to as an "Option"), as set forth on Schedule
3.2(c). Other than as set forth in this Section 3.2 or on Schedule 3.2(c) there
are not now, and on the Closing Date there will not be, any (i) shares of
capital stock or other equity securities of Katy issuable upon exercise of
Options other than Common Shares issuable pursuant to the exercise of the stock
options or stock appreciation rights described in this Section 3.2(c) (ii)
other outstanding awards under the Katy Stock Option Plans, or (iii)
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any class of capital stock of
Katy or any Subsidiary, or contracts, understandings or arrangements to which
Katy or any Subsidiary is a party, or by which any of them is or may be bound,
to issue additional shares of its capital stock or options, warrants, scrip or
rights to subscribe for, or securities or rights convertible into or
exchangeable for, any additional shares of its capital stock, other than the
Convertible Preferred Stock purchased by Purchaser under this Agreement.
(d) The authorized units of Contico International, L.L.C. a Delaware limited
liability company and a Subsidiary ("Contico"), consists solely of Ten Thousand
(10,000) common units (the "Contico Common Units"), all of which are issued,
outstanding and owned by Katy, and Three Hundred Twenty-Nine (329) preferred
units (the "Contico Preferred Units"), all of which are issued, outstanding and
owned by Newcastle Industries, Inc. All of the outstanding Contico Common Units
and Contico Preferred Units have been validly issued, are fully paid and non-
assessable.
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(e) Upon approval by the vote of a majority of the holders of the
outstanding Common Shares entitled to vote at the Shareholder Meeting, 600,000
shares of Convertible Preferred Stock will be duly authorized. Upon purchase of
the Convertible Preferred Stock by Purchaser in accordance with the terms of
this Agreement, the shares of Convertible Preferred Stock to be issued to
Purchaser will be validly issued, fully paid and non-assessable.
Section 3.3. Corporate Authority Relative to this Agreement; No Violation.
Katy has the corporate power and authority to enter into this Agreement, to
carry out its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Katy and, except for the approval by
Katy's shareholders, no other corporate proceedings on the part of Katy or any
Subsidiary are necessary to authorize this Agreement and the transactions
contemplated hereby. The Board of Directors of Katy has determined that the
Recapitalization is in the best interest of Katy and its shareholders. This
Agreement has been duly and validly executed and delivered by Katy and,
assuming this Agreement constitutes a valid and binding agreement of the other
party hereto, this Agreement constitutes a valid and binding agreement of Katy,
enforceable against Katy in accordance with its terms, except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or by general equitable principles, whether applied in a proceeding
at law or in equity. Except as set forth on Schedule 3.3, neither Katy nor any
Subsidiary is subject to or obligated under any charter, by-law or contract
provision or any license, franchise or permit, or subject to any law, order or
decree, that would be breached or violated by Katy's execution or performance
of this Agreement or the consummation of the transactions contemplated hereby.
Other than in connection with or in compliance with the provisions of Delaware
law, the Securities Act of 1933, as amended (the "Securities Act"), and the
Exchange Act (collectively, the "Katy Required Approvals"), no authorization,
consent or approval of, or filing with, any governmental body or authority in
the United States of America is necessary for the consummation by Katy of the
Recapitalization.
Section 3.4. Reports and Financial Statements.
Since January 1, 1998, Katy has timely filed all reports, registration
statements and other filings, together with any amendments required to be made
with respect thereto, that it has been required to file with the SEC under the
Securities Act and the Exchange Act. All such reports, registration statements
and other filings (including all notes, exhibits and schedules thereto and
documents incorporated by reference therein) filed by Katy with the SEC,
together with any amendments thereto, are collectively referred to as the "Katy
SEC Reports". As of the respective dates of their filing (and, in the case of
registration statements and proxy statements, on the dates of effectiveness and
the dates of mailing, respectively) with the SEC, the Katy SEC Reports complied
in all material respects with the Securities Act, the Exchange Act and the
rules and regulations of the SEC thereunder, and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading. Each of the
consolidated financial statements (including any related notes or schedules)
included in the Katy SEC Reports was prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis (except
as may be noted therein or in the notes or schedules thereto) and complied in
all material respects with the rules and regulations of the SEC, and such
consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Katy Group as of the dates thereof and
the results of operations, cash flows and changes in shareholders' equity for
the periods then ended (subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments on a basis consistent with
past periods).
Section 3.5. Accounts Receivable, Accounts Payable and Inventory.
For the purposes of this Agreement, the term "Accounts Receivable" shall
mean all trade accounts receivable and all notes, bonds and other evidences of
indebtedness relating to, and rights to receive payments arising out of, sales
made in the conduct of the business by Katy or any Subsidiary, and the security
agreements
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related thereto, including any rights of Katy or any Subsidiary with respect to
any third party collection proceedings or any other action, suit, proceeding or
arbitration by any person or any investigation by any government body. The term
"Accounts Payable" shall mean all accounts payable of Katy or any Subsidiary as
such would be construed under GAAP. The term "Inventory" shall mean inventory,
raw materials, work-in-progress, finished goods, consigned goods, merchandise,
products under research and development, demonstration equipment, packaging
materials and other accessories related thereto which are held at, or are in
transit from or to, the locations at which the business of Katy or any
Subsidiary is conducted, or located at supplier's premises or customer's
premises on consignment, in each case, which are used or held for use in the
conduct of the business of Katy or any Subsidiary, including any of the
foregoing purchased subject to any conditioned sales or title retention
agreement in favor of any other person, together with all rights against
suppliers of such inventories. All Accounts Receivable (net of allowances for
doubtful accounts) reflected on the September 30, 2000 balance sheet attached
hereto as Schedule 3.5(a) (the "Reference Balance Sheet"), and all Accounts
Receivable arising subsequent to September 30, 2000 (net of allowances for
doubtful accounts), (a) have arisen from bona fide sales transactions in the
ordinary course of business on ordinary trade terms, (b) represent valid and
binding obligations due to Katy, enforceable in accordance with their terms,
and (c) have been collected or are collectible in the ordinary course of
business in the aggregate recorded amounts thereof in accordance with their
terms, except to the extent reserved against and except for such lack of
enforceability or collectibility, individually or in the aggregate, as would
not have a Material Adverse Effect on the Katy Group. Schedule 3.5(b) lists any
obligor which together with all of its affiliates owed uncollected amounts to
Katy or any Subsidiary in an aggregate amount of $100,000 or more as of
September 30, 2000. All Accounts Payable which are due and owing have been or
will be paid in full in the ordinary course and, to the knowledge of any
executive officer (within the meaning of Rule 3b-7 under the Exchange Act) of
Katy ("Katy's Knowledge"), no third party has claimed otherwise, except for
such claims as would not have a Material Adverse Effect on the Katy Group.
Schedule 3.5(c) sets forth all Accounts Payable which were individually in
excess of $50,000 as of December 31, 2000 and which were also more than thirty
(30) days past due under their payment terms as of December 31, 2000. Except as
set forth on Schedule 3.5(d), all Inventory consists of a quality and quantity
usable and salable in the ordinary course of business consistent with past
practice, subject to normal and customary allowances in the industry for
spoilage, damage and outdated items. Except as set forth on Schedule 3.5(d),
all items included in the Inventory are the property of Katy or a Subsidiary,
as the case may be, free and clear of any lien, have not been pledged as
collateral, are not held on consignment from others and conform in all material
respects to all standards applicable to such Inventory or its use or sale
imposed by any law.
Section 3.6. Indebtedness; No Undisclosed Liabilities.
Schedule 3.6 lists all indebtedness of the Katy Group as of September 30,
2000 for borrowed money or for the deferred purchase price of property or
services, directly or indirectly created, incurred or assumed or guaranteed by
Katy and its Subsidiaries or with respect to which Katy or any Subsidiary has
otherwise become directly or indirectly liable, including, without limitation,
all capital lease obligations. Neither Katy nor any Subsidiary has any
liabilities or obligations of any nature, whether or not accrued, contingent or
otherwise, except (a) liabilities or obligations reflected (i) in any of the
Katy SEC Reports, or (ii) on Schedule 3.6, (b) liabilities incurred after
September 30, 2000 in the ordinary course of business consistent with past
practice, (c) the obligation to pay fees and expenses of Katy's attorneys and
accountants and of Bear Stearns & Co. Inc. in accordance with its agreement
with Katy dated January 8, 2001 relating to the provision of a fairness opinion
and (d) liabilities or obligations which would not have a Material Adverse
Effect on the Katy Group.
Section 3.7. [Reserved].
Section 3.8. Customers and Suppliers.
Schedule 3.8 lists the top 25 customers and the top 25 suppliers of the Katy
Group based on aggregate sales and purchases for each of (i) the twelve months
ended December 31, 1999 and (ii) the nine months ended September 30, 2000.
Except as set forth on Schedule 3.8, to Katy's Knowledge, as of the date of
this Agreement, no such customer or supplier of Katy or any Subsidiary is in
the process of or intends to terminate
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its business relationship or pricing scheme with Katy or such Subsidiary, nor
has any such customer or supplier during the past twelve months substantially
decreased, or threatened to substantially decrease, its usage of Katy's or such
Subsidiary's production or its services or supplies to Katy or such Subsidiary,
other than normal seasonal variances in the ordinary course of business, and
other than any such decreases as would not, individually or in the aggregate,
materially and adversely affect the operating income of the Katy Group.
Section 3.9. No Violation of Law.
None of the business or operations of Katy or any Subsidiary is being
conducted in violation of any law, ordinance or regulation of any governmental
body or authority except (a) as specifically disclosed in the schedules hereto
or in any of the Katy SEC Reports and (b) for violations or possible violations
which would not have, individually or in the aggregate, a Material Adverse
Effect on the Katy Group.
Section 3.10. Transactions with Affiliates.
For purposes of this Section 3.10, the term "Affiliate" shall mean (a) any
person who is the beneficial owner of 5% or more of the voting securities of
Katy, (b) any director or officer of Katy or any Subsidiary, (c) any person,
firm or corporation that directly or indirectly controls, is controlled by or
is under common control with, Katy or any Subsidiary (other than any other
member of the Katy Group) and (d) any member of the immediate family of any of
the foregoing persons. Except as set forth on Schedule 3.10, or in the Katy SEC
Reports, since January 1, 1998 neither Katy nor any Subsidiary has in the
ordinary course of business or otherwise (a) purchased, leased or otherwise
acquired any property or assets or obtained any services (except with respect
to services rendered in the ordinary course of business as a director, officer
or employee of Katy or any Subsidiary) in return for consideration of more than
$60,000 in any 12 month period from any Affiliate, (b) sold, leased or
otherwise disposed of any property or assets or provided services (except with
respect to remuneration for services rendered in the ordinary course of
business as a director, officer or employee of Katy or any Subsidiary) in
return for consideration of more than $60,000 in any 12 month period to any
Affiliate, (c) entered into or modified in any manner any Contract with any
Affiliate, or (d) borrowed any money from, or made or forgiven any loan or
advance to, any Affiliate. Except as set forth in Schedule 3.10 or in the Katy
SEC Reports, (i) the Contracts of the Katy Group do not include any obligation
or commitment in excess of $60,000 in any 12 month period with any Affiliate
(except with respect to remuneration for services rendered in the ordinary
course of business as a director, officer or employee of Katy or any
Subsidiary), (ii) the assets of the Katy Group do not include any receivable or
other obligation or commitment in excess of $60,000 in any 12 month period from
any Affiliate and (iii) the liabilities of the Katy Group do not include any
payable or other obligation or commitment in excess of $60,000 in any 12 month
period to or for any Affiliate (except with respect to remuneration for
services rendered in the ordinary course of business as a director, officer or
employee of Katy or any Subsidiary). Except as set forth in Schedule 3.10, no
officer or director of Katy or any Subsidiary has any ownership interest in any
property, real or personal, tangible or intangible, including without
limitation, inventions, patents, trademarks or trade names, used in or
pertaining to the businesses of the Katy Group.
Section 3.11. [Reserved]
Section 3.12. Environmental, Health and Safety Laws and Regulations.
Except as set forth on Schedule 3.12, the Katy SEC Reports, or as would not
have a Material Adverse Effect on the Katy Group, Katy and its Subsidiaries (i)
have obtained or are in the process of obtaining (as specifically set forth in
Schedule 3.12) all applicable permits, licenses and other authorizations which
are required under foreign, federal, state or local laws relating to pollution
or protection of the environment or to human health and safety, including laws
relating to emissions, discharges, releases or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes into
ambient air, surface water, ground water or land or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes by such entity (or, to the extent Katy is so obligated, its
agents) ("Environmental, Health and Safety Laws"); (ii) are in compliance with
all terms and conditions of such required permits, licenses and authorizations,
and also are in compliance
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with all other applicable limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables required
pursuant to applicable Environmental, Health and Safety Laws or contained in
any regulation, code, order, decree, judgment, notice or demand letter issued,
entered, promulgated or approved thereunder, and to Katy's Knowledge, no
proposed or scheduled changes in law will require expenditures in excess of
$500,000 to maintain compliance with the Environmental, Health and Safety Laws
at the Katy facilities in the next 12 months; (iii) have no liability of any
kind whatsoever, whether known or unknown, under any Environmental, Health and
Safety Laws, individually or in the aggregate, that would have a Material
Adverse Effect on the Katy Group; and (iv) represent that no event, condition,
circumstance, activity, practice, incident, action or plan is reasonably likely
to interfere with or prevent continued compliance with the Environmental Health
and Safety Laws or would give rise to any common law or statutory liability, or
otherwise form the basis of any claim, action, suit or proceeding, based on or
resulting from the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling or Katy's emission, discharge or
release into the environment, of any pollutant, contaminant, or hazardous or
toxic material or waste, which liability, claim, action, suit or proceeding,
individually or in the aggregate, would have a Material Adverse Effect on the
Katy Group. Notwithstanding any of the representations and warranties contained
elsewhere in Article III, environmental and health and safety matters shall be
governed exclusively by this Section 3.12 and by Section 3.22 with respect to
Licenses required by Environmental, Health and Safety Laws.
Section 3.13. Employee Benefit Matters.
(a) Schedule 3.13(a) sets forth and Katy has made available to Purchaser
copies of the governing documents, summary plan descriptions, returns, reports,
financial statements, actuarial reports and related employee communications of
the following kinds of employee benefit plans (individually, a "Katy Benefit
Plan," and collectively, the "Katy Benefit Plans") which are sponsored,
maintained or contributed to by Katy or any Subsidiary or any corporation,
trade, business or entity under common control with Katy within the meaning of
sections 414(b), (c), (m) or (o) of the Code (each, an "ERISA Affiliate") for
the benefit of the employees of Katy or any Subsidiary:
(i) each "employee benefit plan", as such term is defined in section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (including, but not limited to, employee benefit plans which are
not subject to the provisions of ERISA); and
(ii) each policy or practice described in an employee handbook, stock
option plan, restricted stock plan, collective bargaining agreement, cash
or stock bonus plan or arrangement, incentive award plan or arrangement,
severance pay plan, policy, or agreement, deferred compensation agreement
or arrangement, executive compensation or supplemental income arrangement,
consulting agreement, employment agreement, and each other employee benefit
plan, agreement, arrangement, program, practice, or understanding which is
not described in Section 3.13(a)(i).
(b) There has been made available to Purchaser, with respect to each Katy
Benefit Plan required to file such report and description, the most recent
report on Form 5500 and the summary plan description. There has been made
available to Purchaser with respect to each Katy Benefit Plan which is a
defined benefit plan subject to the minimum funding requirements of ERISA the
most recent actuarial valuation prepared by the actuaries for the plan.
(c) Except for the Katy Benefit Plans disclosed in Schedule 3.13(c), Katy
and the Subsidiaries do not contribute to or have an obligation to contribute
to any employee benefit plan that is subject to section 302 of ERISA, section
412 of the Code, or Title IV of ERISA (including, without limitation, a
multiemployer plan within the meaning of section 3(37) of ERISA). Assets of any
single-employer qualified plan listed in Schedule 3.13(c) are at least equal to
liabilities accrued to the Closing Date as of the date of the most recently
audited financial statements of Katy and its Subsidiaries.
(d) No complete or partial withdrawal liability (within the meaning of
section 4201 of ERISA) with respect to any multiemployer plan (within the
meaning of section 3(37) of ERISA) has been incurred, which withdrawal
liability has not been satisfied and, to Katy's Knowledge, no liability is
expected to be incurred.
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(e) Except as would not have, individually or in the aggregate, a Material
Adverse Effect on the Katy Group (excluding for purposes of applying the
foregoing standard of materiality the representation in clauses (A) and (B) of
subparagraph (vi) below, which shall not be subject to any standard of
materiality):
(i) Each Katy Benefit Plan conforms to and has been administered and
operated in compliance with its governing documents and applicable laws and
regulations whether domestic or foreign, including, where applicable, ERISA
and the Code, and neither Katy nor any of its Subsidiaries is in default of
its respective obligations under any Katy Benefit Plan, and, to Katy's
Knowledge, there have been no defaults or violations by any other party to
the Katy Benefit Plans;
(ii) Each Katy Benefit Plan intended to be qualified under section 401
of the Code (A) satisfies in form the requirements of such section except
to the extent amendments are not required by law to be made until a date
after the Closing Date, (B) has received a favorable determination letter
from the Internal Revenue Service regarding such qualified status, (C) has
not, since receipt of the most recent favorable determination letter, been
amended, except for amendments for which the period for requesting a
favorable determination letter has not expired, and (D) has not been
operated in a way that would adversely affect its qualified status;
(iii) There are no actions, suits, or claims pending (other than routine
claims for benefits) or, to Katy's Knowledge, threatened against, or with
respect to, any of the Katy Benefit Plans or their assets;
(iv) No act, omission or transaction has occurred which would result in
imposition on Katy or any Subsidiary of (A) breach of fiduciary duty
liability damages under section 409 of ERISA; (B) a civil penalty assessed
pursuant to subsections (c), (i) or (1) of section 502 of ERISA; (C) a tax
imposed pursuant to Chapter 43 of Subtitle D of the Code; (D) a lien upon
property or rights under section 302 (f)(l)(A) and (B) of ERISA for failure
to make a required payment to a plan; or (E) the Pension Benefit Guaranty
Corporation instituting proceedings to terminate the plan;
(v) There is no matter pending (other than routine qualification
determination filings) with respect to any of the Katy Benefit Plans before
any governmental authority;
(vi) With respect to each Katy Benefit Plan, (A) no liability to the
Pension Benefit Guaranty Corporation has been incurred, which liability has
not been satisfied (other than for premiums not yet due), (B) no
accumulated funding deficiency, whether or not waived, within the meaning
of section 302 of ERISA or section 412 of the Code has been incurred, and
(C) no event has occurred, and, to Katy's Knowledge, there exists no
condition or set of circumstances in connection with which Katy or any
Subsidiary would reasonably, directly or indirectly, be expected to become
subject to any liability under ERISA, the Code or any applicable law except
liability for benefit claims and payments in the ordinary course; and
(vii) Except for the conversion of the Convertible Preferred Stock into
Common Shares, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not (A) require
Katy or any Subsidiary to make payments of money or other property to, make
a larger contribution to, or pay greater, more accelerated or supplementary
benefits or provide other rights under, including, without limitation,
funding liabilities that are currently unfunded, any Katy Benefit Plan than
it otherwise would, whether or not some other subsequent action or event
(together with the Recapitalization) would be required to cause such
payment or provision to be triggered, or (B) create or give rise to any
additional vested rights or service credits under any Katy Benefit Plan.
(f) Except for the conversion of the Convertible Preferred Stock into Common
Shares, in connection with the consummation of the Recapitalization no payments
of money or other property, acceleration of benefits, or provisions of other
rights have or will be made hereunder, under any agreement contemplated herein,
or under the Katy Benefit Plans that would be reasonably likely to result in
imposition of sanctions or taxes imposed under sections 280G and 4999 of the
Code, whether or not some other subsequent action or event would be required to
cause such payment, acceleration, or provision to be triggered.
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(g) Except for the Katy Benefit Plans disclosed in Schedule 3.13(g), no Katy
Benefit Plan which is an employee welfare plan provides benefits (whether or
not insured) with respect to any current or former employee of Katy or its
Subsidiaries, which continue beyond their retirement or other termination of
service other than coverage mandated by section 4980 of the Code or sections
601-609 of ERISA or comparable provisions of state law.
Section 3.14. Absence of Certain Changes or Events.
Since September 30, 2000, except as contemplated by this Agreement or except
as disclosed in the Katy SEC Reports or in this Agreement (including the
schedules hereto) and except as permitted pursuant to Section 5.1, Katy and the
Subsidiaries have conducted their businesses only in the ordinary and usual
course, and there has not been (i) any Material Adverse Effect on the Katy
Group; (ii) any material change by Katy or any Subsidiary in its accounting
methods, principles or practices other than as required by GAAP or applicable
law; (iii) any revaluation by Katy or any Subsidiary of any of their respective
assets, including, without limitation, writing down the value of inventory or
writing off notes or accounts receivable other than in the ordinary course of
business; (iv) any entry by Katy or any Subsidiary into any material commitment
or transaction, other than in the ordinary course of business; (v) any
declaration, setting aside or payment of any dividends or distributions in
respect of Common Shares or any redemption, purchase or other acquisition of
any of its securities or any securities of Katy or any Subsidiary, except for
regular dividends not in excess of $0.075 per Common Share per quarter; (vi)
any damage, destruction or loss (whether or not covered by insurance)
materially adversely affecting the properties or business of Katy or any
Subsidiary; (vii) any increase in indebtedness for borrowed money other than an
increase as a result of indebtedness for borrowings incurred in the ordinary
course of business; (viii) any granting of a security interest in or lien on
any material property or assets of Katy or any Subsidiary, other than any such
security interest or lien permitted by the Amended and Restated Credit
Agreement dated as of December 11, 1998 among Katy, Bank of America National
Trust and Savings Association, La Salle National Bank, and the other parties
named therein (including, without limitation, such security interests or liens
contemplated by the definitions of "Perfection Date" and "Permitted Liens"
under that Agreement); or (ix) except as disclosed in Schedule 3.14, any
increase in or establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards or restricted stock awards), stock purchase or other
employee benefit plan or any other increase in the compensation payable or to
become payable to any officers or key employees of Katy or any Subsidiary other
than those that are required under existing contractual arrangements and other
than increases in base salaries in the ordinary course of business.
Section 3.15. Investigations; Litigation.
Except as described in any of the Katy SEC Reports or as set forth in
Schedule 3.15, as of the date of this Agreement:
(a) to Katy's Knowledge, no investigation or review by any governmental body
or authority with respect to Katy or any Subsidiary is pending nor has any
governmental body or authority notified Katy or any Subsidiary in writing of an
intention to conduct the same; and
(b) there are no actions, suits or proceedings pending (or, to Katy's
Knowledge, threatened) against or affecting Katy or any Subsidiary, or any of
their respective properties, at law or in equity, before any federal, state,
local or foreign governmental body or authority.
With respect to each matter set forth on Schedule 3.15, such Schedule sets
forth a summary of the subject matter together with a description of action
taken by Katy or its Subsidiaries with respect thereto.
Section 3.16. Products.
Except as set forth on Schedule 3.16, neither Katy nor any Subsidiary has
experienced product recall or warranty claims in excess of 2% of the aggregate
gross sales for such company in any of the past five years.
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Except as set forth on Schedule 3.16, with regard to products and goods
manufactured by Katy or any Subsidiary prior to the Closing Date, there is no
liability with regard to the sale, purchase or consumption of such products or
goods which will have a Material Adverse Effect on the Katy Group and, to
Katy's Knowledge, there are no circumstances or events which are likely to give
rise to such a liability.
Section 3.17. Securities Filings.
None of the information with respect to the Katy Group to be included in any
of the Offer Documents, the Schedule 14D-9, the Proxy Statement or any other
filings made with the SEC in connection with the Recapitalization
(collectively, the "Securities Filings") contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made hereby with respect to information supplied in writing
by or on behalf of Purchaser or any of the Purchaser Designees specifically for
inclusion in the Securities Filings.
Section 3.18. Tax Matters.
(a)(i) All Tax Returns required to be filed by or on behalf of Katy or any
of its Subsidiaries, and each affiliated, combined, consolidated or unitary
group of which Katy or any of its Subsidiaries is a member (a "Current Katy
Group"), or (ii) to Katy's Knowledge, all Tax Returns required to be filed on
behalf of each combined, consolidated or unitary tax group of which Katy or any
of its Subsidiaries has been a member within ten years prior to the date hereof
but is not currently a member, but only insofar as any such Tax Return relates
to a taxable period which includes Katy or any of its Subsidiaries and which
ends on a date within the last ten years (a "Past Katy Group", together with
Current Katy Groups, a "Katy Affiliated Group") have been timely filed and are
complete and accurate except to the extent any failure to file or any
inaccuracies in such filed Tax Returns would not, individually or in the
aggregate, have a Material Adverse Effect on the Katy Group. All Taxes due and
owing by Katy or any of its Subsidiaries, any Current Katy Group or, to Katy's
Knowledge, any Past Katy Group have been accurately and timely paid, or are
being contested in good faith, and appropriate reserves therefor, determined in
accordance with GAAP, have been included in the financial statements referred
to in Section 3.4, except to the extent any failure to pay or reserve would
not, individually or in the aggregate, have a Material Adverse Effect on the
Katy Group. There is no audit examination, deficiency, refund litigation,
proposed adjustment or matter in controversy with respect to any Taxes due and
owing by Katy, any Current Katy Group or, to Katy's Knowledge, any Past Katy
Group which would, individually or in the aggregate, have a Material Adverse
Effect on the Katy Group. All assessments for Taxes due and owing by Katy, any
Current Katy Group or, to Katy's Knowledge, any Past Katy Group with respect to
completed and settled examinations or concluded litigation have been paid. As
soon as practicable after the public announcement of this Agreement, Katy will
provide Purchaser with written schedules of (i) the taxable years of Katy for
which the statutes of limitations with respect to federal income Taxes have not
expired, and (ii) with respect to federal income Taxes those years for which
examinations have been completed, those years for which examinations are
presently being conducted, and those years for which examinations have not yet
been initiated. Katy and each Subsidiary has complied with all rules and
regulations relating to the withholding of Taxes, except to the extent any such
failure to comply would not, individually or in the aggregate, have a Material
Adverse Effect on the Katy Group.
For purposes of this Agreement: (i) "Taxes" means any and all federal,
state, local, foreign or other taxes of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any taxing authority, including, without
limitation, taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use, capital stock,
payroll, employment, social security, workers' compensation, unemployment
compensation, or net worth, and taxes or other charges in the nature of excise,
withholding, ad valorem or value added, and (ii) "Tax Return" means any return,
filing, report or similar statement (including the attached schedules) required
to be filed with respect to any Tax, including, without limitation, any
information return, claim for refund, amended return or declaration of
estimated Tax.
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Section 3.19. Intellectual Property.
"Intellectual Property" means foreign and domestic patents, patent
applications, designs, utility models, and all improvements and developments
relating thereto, trademarks (common law and registered), trademark
registration applications, service marks (common law and registered), service
mark registration applications, trade names, copyrights, copyright
registrations, copyright applications, domain names, domain registrations,
trade secrets, know-how, and other proprietary information. Katy or a
Subsidiary owns, or holds licenses or sublicenses for, or otherwise has the
right to use, all of the Intellectual Property used by Katy or such Subsidiary
in the conduct of its respective business as currently conducted, except where
such failure to do so would not, individually or in the aggregate, have a
Material Adverse Effect on the Katy Group. Except as set forth on Schedule
3.19, Schedule 3.19 includes all of the owned, issued, registered, licensed or
sublicensed Intellectual Property used by Katy or a Subsidiary in the conduct
of their respective businesses as currently conducted, except for such
Intellectual Property that is not, individually or in the aggregate, material
to the Katy Group. Except as set forth on Schedule 3.19, to Katy's Knowledge,
neither Katy nor any Subsidiary is currently in receipt of any written notice
of infringement or written notice of conflict with the asserted Intellectual
Property rights of other persons in connection with or relating to any
Intellectual Property owned or held by such persons, except, in each case, for
matters that would not, individually or in the aggregate, have a Material
Adverse Effect on the Katy Group. Except as set forth in Schedule 3.19, to
Katy's Knowledge, no third party has infringed or violated the Intellectual
Property as to which Katy or a Subsidiary has rights as listed on Schedule
3.19, except, in each case, for matters that would not, individually or in the
aggregate, have a Material Adverse Effect on the Katy Group. Except as set
forth on Schedule 3.19, neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will cause any
cancellation of or material change in any material license or sublicense. held
by Katy or any Subsidiary in connection with any Intellectual Property.
Section 3.20. Severance Payments.
Except for the conversion of the Convertible Preferred Stock into Common
Shares, neither Katy nor any Subsidiary will owe a severance payment, change of
control payment, parachute payment or similar obligation to any of their
respective employees, officers or directors as a result of the Offer, the
Preferred Stock Purchase or the other transactions contemplated by this
Agreement, nor will any of such persons be entitled to severance payments or
other benefits (including without limitation any additional payments or
benefits supplementary to their regular compensation and benefits in effect
immediately prior to the date hereof) as a result of the Offer, the Preferred
Stock Purchase or the other transactions contemplated by this Agreement in the
event of the subsequent termination of their employment.
Section 3.21. Title to Properties.
Schedule 3.21 lists all real property owned by the Katy Group with a value
of $500,000 or more and each lease of real property to which Katy or any
Subsidiary is a party with $500,000 or more still payable. Katy and its
Subsidiaries have good and marketable title to all of the assets and properties
reflected in the Reference Balance Sheet as being owned by the Katy Group
(other than any assets or properties (i) specified in the Reference Balance
Sheet that have been sold or otherwise disposed of since September 30, 2000 in
the ordinary course of business consistent with past practice or (ii) that are
not, individually or in the aggregate, material to Katy) free and clear of
encumbrances, security interests or liens, other than liens the existence of
which is set forth in Schedule 3.21 or is specifically reflected in the
Reference Balance Sheet, and other than any other encumbrances, security
interests or liens that do not exceed $100,000 in the aggregate. Katy and its
Subsidiaries hold under valid lease agreements all real and personal properties
reflected in the Reference Balance Sheet as being held under capitalized
leases, and all real and personal property that is subject to operating leases,
and enjoys peaceful and undisturbed possession of such properties under such
leases, other than (i) any properties as to which such leases have expired in
accordance with their terms without any liability of any party thereto since
September 30, 2000 and (ii) any properties that, individually or in the
aggregate, are not material to Katy. Katy and the Subsidiaries have not
received any written notice of any adverse claim to the title (both fee and any
leasehold) to any properties owned or leased by them, other than any claims
that, individually or in the aggregate, would not have a Material Adverse
Effect on the Katy Group.
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Section 3.22. Licenses.
Except as set forth in Schedule 3.22, all permits, licenses and other
authorizations issued by the federal government and any applicable state
agencies (the "Licenses") required for the operation of the businesses of Katy
and the Subsidiaries are in full force and effect, and there are no pending
modifications, amendments or revocation proceedings, except for such failure to
be so in effect and such modifications, amendments or proceedings as would not,
individually or in the aggregate, have a Material Adverse Effect on the Katy
Group. All fees due and payable to governmental authorities pursuant to the
rules governing the Licenses have been paid, and no event has occurred with
respect to the Licenses held by Katy and the Subsidiaries which, with the
giving of notice or the lapse of time or both, would constitute grounds for
revocation thereof, except for any such revocation as would not, individually
or in the aggregate, have a Material Adverse Effect on the Katy Group. Katy and
the Subsidiaries are in compliance in all material respects with the terms of
their respective Licenses, as applicable (except where any such failure so to
comply would not, individually or in the aggregate, have a Material Adverse
Effect on the Katy Group), and there is no condition, event or occurrence
existing, nor is there any proceeding being conducted of which Katy or any
Subsidiary has received notice, nor, to Katy's Knowledge, is there any
proceeding threatened by any governmental authority, which would cause the
termination, suspension, cancellation or nonrenewal of any of the Licenses, or
the imposition of any penalty or fine by any regulatory authority, except for
such as would not, individually or in the aggregate, have a Material Adverse
Effect on the Katy Group. No capital expenditures in excess of $500,000 are
anticipated or foreseen by Katy or its Subsidiaries in order to maintain
compliance with any Licenses. Katy and its Subsidiaries reasonably expect that
all Licenses are fully renewable, except for any such nonrenewal as would not,
individually or in the aggregate, have a Material Adverse Effect on the Katy
Group.
Section 3.23. Insurance.
The insurance coverage maintained by Katy and any of its Subsidiaries is
reasonably adequate for the operation of the business of Katy and the
Subsidiaries, and, except as set forth in Schedule 3.23, the transactions
contemplated hereby will not adversely affect such coverage.
Section 3.24. Material Contracts.
Schedule 3.24 sets forth in reasonable detail a list of all written and a
description of all oral contracts, agreements, leases, instruments or legally
binding contractual commitments ("Contracts") that are of a type described
below (collectively, the "Material Contracts"), other than Contracts set forth
on Schedules 3.10, 3.13 or 3.21 and Contracts entered into after the date
hereof not in violation of Section 5.1 hereof:
(i) Any Contract with a customer of Katy or any Subsidiary, or with any
entity that purchases goods or services from Katy or any Subsidiary, for
consideration payable in excess of $250,000 (other than standard inventory
purchase orders executed in the ordinary course of business);
(ii) any Contract for capital expenditures or the acquisition or
construction of fixed assets in excess of $250,000;
(iii) any Contract for the purchase or lease of goods or services
(including, without limitation, equipment, materials, software, hardware,
supplies, merchandise, parts or other property, assets or services)
requiring aggregate future payments in excess of $250,000, other than
standard inventory purchase orders executed in the ordinary course of
business;
(iv) any Contract relating to the borrowing of money or guaranty of
indebtedness (other than any Contracts that do not, individually or in the
aggregate, relate to the borrowing of money or guaranty of indebtedness
totaling more than $250,000);
(v) any collective bargaining or other arrangement with any labor union;
(vi) any Contract granting a first refusal, first offer or similar
preferential right to purchase or acquire any of the capital stock or
assets of Katy or any Subsidiary;
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(vii) any Contract limiting, restricting or prohibiting Katy or any
Subsidiary from conducting business anywhere in the United States or
elsewhere in the world or any Contract limiting the freedom of Katy or any
Subsidiary to engage in any line of business or to compete with any other
person;
(viii) any joint venture or partnership Contract;
(ix) Contracts requiring, or reasonably likely to require, future
payments of an amount greater than $250,000; and
(x) any employment Contract, severance agreement or other similar
binding agreement or policy with any employee of Katy or any Subsidiary
other than any such employment contracts providing for a base salary of
less than $100,000 or any such severance agreements or other such binding
agreements or policies providing for payments of less than $100,000 in the
aggregate.
Katy has made available to Purchaser a true and complete copy of each
written Material Contract (and a written description of each oral Material
Contract), including all amendments or other modifications thereto. Except as
set forth on Schedule 3.24, each Material Contract is, assuming it is a valid
and binding contract of the other parties to it, a valid and legally binding
obligation of Katy or a Subsidiary, as the case may be, enforceable against
such entity in accordance with its terms, except insofar as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally or by general equitable
principles, whether applied in a proceeding at law or in equity. Except as set
forth on Schedule 3.24, Katy has performed in all material respects obligations
required to be performed by it under the Material Contracts and, as of the date
of this Agreement, is not in breach or default thereunder. Except as set forth
on Schedule 3.24, neither Katy nor any Subsidiary has received notice of
termination with respect to any Material Contract.
Section 3.25. Rights Agreement.
Katy and the Board of Directors of Katy have taken all necessary action
including, without limitation, all action required to be taken by Katy to amend
the Rights Agreement with respect to all outstanding Rights issued pursuant to
the Rights Agreement, if necessary, to (a) render the Rights Agreement
inapplicable with respect to the Voting Agreement, the Offer, the Preferred
Stock Purchase, any conversion of the Convertible Preferred Stock, this
Agreement and the other transactions contemplated hereby and ensure that they
thereby do not trigger Rights exercisable under the Rights Agreement, (b)
ensure that (i) Purchaser shall not be deemed an Acquiring Person (as defined
in the Rights Agreement) and (ii) the provisions of the Rights Agreement,
including the occurrence of a Distribution Date (as defined in the Rights
Agreement) or the Stock Acquisition Date (as defined in the Rights Agreement),
are not and shall not be triggered by reason of the execution and delivery of
this Agreement, the announcement or consummation of the Offer, the conversion
of the Convertible Preferred Stock, the authorization and consummation of the
Preferred Stock Purchase or the consummation of any of the other transactions
contemplated by this Agreement and the Voting Agreement, and (c) ensure that
Katy will have no obligations under the Rights or the Rights Agreement in
connection with the Offer, the Preferred Stock Purchase and the conversion of
the Convertible Preferred Stock, and the holders of Katy Common Stock will have
no rights under the Rights or the Rights Agreement in connection with the
Offer, the Preferred Stock Purchase and the conversion of the Convertible
Preferred Stock. Katy has made available to Purchaser a complete and correct
copy of the Rights Agreement as amended and supplemented to the date of this
Agreement.
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ARTICLE IV
Representations and Warranties of Purchaser
Purchaser represents and warrants to Katy that:
Section 4.1. Organization, Qualification, Etc.
Purchaser is a limited liability company duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the
limited liability company power and authority to own its properties and assets
and to carry on its business as it is now being conducted and is duly qualified
to do business and is in good standing in each jurisdiction in which the
ownership of its properties or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so
qualified or to be in good standing would not, individually or in the
aggregate, have a Material Adverse Effect on Purchaser. The copy of Purchaser's
Certificate of Formation, which has been delivered to Katy is complete and
correct and in full force and effect as of the date hereof. A complete and
correct copy of the Limited Liability Company Agreement will be delivered to
Katy promptly after the date hereof. Purchaser was formed solely for the
purpose of engaging in the Recapitalization, and, except for obligations or
liabilities and activities contemplated by this Agreement, Purchaser has, and
through the closing of the Offer and the Preferred Stock Purchase shall not
have, incurred any obligation or liability or engaged in any business activity
of any kind.
Section 4.2. Corporate Authority Relative to this Agreement; No Violation.
Purchaser has the limited liability company power and authority to enter
into this Agreement, to carry out its obligations hereunder and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of Purchaser, and no
other limited liability company proceedings on the part of Purchaser are
necessary to authorize this Agreement and the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Purchaser
and, assuming this Agreement constitutes a valid and binding Agreement of the
other party hereto, this Agreement constitutes a valid and binding agreement of
Purchaser, enforceable against Purchaser in accordance with its terms, except
insofar as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by general equitable principles, whether applied in a proceeding
at law or in equity. Purchaser is not subject to or obligated under any
provision of its Certificate of Formation or Limited Liability Company
Agreement or any contract provision or any license, franchise or permit, or
subject to any law, order or decree, that would be breached or violated by its
execution or performance of this Agreement or the consummation of the
transactions contemplated hereby, except for any breaches or violations which
would not, individually or in the aggregate, have a Material Adverse Effect on
Purchaser. Other than in connection with or in compliance with the provisions
of Delaware law, the Exchange Act and the securities or blue sky laws of the
various states (collectively, the "Purchaser Required Approvals"), no
authorization, consent or approval of, or filing with, any governmental body or
authority in the United States of America is necessary for the consummation by
Purchaser of the Recapitalization.
Section 4.3. Litigation.
There are no claims, suits, actions or proceedings pending, or, to the
knowledge of Purchaser, threatened against, relating to or affecting Purchaser
or any of its subsidiaries before any court, governmental department,
commission, agency, instrumentality or authority or any arbitrator that seek to
restrain or enjoin the consummation of the Offer or the Preferred Stock
Purchase. Neither Purchaser nor any of its subsidiaries is subject to any
judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority, or any
arbitrator, which prohibits or restricts the consummation of the
Recapitalization.
Section 4.4. Ownership of Katy Stock.
Except as contemplated by this Agreement, as of the date of this Agreement
neither Purchaser nor any affiliate or associate (as such terms are defined
under the Exchange Act) of Purchaser, other than William F.
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Andrews, a director of Katy, beneficially owns, directly or indirectly, or is
party to any agreement, arrangement or understanding with respect to acquiring,
holding, voting or disposing of, any Common Shares or other capital stock of
Katy.
Section 4.5. No Required Vote of Purchaser Shareholders.
No vote of the members of Purchaser is required by law or the Certificate of
Formation of Purchaser or otherwise in order for Purchaser to consummate the
Preferred Stock Purchase and the transactions contemplated hereby.
Section 4.6. Securities Filings.
None of the information with respect to the Purchaser to be included in any
of the Offer Documents or any other filings made with the SEC in connection
with the transactions contemplated by this Agreement (collectively, the
"Purchaser Securities Filings") contains or will contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made hereby with respect to information supplied in writing
by Katy or any affiliate of Katy specifically for inclusion in Purchaser
Securities Filings.
Section 4.7. Loan Commitments.
The Purchaser has received a letter dated March 27, 2001 from Kohlberg
Investors IV, L.P. and a letter dated March 27, 2001 from Bankers Trust
Company, true and complete copies of which have been provided to Katy,
committing to provide to Purchaser or to Katy, upon the terms and subject to
the conditions set forth in those letters, up to an aggregate of two hundred
ten million dollars ($210,000,000) in financing for the Recapitalization and
for ongoing general corporate purposes of Katy. Such commitment letters are in
full force and effect subject to the terms and conditions set forth therein and
have not been amended or terminated as of the date of this Agreement.
Section 4.8. Purchase for Investment.
The Purchaser is acquiring the Convertible Preferred Stock for investment
and not with a view toward any resale or distribution thereof except in
compliance with the Securities Act.
ARTICLE V
Covenants and Agreements
It is further agreed as follows:
Section 5.1. Conduct of Business by Katy and the Subsidiaries.
During the period from the date of this Agreement and continuing until the
earlier of the Closing Date or the date, if any, on which this Agreement is
earlier terminated pursuant to Section 7.1 (the "Termination Date"), and except
as set forth in Schedule 5.1 or as may be agreed to by the other party hereto
in writing or as may be expressly permitted pursuant to this Agreement, Katy
and each Subsidiary:
(i) shall conduct its operations according to the ordinary and usual
course of business in substantially the same manner as heretofore
conducted;
(ii) shall use commercially reasonable efforts to preserve intact its
business organization and goodwill, keep available the services of its
officers and employees as a group, subject to changes in the ordinary
course, and maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with the
Katy Group;
(iii) shall confer at such times as Purchaser may reasonably request
with one or more representatives of Purchaser to report operational matters
and the status of ongoing operations;
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(iv) shall notify Purchaser of any emergency or other change in the
normal course of any of the respective businesses of Katy and the
Subsidiaries or in the operation of the respective properties of Katy and
the Subsidiaries and of any complaints, investigations or hearings (or
communications indicating that the same may be contemplated) of any
governmental body or authority if such emergency, change, complaint,
investigation or hearing would have a Material Adverse Effect on the Katy
Group, except with the approval of Purchaser, such approval not to be
unreasonably withheld;
(v) shall not authorize or pay any dividends on or make any distribution
with respect to its Common Shares, except for regular dividends not in
excess of $0.075 per Common Share per quarter;
(vi) shall not enter into or amend any employment, severance or similar
agreements or arrangements with its respective directors or executive
officers, except with the approval of Purchaser, such approval not to be
unreasonably withheld;
(vii) shall not, except as otherwise permitted hereunder, authorize,
propose or announce an intention to authorize or propose, or enter into an
agreement with respect to, any merger, consolidation or business
combination, or, other than in the ordinary course of business, any
acquisition of any material assets or securities, any disposition of any
material amount of assets or securities (other than the Preferred Stock
Purchase) or any release or relinquishment of any contract rights;
(viii) shall not propose or adopt any amendments to its Certificate of
Incorporation, By-laws or the Rights Agreement (other than the
authorization of the Convertible Preferred Stock or as otherwise
contemplated by this Agreement);
(ix) shall not issue any Common Shares (other than Common Shares issued
pursuant to the exercise of Options previously granted under the Katy Stock
Option Plans), or effect any stock split or otherwise change its
capitalization (other than the authorization of the Convertible Preferred
Stock) as it existed on the date hereof, other than as specifically
permitted by this Agreement;
(x) shall not, except as specifically permitted by this Agreement,
grant, confer or award (A) any options, warrants, conversion rights or
other rights, not existing on the date hereof, to acquire any Common Shares
(other than in connection with the issuance of the Convertible Preferred
Stock) or (B) any other awards under the Katy Stock Option Plans;
(xi) shall not purchase or redeem any Common Shares;
(xii) shall not materially amend the terms of its respective employee
benefit plans, programs or arrangements or any severance or similar
agreements or arrangements in existence on the date hereof, except as may
be required by applicable law, or adopt any new employee benefit plans,
programs or arrangements or any severance or similar agreements or
arrangements except as contemplated by this Section 5.1 or Section 5.4;
(xiii) shall not enter into any collective bargaining agreement which
contains terms and conditions which cause, or with the passage of time
would cause, a Material Adverse Effect on the Katy Group including, without
limitation, entering into any collective bargaining agreement which
contains a successorship provision or any provision which requires a
purchaser to assume the collective bargaining agreement;
(xiv) shall not enter into any material loan agreement except for
letters of credit in the ordinary course of business;
(xv) shall not make any Tax election or settle or compromise any
material Tax liability other than in the ordinary and usual course of
business consistent with past practice;
(xvi) shall not agree, in writing or otherwise, to take any of the
foregoing actions or take any action which would make any representation or
warranty in Article III hereof untrue or incorrect;
(xvii) shall not grant, confer or award any monetary or non-monetary
bonus;
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(xviii) shall not settle, compromise or otherwise terminate any material
litigation, claim or other settlement negotiation except with the approval
of Purchaser, such approval not to be unreasonably withheld; and
(xix) shall not fail to maintain insurance under substantially the same
terms and conditions as it currently maintains.
If Katy wishes to seek Purchaser's consent to take action otherwise
prohibited by this Section 5.1, Katy shall give notice to Purchaser pursuant to
Section 8.5 and Purchaser shall notify Katy within three (3) Business Days
whether it will grant such consent. Failure so to notify Katy shall be deemed
to be consent by Purchaser, but such consent shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other action Katy proposes to
take that is governed by this Section 5.1.
Section 5.2. Investigation.
Subject to appropriate confidentiality agreements and reasonable notice
provided to Katy in advance, Katy shall, and shall cause the Subsidiaries to,
afford to Purchaser and to Purchaser's officers, employees, accountants,
counsel and other authorized representatives reasonable access, throughout the
period prior to the earlier of the Closing Date or the Termination Date, to
their respective plants, properties, contracts, commitments, books, and records
(including but not limited to Tax Returns) and any report, schedule or other
document filed or received pursuant to the requirements of federal or state
securities laws and shall use its reasonable best efforts to cause their
respective representatives to furnish promptly to one another such additional
financial and operating data and other information as Purchaser or its duly
authorized representatives may from time to time reasonably request, subject to
compliance with third party confidentiality obligations and as may be required
to maintain any material attorney-client privilege. The terms and conditions of
the Confidentiality Agreement, dated October 10, 2000, between Katy and
Kohlberg & Company, LLC (the "Confidentiality Agreement") shall apply to
information obtained pursuant to this Section 5.2 with references to Kohlberg &
Company, LLC being deemed to be references to Purchaser.
Section 5.3. Cooperation.
Katy and Purchaser shall together, or pursuant to an allocation of
responsibility to be agreed upon between them:
(a) prepare and file with the SEC as soon as is reasonably practicable a
proxy statement, and shall use their reasonable best efforts to have the proxy
statement cleared by the SEC under the Exchange Act;
(b) as soon as is reasonably practicable take all such action as may be
required under state blue sky or federal or state securities laws in connection
with the transactions contemplated by this Agreement; and
(c) cooperate with one another in order to lift any injunctions or remove
any other impediment to the consummation of the transactions contemplated
herein.
Section 5.4. Employee Benefit Plans
Subject to applicable law and obligations under collective bargaining
agreements, for a period of not less than twelve months immediately following
the Closing Date, the compensation, benefits and coverage provided to those
individuals who continue to be employees of Katy or its Subsidiaries (the
"Continuing Katy Employees") pursuant to employee benefit plans or arrangements
maintained by Katy or its Subsidiaries shall be substantially comparable in the
aggregate to those provided to such employees immediately prior to the Closing
Date (it being understood that, after the Closing Date, (i) Options need not be
granted under any Katy Benefit Plan, (ii) Katy and its Subsidiaries may enforce
the employment agreements by which Katy or any Subsidiary is a party in
accordance with their respective terms, including, without limitation, any
right to amend, modify, suspend, revoke or terminate such employment
agreements, and (iii) this Section 5.4 shall not give any employee a right to
continued employment with Katy or its Subsidiaries). Notwithstanding the
foregoing (i) any Katy Benefit Plan that provides as of the date hereof for a
continuation period longer than
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twelve months shall be honored by Katy or any of its Subsidiaries; and (ii)
Purchaser and Katy shall use their reasonable best efforts to implement the
adjustments to the employment arrangements reflected in the management term
sheet agreed to between the parties prior to the date hereof, effective as of
the Closing.
Section 5.5. Filings; Other Action.
Subject to the terms and conditions provided herein and subject to the
fiduciary duties of the directors of Katy (as determined by such directors in
good faith after consultation with counsel), Katy and Purchaser shall use
reasonable efforts to (i) cooperate with one another in (A) determining whether
any filings are required to be made with, or consents, permits, authorizations
or approvals are required to be obtained from, any third party, the United
States government or any agencies, departments or instrumentalities thereof or
other governmental or regulatory bodies or authorities of federal, state, local
and foreign jurisdictions in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and (B)
timely making all such filings and timely seeking all such consents, permits,
authorizations or approvals, and (ii) take, or cause to be taken all other
actions and do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective the transactions contemplated
hereby, including, without limitation, taking all such further action as
reasonably may be necessary to resolve such objections, if any, as the Federal
Trade Commission, the Antitrust Division of the Department of Justice, state
antitrust enforcement authorities or competition authorities of any other
nation or other jurisdiction or any other person may assert under relevant
antitrust or competition laws with respect to the transactions contemplated
hereby.
Section 5.6. [Reserved].
Section 5.7. Anti-takeover Statute.
If any "fair price", "moratorium", "control share acquisition" or other form
of anti-takeover statute or regulation shall become applicable to the
transactions contemplated hereby, each of Katy and Purchaser and the members of
their respective Boards of Directors shall grant such approvals and take such
actions as are reasonably necessary so that the transactions contemplated
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of such statute
or regulation on the transactions contemplated hereby.
Section 5.8. No Solicitation by Katy.
(a) Katy shall not, nor shall it permit any of the Subsidiaries to, nor
shall it authorize or permit any of its directors, officers or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its Subsidiaries to, directly or
indirectly through another person, (i) solicit, initiate or encourage
(including, without limitation, by way of furnishing information or by taking
any action which would make the Rights Agreement inapplicable to any Katy
Takeover Proposal (as defined below) other than the Offer and the Preferred
Stock Purchase), or take any other action designed to facilitate, any inquiries
or the making of any proposal which constitutes any Katy Takeover Proposal or
(ii) participate in any discussions or negotiations regarding any Katy Takeover
Proposal, in each case without the prior written consent of the Purchaser;
provided that prior to the acceptance for payment of Offer Shares pursuant to
the Offer, in response to an unsolicited Katy Takeover Proposal that did not
result from the breach of this Section 5.8, following delivery to Purchaser of
notice of the Katy Takeover Proposal in compliance with its obligations under
Section 5.8(c) hereof, Katy may participate in discussions or negotiations with
or furnish information (pursuant to a confidentiality agreement with customary
terms) to any third party which makes a bona fide written Katy Takeover
Proposal if (A) a majority of Katy's Board of Directors determines in good
faith (after consultation with an independent, nationally recognized investment
bank) that taking such action would be reasonably likely to lead to the
delivery to Katy of a Superior Proposal and (B) a majority of Katy's Board of
Directors determines in good faith (after consultation with outside legal
counsel) that failure to take such actions would not be consistent with the
fiduciary duties of the directors under applicable law. For purposes of this
Agreement, "Katy Takeover Proposal" means any inquiry, proposal or offer from
any person relating to
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any direct or indirect acquisition or purchase of a business that constitutes
25% or more of the net revenues, net income or assets of Katy and its
Subsidiaries, taken as a whole, or 25% or more of any class of equity
securities of Katy (other than purchases made without the prior authorization
or approval of Katy), any tender offer or exchange offer that if consummated
would result in any person beneficially owning 25% or more of any class of
equity securities of Katy, or any merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Katy, other than the Recapitalization. "Superior Proposal" means a bona fide
written Katy Takeover Proposal made by a third party to purchase or otherwise
acquire more than 50% of the outstanding equity securities of Katy pursuant to
a tender offer, exchange offer, merger, recapitalization or other business
combination or similar transaction on terms which a majority of Katy's Board of
Directors determines in good faith (after consultation with an independent,
nationally recognized investment bank) to be superior to Katy's shareholders
(in their capacity as shareholders) from a financial point of view (taking into
account, among other things, the length of time necessary to complete the
proposed transaction, the risk of non-completion, all legal, financial,
regulatory and other aspects of the proposal, and the identity of the offeror)
as compared to the transactions contemplated hereby (including any alternative
proposed by Purchaser pursuant to Section 7.1(h) in response to such Katy
Takeover Proposal), which is reasonably capable of being consummated.
(b) Neither the Board of Directors of Katy nor any committee thereof shall
(i) withdraw or modify, or propose publicly to withdraw or modify, in a manner
adverse to Purchaser, the approval or recommendation by such Board of Directors
or such committee of or with respect to the Offer, the Preferred Stock Purchase
or this Agreement, (ii) approve or recommend, or propose publicly to approve or
recommend, any Katy Takeover Proposal, or (iii) cause Katy to enter into any
letter of intent, agreement in principle, acquisition agreement or other
similar agreement (each, a "Katy Acquisition Agreement") related to any Katy
Takeover Proposal. Nothing in the foregoing sentence shall prevent Katy, its
Board of Directors, or a committee, from (A) complying with the requirements of
rule 14e-2 and rule 14d-9 under the Exchange Act, (B) making such disclosure to
stockholders or otherwise which the Board of Directors after consultation with
counsel, concludes is necessary under applicable law or the rules of the New
York Stock Exchange or (C) withdrawing or modifying an approval or
recommendation of or with respect to the Offer, the Preferred Stock Purchase or
this Agreement, or approving or recommending a Katy Takeover Proposal from a
third party or causing Katy to enter into a Katy Acquisition Agreement, if the
Board of Directors of Katy after consultation with outside legal counsel,
determines that not doing so would not be consistent with the fiduciary
obligations of the directors under applicable law.
(c) In addition to the obligations of Katy set forth in paragraphs (a) and
(b) of this Section 5.8, Katy shall promptly advise Purchaser orally and in
writing of any request for information or of any Katy Takeover Proposal, the
material terms and conditions of such request or Katy Takeover Proposal and the
identity of the person making such request or Katy Takeover Proposal. Katy will
keep Purchaser reasonably informed of the status and details (including
amendments or proposed amendments) of any such request or Katy Takeover
Proposal on a daily basis or more frequently as may be reasonably requested by
Purchaser.
Section 5.9. Rights Agreement.
Katy shall not, unless required to do so by a court of competent
jurisdiction, (i) redeem the Rights, (ii) amend (other than to delay the
Distribution Date and the Stock Acquisition Date (as such terms are defined
therein) or as required to comply with Section 1.3(a)(iv) hereof) or terminate
the Rights Agreement prior to the Closing Date without the consent of
Purchaser, or (iii) take any action which would allow any Person (as such term
is defined in the Rights Agreement) other than Purchaser and the Agreement
Shareholders to be the Beneficial Owner (as such term is defined in the Rights
Agreement) of 15% or more of the Katy Common Stock without causing a
Distribution Date (as such term is defined in the Rights Agreement) or a
Triggering Event (as such term is defined in the Rights Agreement) to occur.
Section 5.10. Public Announcements.
Except as may be required by applicable law, no party hereto shall make any
public announcements or otherwise communicate with any news media or any other
party with respect to this Agreement or any of the
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transactions contemplated hereby without prior consultation with the other
party as to the timing and contents of any such announcement or communications;
provided, however, that nothing contained herein shall prevent any party from
(i) promptly making all filings with governmental authorities or disclosures by
the stock exchange on which such party's capital stock is listed, as may, in
its judgment, be required or advisable in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby or (ii) disclosing the terms of this Agreement to such party's legal
counsel, financial advisors or accountants in furtherance of the
Recapitalization.
Section 5.11. Indemnification of Directors and Officers.
(a) Purchaser agrees that the indemnification obligations set forth in
Katy's Certificate of Incorporation or By-laws, in each case as of the date of
this Agreement, shall survive the consummation of the Recapitalization and
shall not be amended, repealed or otherwise modified for a period of six years
after the Closing Date in any manner that would adversely affect the rights
thereunder of the individuals who on or prior to the Closing Date were
directors, officers, employees or agents of Katy or its Subsidiaries.
(b) For six years from the Closing Date, Purchaser agrees that Katy will
provide to the directors and officers of Katy as of the date of this Agreement
liability insurance protection of the same kind and scope as that provided by
Katy's directors' and officers' liability insurance policies (copies of which
have been made available to Purchaser), with respect to claims arising from
facts or events that occurred prior to the Closing Date; provided, however,
that in no event shall Katy be required to expend more than 200% of the amount
currently expended by Katy (the "Insurance Amount") to maintain or procure its
current directors and officers liability insurance coverage; provided, further,
that if Katy is unable to maintain or obtain the insurance called for by this
Section 5.11, Katy shall use its best efforts to obtain as much comparable
insurance as available for the Insurance Amount.
(c) In the event Purchaser or Katy or any of their respective successors or
assigns (i) consolidates with or merges into any other person or shall not be
the continuing or surviving corporation or entity in such consolidation or
merger or (ii) transfers all or substantially all its properties and assets to
any person, then, and in each case, proper provision shall be made so that the
successors and assigns of Purchaser or Katy, as the case may be, honor the
indemnification obligations set forth in this Section 5.11.
(d) Purchaser agrees that the obligations of Katy under this Section 5.11
shall not be terminated or modified in such a manner as to adversely affect any
director, officer, employee, agent or other person to whom this Section 5.11
applies without the consent of such affected director, officer, employee, agent
or other person (it being expressly agreed that each such director, officer,
employee, agent or other person to whom this Section 5.11 applies shall be
third-party beneficiaries of this Section 5.11).
Section 5.12. Additional Reports.
Katy shall furnish to Purchaser copies of any reports of the type referred
to in Section 3.4 which it files with the SEC on or after the date hereof. Katy
represents and warrants that as of the respective dates thereof, such reports
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statement
therein, in light of the circumstances under which they were made, not
misleading. Any unaudited consolidated interim financial statements included in
such reports (including any related notes and schedules) will fairly present
the financial position of Katy as of the dates thereof and the results of
operations and changes in financial position or other information included
therein for the periods or as of the date then ended (subject, where
appropriate, to normal year-end adjustments), in each case in accordance with
past practice and GAAP consistently applied during the periods involved (except
as otherwise disclosed in the notes thereto).
Section 5.13. Update Disclosure; Breaches.
From and after the date of this Agreement until the Closing Date, each party
hereto shall promptly notify the other party hereto in writing of (i) the
occurrence, or non-occurrence, of any event that would be likely to
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cause any condition to the obligations of any party to effect the Offer, the
Preferred Stock Purchase and the other transactions contemplated by this
Agreement not to be satisfied, or (ii) the failure of Katy or Purchaser, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it pursuant to this Agreement which would be
likely to result in any condition to the obligations of any party to effect the
Offer, the Preferred Stock Purchase and the other transactions contemplated by
this Agreement not to be satisfied; provided, however, that the delivery of any
notice pursuant to this Section 5.13 shall not cure any breach of any
representations or warranty requiring disclosure of such matter prior to the
date of this Agreement or otherwise limit or affect the remedies available
hereunder to the party receiving such notice.
Section 5.14. Corporate Governance.
(a) Purchaser shall have the right to nominate for election at the
Shareholder Meeting, and, so long as Purchaser owns Convertible Preferred
Stock, at any subsequent annual or special meeting of the shareholders of Katy
at which an election for members of Katy's Board of Directors is held, a number
of Purchaser Designees such that, after the election, Purchaser Designees
represent a simple majority of Katy's Board of Directors, subject to approval
by a vote of a majority of the holders of Common Shares present in person or by
proxy and voting at such meeting.
(b) All directors elected at the Shareholder Meeting shall be classified,
with respect to the time for which they severally hold office, into two
classes, one class comprising the four (4) directors who are not Purchaser
Designees to be initially elected for a one-year term expiring at the annual
meeting of Katy's shareholders to be held in 2002, and a second class
comprising the five (5) Purchaser Designees to be elected initially for a two-
year term expiring at the annual meeting of Katy's shareholders to be held in
2003, with the directors in each class to hold office until their respective
successors are duly elected and qualified. At each succeeding annual meeting of
Katy's shareholders, directors elected to succeed those directors whose terms
then expire shall be elected for a term of office to expire at the second
succeeding annual meeting of shareholders after such election. Katy shall amend
its By-Laws to reduce the number of directors constituting the whole board of
Katy to nine (9) and, so long as Purchaser owns Convertible Preferred Stock,
shall not subsequently increase the size of its Board of Directors, unless at
the time of such increase Purchaser has been afforded the opportunity to
nominate the number of additional directors necessary, together with incumbent
directors nominated by Purchaser, to constitute a simple majority of Katy's
Board of Directors.
(c) Purchaser shall not, directly or indirectly (including through any
Person who is an "affiliate" of Purchaser within the meaning of Rule 405 under
the Securities Act ("Purchaser Affiliate")), in any transaction or series of
related transactions, sell, transfer or otherwise dispose of more than 20% of
the Katy Common Stock (on a fully diluted basis, including for such purpose the
Common Shares issuable upon the conversion of Convertible Preferred Stock),
unless all holders of Katy Common Stock other than Purchaser and any Purchaser
Affiliate (the "Other Holders") have the right to participate in such sale,
transfer or other disposition on the same terms and conditions and for the same
consideration per Common Share or Common Share equivalent on a pro rata basis.
In connection with any merger, consolidation or other business combination
involving Katy in which Katy is not the surviving corporation, the Other
Holders shall receive the same consideration per Common Share or Common Share
equivalent as that received by Purchaser.
(d) All fees paid by Katy to Purchaser or to any Purchaser Affiliate and any
transactions between Katy and Purchaser or any Purchaser Affiliate shall be
subject to approval of the members of Katy's Board of Directors who are not
Purchaser Designees or Purchaser Affiliates (the "Other Directors").
(e) Prior to the Closing, the By-Laws of Katy shall be amended to reflect
the restrictions set forth in paragraphs (b) through (d) of this Section 5.14
and to require that any amendment to the By-Laws of Katy modifying the terms
set forth in paragraphs (a) through (d) of this Section 5.14 shall be subject
to approval by a majority of the Other Directors and by a majority of the Other
Holders.
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Section 5.15. Registration Rights.
Purchaser shall have registration rights with respect to the Common Shares
purchased pursuant to the Offer and the Common Shares issued upon conversion of
the Convertible Preferred Stock (collectively, the "Registrable Securities") on
the terms and conditions set forth in Annex II.
ARTICLE VI
Conditions to Closing
Section 6.1. Conditions to Each Party's Obligation to Close.
The respective obligations of each party to consummate the Recapitalization
shall be subject to the fulfillment on or prior to the Closing Date of the
following conditions:
(a) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
court or other tribunal or governmental body or authority which prohibits the
consummation of the Recapitalization substantially on the terms contemplated
hereby. In the event any order, decree or injunction shall have been issued,
each party shall use its reasonable efforts to remove any such order, decree or
injunction.
(b) All Katy Required Approvals and Purchaser Required Approvals shall have
been obtained, except where the failure to obtain such other Katy Required
Approvals and Purchaser Required Approvals would not have a Material Adverse
Effect on the Katy Group or Purchaser, as the case may be.
Section 6.2. Conditions to Obligations of Katy to Close.
The obligation of Katy to consummate the Recapitalization is further subject
to the conditions that (a) the representations and warranties of Purchaser
contained herein shall be true and correct as of the Closing Date with the same
effect as though made as of the Closing Date except (i) for changes
specifically permitted by the terms of this Agreement, (ii) for the accuracy of
representations and warranties that by their terms speak as of the date of this
Agreement or some other date, which will be determined as of such date and
(iii) where any such failure of the representations and warranties in the
aggregate to be true and correct in all respects would not have a Material
Adverse Effect on Purchaser or on the Katy Group, (b) Purchaser shall have
performed in all material respects all obligations and complied with all
covenants required by this Agreement to be performed or complied with by it
prior to the Closing Date, (c) Purchaser shall have delivered to Katy the
Preferred Purchase Price for the Convertible Preferred Stock as set forth in
Section 2.1, (d) Purchaser shall have delivered to Katy a certificate, dated
the Closing Date and signed by an executive officer, certifying to the effects
set forth in clauses (a) and (b) above and (e) Purchaser's counsel shall have
delivered to Katy a legal opinion in the form set forth on Schedule 6.2.
Section 6.3. Conditions to Obligations of Purchaser to Close.
The obligation of Purchaser to consummate the Recapitalization is further
subject to the conditions that (a) the Purchaser Closing Conditions have been
satisfied or, to the extent not satisfied, waived by Purchaser, provided that
Purchaser will not waive the Purchaser Closing Condition set forth under
subparagraph (o) of Annex I without Katy's consent (such consent not to be
unreasonably withheld), (b) Katy shall have delivered to Purchaser a
certificate signed by its respective Chairman of the Board, Chief Executive
Officer and President or any Senior Vice President (an "Officer's
Certificate"), dated the Closing Date, certifying to the effect that the
representations and warranties of Katy contained herein shall be true and
correct as of the Closing Date with the same effect as though made as of the
Closing Date, except (i) for changes specifically permitted by the terms of
this Agreement, (ii) for the accuracy of representations and warranties which
speak as of a specific date, which will be determined as of such date, and
(iii) where the failure of any such representation or warranty to be true and
correct as of the Closing Date or as of such other specific date, as the case
may be, individually or in the aggregate, would not have a Material Adverse
Effect on the Katy Group, (c) Katy shall
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have delivered to Purchaser an Officer's Certificate, dated the Closing Date,
certifying to the effect that Katy shall have performed, or shall have caused a
Subsidiary to perform, all obligations and complied with all covenants required
by this Agreement to be performed or complied with by any of them prior to the
Closing Date, except where the failure so to perform, individually or taken as
a whole, would not adversely affect the ability of Katy to consummate the
Recapitalization, (d) Katy shall have delivered a certificate of the Registrar
of the Katy Common Stock as to the number of shares outstanding as of the close
of business on the day preceding the Closing Date and a certificate from the
Secretary of Katy certifying that the Offer Shares proposed to be accepted for
payment represent less than 30% of the combined voting power of the outstanding
securities of Katy immediately prior to the Closing, and (e) Katy's outside
legal counsel shall have delivered to Purchaser a legal opinion in the form set
forth on Schedule 6.3.
ARTICLE VII
Termination, Waiver, Amendment and Closing
Section 7.1. Termination or Abandonment.
Notwithstanding anything contained in this Agreement to the contrary, this
Agreement may be terminated and abandoned at any time prior to the Closing
Date, whether before or after any approval of the matters presented in
connection with the Recapitalization by the shareholders of Katy:
(a) by the mutual written consent of Katy and Purchaser;
(b) by either Katy or Purchaser if the Closing Date shall not have occurred
on or before June 30, 2001; provided, that the party seeking to terminate this
Agreement pursuant to this Section 7.1(b) shall not have breached in any
material respect its obligations under this Agreement in any manner that shall
have substantially contributed to the failure to consummate the
Recapitalization on or before such date;
(c) by either Katy or Purchaser if (i) a statute, rule, regulation or
executive order shall have been enacted, entered or promulgated prohibiting the
consummation of the Recapitalization substantially on the terms contemplated
hereby or (ii) an order, decree, ruling or injunction shall have been entered
permanently restraining, enjoining or otherwise prohibiting the consummation of
the Recapitalization substantially on the terms contemplated hereby and such
order, decree, ruling or injunction shall have become final and non-appealable;
provided that the party seeking to terminate this Agreement pursuant to this
clause (ii) of Section 7.1(c) shall have used its reasonable best efforts to
remove such order, decree, ruling or injunction;
(d) by Purchaser if the Purchaser Closing Conditions are not satisfied on or
prior to the Closing Date;
(e) [reserved];
(f) by Katy, if Purchaser shall have breached or failed to perform in any
material respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform (i)
would give rise to the failure of a condition set forth in Section 6.2(a) or
(b), and (ii) is incapable of being cured by Purchaser or is not cured within
30 days of notice of such breach or failure;
(g) by Purchaser, if Katy shall have breached or failed to perform, or shall
have failed to cause any Subsidiary to perform, in any material respect any of
its representations, warranties, covenants or other agreements contained in
this Agreement, which breach or failure to perform (i) would give rise to the
failure of a condition set forth in Section 6.3(a), and (ii) is incapable of
being cured by Katy or is not cured within 30 days of notice of such breach or
failure;
(h) by Katy, if at any time prior to the Closing Date, a Superior Proposal
is received by Katy and Katy's Board of Directors determines in good faith
(after consultation with outside legal counsel) that failure to terminate this
Agreement and enter into an agreement to effect the Superior Proposal would be
inconsistent
B-27
with its fiduciary duties under applicable law; provided that Katy may not
terminate this Agreement pursuant to this Section 7.1(h) unless and until (i)
three (3) Business Days have elapsed following delivery to Purchaser of a
written notice of such good faith determination by Katy's Board of Directors
and during such three (3) Business Day period Katy has fully cooperated with
Purchaser, including without limitation, informing Purchaser of the terms and
conditions of such Superior Proposal, and the identity of the person making
such Superior Proposal, with the intent of enabling both parties to agree to a
modification of the terms and conditions of this Agreement so that the
transactions contemplated hereby may be effected; (ii) at the end of such three
(3) Business Day period the Katy Takeover Proposal continues to constitute a
Superior Proposal and Katy's Board of Directors confirms its good faith
determination (after consultation with outside legal counsel) that failure to
terminate this Agreement and enter into an agreement to effect the Superior
Proposal would be inconsistent with its fiduciary duties under applicable law;
and (iii) (A) at or prior to such termination, Purchaser has received payment
of any amounts required by Section 7.2 to be paid at or prior to termination,
but only if and when such amounts are payable under Section 7.2, by wire
transfer in same day funds, and (B) as soon as practicable following such
termination Katy enters into a definitive acquisition, merger or similar
agreement to effect the Superior Proposal.
(i) Except as provided in Sections 7.2 and 8.2 hereof, in the event of the
termination of this Agreement pursuant to Section 7.1, this Agreement shall
forthwith become void, there shall be no liability on the part of Purchaser or
Katy or any of their respective officers or directors to the other and all
rights and obligations of any party hereto shall cease, except that nothing
herein shall relieve any party from liability for any misrepresentation or
breach of any covenant or agreement under this Agreement or from the
confidentiality obligations in Section 5.2 hereof.
Section 7.2. Termination Fee.
(a) If this Agreement is terminated by Purchaser or Katy, as the case may
be, pursuant to Sections 7.1(b), 7.1(c), 7.1(d) or 7.1(g), or by Katy pursuant
to Section 7.1(h), then Katy shall promptly reimburse Purchaser for Purchaser's
documented expenses (including, without limitation, fees and expenses of or
associated with Purchaser's lenders and their counsel in this transaction) up
to $1,000,000, payable by wire transfer of same day funds within five Business
Days of the receipt by Katy of a statement itemizing and reasonably documenting
such expenses.
(b) In the event that a Katy Takeover Proposal shall have been made known to
Katy or has been made directly to its shareholders generally or any person
shall have publicly announced an intention (whether or not conditional) to make
a Katy Takeover Proposal and thereafter this Agreement is terminated by either
Purchaser or Katy pursuant to Sections 7.1(d) (insofar as it relates to failure
to satisfy the Minimum Condition, the conditions set forth in clauses (ii) or
(iii) of the first paragraph of Annex I, or any one or more of the conditions
set forth in clause (b), (c), (d), (g), (h), (i), (j), (k), (m), (n), (o), (p),
(q) or (r) as the case may be, of Annex I), 7.1(g) or 7.1(h), then Katy shall
promptly pay Purchaser a fee equal to $2,000,000 (the "Termination Fee")
payable by wire transfer of same day funds; provided, however, that no
Termination Fee shall be payable to Purchaser pursuant to this Section 7.2
unless and until within 12 months of such termination, Katy or any of its
Subsidiaries enters into any Katy Acquisition Agreement or a Katy Takeover
Proposal is made, and, within 18 months of such termination, Katy or any of its
Subsidiaries consummates any Katy Takeover Proposal (for the purposes of the
foregoing proviso the terms "Katy Acquisition Agreement" and "Katy Takeover
Proposal" shall have the meanings assigned to such terms in Section 5.8, except
that the references to 25% in the definition of "Katy Takeover Proposal" in
Section 5.8(a) shall be deemed to be references to 40%, in which event the
Termination Fee shall be payable within two Business Days of the consummation
of the Katy Takeover Proposal). Katy acknowledges that the agreements contained
in this Section 7.2 are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, Purchaser would not enter
into this Agreement; accordingly, if Katy fails promptly to pay the amount due
pursuant to this Section 7.2, and, in order to obtain such payment, Purchaser
commences a suit which results in a judgment against Katy for the fee set forth
in this Section 7.2, Katy shall pay to Purchaser its costs and expenses
(including reasonable attorneys' fees and expenses) in connection with such
suit, together with interest on the amount of the fee at the prime rate of
Citibank N.A. in effect on the date such payment was required to be made.
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Section 7.3. Approval of Board of Directors Required.
Subject to Sections 5.11 and 5.14, the approval of the Board of Directors of
Katy shall be required for any amendment or modification of the Agreement, any
waiver of any condition to the obligations of Katy under this Agreement, any
waiver of any of Katy's rights under this Agreement, any consent by Katy to a
reduction in the Minimum Condition to the Offer or to the imposition of
additional conditions to the Offer, any amendment to the Offer that is in any
manner adverse to Katy or holders of Common Shares and any extension by Katy of
the time for performance of any acts by Purchaser under this Agreement.
ARTICLE VIII
Miscellaneous
Section 8.1. Non-Survival of Representations and Warranties; Specific
Enforcement; Limitation.
None of the representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Closing Date.
The parties agree that an award of money damages would be inadequate for any
breach of this Agreement by any party and that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity. In the event that any party to
this Agreement should be entitled to damages for breach of any representation,
warranty or covenant, the parties hereby agree that the party alleging any such
breach shall be entitled to damages only to the extent that such breach
(without regard to any materiality exceptions or provisions in such
representation or warranty) is determined, individually or in the aggregate, to
have or to have had a Material Adverse Effect on the Katy Group or Purchaser,
as the case may be.
Section 8.2. Expenses.
Except as set forth in Section 7.1 and 7.2, whether or not the
Recapitalization is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expenses, except that (a) the expenses incurred in
connection with the printing and mailing of the Offer shall be shared equally
by Katy and Purchaser and (b) all transfer taxes shall be paid by Katy.
Section 8.3. Counterparts; Effectiveness.
This Agreement may be executed in two or more consecutive counterparts, each
of which shall be an original, with the same effect as if the signatures
thereto were upon the same instrument, and shall become effective when one or
more counterparts have been signed by each of the parties and delivered (by
telecopy or otherwise) to the other party.
Section 8.4. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware without regard to the principles of conflicts of
laws thereof.
Section 8.5. Notices.
All notices and other communications hereunder shall be in writing
(including telecopy or similar writing) and shall be effective (a) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified in
this Section 8.5 and the appropriate telecopy confirmation is received or (b)
if given by any other means, when delivered at the address specified in this
Section 8.5:
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To Katy:
Katy Industries, Inc.
6300 S. Syracuse Way, Suite 300
Englewood, Colorado 80111
Telecopy: (303) 290-9344
Attention: Chief Executive Officer
with a copy (which shall not constitute notice) to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Telecopy: (212) 909-6836
Attention: Meredith M. Brown, Esq.
To Purchaser:
KKTY Holding Company, L.L.C.
c/o Kohlberg & Company, L.L.C.
111 Radio Circle
Mt. Kisco, New York 10549
Telecopy: (914) 244-0689
Attention: Mr. Christopher Lacovara
with a copy (which shall not constitute notice) to:
Hunton & Williams
200 Park Avenue
New York, New York 10166
Telecopy: (212) 309-1100
Attention: Raul Grable, Esq.
Section 8.6. Assignment; Binding Effect.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by either of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
party. Subject to the preceding sentence, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
Section 8.7. Severability.
Any term or provision of this Agreement which is invalid or unenforceable in
any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the terms and provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as is
enforceable.
Section 8.8. Miscellaneous.
This Agreement (including, for the avoidance of doubt, the exhibits and
annexes to it):
(a) and the disclosure schedules to this Agreement, and the Confidentiality
Agreement constitute the entire agreement, and supersede all other prior
agreements and understandings, both written and oral, between the parties or
their affiliates with respect to the subject matter hereof and thereof; and
(b) is not intended to and shall not confer upon any person other than the
parties hereto any rights or remedies hereunder, except for the rights to
indemnification and insurance provided for in Section 5.11 for the
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benefit of Katy's directors, officers, employees, agents and other persons, and
the rights provided in Section 5.4 for the benefit of Continuing Katy
Employees.
Section 8.9. Headings.
Headings of the Articles and Sections of this Agreement are for convenience
of the parties only, and shall be given no substantive or interpretive effect
whatsoever.
Section 8.10. Finders or Brokers.
Except for the engagement of Bear, Stearns & Co. Inc. by Katy pursuant to
the Agreement dated January 8, 2001, previously provided to Purchaser, neither
Katy nor any of its Subsidiaries, nor Purchaser, has employed any investment
banker, broker, finder or intermediary in connection with the transactions
contemplated hereby who might be entitled to any fee or any commission in
connection with or upon consummation of the Recapitalization payable by Katy or
any of its Subsidiaries or Purchaser, as the case may be.
Section 8.11. Amendment.
This Agreement may be amended by the parties hereto by action taken by or on
behalf of their respective Boards of Directors at any time prior to the Closing
Date; provided, however, that no amendment may be made which would reduce the
amount or change the type of consideration offered for each Offer Share
pursuant to this Agreement upon consummation of the Recapitalization. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
Section 8.12. Waiver.
Subject to Section 7.3, at any time prior to the Closing Date, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein; provided, however,
that after the approval of shareholders of Katy of the Recapitalization is
obtained, there may not be, without further approval of such shareholders, any
extension or waiver of this Agreement or any portion thereof which reduces the
amount or changes the form of the consideration to be delivered to the holders
of Offer Shares hereunder other than as contemplated by this Agreement. Any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party to be bound thereby, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
[The Next Following Page is the Signature Page]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the date first above written.
Katy Industries, Inc.
/s/ Robert M. Baratta
By: _________________________________
Name: Robert M. Baratta
Title: President and Chief
Executive Officer
KKTY Holding Company, l.l.c.
/s/ Christopher Lacovara
By: _________________________________
Name: Christopher Lacovara
Title: Authorized Manager
B-32
ANNEX I
PURCHASER CLOSING CONDITIONS
Notwithstanding any other provision of this Agreement, Purchaser shall not
be required to (A) accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-1(c) under the Exchange Act
(relating to Purchaser's obligation to pay for or return tendered Common Shares
promptly after expiration or termination of the Offer), to pay for any Offer
Shares tendered and (B) consummate the Preferred Stock Purchase unless the
following conditions have been satisfied: (i) there have been validly tendered
and not withdrawn prior to the time the Offer shall otherwise expire at least
2,000,000 Common Shares (the "Minimum Condition"), (ii) the Offer Shares
tendered together with the Common Shares into which the Convertible Preferred
Stock is convertible represent a majority of the Katy Common Stock issuable and
outstanding, calculated on a fully diluted basis (excluding outstanding
Options), on the Closing Date, (iii) the Offer Shares tendered, after
proration, if any, of Common Shares tendered in accordance with Section 1.4(b),
represent less than 30% of the combined voting power of the outstanding
securities of Katy on the Closing Date, and (iv) none of the following events
shall have occurred and be continuing at the time of acceptance for payment of,
or payment for, such Common Shares:
(a) any governmental authority shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order which is in effect and which (1) materially
restricts, prevents or prohibits the consummation of the Recapitalization or
results in the obligation to pay damages as a result of or in connection with
the Recapitalization in amounts that would have an adverse effect on Katy or
Katy's business, (2) prohibits or limits the ownership or operation by Katy,
Purchaser or any of their subsidiaries of all or any material portion of the
business or assets of Katy and the Subsidiaries taken as a whole or compels
Katy, Purchaser, or any of their subsidiaries to dispose of or hold separate
all or any material portion of their business or assets, (3) imposes
limitations on the ability of Purchaser or any subsidiary of Purchaser to
acquire or hold, or to exercise effectively full rights of ownership of, any
Common Shares, including, without limitation, the right to vote any Common
Shares acquired pursuant to the Offer, other than limitations that do not
materially restrict or otherwise materially affect the consummation of the
Offer or the Preferred Stock Purchase, or (4) requires divestitures by
Purchaser or any other affiliate thereof of any Common Shares;
(b) any of the representations and warranties of Katy or any Subsidiary set
forth in the Agreement (without regard to any materiality exceptions or
provisions therein) shall not be true and correct in all material respects as
if such representations and warranties were made at the time of such
determination except (i) for changes specifically permitted by the terms of
this Agreement, (ii) for the accuracy of representations or warranties which
speak as of a specific date, which must not be untrue or incorrect as of such
specific date, (iii) where the failure of any such representation or warranty
to be true and correct, individually or in the aggregate, would not have a
Material Adverse Effect on the Katy Group;
(c) Katy shall not have performed, or shall not have caused a Subsidiary to
perform, in all material respects, all obligations and complied in all material
respects with all covenants necessary to be performed or complied with by any
of them under the Agreement;
(d) any change shall have occurred (or any development shall have occurred
involving prospective changes) in the financial condition, businesses,
operations, properties (including tangible properties), results of operations,
assets (including, without limitation, any Material Contract) or prospects of
the Katy Group, taken as a whole, that has a Material Adverse Effect on the
Katy Group;
(e) any material adverse change after the commencement of the Offer in the
syndication markets for credit facilities similar in nature to the credit
facilities to be furnished to Purchaser by Bankers Trust Company or a
continuing material disruption of or a material adverse change in the
financial, banking or capital markets that would have an adverse effect on such
syndication market, in each case such that Bankers Trust Company determines not
to fund such credit facilities;
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(f) the Agreement shall have been terminated in accordance with its terms;
(g) the Board of Directors of Katy shall have (i) withdrawn or materially
modified or changed (including by amendment of the Schedule 14D-9) in a manner
adverse to Purchaser its recommendation with respect to the Offer, the
Agreement or the Preferred Stock Purchase, (ii) Katy shall have entered into an
agreement (other than a confidentiality agreement) to consummate a Katy
Takeover Proposal other than the Offer and the Preferred Stock Purchase, or
(iii) the Board of Directors of Katy shall have approved or recommended a Katy
Takeover Proposal or resolved to do any of the foregoing;
(h) fewer than all of the licenses, permits, authorizations, consents,
orders, qualifications or approvals of, or declarations or filings with, or
expirations of waiting periods imposed by, any United States or foreign
governmental body or authority that are necessary for the consummation of the
Preferred Stock Purchase and the transactions contemplated thereby shall have
been filed, occurred or been obtained, as the case may be, except for any such
failure of any of the foregoing so to have been filed, occurred or been
obtained, individually or in the aggregate, as would not result in a Material
Adverse Effect on the Katy Group;
(i) Katy shall not have received an opinion of Bear, Stearns & Co. Inc., in
a form and substance satisfactory to Katy and dated the date of this Agreement,
to the effect that, as of such date, the Offer and the Preferred Stock
Purchase, taken as a whole, are fair to Katy's shareholders from a financial
point of view, or such opinion shall have been withdrawn, or Bear, Stearns &
Co. Inc. shall not have consented to the dissemination of such opinion in
connection with the Offer;
(j) holders of Common Shares present in person or by proxy at the
Shareholder Meeting shall not have duly (i) elected the directors of Katy's
Board of Directors, including the Purchaser Designees and (ii) authorized and
approved the issuance and sale of the Convertible Preferred Stock upon
substantially the terms and conditions set forth in Exhibit C, and holders of a
majority of the outstanding Common Shares shall not have approved and adopted
an amendment of Katy's Certificate of Incorporation authorizing (A) the
classification of the Board of Directors into two classes, and (B) 600,000
shares of Convertible Preferred Stock, on substantially the terms and
conditions set forth in Exhibit C;
(k) it shall have been publicly disclosed or Purchaser shall have otherwise
learned that any person or "group" (as described in section 13(d)(3) of the
Exchange Act), other than Purchaser or Purchaser Affiliates or any group of
which any of them is a member, shall have, following the date of this Agreement
(1) acquired beneficial ownership (determined pursuant to Rule 13d-3
promulgated under the Exchange Act) of more than 20% of Katy Common Stock or
shall have been granted an option, right or warrant, conditional or otherwise,
to obtain more than 20% of any class or series of capital stock of Katy
(including, without limitation, Katy Common Stock); or (2) without the prior
consent of Purchaser, entered into any binding agreement or understanding
(other than a confidentiality agreement) with the Katy Group with respect to
(A) a merger, consolidation or other business combination with, or acquisition
of a material portion of the assets of, Katy, or (B) a tender or exchange offer
for Common Shares;
(l) there shall have occurred and be continuing (i) any general suspension
of trading in securities on any national securities exchange or in the over-
the-counter market, (ii) the declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States (whether or not
mandatory), (iii) any indirect limitation (whether or not mandatory) by a
United States governmental authority or agency on the extension of credit by
banks or other financial institutions, (iv) a declaration of war by the
Congress of the United States or the commencement of military hostilities
involving the United States, in each case, having had or that will have a
Material Adverse Effect on the Katy Group, or (v) in the case of any of the
foregoing occurrences existing on the date of commencement of the Offer, a
material acceleration or worsening thereof;
(m) the Board of Directors of Katy shall not have Unanimously approved (i)
the nomination for election by the shareholders of Katy of the Purchaser
Designees (subject to the Closing taking place) and (ii) an amendment to the
By-Laws of Katy reducing the number of directors constituting the whole board
of Katy to nine (9);
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(n) Katy shall not have received by the expiration date of the Offer (as the
same may be extended in accordance with Section 1.1(a)) an unqualified audit
opinion from Arthur Andersen with respect to the consolidated financial
statements of the Katy Group for the fiscal year ended December 31, 2000;
(o) Katy shall not have consummated the sale of Hamilton and shall not have
received gross proceeds in cash, net of any retained liabilities of Hamilton
retained by Katy, in an amount not less than $20,000,000;
(p) the amended Certificate of Incorporation reflecting the authorization of
600,000 shares of Convertible Preferred Stock on substantially the terms and
conditions set forth in Exhibit C shall not have been filed with the Secretary
of State of the State of Delaware;
(q) Katy shall not have entered into the definitive documentation with
respect to the credit facilities to be established under the terms and
conditions of the Refinancing with Bankers Trust Company (including any
modification of the terms of the Refinancing that are inconsistent with the
initial terms of the Refinancing if such modifications have been approved by
Purchaser); or
(r) the Agreement Shareholders shall not have entered into a stock voting
agreement with respect to the election of the Purchaser Designees nominated in
accordance with Section 5.14. hereof (other than the election of directors in
connection with the Shareholder Meeting) on terms and conditions reasonably
satisfactory to Purchaser.
The foregoing conditions (including those set forth in clauses (i) through
(iv) of the initial paragraph) are for the sole benefit of Purchaser and its
affiliates and, subject to the terms of the Agreement, may be asserted by
Purchaser regardless of the circumstances (including, without limitation, any
action or inaction by Purchaser or any of its affiliates) giving rise to any
such condition or may be waived by Purchaser, in whole or in part, from time to
time in its reasonable discretion, except as otherwise provided in the
Agreement. The failure by Purchaser at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right and may be asserted at any time and from
time to time. Unless otherwise defined herein, capitalized terms used herein
shall have the meaning ascribed to them in the Agreement to which this Annex I
is attached.
B-35
ANNEX II
REGISTRATION RIGHTS
(a) In connection with any conversion of the Convertible Preferred Stock
into Common Shares, the holders (the "Converting Holders") of any Registrable
Securities shall have the right to request that Katy file a registration
statement (on Form S-3 ("Form S-3"), if available to Katy at the time) pursuant
to the Securities Act (the "Registration Statement"), provided that the
Converting Holders shall not be entitled to demand a registration on more than
three (3) occasions. Katy shall (i) within 10 days after receiving notice from
any Converting Holder requesting a demand for registration give notice thereof
to all other Converting Holders known to Katy and (ii) promptly and in any
event within 45 days of receipt of such request file a Registration Statement
to effect a registration under the Securities Act covering all Registrable
Securities for which Katy receives a request from the Converting Holders within
30 days of the delivery of the notice by Katy as required in clause (i) above;
(b) In connection with any registration effected pursuant to paragraph (a)
of this Annex II, if the majority of the Converting Holders elect to offer and
sell Registrable Securities in an underwritten offering, they shall be entitled
to select the underwriter, subject to Katy's consent (such consent not to be
unreasonably withheld), and Katy shall enter into an underwriting agreement
(together with the Converting Holders electing to sell their Registrable
Securities in an underwritten offering) with such underwriter. In the event the
underwriter has not limited the number of Registrable Securities or other
securities to be underwritten, Katy may include its securities for its own
account in such registration and underwriting if the underwriter so agrees and
if the number of Registrable Securities included in such underwriting will not
be limited;
(c) In the event Katy registers Common Shares pursuant to a Registration
Statement (other than registrations on Form S-4 or Form S-8), the Converting
Holders shall have the right to include all or part of the Registrable
Securities owned by them at the time in such registration. Katy shall promptly
(i) give each Converting Holder written notice of such registration and (ii)
include in such registration, and in any underwriting involved therein, all the
Registrable Securities specified in a written request delivered to Katy by any
such Converting Holder within 20 days after delivery of such written notice by
Katy;
(d) If Katy elects to offer and sell the Common Shares registered pursuant
to paragraph (c) in an underwritten offering, Katy shall so advise the
Converting Holders as part of the notice given to the Converting Holders. In
such event the right of the Converting Holders to such registration of their
Registrable Securities shall be conditioned upon such underwriting being
effected and the inclusion of any Converting Holder's Registrable Securities in
such underwriting shall be subject to paragraph (e) hereof. All Converting
Holders proposing to distribute their Registrable Securities through such
underwriting shall (together with Katy) enter into an underwriting agreement
with the underwriter for such offering. The Converting Holders shall have no
right to participate in the selection of the underwriters for an offering
pursuant to this paragraph (d), provided that the underwriter is of recognized
national standing;
(e) In the event the underwriter limits the number of Common Shares to be
offered and sold in connection with a registration pursuant to paragraph (c),
the number of Registrable Securities to be included in the registration and the
underwriting shall be reduced on a pro rata basis among the Converting Holders
requesting registration. If any Converting Holder disapproves of the terms of
such underwriting, such Holder may elect to withdraw therefrom by written
notice to Katy and the underwriter delivered at least five days prior to the
effective date of the registration statement. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration;
(f) In the event any Registrable Securities are included in a Registration
Statement pursuant to this Agreement, Katy will indemnify and hold harmless
each Converting Holder whose Registrable Securities are so included, each
person, if any, who "controls" such Converting Holder (within the meaning of
the Securities Act or the Exchange Act) and their respective directors,
officers, employees and agents against all losses,
B-36
claims, damages, or liabilities, joint or several, or actions in respect
thereof to which such Converting Holder or other person entitled to
indemnification hereunder may become subject under the Securities Act, the
Exchange Act, state securities or blue sky law, common law or otherwise,
insofar as such losses, claims, damages, liabilities or actions in respect
thereof arise out of, or are based upon, any untrue statement or alleged untrue
statement of any material fact contained in such Registration Statement, any
related preliminary prospectus, or any related prospectus or any amendment or
supplement thereto, offering circular or other document (including any related
notification or the like) incident to any such registration, qualification or
compliance, or arise out of, or are based upon, any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
Katy of the Securities Act, the Exchange Act, state securities or blue sky law,
common law or otherwise and relating to action or inaction required of Katy in
connection with any such registration, qualification or compliance, and Katy
will reimburse each such Converting Holder or other person entitled to
indemnification hereunder for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that Katy will not be so liable
to the extent that any such loss, claim, damage, liability or action arises out
of, or is based upon, an untrue statement or alleged untrue statement of a
material fact or an omission or alleged omission to state a material fact in
such Registration Statement, such preliminary prospectus, or such prospectus,
or any such amendment or supplement thereto, offering circular or other
document (including any related notification or the like) incident to any
registration, qualification or compliance, in reliance upon, and in conformity
with, written information furnished to Katy by any Converting Holder
specifically for use therein. Katy will also indemnify underwriters and dealer
managers participating in the distribution, each person who "controls" such
persons (within the meaning of the Securities Act or the Exchange Act), and
their respective officers, directors, employees and agents to the same extent
as provided above with respect to the indemnification of the Converting
Holders, if so requested, except (i) with respect to information furnished in
writing specifically for use in any prospectus or Registration Statement by any
selling Converting Holders or any such underwriters, or (ii) to the extent that
any such loss, claim, damage, liability or action is solely attributable to
such underwriter's failure to deliver a final prospectus (or amendment or
supplement thereto) that corrects an actual or alleged material misstatement or
omission contained in the preliminary prospectus (or final prospectus);
(g) With respect to written information furnished to Katy by a Converting
Holder specifically for use in a Registration Statement, any related
preliminary prospectus, or any related prospectus or any supplement or
amendment thereto, offering circular or other document (including any related
notification or the like) incident to any registration, qualification or
compliance, if Registrable Securities held by it are included in the securities
as to which such registration, qualification or compliance is being effected,
such Converting Holder will severally indemnify and hold harmless Katy and its
directors, officers, employees, agents and each person, if any, who "controls"
Katy (within the meaning of the Securities Act or the Exchange Act) and any
other Converting Holder against any losses, claims, damages or liabilities,
joint or several, or actions in respect thereof, to which Katy or such other
person entitled to indemnification hereunder may become subject under the
Securities Act, the Exchange Act, state securities or blue sky laws, common law
or otherwise, insofar as such losses, claims, damages, liabilities or actions
in respect thereof arise out of, or are based upon, any untrue statement or
alleged untrue statement of any material fact contained in such Registration
Statement, such preliminary prospectus, or such prospectus, or any such
amendment or supplement thereto, offering circular or other document (including
any related notification or the like) incident to any registration,
qualification or compliance, or arise out of, or are based upon, the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; and such
Converting Holder will reimburse Katy and such other persons for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, in each case to
the extent, but only to the extent, that the same arises out of, or is based
upon, an untrue statement or alleged untrue statement of material fact or an
omission or alleged omission to state a material fact in such Registration
Statement, such preliminary prospectus, or such prospectus or any such
amendment or supplement thereto, offering circular or other document (including
any related notification or the like) incident to any registration,
qualification or compliance, in reliance upon, and in conformity with, such
written information; provided,
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however, that the obligations of each of the Converting Holders hereunder shall
be limited to an amount equal to the net proceeds to such Converting Holder of
Registrable Securities sold as contemplated herein. Katy shall be entitled to
receive indemnities from underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution, to
the same extent as provided above with respect to the information so furnished
in writing by such persons specifically for inclusion in any prospectus or
Registration Statement. The Converting Holder shall also indemnify underwriters
and dealer managers participating in the distribution and each person who
"controls" such persons (within the meaning of the Securities Act or the
Exchange Act), their officers, directors, employees and agents to the same
extent as provided herein with respect to the indemnification of Katy, if so
requested;
(h) Promptly after receipt by an indemnified party of notice of any claim or
the commencement of any action, the indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party, notify the
indemnifying party in writing of the claim or the commencement of that action;
provided, however, that the failure to notify the indemnifying party will not
relieve it from any liability that it may have to the indemnified party except
to the extent it was actually damaged or suffered any loss or incurred any
additional expense as a result thereof. If any such claim or action is brought
against an indemnified party, and it notifies the indemnifying party thereof,
the indemnifying party shall be entitled to assume the defense thereof with
counsel selected by the indemnifying party and reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, (i) the
indemnifying party will not be liable to the indemnified party for any legal or
other expense subsequently incurred by the indemnified party in connection with
the defense thereof, (ii) the indemnifying party will not be liable for the
costs and expenses of any settlement of such claim or action unless such
settlement was effected with the written consent of the indemnifying party or
the indemnified party waived any rights to indemnification hereunder in
writing, in which case the indemnified party may effect a settlement without
such consent, and (iii) the indemnified party will be obligated to cooperate
with the indemnifying party in the investigation of such claim or action;
provided, however, that the indemnified party who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by such
indemnified party may employ its own counsel if such indemnified party has been
advised by counsel in writing that, in the reasonable judgment of such counsel,
it is advisable for such indemnified party to be represented by separate
counsel due to the presence of actual or potential conflicts of interest, and
in that event the fees and expenses of such separate counsel will also be paid
by the indemnifying party; provided that the indemnifying party shall not be
liable for the reasonable fees and expenses of more than one separate counsel
at any time for all such indemnified parties. An indemnifying party shall not,
without the prior written consent of the indemnified parties, settle,
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes a release of such
indemnified party reasonably acceptable to such indemnified party from all
liability arising out of such claim, action, suit or proceeding and unless the
indemnifying party shall confirm in a written agreement reasonably acceptable
to such indemnified party, that notwithstanding any federal, state or common
law, such settlement, compromise or consent shall not adversely affect the
right of any indemnified party to indemnification or contribution as provided
in this Agreement as such rights may be limited by applicable law without
regard to such settlement, compromise or consent;
(i) If for any reason the indemnification provided for in paragraphs (f) or
(g) is unavailable to an indemnified party or is insufficient to hold such
indemnified party harmless as contemplated therein, then the indemnifying party
shall contribute to the amount paid or payable by the indemnified party as a
result of such loss, claim, damage or liability in such proportion as is
appropriate to reflect not only the relative benefits received by the
indemnifying party and the indemnified party, but also the relative fault of
the indemnifying party and the indemnified party, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether the untrue (or alleged untrue) statement of a material fact or the
omission (or alleged omission) to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the
B-38
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission; provided, however, that the
obligations of each of the Converting Holders hereunder shall be limited to an
amount equal to the net proceeds to such Converting Holder of Registrable
Securities sold as contemplated herein. No person guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation;
(j) The obligations under this Annex II shall survive the completion of any
offering of Registrable Securities in a Registration Statement pursuant to this
Agreement, and otherwise;
(k) Notwithstanding the foregoing provisions of this Annex II, to the extent
that the provisions regarding indemnification and contribution contained in the
underwriting agreement entered into in connection with any underwritten public
offering contemplated by this Agreement are in conflict with the foregoing
provisions, the provisions in such underwriting agreement shall be controlling,
provided that each Converting Holder, each person, if any, who controls such
Converting Holder (within the meaning of the Securities Act or the Exchange
Act) and their respective directors, officers, employees and agents receive
protection in all material respects as extensive and are subject to obligations
that are not materially more extensive, than those set forth in this Annex II;
(l) In the case of any demand registration pursuant to paragraph (a), Katy
shall pay all registration expenses. In the case of any registration pursuant
to paragraph (c), the requesting Converting Holders shall bear the pro rata
share of underwriter's fees, discounts and commissions incurred in such
registration and any incremental registration expenses, in each case, including
(i) incremental registration and qualification fees and expenses, and (ii) any
incremental costs and disbursements (including legal fees and expenses) that
result from the inclusion of the Registrable Securities included in such
registration, with such incremental expenses being borne by the requesting
Converting Holders on a pro rata basis.
Unless otherwise defined herein, capitalized terms used herein shall have the
meaning ascribed to them in the Agreement to which this Annex II is attached.
B-39
EXHIBIT A
As used herein, the following terms shall have the following meanings unless
the context otherwise requires:
"Accounts Payable" shall have the meaning set forth in Section 3.5 hereof.
"Accounts Receivable" shall have the meaning set forth in Section 3.5
hereof.
"Affiliate" shall have the meaning set forth in Section 3.10 hereof.
"Agreement" shall have the meaning set forth in Paragraph 1 hereof.
"Agreement Shareholders" shall have the meaning set forth in the Recitals
hereof.
"Business Day" shall have the meaning set forth in Section 1.1 hereof
"Certificates" shall have the meaning set forth in Section 1.4 hereof.
"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
"Closing" shall have the meaning set forth in Section 2.2 hereof.
"Code" shall have the meaning set forth in Section 1.4 hereof.
"Common Shares" shall have the meaning set forth in the Recitals hereof.
"Confidentiality Agreement" shall have the meaning set forth in Section 5.2
hereof.
"Contico" shall have the meaning set forth in Section 3.2 hereof.
"Contico Common Units" shall have the meaning set forth in Section 3.2
hereof.
"Contico Preferred Units" shall have the meaning set forth in Section 3.2
hereof.
"Continuing Katy Employees" shall have the meaning set forth in Section 5.4
hereof.
"Contracts" shall have the meaning set forth in Section 3.24 hereof.
"Convertible Preferred Stock" shall have the meaning set forth in the
Recitals hereof.
"Converting Holders" shall have the meaning set forth in Annex II hereof.
"Current Katy Group" shall have the meaning set forth in Section 3.18
hereof.
"Depository" shall have the meaning set forth in Section 1.4 hereof.
"DGCL" shall have the meaning set forth in Section 1.3 hereof.
"Environmental, Health and Safety Laws" shall have the meaning set forth in
Section 3.12 hereof.
"ERISA" shall have the meaning set forth in Section 3.13 hereof.
"ERISA Affiliate" shall have the meaning set forth in Section 3.13 hereof.
"Exchange Act" shall have the meaning set forth in Section 1.1 hereof.
"Form S-3" shall have the meaning set forth in Annex II hereof.
B-40
"GAAP" shall have the meaning set forth in Section 3.4 hereof.
"Hamilton" shall have the meaning set forth in the Recitals hereof.
"Insurance Amount" shall have the meaning set forth in Section 5.11 hereof.
"Intellectual Property" shall have the meaning set forth in Section 3.19
hereof.
"Inventory" shall have the meaning set forth in Section 3.5 hereof.
"Katy" shall have the meaning set forth in Paragraph 1 hereof.
"Katy Acquisition Agreement" shall have the meaning set forth in Section 5.8
hereof.
"Katy Affiliated Group" shall have the meaning set forth in Section 3.18
hereof.
"Katy Benefit Plans" shall have the meaning set forth in Section 3.13
hereof.
"Katy Common Stock" shall have the meaning set forth in the Recitals hereof.
"Katy Group" shall have the meaning set forth in Section 3.1 hereof.
"Katy Required Approvals" shall have the meaning set forth in Section 3.3
hereof.
"Katy SEC Reports" shall have the meaning set forth in Section 3.4 hereof.
"Katy Stock Option Plans" shall have the meaning set forth in Section 3.2
hereof.
"Katy Takeover Proposal" shall have the meaning set forth in Section 5.8
hereof.
"Katy's Knowledge" shall have the meaning set forth in Section 3.5 hereof.
"Licenses" shall have the meaning set forth in Section 3.22 hereof.
"Material Adverse Effect" shall have the meaning set forth in Section 3.1
hereof.
"Material Contracts" shall have the meaning set forth in Section 3.24
hereof.
"Minimum Condition" shall have the meaning set forth in Annex I hereof.
"Offer" shall have the meaning set forth in Section 1.1 hereof.
"Offer Commencement Date" shall have the meaning set forth in Section 1.1
hereof.
"Offer Consideration" shall have the meaning set forth in Section 1.1
hereof.
"Offer Documents" shall have the meaning set forth in Section 1.2 hereof.
"Offer Shares" shall have the meaning set forth in the Recitals hereof.
"Officer's Certificate" shall have the meaning set forth in Section 6.3
hereof.
"Option" shall have the meaning set forth in Section 3.2 hereof.
"Other Directors" shall have the meaning set forth in Section 5.14 hereof.
"Other Holders" shall have the meaning set forth in Section 5.14 hereof.
"Past Katy Group" shall have the meaning set forth in Section 3.18 hereof.
B-41
"Preferred Purchase Price" shall have the meaning set forth in Section 2.1
hereof.
"Preferred Stock Purchase" shall have the meaning set forth in the Recitals
hereof.
"Proxy Statement" shall have the meaning set forth in Section 1.3 hereof.
"Purchaser" shall have the meaning set forth in Paragraph 1 hereof.
"Purchaser Affiliate" shall have the meaning set forth in Section 5.14
hereof.
"Purchaser Designees" shall have the meaning set forth in Section 1.3
hereof.
"Purchaser Closing Conditions" shall have the meaning set forth in Section
1.1 hereof.
"Purchaser Required Approvals" shall have the meaning set forth in Section
4.2 hereof.
"Purchaser Securities Filings" shall have the meaning set forth in Section
4.6 hereof.
"Reference Balance Sheet" shall have the meaning set forth in Section 3.5
hereof.
"Recapitalization" shall have the meaning set forth in the Recitals hereof.
"Refinancing" shall have the meaning set forth in the Recitals hereof.
"Registrable Securities" shall have the meaning set forth in Section 5.15
hereof.
"Registration Statement" shall have the meaning set forth in Annex II
hereof.
"Rights" shall have the meaning set forth in the Recitals hereof.
"Rights Agreement" shall have the meaning set forth in the Recitals hereof.
"Schedule 14D-9" shall have the meaning set forth in Section 1.3 hereof.
"Schedule TO" shall have the meaning set forth in Section 1.2 hereof.
"SEC" shall have the meaning set forth in Section 1.2 hereof.
"Securities Act" shall have the meaning set forth in Section 3.3 hereof.
"Securities Filings" shall have the meaning set forth in Section 3.17
hereof.
"Shareholder Meeting" shall have the meaning set forth in the Recitals.
"Subsidiary" shall have the meaning set forth in Section 3.1 hereof.
"Superior Proposal" shall have the meaning set forth in Section 5.8 hereof.
"Tax Return" shall have the meaning set forth in Section 3.18 hereof.
"Taxes" shall have the meaning set forth in Section 3.18 hereof.
"Termination Date" shall have the meaning set forth in Section 5.1 hereof.
"Termination Fee" shall have the meaning set forth in Section 7.2 hereof.
"Unanimously" shall have the meaning set forth in Section 1.3 hereof
"Voting Agreement" shall have the meaning set forth in the Recitals hereof.
B-42
EXHIBIT C
TERM SHEET--CLASSIFICATION OF BOARD OF DIRECTORS
AND CONVERTIBLE PREFERRED STOCK
Classified Board of The Board of Directors of Keystone shall be
Directors.................. classified, with respect to the time for which
the directors severally hold office, into two
classes, one class comprising the four directors
who are not Purchaser Designees to be initially
elected for a one-year term expiring at the
annual meeting of Keystone's shareholders to be
held in 2002, and a second class comprising the
five Purchaser Designees to be elected initially
for a two-year term expiring at the annual
meeting of Keystone's shareholders to be held in
2003, with the directors in each class to hold
office until their respective successors are duly
elected and qualified. At each succeeding annual
meeting of Keystone's shareholders, directors
elected to succeed those directors whose terms
then expire shall be elected for a term of office
to expire at the second succeeding annual meeting
of shareholders after such election.
Name of security........... Convertible Preferred Stock, $100 par value
$100
Par value..................
Number of shares to be
authorized................. 600,000
Number of shares to be
validly issued, fully paid
and nonassessable at the
Closing Date...............
400,000
Preferred Purchase Price... $100 per share, or an aggregate amount of
$40,000,000
Conversion rights.......... At the option of the holder of Convertible
Preferred Stock, a holder can convert any whole
number of shares of Convertible Preferred Stock,
at any time after the earlier of:
(a) the fifth anniversary of the Closing Date;
(b) the approval by Keystone's Board of Directors
of a merger, consolidation or other business
combination between Keystone and another
entity (except where Keystone is the
surviving entity and no change of control of
Keystone occurs as a result of the
transaction) or a sale or other disposition
of all or substantially all of Keystone's
assets;
(c) the authorization by Keystone's Board of
Directors of, or other corporate action taken
to effect, the liquidation, dissolution or
winding up of Keystone; and
(d) the solicitation of proxies from the holders
of any class or classes of capital stock of
Keystone for any annual or special meeting of
shareholders, however called, at which an
election for directors of Keystone is held,
or any solicitation of written consent of the
holders of any class or classes of capital
stock of Keystone with respect to the
election of directors, against the election
as director of any nominee designated by the
holders of the Convertible Preferred Stock or
for removal of any incumbent director
originally nominated by the holders of the
Convertible Preferred Stock.
B-43
Conversion ratio........... For each share of Convertible Preferred Stock
converted the holder will receive twelve and one-
half Common Shares (the "Conversion Ratio"). The
Conversion Ratio will be adjusted for any stock
split, stock combination, stock dividend or other
recapitalization and will be subject to
protection provisions in the event of dilutive
transactions involving the sale of shares of
Keystone Common Stock at a price per share, the
grant of rights, options or warrants having an
exercise per share, or the sale of securities
convertible into Keystone Common Stock having a
conversion price per share, in each case, less
than $8.00 per Common Share.
Procedure for conversion... Standard conversion procedures, including the
following:
The holder is to give Keystone a notice
specifying the number of shares of Convertible
Preferred Stock to be converted, the conversion
date and the names of persons to become the
holders of the Common Shares issued on
conversion.
There will be no fractional issues of Keystone
Common Stock upon conversion. In lieu of
fractional shares Keystone will pay the
conversion value of such fractional share in
cash.
Keystone will pay any documentary, stamp or
similar tax on issuing the certificates for
Common Shares (except that if the certificate is
to be issued to a person other than the holder,
then that person must pay any such tax payable on
the transfer).
Covenants of Keystone...... The shares of Convertible Preferred Stock will be
validly issued, fully paid and nonassessable on
the Closing Date.
The Common Shares that Keystone issues upon the
conversion of the Convertible Preferred Stock
will be validly issued, fully paid and
nonassessable.
Keystone will reserve and keep available out of
its unauthorized but unissued shares of Keystone
Common Stock, for the purpose of issuing Common
Shares on conversion of the Convertible Preferred
Stock, the number of Common Shares issuable on
conversion of the outstanding shares of
Convertible Preferred Stock.
Dividends.................. None
Liquidation preference..... If Keystone is liquidated, dissolved or wound up,
no distribution will be made to the holders of
shares of Keystone Common Stock or any other
class of equity security authorized hereafter,
until the holders of the Convertible Preferred
Stock have received their liquidation preference
equal to the par value for each share of
Convertible Preferred Stock held (the
"Liquidation Preference"). If, when Keystone is
liquidated, dissolved or wound up, the assets
available for distribution among the holders of
the Convertible Preferred Stock are insufficient
to pay the Liquidation Preference, the assets
legally available for distribution to such
holders shall be distributed ratably among them
in accordance with their holdings of Convertible
Preferred Stock.
B-44
A merger, consolidation or other business
combination between Keystone and any other
entity, or a sale or other disposition of all or
substantially all of Keystone's assets, will not
be treated as a liquidation, dissolution or
winding up of Keystone.
Maturity................... Perpetual, subject to redemption by Keystone.
Redemption................. The Convertible Preferred Stock will not be
subject to a sinking fund or other obligations of
Keystone to redeem or retire the Convertible
Preferred Stock. The holder shall have no right
to compel Keystone to redeem the Convertible
Preferred Stock. The Convertible Preferred Stock
shall be redeemable in whole, but not in part, at
Keystone's option at any time on or after the
20th anniversary of the Closing Date. The
redemption price per share of Convertible
Preferred Stock shall equal the par value
thereof, and shall be payable in cash to the
order of the holder on the 30th day after notice
of redemption shall have been given to the
holders, subject to each holder's right to
convert any or all of its shares of Convertible
Preferred Stock into Common Shares.
Preemptive rights.......... The holders have no preemptive rights with
respect to any shares of Keystone's capital stock
or any other securities of Keystone convertible
into or carrying rights or option to buy shares
of capital stock, without prejudice to the
provisions for adjustment of the Conversion Ratio
in the event of dilutive transactions.
Registration rights........ In the event of a registration of Common Shares
by Keystone pursuant to a registration statement
under the Securities Act of 1933, the holder
shall have customary piggy-back rights in respect
of the Common Shares issuable upon conversion of
the Convertible Preferred Stock. In connection
with the conversion of the Convertible Preferred
Stock the holders shall have the right to demand
a registration of the underlying Common Shares,
provided that the holders shall not be entitled
to demand a registration on more than three (3)
occasions.
Voting rights.............. None (except as required by law).
Special rights............. Keystone shall not, without first obtaining the
approval (by vote or written consent) of the
holders of at least a majority of the then
outstanding shares of Convertible Preferred
Stock:
(a) authorize or issue any class or series of
equity security having equal or superior
rights as to payment upon liquidation,
dissolution or a winding up of Keystone;
(b) amend its Certificate of Incorporation or By-
Laws in any way, or enter into a merger,
consolidation, reorganization,
recapitalization or sale of all or
substantially all of its assets, in any case
which adversely affects the rights and
preferences of the holders of Convertible
Preferred Stock as a class (except that
Keystone may complete a reverse-split of the
Keystone Common Stock without the consent of
the holders of the Convertible Preferred
Stock);
(c) engage in any transaction which would impair
or reduce the rights of the holders of the
Convertible Preferred Stock as a class.
B-45
ANNEX C
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
STOCK VOTING AND TENDER AGREEMENT
by and among
KKTY HOLDING COMPANY, L.L.C.
and
THE SHAREHOLDERS NAMED HEREIN
Dated as of March 29, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
1. Definitions............................................................ 1
2. Tender of Securities................................................... 1
3. Provisions Concerning the Securities................................... 1
(a) Agreement To Vote the Securities..................................... 1
(b) Grant of Proxy....................................................... 2
(c) Other Proxies Revoked................................................ 2
4. Representations and Warranties of Each Shareholder..................... 2
(a) Power, etc........................................................... 2
(b) Ownership of Securities.............................................. 2
(c) No Conflicts......................................................... 3
(d) No Finder's Fees..................................................... 3
(e) No Encumbrances...................................................... 3
(f) Reliance by Purchaser................................................ 3
5. Additional Covenants of Each Shareholder............................... 3
(a) No Solicitation...................................................... 3
(b) Restriction on Transfer, Proxies and Non-Interference................ 4
(c) [Reserved]........................................................... 4
(d) Stop Transfer; Changes in Subject Shares............................. 4
(e) Cooperation.......................................................... 4
(f) Releases............................................................. 4
6. Fiduciary Duties....................................................... 4
7. Miscellaneous.......................................................... 4
(a) Further Assurances................................................... 4
(b) Notices.............................................................. 5
(c) Interpretation....................................................... 5
(d) Counterparts......................................................... 5
(e) Entire Agreement; No Third-Party Beneficiaries....................... 5
(f) Governing Law........................................................ 5
(g) Assignment........................................................... 6
(h) Binding Agreement.................................................... 6
(i) Severability......................................................... 6
(j) Enforcement of this Agreement........................................ 6
(k) Amendments........................................................... 6
8. Termination............................................................ 6
9. Publication............................................................ 6
i
STOCK VOTING AND TENDER AGREEMENT
STOCK VOTING AND TENDER AGREEMENT (this "Agreement") dated as of March 29,
2001, among KKTY HOLDING COMPANY, L.LC., a Delaware limited liability company
("Purchaser") and the shareholders listed on Schedule I hereto (individually, a
"Shareholder," and collectively, the "Shareholders").
W I T N E S S E T H :
WHEREAS, simultaneously with entering into this Agreement, Purchaser and
Katy Industries, Inc., a Delaware corporation ("Katy"), are entering into a
Preferred Stock Purchase and Recapitalization Agreement (the "Recapitalization
Agreement"), pursuant to which Purchaser will (i) commence a cash tender offer
(the "Offer") to purchase up to 2,500,000 outstanding shares of common stock,
$1 par value per share, of Katy and (ii) purchase from Katy not less than
400,000 newly issued shares of preferred stock, $100 par value per share (the
"Convertible Preferred Stock"), convertible at a ratio of twelve and one half
Common Shares per share of Convertible Preferred Stock (equivalent to $8.00 per
Common Share) into an aggregate of not less than 5,000,000 Common Shares for an
aggregate purchase price of $40,000,000 (the "Preferred Stock Purchase") (the
Offer, the Preferred Stock Purchase and the other transactions contemplated by
the Recapitalization Agreement are collectively referred to herein as the
"Recapitalization");
WHEREAS, as of the date hereof, each Shareholder is the record and, except
in the case of a Shareholder who is a trustee and owns the Common Shares for
the benefit of a beneficiary, beneficial owner of the number of Common Shares
set forth opposite such Shareholder's name on Schedule I hereto;
WHEREAS, the Shareholders have agreed that such Shareholders shall vote
2,500,000 Common Shares owned (whether of record or beneficially) by such
Shareholders, as of the date hereof (these 2,500,000 Common Shares owned
(whether of record or beneficially) as of the date hereof, the "Securities")
with respect to certain questions that may be put to the Shareholders, in each
case, in accordance with the terms and conditions of this Agreement; and
WHEREAS, as an inducement and a condition to entering into the
Recapitalization Agreement, Purchaser has required that the Shareholders enter
into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual premises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions. For purposes of this Agreement capitalized terms used and
not defined herein have the respective meanings ascribed to them in the
Recapitalization Agreement.
2. Tender of Securities. The Shareholders hereby severally and jointly agree
to tender (or to cause the record owner to tender) for acceptance by Purchaser
pursuant to the Offer not less than 1,500,000 of the Securities and not to
revoke such tender.
3. Provisions Concerning the Securities.
(a) Agreement To Vote the Securities. The Shareholders, hereby severally and
jointly agree that during the period commencing on the date hereof and
continuing until the earlier of the Closing Date or the termination of this
Agreement (such period, the "Voting Period"), at any meeting of the holders of
any class or classes of the capital stock of Katy, however called, or in
connection with any solicitation of written consent of the holders of any class
or classes of the capital stock of Katy, the Shareholders shall vote (or cause
to be voted) the Securities (but for the avoidance of doubt not more or less
than 2,500,000 Common Shares) in favor of any actions required to authorize and
effect the Recapitalization and any actions required in furtherance thereof,
including, without limitation, to vote (A) in favor of the election of all of
the directors nominated by
C-1
Katy's Board of Directors, including each Purchaser Designee (unless the
matters referred to in (B) and (C) below have not been approved by Katy's
shareholders), (B) in favor of the approval and adoption of an amendment to
Katy's Certificate of Incorporation authorizing (1) classification of Katy's
Board of Directors into two classes with staggered terms of office and (2)
600,000 shares of Convertible Preferred Stock, (C) in favor of the issuance of
Convertible Preferred Stock pursuant to the Preferred Stock Purchase and the
issuance of Common Shares upon the conversion of the Convertible Preferred
Stock, (D) against any action, transaction or agreement that would result in a
breach in any respect of any covenant, representation or warranty or any other
obligation or agreement of Katy under the Recapitalization Agreement or of such
Shareholder under this Agreement, and (E) except as otherwise agreed to in
writing in advance by Purchaser, against the following actions (other than the
Recapitalization and the transactions contemplated by the Recapitalization
Agreement): (1) any extraordinary corporate transaction, such as a
reorganization, recapitalization, merger, consolidation or other business
combination involving Katy; (2) a sale, lease or transfer of a significant part
of the assets of Katy, or a reorganization, recapitalization, dissolution or
liquidation of Katy; (3) any change in the persons who constitute the board of
directors of Katy; (4) any change in the present capitalization of Katy or any
amendment of Katy's Certificate of Incorporation or By-laws other than the
authorization and adoption of an amendment to Katy's Certificate of
Incorporation authorizing (I) classification of Katy's Board of Directors into
two classes with staggered terms of office and (II) 600,000 shares of
Convertible Preferred Stock; (5) any other material change in Katy's corporate
structure or business; or (6) any other action involving Katy which is
intended, or could reasonably be expected, to impede, interfere with, delay,
postpone, or materially adversely affect the Recapitalization and the
transactions contemplated by this Agreement or the Recapitalization Agreement.
(b) Grant of Proxy. Each Shareholder severally and not jointly hereby
appoints Purchaser, and any designee of Purchaser, each of them individually,
such Shareholder's proxy and attorney-in-fact, with full power of substitution
and resubstitution, to vote, to act by written consent or to request that the
chairman or secretary of Katy call a special meeting of stockholders, during
the Voting Period with respect to such Shareholder's Securities in accordance
with paragraph (a) of this Section. This proxy is given to secure the
performance of the duties of each Shareholder during the Voting Period under
this Agreement. Each Shareholder severally and not jointly affirms that this
proxy and power of attorney are coupled with an interest and shall be
irrevocable during the Voting Period. Each Shareholder severally and not
jointly shall take such further action or execute such other instruments as may
be necessary to effectuate the intent of this proxy.
(c) Other Proxies Revoked. Each Shareholder severally and not jointly
represents and warrants that any proxies heretofore given in respect of such
Shareholder's Securities are not irrevocable, and that all such proxies have
been or are hereby revoked.
4. Representations and Warranties of Each Shareholder. Each Shareholder,
severally and not jointly, hereby represents and warrants to Purchaser as
follows:
(a) Power, etc. Such Shareholder has all necessary power and authority to
execute and deliver this Agreement, appoint the proxies and attorneys-in-fact
referred to in Section 3(b) hereof and to consummate the transactions
contemplated by this Agreement. This Agreement has been duly and validly
executed and delivered by such Shareholder and, assuming its due authorization,
execution and delivery by each other party hereto, constitutes the legal, valid
and binding obligation of such Shareholder, enforceable against such
Shareholder in accordance with its terms, except insofar as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally or by general equitable
principles, whether applied in a proceeding at law or in equity.
(b) Ownership of Common Shares. Such Shareholder is the record and, except
in the case of a Shareholder who is a trustee and owns the Common Shares for
the benefit of a beneficiary, beneficial owner of the number of Common Shares
listed beside such Shareholder's name on Schedule I attached hereto. All of
such Common Shares are issued and are outstanding. Such Shareholder has sole
voting power and sole power to issue instructions with respect to the matters
set forth in Section 2, Section 3 and Section 5 hereof, as the
C-2
case may be, sole power of disposition and sole power to agree to all of the
matters set forth in this Agreement, in each case with respect to all of such
Common Shares, with no limitations, qualifications or restrictions on such
rights, subject only to applicable laws, Katy's Certificate of Incorporation,
and the terms of this Agreement.
(c) No Conflicts. (i) No filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is necessary for
the execution of this Agreement by such Shareholder and the consummation by
such Shareholder of the transactions contemplated by this Agreement and (ii)
none of the execution and delivery of this Agreement by such Shareholder, the
consummation by such Shareholder of the transactions contemplated by this
Agreement or compliance by such Shareholder with any of the provisions of this
Agreement shall (A) conflict with or result in any breach of or constitute
(with or without notice or lapse of time or both) a default (or give rise to
any third party right of termination, cancellation, material modification or
acceleration) or result in the creation of a lien or encumbrance on the assets
of such Shareholder (including the such Shareholder's Common Shares) under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
license, contract, trust instrument, commitment, arrangement, understanding,
agreement or other instrument or obligation of any kind to which such
Shareholder is a party or by which such Shareholder or any of such
Shareholder's properties or assets may be bound, or (B) violate any order,
writ, injunction, decree, judgment, order, statute, rule or regulation
applicable to such Shareholder or any of such Shareholder's properties or
assets.
(d) No Finder's Fees. Except as disclosed pursuant to the Recapitalization
Agreement, no broker, investment banker, financial advisor or other person is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of such Shareholder in its
capacity as a holder of Katy Common Stock. Such Shareholder, on behalf of
itself and its affiliates, hereby acknowledges that it is not entitled to
receive any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
or by the Recapitalization Agreement.
(e) No Encumbrances. The Common Shares listed beside such Shareholder's name
on Schedule I attached hereto and the certificates representing such Common
Shares are now, and at all times during the term hereof will be, held by such
Shareholder, or by a nominee or custodian for the benefit of such Shareholder,
free and clear of all liens, claims, security interests, proxies, voting trusts
or agreements, understandings or arrangements or any other encumbrances
whatsoever, except for any such encumbrances or proxies arising hereunder.
(f) Reliance by Purchaser. Such Shareholder understands and acknowledges
that Purchaser is entering into the Recapitalization Agreement in reliance upon
such Shareholder's execution and delivery of this Agreement.
5. Additional Covenants of Each Shareholder. Each Shareholder severally and
not jointly covenants and agrees as follows:
(a) No Solicitation. During the Voting Period such Shareholder shall not, in
its capacity as such, directly or indirectly through another person (i)
solicit, initiate or encourage (including, without limitation, by way of
furnishing information), or take any other action designed to facilitate, any
inquiries or the making of any proposal which constitutes any Katy Takeover
Proposal, (ii) participate in any discussions or negotiations regarding any
Katy Takeover Proposal, (iii) withdraw or modify, or propose publicly to
withdraw or modify, in a manner adverse to Purchaser, the approval or
recommendation of such Shareholder of the Recapitalization (including for the
avoidance of doubt the Shareholders' agreement to vote the Securities in
accordance with Section 3 hereof), (iv) approve or recommend, or propose
publicly to approve or recommend, any Katy Takeover Proposal, or (v) enter into
a Katy Acquisition Agreement or any agreement, arrangement or understanding
requiring such Shareholder to abandon, terminate or fail to consummate this
Agreement or any other transaction contemplated hereby, in each case without
the prior written consent of the Purchaser. Such
C-3
Shareholder shall promptly advise Purchaser orally and in writing of any
request for information or of any Katy Takeover Proposal, the material terms
and conditions of such request or Katy Takeover Proposal and the identity of
the person making such request or Katy Takeover Proposal. Such Shareholder will
keep Purchaser reasonably informed of the status and details (including
amendments or proposed amendments) of any such request or Katy Takeover
Proposal on a daily basis or more frequently as may be reasonably requested by
Purchaser. For the avoidance of doubt, nothing in this Section 5(a) restricts a
Shareholder, in his or her capacity as a director or officer of Katy, from
taking action permitted under the Recapitalization Agreement.
(b) Restriction on Transfer, Proxies and Non-Interference. Such Shareholder
shall not (i) except as contemplated in this Agreement, directly or indirectly,
offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the offer for sale, transfer,
tender, pledge, encumbrance, assignment or other disposition of, any or all of
such Shareholders Securities or any interest therein during the Voting Period;
(ii) except as contemplated by this Agreement, grant any proxies or powers of
attorney, deposit any of such Securities into a voting trust or enter into a
voting agreement with respect to any of such Securities; or (iii) take any
action that would make any representation or warranty of such Shareholder
contained in this Agreement untrue or incorrect or have the effect of
preventing or disabling such Shareholder from performing such Shareholder's
obligations under this Agreement.
(c) [Reserved].
(d) Stop Transfer; Changes in Subject Shares. Such Shareholder agrees with,
and covenants to, Purchaser that such Shareholder shall not request that Katy
register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of such Shareholder's Securities
during the Voting Period, unless such transfer is made in compliance with this
Agreement. In the event of a stock dividend or distribution, or any change in
any class of capital stock of Katy by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, the term
"Securities" shall be deemed to refer to and include the Securities as well as
all such stock dividends and distributions and any shares into which or for
which any or all of the Securities may be changed or exchanged.
(e) Cooperation. Such Shareholder, in its capacity as a shareholder, shall
cooperate fully with Purchaser and Katy in connection with their respective
efforts to fulfill the conditions to the Recapitalization set forth in Article
VI of the Recapitalization Agreement and the Purchaser Closing Conditions set
forth in Annex I to the Recapitalization Agreement.
(f) Releases. Such Shareholder hereby fully, unconditionally and irrevocably
releases, effective as of the Closing Date, any and all claims and causes of
action that such Shareholder, in its capacity as a shareholder, has or may have
against Katy or any present or former director, officer, employee or agent of
Katy arising or resulting from or relating to any act, omission, event or
occurrence prior to the date hereof and that have arisen or resulted as of the
Closing Date. The foregoing release does not include a release by any
Shareholder of such Shareholder's rights to indemnification and advancement of
expenses under Katy's Certificate of Incorporation or By-Laws, by agreement, by
law, or pursuant to insurance policies or any claim by that Shareholder in any
other capacity (including as a director, officer or employee). If requested by
Purchaser, such Shareholder shall execute an additional release at the Closing
Date releasing such claims as may arise between the date hereof and the Closing
Date.
6. Fiduciary Duties. Notwithstanding anything in this Agreement to the
contrary, the covenants and agreements set forth herein shall not prevent any
Shareholder or any representative of Purchaser serving on Katy's Board of
Directors or as an officer of Katy from taking any action, subject to the
applicable provisions of the Recapitalization Agreement, while acting in his or
her capacity as a director or officer of Katy.
7. Miscellaneous.
(a) Further Assurances. From time to time, at Purchaser's request and
without further consideration, each Shareholder shall execute and deliver such
additional documents and take all such further lawful action as
C-4
may be necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Agreement.
(b) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, mailed, certified or
registered mail with postage prepaid, sent by overnight courier or telecopied
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(i) if to Purchaser, to
KKTY Holding Company, L.L.C.
c/o Kohlberg & Co., L.L.C.
111 Radio Circle
Mount Kisco, New York 10549
Telecopy.: (914) 244-0689
Attention: Mr. Christopher Lacovara
with copies to:
Hunton & Williams
200 Park Avenue
New York, New York 10166
Telecopy.: (212) 309-1100
Attention: Raul Grable, Esq.
(ii) if to the Shareholders, to the address set forth beside each
Shareholder's name listed on Schedule I hereto
with a copy to:
Hogan & Hartson LLP
One Tabor Center, Suite 1500
1200 Seventeenth Street
Denver, Colorado 80202-5840
Telecopy: (303) 899-7333
Attention: Douglas Pluss, Esq.
(c) Interpretation. When a reference is made in this Agreement to a Section,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
(d) Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement,
including the documents and instruments referred to herein (i) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (ii) except in respect of Section 9, is not intended to confer upon any
person or entity other than the parties any rights or remedies hereunder.
(f) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to the
conflict of laws rules thereof.
C-5
(g) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the prior
written consent of the other parties, except that Purchaser may assign, in its
sole discretion, any of or all their rights, interests and obligations under
this Agreement to any direct or indirect wholly owned subsidiary of Purchaser.
Subject to the preceding sentences, this Agreement shall be binding upon, inure
to the benefit of, and be enforceable by, the parties and their respective
successors and assigns.
(h) Binding Agreement. Each Shareholder agrees that this Agreement and such
Shareholder's obligations under it shall attach to such Shareholder's
Securities and shall bind any person to which legal or beneficial ownership of
the Securities passes, whether by operation of law or otherwise, including such
Shareholder's heirs, guardians, administrators or successors. Notwithstanding
any transfer of Securities, the transferor shall remain liable for the
performance of all its obligations under this Agreement.
(i) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy in any particular situation or in any jurisdiction, that term or
provision shall nevertheless remain in full force and effect in other
situations or jurisdictions, and all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect, so long as the
economic or legal substance of the transactions contemplated hereby are not
affected in any manner materially adverse to any party. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as possible in a
mutually acceptable manner in order that the transactions be consummated as
originally contemplated to the fullest extent possible.
(j) Enforcement of this Agreement. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity.
(k) Amendments. This Agreement may not be amended except by an instrument in
writing signed by the parties.
8. Termination. This Agreement shall terminate, and neither Purchaser nor
any Shareholder shall have any rights or obligations hereunder and this
Agreement shall become null and void and have no effect, upon the termination
of the Recapitalization Agreement in accordance with its terms without the
Recapitalization having occurred, except nothing in this Section 8 shall
relieve any party of liability for breach of this Agreement.
9. Publication. Each Shareholder hereby agrees to permit Purchaser and Katy
to publish and disclose in the Offer Documents and the Proxy Statement relating
to the transactions contemplated by the Recapitalization Agreement (including
all documents and schedules filed with the SEC) its identity and intent with
respect to the Securities and the nature of its commitments under this
Agreement.
10. Scope of Obligations. Notwithstanding anything to the contrary in this
Agreement, no obligation of the Shareholders under this Agreement (including
their obligations under Section 2, Section 3 and Section 5 hereof) shall apply
or in any way affect any shares of capital stock or other securities owned by
the Shareholders other than the Securities. For the purposes of several (but
not joint) obligations of Shareholders under this Agreement, the number of
Securities owned by each Shareholder with respect to which such Shareholder is
committing to make such obligations, is the number calculated by multiplying
2,500,000 by the number of Common Shares owned by such Shareholder (as set
forth on Schedule I hereto), then dividing the product by the total number of
Common Shares owned by all Shareholders (as set forth on Schedule I hereto).
[THE FOLLOWING PAGE IS THE SIGNATURE PAGE]
C-6
IN WITNESS WHEREOF, Purchaser and each Shareholder have caused this
Agreement to be duly executed as of the day and year first above written.
KKTY Holding Company, L.L.C.
/s/ Christopher Lacovara
By: _________________________________
Name: Christopher Lacovara
Title:Authorized Manager
CRL, Inc.
/s/ Jonathan P. Johnson
By: _________________________________
Name: Jonathan P. Johnson
Title:President
/s/ Wallace E. Carroll, Jr.
_____________________________________
Wallace E. Carroll, Jr.
/s/ Amelia M. Carroll
_____________________________________
Amelia M. Carroll
Wallace Foundation
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 7-1-57
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
C-7
Wallace E. & Lelia H. Carroll Trust
U/A
Dated 5/1/58
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 1-20-61
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
Lelia H. Carroll Trust U/A
Dated 7-12-62
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
C-8
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Pamela C. Crigler
/s/ Philip E. Johnson
By: _________________________________
Name: Philip E. Johnson
Title:Trustee
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Susan S. Leonard
/s/ Philip E. Johnson
By: _________________________________
Name: Philip E. Johnson
Title:Trustee
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Margaret B. Berzins
/s/ Philip E. Johnson
By: _________________________________
Name: Philip E. Johnson
Title:Trustee
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Wallace E. Carroll III
/s/ Philip E. Johnson
By: _________________________________
Name: Philip E. Johnson
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Pamela C. Crigler
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
C-9
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Susan S. Leonard
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Margaret B. Berzins
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Wallace E. Carroll, III
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title:Trustee
C-10
Schedule I
04/13/01
Number of
Common Shares
Held of Record
or Owned
Name of Shareholder Officers/Trustees Beneficially Notice Address
------------------- ----------------- -------------- --------------
CRL, Inc. Jonathan P. Johnson, 2,073,436 6300 S. Syracuse Way, Suite 300
President Englewood, Colorado 801111
Wallace E. Carroll, Jr. N/A 182,274 c/o CRL
(see address above)
Amelia M. Carroll N/A 10,765 c/o CRL
(see address above)
Wallace Foundation Wallace E. Carroll, Jr. 32,910 c/o CRL
Amelia M. Carroll (see address above)
Wallace E. Carroll
Trust U/A
Dated 7-1-57 Wallace E. Carroll, Jr. 2,151 c/o CRL
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr. Robert E. Kolek*
Wallace E. & Lelia H.
Carroll Trust U/A
Dated 5-1-58 Wallace E. Carroll, Jr. 603,000 c/o CRL
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr. Robert E. Kolek*
Wallace E. Carroll
Trust U/A
Dated 1-20-61 Wallace E. Carroll, Jr. 11,881 c/o CRL
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr.
Lelia H. Carroll Trust
U/A
Dated 7-12-62 Wallace E. Carroll, Jr. 180,661 c/o CRL
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr.
Wallace E. Carroll, Jr.
Trust #2 U/A c/o CRL
Dated 12-30-76 Philip E. Johnson 193 (see address above)
F/B/O Pamela C. 194
Crigler, 193
Susan S. Leonard, 182
Margaret B. Berzins,
Wallace E Carroll, III
(Four separate trusts--trustee is the same for
all four)
Wallace E. Carroll
Trust U/A
Dated 12-20-79 Wallace E. Carroll, Jr. 1,690 c/o CRL
F/B/O Pamela C. Amelia M. Carroll 1,690 (see address above)
Crigler, Robert E. Kolek* 1,690
Susan S. Leonard, 1,690
Margaret B. Berzins,
Wallace E Carroll, III
(Four separate trusts--trustees are the same
for all four)
---------
Totals 3,104,600
=========
-------
* Powers of this trustee are limited. He is not entitled to vote on matters
involving Katy.
C-11
ANNEX D
CERTIFICATE OF AMENDMENT
TO
THE CERTIFICATE OF INCORPORATION
OF
KATY INDUSTRIES, INC.
KATY INDUSTRIES, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation at a meeting on April
[ ], 2001 adopted a resolution setting forth a proposed amendment of the
Certificate of Incorporation of the Corporation, as amended (the "Certificate
of Incorporation") declaring said amendment to be advisable and directing that
said amendment be submitted to the stockholders of the Corporation for
consideration thereof at the next annual meeting of stockholders. The proposed
amendment to the Certificate of Incorporation is as follows:
RESOLVED, that Article Fourth of the Certificate of Incorporation shall be
deleted and amended in its entirety to read as follows:
"FOURTH: The aggregate number of shares of all classes of stock which the
corporation shall have the authority to issue is twenty-five million six
hundred thousand (25,600,000) shares, divided into two classes, one class
consisting of six hundred thousand (600,000) shares of Preferred Stock of the
par value of one hundred dollars ($100.00) per share, and the other class
consisting of twenty-five million (25,000,000) shares of Common Stock of the
par value of one dollar ($1.00) per share.
1. Preferred Stock. The Preferred Stock of the Corporation shall have the
following relative rights and references which are fixed and determined as set
forth herein.
2. Rank. The Preferred Stock shall be prior in right with respect to
distribution of the Corporation's assets upon redemption and upon the voluntary
or involuntary liquidation, dissolution or winding up of the Corporation to all
other equity securities of the Corporation, including, without limitation, the
Common Stock, whether now or hereafter authorized.
3. Certain Definitions. As used in this Article Fourth and elsewhere in this
Certificate of Amendment, unless the context otherwise requires:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Beneficial Ownership" shall have the meaning set forth in Rule 13d-3
under the Exchange Act or any corresponding provision of a successor law.
(c) "Change in Control" shall mean the acquisition by a person or group of
persons, whether in a single transaction or a series of related transactions,
of Beneficial Ownership of thirty percent (30%) or more, after giving effect to
such transaction or transactions, of the combined voting power of the
outstanding capital stock of the Corporation.
(d) "Common Stock" shall mean the Corporation's authorized Common Stock,
$1.00 par value, and any stock into which such Common Stock may thereafter be
changed or converted, and shall also include stock of the Corporation of any
other class, which is not preferred as to dividends or the distribution of
assets upon liquidation, dissolution or winding up over any other class of
stock of the Corporation, issued to the holders of shares of Common Stock upon
any reclassification thereof.
(e) "Conversion Factor" shall mean eight (8), as adjusted from time to time
in accordance with Section 6(c) of this Article Fourth.
D-1
(f) "Conversion Rate" shall mean one hundred (100) divided by the Conversion
Factor, as adjusted from time to time in accordance with Section 6(c) of this
Article Fourth.
(g) "Effective Date" shall mean May , 2001.
(h) "Exchange Act" shall mean the United States Securities Exchange Act of
1934, as amended.
(i) "Liquidation" shall mean any voluntary or involuntary liquidation,
winding up, or dissolution of the Corporation. A merger, consolidation or other
business combination between the Corporation and any other entity or a sale or
other disposition of all or substantially all of the assets of the Corporation
will not be treated as a Liquidation.
4. Liquidation Preference.
(a) In the event of any Liquidation, holders of Preferred Stock shall be
entitled to receive out of the assets of the Corporation, prior to and in
preference of any distribution or payment upon the Common Stock, an amount in
cash per share of Preferred Stock equal to the par value thereof. If, upon the
occurrence of a Liquidation, the assets and funds thus distributed among the
holders of the Preferred Stock shall be insufficient to permit the payment in
full of the par value thereof for each share of Preferred Stock, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Preferred Stock in
proportion to their respective ownership of shares of Preferred Stock.
(b) Written notice of such Liquidation stating a payment date and the place
where payment in respect of Liquidation shall be payable, shall be given by
mail, postage prepaid, not less than twenty (20) days prior to the payment date
stated therein, to the holders of record of Preferred Stock, such notice to be
addressed to each such holder at its address as shown by the records of the
Corporation.
5. Dividends. The Preferred Stock shall not be entitled to receive
dividends.
6. Conversion. The holders of the Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Optional Conversion Rights. After the earlier of (i) the fifth
anniversary of the Effective Date, (ii) the approval of the Board of Directors
of the Corporation of a merger, consolidation or other business combination
between the Corporation and another entity (except where the Corporation is the
surviving entity and no Change in Control of the Corporation occurs as a result
of the transaction) or a sale or other disposition of all or substantially all
of the Corporation's assets, (iii) the authorization by the Board of Directors
of the Corporation of, or other corporate action taken to effect, a
Liquidation, and (iv) the solicitation of proxies from the holders of any class
or classes of capital stock of the Corporation for any annual or special
meeting of shareholders, however called, at which an election for directors of
the Corporation is held, or any solicitation of written consent of the holders
of any class or classes of capital stock of the Corporation with respect to the
election of directors, against the election as director of any nominee
designated by the holders of the Preferred Stock or for removal of any
incumbent director originally nominated by the holders of the Preferred Stock,
each share of Preferred Stock shall be convertible, at the option of the holder
thereof, at any time, and from time to time, into the number of fully paid and
nonassessable shares of Common Stock equal to the Conversion Rate, as adjusted
from time to time in accordance with Article Fourth, Section 6(c).
(b) Mechanics of Conversion. If a holder of shares of Preferred Stock
desires to exercise its right of conversion, such holder shall give written
notice to the Corporation (the "Conversion Notice") of such holder's election
to convert a stated number of shares of such Preferred Stock (the "Conversion
Shares") into shares of Common Stock, and surrender to the Corporation such
holder's certificate or certificates representing such Conversion Shares. The
Conversion Notice shall state the name or names (with addresses) in which the
certificate or certificates for Common Stock shall be issued. Notwithstanding
the foregoing, the Corporation shall not be required to issue any certificates
to any person other than the holder thereof unless (i) the holder
D-2
has paid to the Corporation the amount of any documentary stamp or similar
taxes payable in respect of transfer involved in the issue or delivery of the
certificate upon conversion to a person other than the holder or has
established to the satisfaction of the Corporation that such tax has been paid;
and (ii) the Corporation has obtained reasonable assurance that such
transaction is exempt from the registration requirements of, or is covered by
an effective registration statement under, the Act and all applicable state
securities laws, including, if necessary in the reasonable judgment of the
Corporation or its legal counsel, receipt of an opinion to such effect from
counsel reasonably satisfactory to the Corporation. As soon as is practicable
after the receipt of the Conversion Notice and the surrender of the certificate
or certificates representing the Conversion Shares, the Corporation shall issue
and deliver, or cause to be delivered, to the holder of the Conversion Shares
or his nominee or nominees, a certificate or certificates for the number of
shares of Common Stock issuable upon the conversion of such Conversion Shares
and a certificate or certificates evidencing any shares of Preferred Stock
represented by the certificates so tendered by the holder that were not to be
converted. Such conversion shall be deemed to have been effected as of the
close of business on the date the Corporation received the Conversion Notice
and the certificate or certificates representing the Conversion Shares, and the
person or persons entitled to receive the shares of Common Stock issuable upon
conversion shall be treated for all purposes as the holder or holders of record
of such shares of Common Stock as of the close of business on such date. If the
conversion is in connection with an underwritten offering of securities
registered pursuant to the Act, the conversion may, at the option of any holder
tendering Preferred Stock for conversion, be conditioned upon the closing with
the underwriters of the sale of securities pursuant to such offering in which
event the person(s) entitled to receive Common Stock upon conversion of such
Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to the closing of such sale of securities.
(c) Conversion Factor and Conversion Rate Adjustments. The Conversion Factor
and, correspondingly, the Conversion Rate shall be subject to adjustment as
follows:
(i) Dividends and Distributions. In the event the Corporation should at
any time or from time to time after the Effective Date fix a record date
for the effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in additional shares of
Common Stock, then, as of such record date (or, if no record date is fixed,
as of the close of business on the date on which the Board of Directors
adopts the resolution relating to such dividend, distribution, split or
subdivision), the Conversion Factor in effect immediately prior to such
date shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior thereto and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately thereafter.
(ii) Combinations. If the number of shares of Common Stock outstanding
at any time after the Effective Date is decreased by a combination of the
outstanding shares of Common Stock, then following such combination, the
Conversion Factor in effect immediately prior thereto shall be multiplied
by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior thereto and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
thereafter.
(iii) Recapitalizations, etc. If any capital reorganization or
reclassification of the Common Stock of the Corporation (other than a
consolidation or merger of the Corporation with or into another corporation
provided for elsewhere in this Article Fourth, Section 6(a) or other than a
Liquidation as set forth in Article Fourth, Section 4), shall be effected,
then, as a condition of such reorganization, reclassification,
consolidation or merger, lawful and adequate provision shall be made
whereby the holders of the Preferred Stock then outstanding shall have the
right to receive, in lieu of the shares of Common Stock of the Corporation
immediately theretofore receivable with respect to such shares of Preferred
Stock, such shares of stock, securities, properties or assets, including
cash, as would have been issued or payable with respect to or in exchange
for the shares of Common Stock which such holders would have held had the
shares of Preferred Stock been converted immediately prior to such
reorganization, reclassification, consolidation or merger. In connection
with any provision made pursuant to the terms of the preceding sentence,
provision
D-3
shall also be made for adjustments to have effect thereafter which shall be
as nearly equivalent as may be practicable to the adjustments provided for
in this Section 6. The above provisions of this Section 6(c)(iii) shall
similarly apply to successive reorganizations, reclassifications,
consolidations or mergers.
(iv) Dilutive Transactions. If the Corporation shall issue or sell
shares of Common Stock (including shares now or hereafter held in the
treasury of the Corporation) at a price per share, or shall grant rights,
options or warrants having an exercise price per share, or securities
convertible into Common Stock having a conversion price per share, less
than the Conversion Factor, expressed in dollars, in effect at that time,
then, upon such issue, sale or grant, the Conversion Factor shall be
adjusted to the amount (calculated to the nearest one hundredth of a cent)
determined by dividing: (x) an amount equal to the sum of (A) the existing
Conversion Factor multiplied by the sum of (1) the number of shares of
Common Stock outstanding immediately prior to such issue, sale or grant and
(2) the number of shares of Common Stock issuable upon conversion, exercise
or exchange of any rights, options, warrants and convertible securities
outstanding immediately prior to such issue, sale or grant, and (B) the
aggregate consideration, if any, received by the Corporation upon such
issue, sale or grant (including, in the case of rights, options, warrants
or convertible securities, the consideration to be received on conversion,
exercise or exchange thereof) by (y) the total number of shares of Common
Stock outstanding and issuable upon conversion, exercise or exchange of any
rights, options, warrants and convertible securities immediately after such
issue, sale or grant; provided, however, that no such adjustment shall be
made with respect to (I) the issuance of shares of Common Stock upon the
exercise or conversion of rights, options, warrants or other securities
convertible into Common Stock outstanding as of the Effective Date, (II)
shares of Common Stock, rights, options or warrants granted or awarded by
the Corporation, with the approval of its Board of Directors or the
Compensation Committee thereof, to employees, directors and consultants of
the Corporation as compensation for service to the Corporation in any such
capacities, if such rights, options or warrants are granted at an exercise
price or value not less than the fair market value of a share as of the
date of grant ("Compensatory Securities"), or (III) the issuance of Common
Stock upon the conversion of any Preferred Stock by a holder thereof. The
securities described in subclauses (I), (II) and (III) of this Article
Fourth, Section 6(c)(iv) are referred to below as "Exempted Securities".
For purposes of this Article Fourth, Section 6(c)(iv) above, the following
clauses 1. through 3., inclusive, shall also be applicable:
1. If the Corporation shall grant any rights, options or warrants to
purchase Common Stock or to purchase securities convertible into Common
Stock (other than Exempted Securities), and the purchase price per share
for which Common Stock is issuable upon the exercise or conversion of such
securities (determined by dividing (x) the total amount, if any, received
or receivable by the Corporation as consideration for the granting of all
such rights, options or warrants, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon the exercise of
all such rights, options or warrants, plus, in the case of convertible
securities, the minimum aggregate amount of additional consideration
payable upon the conversion thereof, by (y) the maximum aggregate number of
shares of Common Stock issuable upon the exercise of such rights, options
or warrants or upon the conversion of any such convertible securities
issuable upon the exercise of such rights, options or warrants) shall be
less than the Conversion Factor, expressed in dollars, in effect
immediately prior to the time of the granting of such rights, options,
warrants or convertible securities, then the maximum aggregate number of
shares of Common Stock issuable upon the exercise of such rights, options
or warrants or upon the conversion of the total maximum amount of such
convertible securities issuable upon the exercise of such rights, options
or warrants shall (as of the date of grant thereof) be deemed to be
outstanding and to have been issued for such price per share. No further
adjustments of the Conversion Factor shall be made upon the actual issuance
of such Common Stock or convertible securities upon the exercise or
conversion of such securities, except as otherwise provided in clause 3.
below;
2. If the Corporation shall issue or sell any convertible securities
(other than Exempted Securities), and the purchase per share for which
Common Stock is issuable upon such conversion (determined by
D-4
dividing (x) the total amount received or receivable by the Corporation as
consideration for the issue or sale of all such convertible securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion thereof, by (y) the maximum
aggregate number of shares of Common Stock issuable upon the conversion of
all such convertible securities) shall be less than the Conversion Factor,
expressed in dollars, in effect immediately prior to the time of such issue
or sale, then the maximum number of shares of Common Stock issuable upon
conversion of all such convertible securities shall (as of the date of the
issue or sale thereof) be deemed outstanding and to have been issued for
such price per share, provided that, except as otherwise specified in
clause 3. below, (A) no further adjustments of the Conversion Factor shall
be made upon the actual issuance of such Common Stock upon conversion of
such convertible securities, and (B) if any such issue or sale of such
convertible securities is made upon the exercise of any rights to subscribe
for or to purchase or upon exercise of any option or warrant to purchase
any such convertible securities, no further adjustment of the Conversion
Factor shall be made by reason of such issue or sale; and
3. If the purchase price or number of shares purchasable provided for in
any right, warrant or option referred to in clause 1. above, or the rate at
which any convertible securities referred to in clause 1. or 2. above are
convertible into Common Stock shall change at any time (other than under or
by reason of provisions designed to protect against dilution in connection
with events for which provision for adjustments in the Conversion Factor
are provided for herein), the Conversion Factor then in effect hereunder
shall forthwith be readjusted to such Conversion Factor as would have been
obtained had the adjustments made upon the issuance of such rights,
warrants, options or convertible securities been made upon the basis of the
changed terms; and on the expiration of any such right, warrant or option
referred to in clause 1. above or the termination of any such right to
convert such convertible securities referred to in clause 1. or 2. above,
the Conversion Factor then in effect hereunder shall forthwith be
readjusted to such Conversion Factor as would have been obtained had the
adjustments made upon the issuance of such rights, warrants or options or
convertible securities been made upon the basis of the issuance of only the
number of shares of Common Stock, if any, theretofore actually delivered
upon the exercise of such rights, warrants or options or upon the
conversion of such convertible securities.
(d) No Impairment. The Corporation will not, by amendment of its Certificate
of Incorporation or through any reorganization, reclassification,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 6 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against impairment.
(e) No Fractional Shares: Certificate as to Adjustments.
(i) No fractional shares of Common Stock shall be issued upon conversion
of the Preferred Stock. In lieu of fractional shares, the Corporation shall
pay the holder the fair market value of such fractional share of Common
Stock in cash.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Factor and the corresponding Conversion Rate for the Preferred
Stock pursuant to this Section 6, the Corporation, at its expense, shall as
soon as practicable compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Preferred
Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any
holder of Preferred Stock, furnish or cause to be furnished to such holder
a like certificate setting forth (A) such adjustment and readjustment, (B)
the Conversion Factor and Conversion Rate at the time in effect, and (C)
the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of a share
of Preferred Stock.
D-5
(f) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock solely for the purpose of effecting the conversion of the
shares of the Preferred Stock, free from any preemptive right or other
obligation, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of the
Preferred Stock; and if at any time the number of authorized but unissued
shares of the Common Stock shall not be sufficient to effect the conversion of
all then outstanding shares of the Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock, the
Corporation shall as soon as practicable take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purposes. The Corporation
shall prepare and shall use its best efforts to obtain and keep in force such
governmental or regulatory permits or other authorizations as may be required
by law, and shall comply with all requirements as to registration,
qualification or listing of the Common Stock, in order to enable the
Corporation lawfully to issue and deliver to each holder of record of Preferred
Stock such number of shares of its Common Stock as shall from time to time be
sufficient to effect the conversion of all Preferred Stock then outstanding and
convertible into shares of Common Stock.
(g) Notices. Any notice required by the provisions of this Article Fourth,
Section 6 to be given to the holders of shares of Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, or by a
recognized commercial delivery service (e.g., United Parcel Service), delivery
prepaid and addressed to each holder of record at his address appearing on the
books of this Corporation.
7. Voting Rights. Except as provided in Section 8 below, and except as
otherwise required by law, a holder of Preferred Stock shall have no voting
rights.
8. Protective Provisions. The Corporation shall not, without first obtaining
the approval (by vote or written consent) of the holders of at least a majority
of the then outstanding shares of Preferred Stock:
(a) authorize or issue any class or series of equity security having equal
or superior rights as to payment upon liquidation, dissolution or a winding up
of the Corporation;
(b) amend its Certificate of Incorporation or By-Laws in any way, or enter
into a merger, consolidation, reorganization, recapitalization or sale of all
or substantially all of its assets, in any case which adversely effects the
rights and preferences of the holders of the Preferred Stock as a class (except
that the Corporation may complete a reverse-split of its Common Stock without
the consent of the holders of the Preferred Stock);
(c) engage in any transaction which would impair or reduce the rights of the
holders of the Preferred Stock as a class.
9. Optional Redemption of the Preferred Stock. The Convertible Preferred
Stock will not be subject to a sinking fund or other obligations of the
Corporation to redeem or retire the Preferred Stock. The holders of Preferred
Stock shall have no right to compel the Corporation to redeem the Preferred
Stock. The Preferred Stock shall be redeemable in whole, but not in part, at
the Corporation's option at any time on or after June 30, 2021. The redemption
price per share of Preferred Stock shall equal the par value thereof, and shall
be payable in cash to the order of the holder on the 30th day after notice of
redemption shall have been given to the holders, subject to each holder's right
to convert any or all of its shares of Preferred Stock into Common Stock in
lieu of such payment.
10. Cancellation of Shares. No Preferred Stock acquired by the Corporation
by reason of redemption, purchase, conversion or otherwise shall be reissued,
and all such acquired Preferred Stock shall be canceled, retired, and
eliminated from the shares which the Corporation shall be authorized to issue.
The Corporation shall from time to time take such appropriate corporate action
as may be necessary to reduce the authorized number of Preferred Shares
accordingly."
D-6
SECOND: That the Board of Directors of the Corporation at a meeting on March
29, 2001 adopted resolutions setting forth a proposed amendment of the
Certificate of Incorporation declaring said amendment to be advisable and
directing that said amendment be submitted to the stockholders of the
Corporation for consideration thereof at the next annual meeting of
stockholders. The proposed amendment to the Certificate of Incorporation is as
follows:
RESOLVED, that Article Tenth of the Certificate of Incorporation be and it
hereby is renumbered as Article Eleventh.
FURTHER RESOLVED, that a new Article Tenth be and it hereby is added to the
Certificate of Incorporation as follows:
"TENTH: Commencing with the annual meeting of stockholders in 2001,
directors shall be divided into two classes, as nearly equal in number as
possible, designated as Class I and Class II. The initial term of office of the
Class I directors shall expire on the day of the first annual meeting of
stockholders following the end of the 2001 fiscal year (the "2002 Annual
Meeting") and the initial term of office of the Class II directors shall expire
on the day of the annual meeting of stockholders next succeeding the 2002
Annual Meeting. At each annual meeting of stockholders following such
classification and division of the members of the board of directors, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the second succeeding annual meeting of
stockholders after their election, so that the term of office of one class of
directors shall expire in each year. Each director shall hold office until the
expiration of such director's term of office and until such director's
successors shall have been elected and qualified, or until such director's
earlier resignation, removal or death. In case of any increase or decrease,
from time to time, in the number of directors constituting the whole board of
directors, the number of directors in each class shall be determined by action
of the board of directors. A director elected by the remainder of the board of
directors to fill a vacancy shall hold office for the remaining term of the
predecessor director and until such director's successor has been elected and
qualified, or until such director's earlier resignation, removal and death."
THIRD: That pursuant to Section 242 of the General Corporation Law of the
State of Delaware, the holders of a majority of the issued and outstanding
shares of capital stock of the Corporation entitled to vote on the matter voted
in favor of, approved and adopted the foregoing proposed amendments of the
Certificate of Incorporation at the Corporation's annual meeting, duly convened
and held on May [ ], 2001.
FOURTH: That the aforesaid amendments were duly adopted in accordance with
the applicable provisions of Sections 141 and 242(b)(1) of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment
to be signed and executed in its corporate name by its President and attested
to by its Secretary, who declare, affirm, acknowledge and certify, under the
penalties of perjury, that this is their free act and deed and that the facts
stated herein are true and caused its corporate seal to be hereunto affixed, as
of the day of May , 2001.
Effective Date: May , 2001
ATTEST: Katy Industries, Inc.
a Delaware corporation
By: _________________________________ By: _________________________________
Arthur R. Miller, Secretary Robert M. Baratta, President
D-7
Exhibit E
KATY INDUSTRIES, INC.
AUDIT COMMITTEE CHARTER
The Board of Directors of Katy Industries, Inc. (Katy or the Company) hereby
defines and establishes the role of its Audit Committee (the Committee) with
authority, responsibility, and specific duties as described in the following
text.
The Audit Committee
Composition
The Committee shall be comprised of three or more directors who are
independent of management and operating executives. One of the members shall be
appointed Committee Chairman by the Chairman of the Board of Directors.
Authority
The Audit Committee is granted the authority to investigate any activity of
the Company, and all employees are directed to cooperate as requested by
members of the Committee. The Committee is empowered to retain persons having
special competence as necessary to assist the Committee in fulfilling its
responsibility.
Responsibility
The Audit Committee is to serve as a focal point for communication between
noncommittee directors, the independent accountants, internal audit, and Katy's
management, as their duties relate to financial accounting, reporting, and
controls. The Audit Committee is to assist the Board of Directors in fulfilling
its fiduciary responsibilities as to accounting policies and reporting
practices of Katy and all subsidiaries and the sufficiency of auditing relative
thereto. It is to be the Board's principal agent in assuring the independence
of the corporation's independent accountants, the integrity of management, and
the adequacy of disclosures to stockholders. The opportunity for the
independent accountants to meet with the entire Board of Directors as needed is
not to be restricted.
Meetings
The Audit Committee is to meet at least two times per year and as many times
as that committee deems necessary.
Attendance
Members of the Audit Committee are to be present at all meetings; however, a
quorum of two, including the Chairman, suffices for a meeting. As necessary or
desirable, the Chairman may request that members of management, internal
auditors, and representatives of the independent accountants be present at
meetings of the Committee.
Minutes
Minutes of each meeting are to be prepared and sent to Committee members and
the Katy directors who are not members of the Committee, and/or matters
reviewed at each committee meeting will be discussed with the Board of
Directors.
Specific Duties
The Audit Committee is to:
1) Inform the independent accountants and management that the independent
accountants and the Committee may communicate with each other at all times; and
the Committee Chairman may call a meeting whenever he deems necessary.
E-1
2) Review with the Company's management, independent accountants, and
internal auditors, as deemed necessary by the Committee, the Company's
policies and procedures to reasonably assure the adequacy of internal
accounting and financial reporting controls.
3) Have familiarity, through the individual efforts of its members, with
the accounting and reporting principles and practices applied by the
Company in preparing its financial statements. Further, the Committee is to
make, or cause to be made, all necessary inquiries of management and the
independent accountants concerning established standards of corporate
conduct and performance, and deviations therefrom.
4) Review, prior to the annual audit, the scope and general extent of
the independent accountant's audit examination, including the engagement
letter. The auditor's fees are to be arranged with management and annually
summarized for Committee review. The Committee's review should entail an
understanding from the independent accountant of the factors considered by
the accountant in determining the audit scope, including:
a) Industry and business risk characteristics of the Company
b) External reporting requirements
c) Materiality of the various segments of the Company's consolidated
and nonconsolidated activities
d) Quality of internal controls
e) Extent of involvement of internal audit in the audit examination
f) Other areas to be covered during the audit engagement
5) Review and approve requests for any management consulting engagement
to be performed by the Company's independent auditor and be advised of any
other study undertaken at the request of management that is beyond the
scope of the audit engagement letter.
6) Review with management and the independent accountants, upon
completion of their audit, financial results for the year, prior to their
release to the public. This review is to encompass:
a) The Company's annual report to shareholders and Form 10-K,
including the financial statements, and financial statement and
supplemental disclosures required by generally accepted accounting
principles and the Securities and Exchange Commission
b) Significant transactions not a normal part of the Company's
operations
c) Changes, if any, during the year in the Company's accounting
principles or their application
d) Significant adjustments proposed by the independent accountants
e) All other communications required to be made by professional
standards
7) Review quarterly results before their release with management and the
independent public accountants. This can be accomplished by a discussion
between the Chairman of the Committee, the engagement partner of the
independent accountants, and any other individuals they deem appropriate.
The independent accountants should be instructed to communicate with the
Committee if there is a probability that any quarterly review report, if
one is to be issued, will be other then standard.
8) Evaluate the cooperation received by the independent accountants
during their audit examination, including their access to all requested
records, data, and information. Also, elicit the comments of management
regarding the responsiveness of the independent accountants to the
Company's needs. Inquire of the independent accountants whether there have
been any disagreements with management that if not satisfactorily resolved
would have caused them to modify their report on the Company's financial
statements.
E-2
9) Discuss with the independent accountants the quality of the Company's
financial and accounting personnel, and any relevant recommendations that
the independent accountants may have (including those in their "letter of
comments and recommendations"). Topics to be considered during this
discussion include improving internal financial controls, the selection of
accounting principles, and management reporting systems. Review written
responses of management to letter of comments and recommendations from the
independent accountants.
10) Discuss with Company management the scope and quality of internal
accounting and financial reporting controls in effect.
11) Review and concur in the appointment, replacement, reassignment or
dismissal of the Director of Internal Audit.
12) Apprise the Board of Directors, through minutes and special
presentations as necessary, of significant developments in the course of
performing the above duties.
13) Recommend to the Board of Directors any appropriate extension or
changes in the duties of the Committee.
14) Recommend to the Board of Directors the independent accountants to
be nominated, approve the compensation of the independent accountants and
review and approve the discharge of the independent accountants.
E-3
PRELIMINARY COPY
KATY INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert M. Baratta and Stephen P. Nicholson,
and each of them, each with full power of substitution, to represent the
undersigned and to vote all the shares of the stock of Katy Industries, Inc.
which the undersigned is entitled to vote at the Annual Meeting of Stockholders
of Katy Industries, Inc. to be held at the Hotel Inter-Continental New York,
located at 111 East 48th Street, New York, New York on May 23, 2001 at 10:00
a.m. local time, and at any adjournment thereof (1) as hereinafter specified
upon the proposals listed below and as more particularly described in Katy's
Proxy Statement, receipt of which is hereby acknowledged, and (2) in their
discretion upon such other matters as may properly come before the meeting. The
undersigned hereby acknowledges receipt of Katy's 2000 Annual Report on
Form 10-K.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN
AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK MAY BE
REPRESENTED AT THE MEETING.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF KATY.
(Continued and to be signed on reverse side)
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
The shares represented hereby shall be voted as specified. If no
specification is made, such shares shall be voted FOR proposals 1, 2, 3, 4 and
5.
A vote FOR the following proposals is recommended by the Board of
Directors:
1. To approve the issuance and sale of 400,000 shares of Katy's convertible
preferred stock, $100 par value per share, to KKTY Holding Company, L.L.C. and
the issuance of shares of common stock to the holder of the convertible
preferred stock in accordance with the terms of the convertible preferred stock.
Approval of this proposal is contingent on approval of Proposal 2 and Proposal
3.
[_] For [_] Against [_] Abstain
2. To amend Katy's Restated Certificate of Incorporation to authorize 600,000
shares of convertible preferred stock. Approval of this proposal is contingent
on approval of Proposal 1 and Proposal 3.
[_] For [_] Against [_] Abstain
3. To amend Katy's Restated Certificate of Incorporation to establish a
classified Board of Directors. Approval of this proposal is contingent on
approval of Proposal 1 and Proposal 2.
[_] For [_] Against [_] Abstain
4. Election of Directors
[_] For All [_] Withhold All [_] For All Except
In the event that Proposal 1, Proposal 2 and Proposal 3 are approved, the
election of:
Class I Directors: C. Michael Jacobi, Robert M. Baratta, Daniel B. Carroll and
Wallace E. Carroll, Jr., each to serve a one year term until the next annual
meeting of stockholders in 2002
Class II Directors: Christopher Anderson, William F. Andrews, Samuel P. Frieder,
James A. Kohlberg and Christopher Lacovara, each to serve a two year term until
the annual meeting of stockholders in 2003
Instruction: To withhold authority to vote for any individual nominee, write the
nominee's name in the space provided below.
_______________________________
In the event that Proposal 1, Proposal 2 or Proposal 3 is not approved, the
election of: William F. Andrews, Robert M. Baratta, Amelia M. Carroll, Daniel B.
Carroll, Wallace E. Carroll, Jr., Arthur R. Miller, Charles W. Sahlman, Jacob
Saliba and Glenn W. Turcotte, each to serve a one year term until the next
annual meeting of stockholders in 2002.
Instruction: To withhold authority to vote for any individual nominee, write the
nominee's name in the space provided below.
_______________________________
5. To ratify the appointment of Arthur Andersen LLP as Katy's independent
auditors for the fiscal year ending December 31, 2001.
[_] For [_] Against [_] Abstain
Please check this box if you plan to attend the annual meeting [_]
Date: _________________________
(signature)
Date: _________________________
(signature)
Sign exactly as your name(s) appears on your stock certificate. If shares of
stock stand of record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above Proxy. If shares of stock are held of record by a
corporation, the Proxy should be executed by the President or Vice President and
the Secretary or Assistant Secretary, and the corporate seal should be affixed
thereto. Executors or administrators or other fiduciaries who execute the above
Proxy for a deceased stockholder should give their full title. Please date the
proxy.
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT!
PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.