UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
SCHEDULE 14A
Proxy Statement Pursuant To Section 14(A) Of The Securities Exchange Act Of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (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 __________________
on May __, 2001 at ______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 ___, 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
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 __, 2001 at
__ a.m., local time. The meeting will be held at_____________________. 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
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Dated: April __, 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
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 on May __, 2001 at _________________________________.
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.
On April __, 2001, we began mailing information to people who, according to
our stockholder records, owned shares of Katy's common stock at the close of
business on April 23, 2001.
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TABLE OF CONTENTS
SUMMARY.................................................................... 1
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING............................ 5
THE ANNUAL MEETING...................................................... 5
THIS PROXY SOLICITATION................................................. 5
VOTING YOUR SHARES...................................................... 5
VOTE REQUIRED FOR APPROVAL.............................................. 6
OTHER MATTERS........................................................... 7
PROPOSAL 1 - SALE OF CONVERTIBLE PREFERRED STOCK........................... 7
INTRODUCTION............................................................ 7
REQUIRED VOTE........................................................... 8
RECOMMENDATION OF THE BOARD OF DIRECTORS................................ 9
THE TRANSACTION......................................................... 9
INFORMATION ABOUT THE PURCHASE AGREEMENT................................ 9
The Tender Offer..................................................... 9
The Preferred Stock Issuance......................................... 10
Corporate Governance ............................................ 10
Conditions to Accepting Shares Tendered into the Tender Offer and
Purchasing the Preferred Stock.................................... 11
No Solicitation...................................................... 13
Termination.......................................................... 13
Termination Fees..................................................... 14
Transaction and Monitoring Fee....................................... 15
VOTING AGREEMENT........................................................ 15
TERMS OF THE CONVERTIBLE PREFERRED STOCK................................ 16
Conversion Rights.................................................... 16
Registration Rights.................................................. 16
Liquidation Preference............................................... 16
Redemption........................................................... 17
No Dividends......................................................... 17
No Voting Rights..................................................... 17
No Preemptive Rights................................................. 17
Special Rights....................................................... 17
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USE OF PROCEEDS.......................................................... 17
INFORMATION ABOUT THE RELATED TRANSACTIONS............................... 18
The Tender Offer...................................................... 18
Bankers Trust Credit Facility......................................... 20
Partial Redemption of Preferred Interest in Contico International..... 21
BACKGROUND OF THE TRANSACTION............................................ 21
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS............................. 31
OPINION OF BEAR STEARNS.................................................. 34
Overview.............................................................. 34
Bear Stearns Opinion.................................................. 35
Summary of Analysis................................................... 37
Other Considerations.................................................. 43
INFORMATION ABOUT PURCHASER AND KOHLBERG................................. 44
PROPOSAL 2 - TO AUTHORIZE 600,000 SHARES OF CONVERTIBLE
PREFERRED STOCK.......................................................... 45
GENERAL.................................................................. 45
REQUIRED VOTE............................................................ 45
RECOMMENDATION OF THE BOARD OF DIRECTORS................................. 45
PROPOSAL 3 - ESTABLISHING A CLASSIFIED BOARD OF DIRECTORS................... 45
REQUIRED VOTE............................................................ 47
RECOMMENDATION OF THE BOARD OF DIRECTORS................................. 47
PROPOSAL 4 - ELECTION OF DIRECTORS.......................................... 48
NOMINEES................................................................. 48
REQUIRED VOTE............................................................ 49
RECOMMENDATION OF THE BOARD OF DIRECTORS................................. 49
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE
OFFICERS.............................................................. 49
Nominees.............................................................. 50
Current Directors..................................................... 51
Executive Officers.................................................... 55
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PROPOSAL 5 - RATIFICATION OF THE APPOINTMENT OF ARTHUR
ANDERSEN LLP AS THE INDEPENDENT AUDITORS OF KATY......................... 56
AUDIT FEES............................................................... 56
ALL OTHER FEES........................................................... 56
REQUIRED VOTE............................................................ 57
RECOMMENDATION OF THE BOARD OF DIRECTORS................................. 57
INFORMATION ABOUT KATY STOCK OWNERSHIP...................................... 57
OUTSTANDING SHARES....................................................... 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.......................... 57
SECURITY OWNERSHIP OF MANAGEMENT......................................... 59
CHANGE OF CONTROL........................................................ 61
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE............................................................ 61
EXECUTIVE COMPENSATION...................................................... 62
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION........................... 62
OPTION GRANT TABLE....................................................... 64
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-
END OPTION/SAR VALUE TABLE............................................ 65
TERMINATION OF EMPLOYMENT, CHANGE OF CONTROL AND
OTHER ARRANGEMENTS.................................................... 66
Compensation and Benefits Assurance Program........................... 66
Other Arrangements.................................................... 67
DIRECTORS' COMPENSATION.................................................. 67
COMPENSATION COMMITTEE'S REPORT ON EXECUTIVE
COMPENSATION.......................................................... 68
Compensation Philosophy............................................... 68
Compensation Program Components....................................... 69
Chief Executive Officer Compensation.................................. 70
Summary............................................................... 70
STOCK PRICE PERFORMANCE GRAPH............................................ 70
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION......................................................... 71
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 72
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS........................ 72
AUDIT COMMITTEE REPORT................................................... 73
PROPOSALS OF STOCKHOLDERS FOR 2002 ANNUAL MEETING........................... 73
FORWARD-LOOKING STATEMENTS.................................................. 73
WHERE TO GET ADDITIONAL INFORMATION......................................... 74
ANNUAL REPORT ON FORM 10-K.................................................. 74
OTHER MATTERS............................................................... 75
INCORPORATION OF DOCUMENTS BY REFERENCE..................................... 75
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
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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 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.
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.
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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.
_ 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.
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 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.
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_ 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.
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INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
THE ANNUAL MEETING
The Annual Meeting will be held on May __, 2001 at __________________ at
____ 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.
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_ 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.
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.
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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.
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
7
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.
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.
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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.
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.
9
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.
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
10
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
include:
- 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 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 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 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;
- 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;
- 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 on 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.
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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.
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.
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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 for a third person 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);
14
. 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 for a third person 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.
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
15
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 Keystone'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.
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
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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;
- 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.
17
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 will use these funds, together with the proceeds of the new secured loan
facility and the net proceeds of the sale of Hamilton, to refinance its existing
bank debt, to partially redeem a third party's preferred interest in a Katy
subsidiary and to pay approximately $8,000,000 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 20th 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
18
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;
- 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
19
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 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
20
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 the 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
- 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 certain financial ratio covenants under its existing bank credit agreement
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
21
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 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.
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
22
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 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.
Based on publicly available information and additional information about
Katy that Kohlberg received from Katy, on October 26, 2000, including Katy's
estimates for earnings before interest, taxes, depreciation and amortization
("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
23
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.
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
24
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.
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.
25
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. 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
26
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.
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 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.
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
27
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 amounts 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.
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
28
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. 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 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 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 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.
29
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.
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
30
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.
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
31
announced, and also to remain as stockholders in a company that will
be financially strengthened by Purchaser's cash infusion.
(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.
(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
32
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).
(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.
(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),
33
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 election 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
34
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 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
35
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;
. 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
36
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 the material valuation and financial
and comparative analyses considered by Bear Stearns in connection with the
rendering of its opinion. This summary does not purport to be a complete
description of the analyses
37
underlying the Bear Stearns opinion and 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 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
outstanding 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
38
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.
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 deemed by Bear Stearns to be generally comparable to Katy. 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 Value/LTM Market Value Price/2001
--------------------
EBITDA EBIT LTM/Net Income Estimated 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
39
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.
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:
Comparable Business Transactions
Target Company Acquiring Company
-------------- -----------------
L.E. Mason Company Thomas & Betts Corporation
Easco Inc. Caradon PLC
Belden Inc. (Cord Products Division) Volex Group PLC
Noma Industries Limited General Chemical Group, Inc.
American Safety Razor Company J.W. Childs Associates
Contico International, Inc Katy Industries, Inc.
Newell Plastics Home Products International Inc.
Tenex Corporation (Consolidated Storage Line) Home Products International Inc.
Wilen Companies, Inc. Katy Industries, Inc.
Sun Coast Industries, Inc. Kerr Group, Inc.
PureTec Corporation Tekni-Plex Inc.
Seymour Housewares Home Products International Inc.
Tamor Corporation Home Products International Inc.
GC Thorsen, Inc. Katy Industries, Inc.
The following 10 transactions were selected because the target companies
were diversified industrial micro-cap companies and were deemed by Bear Stearns
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
Target Company Acquiring Company
-------------- -----------------
Cascade Corporation Lift Technologies, Inc./TD Capital
Group Ltd./Ontario Municipal Employees
Retirement Board
Simpson Industries, Inc. Heartland Industrial Partners, L.P.
General Bearing Corporation Management Group
40
Target Company Acquiring Company
-------------- -----------------
U.S. Can Corporation Berkshire Partners
Jason Inc. Saw Mill Capital, LLC
Transportation Technologies Industries, Inc. Management Group
Gleason Corporation Vestar Capital Partners
Autocam Corporation Aurora Capital Group
Synthetic Industries, Inc. Investcorp SA
Citation Corporation Kelso & Company
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
41
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 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 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, the
required rates of return for participants in the financial buyer community and
the difficulty of completing any leveraged buyout for Katy, and determined that
the leveraged buyout analysis was not relevant to the conclusions set forth in
its opinion.
42
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").
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. Notwithstanding the numerous and significant
differences between the Tender Offer and Preferred Stock Purchase and the
Precedent Investment Transactions, this analysis provided a useful benchmark as
to certain structural, corporate governance and financial aspects of such
investment transactions.
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
43
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.
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
44
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.
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
45
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.
Members in each class would be elected at the May __, 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;
46
- 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.
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
47
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
It is anticipated that Mr. Jacobi will become the Chief Executive Officer
of Katy effective upon closing.
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.
48
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.
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.
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.
49
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 Other
Name Age During the Past Five Years 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
Kohlberg Nurseries Inc.
Holley
Performance
Products Inc.
50
Principal Occupation and
Business Experience Other
Name Age During the Past Five Years Directorships
-------------------------- --- ----------------------------------- -------------------
C. Michael Jacobi 57 1999 to present: Consultant Corrections
(proposed President and 1993 to 1999: Chief Executive Corporation of
Chief Executive Officer Officer, President, and a director America
upon closing of the of Timex Corporation, a leading Webster Financial
Preferred Stock Purchase worldwide manufacturer and Corporation
and Tender Offer) 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
Managing Principal of Kohlberg Nurseries Inc.
Holley
Performance
Products Inc.
Christopher Lacovara 36 1988 to present: Principal of Holley
Kohlberg Performance
Products Inc.
Northwestern
Steel and Wire
Company
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
51
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 of
and Business Service
Experience During Other as Katy
Name Age the Past Five Years Directorships Director
------------------------ --- --------------------- --------------- ----------
William F. Andrews 69 2000 to Present: Johnson Controls 1991 to
Chairman of Inc. present
Corrections Corp. of Navistar
America, a private Northwestern Steel
sector provider of & Wire
detention and Company
corrections services Black Box
1997 to present: Corporation
Principal of Corrections
Kohlberg & Co. Corporation of
1998 to present: America
Chairman of Holly Performance
Northwestern Steel Products Inc.
& 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 2001
present: (February)
President and Chief to present
Executive Officer
and 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
52
Principal Occupation Period of
and Business Service
Experience During Other as Katy
Name Age the Past Five Years Directorships Director
------------------------ --- --------------------- --------------- ----------
holding company for
a subsidiary engaged
in waste-to-energy
operations
Amelia M. Carroll 58 1991 to present: 1996 to
Investor present
Daniel B. Carroll 65 1998 to present: 1994 to
Member and present
Manager of
Newgrange LLC, a
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
Wallace E. Carroll, Jr. 63 1992 to present: 1991 to
Chairman of CRL, present
Inc., a diversified
holding company
1987 to present:
Investor
Arthur R. Miller 50 1998 to present: 1988 to
Executive Vice present
President, Corporate
Development,
Secretary and
53
Principal Occupation Period of
and Business Service
Experience During Other as Katy
Name Age the Past Five Years Directorships Director
------------------------ --- --------------------- --------------- ----------
General Counsel of
Katy
1988 to 1998:
Partner with Holleb
& Coff, attorneys at
law
Charles W. Sahlman 74 1987 to present: 1972 to
President, Sahlman present
Holding Company,
Inc., a holding
company (43%
owned by Katy) for
subsidiaries engaged
in seafood
harvesting
Jacob Saliba 87 1997 to present: RCM Dresdner 1968 to
Chairman of the Global Funds present
Board of Katy
Glenn W. Turcotte 60 2000 to present: 1995 to
Senior Vice present
President
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
54
Principal Occupation Period of
and Business Service
Experience During Other as Katy
Name Age the Past Five Years Directorships Director
------------------------ --- --------------------- --------------- ----------
Katy subsidiary
Executive Officers
Principal Occupation and Business Experience
Name Age During the Past Five Years
------------------------ --- ----------------------------------------------------------
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
55
Principal Occupation and Business Experience
Name Age During the past Five Years
----------------------- --- -------------------------------------------------
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.
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
56
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.
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
Name and Address of Beneficial Percent of
Of Beneficial Owner Ownership Notes Class
-------------------------------------------- ----------------- ------- ----------
Wallace E. Carroll, Jr. and 3,126,767 (1)(2) 35.2%
the WEC Jr. Trusts
c/o CRL, Inc.
6300 S. Syracuse Way, Suite 300
Englewood, CO 80111
57
Amount and Nature
Name and Address of Beneficial Percent of
Of Beneficial Owner Ownership Notes Class
-------------------------------------------- ----------------- ------- ----------
Amelia M. Carroll and the WEC Jr. 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 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.
58
(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.
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
59
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 Beneficial Percent
Name 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) 35.4%
Daniel B. Carroll 19,000 (1) *
Wallace E. Carroll, Jr. 3,126,767 (1)(2) 35.1%
Michael H. Kane 4,560 (4)(5) *
Arthur R. Miller 95,480 (3) *
John R. Prann, Jr. 190,023 (4)(5) 1.8%
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 16,160 (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) 41.0%
* 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 by 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.
60
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.
(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.
61
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").
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Position Year Salary Bonus(3) Compensation (4) Award(5) 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, 1998 325,000 195,000 - - - 49,759
Corporate
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 - - 54,000 3,000 34,281
Maintenance-Retail 1998 183,462 28,731 - - - 14,446
Stephen P. 2000 $ 230,000 $ - $ - $ - 15,000 $ 8,890
Nicholson 1999 230,000 - - 54,000 10,000 25,085
Vice President, 1999 200,000 105,000 - - - 31 ,088
Financial Officer
Finance and Chief
62
(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.
(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:
Name Number of Shares Katy's Stock Grant Date
Granted Price on the 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
63
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 Term Life
Auto Allowance Insurance 401(k) 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
OPTION GRANT TABLE
The following table shows information on grants of stock options during
2000 to the Named Executive Officers.
Number of % of Total
Securities Options Potential Realized
Underlying Granted to Exercise Value at Assumed
Options Employees Or Base Expiration Annual Rates Stock of
Name Granted(1) During 2000 Price Date Price Appreciation(2)
-------------------- ---------- ----------- -------- ---------- ---------------------
5% 10%
-- ---
John R. Prann 0 0.0%
Arthur R. Miller 0 0.0%
64
Number of % of Total
Securities Options Potential Realized
Underlying Granted to Exercise Value at Assumed
Options Employees Or Base Expiration Annual Rates Stock of
Name Granted(1) During 2000 Price Date Price Appreciation(2)
-------------------- ---------- ----------- -------- ---------- ---------------------
Glenn W. Turcotte 0 0.0%
Roger G. Engle 30,000 20.3% 10.25 09/12/10 40,407 84,956
Michael H. Kane 30,000 20.3% 10.25 09/12/10 40,407 84,956
Stephen P. Nicholson 15,000 10.1% 10.25 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
------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Name
----
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
65
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.
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.
66
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 vlaue 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 (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.
67
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.
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.
68
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.
69
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 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
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.
70
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG KATY INDUSTRIES, INC., THE RUSSELL 2000 INDEX
AND THE S & P MANUFACTURING (DIVERSIFIED) INDEX
[GRAPH APPEARS HERE]
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 100.00 137.81 164.11 190.20 233.82 278.35
(Diversified)
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.
71
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
72
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.
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
________________.
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.
73
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.
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.
74
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.
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
75
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 __, 2001
76
ANNEX A
[BEAR STEARNS LETTERHEAD] 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
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
$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:
o reviewed a draft of the Recapitalization Agreement dated March 28,
2001 (including the Preferred Term Sheet);
o reviewed a draft of the Voting Agreement dated March 28, 2001;
o 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;
o reviewed the Commitment Letter;
o 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;
o 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;
o 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;
o met with certain members of Katy's senior management to discuss Katy's
business, operations, historical and projected financial results and future
prospects;
o reviewed the historical prices, trading multiples and trading volumes of the
common shares of Katy;
o reviewed publicly available financial data, stock market performance data
and trading multiples of companies which we deemed generally comparable to
Katy;
o 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;
o performed discounted cash flow analyses based on the projections for Katy
furnished to us by the management of Katy;
o 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
o conducted such other studies, analyses, inquiries and investigations as we
deemed appropriate.
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
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.
By: /s/ Marc R. Daniel
________________________________
Senior Managing Director
ANNEX B
EXECUTION COPY
================================================================================
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
================================================================================
TABLE OF CONTENTS
Page
----
ARTICLE I THE OFFER.................................................................................................. 2
SECTION 1.1. The Offer......................................................................................... 2
SECTION 1.2. Offer Documents................................................................................... 3
SECTION 1.3. Certain Actions................................................................................... 4
SECTION 1.4. Payment for Offer Shares Tendered and Accepted.................................................... 7
ARTICLE II PREFERRED STOCK PURCHASE.................................................................................. 8
SECTION 2.1. Purchase and Sale................................................................................. 8
SECTION 2.2. Closing........................................................................................... 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF KATY................................................................... 9
SECTION 3.1. Organization, Qualification, Etc.................................................................. 9
SECTION 3.2. Capitalization.................................................................................... 10
SECTION 3.3. Corporate Authority Relative to this Agreement; No Violation...................................... 11
SECTION 3.4. Reports and Financial Statements.................................................................. 11
SECTION 3.5. Accounts Receivable, Accounts Payable and Inventory............................................... 12
SECTION 3.6. Indebtedness; No Undisclosed Liabilities.......................................................... 13
SECTION 3.7. [Reserved]........................................................................................ 13
SECTION 3.8. Customers and Suppliers........................................................................... 13
SECTION 3.9. No Violation of Law............................................................................... 13
SECTION 3.10. Transactions with Affiliates...................................................................... 14
SECTION 3.11. [Reserved]........................................................................................ 14
SECTION 3.12. Environmental, Health and Safety Laws and Regulations............................................. 14
SECTION 3.13. Employee Benefit Matters.......................................................................... 15
SECTION 3.14. Absence of Certain Changes or Events.............................................................. 18
SECTION 3.15. Investigations; Litigation........................................................................ 19
SECTION 3.16. Products.......................................................................................... 19
SECTION 3.17. Securities Filings................................................................................ 19
SECTION 3.18. Tax Matters....................................................................................... 19
SECTION 3.19. Intellectual Property............................................................................. 20
SECTION 3.20. Severance Payments................................................................................ 21
SECTION 3.21. Title to Properties............................................................................... 21
SECTION 3.22. Licenses.......................................................................................... 22
SECTION 3.23. Insurance......................................................................................... 23
SECTION 3.24. Material Contracts................................................................................ 23
SECTION 3.25. Rights Agreement.................................................................................. 24
i
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................................ 25
SECTION 4.1. Organization, Qualification, Etc................................................................. 25
SECTION 4.2. Corporate Authority Relative to this Agreement; No Violation..................................... 25
SECTION 4.3. Litigation....................................................................................... 26
SECTION 4.4. Ownership of Katy Stock.......................................................................... 26
SECTION 4.5. No Required Vote of Purchaser Shareholders....................................................... 26
SECTION 4.6. Securities Filings............................................................................... 26
SECTION 4.7. Loan Commitments................................................................................. 26
SECTION 4.8. Purchase for Investment.......................................................................... 27
ARTICLE V COVENANTS AND AGREEMENTS................................................................................ 27
SECTION 5.1. Conduct of Business by Katy and the Subsidiaries................................................. 27
SECTION 5.2. Investigation.................................................................................... 29
SECTION 5.3. Cooperation...................................................................................... 30
SECTION 5.4. Employee Benefit Plans........................................................................... 30
SECTION 5.5. Filings; Other Action............................................................................ 30
SECTION 5.6. [Reserved]........................................................................................31
SECTION 5.7. Anti-takeover Statute............................................................................ 31
SECTION 5.8. No Solicitation by Katy.......................................................................... 31
SECTION 5.9. Rights Agreement................................................................................. 33
SECTION 5.10. Public Announcements............................................................................. 33
SECTION 5.11. Indemnification of Directors and Officers........................................................ 33
SECTION 5.12. Additional Reports............................................................................... 34
SECTION 5.13. Update Disclosure; Breaches...................................................................... 34
SECTION 5.14. Corporate Governance............................................................................. 35
SECTION 5.15. Registration Rights.............................................................................. 36
ARTICLE VI CONDITIONS TO CLOSING.................................................................................. 36
SECTION 6.1. Conditions to Each Party's Obligation to Close................................................... 36
SECTION 6.2. Conditions to Obligations of Katy to Close....................................................... 37
SECTION 6.3. Conditions to Obligations of Purchaser to Close.................................................. 37
ARTICLE VII TERMINATION, WAIVER, AMENDMENT AND CLOSING............................................................ 38
SECTION 7.1. Termination or Abandonment....................................................................... 38
SECTION 7.2. Termination Fee.................................................................................. 39
SECTION 7.3. Approval of Board of Directors Required.......................................................... 40
ARTICLE VIII MISCELLANEOUS........................................................................................ 41
SECTION 8.1. Non-Survival of Representations and Warranties; Specific Enforcement;
Limitation..................................................................................... 41
SECTION 8.2. Expenses......................................................................................... 41
SECTION 8.3. Counterparts; Effectiveness...................................................................... 41
ii
SECTION 8.4. Governing Law............................................................................ 41
SECTION 8.5. Notices.................................................................................. 42
SECTION 8.6. Assignment; Binding Effect............................................................... 43
SECTION 8.7. Severability............................................................................. 43
SECTION 8.8. Miscellaneous............................................................................ 43
SECTION 8.9. Headings................................................................................. 43
SECTION 8.10. Finders or Brokers...................................................................... 44
SECTION 8.11. Amendment............................................................................... 44
SECTION 8.12. Waiver.................................................................................. 44
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
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
iii
Schedule 3.21
Schedule 3.22
Schedule 3.23
Schedule 3.24
Schedule 5.1
Schedule 6.2
Schedule 6.3
iv
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;
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
2
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 20/th/ 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 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
3
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
4
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 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
5
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 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
6
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.
7
(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, 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, 43/rd/ Floor,
New York, New York 10166-0136 or as otherwise agreed to by the parties hereto.
8
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 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.
9
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.
10
(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
11
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 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
12
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 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
13
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
14
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 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
15
(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.
(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
16
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
17
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.
(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.
18
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. 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
19
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.
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
20
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
21
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.
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.
22
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;
(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
23
(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.
24
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
25
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. 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
26
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;
(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;
27
(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;
28
(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;
(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.
29
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 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
30
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
31
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 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
32
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 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
33
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 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
34
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
35
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.
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.
36
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 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
37
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;
38
(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 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.
39
(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.
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.
40
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.
41
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:
-----------
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
42
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 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.
43
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]
44
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.
By: /s/ Robert M. Baratta
------------------------------------------
Name: Robert M. Baratta
Title: President and Chief Executive Officer
KKTY HOLDING COMPANY, L.L.C.
By: /s/ Christopher Lacovara
------------------------------------------
Name: Christopher Lacovara
Title: Authorized Manager
45
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
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% 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;
(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
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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
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C;
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(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);
(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
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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
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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
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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.
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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
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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, 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, 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 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
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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
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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;
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(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.
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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.
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"Accounts Receivable" shall have the meaning set forth in Section 3.5 hereof.
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"Affiliate" shall have the meaning set forth in Section 3.10 hereof.
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"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
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"Certificates" shall have the meaning set forth in Section 1.4 hereof.
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"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
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"Closing" shall have the meaning set forth in Section 2.2 hereof.
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"Code" shall have the meaning set forth in Section 1.4 hereof.
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"Common Shares" shall have the meaning set forth in the Recitals hereof.
"Confidentiality Agreement" shall have the meaning set forth in Section 5.2
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hereof.
"Contico" shall have the meaning set forth in Section 3.2 hereof.
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"Contico Common Units" shall have the meaning set forth in Section 3.2 hereof.
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"Contico Preferred Units" shall have the meaning set forth in Section 3.2
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hereof.
"Continuing Katy Employees" shall have the meaning set forth in Section 5.4
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hereof.
"Contracts" shall have the meaning set forth in Section 3.24 hereof.
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"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.
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"Current Katy Group" shall have the meaning set forth in Section 3.18 hereof.
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"Depository" shall have the meaning set forth in Section 1.4 hereof.
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"DGCL" shall have the meaning set forth in Section 1.3 hereof.
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"Environmental, Health and Safety Laws" shall have the meaning set forth in
Section 3.12 hereof.
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"ERISA" shall have the meaning set forth in Section 3.13 hereof.
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"ERISA Affiliate" shall have the meaning set forth in Section 3.13 hereof.
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"Exchange Act" shall have the meaning set forth in Section 1.1 hereof.
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"Form S-3" shall have the meaning set forth in Annex II hereof
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"GAAP" shall have the meaning set forth in Section 3.4 hereof.
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"Hamilton" shall have the meaning set forth in the Recitals hereof.
"Insurance Amount" shall have the meaning set forth in Section 5.11 hereof.
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"Intellectual Property" shall have the meaning set forth in Section 3.19 hereof.
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"Inventory" shall have the meaning set forth in Section 3.5 hereof.
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"Katy" shall have the meaning set forth in Paragraph 1 hereof.
"Katy Acquisition Agreement" shall have the meaning set forth in Section 5.8
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hereof.
"Katy Affiliated Group" shall have the meaning set forth in Section 3.18 hereof.
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"Katy Benefit Plans" shall have the meaning set forth in Section 3.13 hereof.
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"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.
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"Katy Required Approvals" shall have the meaning set forth in Section 3.3
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hereof.
"Katy SEC Reports" shall have the meaning set forth in Section 3.4 hereof.
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"Katy Stock Option Plans" shall have the meaning set forth in Section 3.2
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hereof.
"Katy Takeover Proposal" shall have the meaning set forth in Section 5.8 hereof.
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"Katy's Knowledge" shall have the meaning set forth in Section 3.5 hereof.
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"Licenses" shall have the meaning set forth in Section 3.22 hereof.
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"Material Adverse Effect" shall have the meaning set forth in Section 3.1
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hereof.
"Material Contracts" shall have the meaning set forth in Section 3.24 hereof.
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"Minimum Condition" shall have the meaning set forth in Annex I hereof.
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"Offer" shall have the meaning set forth in Section 1.1 hereof.
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"Offer Commencement Date" shall have the meaning set forth in Section 1.1
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hereof.
"Offer Consideration" shall have the meaning set forth in Section 1.1 hereof.
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"Offer Documents" shall have the meaning set forth in Section 1.2 hereof.
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"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.
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"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.
------------
"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.
EXHIBIT C
Term Sheet - Classification of Board of Directors and Convertible
Preferred Stock
--------------------------------------------------------------------------------
Classified Board of The Board of Directors of Katy shall be Directors
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
Katy'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 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.
--------------------------------------------------------------------------------
Name of security Convertible Preferred Stock, $100 par value
--------------------------------------------------------------------------------
Par value $100
--------------------------------------------------------------------------------
Number of shares to be 600,000
authorized
--------------------------------------------------------------------------------
Number of shares to be 400,000
validly issued, fully paid
and nonassessable at the
Closing Date
--------------------------------------------------------------------------------
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 Katy's Board of
Directors of a merger, consolidation or
other business combination between Katy
and another entity (except where Katy is
the surviving entity and no change of
control of Katy occurs as a result of
the transaction) or a sale or other
disposition of all or substantially all
of Katy's assets;
(c) the authorization by Katy's Board of
Directors of, or other corporate action
taken to effect, the liquidation,
dissolution or winding up of Katy; and
(d) the solicitation of proxies from the
holders of any class or classes of
capital stock of Katy for any annual or
special meeting of shareholders, however
called, at which an election for
directors of Katy is held, or any
solicitation of written consent of the
holders of any class or classes of
capital stock of Katy 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.
--------------------------------------------------------------------------------
2
--------------------------------------------------------------------------------
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 Katy 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 Katy 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 Katy
Common Stock upon conversion. In lieu of
fractional shares Katy will pay the
conversion value of such fractional share in
cash.
Katy 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).
--------------------------------------------------------------------------------
3
--------------------------------------------------------------------------------
Covenants of Katy The shares of Convertible Preferred Stock
will be validly issued, fully paid and
nonassessable on the Closing Date.
The Common Shares that Katy issues upon the
conversion of the Convertible Preferred Stock
will be validly issued, fully paid and
nonassessable.
Katy will reserve and keep available out of
its unauthorized but unissued shares of Katy
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 Katy is liquidated, dissolved or wound up,
no distribution will be made to the holders
of shares of Katy 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 Katy 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.
--------------------------------------------------------------------------------
A merger, consolidation or other business
combination between Katy and any other
entity, or a sale or other disposition of all
or substantially all of Katy's assets, will
not be treated as a liquidation, dissolution
or winding up of Katy.
--------------------------------------------------------------------------------
Maturity Perpetual, subject to redemption by Katy.
--------------------------------------------------------------------------------
4
--------------------------------------------------------------------------------
Redemption The Convertible Preferred Stock will not be
subject to a sinking fund or other
obligations of Katy to redeem or retire the
Convertible Preferred Stock. The holder shall
have no right to compel Katy to redeem the
Convertible Preferred Stock. The Convertible
Preferred Stock shall be redeemable in whole,
but not in part, at Katy'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 Katy's capital stock
or any other securities of Katy 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 Katy 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).
--------------------------------------------------------------------------------
5
--------------------------------------------------------------------------------
Special rights Katy 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 Katy;
(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 Katy may complete a reverse-
split of the Katy 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.
--------------------------------------------------------------------------------
6
ANNEX C
Execution Copy
================================================================================
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
================================================================================
Execution Copy
TABLE OF CONTENTS
Page
1. Definitions............................................................. 1
2. Tender of Securities.................................................... 1
3. Provisions Concerning the Securities.................................... 2
(a) Agreement To Vote the Securities.................................. 2
(b) Grant of Proxy.................................................... 2
(c) Other Proxies Revoked............................................. 3
4. Representations and Warranties of Each Shareholder...................... 3
(a) Power, etc........................................................ 3
(b) Ownership of Securities........................................... 3
(c) No Conflicts...................................................... 3
(d) No Finder's Fees.................................................. 4
(e) No Encumbrances................................................... 4
(f) Reliance by Purchaser............................................. 4
5. Additional Covenants of Each Shareholder................................ 4
(a) No Solicitation................................................... 4
(b) Restriction on Transfer, Proxies and Non-Interference............. 5
(c) [Reserved]........................................................ 5
(d) Stop Transfer; Changes in Subject Shares.......................... 5
(e) Cooperation....................................................... 5
(f) Releases.......................................................... 5
6. Fiduciary Duties........................................................ 6
7. Miscellaneous........................................................... 6
(a) Further Assurances................................................ 6
(b) Notices........................................................... 6
(c) Interpretation.................................................... 7
(d) Counterparts...................................................... 7
(e) Entire Agreement; No Third-Party Beneficiaries.................... 7
(f) Governing Law..................................................... 7
(g) Assignment........................................................ 7
(h) Binding Agreement................................................. 7
(i) Severability...................................................... 8
(j) Enforcement of this Agreement..................................... 8
(k) Amendments........................................................ 8
i
8. Termination............................................................. 8
9. Publication............................................................. 8
ii
Execution Copy
STOCK VOTING AND TENDER AGREEMENT
STOCK VOTING AND TENDER AGREEMENT (this "Agreement") dated as of March 29,
2001, among KKTY HOLDING COMPANY, L.L.C., 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.
1
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 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.
2
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 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
3
(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 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
4
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.
5
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 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.
6
(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.
(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.
7
(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]
8
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.
By: /s/ Christopher Lacovara
----------------------------
Name: Christopher Lacovara
Title: Authorized Manager
CRL, INC.
By: /s/ Jonathan P. Johnson
----------------------------
Name: Jonathan P. Johnson
Title: President
WALLACE E. CARROLL, JR.
/s/ Wallace E. Carroll, Jr.
-------------------------------
AMELIA M. CARROLL
/s/ Amelia M. Carroll
-------------------------------
9
WALLACE FOUNDATION
By: /s/ Wallace E. Carroll, Jr.
-----------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
-----------------------------
Name: Amelia M. Carroll
Title: Trustee
WALLACE E. CARROLL TRUST U/A DATED
7-1-57
F/B/O WALLACE E. CARROLL, JR.
By: /s/ Wallace E. Carroll, Jr.
-------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
--------------------------------
Name: Amelia M. Carroll
Title: Trustee
WALLACE E. & LELIA H. CARROLL TRUST
U/A DATED 5/1/58
F/B/O WALLACE E. CARROLL, JR.
By: /s/ Wallace E. Carroll, Jr.
--------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
--------------------------------
Name: Amelia M. Carroll
Title: Trustee
10
WALLACE E. CARROLL TRUST U/A DATED
1-20-61
F/B/O WALLACE E. CARROLL, JR.
By: /s/ Wallace E. Carroll, Jr.
-------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
-------------------------------
Name: Amelia M. Carroll
Title: Trustee
LELIA H. CARROLL TRUST U/A DATED
7-12-62
F/B/O WALLACE E. CARROLL, JR.
By: /s/ Wallace E. Carroll, Jr.
-------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
-------------------------------
Name: Amelia M. Carroll
Title: Trustee
WALLACE E. CARROLL, JR. TRUST #2 U/A
DATED 12-30-76
F/B/O Pamela C. Crigler
By: /s/ Philip E. Johnson
---------------------------------
Name: Philip E. Johnson
Title: Trustee
11
WALLACE E. CARROLL, JR. TRUST #2 U/A
U/A DATED 12-30-76
F/B/O Susan S. Leonard
By: /s/ Philip E. Johnson
-------------------------------
Name: Philip E. Johnson
Title: Trustee
WALLACE E. CARROLL, JR. TRUST #2 U/A
DATED 12-30-76
F/B/O Margaret B. Berzins
By: /s/ Philip E. Johnson
-------------------------------
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
By: /s/ Philip E. Johnson
-------------------------------
Name: Philip E. Johnson
Title: Trustee
WALLACE E. CARROLL TRUST U/A DATED
12-20-79
F/B/O Pamela C. Crigler
By: /s/ Wallace E. Carroll, Jr.
-------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
-------------------------------
Name: Amelia M. Carroll
Title: Trustee
12
WALLACE E. CARROLL TRUST
U/A DATED 12-20-79
F/B/O Susan S. Leonard
By: /s/ Wallace E. Carroll, Jr.
-------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
-------------------------------
Name: Amelia M. Carroll
Title: Trustee
WALLACE E. CARROLL TRUST U/A DATED
12-20-79
F/B/O Margaret B. Berzins
By: /s/ Wallace E. Carroll, Jr.
-------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
-------------------------------
Name: Amelia M. Carroll
Title: Trustee
WALLACE E. CARROLL TRUST U/A DATED
12-20-79
F/B/O Wallace E. Carroll, III
By: /s/ Wallace E. Carroll, Jr.
-------------------------------
Name: Wallace E. Carroll, Jr.
Title: Trustee
By: /s/ Amelia M. Carroll
-------------------------------
Name: Amelia M. Carroll
Title: Trustee
13
Schedule I
04/03/01
------------------------------------------------------------------------------------------------------------------------------------
Number of Common Shares
Name of Shareholder Officers/Trustees Held of Record Notice Address
or Owned Beneficially
------------------------------------------------------------------------------------------------------------------------------------
CRL, Inc. Jonathan P. Johnson, 2,073,436 6300 S. Syracuse Way, Suite 300
---------
President Englewood, Colorado 80111
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 2,151 c/o CRL
-----------------------------------------
F/B/O Wallace E. Carroll, Jr. Wallace E. Carroll, Jr. (see address above)
Amelia M. Carroll
Robert E. Kolek *
Wallace E. & Lelia H. Carroll Trust U/A Dated 5-1-58 603,000 c/o CRL
----------------------------------------------------
F/B/O Wallace E. Carroll, Jr. Wallace E. Carroll, Jr. (see address above)
Amelia M. Carroll
Robert E. Kolek*
Wallace E. Carroll Trust U/A Dated 1-20-61 11,881 c/o CRL
------------------------------------------
F/B/O Wallace E. Carroll, Jr. Wallace E. Carroll, Jr. (see address above)
Amelia M. Carroll
Lelia H. Carroll Trust U/A Dated 7-12-62 180,661 c/o CRL
----------------------------------------
F/B/O Wallace E. Carroll, Jr. Wallace E. Carroll, Jr. (see address above)
Amelia M. Carroll
Wallace E. Carroll, Jr. Trust #2 U/A Dated 12-30-76
---------------------------------------------------
F/B/O Pamela C. Crigler Philip E. Johnson 193 c/o CRL
Susan S. Leonard 194 (see address above)
Margaret B. Berzins 193
Wallace E Carroll, III 182
(Four separate trusts - trustee is the same for all four)
Wallace E. Carroll Trust U/A Da
-------------------------------
F/B/O Pamela C. Crigler
Susan S. Leonard Wallace E. Carroll, Jr. 1,690 c/o CRL
Margaret B. Berzins Amelia M. Carroll 1,690 (see address above)
Wallace E Carroll, III Robert E. Kolek* 1,690
1,690
(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.
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.
(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.
2
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 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
3
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
4
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 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
5
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 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
6
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.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at
7
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
8
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."
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."
9
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
10
Annex 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.
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
2
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.
3
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.
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.
4
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 __________________________on May __, 2001
at ___ 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)
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The shares represented hereby shall be voted as specified. IF NO
SPECIFICATION IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
A VOTE FOR THE FOLLOWING PROPOSALS IS RECOMMENDED BY THE BOARD OF
DIRECTORS:
Proposal 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
Proposal 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
Proposal 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
Proposal 4. Election of Directors
[_] For [_] Withheld
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.
_______________________________
Proposal 5. To ratify the appointment of Arthur Andersen LLP as Katy's
independent accountants for the fiscal year ending December 31, 2001.
[_] For [_] Against [_] Abstain
Please check this box if you plan to attend the annual meeting [_]
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.
Date: _________________________
(signature)
Date: _________________________
(signature)
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