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UVA-F-0614

This case was prepared by Professor Robert F. Bruner. This case was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  1984 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev.01/88. ◊

NORRIS INDUSTRIES It was mid-August 1981 when Sam Mencoff, an investment manager at First Chicago Investment Corporation (FCIC), reclined pensively in his chair after his first thorough reading of the prospectus before him. FCIC had been invited to make a major investment in the leveraged buy-out of Norris Industries, a large, California-based firm engaged in the design and manufacture of industrial, construction, and defense products that involved the application of metalworking technology. Mr. Mencoff was struck by the purchase price, which at $43.05 per share represented almost a 50 percent premium over the market price ($29) that Norris was selling for the day before the announcement and nearly a 90 percent premium over what Norris had been selling for in 1979 before negotiations began. Norris was listed on the New York Stock Exchange (NYSE), and its $420 million purchase price would make it one of the largest buy-outs in history. Much had been written about the restructuring of industrial America that Norris exemplified. The proposed buy-out had been arranged and structured by Kohlberg, Kravis, Roberts & Co. (KKR), a leading New York investment firm that specialized in leveraged buy-outs. FCIC had worked with KKR in the past, and Mr. Mencoff considered them one of the top performers in the industry. He was far from confident, however, about this particular deal. Because the total purchase price was so large, FCIC would be expected to invest a major sum, close to $9 million for a “strip” of investment instruments. This figure would represent one of the largest investments in a single company that FCIC had ever made. Furthermore, Norris’s business was tied to the housing and auto industries, which had been devastated by the current recession. The timing and extent of those industries’ recoveries would in large part determine the safety of FCIC’s investment. Would the housing and auto industries, and hence Norris, ever return to their former viability, wondered Mr. Mencoff, or were they in the “final” down cycle that spelled the beginning of the end?

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Norris Industries Norris Industries was founded by Kenneth T. Norris in 1930 as Norris Stamping and Manufacturing Company for the purpose of making fabricated metal products. The company was operated as an individual proprietorship until 1940 when it was incorporated. In 1938, Norris won its first military contract to build practice bombs, which was followed by another award for the manufacture of aluminum cartridge containers. During World War II, the company’s defense business dominated what little commercial business remained. Following the war, Norris expanded into automobile wheels, stainless cookware, and plumbing fixtures. In 1950, Norris became a publicly-held corporation when the Norris family sold 30 percent of its interest. Thermador Electrical Manufacturing Company, a maker of consumer appliances, and the Compressed Gas Cylinders Company were acquired in 1951, and the company changed its name to Norris-Thermador Corporation to capitalize on the public acceptance of Thermador products. The company’s growth in commercial products was halted during the Korean War, when once again the defense business grew sharply and became dominant. Norris’s shares were listed on the New York Stock Exchange in 1960, and during the 1960s, a more active acquisition program expanded the company’s commercial product lines at the same time the Vietnam War caused rapid expansion of its defense business. Among the acquisitions made during the decade which formed a major part of today’s commercial business were: Bowers Manufacturing Company (electrical hardware) in 1963; Trade-Wind Motor Fans in 1965 (currently part of Thermador-Waste King); Weiser Company (locks) and Waste King Corporation (consumer appliances) in 1967; and Price Pfister Brass Manufacturing Company (household plumbing) in 1969. The company again changed its name in 1966 to its present Norris Industries to reflect its growing diversification. The 1970s began with the acquisitions of Artistic Brass and Pressed Steel Tank Company in 1970 and the Automotive Trim Division in 1973. In 1977, Norris acquired the McIntosh Corporation, which significantly added to its automotive product lines. Despite acquisitions during the 1970s, the major emphasis (more than a quarter of a billion dollars) was on providing modern equipment and adequate capacity to capitalize on opportunities of the future. During 1980, the company emphasized market and product development and metalworking technology, with less emphasis on capital expansion. Norris was a market leader or one of the leaders for most of its product lines. For instance, it held 30 percent of the U.S. residential lock market, 42 percent of the decorative brass market, and was the largest producer of wheel covers in the United States. In defense products it held a dominant share in cartridge cases and projectile bodies. In 1981, the company operated 38 factories that were organized into 12 divisions. Norris’s revenues were derived from building and remodeling products (43 percent), automotive and industrial products (42 percent), and defense products (15 percent). The company

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had $599 million in sales in 1980 on $365 million in assets. Because of heavy reliance on cyclical industries, net income was down to $23.8 million in 1980, compared to $35.4 in 1979 and $41.7 in 1978. Capital expenditures had consistently exceeded depreciation in recent years, and the company had little debt. Exhibits 1 to 4 present a detailed examination of Norris’s financial performance. Exhibits 5 and 6 show the impact on the results if Norris had used the capital restructuring proposed by KKR over the period 1976 to 1981. First Chicago Investment Corporation FCIC was founded in 1972 under the Bank Holding Company Act and was a wholly owned subsidiary of First Chicago Corporation (the parent of The First National Bank of Chicago). FCIC and the First Capital Corporation composed the Equity Group of First Chicago, a leading institutional investor in the U.S. private equity capital markets. In 1980, the firm’s portfolio was roughly $180 million (at cost) invested in 90 companies. These companies generally fell into one of two categories: start-up ventures requiring equity to finance additional growth, and management buy-outs where equity was required for the acquisition of operating assets by a management team through the use of significant debt leverage. In analyzing an investment opportunity, the First Chicago Equity Group emphasized the strength of the management team, the value of a unique market opportunity or competitive advantage, and attractive economics and returns commensurate with the risks. Terms of the Financing KKR was forming a new company (NEWCO) to acquire all the outstanding stock of Norris. The purchase price was $420.1 million, based on $43.05 per share for approximately 9.8 million outstanding shares. The purchase price was 10.6 times 1981 estimated earnings of $39.8 million or approximately $4.00 per share. Norris projected excess cash of approximately $60 million, which was to be used as part of this financing. After deducting the cash, the purchase price was approximately $360.1 million or 9.9 times 1981 estimated earnings. The funds necessary to finance the acquisition of Norris Industries were to be raised and used as shown in Table 1. The subordinated notes would be sold to institutional investors along with 4.5 million shares of stock at $5.50 per share. After completion of the acquisition, and after the exercise of the stock options issued to management, ownership of NEWCO on a fully diluted basis would be as shown in Table 2. The balance sheets would be as shown in Exhibit 7.

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Table 1 Source and Use of Funds in Buyout ($ millions) Funds Available: 9-year declining balance revolving bank credit with required annual 275.0 amortization in years 3 through 9.1 5-year bank credit at 18 percent. Interest only in first 5 years. 12.8 Issued with warrants to purchase 430,550 shares at $5.50 per share. 19.5 percent subordinated notes with requires amortization in years 39.9 20 and 11.2 Common equity from the sale of 8.6 million shares at $5.50 per share.3 47.3 Total Raised $375.0 Estimated cash on December 31, 1981 60.6 Total Funds Available $435.6 Funds to be used: Purchase of stock4 $420.1 Purchase of Deferred Stock Plan and Employee Stock Options5 1.3 Fees and expenses6 9.0 Excess cash and working capital 5.2 Total Funds Used $435.6

1$25 million in years 3 through 6, $45 million in years 7 and 8, and a final reduction of $85 million at maturity.

Mandatory reductions were also to be made with the proceeds from the sale of specific assets held for sale (Exhibit 8). Interest would be at prime plus 3/4 percent with a maximum cash-flow limit of 17 percent. Any interest beyond 17 percent would be accrued and added onto the loan up to a maximum of $40 million. The company would also have available a $30 million line of credit. The prime rate in August 1981 was 20.5 percent. There would be an annual commitment fee of .5 percent on the unused portion of the line of credit. Over the long term, the prime rate was expected to float at 350 basis points above the yield to maturity of the one-year Treasury Note. Funding costs at large commercial banks were expected to float at 50 basis points above the rate of one-year treasuries.

216.5 of the 19.5 percent would be payable on a quarterly basis with the balance payable annually and subject to a restrictive payment clause to be negotiated with the banks.

3Approximately 9.9 million shares were to be issuable on a fully diluted basis. Banks were to be issued 430,550 warrants at closing, managers were to be issued approximately 576,900 options at closing, and approximately 321,600 shares were to be reserved but unissued for future management employees.

49,758,254 shares at $43.05 per share. 5148,500 options exercisable at $25.50. Amount shown is net of taxes. 6Includes fees to Goldman, Sachs of $3.0 million and $4.0 million to KKR.

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Table 2 # Shares Book Value Ownership Position Banks 430,550 $ 2,368,025 4.3 Institutions 4,505,780 24,781,790 45.4 Management 1,300,000 7,150,00071 13.1 KKR 3,700,000 20,350,000 37.2 Total 9,936,330 $54,649,815 100.0% The Investment Decision As Mr. Mencoff looked again at the pro formas (Exhibits 5 to 7), several concerns came to mind. First and foremost, he pondered the $43.05 price per share. The purchase premium itself did not seem out of line with other leveraged buyouts (see Exhibits 9 and 10), but he knew that Norris, through Goldman, Sachs, had been seeking a buyer for two years without success. He was also aware that the price had been set at $38, but that it suddenly had been raised with a third-party corporation made an unexpected offer of $43 per share. All of these things made him want to look at a valuation carefully. A summary of the loan covenants is shown as Exhibit 11. The biggest risk that Mr. Mencoff saw was the default risk. Could Norris service its huge debt obligations should the housing and auto markets not perform as projected? How much financial slack did Norris have? How long could Norris survive a prolonged recession? Were there risks that Norris, KKR, and he had overlooked? To start with, Mencoff was interested to understand the attractions of this deal for the other players—particularly the commercial banks. As a benchmark against which to gauge the profitability of the loans, he used the return on assets for a number of money center and regional banks. Value Line reported that the bulk of these returns fell between .6 and .8 percent with a maximum of 1.45 percent. Mencoff was also curious about the value of the warrants accompanying the five-year bank loans. A phone call to an NYSE options specialist revealed a range of possible volatility estimates for common stocks: 15 percent for the Standard & Poors (S&P) 500 Index, and 25 percent for the High Beta Index (HBI) (a new hedging index offered on the NYSE consisting of the highest beta stocks activity traded). The trader characterized 50 and 75 percent as “unusually high” and “extremely high” volatility, respectively.

7Management was to purchase approximately 401,500 shares for cash at a price of $5.50 per share and be issued

stock options to purchase approximately 576,900 shares at an option exercise price of $5.50 per share at the closing.

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Finally, Mr. Mencoff decided he would have to generate some estimates of return to FCIC on its investment. KKR had suggested that FCIC invest a total of $8,999,996 in a strip of securities: $3,075,000 in the 19.5 percent subordinated notes, $1,909,875 in common stock (347,250 shares), and an additional investment of $4,015,121 in the KKR Fund, which would invest directly in the common stock of NEWCO (730,022 shares) and bring FCIC’s total fully diluted ownership of NEWCO to 10.8 percent. What were the critical factors in making this a good investment?

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Exhibit 1 NORRIS INDUSTRIES Consolidated Balance Sheets December 31, 1980 1979 Assets Current assets: Cash $ 346,000 $ 5,411,000 Short-term investments 28,193,000 -- Accounts receivable 86,850,000 89,802,000 Inventories 86,136,000 97,394,000 Prepaid expenses 7,474,000 6,926,000 Total current assets 208,999,000 199,533,000 Property, plant, and equipment 254,615,000 230,090,000 Less accumulated depreciation 128,302,000 111,588,000 Net property, plant, and equipment 126,313,000 118,502,000 Special tooling, net of amortization 6,916,000 3,317,000 Total net property, plant, and equipment 131,229,000 121,819,000 Other assets: Leases and contracts receivable 13,704,000 12,171,000 Excess cost of businesses over net assets acquired 4,961,000 7,129,000 Other 5,756,000 8,438,000 Total other assets 24,421,000 27,738,000 Total assets $364,649,000 $349,090,000 Current liabilities: Current portion of long-term debt $ 1,521,000 $ 245,000 Accounts payable 29,002,000 27,381,000 Other liabilities 40,161,000 36,217,000 Total current liabilities 70,684,000 63,843,000 Deferred incentive compensation 11,126,000 9,145,000 Long-term debt 23,265,000 24,786,000 Shareholders’ equity: Common stock—par value $.50 per share (authorized 20,000,000 shares, issued 9,758,254 in 1980 and 1979) 5,090,000 5,090,000 Additional paid-in capital 8,528,000 8,528,000 Retained earnings 245,956,000 237,698,000 Total shareholders’ equity 259,574,000 251,316,000 Total liabilities and shareholders’ equity $364,649,000 $349,090,000

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Exhibit 2 NORRIS INDUSTRIES Consolidated Statements of Income and Retained Earnings For the Years Ending December 31, 1980 1979 1978 Net Sales $599,179,000 $659,008,000 $628,273,000 Costs and Expenses: Cost of sales 488,341,000 530,091,000 487,607,000 Selling and advertising expense 32,361,000 31,324,000 28,775,000 General and administrative expense 33,527,000 31,255,000 27,752,000 Interest expense 1,652,000 2,818,000 2,839,000 Loss on disposition of products 4,520,000 -- -- Other (net) (3,489,000) (161,000) 352,000 Total 556,912,000 595,327,000 547,325,000 Income before income taxes 42,267,000 63,681,000 80,948,000 Income taxes 18,396,000 28,287,000 39,256,000 Net income 23,871,000 35,394,000 41,692,000 Retained earnings at beginning of year 237,698,000 215,966,000 186,374,000 Cash dividends to shareholders (per share: $1.60 in 1980; $1.40 in 1979; $1.24 in 1978) (15,613,000) (13,662,000) (12,100,000) Retained earnings at end of year $245,956,000 $237,698,000 $215,966.000 Net income per common share $2.45 $3.63 $4.27

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Exhibit 3 NORRIS INDUSTRIES Revenues and Profits by Industry Segment Revenues by Industry Segment 1976 1977 1978 1979 1980 1981e Building & Remodeling Hardware products 19.8% 19.3% 18.2% 19.5% 19.3% 17.7% Housing products 12.4 12.5 12.7 13.1 12.8 12.4 Plumbing products 15.4 15.9 15.1 14.5 14.7 13.2 Total 47.6 47.7 46.0 47.1 46.8 43.3 Industrial Automotive products 32.3 34.6 36.2 35.6 30.2 36.7 Cylinder products 5.0 5.3 4.5 4.5 5.3 4.8 Total 37.3 39.9 40.7 40.1 35.5 41.5 Defense Products 15.1 12.4 13.3 12.8 17.7 15.2 Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Pre-Tax Contribution by Industry Segment Building & Remodeling Hardware products 19.4% 19.0% 17.8% 18.3% 11.9% 17.0% Housing products 6.2 8.2 8.0 10.3 2.0 8.2 Plumbing products 10.0 12.1 11.7 6.8 (1.1) 8.7 Total 35.6 39.3 37.5 35.4 12.8 33.9 Industrial Automotive products 45.4 44.0 50.5 49.5 59.2 50.7 Cylinder products 5.2 5.6 3.1 5.8 10.6 2.9 Total 50.6 49.6 53.6 55.3 69.8 53.6 Defense Products 13.8 11.1 8.9 9.3 17.4 12.5 Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

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Exhibit 4 NORRIS INDUSTRIES Depreciation and Capital Expenditures Depreciation & Amortization Capital Expenditures 1980 1979 1978 1980 1979 1978 Building & Remodeling Plumbing products $ 2,968 $ 2,920 $ 2,715 $ 3,294 $ 4,490 $ 2,929 Hardware products 5,254 5,400 3,723 4,131 4,884 8,007 Household products 1,249 1,452 1,395 2,512 1,273 1,614 Total 9,471 9,772 7,833 9,937 10,647 12,550 Industrial Automotive products 7,862 6,384 5,142 7,303 17,703 10,095 Cylinder products 496 460 464 9,223 1,825 714 Total 8,358 6,844 5,606 16,526 19,528 10,809 Defense 1,081 969 2,543 2,584 1,883 2,047 General Corporate 451 401 360 252 346 265 Total $19,361 $17,986 $16,342 $29,299 $32,404 $25,671

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Exhibit 5 NORRIS INDUSTRIES Pro Forma Historical Results ($ millions) 1976 1977 1978 1979 1980 1981E Income before taxes and interest $75.4 $86.7 $83.8 $66.5 $43.9 $77.7 Pro Forma Interest Expense Industrial revenue bonds 1.6 1.6 1.6 1.6 1.6 1.6 Senior bank debt @17%1 48.8 48.8 48.8 48.8 48.8 48.8 Subordinated notes @19.5%2 8.0 8.0 8.0 8.0 8.0 8.0 Total 58.4 58.4 58.4 58.4 58.4 58.4 Pro Forma pre-tax income 17.0 28.3 25.4 8.1 (14.5) 19.3 Income taxes @ 50 percent 8.5 14.1 12.7 4.0 (7.2) 9.6 Pro Forma Net Income $ 8.5 $14.2 $12.7 $ 4.1 $(7.3) $ 9.7 Interest coverage Senior debt 1.50 1.72 1.66 1.32 0.87 1.54 All debt 1.29 1.48 1.43 1.14 0.75 1.33 Cash flow Net income $ 8.5 $14.2 $12.7 $ 4.1 $(7.3) $ 9.7 Depreciation 12.3 13.0 16.3 18.0 19.4 22.4 From operations $20.8 $27.2 $29.0 $22.1 $12.1 $32.1

117 percent is assumed to reflect a reasonable long-term average bank rate. The actual rate in effect would float

with a cash-flow limit of 17 percent per year. 216.6 of the 19.5 percent would be payable on a quarterly basis with the balance payable annually—subject to a

restrictive payment clause to be negotiated with the banks.

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Exhibit 5 (continued) Pro Forma Balance Sheet June 30, 1981 Actual Adjustments Pro Forma Assets Cash and equivalents $ 50.3 ($55.4)3 $ (5.1)3 Accounts receivable 98.4 98.4 Inventory (LIFO basis)2 73.3 73.3 Prepaid expenses 7.5 7.5 Total current assets $229.5 (55.4) $174.1 Net property, plant, and equipment 127.5 127.5 Other assets 27.0 158.55 185.5 Total assets $384.0 $103.1 $487.1 Liabilities and Stockholders’ Equity Current liabilities $ 76.9 $ 76.9 Deferred compensation 12.0 12.0 Industrial revenue bonds 23.2 23.2 Revolving credit 286.04 286.04 Subordinated debt 41.04 41.04 Equity 271.9 (223.9) 48.04 Total liabilities and stockholders’ equity $384.0 103.1 $487.1 1Assumes the transaction had occurred on June 30, 1981. 2The excess of current cost over the amount determined under LIFO was $52.1 million on July 30, 1981. 3Proceeds from financing $ 375.0 purchase of stock (420.1) stock options and deferred stock repurchase (1.3) fees and expenses (9.0) Net cash $(55.4) Norris’s cash balance was projected to increase to $60.6 million by December 31, 1981.

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Exhibit 5 (continued) 4Proceeds from acquisition financing. 5While it was estimated that NEWCO would write up the assets of Norris immediately after completion of the acquisition, thereby eliminating much of the goodwill, the excess purchase price over book value upon acquisition would be: Purchase price $420.1 Book value 271.9 Less stock option and deferred stock purchase not previously recorded (1.3) Less fees (9.0) Total 261.6 Adjusted book value (261.6) Excess purchase price over book value of assets acquired $158.5

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Exhibit 6 NORRIS INDUSTRIES Pro Forma Income Statements 1982-90 ($ millions except per share amounts) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Income before taxes and interest $ 91.6 $100.7 $110.7 $121.7 $133.8 $147.1 $161.8 $177.9 $195.6 Interest expense Industrial revenue bonds 1.6 1.6 1.6 1.6 1.6 1.5 1.5 1.4 1.4 Bank debt @ 17 percent 48.8 48.8 48.8 44.5 40.2 34.0 29.8 22.1 14.5 Subordinated notes @ 19 percent 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 Total 58.4 58.4 58.4 54.1 49.8 43.5 39.3 31.5 23.9 Pre-tax income 33.2 42.3 52.3 67.6 84.0 103.6 122.5 146.4 171.7 Income taxes @ 50 percent 16.6 21.1 26.1 33.8 42.0 51.8 61.2 73.2 85.8 Net income 16.6 21.1 26.2 33.8 42.0 51.8 61.2 73.2 85.9 Earnings per share 1.66 2.12 2.62 3.38 4.20 5.18 6.13 7.32 8.59 Book value per share1 $ 7.16 $ 9.28 $11.90 $15.28 $19.48 $24.66 $30.79 $38.11 $46.70 Interest coverage ratio Senior debt 1.8 2.0 2.2 2.6 3.2 4.1 5.2 7.6 12.3 All debt 1.6 1.7 1.9 2.3 2.7 3.4 4.1 5.7 8.2 Capitalization at Year-End Bank debt $286.0 $286.0 $261.0 $236.0 $200.0 $175.0 $130.0 $ 85.0 $ 0.0 Industrial revenue bonds 23.0 22.7 22.4 21.9 21.3 20.7 20.1 19.7 19.3 Total senior debt 309.0 308.7 283.4 257.9 221.3 195.7 150.1 104.7 19.3 Subordinated debt 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 Equity 64.6 85.8 112.0 145.8 187.8 239.6 300.9 374.1 460.0 Total subordinated debt and equity $105.6 $126.8 $153.0 $186.8 $228.8 $280.6 $341.9 $415.1 $501.0 1Assumes 10 million shares outstanding at $5.50 per share.

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Exhibit 6 (continued) Pro Forma Cash Flow 1982-90 ($ millions) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Pro Forma net income $16.6 $21.1 $26.1 $33.8 $42.0 $51.8 $61.3 $73.2 $85.9 Depreciation 23.0 23.1 23.1 22.0 21.5 21.5 21.5 21.5 21.5 Cash flow from operations 39.6 44.2 49.2 55.8 63.5 73.3 82.8 94.7 107.4 Bank payments 0.0 0.0 25.0 25.0 36.0 25.0 45.4 45.0 85.0 Industrial revenue bond payments 0.3 0.3 0.3 0.5 0.6 0.6 0.6 0.4 0.4 Subordinated payments—industrial revenue bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total payments 0.3 0.3 25.3 25.5 36.6 25.6 45.6 45.4 85.4 Cash flow available for working capital and capital expenditures 39.3 43.9 23.9 30.0 26.9 47.7 37.2 49.3 22.0 Capital expenditures 15.0 16.0 17.0 18.0 19.0 25.00 25.0 25.0 25.0 Working capital 12.0 8.0 8.0 5.0 5.0 5.0 5.0 5.0 5.0 Net cash flow $12.3 $19.9 $(1.1) $ 7.3 $ 2.9 $17.7 $ 7.2 $19.3 $(8.0) Starting cash $ 5.2 $17.5 $37.4 $36.3 $43.6 $46.5 $64.2 $71.4 $90.7 Ending cash $17.5 $37.4 $36.3 $43.6 $46.5 $64.2 $71.4 $90.7 $82.7

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Exhibit 6 (continued) Assumptions to Pro Forma Statements for 1982-90 1. Income before taxes and interest is based on management estimate of $91.6 million for 1982

compared to the current estimate of $77.7 for 1981. Principal underlying assumptions include the following:

a. domestic automobile and light truck production estimate at 10.3 million units for

1982 versus current estimate for 1981 of 9.0 million units. b. residential construction at 1.65 million units for 1982 versus estimate for 1981 of

1.35 million units. 2. Income before taxes and interest beyond 1982 is based on projections made by KKR

assuming a 10 percent compounded growth rate. 3. There is no interest income on excess cash. 4. No proceeds from the sale of assets are included. Norris currently has assets held for sale

that should generate $14.1 million. 5. No effects resulting from the revaluation of assets pursuant to Accounting Principles Board-

16 are included. 6. Working capital includes net change in receivables, inventories, and accounts payable. 7. Existing Industrial Revenue Bonds will be assumed by NEWCO. 8. Note that depreciation expense reflects no increase resulting from the write-up of assets. The

casewriter estimated that the increase would amount to approximately $10 million per year.

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Exhibit 7 NORRIS INDUSTRIES Balance Sheets Before and After Recapitalization as of December 31, 1981 ($ millions) NEWCO Projected Redeem Redeem Issue Record Record Pro Forma Balance Sheet Stock Shareholders’ NEWCO New Debt Fees & Balance Sheet 12/31/81 Options Equity Stock Structure Expenses 12/31/81 Assets Current assets Cash and cash equivalents $60.6 $(1.3) $(420.1) $48.0 $327.0 $(9.0) $5.2 Accounts receivable 93.6 93.6 Inventories 79.3 79.3 Prepaid expenses 7.9 7.9 Total current assets $241.4 $(1.3) $(420.1) $48.0 $327.0 $(9.0) $186.0 Property, plant, and equipment 134.0 134.0 Excess of purchase price over net worth 137.6 9.0 146.6 Other assets1 24.8 24.8 Total assets $400.2 $(1.3) $(282.5) $48.0 $327.0 $491.4 Liabilities and Shareholders’ Equity Current liabilities $80.8 $80.8 Deferred incentive compensation 12.6 12.6 Long-term debt 23.0 $327.0 $350.0 Total liabilities $116.4 $327.0 $443.4

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Exhibit 7 (continued) NEWCO Projected Redeem Redeem Issue Record Record Pro Forma Balance Sheet Stock Shareholders’ NEWCO New Debt Fees & Balance Sheet 12/31/81 Options Equity Stock Structure Expenses 12/31/81 Equity Common stock 5.1 $(5.1)2 $48.0 $48.0 Additional paid-in capital 8.5 $(8.5) Retained earnings 270.2 (1.3) $(268.9) Total equity $283.8 $(1.3) $(282.5) $48.0 $48.0 Total liabilities and shareholders’ equity $400.2 $(1.3) $(282.5) $48.0 $327.0 $491.4 Working capital $160.0 $105.2 Current ratio 2.99 2.30 Common shares outstanding 9,758,254 10,000,0003 Book value per common share $29.08 $5.50 1Includes excess of investment over net assets acquired of $4.9. 2To adjust stock to $43.05 per share and record payout net of related income-tax effects. 3Fully diluted.

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Exhibit 8 NORRIS INDUSTRIES Assets Held for Sale ($ millions) Estimated Net Book Net Cash Description Contemplated Price Value After Taxes Sponge Cushion Sell as going concern $ 3.8 $ 3.6 $ 3.7 all assets including receivables O. L. Anderson Sell as going concern 2.4 1.7 2.1 plant inventory and property, plant, and equipment Leases and contracts Sell to financial 14.51 17.0 14.5 currently financed institution by the company in-house Ypsilanti plant Sell 3.0 1.7 2.5 currently partially leased to General Motors (205,000 sq. ft. on 20 acres) Other miscellaneous Sell 1.7 .5 1.3 property (129,000 sq. ft. of buildings) Total $25.4 $24.5 $24.1 1A 15 percent discount rate was used to estimate the value of fixed longer-term low-rate leases and contracts outstanding.

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Exhibit 9 NORRIS INDUSTRIES Data on Comparable Leveraged Buyouts and Other Acquisitions Acquisition Premium/Price Offer as a Company of Stock One Day Prior Percentage of Multiple of Senior Debt/ Sub. Debt/ Senior Debt/ Sub. Debt/ Acquired Date or Assets to Announcement Net Income Book Value Total Debt Total Debt Total Cap. Total Cap. Houdaille 10/28/78 S 93% 13.9Η 2.0Η 65.5% 34.5% 56% 29.6% Industries Bliss & 8/10/79 S 23 8.7 1.7 N.A. N.A. N.A. N.A. Laughlin Carrier Corp. 9/16/78 A 39 10.2 1.6 N.A. N.A. N.A. N.A. Gardner- 1/22/79 A 46 12.2 2.1 N.A. N.A. N.A. N.A. Denver Eltra Corp. 6/29/79 A 25 11.6 1.5 N.A. N.A. N.A. N.A. Washington 3/12/79 A 34 7.3 1.3 N.A. N.A. N.A. N.A. Steel Studebaker- 7/25/79 A 17 10.7 1.4 N.A. N.A. N.A. N.A. Northington Marathon 8/13/79 A 13 11.4 2.1 N.A. N.A. N.A. N.A. Manufacturing Congoleum 1980 A/S 50 9.4 2.4 68.6 31.4 60.4 17.6

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Exhibit 10 NORRIS INDUSTRIES Market Prices of Norris Shares1 Period High Low 1977 $31 $19 1978 First Quarter 23-3/4 19-3/4 Second Quarter 26 21-1/2 Third Quarter 27 20-5/8 Fourth Quarter 26-3/4 20 1979 First Quarter 25-1/4 20-3/8 Second Quarter 28 22-3/4 Third Quarter 28-7/8 23-1/4 Fourth Quarter 26-5/8 19 1980 First Quarter 26-3/8 18-1/4 Second Quarter 23-1/2 19 Third Quarter2 33-1/2 22-3/8 Fourth Quarter 32-1/2 23-3/4 1981 First Quarter 31-1/2 25-1/2 Second Quarter 32-1/2 27-1/2 Third Quarter3 39-3/4 29 1Norris Shares were currently traded on the New York Stock Exchange and the Pacific Stock Exchange. 2On August 4, 1980, the last business day prior to the public announcement of proposals for the acquisition of Norris by KKR and another firm, the closing price per share of the Norris shares was $29. 3On July 22, 1981, the last business day prior to the public announcement of a proposal for the acquisition of Norris at a price of $38 per share by an investor group to be formed by KKR, the closing price per share of the Norris shares was $29.13. On August 19, 1981, the last business day prior to the announcement that an agreement had been executed with KKR for an increased price of $43.05 per Norris share, the closing price per share was $36.00.

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Exhibit 11 NORRIS INDUSTRIES Summary of Loan Covenants 1. Working capital minimum of $75,000,000. 2. Current ratio minimum of 1.5 to 1. 3. Tangible net worth minimum of: Amount Period $ 41,000,000 Closing to 12/31/82 52,000,000 12/31/82 to 12/31/83 64,000,000 12/31/83 to 12/31/84 84,000,000 12/31/84 to 12/31/85 109,000,000 12/31/85 to 12/31/86 144,000,000 12/31/86 to 12/31/87 179,000,000 12/31/87 to 12/31/88 219,000,000 12/31/88 and thereafter 4. No prepayment of subordinated debt. 5. Sale of assets is unlimited, except by other financial covenants, and proceeds must be applied to the

revolving credit to the extent of: a. 50 percent for all assets sold in a single sale or in an integrated series of sales over

$1,000,000. b. 100 percent for all assets held for sale in excess of $4,000,000.

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Exhibit 12 NORRIS INDUSTRIES Yields on Debt Issues, August 1981 A. Moody’s Industrial Rating Categories Yield to Maturity Aaa 15.21% Aa 15.65% A 16.07% Baa 16.54% B. Medium-Term Subordinated Issues S&P Yield to Issues Matures Rating Maturity Allstate Financial Corp. 1987 A- 17.98% Altec Corp. (with sinking fund) 1988 CCC 24.97% APL Corp. (with sinking fund) 1992 B- 19.87% International Harvester (with sinking fund) 1988 CCC 18.65% Roblin Industries (with sinking fund) 1989 B- 19.62% Standard Packaging 1990 B- 18.86% C. Money Market Rates Interest Rate Commercial Paper (30-days) 17.58% Federal Funds 17.82 U.S. Treasury Bills (90-days) 14.70 D. U.S. Treasury Notes and Bonds Yield to Term Maturity 1-Year 17.07% 2-Year 16.71% 3-Year 16.39% 4-Year 16.22% 5-Year 16.04% 6-Year 15.87% 7-Year 15.69% 10-Year 15.32% 20-Year 14.99% 30-Year 14.57%