<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1998
REGISTRATION NO. 333-48851
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
NATCO GROUP INC.
(Exact Name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3443 22-2906892
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
WILLIAM B. WIENER III
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
BROOKHOLLOW CENTRAL III BROOKHOLLOW CENTRAL III
2950 NORTH LOOP WEST, SUITE 750 2950 NORTH LOOP WEST, SUITE 750
HOUSTON, TEXAS 77092 HOUSTON, TEXAS 77092
(713) 683-9292 (713) 683-9292
(Address, including zip code, and telephone number (Name, address, including zip code, and telephone
including area code, of Registrant's principal number,
executive offices) including area code, of agent for service)
</TABLE>
Copies To:
<TABLE>
<S> <C>
VINSON & ELKINS L.L.P. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
FIRST CITY TOWER 1700 PACIFIC AVENUE, SUITE 4100
1001 FANNIN STREET DALLAS, TEXAS 75201-4618
HOUSTON, TEXAS 77002-6760 (214) 969-4780
(713) 758-2222 ATTN.: SETH R. MOLAY, P.C.
ATTN.: WILLIAM E. JOOR III
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Section 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 9, 1998
PROSPECTUS
, 1998
SHARES
[LOGO]
NATCO GROUP INC.
COMMON STOCK
Of the shares of common stock, $0.01 par value ("Common Stock"),
being offered hereby (the "Offering"), shares are being sold by NATCO
Group Inc. (the "Company") and 1,010,333 shares are being sold by the Selling
Stockholder named under "Principal and Selling Stockholders." The Company will
not receive any of the proceeds from the sale of shares of Common Stock by the
Selling Stockholder.
Prior to the Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.
The Company intends to make application to list the Common Stock on the New
York Stock Exchange, under the symbol "NTG."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREIN, FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- -----------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total(3)........................ $ $ $ $
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional shares of Common Stock on the same terms as set
forth above solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Common Stock offered hereby are offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including their right to reject orders in
whole or in part. It is expected that the shares of Common Stock offered hereby
will be ready for delivery on or about , 1998, against payment
therefor in immediately available funds.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
SIMMONS & COMPANY
INTERNATIONAL
<PAGE> 3
MAPS OF LOCATIONS AND OTHER GRAPHICS
[Map of North America depicting locations in which the Company maintains
offices.]
[Inset map of Japan depicting the location in which the Company maintains an
office.]
[Inset map of Malaysia depicting the location in which the Company maintains an
office.]
[Inset map of Kazakhstan depicting the location in which the Company maintains
an office.]
[Inset map of Venezuela depicting locations in which the Company maintains
offices.]
[Inset map of England depicting the location in which the Company maintains an
office.]
[Photograph of gas membrane bulk carbon dioxide removal unit capable of
processing 125 million standard cubic feet of gas per day.]
[Photograph of Refinery Electro-Dynamic(TM) desalter (12(#) x 66(#)) capable of
processing 100,000 barrels of liquids per day.]
[Photograph of gas dehydration package including glycol contactor and glycol
regenerator capable of processing 30 million standard cubic feet per day.]
[Photograph of integrated production module for floating production vessel
capable of processing 20,000 barrels of oil, 24 million standard cubic feet of
gas and 4,000 barrels of water per day.]
[Photograph of horizontal, three-phase, special high-pressure well-test
separator package capable of processing 93 million standard cubic feet of gas
and 17,000 barrels of liquid per day.]
[Oil and gas processing schematic]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COM-
MON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION
WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information contained herein (i) gives effect to the
pending acquisition of The Cynara Company ("Cynara"), (ii) gives effect to the
Company's 4 for 3 stock split effected March 6, 1998 and (iii) assumes that the
Underwriters' over-allotment option is not exercised. Unless the context
indicates otherwise, references in this Prospectus to "NATCO" or the "Company"
mean NATCO Group Inc. and its subsidiaries. The Company's pro forma financial
data set forth herein give effect to (i) the acquisition of Total Engineering
Services Team, Inc. ("TEST") in June 1997, (ii) the acquisition of Cynara, (iii)
the issuance by the Company of 1,479,258 shares of Common Stock to certain
stockholders in exchange for outstanding indebtedness of the Company and (iv)
the sale by the Company of shares of Common Stock and the use of the net
proceeds therefrom, as if the acquisitions of TEST and Cynara and the other
transactions occurred on April 1, 1997 for the pro forma statements of
operations data and give effect to the transactions described in clauses (ii),
(iii) and (iv) as if they had occurred on March 31, 1998 for the pro forma
balance sheet data.
THE COMPANY
NATCO is a leading provider of wellhead equipment, systems and services
used in the production of oil and gas. The Company's production equipment and
systems are primarily used at or near the wellhead to separate oil and gas
within a hydrocarbon stream and to remove contaminants from the oil and gas
stream. Separation and decontamination at the wellhead are necessary to meet the
specifications of transporters and end users. The Company's products and
services are used in onshore and offshore fields in most major oil and gas
producing regions in the world. The Company's revenues and Adjusted EBITDA (as
defined herein), on a pro forma basis, were approximately $236.4 million and
$20.9 million, respectively, for the fiscal year ended March 31, 1998.
The Company designs and manufactures a diverse line of production
equipment, including: (i) separators, which separate a hydrocarbon stream into
oil, gas and water; (ii) dehydration and desalting units, which remove water and
salt from oil and gas; (iii) heaters, which prevent solids from forming in gas
and reduce the viscosity of oil; (iv) gas conditioning units, which remove
carbon dioxide and other contaminants from a gas stream; (v) water filtration
systems, which remove oil and contaminants from water derived from the
production process; and (vi) control systems, which monitor and control
production equipment.
The Company has designed, manufactured and marketed production equipment
and systems for over 70 years and believes that, among its competitors, it has
the largest installed base of production equipment in the industry. The Company
has developed its position as a leading provider of production equipment and
services by maintaining its technological leadership, capitalizing on its strong
brand name recognition and offering a broad range of products and services. The
Company has utilized these strengths to enter into formal and informal alliances
with certain key customers. Revenues from such alliance customers represented
approximately 38% of the Company's revenues for the year ended March 31, 1998,
on a pro forma basis.
The Company offers its products and services either as integrated systems
or individual components. The Company generally categorizes its products and
services based on the degree of engineering, design and customization provided,
the size and scope of the project and the organization used to market such
products and services. These categories include the following:
Traditional Production Equipment and Services. The Company designs,
manufactures, refurbishes, distributes, installs and services a wide variety of
new and used traditional production equipment, such as separators, dehydration
units, heaters, gas conditioning units and water filtration systems. The Company
sells and services both its new and refurbished traditional production equipment
primarily through a network of 33 field offices in the United States and three
in Canada, the largest such network in North America. The refurbishment of used
equipment for resale enables the Company to reduce delivery times and lower
3
<PAGE> 5
their equipment costs relative to new equipment. The Company maintains a
proprietary database of surplus production equipment in order to respond to
customer requests for refurbished equipment quickly and efficiently.
Engineered Systems. The Company provides turnkey, single source design and
manufacturing of integrated production systems. Engineered systems products are
typically designed and manufactured for large production development projects
throughout the world and include large scale oil and gas processing trains for
offshore platforms and onshore flow stations, floating production systems, oil
treating and desalting facilities and large gas processing facilities. The
Company's engineered systems typically require a significant amount of
technology, engineering and project management. The Company markets its
engineered systems through direct sales forces based in Houston, Calgary,
London, Tokyo and Caracas, augmented by independent representatives in other
countries.
Instrumentation and Electrical Control Systems. The Company designs,
constructs, installs and services instrumentation and electrical ("I&E") control
and safety systems and supervisory control and data acquisition ("SCADA")
systems under its TEST brand name. Control systems monitor, control and shutdown
equipment on production platforms, compressor stations and other production
facilities. SCADA systems provide remote monitoring and control of equipment,
production facilities, pipelines and compressors via wireless communication
links. The Company markets its I&E products through a four branch network
primarily in the Gulf Coast area.
THE INDUSTRY
Demand for oil and gas production equipment and services is driven
primarily by (i) levels of production of oil and gas in response to worldwide
demand, (ii) the discovery of new oil and gas fields, (iii) the changing
production profiles of existing fields (meaning the mix of oil, gas and water in
the hydrocarbon stream and the level of contaminants therein) and (iv) the
quality of new hydrocarbon production. Generally, oil and gas exploration and
production companies tend to reduce exploration activity during periods of weak
oil prices and demand while maintaining production activity. Accordingly, the
Company believes that the production equipment and service industry tends to be
characterized by more stable revenues than those of companies that primarily
provide products and services to the oil and gas exploration industry. The
Company also believes that, at times of stronger oil prices and demand,
companies that primarily provide products and services to the oil and gas
exploration industry realize increases in revenues more quickly than the
production equipment and service industry. The extent to which the revenues of
the production equipment and service industry increase depends upon the success
of the exploration efforts and, in general, lag increased revenues in the
exploration industry. These lag times can be up to several years in offshore
operations but are generally shorter with respect to onshore operations. Over
the last three years, worldwide oil and gas exploration and production
expenditures have increased 14% annually. As a result, the Company believes that
the demand for products and services from the production equipment and service
industry attributable to new field discoveries will increase in the near future.
Changing production profiles in existing fields also increase the demand
for products and services in the production equipment and services industry. As
existing fields are reworked or enhanced recovery methods are employed,
additional and more complex equipment may be required to produce oil and gas
from such fields. This can result from a change in the mix of oil and gas
produced in the field or an increase in contaminants such as water or carbon
dioxide that may occur naturally over time or as a result of enhanced recovery
techniques, such as waterflooding or carbon dioxide injection, that may be
implemented to accelerate production or extend a field's productive life. In
addition, many new oil and gas fields contain lower quality hydrocarbon streams
that require more complex production equipment. Examples include carbon dioxide
rich formations in West Texas and Southeast Asia and heavy crude in Western
Canada and in the Orinoco Delta in Venezuela. The Company believes that these
factors will result in increased demand for surface production equipment,
systems and services.
4
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STRATEGY
The Company's growth in revenue and EBITDA over the four fiscal years ended
March 31, 1998 is principally a result of increasing its market penetration of
the production equipment and services industry. The Company's strategy for
increasing EBITDA and earnings per share in the future is to expand its existing
market position and improve productivity through:
Focusing on Customer Alliances. Exploration and production companies have
reduced production costs and delivery times for oilfield equipment by
establishing alliances with leading oilfield equipment and service suppliers
that can provide a broad range of products and services on a cost effective and
timely basis. The Company has generated substantial revenue growth and expanded
its market position, principally as a result of alliances established with
subsidiaries of major oil companies and large independent producers such as
Amoco Production Company, BP Exploration (Alaska), Inc., Chevron Canada
Resources, Mobil Oil Canada, Sonat Exploration Company and Union Pacific
Resources Group Inc. The Company is actively engaged in discussions with other
potential alliance customers. The Company believes its breadth of products and
services, geographic scope, technological expertise and service orientation
provide it with a competitive advantage in establishing such alliances.
Providing Turnkey Integrated Systems and Solutions. The Company believes
its turnkey, single source design and manufacturing capabilities enable it to
reduce its customers' production equipment and systems costs and shorten
delivery times. In certain applications, such as skid-mounted gas conditioning
packages for offshore applications, the Company intends to increase the degree
of standardization to reduce engineering costs and shorten delivery times.
Introducing New Technologies and Products. Since its formation, the Company
has developed and acquired leading technologies for the surface production
equipment industry to address the market demand for increasingly sophisticated
production equipment. For example, the Company developed the first high capacity
oil and gas separator and the first emulsion treating system in the industry,
and its electrostatic oil treating technology is the most advanced in the
industry. In addition, the Company developed the industry standard separation
technology on floating production vessels. Further, the Company has recently
developed the Electro-Pulse Inductive Coalescer (EPIC(TM)), a commercial
application of electrostatic technology that can extend production in oil
streams that have increasing water content.
Pursuing Complementary Acquisitions. The Company pursues complementary
acquisitions that expand its ability to offer integrated production systems and
leading technologies. The acquisition of Cynara will provide the Company with
bulk carbon dioxide separation technology. Combined with the Company's
experience with lower concentration carbon dioxide removal processes, Cynara's
membrane technology will allow the Company to provide removal solutions for the
entire range of carbon dioxide concentrations. The production equipment industry
is highly fragmented with smaller competitors that have narrow product lines and
geographic scope. The Company believes an industry trend is for customers to
work with vendors, such as the Company, that provide broader product and service
lines and the ability to offer integrated systems. The Company believes that its
size, scope of products and services and, following the Offering, its status as
a public company, provide it with a competitive advantage in making
consolidating acquisitions in the production equipment industry.
Expanding International Presence. The Company has been and intends to
continue expanding its international presence in targeted geographic regions in
which it either has a relationship with a customer or has technology that
provides it with a competitive advantage. Examples include Venezuela and
Kazakhstan, where the Company has existing relationships with customers that are
expanding operations in such regions, and Southeast Asia, where Cynara's
membrane separation technology has applications in carbon dioxide rich fields.
Moreover, the Company is frequently invited to bid on international production
equipment and service projects because of its international reputation and its
large installed base of production equipment. Finally, the Company intends to
continue to expand its international presence through the acquisition of
companies with complementary overseas operations.
5
<PAGE> 7
Improving Productivity. The Company believes unrealized efficiencies remain
in its operations and intends to increase profitability through implementation
of a strategic business planning process across the Company and total quality
management ("TQM") principles in its United States operations. The Company
implemented TQM principles in its Canadian operations beginning in 1993 and
believes that it is in part responsible for improvements in results of Canadian
operations over the past four years. The Company believes that significant
opportunities for process and productivity improvements across the Company will
be identified and implemented as a result of these efforts.
RECENT ACQUISITIONS
TEST. In June 1997, the Company acquired TEST, a leading provider of I&E
control systems and services, from Weatherford Enterra, Inc. for $19.4 million
in cash. The acquisition of TEST broadened the Company's product line and
increased the Company's ability to provide fully integrated engineered systems.
For the year ended March 31, 1998, TEST had revenues and EBITDA of $44.8 million
and $3.5 million, respectively.
Cynara. In March 1998, the Company entered into a definitive agreement to
acquire Cynara (the "Cynara Acquisition"), a leader in the design, construction,
installation, operation and servicing of membrane separation systems that remove
carbon dioxide from gas streams. The Cynara Acquisition will expand the
Company's ability to offer integrated systems and services and will complement
its gas conditioning product line. Aggregate consideration for the Cynara
Acquisition will consist of $7.5 million in cash, 906,667 shares of Common
Stock, the repayment of $10.5 million of Cynara debt and an additional 20.1
shares of Common Stock for each $1,000 of gross margin generated by projects in
Southeast Asia that are awarded to Cynara over the next two years, up to a
maximum of 906,667 additional shares. For the year ended December 31, 1997,
Cynara's revenues and EBITDA were $18.6 million and $4.4 million, respectively.
Proceeds from the Offering will be used, in part, to fund the cash portion of
the purchase price. The closing of the Cynara Acquisition is contingent upon the
contemporaneous closing of the Offering.
GENERAL
National Tank Company was founded in 1926 in Tulsa, Oklahoma. The Company
was incorporated in Delaware in 1988 and acquired National Tank Company in 1989.
National Tank Company is the Company's principal operating subsidiary. The
Company's address at its principal executive offices is Brookhollow Central III,
2950 North Loop West, Suite 750, Houston, Texas 77092, and its telephone number
is (713) 683-9292.
6
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THE OFFERING
The shares of Common Stock offered hereby are being offered by the Company
and the Selling Stockholder.
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Common Stock offered:
By the Company.............................. shares
By the Selling Stockholder.................. 1,010,333 shares
Total............................... shares
Common Stock to be outstanding after the
Offering and the Cynara Acquisition(1)(2)... shares
Use of Proceeds............................... The net proceeds to the Company from the Offering
will be used to (i) pay the cash portion of the
consideration for the Cynara Acquisition, (ii) repay
outstanding indebtedness under the Company's Bank
Credit Facilities (as defined herein) and under the
Cynara Credit Facility (as defined herein), (iii) pay
deferred compensation owed by the Company to certain
TEST employees and incentive compensation owed under
an existing arrangement with the Chairman and Chief
Executive Officer of the Company tied to the
successful completion of the Offering and (iv) for
general working capital. See "Use of Proceeds."
Proposed New York Stock Exchange ("NYSE")
symbol...................................... NTG
</TABLE>
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(1) Includes an aggregate of 1,479,258 shares of Common Stock to be issued
immediately prior to the commencement of the Offering to Capricorn
Investors, L.P., a Delaware limited partnership, ("Capricorn I") (1,010,333
shares) and Capricorn Investors II, L.P., a Delaware limited partnership,
("Capricorn II") (468,925 shares) pursuant to the Securities Exchange
Agreement with the Company described under "Certain
Transactions -- Securities Transactions."
(2) Does not include: (i) 1,755,115 shares of Common Stock reserved for
issuance upon exercise of stock options outstanding under the Company's
stock option plans and certain option agreements with Management (see
"Management -- Executive Compensation"); (ii) any additional shares of
Common Stock, up to a maximum of 906,667 shares, that may be paid in the
Cynara Acquisition under certain circumstances (see "The Cynara
Acquisition"); (iii) approximately 110,000 shares of Common Stock that the
Company will issue to participants in certain of the Company's employee
benefit plans within 90 days of the Offering (see "Risk
Factors -- Potential Effect of Shares Eligible for Future Sale on Price of
Common Stock") or (iv) 173,050 shares of Common Stock that the Company has
an option to repurchase as described under "Certain
Transactions -- Miscellaneous" (which would reduce the shares of Common
Stock outstanding).
RISK FACTORS
Prospective investors should consider the factors discussed in detail
elsewhere in this Prospectus under the caption "Risk Factors."
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SUMMARY FINANCIAL INFORMATION
The following summary consolidated financial information should be read in
conjunction with the consolidated financial statements and notes thereto of the
Company, the financial statements and notes thereto of Cynara and TEST,
"Selected Consolidated Financial Data," "Unaudited Condensed Pro Forma Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The unaudited
summary pro forma balance sheet data gives effect to the Cynara Acquisition and
the consummation of the Offering as if each of such events had occurred on March
31, 1998. The unaudited summary pro forma income statement data for the fiscal
year ended March 31, 1998 give effect to the acquisitions of TEST and Cynara and
the consummation of the Offering as if each of such events had occurred on April
1, 1997. Such pro forma data are presented for illustrative purposes only and do
not purport to represent the Company's actual results if such events had
occurred at the dates indicated, nor do such data purport to project the results
of operations for any future period.
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<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------
PRO FORMA
1996 1997 1998(1) 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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INCOME STATEMENT DATA(2):
Revenues.................................................. $112,724 $126,657 $202,023 $236,436
Cost of goods sold........................................ 91,258 99,984 160,266 183,945
-------- -------- -------- --------
Gross profit.............................................. 21,466 26,673 41,757 52,491
Selling, general and administrative expense............... 21,754 23,292 29,246 33,207
Restructuring charges(3).................................. 776 21 282 282
Depreciation and amortization expense..................... 731 862 1,322 3,344
Interest expense.......................................... 2,422 1,861 2,992 221
Interest cost on postretirement benefit liability(4)...... 932 957 1,048 1,048
Revaluation loss on postretirement benefit liability(4)... 2,273 1,466 159 159
Interest income........................................... (336) (116) (140) (140)
Gain on sale of investment(5)............................. (6,320) -- -- --
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes................................................... (766) (1,670) 6,848 14,370
Income tax provision (benefit)............................ (430) (363) 1,342 4,445
-------- -------- -------- --------
Income (loss) from continuing operations.................. $ (336) $ (1,307) $ 5,506 $ 9,925
======== ======== ======== ========
Basic earnings per share from continuing operations....... $ (0.05) $ (0.22) $ 0.74 $
Diluted earnings per share from continuing operations..... (0.05) $ (0.22) 0.70
Basic earnings per share.................................. 0.08 0.76 0.84
Diluted earnings per share................................ 0.08 0.70 0.79
Basic weighted average number of shares of common stock... 6,056 6,032 7,451
Diluted weighted average number of shares of common
stock................................................... 6,243 6,371 7,895
OTHER DATA:
Cash flows provided by (used in) operating activities..... $ (4,416) $ 1,059 $ 3,113
Cash flows provided by (used in) investing activities..... 9,544 (798) (24,712)
Cash flows provided by (used in) financing activities..... (7,671) (1,033) 21,660
EBITDA(6)................................................. 2,051 937 11,022 17,795
Adjusted EBITDA(7)........................................ -- -- -- 20,868
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------
PRO FORMA
1996 1997 1998 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 3,935 $13,909 $26,159 37,731
Net property, plant and equipment......................... 6,660 6,833 9,332 18,647
Total assets.............................................. 58,520 71,701 98,024 137,530
Long-term debt(8)......................................... 23,245 27,566 33,719 5,967
Stockholders' equity (deficit)............................ (8,033) (5,379) 7,136 71,078
</TABLE>
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(1) Includes the results of operations of TEST from June 30, 1997, the date on
which the Company acquired TEST.
(2) In June 1997, the Company's investment in PTH (as defined herein) was
distributed to its stockholders in a tax free transaction. In accordance
with generally accepted accounting principles, the results of operations of
PTH are accounted for as discontinued operations for all periods presented.
Accordingly, the net income of PTH is excluded from income (loss) from
continuing operations in the Company's income statements for the periods
presented. The results of operations of PTH are presented as income from
discontinued operations and gain on disposal of a PTH division in the
Company's income statements for the periods presented. In addition, the net
assets of PTH are included as a separate line item in the Company's balance
sheets for the periods presented.
(3) The Company recorded charges of (i) $776,000 in fiscal 1996 of which
$500,000 related to the closing of the Company's Singapore operations and
$276,000 related to recruiting and employee relocation expenses and (iii)
$282,000 in the year ended March 31, 1998 related to the closing of the
Company's United Kingdom subsidiary.
(4) Pursuant to agreements relating to the acquisition of National Tank Company
by the Company in 1989 from Combustion Engineering, Inc., the Company is
required to provide certain health care and life insurance benefits to
employees of National Tank Company who retired prior to June 21, 1989. These
agreements provide that the Company's annual cash costs of these benefits
are reimbursed by the seller through June 21, 1999 to the extent that they
exceed on an annual basis the lesser of one-third of the cash costs in that
year or $755,000 (as adjusted for inflation). For the fiscal years ended
March 31, 1997 and 1998, the Company's aggregate cash costs of these
benefits were $1,659,000 and 1,668,000, respectively, of which $1,149,000
and $1,047,000, respectively, were reimbursed. Commencing June 22, 1999, the
Company will no longer be reimbursed for any portion of these cash costs.
The Company currently plans to fund the cash requirements related to these
retired employee benefits on a current basis.
In 1989, the Company recorded as an expense the estimated liability,
discounted to present value, of the unreimbursable cost of these benefits.
This liability is evaluated annually by an actuarial firm for changes in
plan experience factors, health care cost trends and long-term interest
rates. The Company has elected to recognize gains and losses from such
evaluations immediately and reports them separately in its consolidated
statements of operations as gain or loss on revaluation of postretirement
employee liability. See "Risk Factors -- Uncertainty of Postretirement
Benefit Obligations" for further information regarding these obligations.
(5) In fiscal 1996, the Company completed the sale of its remaining interest in
American Premier Holdings, Inc. ("APH") for a gain of $6,320,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- History of the Company."
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
consists of income (loss) from continuing operations plus (i) interest
expense, less interest income, (ii) income tax expense and (iii)
depreciation and amortization. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles and should not be
considered in isolation from or as a substitute for net income or cash flow
measures prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. EBITDA
is included as a supplemental disclosure because it may provide useful
information regarding a company's ability to service debt and to fund
capital expenditures. In evaluating EBITDA, the Company believes that
investors should consider, among other things, the components of EBITDA,
such as revenues and cost of goods sold, the variability of such components
over time and the amount by which EBITDA exceeds interests costs for the
period. Management interprets trends in EBITDA to measure the Company's
operations that are within the control of operating managers, by isolating
such factors as interest expense, depreciation policies and tax rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of trends that may be depicted in the Company's
EBITDA. In addition, EBITDA may not be comparable to similarly titled
measures reported by other companies.
(7) Adjusted EBITDA consists of EBITDA plus (i) restructuring expense, (ii)
interest cost on postretirement liability and (iii) revaluation loss on
postretirement liability less EBITDA from the operations of terminated
subsidiaries (NATCO-UK and NATCO-Singapore, each as defined herein).
Adjusted EBITDA is not a measurement presented in accordance with generally
accepted accounting principles and should not be considered in isolation
from or as a substitute for net income or cash flow measures prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity. Adjusted EBITDA is included as a
supplemental disclosure because it may provide useful information regarding
a company's ability to service debt and to fund capital expenditures. In
evaluating Adjusted EBITDA, the Company believes that investors should
consider, among other things, the components of Adjusted EBITDA, such as
revenues and cost of goods sold, the variability of such components over
time and the amount by which Adjusted EBITDA exceeds interest costs for the
period. Management interprets trends in Adjusted EBITDA to measure the
Company's operations that are within the control of operating managers by
isolating, in addition to those items excluded from EBITDA, those items for
which adjustment is made as described above from the evaluation of
managerial control of the Company's operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a
discussion of trends that may be depicted in the Company's Adjusted EBITDA.
(8) Includes current portion of long-term debt and revolving lines of credit.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.
INDUSTRY CONDITIONS
The Company's business is substantially dependent upon the condition of the
oil and gas industry and the industry's willingness to spend capital on the
production of oil and gas. The level of such capital expenditures is generally
dependent upon the prevailing view of future oil and gas prices, which are
affected by numerous factors affecting the supply and demand for oil and gas,
including the level of exploration activity, worldwide economic activity,
interest rates and the cost of capital, environmental regulation, tax policies,
political requirements of national governments, coordination by the Organization
of Petroleum Exporting Countries ("OPEC"), the cost of producing oil and gas and
technological advances. Oil and gas prices and activity have been characterized
by significant volatility in recent years. Accompanying this volatility have
been numerous changes in oil and gas company strategies and expenditure levels
and patterns. To the extent that oil and gas prices decline or remain at low
levels for an extended period of time, producers may react by reducing
expenditures, which would likely adversely affect the Company's results of
operations and could adversely affect its financial condition. No assurance can
be given as to the future price levels of oil and gas or the volatility thereof
or that the future price of oil and gas will be sufficient to support the level
of production-related activities necessary for the Company to grow or maintain
its business.
CONTRACT BIDDING RISKS
A substantial number of the Company's projects, including a number of
larger engineered systems projects, are performed on a fixed-price basis. The
Company is responsible for all cost overruns, excluding change orders. The costs
and gross profit, if any, realized on a fixed-price contract will often vary
from the estimated amounts on which such contracts were originally based because
of various reasons, including errors in estimates or bidding, changes in the
availability and cost of labor and material and variations in productivity from
the original estimates. These variations and the risks inherent in engineered
systems projects may result in reduced profitability or losses on projects.
Depending on the size of a project, variations from estimated contract
performance can have a significant impact on the Company's operating results for
any particular fiscal quarter or year.
NEED FOR SKILLED LABOR
The Company's ability to remain profitable depends in part on its ability
to attract and retain skilled manufacturing workers, equipment operators,
engineers and other technical personnel. The Company's ability to expand its
operations, particularly in the Gulf Coast areas, depends primarily on its
ability to increase its labor force. The demand for such workers is currently
high and the supply is extremely limited. While the Company believes that its
wage rates are competitive and that its relationship with its skilled labor
force is good, a significant increase in the wages paid by competing employers
could result in a reduction in the Company's skilled labor force, increases in
the wage rates paid by the Company, or both. If either of these events occurred,
in the near-term, the profits realized by the Company would be reduced and, in
the long-term, the production capacity and profitability of the Company could be
diminished and its growth potential impaired.
UNCERTAINTY OF POSTRETIREMENT BENEFIT OBLIGATIONS
Pursuant to agreements relating to the acquisition of National Tank Company
by the Company in 1989 from Combustion Engineering, Inc., the Company is
required to provide certain health care and life insurance benefits to employees
of National Tank Company who retired prior to June 21, 1989. These agreements
provide that the Company's annual cash costs of these benefits are reimbursed by
the seller through June 21, 1999 to the extent that they exceed on an annual
basis the lesser of one-third of the cash costs in that year or
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$755,000 (as adjusted for inflation). For the fiscal years ended March 31, 1997
and 1998, the Company's aggregate cash costs of these benefits were $1.7 million
for each year of which $1.1 million and $1.0 million, respectively, were
reimbursed. Commencing June 22, 1999, the Company will no longer be reimbursed
for any portion of these cash costs. At April 30, 1998, there were 565 retirees
and surviving spouses and 357 dependents covered by postretirement benefits
obligations. No additional retirees were covered after June 21, 1989. The
benefits provided for retirees and surviving spouses over the age of 65 are
secondary to Medicare.
In order to account for this liability, the Company in 1989 recorded as an
expense the estimated liability, discounted to present value, of the
unreimbursable cost of these benefits. This liability is evaluated annually by
an actuarial firm for changes in plan experience factors, health care cost
trends and long term interest rates. The Company has elected to recognize gains
and losses from such evaluations immediately and reports them separately in its
consolidated statements of operations as gain or loss on revaluation of
postretirement employee liability. The Company reported losses on revaluation of
postretirement employee liability of $2.3 million, $1.5 million and $0.2 million
for fiscal 1996, 1997 and 1998, respectively.
Although the Company believes that the actuarial assumptions used in
adjusting the liability are reasonable, there can be no assurance that the costs
of the actual benefits will not exceed those projected or that future actuarial
assessments of the extent of those costs will not exceed the current assessment.
Under such circumstances, the adjustments required to be made to the Company's
recorded liability for such benefits could have a material adverse effect on the
Company's results of operations and financial condition.
CUSTOMER ALLIANCES
The Company has entered into alliances with major and large independent oil
producers and intends to enter into additional alliances as part of its strategy
to increase market penetration. The Company's alliance arrangements include
blanket purchase orders for specified amounts of standardized equipment,
project-specific integrated alliances and ongoing informal working
relationships. As is common in the oil and gas production industry, many of
these alliances are not formal contracts but represent informal arrangements in
which both parties undertake to satisfy the objectives of the alliance. Under
these alliances, the Company is typically designated as the preferred supplier
of equipment and/or services. See "Business -- Customers and Alliances." Neither
the Company nor the customer may be legally required to honor any commitments
made under an alliance. There can be no assurance that the Company's alliances
will be honored or maintained by the Company's customers in the future. The loss
of one or more of such alliances could have a material adverse effect on the
Company's business, results of operations and financial condition.
INTERNATIONAL OPERATIONS
The Company operates its business and markets its products and services in
oil and gas producing areas throughout the world and is, therefore, subject to
the risks customarily attendant to international operations and investments in
foreign countries. These risks include nationalization, expropriation, war and
civil disturbance, restrictive action by local governments, limitation on
repatriation of earnings, change in foreign tax laws and change in currency
exchange rates, any of which could have an adverse effect on the demand in
certain regions for, or the Company's ability to provide, its products. To date,
the Company has not experienced any significant problems in foreign countries
arising from local government actions or political instability, but there can be
no assurance that such problems will not arise in the future. Interruption of
the Company's international operations could have a material adverse effect on
its results of operations and financial condition.
The Company may, from time to time, conduct a portion of its business in
currencies other than the United States dollar, thus subjecting the Company's
results to fluctuations in foreign currency exchange rates. There can be no
assurance that the Company will be able to protect itself against such
fluctuations in the future.
The Company conducts business, or may conduct business in the future, in
countries that have limited, or may in the future limit, repatriation of
earnings. Although the Company historically has not been adversely
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affected by limitations on repatriation of earnings, there can be no assurance
that the countries in which the Company operates or may operate in the future
will not adopt policies limiting repatriation of earnings that could constitute
in effect a conversion of the earnings from such operations into an investment
in such operations, prevent the repatriation of cash and thereby have a material
adverse effect on the Company's liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
A portion of the Company's sales are made in Southeast Asia. The currencies
of several countries in Southeast Asia have undergone significant devaluations
against the United States dollar in 1997 and early 1998. The devaluation of such
currencies and the related consequences to the economies in such countries have
adversely affected economic growth in the region. To the extent the economies of
countries in Southeast Asia continue to be adversely affected, there can be no
assurance that the demand for the Company's products and services in such region
will continue at historical or anticipated levels.
AVAILABILITY AND INTEGRATION OF ACQUISITIONS
As part of its strategy, the Company has pursued, and intends to pursue in
the future, the acquisition of other companies, assets and product lines that
complement or expand its existing business. Each such acquisition involves a
number of potential risks, such as the diversion of management's attention to
the assimilation of the operations and personnel of the acquired businesses and
possible short-term adverse effects on the Company's operating results during
the integration process.
By virtue of this strategy, the Company routinely conducts preliminary
discussions with numerous companies concerning possible acquisitions. The
Company is unable to predict whether or when any prospective candidate will
become available or the likelihood of a material acquisition being completed.
The Company may seek to finance any such acquisition through borrowings under
credit facilities or the issuance of new debt or equity securities. If the
Company proceeds with an acquisition, and if such acquisition is relatively
large and consideration is in the form of cash, a substantial portion of the
Company's financial resources could be used to consummate any such acquisition.
CONCENTRATION OF SALES TO SINGLE CUSTOMER
For the year ended March 31, 1998, approximately 11.7% of the Company's pro
forma revenues were attributable to sales to BP Exploration (Alaska), Inc. There
may be periods where a substantial portion of the Company's revenues are derived
from a single or small group of customers. A prolonged failure of any such
customer or group of customers to fulfill contractual obligations to the Company
or a termination of any such projects could materially adversely affect the
Company's results of operations and financial condition.
POTENTIAL PRODUCT LIABILITY CLAIMS
Certain products of the Company are used in potentially hazardous
production applications that can cause personal injury or loss of life, damage
to property, equipment or the environment and suspension of operations. The
Company maintains insurance coverage in such amounts and against such risks as
it believes to be in accordance with normal industry practice. Such insurance
does not, however, provide coverage for all liabilities (including liabilities
for certain events involving pollution) or for business interruption, and there
can be no assurance that such insurance will be adequate to cover all losses or
liabilities that may be incurred by the Company in its operations. Moreover, no
assurance can be given that the Company will, in the future, be able to maintain
insurance at levels it deems adequate and at rates it considers reasonable or
that any particular types of coverage will be available. Litigation arising from
a catastrophic occurrence at a location where the Company's equipment and
services are used may in the future result in the Company being named as a
defendant in product liability or other lawsuits asserting potentially large
claims. If the Company were to incur substantial liability and such damages were
not covered by insurance or were in excess of policy limits or if the Company
were to incur such liability at a time when it is not able to obtain liability
insurance, its business, results of operations and financial condition could be
materially adversely affected.
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POTENTIAL WARRANTY CLAIMS
The Company typically provides warranties as to the proper operation and
conformance to specifications of the equipment it manufactures. Failure of such
equipment to operate properly or meet specifications may result in increased
costs for additional engineering resources, parts and equipment replacement or
service or monetary reimbursement to a customer. The Company's warranties are
often backed by letters of credit, of which the Company had approximately $1.6
million outstanding as of May 31, 1998 related to warranties. The Company has
historically received and expects to continue to receive warranty claims. The
Company allocates a certain portion of annual sales revenue in a warranty
reserve against such claims. To the extent that the Company incurs several large
warranty claims against equipment delivered to customers in any period, results
of operations and financial condition could be materially adversely affected.
ENVIRONMENTAL LIABILITY RISKS
The Company generates or manages hazardous wastes, such as solvents,
thinner, waste paint, waste oil, washdown wastes and sandblast material as a
result of its fabrication and refurbishing operations. Although the Company
attempts to identify and address contamination before acquiring properties and
to utilize industry accepted operating and disposal practices, hydrocarbons or
wastes may have been disposed of or released on or under properties owned,
leased or operated by the Company or on or under other locations where such
hydrocarbons or wastes have been taken for disposal. These properties and the
wastes generated as a result of the Company's operations may be subject to
federal or state environmental laws and regulations that could require the
Company to remove the wastes or remediate sites where they have been released as
well as impose civil and criminal penalties for violations.
Various state and federal agencies from time to time consider adopting new
laws and regulations or amending existing laws and regulations regarding
environmental protection. While the Company may attempt to pass on to its
customers the additional costs of complying with such laws and regulations,
there can be no assurances that attempts to do so will be successful.
Accordingly, new laws or regulations or amendments to existing laws or
regulations could require the Company to undertake significant capital
expenditures and could otherwise have a material adverse effect on the Company's
results of operations and financial condition.
IMPACT OF GOVERNMENTAL REGULATIONS
Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulation, including those relating to oilfield operations, worker safety and
the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally. The adoption of laws and
regulations curtailing exploration for or production of oil and gas for economic
or other policy reasons could adversely affect the Company's operations. The
Company cannot determine the extent to which its future operations and earnings
may be affected by new legislation, new regulations or changes in existing
regulations. See "Business -- Governmental Regulation and Environmental
Matters."
FLUCTUATIONS IN QUARTERLY SALES AND EARNINGS
A substantial amount of the Company's revenues are derived from significant
contracts which are often performed over a period of two to four quarters. As a
result, revenues and earnings may fluctuate significantly from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
BACKLOG
The Company's backlog is based on the price of awarded projects or, in the
case of certain awarded cost-plus projects, the estimated price, adjusted by
management's estimate of the percentage of the project that has been completed.
Awarded projects include those projects on which a customer has authorized the
Company to begin work or purchase materials pursuant to written contracts,
letters of intent or other forms of
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authorization. All projects currently included in the Company's backlog are
subject to change or termination at the option of the customer, either of which
could substantially change the amount of backlog currently reported. In the case
of a termination, the customer is generally required to pay the Company for work
performed and materials purchased through the date of termination, and in some
cases, pay the Company termination fees; however, due to the large dollar
amounts of backlog estimated for each of a small number of projects, amounts
included in the Company's backlog could decrease substantially if one or more of
these projects were to be terminated by the Company's customers.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends heavily on the continued services of its
senior management, who possess bidding, procurement, transportation, logistics,
planning, project management, risk management and financial skills. The loss or
interruption of services provided by one or more of its senior officers could
adversely affect the Company's results of operations and financial condition.
Furthermore, there can be no assurance that the Company will continue to attract
and retain sufficient qualified personnel. The Company does not and does not
intend to maintain key man life insurance. See "Management."
COMPETITION
Production equipment companies servicing the oil and gas industry compete
intensely for available projects. Contracts for the Company's products and
services are generally awarded on a competitive basis. Customers may consider,
among other things, the availability and capabilities of equipment, the
contractor's reputation, experience and safety record. Price and ability to meet
a customer's delivery schedule are the principal factors in determining which
qualified contractor is awarded the job. Historically, the market for oilfield
services and equipment has experienced overcapacity which has resulted in
increased price competition in many areas of the Company's business. The Company
competes with a large number of companies, some of which may offer different
technologies or possess greater financial and other resources than the Company.
In addition, because of subsidies, import duties and fees, taxes imposed on
foreign operators and lower wage rates in foreign countries along with
fluctuations in the value of the United States dollar and other factors, the
Company may not be able to remain competitive with foreign contractors for
projects designed for use in international locations. See
"Business -- Competition."
CERTAIN TAX MATTERS
In June 1997, the Company, in connection with a financing effected to
provide funds for the acquisition of TEST and other corporate purposes (the
"1997 Financing"), distributed all of the outstanding stock of PTH then owned by
the Company to its then sole stockholder, Capricorn I (the "Distribution"). In
connection with the Distribution, the Company received an opinion of counsel to
the effect that the Distribution would be tax-free to both the Company and
Capricorn I. Tax-free treatment of the Distribution depends, in part, upon the
underlying facts and circumstances at the time of the Distribution. There can be
no assurance that the Internal Revenue Service will agree with the Company's and
its counsel's interpretation of such facts and circumstances. If the Internal
Revenue Service were to challenge the tax-free treatment of the Distribution and
such challenge were ultimately to prevail, the Company would be treated as
recognizing a gain for federal income tax purposes with respect to the
Distribution in an amount equal to the excess of the fair market value of the
PTH stock at the time of the Distribution over its tax basis to the Company.
Such treatment could have a material adverse effect on the Company's results of
operations and financial condition. See the notes to the Company's consolidated
financial statements.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS AND CERTAIN ANTI-TAKEOVER
PROVISIONS
As of May 31, 1998, 68.3% of the Company's outstanding Common Stock was
owned by Capricorn I, and the balance (31.7%) was owned by Capricorn II. See
"Principal and Selling Stockholders." Immediately following the sale of the
Common Stock offered hereby (including the sale of the Common Stock included in
the Offering by the Selling Stockholder) and the consummation of the Cynara
Acquisition, Capricorn I and Capricorn II will own approximately and ,
respectively, of the Common Stock of the Company
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( and , respectively, if the Underwriters' over-allotment option is
exercised in full). As a result, Mr. Winokur, who controls the managing general
partner of Capricorn Holdings, L.P. and is the managing member of Capricorn
Holdings, LLC, which are the sole general partners of Capricorn I and Capricorn
II, respectively, will have sufficient voting power to control the direction and
policies of the Company and the outcome of any matter requiring stockholder
approval, including mergers, consolidations, the sale of all or substantially
all of the assets of the Company and the election of directors, and to prevent a
change in control of the Company except on terms acceptable to Capricorn I and
Capricorn II. Further, for so long as Capricorn I or Capricorn II individually
or in combination own at least 20% of the Common Stock of the Company, the
general partners of Capricorn I and Capricorn II have the right to nominate two
of the Company's directors. See "Management -- Stockholders' Agreement."
The Company's certificate of incorporation and bylaws, each as amended,
contain various provisions, including certain notice provisions, that may make
it more difficult for a third party to acquire, or may discourage acquisition
bids for, control of the Company and could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
After the Offering, the ownership by Capricorn I and Capricorn II, together with
the beneficial ownership of Common Stock by the Company's officers, directors
and their affiliates, of a substantial number of shares of Common Stock could
also discourage such bids. In addition, the rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of any
holders of preferred stock which may be issued in the future and that may be
senior to the rights of the holders of Common Stock. See "Description of Capital
Stock."
The Board of Directors of the Company has adopted a stockholders' rights
plan pursuant to which preferred stock purchase rights (the "Rights") have been
issued as a dividend on the outstanding Common Stock and will be issued in
conjunction with future issuances of Common Stock by the Company, including the
shares issued by the Company in the Offering. The Rights will become exercisable
upon the occurrence of certain events. See "Description of Capital
Stock -- Rights to Purchase Preferred Stock." The Rights have certain
anti-takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire the Company without the approval of the Board of
Directors of the Company. Furthermore, certain provisions of Delaware law could
delay or make difficult a merger, tender offer or proxy contest involving the
Company. Neither the Rights nor such provisions of Delaware law should, however,
interfere with any merger or other business combination that is approved by the
Board of Directors of the Company.
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common
Stock. While the Company intends to make application to list the Common Stock on
the NYSE, there can be no assurance that an active trading market for the Common
Stock will develop subsequent to the Offering or, if developed, that it will be
sustained.
The initial public offering price of the Common Stock will be determined
through negotiations between the Company and the Selling Stockholder on one hand
and the representatives of the Underwriters on the other and may bear no
relationship to the price at which the Common Stock will trade after the
Offering. For information relating to the factors to be considered in
determining the initial public offering price, see "Underwriting." Prices for
the Common Stock after the Offering may be influenced by a number of factors,
including the liquidity of the market for the Common Stock, investor perceptions
of the Company and the energy services industry and general economic and other
conditions.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market
subsequent to the Offering, or the perception that such sales may occur, could
adversely affect the market price of the Common Stock. Upon consummation of the
Offering, the Company will have shares of Common Stock outstanding
( shares if the Underwriters' over-allotment option is exercised in
full). Of these shares, the 906,667 shares received by the stockholders of
Cynara and the shares of Common Stock outstanding prior to the
Offering will be "restricted securities" within the meaning of Rule 144 under
the
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Securities Act and will be eligible for resale subject to the volume, manner of
sale, holding period and other limitations of Rule 144 (although the holding
period restrictions under that rule have lapsed with respect to the holdings of
Common Stock by Capricorn I other than the shares included in the Offering).
Capricorn I, Capricorn II and, upon consummation of the Cynara Acquisition, the
stockholders of Cynara will have registration rights with respect to their
holdings of Common Stock. See "Certain Transactions -- Securities Transactions."
In addition, options to purchase 1,279,778 shares of Common Stock will be
exercisable upon consummation of the Offering. In addition, the Company intends
to contribute approximately 110,000 newly issued shares of Common Stock into
certain of the Company's employee benefit plans within 90 days of the Offering.
The Company, the executive officers and directors of the Company, certain other
stockholders and the Selling Stockholder have agreed not to sell any shares of
Common Stock for a period of 180 days from the date of this Prospectus without
the consent of Donaldson, Lufkin & Jenrette Securities Corporation. See "Shares
Eligible for Future Sale" and "Underwriting."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of their Common Stock of
$ (assuming an initial public offering price of $ per share).
To the extent outstanding options to purchase the Company's Common Stock are
exercised, there may be further dilution. See "Dilution."
FORWARD-LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Prospectus, including statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," are
forward-looking statements. Forward-looking statements in this Prospectus
generally are accompanied by words such as "anticipate," "believe," "estimate,"
"project," "expect" or similar statements. Such forward-looking information
involves important known and unknown risks and uncertainties and other factors
that may cause the actual results, performance or achievements of the Company to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements include the risks described
under "Risk Factors," such as the fluctuations of the prices received or demand
for oil and gas, acquisition risks, requirements for capital, general economic
conditions, the competition from other production equipment providers and the
effects of governmental and environmental regulation. All forward-looking
statements in this Prospectus are expressly qualified in their entirety by the
cautionary statements in this paragraph and potential investors are cautioned
not to place undue reliance on the forward-looking statements made in this
Prospectus.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (assuming an initial public offering price of $ per
share and after deducting underwriting discounts and estimated offering
expenses) are estimated to be approximately $ million (approximately $
million if the Underwriters' over-allotment option is exercised in full). Of
such net proceeds, (i) $7.5 million will be used to fund the cash portion of the
purchase price of the Cynara Acquisition, (ii) approximately $35.6 million will
be used to repay borrowings by the Company under the U.S. Credit Facility and
the EXIM Credit Facility and by Cynara under the Cynara Credit Facility, (iii)
approximately $2.4 million will be used to pay deferred compensation to certain
TEST employees and incentive compensation owed under an existing arrangement
with the Chairman and Chief Executive Officer of the Company tied to the
successful completion of the Offering and (iv) approximately $3.4 million will
be used for working capital and general corporate purposes. See "The Cynara
Acquisition," "Description of Bank Credit Facilities" and
"Management -- Employment Agreement."
Outstanding borrowings at May 31, 1998 by the Company under the U.S. Credit
Facility and the EXIM Credit Facility were approximately $22.9 million and $2.2
million, respectively, and by Cynara under the Cynara Credit Facility were $10.5
million. The borrowings by the Company under the U.S. Credit Facility were used
to pay the purchase price for TEST and for general working capital and those
under the EXIM Credit Facility were used to finance working capital for export
projects. The borrowings by Cynara under the Cynara Credit Facility were used by
its prior owners to fund the acquisition of Cynara and for general working
capital. For a description of each of these credit facilities, including the
interest rates applicable thereto, see "Description of Bank Credit Facilities."
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholder in the Offering.
Pending use of the net proceeds of the Offering as described above, the net
proceeds will be invested in short-term money market securities.
DIVIDEND POLICY
The Company intends to retain its earnings for use in its business rather
than to pay cash dividends on the Common Stock in the foreseeable future. In
addition, the Bank Credit Facilities currently restrict the ability of the
subsidiaries of the Company to pay dividends or make other distributions to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Description of Bank
Credit Facilities" and the notes to the consolidated financial statements of the
Company.
17
<PAGE> 19
DILUTION
The historical net tangible book value of the Company as of March 31, 1998
was $ per share of Common Stock. Net tangible book value per share is
determined by dividing the tangible net worth of the Company (tangible assets
less total liabilities) by the total number of outstanding shares of Common
Stock. After giving pro forma effect to the Cynara Acquisition as if it had been
consummated on that date, the pro forma net tangible book value per share as of
March 31, 1998 was $ . After giving effect to (i) the sale of the
Common Stock offered hereby and the receipt of the estimated net proceeds to the
Company and (ii) the pro forma effect of the Cynara Acquisition as aforesaid,
the net tangible book value of the Company at March 31, 1998, would have been
$ per share. This represents an immediate increase in the net tangible
book value of $ per share to existing stockholders (including the
stockholders of Cynara) and an immediate dilution (i.e., the difference between
the initial public offering price and the pro forma net tangible book value
after the Offering) to new investors purchasing Common Stock in the Offering.
The following table illustrates the dilution of $ per share to new
investors purchasing Common Stock in the Offering:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $
Net tangible book value per share at March 31, 1998....... $
Increase per share attributable to the Cynara
Acquisition...........................................
Increase per share attributable to new investors.......
-----
Pro forma net tangible book value per share after the
Offering.................................................. $
-----
Dilution per share to new investors......................... $
=====
</TABLE>
The following table sets forth, as of March 31, 1998 (after giving pro
forma effect to the Cynara Acquisition), the number of shares of Common Stock
purchased from the Company, the total consideration paid therefor and the
average price per share paid to the Company by existing stockholders, the
stockholders of Cynara and by new investors:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 8,145,926 % $26,944,000 % $ 3.31
Cynara stockholders........... 906,667
New investors.................
---------- ----- ----------- -------
Total....................... 100.0% $ 100.0%
========== ===== =========== =======
</TABLE>
The foregoing computations with respect to existing stockholders give
effect to the exchange of approximately $7.44 million in aggregate principal
amount of the Company's outstanding 13% Subordinated Promissory Notes due 2000
(the "Subordinated Notes") held by Capricorn I and Capricorn II, together with
accrued interest thereon of approximately $700,000, for an aggregate of
1,479,258 shares of Common Stock prior to consummation of the Offering. See
"Certain Transactions -- Securities Transactions" and Note (3)(f) of Notes to
Unaudited Condensed Pro Forma Financial Statements. The foregoing computations
assume that no outstanding individual employee stock options granted prior to
1998 otherwise than pursuant to a plan ("Individual Employee Stock Options") or
outstanding stock options ("Plan Stock Options") granted under the Company's
1998 Director Stock Option Plan or its 1998 Employee Stock Option Plan (the
"Stock Option Plans") are exercised. Individual Employee Stock Options covering
a total of 1,541,781 shares of Common Stock are outstanding at exercise prices
ranging from $1.47 to $5.03. Plan Stock Options covering a total of 213,334
shares of Common Stock have been granted and are outstanding under the Stock
Option Plans, of which 13,334 are exercisable at $8.81 per share, and the
remainder are exercisable at the initial public offering price per share. See
"Management -- Stock Option Plans." If the shares of Common Stock currently
subject to outstanding Individual Employee Stock Options and Plan Stock Options
were included in the foregoing calculations, the net tangible book value per
share before the Offering (after giving pro forma effect to the Cynara
Acquisition) would be $ , the pro forma net tangible book value per
share after the Offering (after giving pro forma effect to the exercise of all
such options) would be $ and the dilution per share to new investors
would be $ . In addition, the average price per share paid by existing
stockholders would increase to $ per share.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31, 1998 and (ii) the pro forma capitalization of the Company as of such
date after giving effect to the Cynara Acquisition as if it had been effected on
such date and as adjusted as of that date to reflect the sale of the shares of
Common Stock offered hereby and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company, the
financial statements of TEST and Cynara and the unaudited pro forma condensed
financial statements of the Company and in each case the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
HISTORICAL PRO FORMA
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 941 $ 7,944
======= ========
Current portion of long-term debt and revolving credit
facility(1)............................................... $ 5,829 $ 4,383
Long-term debt (excluding current portion)(1)............... 27,890 1,584
Stockholders' equity:
Preferred Stock, par value $0.01 per share, 5,000,000
shares authorized; no shares outstanding............... -- --
Common Stock, par value $0.01 per share, 50,000,000 shares
authorized; 6,666,668 shares outstanding; shares
outstanding, pro forma(2).............................. 67 126
Additional paid-in capital................................ 20,272 86,632
Accumulated deficit....................................... (7,753) (9,464)
Treasury stock, 470,188 shares at cost...................... (4,350) (5,116)
Cumulative translation adjustments.......................... (1,100) (1,100)
------- --------
Total stockholders' equity........................ $ 7,136 $ 71,078
------- --------
Total capitalization.............................. $40,855 $ 77,045
======= ========
</TABLE>
- ------------------------------
(1) For a description of the Bank Credit Facilities, see "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Bank
Credit Facilities."
(2) Does not include the 1,555,115 shares of Common Stock reserved for issuance
upon exercise of Individual Employee Stock Options and Plan Stock Options
outstanding at May 31, 1998 or the 200,000 shares of Common Stock reserved
for issuance upon exercise of Plan Stock Options granted subsequently. See
"Management -- Stock Option Plans."
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
five fiscal years ended March 31, 1998 have been derived from the audited
consolidated financial statements of the Company. This data should be read in
conjunction with the consolidated financial statements and notes thereto of the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The selected
consolidated financial data for the fiscal years ended and as of March 31, 1995
and 1994 and the balance sheet data as of March 31, 1996 have been derived from
audited consolidated financial statements of the Company, which are not included
in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
---------------------------------------------------
1994 1995 1996 1997 1998(1)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(2):
Revenues.................................................. $89,073 $109,909 $112,724 $126,657 $202,023
Cost of goods sold........................................ 70,269 88,229 91,258 99,984 160,266
------- -------- -------- -------- --------
Gross profit.............................................. 18,804 21,680 21,466 26,673 41,757
Selling, general and administrative expense............... 18,258 22,483 21,754 23,292 29,246
Restructuring charges(3).................................. 913 984 776 21 282
Depreciation and amortization expense..................... 1,294 903 731 862 1,322
Interest expense.......................................... 3,930 3,358 2,422 1,861 2,992
Interest cost on postretirement benefit liability(4)...... 1,382 1,064 932 957 1,048
Revaluation (gain) loss on postretirement benefit
liability(4)............................................ -- (4,781) 2,273 1,466 159
Interest income........................................... (2,126) (1,692) (336) (116) (140)
Gain on sale of investment(5)............................. (6,874) (10,124) (6,320) -- --
------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes................................................... 2,027 9,485 (766) (1,670) 6,848
Income tax provision (benefit)............................ 1,152 4,495 (430) (363) 1,342
------- -------- -------- -------- --------
Income (loss) from continuing operations.................. 875 4,990 (336) (1,307) 5,506
Cumulative effect of change in accounting for income
taxes................................................... 13,690 -- -- -- --
Cumulative effect of change in accounting for
postretirement benefits, net of deferred income tax..... 1,171 -- -- -- --
------- -------- -------- -------- --------
Income (loss) from continuing operations after the
cumulative effect of changes in accounting principles... $15,736 $ 4,990 $ (336) $ (1,307) $ 5,506
======= ======== ======== ======== ========
Basic earnings (loss) per share from continuing
operations.............................................. $ 0.13 $ 0.77 $ (0.05) $ (0.22) $ 0.74
Diluted earnings (loss) per share from continuing
operations.............................................. 0.13 0.77 (0.05) (0.22) 0.70
Basic earnings (loss) per share........................... 1.70 0.82 0.08 0.76 0.84
Diluted earnings (loss) per share......................... 1.70 0.82 0.08 0.70 0.79
Basic weighted average number of shares of common stock... 6,502 6,502 6,056 6,032 7,451
Diluted weighted average number of shares of common
stock................................................... 6,502 6,502 6,243 6,371 7,895
OTHER DATA:
Cash flows provided by (used in) operating activities..... 4,033 (5,160) (4,416) 1,059 3,113
Cash flows provided by (used in) investing activities..... 9,303 15,457 9,544 (798) (24,712)
Cash flows provided by (used in) financing activities..... (11,459) (8,547) (7,671) (1,033) 21,660
EBITDA(6)................................................. $ 5,125 $ 12,054 $ 2,051 $ 937 $ 11,022
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $(1,016) $ 4,415 $ 3,935 $ 13,909 $ 26,159
Net property, plant and equipment......................... 3,721 6,506 6,660 6,833 9,332
Total assets.............................................. 72,361 68,061 58,520 71,701 98,024
Long-term debt(7)......................................... 36,939 25,649 23,245 27,566 33,719
Stockholders' equity (deficit)............................ (9,249) (4,073) (8,033) (5,379) 7,136
</TABLE>
20
<PAGE> 22
- ------------------------------
(1) Includes the results of operations of TEST from June 30, 1997, the date on
which the Company acquired TEST.
(2) In June 1997, the Company's investment in PTH was distributed to its
stockholders in a tax free transaction. In accordance with generally
accepted accounting principles, the results of operations of PTH are
accounted for as discontinued operations for all periods presented.
Accordingly, the net income of PTH is excluded from income (loss) from
continuing operations in the Company's income statements for the periods
presented. The results of operations of PTH are presented as income from
operations of discontinued operations and gain on disposal of a PTH division
in the Company's income statements for the periods presented. In addition,
the net assets of PTH are included as a separate line item in the Company's
balance sheets for the periods presented.
(3) The Company has recorded charges of (i) $213,000 in fiscal 1994 for
additional severance benefit costs related to the 1993 restructuring, (ii)
$700,000 in fiscal 1994 of which $400,000 related to the planned relocation
of certain administrative departments and $300,000 related to executive
recruiting costs, (iii) $984,000 in fiscal 1995 consisting of relocation,
severance benefits and recruiting costs related to the relocation of
engineering and administrative personnel to corporate headquarters, (iv)
$776,000 in fiscal 1996 of which $500,000 related to the closing of the
Company's Singapore operations and $276,000 related to recruiting and
employee relocation expenses and (v) $282,000 in fiscal 1998 related to the
closing of the Company's United Kingdom operations.
(4) Pursuant to agreements relating to the acquisition of National Tank Company
by the Company in 1989 from Combustion Engineering, Inc., the Company is
required to provide certain health care and life insurance benefits to
employees of the Company who retired prior to June 21, 1989. These
agreements provide that the Company's annual cash costs of these benefits
are reimbursed by the seller through June 21, 1999 to the extent that they
exceed on an annual basis the lesser of one-third of the cash costs in that
year or $755,000 (as adjusted for inflation). For the fiscal years ended
March 31, 1997 and 1998, the Company's aggregate cash costs of these
benefits were $1,659,000 and $1,668,000, respectively, of which $1,149,000
and $1,047,000, respectively, were reimbursed. Commencing June 22, 1999, the
Company will no longer be reimbursed for any portion of these cash costs.
The Company currently plans to fund the cash requirements related to these
retired employee benefits on a current basis.
In 1989, the Company recorded as an expense the estimated liability,
discounted to present value, of the unreimbursable cost of these benefits.
This liability is evaluated annually by an actuarial firm for changes in
plan experience factors, health care cost trends and long-term interest
rates. The Company has elected to recognize gains and losses from such
evaluations immediately and reports them separately in its consolidated
statements of operations as gain or loss on revaluation of postretirement
employee liability. See "Risk Factors -- Uncertainty of Postretirement
Benefit Obligations" for further information regarding these obligations.
(5) In fiscal 1994 and 1995, the Company sold a portion of its interest in APH
for a gain of $6,874,000 and $10,124,000, respectively. In fiscal 1996, the
Company completed the sale of its remaining interest in APH for a gain of
$6,320,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- History of the Company."
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
consists of income (loss) from continuing operations plus (i) interest
expense, less interest income, (ii) income tax expense and (iii)
depreciation and amortization. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles and should not be
considered in isolation from or as a substitute for net income or cash flow
measures prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. EBITDA
is included as a supplemental disclosure because it may provide useful
information regarding a company's ability to service debt and to fund
capital expenditures. In evaluating EBITDA, the Company believes that
investors should consider, among other things, the components of EBITDA,
such as revenues and cost of goods sold, the variability of such components
over time and the amount by which EBITDA exceeds interests costs for the
period. Management interprets trends in EBITDA to measure the Company's
operations that are within the control of operating managers by isolating
such factors as interest expense, depreciation policies and tax rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of trends that may be depicted in the Company's
EBITDA. In addition, EBITDA may not be comparable to similarly titled
measures reported by other companies.
(7) Includes current portion of long-term debt and revolving lines of credit.
21
<PAGE> 23
UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed pro forma financial statements consist of
unaudited statements of operations for the fiscal year ended March 31, 1998 and
the unaudited balance sheet as of March 31, 1998 and related notes. The
unaudited condensed pro forma financial statements give effect to (i) the
acquisition of TEST as if such transaction had occurred on April 1, 1997 for the
pro forma statement of operations, (ii) the Cynara Acquisition, (iii) the
issuance of shares of Common Stock in the Offering and the use of the
proceeds thereof and (iv) the exchange of subordinated notes into Common Stock
as if the transactions described in (ii), (iii) and (iv) had occurred on April
1, 1997 for the pro forma statement of operations and March 31, 1998 for the pro
forma balance sheet.
The historical data of the Company for the fiscal year ended March 31, 1998
have been derived from the Company's audited consolidated financial statements
including nine months activity for TEST, Inc. The historical data of TEST have
been derived from their unaudited quarterly statement for the period ended June
30, 1997. The historical data for Cynara for the year ended March 31, 1998 have
been derived from their unaudited financial statements for the twelve months
ended March 31, 1998.
The unaudited condensed pro forma financial statements are based on
assumptions and include adjustments as explained in the notes thereto. The
unaudited condensed pro forma financial statements are not necessarily
indicative of the actual financial results if the transactions described in the
preceding paragraph had been effective on and as of the dates indicated and
should not be indicative of operations in future periods or as of future dates.
The unaudited condensed pro forma financial statements should be read in
conjunction with the notes thereto and the historical audited and unaudited
consolidated financial statements of the Company, Cynara and TEST and the notes
thereto included elsewhere in this Prospectus.
22
<PAGE> 24
NATCO GROUP INC.
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS(1)
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL TEST(2) CYNARA ADJUSTMENTS(3) PRO FORMA
<S> <C> <C> <C> <C> <C>
Revenues.............................. $202,023 $12,113 $22,300 $ -- $236,436
Cost of goods sold.................... 160,266 9,502 14,177 -- 183,945
-------- ------- ------- ------- --------
Gross profit.......................... 41,757 2,611 8,123 -- 52,491
Selling, general and administrative
expense............................. 29,246 1,910 2,494 (443)(a) 33,207
Restructuring charge.................. 282 -- -- -- 282
Depreciation and amortization
expense............................. 1,322 111 1,450 461(b) 3,344
Interest expense...................... 2,992 -- 1,269 (4,040)(c) 221
Interest cost on postretirement
liability........................... 1,048 -- -- -- 1,048
Revaluation loss on postretirement
benefit liability................... 159 -- -- -- 159
Interest income....................... (140) -- -- (140)
-------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes...... 6,848 590 2,910 4,022 14,370
Income tax provision.................. 1,342 294 -- 2,809(d) 4,445
-------- ------- ------- ------- --------
Income (loss) from continuing
operations.......................... $ 5,506 $ 296 $ 2,910 $ 1,213 $ 9,925
======== ======= ======= ======= ========
Basic earnings per share from
continuing operations............... $ 0.74
Diluted earnings per share from
continuing operations............... $ 0.70
Basic weighted average number of
shares of common stock.............. 7,451
Diluted weighted average number of
shares of common stock.............. 7,895
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
23
<PAGE> 25
NATCO GROUP INC.
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET(1)
AS OF MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL CYNARA(A) ADJUSTMENTS(3) PRO FORMA
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 941 $ 556 $ (7,500)(a) $ 7,994
45,500(b)
(29,126)(c)
(2,377)(d)
Restricted cash................................ 549 262 -- 811
Trade accounts receivable, net of allowance for
doubtful accounts............................ 43,945 5,768 -- 49,713
Inventories.................................... 22,707 1,944 -- 24,651
Note receivable from director.................. 1,576 -- (1,525)(e) 51
Deferred income tax benefits................... 2,590 -- -- 2,590
Prepaid expenses and other current assets...... 1,655 140 (200)(e) 1,595
------- ------- -------- --------
Total current assets.................... 73,963 8,670 4,772 87,405
------- ------- -------- --------
Property, plant and equipment, net............. 9,332 9,315 -- 18,647
Cost in excess of fair value of net assets
acquired..................................... 7,416 -- 16,601(a) 24,017
Deferred income tax benefits................... 6,162 -- -- 6,162
Other assets, net.............................. 1,151 148 -- 1,299
------- ------- -------- --------
Total assets............................ $98,024 $18,133 $ 21,373 $137,530
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt......... $ 1,682 1,625 $ (3,054)(c) $ 253
Revolving credit bank loan..................... 4,147 -- (17)(c) 4,130
Accounts payable............................... 24,109 2,359 -- 26,468
Accrued expenses and other..................... 13,573 2,582 (1,625)(d)(e) 14,530
Customer advances.............................. 2,057 -- -- 2,057
Income taxes payable........................... 2,236 -- -- 2,236
------- ------- -------- --------
Total current liabilities............... 47,804 6,566 (4,696) 49,674
------- ------- -------- --------
Long-term debt, excluding current
installments................................. 27,890 7,975 (26,055)(c) 1,584
(8,226)(f)
Postretirement benefit liability............... 15,194 -- -- 15,194
------- ------- -------- --------
Total liabilities....................... 90,888 14,541 (38,977) 66,452
------- ------- -------- --------
Stockholders' equity:
Common stock, $.01 par value per share......... 67 -- 59(a)(b)(f) 126
Additional paid-in capital..................... 20,272 1,659 11,025(a) 86,632
45,464(b)
8,212(f)
Accumulated deficit............................ (7,753) 1,933 (1,711)(d)(e) (9,464)
(1,933)(a)
Treasury stock, 470,188 shares at cost......... (4,350) -- (766)(e) (5,116)
Cumulative translation adjustments............. (1,100) -- -- (1,100)
------- ------- -------- --------
Total stockholders' equity.............. 7,136 3,592 60,350 71,078
------- ------- -------- --------
Total liabilities and stockholders'
equity................................ $98,024 $18,133 $ 21,373 $137,530
======= ======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
24
<PAGE> 26
NATCO GROUP INC.
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) BASIS OF PRESENTATION
The following sets forth the assumptions used in preparing the Company's
unaudited condensed pro forma balance sheet as of March 31, 1998 and unaudited
condensed pro forma statement of operations for the fiscal year ended March 31,
1998.
The unaudited condensed pro forma financial data should be read in
conjunction with (i) the consolidated financial statements of the Company as of
and for the fiscal year ended March 31, 1998 and the notes thereto included
elsewhere in the Prospectus, (ii) the financial statements of TEST as of and for
the year ended December 31, 1996 and as of and for the six months ended June 30,
1997 (unaudited) and the notes thereto, included elsewhere in the Prospectus and
(iii) the financial statements of Cynara as of and for the year ended December
31, 1997 and the unaudited financial statements for the three month period ended
March 31, 1998, and the notes thereto included elsewhere in the Prospectus. Pro
forma financial data are not necessarily indicative of future operations of the
Company. Certain information normally included in financial statements prepared
in accordance with generally accepted accounting principles has been condensed
or omitted pursuant to the rules of the Securities and Exchange Commission (the
"Commission").
(2) RESULTS OF TEST
The statement of operations data for TEST represents results of operations
for the three months ended June 30, 1997 prior to its acquisition by the
Company.
(3) ADJUSTMENTS TO THE HISTORICAL FINANCIAL STATEMENTS
The unaudited condensed pro forma financial statements give effect to (i)
the acquisition of TEST, (ii) the Cynara Acquisition, (iii) the issuance of an
aggregate of 1,479,258 shares of Common Stock to Capricorn I and Capricorn II
pursuant to the Securities Exchange Agreement and (iv) the issuance of
shares of Common Stock in the Offering and the use of the proceeds
thereof, as if all such transactions had occurred on April 1, 1997 for the pro
forma statement of operations and give effect to the transactions described in
clauses (ii), (iii) and (iv) as if they had occurred on March 31, 1998 for the
pro forma balance sheet.
The following assumptions and pro forma adjustments have been made with
respect to the historical financial statements of the Company:
STATEMENT OF OPERATIONS
(a) As part of its arrangement with its former stockholder, TEST was
charged an amount to offset overhead for corporate management, accounting,
human resources, and legal services provided by such stockholder. NATCO
corporate overhead has not increased as a result of the acquisition of
TEST. Such amount would be duplicative to the overhead already incurred by
NATCO, and accordingly $250 has been eliminated. Management fees paid by
the Company to Capricorn in the amount of $144 have been reduced by $69 to
reflect the reduction in such fees by contractual agreement effective July
1, 1997. Management fees in the amount of $124 paid by Cynara to one of its
stockholders have been eliminated, as the management agreement will be
terminated effective upon the consummation of the Cynara Acquisition.
(b) To reflect additional goodwill amortization recorded in the
acquisition of Cynara and TEST of $415 and $46 (one additional quarter),
respectively, for the fiscal year ended March 31, 1998.
(c) To reflect the elimination of interest expense on the U.S. Credit
Facility ($1,740) and the Cynara Credit Facility ($1,269) as a result of
repayment of an aggregate of $26.8 million of principal
25
<PAGE> 27
NATCO GROUP INC.
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
under such facilities and the elimination of interest expense ($1,031)
related to the exchange of approximately $7.44 million in aggregate
principal amount of the Company's Subordinated Notes, together with accrued
interest thereon of approximately $700, held by Capricorn I and Capricorn
II into equity. See "Certain Transactions -- Securities Transactions" and
note (f) below.
(d) To reflect income tax effects of adjustments at a rate of 38%,
which does not include benefit for goodwill amortization. To also reflect
income taxes for Cynara (an S corporation) at a rate of 38%.
BALANCE SHEET
(a) To reflect the consummation of the Cynara Acquisition. The
purchase will be funded by the issuance of 906,667 shares of the Company's
common stock at a price of $ per share (the assumed initial public
offering price per share) and the payment of $7,500 in cash. The
acquisition will be accounted for using the purchase method of accounting,
and accordingly the fair market values of assets and liabilities of Cynara
were evaluated and did not differ materially from those amounts recorded as
historical cost. Excess purchase price over the fair market value of the
underlying assets of $16,601 was allocated to goodwill, and will be
amortized over 40 years. The purchase price is subject to an increase of up
to $ (based on an assumed initial public offering price per share of
$ ), dependent upon the gross margin contribution generated by
projects in Southeast Asia that are awarded to Cynara over the next two
years. See "The Cynara Acquisition." Should additional shares be issued
under this provision, they will be recorded at fair market value at the
date of issuance, with a corresponding increase to goodwill.
(b) To reflect the sale by the Company of shares of Common Stock
in the Offering at an assumed initial public offering price of $ per
share and the related costs thereof.
(c) To reflect the repayment of $29,126 of outstanding borrowings
under the U.S. Credit Facility, EXIM Facility and the Cynara Credit
Facility.
(d) To reflect the payment of deferred compensation expense to certain
TEST employees and a bonus award, based on an assumed initial public
offering price of $ ($2,377 in the aggregate) to the Chief Executive
Officer of the Company related to the Offering. Such expense will be
recognized in the quarter in which the Offering is consummated. See
"Management -- Employment Agreement."
(e) Reflects the repayment of a $200 account receivable from Capricorn
Management (as defined herein) and a simultaneous purchase by the Company
of an option to purchase 173,050 shares of Common Stock from Pug Winokur,
the owner of Capricorn Management and a director of the Company; and the
repayment of a $1,525 note receivable by Mr. Winokur with the proceeds from
the exercise of the option by the Company. The Company intends to use such
shares purchased under the Option Agreement in funding the Company's
discretionary 401(k) match for the most recent fiscal year and for future
contributions. See "Certain Transactions -- Miscellaneous."
(f) To reflect the exchange of the Company's Subordinated Notes held
by Capricorn I and Capricorn II for 1,479,258 shares of Common Stock at a
value of $5.03 per share and the contribution of approximately $700 in
accrued interest to additional paid in capital in June 1997. This value
reflects the value of the Common Stock based on an appraisal made in
February 1997 by an independent third party and utilized in connection with
the issuance of Common Stock to Capricorn I and Capricorn II on June 30,
1997. The parties reached an oral understanding regarding the exchange at
that time, although the Securities Exchange Agreement that provides for
such exchange (discussed under "Certain Transactions -- Securities
Transactions") was not executed and delivered until March 1998.
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<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORY OF THE COMPANY
The Company was incorporated in 1988 by Capricorn I. Capricorn I led a
group of investors in acquiring all the outstanding capital stock of the Company
by investing sufficient funds in the Company to enable the Company to acquire
National Tank Company in 1989 from Combustion Engineering, Inc. for cash.
National Tank Company is now the Company's principal subsidiary.
Concurrently with the acquisition of National Tank Company, the Company
also acquired all the outstanding capital stock of W.S. Tyler Incorporated
("Tyler") and American Premier, Inc. ("API"). In 1992, the Company formed APH
and caused API to be merged with a subsidiary of APH. The Company disposed of
its interests in APH in a series of transactions from 1993 through 1996.
In 1992, the Company formed Process Technology Holdings, Inc. ("PTH") and
contributed to it all the outstanding capital stock of Tyler. During 1992, the
Company sold 5% of its equity interest in PTH. In June 1997, the Company, in
connection with a financing transaction effected to provide funds for, among
other things, the acquisition of TEST (the "1997 Financing"), distributed all
the outstanding capital stock of PTH then owned by it to Capricorn I.
In December 1991, Capricorn I loaned the Company approximately $5.0 million
and received in exchange certain subordinated promissory notes. During the
period prior to June 1997, the maturities of these subordinated promissory notes
were extended. In connection with the distribution of the capital stock of PTH
in June 1997, PTH, with the consent of Capricorn I, assumed a portion of the
Company's obligations under these notes. In connection with the 1997 Financing,
the Company refinanced the balance of the subordinated promissory notes by
issuing in exchange therefor $5.1 million in principal amount of a 13%
Subordinated Promissory Note (the "Cap I Note").
During the period from June 1989 through January 1997, the Common Stock
owned by each investor other than Capricorn I was acquired by either Capricorn I
or the Company, with the result that at the end of January 1997 Capricorn I was
the Company's sole stockholder.
During 1996, the Company formed NATCO Holdings, Inc. ("NHI") and
contributed its investment in National Tank Company to NHI. Prior to the
creation of NHI, NATCO-Singapore Pte Ltd. ("NATCO-Singapore") and NATCO-(UK) Ltd
("NATCO-UK") were subsidiaries of NATCO. Subsequent to the formation of NHI,
these entities were no longer subsidiaries of NATCO but were consolidated at the
NHI level. NHI remains wholly-owned by the Company.
The Company in 1996 and 1997 began the termination of the operations of two
of its overseas subsidiaries, NATCO-Singapore and NATCO-UK. These subsidiaries
experienced high overhead costs, insufficient workloads and, in some instances,
significant losses on large projects. The operations of NATCO-Singapore have
been completely terminated. The operations of NATCO-UK have been significantly
reduced, and the Company is continuing to wind down its affairs.
In connection with the 1997 Financing, Capricorn II invested $13.0 million
to acquire $2.4 million in principal amount of a 13% Subordinated Promissory
Note due 2000 (the "Cap II Note" and, together with the Cap I Note, the
"Subordinated Notes") and 2,113,334 shares of Common Stock. The Company used the
proceeds from the sale of these securities, together with borrowings under the
U.S. Credit Facility, to acquire all the outstanding capital stock of TEST. The
Company has consolidated the results of operations of TEST with those of the
Company since the date of acquisition under the purchase method of accounting
for business combinations.
In March 1998, the Company entered into a Securities Exchange Agreement
with Capricorn I and Capricorn II pursuant to which the Company will issue
1,010,333 shares and 468,925 shares of Common Stock to Capricorn I and Capricorn
II, respectively, in exchange for the surrender and cancellation of the
27
<PAGE> 29
Cap I Note and the Cap II Note. This exchange is required to be effected
immediately prior to the commencement of the Offering.
Also in March 1998, the Company entered into the Cynara Acquisition
Agreement pursuant to which Cynara will be merged with and into a subsidiary of
the Company in exchange for cash, the repayment of debt, shares of Common Stock
and a right to receive additional Common Stock under certain circumstances.
Under the Cynara Acquisition Agreement, the Cynara Acquisition is to be effected
concurrently with the closing of the Offering. After the Cynara Acquisition, the
Company will consolidate the results of operations of Cynara with those of the
Company from the date of acquisition under the purchase method of accounting for
business combinations. See "The Cynara Acquisition."
OVERVIEW
The Company is a holding company and substantially all its operations are
conducted through wholly owned subsidiaries, including National Tank Company and
TEST. Products and services provided by the Company in the United States are
classified into three primary categories based on the degree of engineering,
design and customization provided, the size and scope of the project and the
organization used to market its products and services. These categories include
(i) traditional production equipment and services (including the refurbishment
of used equipment), (ii) engineered systems and (iii) instrumentation and
electrical control systems. The Company provides similar equipment and services
in Canada and its other international operations.
Percentage of Completion. Revenues from significant contracts (contracts
greater than $250,000 and longer than four months in duration) and all I&E
contracts and orders are recognized on the percentage of completion method.
Revenues and profits on other sales are recorded as shipments are made. Earned
revenue is based on the percentage that incurred costs to date bear to total
estimated costs. For fixed price engineered systems contracts in the United
States, the Company defers recognition of a portion of the total contract price
until the contract nears completion. If estimated total costs on any contracts
or work-in-process indicate a loss, the entire loss is recognized immediately.
Revenue and earnings to which the percentage of completion method applies are
generally recognized over a period of two to four quarters, and the Company does
not recognize holdback amounts until a project nears completion.
Single Customer. Due to the size of certain projects undertaken by the
Company there may be periods where a substantial portion of the Company's
revenues are derived from a single customer or small group of customers. For the
year ended March 31, 1998, approximately 11.7% of the Company's pro forma
revenues were attributable to sales to BP Exploration (Alaska), Inc. A prolonged
failure of any such customer or customers to fulfill contractual obligations to
the Company or a termination of any such projects could materially adversely
affect the Company's financial condition and results of operations.
Postretirement Benefits. Pursuant to agreements relating to the acquisition
of National Tank Company by the Company in 1989 from Combustion Engineering,
Inc., the Company is required to provide certain health care and life insurance
benefits to employees of National Tank Company who retired prior to June 21,
1989. These agreements provide that the Company's annual cash costs of these
benefits are reimbursed by the seller through June 21, 1999 to the extent they
exceed on an annual basis the lesser of one-third of the cash costs in that year
or $755,000 (as adjusted for inflation). For the fiscal years ended March 31,
1997 and 1998, the Company's aggregate cash costs of these benefits were $1.7
million and $1.7 million, respectively, of which $1.1 million and $1.0 million,
respectively, were reimbursed. Commencing June 22, 1999, the Company will no
longer be reimbursed for any portion of these cash costs. At April 30, 1998,
there were 565 retirees and surviving spouses and 357 dependents covered under
such postretirement benefits obligations. No additional retirees were covered
after June 21, 1989. The benefits provided for retirees and surviving spouses
aged 65 or older are secondary to Medicare.
The Company adopted Financial Accounting Standards Board No. 106,
"Employer's Accounting for Post-Retirement Benefits other than Pensions," and in
1989 recorded as an expense the estimated liability, discounted to present
value, of the unreimbursable cost of these benefits. This liability is evaluated
annually by an actuarial firm for changes in plan experience factors, health
care cost trends and long term interest rates.
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<PAGE> 30
The Company has elected to recognize gains and losses from such evaluations
immediately and reports them separately in its consolidated statements of
operations as gain or loss on revaluation of postretirement employee liability.
The Company reported losses of $2.3 million, $1.5 million and $200,000 for
fiscal 1996, 1997 and 1998, respectively.
Although the Company believes that the actuarial assumptions used in
adjusting the liability are reasonable, there can be no assurance that the costs
of the actual benefits will not exceed those projected or that future actuarial
assessments of the extent of those costs will not exceed or significantly exceed
the current assessment. Under such circumstances, the adjustments required to be
made to the Company's recorded liability for such benefits could have a material
adverse effect on the Company's results of operations and financial condition.
Distribution of PTH. In July 1997, the Company's investment in PTH was
distributed to its stockholders in a tax-free transaction. In accordance with
generally accepted accounting principles, the results of operations of PTH are
accounted for as discontinued operations for all periods presented. Accordingly,
the net income of PTH is excluded from income (loss) from continuing operations
in the Company's income statements for the periods presented. The results of
operations of PTH are presented as income from operations of discontinued
operations and gain on disposal of PTH division in the Company's income
statements for the periods presented. In addition, only the net assets of PTH
are included in the Company's balance sheets and identified as net assets of
discontinued operations for the periods presented.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1996 1997 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................................ $112,724 100.0% $126,657 100.0% $202,023 100.0%
Cost of goods sold...................................... 91,258 81.0 99,984 78.9 160,266 79.3
-------- ----- -------- ----- -------- -----
Gross profit............................................ 21,466 19.0 26,673 21.1 41,757 20.7
Selling, general and administrative expense............. 21,754 19.3 23,292 18.4 29,246 14.5
Restructuring charges................................... 776 0.7 21 -- 282 0.1
Depreciation and amortization expense................... 731 0.7 862 0.7 1,322 0.7
Interest expense........................................ 2,422 2.1 1,861 1.4 2,992 1.5
Interest cost on postretirement benefit liability....... 932 0.8 957 0.8 1,048 0.5
Revaluation (gain) loss on postretirement benefit
liability............................................. 2,273 2.0 1,466 1.2 159 0.1
Interest income......................................... (336) (0.3) (116) (0.1) (140) (0.1)
Gain on investment...................................... (6,320) (5.6) -- -- -- --
-------- ----- -------- ----- -------- -----
Income (loss) from continuing operations before income
taxes................................................. (766) (0.7) (1,670) (1.4) 6,848 3.4
Income tax provision (benefit).......................... (430) (0.4) (363) (0.3) 1,342 0.7
-------- ----- -------- ----- -------- -----
Income (loss) from continuing operations................ (336) (0.3) (1,307) (1.1) 5,506 2.7
Income from discontinued operations, net of income
tax................................................... 811 0.7 1,100 0.9 767 0.4
Gain on disposal of division, net of income tax......... -- -- 4,788 3.8 -- --
-------- ----- -------- ----- -------- -----
Net income.............................................. $ 475 0.4% $ 4,581 3.6% $ 6,273 3.1%
======== ===== ======== ===== ======== =====
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Revenues. Revenues for the fiscal year ended March 31, 1998 increased by
$75.3 million, or 59%, to $202.0 million from $126.7 million for the fiscal year
ended March 31, 1997. Of this increase, $32.7 million was attributable to the
inclusion of the results of TEST in the Company's results for the last nine
months of the fiscal year ended March 31, 1998. The Company had revenues of
$27.7 million from the BP Exploration (Alaska), Inc. alliance project compared
to revenues of only $4.5 million from such alliance for the fiscal year ended
March 31, 1997.
Revenues for U.S. traditional equipment and services for the fiscal year
ended March 31, 1998 increased by $21.6 million, or 36%, to $80.9 million from
$59.3 million for the fiscal year ended March 31, 1997. The increase in revenues
resulted primarily from strong demand in the market for these products and
services.
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<PAGE> 31
Revenue for U.S. engineered systems for the fiscal year ended March 31,
1998 decreased by $10.6 million, or 27%, to $28.7 million from $39.3 million for
the fiscal year ended March 31, 1997. The decrease in revenues resulted
primarily from the postponement of a major project and from the Company's
increased selectivity in the bid process.
Revenues for NATCO Canada, for the fiscal year ended March 31, 1998,
increased by $31.6 million, or 112%, to $59.7 million compared to $28.1 million
for the fiscal year ended March 31, 1997. A significant portion of the increase
in revenues was due to a substantial project for BP Exploration (Alaska), Inc.
Revenues for instrumentation and electrical systems of $32.7 million was
attributable to the inclusion of TEST revenues for the nine months ended March
31, 1998.
Gross profit. Gross profit for the fiscal year ended March 31, 1998,
increased $15.1 million, or 57%, to $41.8 million from $26.7 million for the
fiscal year ended March 31, 1997 primarily due to the increases in revenues
discussed above. As a percentage of revenues, gross profits decreased from 21.1%
for the fiscal year ended March 31, 1997 to 20.7% for the fiscal year ended
March 31, 1998.
Gross profit for U.S. traditional equipment and services, for the fiscal
year ended March 31, 1998, increased $5.1 million, or 33%, to $20.7 million from
$15.6 million for the fiscal year ended March 31, 1997 primarily due to the
increases in revenue discussed above. As a percentage of revenues, gross profit
decreased from 26.4% for the fiscal year ended March 31, 1997 to 25.6% for the
fiscal year ended March 31, 1998, primarily as a result of a shift in the mix of
business, as the volume of higher margin parts business grew less rapidly than
the traditional equipment business.
Gross profit for U.S. engineered systems, for the fiscal year ended March
31, 1998, decreased $1.3 million, or 22%, to $4.5 million from $5.7 million for
the fiscal year ended March 31, 1997, primarily due to the decrease in revenue
discussed above. As a percentage of revenues, gross profit increased from 14.5%
for the fiscal year ended March 31, 1997 to 15.5% for the fiscal year ended
March 31, 1998.
Gross profit for NATCO Canada, for the fiscal year ended March 31, 1998,
increased by $4.5 million, or 80%, to $9.8 million from $5.3 million for the
fiscal year ended March 31, 1997 primarily due to the increase in revenue
discussed above. As a percentage of revenues, gross profit decreased from 19.1%
for the fiscal year ended March 31, 1997 to 16.5% for the fiscal year ended
March 31, 1998, primarily as a result of a lower margin on the BP Exploration
(Alaska), Inc. project.
Gross profit for instrumentation and electrical systems of $7.4 million was
attributable to the inclusion of gross profit for TEST for the nine months ended
March 31, 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $5.9 million, or 26%, to $29.2 million for the
fiscal year ended March 31, 1998 from $23.3 million for the fiscal year ended
March 31, 1997. Of this increase, $4.7 million was attributable to the inclusion
of the results of TEST, and the remainder was primarily attributable to
increased expenses associated with the increase in volume in the Company's
business.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $460,000, or 53%, to $1.3 million for the fiscal year ended
March 31, 1998 from $862,000 for the fiscal year ended March 31, 1997. Of the
$460,000 increase in fiscal 1998, $445,000 related to depreciation and
amortization expense at TEST.
Interest expense. Interest expense increased by $1.1 million, or 60%, to
$3.0 million for the fiscal year ended March 31, 1998 from $1.9 million for the
fiscal year ended March 31, 1997, primarily as a result of increased debt
incurred in connection with the acquisition of TEST.
Interest Cost on Postretirement Benefit Liability. Interest cost on
postretirement benefit liability increased $91,000, or 10%, to $1.0 million for
the fiscal year ended March 31, 1998 from $957,000 for the fiscal year ended
March 31, 1997 due to increased amortization resulting from an upward
revaluation of the postretirement benefit liability based on revised actuarial
assumptions at March 31, 1997.
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<PAGE> 32
Revaluation Loss on Postretirement Benefit Liability. The Company's
revaluation of postretirement benefit liability increased $159,000 for the
fiscal year ended March 31, 1998 from the fiscal year ended March 31, 1997
primarily as a result of a decrease in the discount rate used in the actuarial
calculations.
Income from Continuing Operations. Income from continuing operations
increased $6.8 million to $5.5 million for fiscal year ended March 31, 1998 from
a loss of $1.3 million for the fiscal year ended March 31, 1997, primarily as a
result of increases in gross profit and the inclusion of operations of TEST for
the nine months ended March 31, 1998.
Income from Discontinued Operations. Income from discontinued operations of
$767,000 for the fiscal year ended March 31, 1997 represented income from PTH,
an affiliate of the Company, the stock of which was distributed to the Company's
stockholder in June 1997.
Net Income. Net income increased by $1.7 million, or 37%, to $6.3 million
for the fiscal year ended March 31, 1998 from $4.6 million for the fiscal year
ended March 31, 1997 primarily as a result of the factors discussed above.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Revenues. Revenues increased $13.9 million, or 12%, to $126.7 million for
the fiscal year ended March 31, 1997, from $112.7 million for the fiscal year
ended March 31, 1996 primarily as a result of increased revenues in both the
Company's engineered systems and traditional equipment and services business in
the United States and in its Canadian operations, partially offset by decreases
in revenues by its United Kingdom and Singapore operations that were winding
down their operations.
Revenues for U.S. traditional equipment and services for the fiscal year
ended March 31, 1997 increased by $12.7 million, or 27%, to $59.3 million from
$46.6 million for the fiscal year ended March 31, 1996. The increase in revenues
resulted primarily from strong demand in the market for these products and
services.
Revenue for U.S. engineered systems for the fiscal year ended March 31,
1997 increased by $12.2 million, or 45%, to $39.3 million from $27.0 million for
the fiscal year ended March 31, 1996. The increase in revenues resulted
primarily from work on several large export engineered systems projects.
Revenues for the Company's United Kingdom and Singapore discontinued
engineering offices decreased from $16.6 million for the fiscal year ended March
31, 1996 to zero for the fiscal year ended March 31, 1997. These offices were
closed effective March 31, 1996.
Revenues for NATCO Canada for the fiscal year ended March 31, 1997
increased by $6.3 million, or 29%, to $28.1 million compared to $21.8 million
for the fiscal year ended March 31, 1996. The increase in revenues resulted from
strong demand in the Canadian market for its products and services.
Gross Profit. Gross profit increased $5.2 million, or 24%, to $26.7 million
for the fiscal year ended March 31, 1997 from $21.5 million for the fiscal year
ended March 31, 1996 primarily due to the increases in revenues discussed above.
As a percentage of revenues, gross profit increased from 19.0% for fiscal 1996
to 21.1% for fiscal 1997 primarily as a result of the wind-down of the Company's
unprofitable United Kingdom and Singapore operations in fiscal 1997, offset in
part by lower margins in the Company's engineered systems business in the United
States.
Gross profit for U.S. traditional equipment and services for the fiscal
year ended March 31, 1997 increased $2.3 million, or 17%, to $15.6 million from
$13.3 million for the fiscal year ended March 31, 1996 primarily due to the
increases in revenue discussed above. As a percentage of revenues, gross profit
decreased from 28.5% for the fiscal year ended March 31, 1996 to 26.4% for the
fiscal year ended March 31, 1997, primarily as a result of a shift in the mix of
business, as the higher margin parts business grew less rapidly than the other
components of traditional equipment and services.
Gross profit for U.S. engineered systems for the fiscal year ended March
31, 1997 increased $45,000, or 1%, to $5.7 million. As a percentage of revenues,
gross profit decreased from 21.2% for the fiscal year ended
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<PAGE> 33
March 31, 1996 to 14.5% for the fiscal year ended March 31, 1997. The decline in
gross profit percentage was a result of low margins on several major export
projects.
Gross profit for the Company's discontinued United Kingdom and Singapore
operations was zero for the fiscal year ended March 31, 1997, which was an
improvement over the negative $718,000 gross profit for the fiscal year ended
March 31, 1996.
Gross profit for NATCO Canada for the fiscal year ended March 31, 1997
increased by $1.4 million, or 37%, to $5.4 million from $3.9 million for the
fiscal year ended March 31, 1996 primarily due to the increase in revenue
discussed above. As a percentage of revenues, gross profit increased from 18.0%
for the fiscal year ended March 31, 1996 to 19.1% for the fiscal year ended
March 31, 1997.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $1.5 million, or 7%, to $23.3 million for the
fiscal year ended March 31, 1997 from $21.8 million for the fiscal year ended
March 31, 1996.
Restructuring Charges. Restructuring charges decreased by $755,000, or 97%,
to $21,000 for the fiscal year ended March 31, 1997 from $776,000 for the fiscal
year ended March 31, 1996. Of the $776,000 in fiscal 1996, $500,000 related to
the closing of the Company's Singapore operations and $276,000 related to
recruiting and employee relocation expenses.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $131,000, or 18%, to $862,000 for the fiscal year ended March
31, 1997 from $731,000 for the fiscal year ended March 31, 1996 primarily due to
increased investment in manufacturing facilities.
Interest Expense. Interest expense decreased $561,000, or 23%, to $1.9
million in fiscal 1997 from $2.4 million in fiscal 1996 primarily as a result of
interest savings from the retirement of certain subordinated debt of the
Company.
Revaluation Loss on Postretirement Benefit Liability. The Company's
revaluation loss on postretirement benefit liability increased $1.5 million for
the fiscal year ended March 31, 1997 from the fiscal year ended March 31, 1996
primarily as a result of increases in the level of medical claims used in the
actuarial calculations.
Interest Income. Interest income decreased by $220,000, or 66%, to $116,000
for the year ended March 31, 1997 from $336,000 for the year ended March 31,
1996. The interest income in fiscal 1996 was due primarily to APH debt
obligations to the Company that were retired in fiscal 1996.
Gain on Investment. There was no gain on investment for the year ended
March 31, 1997. For the year ended March 31, 1996, the Company recognized a $6.3
million gain from the sale of its remaining 25% interest in APH, a previously
affiliated company.
Income (Loss) from Continuing Operations. Loss from continuing operations
increased $1.0 million to a loss of $1.3 million for the fiscal year ended March
31, 1997 from a loss of $336,000 for the fiscal year ended March 31, 1996
primarily as a result of $6.3 million of gains in the prior year which did not
recur in the year ended March 31, 1997, partially offset by an increase in gross
profit, as discussed above.
Income from Discontinued Operations. Income from discontinued operations
increased $0.3 million, or 36%, to $1.1 million for the fiscal year ended March
31, 1997 from $811,000 for the fiscal year ended March 31, 1996 primarily due to
a gain on the sale of a division by PTH.
Net Income. Net income increased $4.1 million, or 864%, to $4.6 million for
the fiscal year ended March 31, 1997 from $475,000 for the fiscal year ended
March 31, 1996 primarily as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since the acquisition of National Tank Company, Tyler and API in 1989, the
Company has utilized primarily cash flow from operations, borrowings, capital
contributions by Capricorn I and Capricorn II and
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<PAGE> 34
proceeds from the sale of APH to fund its operations, capital expenditures,
acquisitions and working capital requirements. As of March 31, 1998, the Company
had cash and working capital of $941,000 and $26.2 million, respectively. As of
March 31, 1998, on a pro forma basis, the Company would have had cash and
working capital of $8.0 million and $37.7 million, respectively.
The primary uses of cash by the Company are working capital, capital
expenditures and acquisitions. The Company's cash sources are cash provided by
operations, cash provided by investing activities and cash provided by financing
activities. To the extent that the Company's cash requirements for working
capital, capital expenditures and acquisitions are greater than the amount of
cash provided by operations and investing activities, the Company must finance
its cash requirements, primarily through debt and equity financing activities.
Net cash provided by (used in) operating activities for the fiscal years
ended March 31, 1996, 1997 and 1998 was $(4.4) million, $1.1 million and $1.9
million, respectively.
Net cash provided by (used in) investing activities for fiscal years ended
March 31, 1996, 1997 and 1998 was $9.5 million, $(798,000) and $(24.7) million,
respectively. The increase in fiscal 1996 was due to proceeds from sale of
investments which were $10.3 million. The increase in net cash used in investing
activities during the year ended March 31, 1998 was due to the acquisition of
TEST which required $22.4 million of cash.
Net cash provided by (used in) financing activities was $(7.7) million,
$3.6 million and $22.8 million in fiscal 1996, 1997 and 1998, respectively. The
decreases in net cash used in financing activities during such periods were the
result of decreased repayments of long-term debt. The increase in net cash
provided by financing activities during the year ended March 31, 1998 was due to
the issuance of $10.6 million of Common Stock and net borrowings of $10.3
million to finance the acquisition of TEST.
The Company has three credit facilities, the U.S. Credit Facility, the
Canadian Credit Facility and the EXIM Credit Facility. The U.S. Credit Facility
provides for up to $10.0 million of borrowings under term loans and up to $18.0
million of borrowings under revolving loans, subject to borrowing base
limitations. As of May 31, 1998, the Company had $8.9 million of borrowings
outstanding under the term loans and $14.0 million of borrowings outstanding
under the revolving loans. The term loans under the U.S. Credit Facility mature
in 2002 and the revolving loans mature in 2000. The Canadian Credit Facility
provides for aggregate borrowings of Cdn. $9.0 million, subject to borrowing
base limitations, of which Cdn. $6.7 million was outstanding as of May 31, 1998.
The Canadian Credit Facility is repayable upon demand. The EXIM Credit Facility
provides for aggregate borrowings of $5.0 million, subject to borrowing base
limitations, of which $2.2 million was outstanding as of May 31, 1998. The EXIM
Credit Facility matures on June 30, 1998. See "Description of Bank Credit
Facilities."
All outstanding borrowings under the U.S. Credit Facility, the EXIM Credit
Facility and the Cynara Credit Facility will be repaid from the net proceeds of
the Offering and, after giving effect to the Cynara Acquisition, the Offering
and the use of proceeds thereof, the Company's long-term debt at March 31, 1998
would have been approximately $6.0 million. Approximately $2.4 million of the
proceeds of the Offering will be used to pay deferred compensation to certain
TEST employees and a one-time cash bonus to the Chief Executive Officer of the
Company pursuant to his employment agreement. Such expense will be recognized in
the quarter in which the Offering is consummated. See "Management -- Employment
Agreement."
The Company estimates that cash generated from operations will be
sufficient to meet cash operating requirements in fiscal 1999. The Company's
capital expenditures generally consist of renovations and expansions of its
plants, technological improvements to its management information systems and
acquisitions of, and improvements to, other equipment used in its business. Upon
consummation of the Offering, the Company will have approximately $18.0 million
of credit available under its credit facilities for working capital, capital
expenditures and acquisitions. In addition, on a pro forma basis as of March 31,
1998, the Company will have, after consummation of the sale of Common Stock
offered hereby, approximately $8.0 million in cash and cash equivalents.
Moreover, following consummation of the Offering, the Company will have no
significant scheduled debt repayment obligations in fiscal 1999. Accordingly,
the Company
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believes that its operating cash flow, supported by its borrowing capacity, will
be adequate to fund the Company's investing activities, excluding acquisitions,
throughout fiscal 1999. If the Company should determine to pursue one or more
acquisition opportunities during fiscal 1999, the Company's determination as to
its ability to finance the acquisitions will be a critical element of its
analyses of the opportunities.
The Company is a holding company, the only assets of which are the shares
of capital stock of a subsidiary that, in turn, owns, directly and indirectly,
the capital stock of the operating subsidiaries. As a consequence, the Company,
on a stand-alone basis, is dependent on advances, dividends and distributions
from its subsidiaries to provide the cash necessary to meet its cash
requirements. The primary cash requirements of the Company, on a stand-alone
basis after consummation of the Offering, are expected to be franchise taxes,
financial statement audit expenses, the expenses of compliance with the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and directors' fees and expenses. (Payroll expense and federal
income tax expense are the responsibility of the operating subsidiaries.) The
current Bank Credit Facilities substantially restrict the ability of the
Company's operating subsidiaries to make advances and pay dividends or
distributions to the Company. See Note 11 of Notes to Consolidated Financial
Statements. As indicated above, outstanding borrowings under the U.S. Credit
Facility and the Cynara Credit Facility will be repaid from the net proceeds of
the Offering, and, upon completion of the Offering, the Company would have had,
on a pro forma basis as of March 31, 1998, cash and cash equivalents of
approximately $8.0 million, which management of the Company believes is adequate
to meet the Company's cash requirements for the foreseeable future. In addition,
the Company is currently renegotiating the terms of the U.S. Credit Facility and
the other Bank Credit Facilities for the purpose, among others, of enhancing the
ability of the operating subsidiaries to pay dividends and distributions and
advance funds to the Company to meet its cash requirements.
INFLATION AND CHANGES IN PRICES
The costs of materials (e.g., steel) for the Company's products rise and
fall with their value in the commodity markets. Generally, increases in raw
materials and labor costs are passed on to the Company's customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other financial
statements; the total or other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after December 15, 1997.
The Company will adopt SFAS 130 in the fiscal year ending March 31, 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises are
to report information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosure about products and services, geographic areas and major
customers. SFAS 131 is effective for periods beginning after December 15, 1997.
The Company will adopt SFAS 131 in the fiscal year ending March 31, 1999.
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YEAR 2000 MANAGEMENT INFORMATION SYSTEMS
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and has implemented a
plan to resolve the issue. The Year 2000 issue is a result of computer programs
that have been written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with the upgrades already installed in its existing software, the
Year 2000 problem will not pose significant operational problems for the
Company's computer systems as upgraded. The Company does not currently have any
information concerning the year 2000 compliance status of its customers or
vendors.
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BUSINESS
GENERAL
NATCO is a leading provider of wellhead equipment, systems and services
used in the production of oil and gas. The Company's production equipment and
systems are primarily used at or near the wellhead to separate oil and gas
within a hydrocarbon stream and to remove contaminants from the oil and gas
stream. Separation and decontamination at the wellhead are necessary to meet the
specifications of transporters and end users. The Company's products and
services are used in onshore and offshore fields in most major oil and gas
producing regions in the world. The Company's revenues and Adjusted EBITDA, on a
pro forma basis, were approximately $236.4 million and $20.9 million,
respectively, for the fiscal year ended March 31, 1998. See "Unaudited Condensed
Pro Forma Financial Statements."
The Company designs and manufactures a diverse line of production
equipment, including: (i) separators, which separate a hydrocarbon stream into
oil, gas and water; (ii) dehydration and desalting units, which remove water and
salt from oil and gas; (iii) heaters, which prevent solids from forming in gas
and reduce the viscosity of oil; (iv) gas conditioning units, which remove
carbon dioxide and other contaminants from a gas stream; (v) water filtration
systems, which remove oil and contaminants from water derived from the
production process; and (vi) control systems, which monitor and control
production equipment.
The Company has designed, manufactured and marketed production and
equipment systems for over 70 years and believes that, among its competitors, it
has the largest installed base of production equipment in the industry. The
Company has developed its position as a leading provider of production equipment
and services by maintaining its technological leadership, capitalizing on its
strong brand name recognition and offering a broad range of products and
services. The Company has utilized these strengths to enter into formal and
informal alliances with certain key customers. Revenues from such alliance
customers represented approximately 38% of the Company's revenues for the year
ended March 31, 1998, on a pro forma basis.
The Company offers its products and services either as integrated systems
or individual components. The Company generally categorizes its products and
services based on the degree of engineering, design and customization provided,
the size and scope of the project and the organization used to market such
products and services. These categories include the following:
Traditional Production Equipment and Services. The Company designs,
manufactures, refurbishes, distributes, installs and services a wide variety of
new and used traditional production equipment, such as separators, dehydration
units, heaters, gas conditioning units and water filtration systems. The Company
sells and services both its new and refurbished traditional production equipment
primarily through a network of 33 field offices in the United States and three
in Canada, the largest such network in North America. The refurbishment of used
equipment for resale enables the Company to reduce customers' delivery times and
lower their equipment costs relative to new equipment. The Company maintains a
proprietary database of surplus production equipment in order to respond to
customer requests for refurbished equipment quickly and efficiently.
Engineered Systems. The Company provides turnkey, single source design and
manufacturing of integrated production systems. Engineered systems products are
typically designed and manufactured for large production development projects
throughout the world and include large scale oil and gas processing trains for
offshore platforms and onshore flow stations, floating production systems, oil
treating and desalting facilities and large gas processing facilities. The
Company's engineered systems typically require a significant amount of
technology, engineering, and project management. The Company markets its
engineered systems through direct sales forces based in Houston, Calgary,
London, Tokyo and Caracas, augmented by independent representatives in other
countries.
Instrumentation and Electrical Control Systems. The Company designs,
constructs, installs and services I&E control and safety systems and SCADA
systems under its TEST brand name. Control systems monitor, control and shutdown
equipment on production platforms, compressor stations and other production
facilities.
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SCADA systems provide remote monitoring and control of equipment, production
facilities, pipelines and compressors via wireless communication links. The
Company markets its I&E products through a four branch network primarily in the
Gulf Coast area.
THE INDUSTRY
Demand for oil and gas production equipment and services is driven
primarily by (i) levels of production of oil and gas in response to worldwide
demand, (ii) the discovery of new oil and gas fields, (iii) the changing
production profiles of existing fields (meaning the mix of oil, gas and water in
the hydrocarbon stream and the level of contaminants therein) and (iv) the
quality of new hydrocarbon production. Generally, oil and gas exploration and
production companies tend to reduce exploration activity during periods of weak
oil prices and demand while maintaining production activity. Accordingly, the
Company believes that the production equipment and service industry tends to be
characterized by more stable revenues than those of companies that primarily
provide products and services to the oil and gas exploration industry. The
Company also believes that, at times of stronger oil prices and demand,
companies that primarily provide products and services to the oil and gas
exploration industry realize increases in revenues more quickly than the
production equipment and service industry. The extent to which the revenues of
the production equipment and service industry increase depends upon the success
of the exploration efforts and, in general, lag increased revenues in the
exploration industry. These lag times can be up to several years in offshore
operations but are generally shorter with respect to onshore operations. Over
the last three years, worldwide oil and gas exploration and production
expenditures have increased 14% annually. As a result, the Company believes that
the demand for products and services from the production equipment and service
industry attributable to new field discoveries will increase in the near future.
Changing production profiles in existing fields also increase the demand
for products and services in the production equipment and services industry. As
existing fields are reworked or enhanced recovery methods are employed,
additional and more complex equipment may be required to produce oil and gas
from such fields. This can result from a change in the mix of oil and gas
produced in the field or an increase in contaminants such as water or carbon
dioxide that may occur naturally over time or as a result of enhanced recovery
techniques, such as waterflooding or carbon dioxide injection, that may be
implemented to accelerate production or extend a field's productive life. In
addition, many new oil and gas fields contain lower quality hydrocarbon streams
that require more complex production equipment. Examples include carbon dioxide
rich formations in West Texas and Southeast Asia and heavy crude in Western
Canada and in the Orinoco Delta in Venezuela. The Company believes that these
factors will result in increased demand for surface production equipment,
systems and services.
STRATEGY
The Company's growth in revenue and EBITDA over the four fiscal years ended
March 31, 1998 is principally a result of increasing its market penetration of
the production equipment and services industry. The Company's strategy for
increasing EBITDA and earnings per share in the future is to expand its existing
market position and improve productivity through:
Focusing on Customer Alliances. Exploration and production companies have
reduced production costs and delivery times for oilfield equipment by
establishing alliances with leading oilfield equipment and service suppliers
that can provide a broad range of products and services on a cost effective and
timely basis. The Company has generated substantial revenue growth and expanded
its market position, principally as a result of alliances established with
subsidiaries of major oil companies and large independent producers such as
Amoco Production Company, BP Exploration (Alaska), Inc., Chevron Canada
Resources, Mobil Oil Canada, Sonat Exploration Company and Union Pacific
Resources Group Inc. The Company is actively engaged in discussions with other
potential alliance customers. The Company believes its breadth of products and
services, geographic scope, technological expertise and service orientation
provide it with a competitive advantage in establishing such alliances.
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Providing Turnkey Integrated Systems and Solutions. The Company believes
its turnkey, single source design and manufacturing capabilities enable it to
reduce its customers' production equipment and systems costs and shorten
delivery times. In certain applications, such as skid-mounted gas conditioning
packages for offshore applications, the Company intends to increase the degree
of standardization to reduce engineering costs and shorten delivery times.
Introducing New Technologies and Products. Since its formation, the Company
has developed and acquired leading technologies for the surface production
equipment industry to address the market demand for increasingly sophisticated
production equipment. For example, the Company developed the first high capacity
oil and gas separator and the first emulsion treating system in the industry,
and its electrostatic oil treating technology is the most advanced in the
industry. In addition, the Company developed the industry standard separation
technology on floating production vessels. Further, the Company has recently
developed the EPIC(TM) , a commercial application of electrostatic technology
that can extend production in oil streams that have increasing water content.
Pursuing Complementary Acquisitions. The Company pursues complementary
acquisitions that expand its ability to offer integrated production systems and
leading technologies. The acquisition of Cynara will provide the Company with
bulk carbon dioxide separation technology. Combined with the Company's
experience with lower concentration carbon dioxide removal processes, Cynara's
membrane technology will allow the Company to provide removal solutions for the
entire range of carbon dioxide concentrations. The production equipment industry
is highly fragmented with smaller competitors that have narrow product lines and
geographic scope. The Company believes an industry trend is for customers to
work with vendors, such as the Company, that provide broader product and service
lines and the ability to offer integrated systems. The Company believes that its
size, scope of products and services and, following the Offering, its status as
a public company, provide it with a competitive advantage in making
consolidating acquisitions in the production equipment industry.
Expanding International Presence. The Company has been and intends to
continue expanding its international presence in targeted geographic regions in
which it either has a relationship with a customer or has technology that
provides it with a competitive advantage. Examples include Venezuela and
Kazakhstan, where the Company has existing relationships with customers that are
expanding operations in such regions, and Southeast Asia, where Cynara's
membrane separation technology has applications in carbon dioxide rich fields.
Moreover, the Company is frequently invited to bid on international production
equipment and service projects because of its international reputation and its
large installed base of production equipment. Finally, the Company intends to
continue to expand its international presence through the acquisition of
companies with complementary overseas operations.
Improving Productivity. The Company believes unrealized efficiencies remain
in its operations and intends to increase profitability through implementation
of a strategic business planning process across the Company and total quality
management ("TQM") principles in its United States operations. The Company
implemented TQM principles in its Canadian operations beginning in 1993 and
believes that it is in part responsible for improvements in results of Canadian
operations over the past four years. The Company believes that significant
opportunities for process and productivity improvements across the Company will
be identified and implemented as a result of these efforts.
RECENT ACQUISITIONS
TEST. In June 1997, the Company acquired TEST, a leading provider of I&E
control systems and services, from Weatherford Enterra, Inc. for $19.4 million
in cash. The acquisition of TEST broadened the Company's product line and
increased the Company's ability to provide fully integrated engineered systems.
For the year ended March 31, 1998, TEST had revenues and EBITDA of $44.8 million
and $3.5 million, respectively.
Cynara. In March 1998, the Company entered into a definitive agreement to
acquire Cynara, a leader in the design, construction, installation, operation
and servicing of membrane separation systems that remove carbon dioxide from gas
streams. The Cynara Acquisition will expand the Company's ability to offer
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integrated systems and services and will complement its gas conditioning product
line. Aggregate consideration for the Cynara Acquisition will consist of $7.5
million in cash, 906,667 shares of Common Stock, the repayment of $10.5 million
of Cynara debt and an additional 20.1 shares of Common Stock for each $1,000 of
gross margin generated by projects in Southeast Asia that are awarded to Cynara
over the next two years, up to a maximum of 906,667 additional shares. For the
year ended December 31, 1997, Cynara's revenues and EBITDA were $18.6 million
and $4.4 million, respectively. Proceeds from the Offering will be used, in
part, to fund the cash portion of the purchase price. The closing of the Cynara
Acquisition is contingent upon the contemporaneous closing of the Offering.
PRODUCTS AND SERVICES
TRADITIONAL PRODUCTION EQUIPMENT AND SERVICES
The Company's traditional production equipment and services consist of
production equipment, replacement parts, used equipment refurbishing and the
servicing of such equipment. The Company sells its traditional production
equipment and services primarily onshore in North America and in the Gulf of
Mexico. Traditional production equipment built for the North American oil and
gas industry is typically provided "off the shelf" or in customized variations
of standardized equipment and requires limited engineering. Traditional
production equipment includes:
Separators. Separators are used for the primary separation of a hydrocarbon
stream into oil, water and gas. The Company's separator product line includes:
(i) horizontal separators, which are used in the separation of hydrocarbon
streams with large volumes of gas, liquids or foam; (ii) vertical separators,
which are used in the separation of hydrocarbon streams containing salt or wax;
(iii) filter separators, which are used in the removal of gas stream particles;
(iv) Gasunie(R) Cyclone separators, which are used in high efficiency removal
streams with high gas flow rates; and (v) Thermo Pak(TM) Units, which are used
for the combined heating and separating of production in cold climates.
Oil Dehydration Equipment. Oil dehydrators are used to remove water from
oil. The Company's oil dehydration product line includes: (i) horizontal
PERFORMAX(R) treaters, which separate emulsions using the Company's PERFORMAX(R)
technology by accelerating coalescence so that a smaller vessel is capable of
handling larger volumes; (ii) Dual Polarity(R) electrostatic treaters, which use
a patented method to combine AC and DC electrostatic fields to dehydrate oil
thus enabling higher volumes of crude oil to be processed at lower temperatures;
(iii) vertical treaters, which are primarily used in low volume, high water cut
situations and optimize recovery of condensable, salable hydrocarbons; (iv)
Vertical Flow Horizontal (VFH(TM)) processors, which combine the advantages of
horizontal and vertical vessels to remove gas and water; and (v)
heater-treaters, which use heat to accelerate the dehydration process.
Heaters. Heaters are used to reduce the viscosity of oil to improve flow
rates and to prevent solids from forming in gas. The Company manufactures
indirect fired heaters that heat fluids without direct flame contact as well as
standardized and customized direct fired heaters used in the heating of fluids
and gases for processing. In each system, heat is transferred to the hydrocarbon
stream through media such as water, water/glycol, steam, salt or flue gas. The
Company's heater product line includes: (i) water bath heaters; (ii) propane
vaporizers used to vaporize propane and other liquefied gases; (iii) salt bath
heaters; (iv) steam bath heaters and (v) Controlled Heat Flux Heaters (CHF(TM)),
which use combustion to create a heat transfer medium.
Gas Conditioning Equipment. Gas conditioning equipment removes contaminants
from gas streams. The Company's glycol dehydration equipment removes water vapor
from gas streams. The Company's amine gas treating equipment removes acidic
gases (hydrogen sulfide and carbon dioxide) from gas streams. The Company also
offers batch sweetening equipment for the extraction of hydrogen sulfide.
Gas Processing Equipment. The Company offers standard and custom processing
equipment for the extraction of liquid hydrocarbons to meet feed gas and liquid
product requirements. The Company manufactures several standard mechanical
refrigeration units for the recovery of salable hydrocarbon liquids from gas
streams. The Company's Low Temperature Extractor (LTX(R)) units are mechanical
separation
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systems designed for handling high pressure gas at the wellhead and removing
liquid hydrocarbons more efficiently and economically than other methods.
Water Treatment Equipment. The Company designs and manufactures water
treatment and conditioning equipment for the removal of contaminants from water
extracted in oil and gas production. The Company's PERFORMAX(R) Matrix Plate
Coalescer is used in primary separators of oil and water and final skimming. The
Company's flow splitter removes gases from an oil-water dispersion, separates
oil and water and discharges the oil and/or emulsion through controllable
outlets.
Equipment Refurbishment. The Company sources, refurbishes and integrates
used oil and gas production equipment. The refurbishment of used equipment for
resale enables the Company to reduce delivery times and lower equipment costs
relative to new equipment. The used equipment market is focused primarily in
North America, both onshore and offshore, although the Company has observed a
growing interest internationally.
The Company has entered into agreements with major and large independent
oil companies in both the United States and Canada to evaluate, track and
refurbish used production equipment. In providing such equipment to its
customers, the Company may act as a broker between an oil company and the
customer or may purchase, refurbish and sell used equipment to the customer. The
Company believes it has one of the largest databases in the North American oil
and gas industry of available surplus production equipment, which, when coupled
with its extensive refurbishing facilities and experience, enables the Company
to respond to customer requests for refurbished equipment quickly and
efficiently.
Parts, Service and Training. The Company provides replacement parts for its
own equipment and for equipment manufactured by others. Each branch of the
Company's marketing network also serves as a local parts and service business.
The Company has service employees stationed in certain branches of Wilson Supply
Company and National-Oilwell, Inc. In an effort to expand this area of the
Company's business, the Company has recently added services, including
specialized relief valve repair and glycol dehydrator cleaning. The Company also
offers operational and safety training to the oil and gas production industry.
The Company also uses its training programs to serve as a marketing tool for
other products and services.
The Company markets its traditional production equipment and services
primarily through 33 sales and service centers throughout the United States,
three in Canada and two in Venezuela. The Company has alliances with a number of
companies for traditional production equipment and related services. See
"-- Customers and Alliances."
ENGINEERED SYSTEMS
The Company's engineered systems typically require a significant amount of
technology, engineering and project management. Engineered systems are typically
designed and manufactured for large production development projects throughout
the world such as offshore platforms in the Gulf of Mexico and onshore and
offshore developments in Alaska, Latin America, the Middle East, Africa, and
countries in the former Soviet Union. In connection with the Company's
engineered systems, the Company can provide design, engineering, manufacturing
and start-up services. The Company's engineered systems include:
Integrated Oil and Gas Processing Trains. Integrated oil and gas processing
trains consist of multiple pieces of equipment that process oil and gas from
primary separation through contaminant removal. In providing these systems, the
Company combines the roles of an engineering company and a vessel and structural
fabricator. The Company is one of the few production equipment suppliers that
have this capability. For example, the Company designed, manufactured and
assembled a production module for a production facility for operation off the
coast of West Africa that is capable of processing 20,000 barrels of oil, 4,000
barrels of water and 24 million standard cubic feet of gas per day. Also, the
Company designed, manufactured and is slated to install process systems for BP
Exploration (Alaska), Inc.'s 35,000 barrel per day Badami development on the
North Slope of Alaska and its 65,000 barrel per day Northstar development also
located on the North Slope.
Floating Production Systems. Production equipment used on floating
production systems consists of large packaged skids for various
semi-submersible, converted tanker and other floating production vessels.
Because
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of the wave motion experienced on a floating vessel, successful floating
production requires technology and experience to overcome the detrimental
effects of wave motion. The Company pioneered and patented the first wave-motion
production vessel internal system. The Company continues to advance this
technology at its research and development facility using a wave-motion table
which simulates a variety of sea states.
Dehydration and Desalting Facilities. Dehydration and desalting involves
the removal of water and salt from an oil stream. Desalting is a specialized
form of dehydration where water is injected into the oil stream, salt dissolves
in the water, and then the saltwater is removed. Large projects often use
electrostatic technology to accomplish desalting. The Company believes that it
is the leading developer of electrostatic technologies for oil treating and
desalting. The Company's Electro-Dynamic(TM) Desalter ("EDD") combines NATCO's
Dual-Polarity technology (using both AC and DC fields) with electrostatic mixing
and countercurrent flow technologies allowing for multi-stage desalting within a
single vessel. A large portion of the market for these facilities has
historically been in the Middle East. In addition, NATCO has successfully
marketed and intends to continue to market these facilities to prospective
producers of heavy crude in Venezuela.
The Company's EDD systems also have applications in oil refineries, where
stringent desalting requirements have grown increasingly important. These
requirements have increased as crude quality has declined and catalysts have
become more sensitive and sophisticated, requiring lower levels of contaminants.
The reduced number of vessels employed by an EDD system is particularly
important in refinery applications where space is at a premium. Refinery
retrofits have even stricter space requirements than newly constructed
refineries.
Large Gas Processing Facilities. The Company provides large gas processing
facilities for the separation, heating, dehydration, and removal of gas liquids
and contaminants, such as carbon dioxide and hydrogen sulfide, to produce
pipeline or liquefaction-quality gas. The Cynara Acquisition provides the
Company with technology that complements the Company's gas processing product
line. Cynara's membrane technology for bulk carbon dioxide removal provides the
most cost-effective solution for gas streams which contain more than 20% carbon
dioxide. The primary applications of Cynara's technology occur in fields where
carbon dioxide injection is used to extract oil and gas reserves, such as West
Texas, and where high levels of carbon dioxide are naturally occurring, such as
Southeast Asia. Cynara's membrane technology is well suited to both of these
applications.
Downstream Facilities. The Company possesses several technologies that have
crossover applications in the refinery and petrochemical sectors, most of which
are centered on aspects of oil treating and water treating. In addition to the
Company's EDD applications in the refinery desalter market discussed above, the
Company's DOX(TM)technology, which is primarily used in ethylene quench water
applications, cleans both heavy and light dispersed oil from water. DOX(TM)
units are specified in many ethylene technology providers' process schemes.
The Company markets its engineered systems through direct sales forces
based in Houston, Calgary, London, Tokyo and Caracas, augmented by independent
representatives in other countries. The Company also uses its unique oil testing
capabilities at its research and development facility to market engineered
systems. This capability enables the Company to determine equipment
specifications that best suit customers' requirements. See "-- Technology and
New Products."
INSTRUMENTATION AND ELECTRICAL SYSTEMS
Control Systems. The Company designs, assembles and installs pneumatic,
hydraulic, electrical and computerized control panels and systems. These systems
monitor and change key parameters of oil and gas production systems. Such
parameters include wellhead flow control and emergency shutdown of production
and safety systems. A control system consists of a control panel and related
tubing, wiring and connections.
Engineering and Field Services. The Company provides start-up support,
testing, maintenance, repair, renovation, expansion and upgrade of control
systems including those designed or installed by competitors. The Company's
design and engineering staff also provide contract electrical engineering
services.
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SCADA Systems. SCADA systems provide remote monitoring and control of
equipment, production facilities, pipelines and compressors via radio, cellular
phone, microwave and satellite communication links. The Company's SCADA systems
reduce the number of personnel and frequency of site visits and allow for
continued production during periods of emergency evacuation thereby reducing
operating costs.
The primary market for the Company's I&E systems is in offshore
applications throughout the world. The Company markets and services its I&E
products through a four branch network primarily in the Gulf Coast area.
CUSTOMERS AND ALLIANCES
One of the Company's primary strategies for growth is the further
development of existing customer alliances and the formation of new customer
alliances. The Company currently has alliances with a number of major and
independent oil companies, including Amoco Production Company, BP Exploration
(Alaska), Inc., Chevron Canada Resources, Mobil Oil Canada, Sonat Exploration
Company and Union Pacific Resources Group Inc. The Company also works on an
alliance basis with Halliburton Energy Services and Brown & Root. The Company is
actively engaged in discussions with other potential alliance customers. The
Company's alliance business has accounted for an increasing percentage of the
Company revenues. For the year ended March 31, 1998, alliance customers
accounted for approximately 38% of the Company's pro forma revenues. The
Company's alliances include arrangements such as blanket purchase orders for
specified amounts of standardized equipment, project-specific integrated
alliances and ongoing informal working relationships. As is common in the oil
and gas production industry, many of these alliances are not formal contracts
but represent informal arrangements in which both parties undertake to satisfy
the objectives of the alliance. Although the alliance customers as a group are a
significant contributor to the Company's revenues, no one customer represented
more than 10% of total revenues for any of the Company's last three fiscal
years. Sales to BP Exploration (Alaska), Inc. accounted for approximately 11.7%
of the Company's pro forma revenues for the year ended March 31, 1998. A
customer that accounts for a significant portion of revenues in one fiscal year
may, however, represent a smaller portion of revenues in subsequent years.
TECHNOLOGY AND NEW PRODUCTS
Since its inception, the Company has been a leader in the development of
oil and gas industry production equipment technology. The Company pioneered many
of the original separating technologies for converting unprocessed hydrocarbon
fluids into salable oil and gas. The Company has developed the first high
capacity oil and gas separator, the first emulsion treating system, Dual
Polarity(TM) electrostatic oil treaters, DOX(TM) and OSX(TM) water filtration
systems, high pressure indirect heaters, and PERFORMAX(R) oil and water treating
systems. The Company's wave-motion compensating separator has become the
industry standard for floating production applications, and its electrostatic
oil treating technology is the most advanced in the industry.
As of May 31, 1998, the Company held 56 United States patents and 111
foreign patents and had applications pending for four United States patents and
one foreign patent.
The Company operates its own research and development facility, which is
located in Tulsa, Oklahoma and includes wet and dry laboratories, a hydrocarbon
treatment unit, a wave-motion simulator, a process flow loop and other fluid
analyzers and test equipment. In recent years, the Company has invested in
refurbishing its wave motion simulator, building a new oil flow loop to test
high gas-to-oil ratio coalescers and building pilot units for field testing and
electro-pulse inductive coalescer technology described below. The Company has
also devoted substantial resources to develop improved equipment designs using
flow simulation software.
A recent focus of the Company's research and development has been the
integration of TEST control panels into its heaters. The Cynara Acquisition
provides the Company with membrane technology to complement its engineered
systems product line while allowing the Company to develop new applications of
such technology in other product offerings. Cynara has an active product
development and field testing program which works toward continually improving
the membrane product which is delivered to the customer. Several recent
production improvements include a new membrane wrapping process and the
development of larger membranes to process more gas per installed unit. Cynara
also has agreements to test and apply
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membranes made primarily by Japanese membrane manufacturers for varying process
conditions in oil and gas applications.
The Electro-Pulse Inductive Coalescer (EPIC(TM)), currently being
commercialized by the Company, is a relatively small vessel designed to coalesce
water in a flowing stream of oil. At existing flow stations that are losing
production as water increases, the installation of an EPIC(TM) can extend and
increase production. For new production, EPIC(TM) can reduce equipment size,
weight, and space requirements for primary separation equipment.
The Company recently completed and installed a large EPIC(TM) facility in
the Middle East, the first such project to increase production at a large
gathering facility. The Company is also fabricating a smaller unit to be
installed at a production facility of NAM in the Netherlands. That unit will
eliminate the need for demulsifying chemicals in its application. The Company
also has pilot units which are currently being field tested by other major oil
companies for possible EPIC(TM) applications.
MANUFACTURING
The Company's major manufacturing facilities are located in New Iberia,
Louisiana; Electra, Texas; Pittsburg, California; and Calgary, Alberta. The
Company also manufactures and assembles products in its Houston, Texas; Odessa,
Texas; Harvey, Louisiana; and Lafayette, Louisiana facilities. The Company's
34,700 square foot manufacturing facility in New Iberia fabricates packaged
production systems for delivery throughout the world and can handle large
equipment systems up to 480 tons. The Company upgraded and expanded its New
Iberia facility in 1994. The Company's manufacturing facility in Electra covers
130,000 square feet and produces all types of low and high pressure vessels as
well as skid packages. The Company fabricates the membranes for its membrane
separation equipment at its 8,000 square foot facility in Pittsburg, California.
The facility in Calgary covers 100,500 square feet and specializes in heavy wall
and cold weather packaged equipment and systems primarily for the Canadian
market.
The Company's manufacturing operations are vertically integrated, with
capability for heat treatment, fabrication, inspection, assembly and testing.
This capability provides competitive advantages because the Company is able to
control the quality of its products and the cost and schedule of its
manufacturing.
The Company's New Iberia, Electra and Calgary facilities have been
certified to ISO 9002 standards. ISO 9002 is an internationally recognized
verification system for quality management overseen by the International
Standards Organization based in Geneva, Switzerland. The certification is based
on a review of the Company's programs and procedures designed to maintain and
enhance quality production and is subject to annual review and recertification.
The Company fabricates to the standards of the American Petroleum
Institute, the American Welding Society, the American Society of Mechanical
Engineers and specific customer specifications. The Company uses welding and
fabrication procedures in accordance with the latest technology and industry
requirements. Training programs have been instituted to upgrade skilled
personnel and maintain high quality standards. Management believes that these
programs generally enhance the quality of its products and reduce their repair
rate.
COMPETITION
Production equipment companies servicing the oil and gas industry compete
intensely for available projects. Contracts for the Company's products and
services are generally awarded on a competitive basis. Customers may consider,
among other things, the availability and capabilities of equipment, the
contractor's reputation, experience and safety record. Price and ability to meet
a customer's delivery schedule are the principal factors in determining which
qualified contractor is awarded the job. Historically, the market for oilfield
services and equipment has experienced periods of overcapacity which have
resulted in increased price competition in many areas of the Company's business.
The Company competes with a large number of companies, some of which may offer
different technologies or possess greater financial and other resources than the
Company. In addition, because of subsidies, import duties and fees, taxes
imposed on foreign
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<PAGE> 45
operators and lower wage rates in foreign countries along with fluctuations in
the value of the U.S. dollar and other factors, the Company may not be able to
remain competitive with foreign contractors for projects designed for use in
international locations as well as those designed for use in the Gulf of Mexico.
The Company believes that performance, price and reliability are the prime
competitive factors in the markets in which it competes.
The Company believes that it is one of the largest oil and gas surface
production equipment providers in North America and that its size, research and
development capabilities, brand names and marketing organization provides it
with a competitive advantage over other participants in the industry.
BACKLOG
As of April 30, 1998, the Company had backlog of $40.4 million (exclusive
in both years of orders related to TEST and Cynara). Backlog consists of firm
customer orders for which a purchase order has been received, satisfactory
credit or financing arrangements exist and delivery is scheduled. All projects
currently included in the Company's backlog are subject to change and/or
termination at the option of the customer, either of which could substantially
change the amount of backlog currently reported. In the case of a termination,
the customer is generally required to pay the Company for work performed and
materials purchased through the date of termination, and in some cases, pay the
Company termination fees; however, due to the large dollar amounts of backlog
estimated for each of a small number of projects, amounts included in the
Company's backlog could decrease substantially if one or more of these projects
were to be terminated by the Company's customers.
PROPERTIES
The Company is headquartered in Houston, Texas and has 44 sales and
service, manufacturing and other facilities in the United States, three in
Canada, two in Venezuela, one in England, one in Japan, and one in Kazakhstan.
The Company owns 15 of such facilities, and leases the other 38. Cynara is
headquartered in Houston, Texas and has a sales office in Malaysia and a
manufacturing facility in Pittsburg, California. See "-- Manufacturing" for a
discussion of the Company's manufacturing facilities.
EMPLOYEES
As of April 30, 1998, the Company had approximately 1,348 employees,
including 119 located at the Company's manufacturing facility at Calgary who are
covered by a collective bargaining agreement. The most recent collective
bargaining agreement in Calgary was executed in July 1997 and expires in July
1999. No other employees are covered by collective bargaining agreements. The
Company believes that its relations with employees are satisfactory.
Cynara had 42 employees as of March 31, 1998. No Cynara employees are
represented by labor unions, and Cynara believes that its relations with its
employees are satisfactory.
INSURANCE
The Company's operations are subject to the risks inherent in manufacturing
products and providing services in the oil and gas production industry. These
risks include personal injury and loss of life, business interruptions, loss of
production and property and equipment damage. Damages arising from an occurrence
at a location where the Company's products are used have in the past and may in
the future result in the Company being named as a defendant in lawsuits or other
proceedings asserting potentially large claims. The Company maintains
comprehensive insurance covering its assets and operations, including product
liability and workers' compensation insurance, at levels which management
believes to be appropriate and in accordance with industry practice in each case
subject to deductibles ranging up to $300,000 per occurrence, depending on the
type of coverage. However, no assurance can be given that the Company's
insurance coverage will be adequate in all circumstances or against all hazards,
or that the Company will be able to maintain adequate insurance coverage in the
future at commercially reasonable rates or on acceptable terms.
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<PAGE> 46
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The Company's operations are subject to regulations by federal, state and
local authorities in the United States and regulatory authorities with
jurisdiction over its foreign operations. Environmental laws and regulations
have changed substantially and rapidly over the last 20 years, placing more
restrictions and limitations on activities that may impact the environment, such
as emissions of pollutants, generation and disposal of wastes and use and
handling of chemical substances. Violation of such laws and regulations may
result in civil and criminal actions. Although compliance with various
governmental laws and regulations has not materially and adversely affected the
Company's financial condition or results of operations, no assurance can be
given that compliance with such laws or regulations will not have a material
adverse impact on the Company's business in the future.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the manufacture and
storage of products and equipment containing or requiring oil and/or hazardous
substances. Although the Company has utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons or wastes may have
been disposed of or released on or under the properties owned, leased or
operated by the Company or on or under other locations where such hydrocarbons
or wastes have been taken for disposal. In addition, many of these properties
have been operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under the Company's control. These
properties and the hydrocarbons or wastes disposed thereon may be subject to the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act and analogous state laws. Under such
laws, the Company would be required to remove or remediate previously disposed
wastes (including wastes disposed of or released by prior owners or operators),
property contamination (including groundwater contamination) or to perform
remedial operations to prevent future contamination.
CERCLA imposes liability, without regard to fault or the legality of the
original conduct, on certain classes of persons with respect to the release of a
hazardous substance into the environment. These persons include the owner and
operator of the disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substances found at
such site. Persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.
Although the Company believes that it is in substantial compliance with
existing laws and regulations, there can be no assurance that substantial costs
for compliance will not be incurred in the future. Moreover, it is possible that
other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could result in additional, presently
unquantifiable costs or liabilities to the Company.
On January 9, 1998, the Company received a citation and notification of
penalty from the Occupational Safety and Health Administration ("OSHA"), in
which OSHA levied a fine of approximately $260,000 against the Company following
injuries sustained by two employees for safety violations. The Company is
currently appealing the fine and believes it will be reduced. The Company
believes its safety program and record are generally exemplary by industry
standards and continues to emphasize safety and health training and prevention
at all Company facilities. There can be no assurance, however, that OSHA fines
would not be levied against the Company again in the future if additional safety
violations occur.
LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings primarily
involving commercial claims, products liability claims, asbestos related
personal injury claims and workers' compensation claims. While the outcome of
these lawsuits, legal proceedings and claims cannot be predicted with certainty,
management believes that the outcome of all such proceedings, even if determined
adversely, would not have a material adverse effect on the Company's business or
financial condition.
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THE CYNARA ACQUISITION
On March 16, 1998, the Company entered into an agreement and plan of merger
with Cynara and its stockholders for the acquisition by the Company of all of
the outstanding shares of common stock of Cynara (the "Cynara Acquisition
Agreement"). Aggregate consideration payable to the stockholders of Cynara for
the Cynara Acquisition will consist of $7.5 million in cash, the repayment of
$10.5 million of Cynara debt, and the issuance of 906,667 shares of Common
Stock, subject to adjustment as more fully described below. The Company will
issue an additional 20.1 shares of Common Stock (the "Additional Shares") for
each $1,000 of gross margin generated by projects in Southeast Asia that are
awarded to Cynara prior to March 31, 2000, up to a maximum of 906,667 shares of
Common Stock. At certain times on or prior to June 30, 2000, stockholders of
Cynara would receive up to 90% of the Additional Shares to be issued based on
the Company's estimate of gross margin expected to be generated by such projects
(which shares will be credited against any later obligations to issue Additional
Shares). Pursuant to the Cynara Acquisition Agreement, the stockholders of
Cynara have agreed to indemnify the Company, on a several basis, for breaches of
their representations in such agreement up to an aggregate of $2.5 million for a
period of one year from the date of the Cynara Acquisition.
The liabilities of Cynara include its obligations under the Cynara Credit
Facility which at May 31, 1998 approximated $10.5 million. Cynara's obligations
under the Cynara Credit Facility will be paid out of the net proceeds from the
sale of the Common Stock offered hereby. See "Use of Proceeds."
For information regarding a registration rights agreement between the
Company and the stockholders of Cynara, see "Certain Transactions -- Securities
Transactions."
The closing of the Cynara Acquisition will occur concurrently with, and is
conditioned upon the completion of, the Offering. As of the date of this
Prospectus, all the conditions to consummation of the Cynara Acquisition, other
than the condition relating to consummation of the sale of the Common Stock
offered hereby, have been fulfilled.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of the current
directors and executive officers of the Company. The Board of Directors is
divided into three classes. See "-- Classified Board."
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Nathaniel A. Gregory(1)................... 49 Chairman of the Board and Chief
Executive Officer
Patrick M. McCarthy(1).................... 52 President and Director
William B. Wiener III..................... 46 Senior Vice President and Chief
Financial Officer
Frank Smith............................... 46 President of NATCO -- U.S.
James Crittall............................ 53 President of NATCO Canada, Ltd.
David Volz................................ 44 President of TEST
Richard D. Peters......................... 38 President of Cynara
Herbert S. Winokur, Jr.(1)(2)............. 54 Director
E. Hale Staley............................ 68 Director
Howard I. Bull(2)......................... 57 Director
Keith K. Allan(3)......................... 57 Director
George K. Hickox, Jr.(3)(4)............... 39 Director
</TABLE>
- ------------------------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Election as director effective upon the consummation of the Offering.
Set forth below is a brief description of the business experience of the
directors and executive officers of the Company.
Nathaniel A. Gregory has served as Chairman of the Board and Chief
Executive Officer of the Company since April 1, 1993. Prior to joining the
Company, Mr. Gregory held a number of positions in both the engineering and
construction industries and in investment banking. Mr. Gregory also serves as a
director of Marine Drilling Companies, Inc., an offshore drilling contractor,
and Mrs. Fields' Original Cookies, Inc.
Patrick M. McCarthy has served as President and a Director of the Company
since December 1997 and February 1998, respectively. Mr. McCarthy served as
Executive Vice President, with marketing and operations responsibilities for the
entire Company, from November 1996 to December 1997 and as Senior Vice
President -- Marketing from June 1994 to November 1996. Prior to joining the
Company in June 1994, Mr. McCarthy was Vice President -- Worldwide Oil and Gas
at ABB Lummus Crest, an engineering and construction company, from October 1991
to May 1994.
William B. Wiener III has served as Senior Vice President and Chief
Financial Officer of the Company since September 1993. Prior to joining the
Company, Mr. Wiener spent fifteen years with First City Bancorporation, a bank
holding company, in Houston, Texas, most recently as Executive Vice President
and Senior Credit Officer.
Frank Smith has served as President of NATCO -- U.S. since January 1998.
Mr. Smith served as Senior Vice President -- Sales and Service from September
1993 to December 1997 and as the Northern Region Director of the Sales and
Service Centers from April 1992 to September 1993.
James Crittall has served as President of NATCO Canada, Ltd. since November
1996 and was Vice President of Technical Operations from December 1992 to
October 1996. Mr. Crittall joined the Company's predecessor in 1971 and has
served in several managerial positions, including Manager of Engineering and
Sales and Manager of Engineering for NATCO Canada, Ltd.
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<PAGE> 49
David Volz has served as President of TEST since its acquisition by the
Company. Mr. Volz joined TEST in 1976 as a Technical Specialist and has held a
number of positions of increasing responsibility prior to serving as President
in July 1997.
Richard D. Peters has served as President of Cynara since November 1997.
Mr. Peters served as Chief Financial Officer of Cynara from June 1996 to October
1997 and as Project Manager and Accounting Coordinator from February 1991 to May
1996.
Herbert S. Winokur, Jr. has been a director of the Company since its
formation in 1989. Mr. Winokur has been the Managing General Partner of
Capricorn I and Capricorn II since he founded such entities in 1987 and 1994,
respectively. Prior thereto, he held a number of positions at Penn Central
Corporation, including Senior Executive Vice President and Member of the Office
of the President and Director, and has held senior management positions at
Pacific Holding Corporation and The Palmieri Company. Mr. Winokur also serves as
a director of Enron Corp., DynCorp, The WMF Group, Ltd., NacRe Corp. and Mrs.
Fields' Original Cookies, Inc.
E. Hale Staley has been a director of the Company since February 1998 and a
director of the Company's principal operating subsidiary since June 1989. He has
served as a consultant to the Company since August 1995. Mr. Staley joined the
Company's predecessor in 1952 and served as President and Chief Executive
Officer from July 1985 to July 1995.
Howard I. Bull has been a director of the Company since February 1998. From
April 1994 to June 1997, Mr. Bull was President, Chief Executive Officer and a
director of Dal-Tile International, Inc., a manufacturer and distributor of
ceramic tile. From May 1992 to February 1993, Mr. Bull was President of the Air
Conditioning Group of York International Corporation, a producer of heating, air
conditioning and refrigeration systems and equipment, and was President of its
Applied Systems Division from November 1990 to May 1992. From February 1979 to
November 1990, Mr. Bull was employed by Baker Hughes, Inc. in several executive
positions. Mr. Bull is a director of Marine Drilling Companies, Inc. and
National-Oilwell, Inc.
Keith K. Allan has been a director of the Company since February 1998. Mr.
Allan was a director of NATCO (U.K.) Ltd. from October 1996 to January 1998.
From February 1993 to August 1996, Mr. Allan was Technical Director in the North
Sea for Shell U.K. Exploration and Production. Prior thereto, Mr. Allan served
in a number of positions for Royal Dutch/Shell Group, which he joined in 1965.
George K. Hickox, Jr. will become a director of the Company upon
consummation of the Cynara Acquisition. Since September 1991, Mr. Hickox has
served as a general partner of Heller Hickox Dimeling Schreiber and Park, a
partnership specializing in energy investments. Mr. Hickox has also served as a
director of Cynara prior to its acquisition by the Company. Mr. Hickox presently
serves as an officer and director of several privately held companies.
CLASSIFIED BOARD
The Board of Directors is divided into three classes of directors, with
directors serving staggered three-year terms which initially expire at the
annual meetings of stockholders following fiscal year 1999 (Class I), fiscal
year 2000 (Class II) and fiscal year 2001 (Class III). At each annual meeting of
stockholders, one class of directors will be elected for a full term of three
years to succeed that class of directors whose terms are expiring. The current
classification of directors is as follows: Class I -- Messrs. McCarthy and
Staley; Class II -- Messrs. Allan, Bull and, upon election, Mr. Hickox; and
Class III -- Messrs. Gregory and Winokur.
STOCKHOLDERS' AGREEMENT
The Company, Capricorn I and Capricorn II are parties to a Stockholders'
Agreement dated , 1998 (the "Stockholders' Agreement"). Pursuant to the
Stockholders' Agreement, the Company has agreed that, so long as Capricorn I and
Capricorn II together own 20% or more of the outstanding Common Stock, the
Company will nominate the individuals designated by Capricorn I and Capricorn II
for election as the Class III directors when such class stands for election. If
such class should be enlarged, the Company will be
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<PAGE> 50
obligated to nominate only the two individuals so designated. If it should be
reduced to one, the Company's obligation will be to nominate one individual so
designated as a Class III director and one as a Class II director. If a vacancy
should arise in the Class III directors during the term thereof, the Company has
agreed to elect an individual designated by Capricorn I and Capricorn II to fill
the vacancy.
COMMITTEES
The Company's Board of Directors recently established an audit committee
(the "Audit Committee") consisting of Messrs. Allan and Hickox, each of whom is
a non-employee director. The Audit Committee, which is chaired by Mr. Allan,
will meet separately with representatives of the Company's independent auditors
and with representatives of senior management in performing its functions. The
Audit Committee will review the general scope of audit coverages, the fees
charged by the independent auditors, matters relating to the Company's internal
control systems and other matters related to audit functions.
The Company's Board of Directors recently established a compensation
committee (the "Compensation Committee") consisting of Messrs. Bull and Winokur,
each of whom is a non-employee director. The Compensation Committee, which is
chaired by Mr. Winokur, administers the Company's stock option plans, and in
this capacity will make all option grants or awards to Company employees,
including executive officers, under the plans. In addition, the Compensation
Committee will be responsible for making recommendations to the Board of
Directors with respect to the compensation of the Company's Chief Executive
Officer and its other executive officers, and will be responsible for the
establishment of policies dealing with various compensation and employee benefit
matters for the Company.
The Company's Board of Directors recently established an executive and
nominating committee (the "Executive Committee") consisting of Messrs. Gregory,
McCarthy and Winokur. The Executive Committee, which is chaired by Mr. Gregory,
is authorized to exercise the powers of the Board of Directors during the
intervals between the meetings of the Board of Directors and may from time to
time be delegated certain authority in matters pertaining to the Company. The
Executive Committee also reviews the qualifications of potential candidates for
the Board of Directors, evaluates the performance of incumbent directors and
recommends to the Board nominees to be elected at the annual meeting of
stockholders. For information concerning the agreement of the Company to
nominate two individuals for director as designated by Capricorn I and Capricorn
II, see "-- Stockholders' Agreement."
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal year ended March
31, 1998 (except as indicated) with respect to the Chief Executive Officer of
the Company and each of the four other most highly compensated executive
officers of the Company (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING STOCK ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#)(1) COMPENSATION
<S> <C> <C> <C> <C>
Nathaniel A. Gregory..................... $350,000 $152,125(2) -- $9,375(3)
Chairman and Chief Executive Officer
Patrick M. McCarthy...................... 215,004 102,540 --(4) 9,375(3)
President and Director
William B. Wiener III.................... 148,407 58,080 -- 9,375(3)
Senior Vice President and Chief
Financial Officer
Frank Smith.............................. 132,502 52,760 33,334 9,375(3)
President of NATCO -- U.S.
David Volz(5)............................ 107,385 95,959 66,667 6,286(6)
President of TEST
</TABLE>
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<PAGE> 51
- ------------------------------
(1) Excludes options awarded during fiscal 1997 as result of conversion of SARs
granted in previous periods or, in the case of Mr. Gregory, pursuant to
prior option grants. See "-- Individual Employee Stock Options" and
"-- Stock Option Grants." For information concerning the aggregate holdings
of stock options by the Named Executive Officers, see "-- Stock Option
Grants."
(2) See "-- Employment Agreement" for the terms of an additional bonus to be
paid in connection with the consummation of the Offering.
(3) Includes contractual and discretionary contributions by the Company to the
Named Executive Officer's 401(k) plan account.
(4) Excludes an option to purchase 16,667 shares of Common Stock at the initial
public offering price granted to Mr. McCarthy effective upon consummation of
the Offering.
(5) Compensation information relating to Mr. Volz is provided for TEST's fiscal
year ended December 31, 1997.
(6) Includes matching contributions by TEST to Mr. Volz's 401(k) plan account.
EMPLOYMENT AGREEMENT
The Company and Mr. Gregory are parties to an employment agreement dated
March 15, 1994 pursuant to which Mr. Gregory serves as Chairman and Chief
Executive Officer of the Company. As amended in July 1997 (as amended, the
"Employment Agreement"), the Employment Agreement provides for the employment of
Mr. Gregory as Chairman and Chief Executive Officer of the Company through July
1998. Thereafter, the Employment Agreement will be annually renewed for one year
unless terminated by the Company or Mr. Gregory. The Employment Agreement
provides for an annual base salary in the amount of $350,000, an annual bonus
with a target award of 60% of Mr. Gregory's base salary based on targeted
performance criteria and additional discretionary bonuses as may be determined
by the Board of Directors.
In addition to Mr. Gregory's base salary and bonuses, the Employment
Agreement entitles Mr. Gregory to an additional bonus upon the occurrence of any
sale or public offering of the Company. Such bonus will equal one and one-half
percent (1.5%) of the value of all securities owned by stockholders of the
Company prior to the sale or offering, including Common Stock valued at the
price per share received in either the sale or public offering, and any debt
held by such stockholders. This Offering constitutes a sale or public offering
that triggers the bonus payment under the Employment Agreement. Based on an
assumed initial public offering price of $ , the amount of Mr.
Gregory's bonus is estimated to be .
For information regarding a stock option agreement between the Company and
Mr. Gregory executed at the time of original execution of the Employment
Agreement, see "-- Individual Employee Stock Options."
If the Company terminates Mr. Gregory's employment for any reason other
than just cause, Mr. Gregory is entitled to severance pay in accordance with any
severance plan or policy that the Company then has in effect. If Mr. Gregory
terminates the Employment Agreement for any reason, other than by reason of a
material breach of the Employment Agreement by the Company, Mr. Gregory will not
be entitled to receive any bonus compensation or severance pay, and the Company
shall have no further obligations or responsibilities other than base salary
amounts earned but not yet paid.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive a retainer or
fees for service on the Board of Directors or any committees thereof. The
Company recently began compensating non-employee members of the Board of
Directors for their service as directors of the Company. Directors who are not
employees of the Company receive a quarterly fee of $6,500 and a fee of $500 for
attendance at each meeting of the Board of Directors. In addition, pursuant to
the 1998 Director Stock Option Plan, following completion of the Offering, each
non-employee director who is reelected as a director after completing at least
one year of service as a director will receive, on the date of reelection, a
Plan Stock Option to purchase 2,667 shares of the Company's
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<PAGE> 52
Common Stock at the current market price on the date of grant. See "-- Stock
Option Plans." Certain non-employee directors have also been awarded initial
stock options, which vest over a period of two and one-half years, to purchase
6,667 shares of the Company's Common Stock at a price of $8.81 per share.
Directors of the Company are reimbursed for reasonable out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof
and for other expenses reasonably incurred in their capacity as directors of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, the Company did not have a compensation committee of
its Board of Directors. As a result, each of the Company's directors, including
Mr. Gregory, Chairman of the Board and Chief Executive Officer of the Company,
participated in deliberations of the Company's Board of Directors with respect
to the compensation of executive officers. The Board of Directors recently
established a Compensation Committee consisting of Messrs. Bull and Winokur. See
"-- Committees."
INDIVIDUAL EMPLOYEE STOCK OPTIONS
Beginning in June 1989, the Company issued stock appreciation rights to
certain of its employees pursuant to a stock appreciation rights plan, which was
amended in 1994. In June 1997, the Company terminated such plan and converted
all outstanding stock appreciation rights into Individual Employee Stock Options
to purchase Common Stock on terms consistent with those of the previously
outstanding stock appreciation rights. The Company entered into stock option
agreements ("Stock Option Agreements") with the executive officers and key
employees who were granted Individual Employee Stock Options in June 1997 and
whose stock appreciation rights have been converted into Individual Employee
Stock Options.
The Stock Option Agreements provide for vesting of Individual Employee
Stock Options ratably over three or four years, except as provided below with
respect to Individual Employee Stock Options granted to Mr. Gregory. Individual
Employee Stock Options become fully vested in certain circumstances upon a sale
of the Company and upon the death or disability of the recipient while employed
by the Company. Individual Employee Stock Options terminate upon the earliest to
occur of (i) the termination of employment with the Company for cause; (ii)
thirty days after termination of employment with the Company for any reason
other than cause; (iii) thirty days after an alteration of employment; or (iv)
the expiration of the option period provided in each Stock Option Agreement
(either December 21, 2001, April 15, 2003 or January 1, 2005). The Company is
obligated to purchase vested options under certain circumstances and according
to procedures set forth in the Stock Option Agreements. Individual Employee
Stock Options are not transferable and may be exercised only by the recipient or
his estate. The shares of Common Stock subject to the Stock Option Agreements
and the exercise prices therefor are subject to adjustment in certain events.
See "Certain Transactions."
The Stock Option Agreement between the Company and Mr. Gregory supersedes
options granted to him in March 1994 and July 1996. Mr. Gregory's Stock Option
Agreement provides that all options granted to him, including his Individual
Employee Stock Options, are fully vested and exercisable at the time of grant.
Mr. Gregory's Individual Employee Stock Options terminate upon the earliest to
occur of (i) the termination of his employment with the Company for cause, (ii)
one year after the termination of his employment due to death or disability,
(iii) in certain circumstances, the sale of all of the outstanding Common Stock
and (iv) the expiration of the various seven year option periods provided in his
Stock Option Agreement. Mr. Gregory's Individual Employee Stock Options are
subject to adjustments for stock dividends, stock splits, stock combinations or
other recapitalizations and for the dilutive effect of the issuance of Common
Stock and certain equivalent securities below market value.
As of May 31, 1998, Individual Employee Stock Options have been granted
under the Stock Option Agreements with respect to a total of 1,541,781 shares of
Common Stock, of which 895,559 are exercisable at $1.47 per share, 50,001 are
exercisable at $2.22 per share, 185,186 are exercisable at $3.58 per share and
411,035 are exercisable at $5.03 per share.
51
<PAGE> 53
STOCK OPTION PLANS
1998 Director Plan. The Company adopted the Directors Compensation Plan
(the "1998 Director Plan") in February 1998. The 1998 Director Plan provides for
both the award of stock options to and compensation of non-employee directors of
the Company. See "-- Compensation of Directors." The 1998 Director Plan provides
for both discretionary option and formula option grants and is administered by
the Board of Directors of the Company, which may delegate all of its power of
administration, with the exception of the power to authorize issuance of
options. No director may vote or decide upon any matter relating solely to such
director under the 1998 Director Plan, nor may any director vote in any case in
which the director's individual right to claim any benefit under the 1998
Director Plan is particularly involved.
The maximum number of shares issuable under the 1998 Director Plan is
60,000. Options granted under the 1998 Director Plan will have a term of 10
years and will be subject to earlier termination if the optionee's membership on
the Board of Directors terminates for cause. If the optionee's membership on the
Board of Directors is terminated for any reason other than cause, options may be
exercised for up to three years from the date of such termination, but only as
to the number of shares such optionee could have purchased on the date of
termination from the Board of Directors. Discretionary option grants will be
exercisable as determined by the Board of Directors, and formula option grants
will be fully exercisable on the first anniversary of the date of grant. The
exercise price of an option shall be the price determined by the Board of
Directors in the case of discretionary option grants, and the fair market value
in the case of formula option grants.
The 1998 Director Plan contains provisions whereby the Board of Directors
may make adjustments in the number of shares to be acquired upon exercise of
options in the event of a stock split, combination or stock dividend.
The 1998 Director Plan may be amended or terminated at any time by the
Board of Directors. Such amendment or termination will not impair the rights of
a non-employee director with respect to options previously granted to such
non-employee director or affect options previously granted and outstanding under
the 1998 Director Stock Option Plan.
As of May 31, 1998, options have been granted under the 1998 Director Plan
with respect to a total of 13,334 shares of Common Stock, all of which are
exercisable at $8.81 per share. All of the currently outstanding options vest
quarterly over a period of 2 1/2 years. No stock appreciation rights have been
granted under the 1998 Director Plan.
1998 Employee Plan. The Company adopted the Employee Stock Incentive Plan
(the "1998 Employee Plan") in February 1998. The purpose of the 1998 Employee
Plan is to attract qualified consultants, advisors and employees and to give
certain individuals and key employees of the Company who are responsible for its
administration and management a proprietary interest in the Company, thereby
strengthening their concern for its welfare and providing them with additional
incentive and reward opportunities. The maximum number of shares issuable under
the 1998 Employee Plan is 700,000, subject to adjustment in certain events. The
maximum number of shares and options to purchase shares issuable to an
individual in a single year under the 1998 Employee Plan is 100,000.
The 1998 Employee Plan provides for the award of "incentive stock options"
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), non-qualified stock options (options that do not qualify
under section 422 of the Code), restricted stock awards and stock appreciation
rights, or any combination of the foregoing. Awards may be granted only to
employees, advisors and consultants of the Company or any parent or subsidiary
corporation. The 1998 Employee Plan is administered by the Compensation
Committee of the Board of Directors of the Company. The Compensation Committee
has the authority, in its discretion, to determine which employees, consultants
or advisors shall receive an option, stock appreciation right or restricted
stock award (collectively, "Awards"), the time or times when such Awards shall
be made, what type of Award shall be granted, the number of shares subject to
each such Award and the vesting conditions of each such Award.
To the extent that the fair market value of Common Stock underlying
incentive stock options exceeds $100,000, such incentive stock options shall be
treated as non-qualified stock options. No incentive stock
52
<PAGE> 54
option shall be granted to an individual if, at the time of grant, the
individual owns stock possessing more than 10% of the total combined voting
power of all classes of the Company's capital stock, subject to certain
exceptions. The exercise price per share of Common Stock under each option is
determined by the Compensation Committee; provided, however, that such exercise
price shall not be less than the fair market value of a share of Common Stock on
the date the option is granted.
Stock appreciation rights may be granted either in conjunction with an
option grant or independently of any option grant. The terms of each stock
appreciation right are determined by the Compensation Committee, provided that
the exercise price shall not be less than the fair market value of a share of
Common Stock on the date the stock appreciation right is granted.
The 1998 Employee Stock Option Plan provides that, in the event of a
corporate change (as defined in the 1998 Employee Stock Option Plan, generally
to include certain mergers, dispositions of all or substantially all of the
Company's assets, liquidation and dissolution, the acquisition by a person or
group of more than 20% of the voting power of the outstanding capital stock of
the Company or a change in the majority of directors of the Company as a result
of a contested election of directors), the Compensation Committee may, in its
discretion, accelerate the vesting of outstanding options, require the surrender
of outstanding options in exchange for a cash payment based on a formula
specified in the 1998 Employee Stock Option Plan, make adjustments to
outstanding options to reflect such corporate change or provide that such
outstanding options will cover securities or property that the optionee would
have received in a corporate change if the optionee were then the holder of the
Common Stock covered by the option. The Compensation Committee may also fully
vest any or all Common Stock awarded to the holder pursuant to a restricted
stock award.
The Board of Directors may terminate or amend the 1998 Employee Plan at any
time, provided that no change in any Award previously granted may be made that
would materially impair the rights of a holder of such Award. Further, the Board
of Directors may not, without stockholder approval, amend the 1998 Employee Plan
to increase the maximum aggregate number of shares that may be issued under the
1998 Employee Plan or change the class of individuals eligible to receive Awards
under the 1998 Employee Plan.
Subsequent to March 31, 1998, the Company reserved for issuance 200,000
shares of Common Stock for the exercise of stock options under the Company's
stock option plans to be granted effective upon consummation of the Offering
exercisable at the initial public offering price per share, including a Plan
Stock Option with respect to 16,667 shares to Mr. McCarthy. See "-- Stock Option
Grant."
CHANGE OF CONTROL AND SEVERANCE PLAN
The executive officers of the Company have entered into change of control
agreements with the Company that provide for the payment of 150% of base salary
(200% in the case of Mr. McCarthy) plus accrued bonuses upon a change of control
of the Company. A change of control means the acquisition by any party unrelated
to Capricorn I or Capricorn II of 80% or more of the outstanding Common Stock of
the Company or securities which may be converted to Common Stock or assets of
the Company. A change of control is deemed not to have occurred if any surviving
corporation in the case of a merger, or any purchasing corporation in the case
of a sale of all the assets of the Company, agrees to employ the executive
officers of the Company on terms substantially similar to the terms of each
executive officer's employment with the Company prior to such change of control.
Senior executive officers participate in an executive severance policy (the
"Executive Severance Plan") adopted by the Company in September 1990. The
purpose of the plan is to provide severance pay in the event of an executive's
involuntary termination from the Company. The Executive Severance Plan covers
all senior executives of the Company and does not apply to voluntary
separations, such as resignation or retirement, or separations for cause, sale
of the Company or the death of the employee. Under the Executive Severance Plan,
upon involuntary termination of employment, senior executives receive severance
pay in an amount equal to one month's pay for each $10,000 of base salary, up to
a maximum of twelve months' pay. Senior executives also receive earned vacation
pay at the time of involuntarily termination.
53
<PAGE> 55
DEFERRED COMPENSATION PLAN
TEST adopted a deferred compensation plan (the "TEST Plan") effective July
1, 1995 to provide incentives and rewards to certain individuals. Awards are
payable in five equal annual installments plus any earnings that have been
allocated to a participant's account. The Company has elected not to make any
additional awards for the plan year beginning January 1, 1998. The Company
intends to terminate the TEST Plan upon consummation of the Offering and to pay
out all accrued amounts to each participant. As of May 31, 1998, the total
amount owed under the TEST Plan was $694,221. This balance presently accrues
earnings at the prime rate plus 1%.
STOCK OPTION GRANTS
The following table contains certain information concerning stock options
granted to the Named Executive Officers under individual Stock Option Agreements
and under the Company's Stock Option Plans as of March 31, 1998. No stock
options have been exercised as of May 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- ------------------------------------------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED EXERCISE
OPTIONS TO PRICE PER
NAME GRANTED(#) EMPLOYEES SHARE EXPIRATION DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Nathaniel A. Gregory....... 555,555 36.0% $1.47 July 31, 2003 $474,202 $1,181,799
185,186 12.0% $3.58 July 31, 2003 269,894 628,967
164,363 10.7% $5.03 July 31, 2004 341,396 797,720
Patrick M. McCarthy(1)..... 133,334 8.6% $1.47 December 21, 2001 86,687 205,047
William B. Wiener III...... 66,667 4.3% $1.47 December 21, 2001 43,343 102,324
Frank Smith................ 33,334 2.2% $1.47 December 21, 2001 21,672 51,263
33,334 2.2% $5.03 January 1, 2005 74,157 175,408
David Volz................. 66,667 4.3% $5.03 January 1, 2005 148,311 350,812
</TABLE>
- ------------------------------
(1) Excludes an option to purchase 16,667 shares of Common Stock at the initial
offering price granted to Mr. McCarthy effective upon consummation of the
Offering.
54
<PAGE> 56
CERTAIN TRANSACTIONS
SECURITIES TRANSACTIONS
In 1988, the Company was incorporated by Capricorn I for the purpose of
acquiring in June 1989 National Tank Company, now the Company's principal
subsidiary, from Combustion Engineering, Inc. Capricorn I led a group of
investors that acquired all the capital stock of the Company at the time. In
December 1991, Capricorn I loaned the Company approximately $5.0 million and
received in exchange $5.0 million in principal amount of 11% subordinated notes.
During the period prior to June 1997, accrued interest was added to principal,
the maturity dates of these notes were extended to 2000 and $4.6 million in
principal amount thereof was assumed, with the consent of Capricorn I, by PTH in
connection with the distribution by the Company of the capital stock of PTH to
Capricorn I. In conjunction with the 1997 Financing, the remaining notes plus
accrued but unpaid interest held by Capricorn I were exchanged for $5.1 million
in principal amount of the Company's 13% Subordinated Promissory Note due 2000
(the Cap I Note, being one of the Subordinated Notes).
During the period from June 1989 through January 1997, the Common Stock
owned by each investor other than Capricorn I was acquired by either Capricorn I
or the Company with the result that at the end of January 1997 Capricorn I was
the Company's sole stockholder.
In June 1997, the Company engaged in the 1997 Financing, in part to finance
the acquisition of TEST. At that time, Capricorn II invested an aggregate of
$13.0 million in the Company and received in exchange 2,113,334 shares of Common
Stock and $2.4 million in principal amount of the Company's 13% Subordinated
Promissory Note due 2000 (the Cap II Note, being the other Subordinated Note),
the terms of which are, except for the principal amount, identical to the Cap I
Note.
After the 1997 Financing, Capricorn I owned an aggregate of 4,553,334
shares of Common Stock representing 68.3% of the outstanding Common Stock, and
Capricorn II owned an aggregate of 2,113,334 shares of Common Stock representing
31.7% of the outstanding Common Stock.
Capricorn I and Capricorn II are both limited partnerships organized under
the laws of Delaware and both constitute private investment funds. Capricorn I
is managed by its general partner, Capricorn Holdings, G.P., which in turn is
managed by Winokur Holdings, Inc. Herbert S. Winokur, Jr., a director of the
Company, is President of Winokur Holdings, Inc.
Capricorn II is managed by Capricorn Holdings, LLC, a Delaware limited
liability company, two of the members of which are Mr. Winokur and Mr. Gregory,
the Chairman of the Board and Chief Executive Officer of the Company. Mr.
Winokur is the managing member of Capricorn Holdings, LLC.
In March 1998, the Company entered into a Securities Exchange Agreement
with Capricorn I and Capricorn II pursuant to which Capricorn I and Capricorn II
agreed to deliver to the Company the Cap I Note and the Cap II Note in exchange
for the issuance of Common Stock by the Company to Capricorn I and Capricorn II.
The terms of such exchange were set to be equivalent to the price per share
agreed at the time of Capricorn II's investment in June 1997, which was $5.03 of
principal amount per share of Common Stock. In exchange for the Cap I Note and
the Cap II Note, Capricorn I and Capricorn II will receive 1,010,333 shares and
468,925 shares of Common Stock, respectively. These transactions are to be
effected immediately prior to the Offering. The Company has agreed in the Cynara
Merger Agreement that it will not modify or amend the terms of the Securities
Exchange Agreement without the prior written consent of Cynara. Immediately
following the consummation of such transactions and prior to consummation of the
Offering and the Cynara Acquisition, Capricorn I and Capricorn II will own
5,563,667 shares and 2,582,259 shares, respectively of Common Stock.
In connection with the Cynara Acquisition, the Company, Capricorn I and
Capricorn II have entered into a registration rights agreement dated as of June
, 1998, and the stockholders of Cynara have entered into a separate
registration rights agreement with the Company, dated as of June , 1998.
Pursuant to these agreements, Capricorn I, Capricorn II and the stockholders of
Cynara will be entitled to certain demand and "piggy-back" registration rights
under the Securities Act with respect to the shares of Common Stock held by
55
<PAGE> 57
them. Each of Capricorn I and Capricorn II has the right to register the
distribution by Capricorn I or Capricorn II of Common Stock to their respective
general and limited partners. In addition, Herbert S. Winokur, Jr. has the right
to require the Company to register shares of Common Stock that he has acquired
from Capricorn I or Capricorn II if such shares may not be sold in reliance on
an exemption from the Securities Act or if any such shares that are pledged as
collateral for loans must be sold by the lender in connection with the debt
secured by such pledge. Certain stockholders of Cynara also have demand
registration rights for any Additional Shares earned by such stockholders under
the Cynara Acquisition Agreement. See "The Cynara Acquisition." These rights may
not be exercised for a period of 180 days following the date of this Prospectus
without the consent of Donaldson, Lufkin & Jenrette Securities Corporation. The
exercise of these rights is subject to customary limitations and conditions.
CAPRICORN MANAGEMENT, G.P.
Capricorn Management, G.P., ("Capricorn Management") an entity controlled
by Mr. Winokur, provides management services to Capricorn I and Capricorn II.
The Company contracted in 1989 to pay $350,000 per year plus certain
out-of-pocket expenses to Capricorn Management to reimburse it for costs and
expenses incurred by it to perform certain management and other responsibilities
(including services to PTH, whose capital stock was distributed to Capricorn I
on June 30, 1997 and to another affiliate which has been sold). Effective July
1, 1997, the cost reimbursement was reduced to $75,000 a year and is payable
quarterly in advance. The Company reimbursed Capricorn Management $350,000,
$350,000 and $144,000 for fiscal 1995, 1996 and 1997, respectively, under this
agreement. The Company and Capricorn Management entered into a contract dated as
of July 1, 1997 evidencing their agreement with respect to management services.
The initial term of such agreement expires on June 30, 1998 but is automatically
extended for one additional year if neither party gives notice to confirm its
scheduled expiration.
In June 1989, the Company entered into an agreement with Capricorn
Management (later assigned by Capricorn Management to Winokur Holdings, Inc.),
whereby a fee would be paid to Winokur Holdings, Inc., contingent upon the
occurrence of certain events as defined in the agreement. During 1997, the fee
of $374,000 was paid. No further amounts are payable by the Company under this
agreement.
Employees of Capricorn Management participate in various NATCO benefit
plans for which Capricorn Management reimburses the Company. In addition, the
Company from time to time is billed by its vendors for Capricorn Management
expenses. Accrued costs were $25,800 and $115,700 for these services for fiscal
1996 and 1997, respectively. As of March 31, 1998, Capricorn Management owed the
Company $229,900. On April 9, 1998, the Company received a payment from
Capricorn Management in the amount of $196,907 in partial satisfaction of the
outstanding balance.
PTH
The Company currently provides tax consulting and analysis services to PTH
for $7,000 a month. PTH paid the Company $225,000, $218,000, and $95,000 during
1996, 1997 and 1998, respectively, of which approximately $218,000 annually
represents the reimbursement of costs and expenses paid by the Company to
Capricorn Management and payments for tax consulting services, as described
above. The balance in 1996 represented payment of certain inter-company charges.
The Company will file a consolidated federal income tax return, that includes
PTH through June 30, 1997.
MISCELLANEOUS
On November 7, 1997, Mr. Winokur issued a promissory note (the "Original
Note") to the Company in the amount of $1.5 million which provided, among other
things, for interest to be payable at a rate equal to, at the Company's
election, either (i) 10% per annum or (ii) if elected prior to March 10, 1998, a
rate per annum calculated by dividing (a) the difference between the average
closing price of the Common Stock of the Company for the five business days
prior to the due date of the Original Note after such election and $11.75 by (b)
$11.75 (the "Participating Rate"). If the Company elected to receive interest at
the Participating Rate with respect to all or any portion of the Original Note,
Mr. Winokur had the option to pay such portion by
56
<PAGE> 58
delivery of (i) cash or (ii) shares of the Common Stock of the Company. The
Company did not exercise the election with respect to the Participating Rate
and, therefore, the Original Note was due in accordance with its terms on March
31, 1998. As of March 31, 1998, Mr. Winokur executed and delivered to the
Company a new promissory note (the "New Note") in exchange for the Original Note
which was canceled. The outstanding principal and accrued interest on March ,
1998 under the Original Note was $1.6 million. The New Note is in the principal
amount of $1.6 million, bears interest at 11% per annum and is due on the later
to occur of (i) January 2, 1999 and (ii) the date on which the 173,050 shares of
Common Stock described below are publicly traded and have been distributed by
Capricorn I to its partners. In addition, as of March 31, 1998, the Company and
Mr. Winokur executed an option agreement (the "Option Agreement"). Under the
Option Agreement, the Company purchased an option to acquire 173,050 shares of
Common Stock (at the later to occur of (i) January 2, 1999 and (ii) the date on
which such stock is publicly traded and has been distributed by Capricorn I to
its partners) at a price of $8.81 per share. The cost of such option was
$200,000.
Cynara pays a monthly management fee of $25,000 to Heller Hickox Dimeling
Schreiber and Park pursuant to a management agreement. Cynara paid $75,000 and
$300,000 in management fees plus reimbursement of expenses during 1996 and 1997,
respectively, under such management agreement. Mr. Hickox, who will become a
director of the Company upon consummation of the Cynara Acquisition and the
Offering, is a general partner of Heller Hickox Dimeling Schreiber and Park.
Such management agreement will be terminated effective upon the consummation of
the Cynara Acquisition.
Management believes that the foregoing transactions were no less favorable
to the Company than those that would otherwise be obtainable in arms' length
transactions with unaffiliated third parties.
57
<PAGE> 59
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1998, and as adjusted to
reflect the sale of the Common Stock offered hereby, by (i) each director, (ii)
each Named Executive Officer, (iii) each person who is known by the Company to
own beneficially 5% or more of the Common Stock, (iv) all directors and
executive officers as a group and (v) Capricorn I, as the Selling Stockholder.
Unless otherwise indicated, the Company believes, based on information provided
by each such person, that each of the stockholders listed below has sole voting
and dispositive power over the shares indicated as owned by such person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING SHARES TO OFFERING
--------------------- BE SOLD --------------------
NAME OF BENEFICIAL OWNER(1)(2) NUMBER PERCENT IN THE OFFERING NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Capricorn I(3)....................... 5,563,667 68.3% 1,010,333 4,553,334
-------%
Capricorn II(4)...................... 2,582,259 31.7% -- 2,582,259
-------%
Herbert S. Winokur, Jr.(5)........... 8,145,926 100.0% -- 7,135,593
-------%
Nathaniel A. Gregory(6)(7)........... 3,487,363 38.5% -- 3,487,363
-------%
E. Hale Staley(7).................... 33,334 * -- 33,334 *
Patrick M. McCarthy(7)............... 133,334 * -- 133,334
-------%
William B. Wiener III(7)............. 66,667 * -- 66,667 *
Frank Smith(7)....................... 41,668 * -- 41,668 *
David Volz(7)........................ 16,667 * -- 16,667 *
Howard I. Bull....................... 1,334 * -- 1,334 *
Keith K. Allan....................... 1,334 * -- 1,334 *
George K. Hickox, Jr. ............... -- * -- 151,789
-------%
All directors and executive officers
as a group (12 persons)(5)(6)(7)... 9,360,702 100% -- 9,360,702
-------%
</TABLE>
- ------------------------------
* Less than 1%.
(1) Except as otherwise noted, each stockholder has sole voting and investment
power with respect to the shares beneficially owned.
(2) The address of Capricorn I, Capricorn II and Mr. Winokur is 30 East Elm
Street, Greenwich, Connecticut 06830.
(3) A Delaware limited partnership of which Capricorn Holdings L.P. is the
general partner. Mr. Winokur, a director of the Company, controls the
general partner of Capricorn Holdings L.P.
(4) A Delaware limited partnership of which Capricorn Holdings LLC is the
general partner. Messrs. Winokur and Gregory, directors of the Company, are
Managing Member and Member of Capricorn Holdings LLC, respectively.
(5) The 8,145,926 shares indicated as beneficially owned by Mr. Winokur are
owned directly by Capricorn I and Capricorn II and are included due to Mr.
Winokur's affiliation with Capricorn I and Capricorn II.
(6) Of the 3,487,363 shares indicated as beneficially owned by Mr. Gregory,
2,582,259 are owned directly by Capricorn II and are included because of
Mr. Gregory's affiliation with Capricorn II.
(7) Of the shares indicated as beneficially owned by Messrs. Gregory, Staley,
McCarthy, Wiener, Smith and Volz, 905,104; 33,334; 133,334; 66,667; 41,668
and 16,667 shares, respectively, may be acquired by such persons within 60
days through the exercise of stock options. The shares owned by the
executive officers and directors as a group include 1,214,776 shares that
may be acquired by such persons within 60 days through the exercise of
stock options.
58
<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock and 5,000,000 shares of preferred stock, par value $0.01 per
share, (the "Preferred Stock"). As of December 31, 1997, 6,666,668 shares of
Common Stock were outstanding and held of record by Capricorn I and Capricorn
II, and no shares of Preferred Stock were outstanding. Prior to this Offering,
there has been no public market for the Common Stock. Although the Company
intends to make application to list the Common Stock on the NYSE, there can be
no assurance that a market for the Common Stock will develop or, if developed,
will be sustained. See "Risk Factors -- No Prior Public Market and Determination
of Public Offering Price" and "Dilution."
The following descriptions of certain of the provisions of the Certificate
of Incorporation of the Company, as amended and restated (the "Company
Charter"), and of the Rights Agreement (as defined below) are necessarily
general and do not purport to be complete and are qualified in their entirety by
reference to such documents, which are included as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share of
Common Stock held of record on all matters submitted to a vote of stockholders.
The holders of Common Stock do not have cumulative voting rights in the election
of directors. Subject to any preferences accorded to the holders of the
Preferred Stock, if and when issued pursuant to authorization of the Board of
Directors, holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors of the Company
out of legally available funds. The Company has never paid cash dividends on its
Common Stock and does not intend to pay dividends for the foreseeable future. In
addition, the Company's Bank Credit Facilities contain provisions that restrict
the Company from paying dividends on the Common Stock. Upon liquidation,
dissolution or winding up of the Company, after payment of debts, expenses and
the liquidation preference plus any accrued dividends on any outstanding shares
of Preferred Stock, the holders of Common Stock will be entitled to share
ratably in all remaining assets of the Company. The holders of Common Stock have
no preemptive, subscription, redemptive or conversion rights. The outstanding
shares of Common Stock are, and the shares of Common Stock being sold in the
Offering will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
General. The Board of Directors of the Company has authority, without
stockholder approval to issue shares of Preferred Stock in one or more series
and to fix the number of shares and rights, preferences and limitations thereof
of each such series. Among the specific matters that may be determined by the
Board of Directors are the designation, dividend rights, conversion rights,
voting powers, redemption rights and liquidation preferences of each such
series. The issuance of Preferred Stock, while providing desired flexibility in
connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power of holders of Common Stock and the likelihood
that such holders will receive dividend payments and payments upon liquidation.
The Company has no present plans to issue any Preferred Stock.
One of the effects of the existence of authorized but unissued Common Stock
and undesignated Preferred Stock may be to enable the Board of Directors to make
more difficult or to discourage an attempt to obtain control of the Company by
means of a merger, tender offer, proxy contest or otherwise, and thereby to
protect the continuity of the Company's management. If, in the exercise of its
fiduciary obligations, the Board of Directors were to determine that a takeover
proposal was not in the Company's best interest, such shares could be issued
pursuant to authorization by the Board of Directors without stockholder approval
in one or more transactions that might prevent or make more difficult or costly
the completion of the takeover transaction by diluting the voting or other
rights of the proposed acquiror or insurgent stockholder group, by creating a
substantial voting block in institutional or other hands that might undertake to
support the position of the incumbent Board of Directors, by effecting an
acquisition that might complicate or preclude the takeover or
59
<PAGE> 61
otherwise. In this regard, the Company Charter grants the Board of Directors
broad power to establish the rights and preferences of the authorized and
unissued Preferred Stock, one or more series of which could be issued entitling
holders (i) to vote separately as a class on any proposed merger or
consolidation, (ii) to cast a proportionately larger vote together with the
Common Stock on any such transaction or for all purposes, (iii) to elect
directors having terms of office or voting rights greater than those of other
directors, (iv) to convert Preferred Stock into a greater number of shares of
Common Stock or other securities, (v) to demand redemption at a specified price
under prescribed circumstances related to a change of control of the Company or
(vi) to exercise other rights designed to impede a takeover. The issuance of
shares of Preferred Stock pursuant to the authority of the Board of Directors
described above may adversely affect the rights of holders of Common Stock.
Series A Preferred Stock. The Board of Directors of the Company has, in
conjunction with its adoption of the Rights Agreement described below,
designated 500,000 shares of Preferred Stock as the Series A Junior
Participating Preferred Stock (the "Series A Preferred Stock"). The terms of the
Series A Preferred Stock are designed so that the value of each one-hundredth of
a share purchasable upon exercise of a Right will approximate the value of one
share of Common Stock. The Series A Preferred Stock is nonredeemable and will
rank junior to all other series of Preferred Stock. Each whole share of Series A
Preferred Stock is entitled to receive a cumulative quarterly preferential
dividend in an amount per share equal to the greater of (i) $1.00 in cash or
(ii), in the aggregate, 100 times the dividend declared on the Common Stock. In
the event of liquidation, the holders of the Series A Preferred Stock are
entitled to receive a preferential liquidation payment equal to the greater of
(i) $100.00 per share or (ii), in the aggregate, 100 times the payment made on
the Common Stock, plus, in either case, the accrued and unpaid dividends and
distributions thereon. In the event of any merger, consolidation or other
transaction in which the Common Stock is exchanged for or changed into other
stock or securities, cash or property, each whole share of Series A Preferred
Stock is entitled to receive 100 times the amount received per share of Common
Stock. Each whole share of Series A Preferred Stock is entitled to 100 votes on
all matters submitted to a vote of the stockholders of the Company, and holders
of Series A Preferred Stock will generally vote together as one class with the
holders of Common Stock and any other capital stock on all matters submitted to
a vote of stockholders of the Company.
CERTAIN CHARTER AND BYLAW PROVISIONS
Stockholder Action by Unanimous Consent. Under Delaware law, unless a
corporation's certificate of incorporation specifies otherwise, any action that
could be taken by its stockholders at an annual or special meeting may be taken,
instead, without a meeting and without notice to or a vote of other
stockholders, if a consent in writing is signed by holders of outstanding stock
having voting power that would be sufficient to take such action at a meeting at
which all outstanding shares were present and voted. The Company Charter
provides that stockholder action may be taken only at an annual or special
meeting of stockholders or by unanimous written consent. As a result,
stockholders may not act upon any matter except at a duly called meeting or by
unanimous written consent.
Amendment of the Bylaws. Under Delaware law, the power to adopt, amend or
repeal bylaws is conferred upon the stockholders. A corporation may, however, in
its certificate of incorporation also confer upon the board of directors the
power to adopt, amend or repeal its bylaws. The Company Charter and Company
Bylaws grant the Board of Directors the power to adopt, amend and repeal the
Company Bylaws at any regular or special meeting of the Board of Directors upon
the affirmative vote of a majority of the directors then in office. The
Company's stockholders may adopt, amend or repeal the Company Bylaws but only at
any regular or special meeting of stockholders by an affirmative vote of a
majority of the Common Stock present at such meeting in person or by proxy or by
unanimous written consent.
RIGHTS TO PURCHASE PREFERRED STOCK
On May 5, 1998, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of Common Stock held
of record on May 15, 1998, and approved the further issuance of Rights with
respect to all shares of Common Stock that are subsequently issued. The Rights
were issued subject to a Rights Agreement dated as of May 15, 1998 between the
Company and
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ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the "Rights
Agreement"). Each Right now entitles the registered holder to purchase from the
Company one-hundredth of a share of Series A Preferred Stock at a price of
$72.50 in cash (the "Purchase Price"), subject to adjustment. See "-- Preferred
Stock -- Series A Preferred Stock." Until the occurrence of certain events
described below, the Rights are not exercisable, will be evidenced by the
certificates for Common Stock and will not be transferable apart from the Common
Stock.
Detachment of Rights; Exercise. The Rights are currently attached to all
certificates representing outstanding shares of Common Stock and no separate
Right certificates have been distributed. The Rights will separate from the
Common Stock and a distribution date ("Distribution Date") will occur upon the
earlier of (i) ten business days following the public announcement that a person
or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding Voting Shares
(as defined in the Rights Agreement) of the Company or (ii) ten business days
following the commencement or announcement of an intention to commence a tender
offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of such outstanding
Voting Shares.
The Rights are not exercisable until the Distribution Date. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights will be mailed to holders of record of Common Stock as of the close
of business on the Distribution Date and such separate certificates alone will
thereafter evidence the Rights.
If a person or group were to acquire 15% or more of the Voting Shares of
the Company, each Right then outstanding (other than Rights beneficially owned
by the Acquiring Person which would become null and void) would become a right
to buy that number of shares of Common Stock (or, under certain circumstances,
the equivalent number of one-hundredths of a share of Series A Preferred Stock)
that at the time of such acquisition would have a market value of two times the
Purchase Price of the Right.
If following the occurrence of a Distribution Date the Company were
acquired in a merger or other business combination transaction or more than 50%
of its consolidated assets or earning power were sold, proper provision must be
made so that each holder of a Right would thereafter have the right to receive,
upon the exercise thereof at the then current Purchase Price of the Right, that
number of shares of common stock of the acquiring company that at the time of
such transaction would have a market value of two times the Purchase Price of
the Right.
Antidilution and Other Adjustments. The number of shares (or fractions
thereof) of Series A Preferred Stock or other securities or property issuable
upon exercise of the Rights, and the Purchase Price payable, are subject to
customary adjustments from time to time to prevent dilution. The number of
outstanding Rights and the number of shares (or fractions thereof) of Series A
Preferred Stock issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in Common Stock or any subdivision, consolidation or
combination of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Exchange Option. At any time after the acquisition by a person or group or
affiliated or associated persons of beneficial ownership of 15% or more of the
outstanding Voting Shares of the Company and before the acquisition by a person
or group of 50% or more of the outstanding Voting Shares of the Company, the
Board of Directors may, at its option, issue Common Stock in mandatory
redemption of, and in exchange for, all or part of the then outstanding and
exercisable Rights (other than Rights owned by such person or group which would
become null and void) at an exchange ratio of one share of Common Stock (or
one-hundredth of a share of Series A Preferred Stock) for each two shares of
Common Stock for which each Right is then exercisable, subject to adjustment.
Redemption of Rights. At any time prior to the first public announcement
that a person or group has become the beneficial owner of 15% or more of the
outstanding Voting Shares, the Board of Directors of the Company may redeem all
but not less than all the then outstanding Rights at a price of $.01 per Right
(the "Redemption Price"). The redemption of the Rights may be made effective at
such time, on such basis and
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with such conditions as the Board of Directors of the Company in its sole
discretion may establish. Immediately upon the action of the Board of Directors
of the Company ordering redemption of the Rights, the right to exercise the
Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
Expiration; Amendment of Rights. The Rights will expire on May 15, 2008,
unless earlier extended, redeemed or exchanged. The terms of the Rights may be
amended by the Board of Directors of the Company without the consent of the
holders of the Rights, including an amendment to extend the expiration date of
the Rights, and, provided a Distribution Date has not occurred, to extend the
period during which the Rights may be redeemed, except that after the first
public announcement that a person or group has become the beneficial owner of
15% or more of the outstanding Voting Shares, no such amendment may materially
and adversely affect the interests of holders of the Rights.
DELAWARE ANTITAKEOVER LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law, which prohibits Delaware corporations from engaging in a wide range of
specified transactions with any interested stockholder. The latter term is
defined to include any person, other than such corporation and any of its
majority-owned subsidiaries, who owns 15% or more of any class or series of
stock entitled to vote generally in the election of directors, unless, among
other exceptions, the transaction is approved by (i) the Board of Directors
prior to the date the interested stockholder obtained such status or (ii) the
holders of two-thirds of the outstanding shares of each class or series of stock
entitled to vote generally in the election of directors, not including those
shares owned by the interested stockholder.
CERTAIN EFFECTS OF RIGHTS AND ANTITAKEOVER LAW
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without the approval of the Board of Directors of the Company. Moreover, the
Rights and the above described provisions of the Delaware General Corporation
Law may tend to deter any potential unfriendly offers or other efforts to obtain
control of the Company that are not approved by the Board of Directors and
thereby deprive the stockholders of opportunities to sell shares of Common Stock
at prices higher than the prevailing market price. On the other hand, the Rights
and these provisions will tend to assure continuity of management and corporate
policies and to induce any person seeking control of the Company or a business
combination with the Company to negotiate on terms acceptable to the then
elected Board of Directors.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares
of Common Stock outstanding ( shares if the Underwriters'
over-allotment option is exercised in full). Of these outstanding shares of
Common Stock, shares to be sold in this Offering will be freely
tradeable without restriction or further registration under the Act, unless
purchased by "Affiliates" of the Company, as that term is defined in Rule 144
("Rule 144") under the Act described below. The remaining shares of
Common Stock outstanding after the Offering will be "restricted securities"
within the meaning of Rule 144 under the Act and may not be sold in a public
distribution except in compliance with the registration requirements of the Act
or an applicable exemption under the Act, including an exemption pursuant to
Rule 144 thereunder. Restricted securities are eligible for sale in the public
market pursuant to Rule 144 no sooner than one year from the date of
acquisition. In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year (including
the holding period of any prior owner except an affiliate) is entitled to sell
in "broker's transactions" or to market makers, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of: (i) one percent of the number of shares of
Common Stock then outstanding (approximately 123,000 shares immediately after
the Offering); or (ii) generally, the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the required filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain "manner of sale" provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an affiliate), is entitled to sell such shares without having
to comply with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
The Company has granted certain stockholders registration rights. See
"Certain Transactions -- Securities Transactions."
As of May 31, 1998, the Company has reserved an aggregate of 1,755,115
shares of Common Stock for issuance upon exercise of options of which 1,279,778
are exercisable immediately upon consummation of the Offering. See
"Management -- Executive Compensation -- Stock Option Plans."
DESCRIPTION OF BANK CREDIT FACILITIES
The following is a description of the principal terms of certain of the
Company's indebtedness, including indebtedness to be repaid with a portion of
the proceeds of the Offering. Copies of the definitive agreements setting forth
the terms of this indebtedness have been filed as exhibits to the Registration
Statement on Form S-1 (the "Registration Statement") of which this Prospectus is
a part. The following summaries of certain provisions of the agreements do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the agreements. See the notes to the
Company's consolidated financial statements.
U.S. CREDIT FACILITY
On June 30 1997, National Tank Company, the Company's wholly-owned
subsidiary, entered into a credit facility (the "U.S. Credit Facility") with
Chase Bank of Texas, N.A., as agent (the "Agent"), and other lending
institutions party thereto (the "Lenders"). The U.S. Credit Facility provides
for an aggregate principal amount of term loans equal to $10.0 million and an
aggregate principal amount of revolving loans of up to $18.0 million subject to
borrowing base limitations. As of May 31, 1998, $8.9 million of term borrowings
and $14.0 million of revolving borrowings were outstanding under the U.S. Credit
Facility. The term borrowings mature on June 30, 2002, and the revolving
borrowings mature on June 30, 2000. Indebtedness under the U.S. Credit Facility
bears interest at a floating rate based (at the Company's option) upon (i) the
Base Rate with respect to Base Rate Loans, plus the Margin Percentage or (ii)
the London Interbank Offered Rate for one, two, three or six months, plus the
Margin Percentage. The Base Rate is the greater of (i) the Prime Rate or (ii)
the Federal Funds Rate plus 1/2 of 1%. The Margin Percentage for Base Rate Loans
varies
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from 1.00% to 0.00% depending on the Company's debt to capitalization ratio; and
the Margin Percentage for Eurodollar Loans varies from 2.75% to 1.00% depending
on the Company's debt to capitalization ratio.
EXIM CREDIT FACILITY
The Company's subsidiary National Tank Company has entered into the EXIM
Credit Facility with Chase Bank of Texas, N.A., as lender (the "EXIM Lender").
The EXIM Credit Facility provides for an aggregate principal amount of revolving
loans and letters of credit of up to $5.0 million subject to borrowing base
limitations. Indebtedness under the EXIM Credit Facility bears interest at a
floating rate based (at the Company's option) upon (i) the Base Rate with
respect to Base Rate Loans or (ii) the London Interbank Offered Rate for one,
two, three or six months, plus 2.25% per annum. The Base Rate is the greater of
(i) the Prime Rate or (ii) the Federal Funds Rate. As of May 31, 1998, an
aggregate of $2.2 million of borrowings were outstanding under the EXIM Credit
Facility. The EXIM Credit Facility matures on June 30, 1998.
CANADIAN CREDIT FACILITY
NATCO Canada, Ltd., a wholly owned subsidiary of the Company ("NATCO
Canada") has entered into a credit facility (the "Canadian Credit Facility")
with The Bank of Nova Scotia, as lender (the "Canadian Lender"). The Canadian
Credit Facility provides for an aggregate principal amount of revolving loans
and bankers' acceptances of up to Cdn. $9.0 million subject to borrowing base
limitations. As of May 31, 1998, an aggregate of Cdn. $6.7 million was
outstanding under the revolving portion of the Canadian Credit Facility and Cdn
$5.2 million was outstanding under term loan portion of the Canadian Credit
Facility. The revolving portion of the Canadian Credit Facility is repayable on
demand with principal and interest payable quarterly through May 2000, and the
term loan portion of the Canadian Credit Facility is repayable in quarterly
installments through February 2000. Indebtedness under the Canadian Credit
Facility bears interest at a floating rate based (at NATCO Canada's option) upon
the Canadian Prime Rate plus 1/2 of 1% per annum. NATCO Canada may also issue
bankers' acceptances at the Canadian Lender's commercial bankers' acceptance fee
plus 1/2 of 1% for bankers' acceptances having a 30 to 180 day tenor, as
applicable.
CYNARA CREDIT FACILITY
Cynara entered into a credit facility (the "Cynara Credit Facility") with
Bank One Texas, N.A., as lender. The Cynara Credit Facility consists of (i) a
term loan in the amount of $6.6 million which matures on December 31, 2002 and
bears interest at the lender's prime rate plus 1% and (ii) a revolving credit
facility with aggregate borrowing capacity of $6.0 million, of which $3.9
million was outstanding as of May 31, 1998, which matures on October 31, 1999
and bears interest at the lender's prime rate.
RESTRICTIVE COVENANTS
The Bank Credit Facilities and the Cynara Credit Facility contain covenants
that, among other things, limit the incurrence of additional indebtedness, the
nature of the business of the Company and its subsidiaries, investments, leases
of assets, creation and ownership of subsidiaries, dividends, transactions with
affiliates, mergers, consolidations and acquisitions and dispositions of assets,
liens and encumbrances and other matters customarily restricted in similar
credit agreements.
The U.S. Credit Facility and the EXIM Credit Facility require that National
Tank Company maintain a tangible net worth as of the end of each quarter in an
amount that is greater than the minimum tangible net worth requirement as of the
previous quarter plus 50% of the net income of National Tank Company and its
subsidiaries for the period from March 31, 1997 through the end of the quarter
for which such calculation is being made plus 100% of the net proceeds realized
from the issuance of equity securities by National Tank Company or any of its
subsidiaries during such period. Such minimum tangible net worth requirement was
approximately $17.9 million at March 31, 1998. National Tank Company must also
maintain a debt to capitalization ratio of not greater than 60% prior to June
30, 1998; not greater than 50% during the period between July 1, 1998 and June
30, 1999; and not greater than 45% at all times thereafter. In addition,
National
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Tank Company must maintain a fixed charge coverage ratio of not less than 1.25
to 1.00 at all times. National Tank Company has historically satisfied all such
financial covenants.
Each of the U.S. Credit Facility and the EXIM Credit Facility restrict
National Tank Company from the payment of dividends and other advances and
transfers except in certain limited circumstances and then only so long as no
event of default under the facilities has occurred and continues. Dividends may
be paid by National Tank Company solely for repayment of certain indebtedness of
the Company, certain corporate holding company expenses, the cash portion of
retiree medical expenses and cash shortages in the Company's operations in
London. Such dividends cannot exceed $1.9 million in 1998, $1.5 million in 1999,
$2.0 million in 2000 and $2.2 million in 2001 and 2002. The Canadian Credit
Facility limits, among other things, NATCO Canada's ability to pay dividends in
excess of 50% of net cash flows (as defined). See Note 11 of Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Canadian Credit Facility grants the lenders thereunder a mortgage on
certain real property interests in Canada owned by NATCO Canada.
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UNDERWRITING
Subject to the terms and subject to the conditions of an Underwriting
Agreement, dated , 1998 (the "Underwriting Agreement"), the
Underwriters named below, who are represented by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Smith Barney Inc. and Simmons & Company
International (the "Representatives"), have severally agreed to purchase from
the Company and the Selling Stockholder the respective numbers of shares of
Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Smith Barney Inc. ..........................................
Simmons & Company International.............................
--------
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
The Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to additional shares of Common Stock at the
initial public offering price less underwriting discounts and commissions. The
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the Offering. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such Underwriter's percentage underwriting commitment as indicated in the
preceding table.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholder) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or
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(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless or whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, such other securities, cash or
otherwise) for a period of 180 days after the date of this Prospectus without
the prior written consent of DLJ. In addition, during such period, the Company
has also agreed not to file any registration statement with respect to, and each
of its executive officers, directors and certain stockholders of the Company
(including the Selling Stockholder) has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock without DLJ's prior written consent.
Of the Common Stock offered hereby, up to 5% of the shares offered hereby
will be directed to, and may be purchased by, employees of the Company and
others, subject to certain restrictions of the National Association of
Securities Dealers, Inc.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial offering price for the shares of Common Stock offered
hereby will be determined by negotiation among the Company, representatives of
the Selling Stockholder and the Representatives. The factors to be considered in
determining the initial public offering price include the history of and the
prospects for the industry in which the Company competes, the past and present
operations of the Company, the historical results of operations of the Company,
the prospects for future earnings of the Company, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of the Offering.
Application will be made to list the Common Stock on the NYSE under the
symbol NTG, subject to official notice of issuance. In order to meet the
requirements for listing the Common Stock on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
owners.
Other than in the United States, no action has been taken by the Company,
the Selling Stockholder or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
laws, rules and regulations of such jurisdiction. Persons into whose possession
this Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the Offering and the distribution of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of Common Stock offered hereby in any jurisdiction in
which such offer or solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if DLJ
repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise or if DLJ receives a
report that indicates that the clients of such syndicate members have "flipped"
the Common Stock. These activities may stabilize or maintain the market price of
the Common Stock at above independent market levels. The Underwriters are not
required to engage in these activities and may end any of these activities at
any time.
Affiliates of DLJ own limited partnership interests in Capricorn I and
Capricorn II. Affiliates of Smith Barney Inc. own limited partnership interests
in Capricorn II.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Vinson & Elkins L.L.P., Houston, Texas. Certain legal
matters in connection with the shares of Common Stock offered hereby will be
passed upon for the Underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P.
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EXPERTS
The consolidated financial statements of NATCO Group Inc. and its
subsidiaries as of March 31, 1998 and 1997, and for each of the fiscal years in
the three-year period ended March 31, 1998, and of Total Engineering Services
Team, Inc. as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, have been included herein and in the
Registration Statement of which this Prospectus is a part in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of The Cynara Company at December 31, 1997 and
1996, and for the year ended December 31, 1997 and for the period from March 5,
1996 (date of inception) to December 31, 1996, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Exchange Act. The Company has filed with the Commission a Registration
Statement under the Securities Act, with respect to the offer and sale of Common
Stock pursuant to this Prospectus. This Prospectus, filed as a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement or the exhibits and schedules thereto in accordance with
the rules and regulations of the Commission and reference is hereby made to such
omitted information. Statements made in this Prospectus concerning the contents
of any contract, agreement or other document filed as an exhibit to the
Registration Statement are summaries of the terms of such contracts, agreements
or documents and are not necessarily complete. Reference is made to each such
exhibit for a more complete description of the matters involved and such
statements shall be deemed qualified in their entirety by such reference. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facility maintained by the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621-2511. Such materials also may be accessed electronically by means
of the Commission's home page on the Internet at http://www.sec.gov. For further
information pertaining to the Common Stock offered by this Prospectus and the
Company, reference is made to the Registration Statement.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NATCO GROUP INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 31, 1997 and 1998... F-3
Consolidated Statements of Operations for the years ended
March 31, 1996, 1997 and 1998............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 31, 1996, 1997 and 1998......... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1997 and 1998............................. F-6
Notes to Consolidated Financial Statements.................. F-7
TOTAL ENGINEERING SERVICES TEAM, INC.
Independent Auditors' Report................................ F-28
Balance Sheets as of December 31, 1995 and 1996 and June 30,
1997 (unaudited).......................................... F-29
Statements of Income for the years ended December 31, 1994,
1995 and 1996 and for the six months ended June 30, 1997
(unaudited)............................................... F-30
Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1996 and for the six month period
ended June 30, 1997 (unaudited)........................... F-31
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and for the six months ended June 30,
1997 (unaudited).......................................... F-32
Notes to Financial Statements............................... F-33
THE CYNARA COMPANY
Report of Independent Auditors.............................. F-37
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-38
Statements of Operations for the period from March 5, 1996
(date of inception) to December 31, 1996 and for the year
ended December 31, 1997 and for the three months ended
March 31, 1998 (unaudited) and March 31, 1997
(unaudited)............................................... F-39
Statements of Stockholders' Equity as of December 31, 1996
and 1997 and March 31, 1998 (unaudited)................... F-40
Statements of Cash Flows for the period from March 5, 1996
(date of inception) to December 31, 1996 and for the year
ended December 31, 1997 and for the three months ended
March 31, 1998 (unaudited) and March 31, 1997
(unaudited)............................................... F-41
Notes to Financial Statements............................... F-42
</TABLE>
F-1
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NATCO Group Inc.:
We have audited the accompanying consolidated balance sheets of NATCO Group
Inc., (formerly Cummings Point Industries, Inc.) and subsidiaries as of March
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended March 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NATCO Group
Inc. and subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
June 4, 1998
F-2
<PAGE> 72
NATCO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,216 $ 941
Restricted cash........................................... 408 549
Trade accounts receivable, less allowance for doubtful
accounts of $508 and $965 as of March 31, 1997 and
1998, respectively..................................... 28,096 43,945
Inventories............................................... 16,695 22,707
Notes receivable from director............................ -- 1,576
Net deferred income tax assets............................ 1,677 2,590
Prepaid expenses and other current assets................. 1,053 1,655
Net assets of discontinued operations..................... 9,483 --
------- -------
Total current assets.............................. 58,628 73,963
Property, plant and equipment, net.......................... 6,833 9,332
Cost in excess of fair value of net assets acquired, net.... 219 7,416
Net deferred income tax assets.............................. 5,520 6,162
Other assets, net........................................... 501 1,151
------- -------
Total assets...................................... $71,701 $98,024
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt.................... $ 3,953 $ 1,682
Revolving credit bank loan................................ 5,860 4,147
Accounts payable.......................................... 21,950 24,109
Accrued expenses and other................................ 9,438 13,573
Customer advances......................................... 1,240 2,057
Income taxes payable...................................... 2,278 2,236
------- -------
Total current liabilities......................... 44,719 47,804
Long-term debt, excluding current installments.............. 17,753 27,890
Postretirement benefit liability............................ 14,608 15,194
------- -------
Total liabilities................................. 77,080 90,888
Stockholders' equity (deficit):
Preferred stock $.01 par value. 5,000,000 shares
authorized; no shares outstanding...................... -- --
Common stock, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 4,553,334 and 6,666,668
shares as of March 31, 1997 and 1998, respectively..... 1 67
Additional paid-in capital................................ 9,623 20,272
Accumulated deficit....................................... (9,468) (7,753)
Treasury stock, 470,188 shares at cost.................... (4,350) (4,350)
Cumulative translation adjustments........................ (764) (1,100)
Notes receivable from stockholders........................ (421) --
------- -------
Total stockholders' equity (deficit).............. (5,379) 7,136
Commitments and contingencies
------- -------
Total liabilities and stockholders' equity
(deficit)........................................ $71,701 $98,024
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 73
NATCO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................... $112,724 $126,657 $202,023
Cost of goods sold......................................... 91,258 99,984 160,266
-------- -------- --------
Gross profit..................................... 21,466 26,673 41,757
Selling, general and administrative expense................ 21,754 23,292 29,246
Restructuring charge....................................... 776 21 282
Depreciation and amortization expense...................... 731 862 1,322
Interest expense........................................... 2,422 1,861 2,992
Interest cost on postretirement benefit liability.......... 932 957 1,048
Revaluation loss on postretirement benefit liability....... 2,273 1,466 159
Interest income............................................ (336) (116) (140)
Gain on sale of investment................................. (6,320) -- --
-------- -------- --------
Income (loss) from continuing operations before
income taxes................................... (766) (1,670) 6,848
Income tax provision (benefit)............................. (430) (363) 1,342
-------- -------- --------
Income (loss) from continuing operations......... (336) (1,307) 5,506
Income from discontinued operations (net of applicable
income tax expense (benefit) of $831, $(825) and $395,
respectively)............................................ 811 1,100 767
Gain on disposal of PTH division (net of applicable income
taxes of $3,807)......................................... -- 4,788 --
-------- -------- --------
Net income....................................... $ 475 $ 4,581 $ 6,273
======== ======== ========
Basic earnings (loss) per share:
Continuing operations.................................... $ (0.05) $ (0.22) $ 0.72
Discontinued operations.................................. 0.13 0.98 0.10
-------- -------- --------
Net income............................................... 0.08 0.76 0.82
======== ======== ========
Diluted earnings (loss) per share:
Continuing operations.................................... (0.05) (0.22) 0.68
Discontinued operations.................................. 0.13 0.92 0.10
-------- -------- --------
Net income............................................... 0.08 0.70 0.78
======== ======== ========
Basic weighted average number of shares of common stock.... 6,056 6,032 7,623
Diluted weighted average number of shares of common
stock.................................................... 6,243 6,371 8,067
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 74
NATCO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
ADDITIONAL CUMULATIVE RECEIVABLE
COMMON PAID-IN ACCUMULATED TREASURY TRANSLATION FROM
SHARES STOCK CAPITAL DEFICIT STOCK ADJUSTMENTS STOCKHOLDERS
--------- ------ ---------- ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1995........ 5,023,008 $ 1 $10,562 $(13,719) $ -- $ (479) $(438)
Change in warrant value........... -- -- 594 (594) -- -- --
Net income........................ -- -- -- 475 -- -- --
Change in equity of minority
interest........................ -- -- (14) -- -- -- --
Purchase of treasury stock........ (469,674) -- -- -- (4,350) -- --
Foreign currency translation
adjustment...................... -- -- -- -- -- (84) --
Stockholder note repayments....... -- -- -- -- -- -- 13
--------- --- ------- -------- ------- ------- -----
Balances at March 31, 1996........ 4,553,334 1 11,142 (13,838) (4,350) (563) (425)
Purchase of warrant............... -- -- (2,889) (211) -- -- --
Net income........................ -- -- -- 4,581 -- -- --
Employee stock compensation....... -- -- 1,241 -- -- -- --
Change in equity of minority
interest........................ -- -- 129 -- -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- -- (201) --
Stockholder note repayments....... -- -- -- -- -- -- 4
--------- --- ------- -------- ------- ------- -----
Balances at March 31, 1997........ 4,553,334 1 9,623 (9,468) (4,350) (764) (421)
--------- --- ------- -------- ------- ------- -----
Issue Common stock................ 2,113,334 16 10,624 -- -- -- --
Stock split....................... -- 50 (50) -- -- -- --
Change in equity of minority
interest........................ -- -- (11) -- -- -- --
Dividends paid.................... -- -- -- (4,558) -- -- --
Net income........................ -- -- -- 6,273 -- -- --
Employee stock compensation....... -- -- 86 -- -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- -- (336) --
Note repayment.................... -- -- -- -- -- -- 421
--------- --- ------- -------- ------- ------- -----
Balances at March 31, 1998........ 6,666,668 $67 $20,272 $ (7,753) $(4,350) $(1,100) $ --
========= === ======= ======== ======= ======= =====
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balances at March 31, 1995........ $(4,073)
Change in warrant value........... --
Net income........................ 475
Change in equity of minority
interest........................ (14)
Purchase of treasury stock........ (4,350)
Foreign currency translation
adjustment...................... (84)
Stockholder note repayments....... 13
-------
Balances at March 31, 1996........ (8,033)
Purchase of warrant............... (3,100)
Net income........................ 4,581
Employee stock compensation....... 1,241
Change in equity of minority
interest........................ 129
Foreign currency translation
adjustment...................... (201)
Stockholder note repayments....... 4
-------
Balances at March 31, 1997........ (5,379)
-------
Issue Common stock................ 10,640
Stock split....................... --
Change in equity of minority
interest........................ (11)
Dividends paid.................... (4,558)
Net income........................ 6,273
Employee stock compensation....... 86
Foreign currency translation
adjustment...................... (336)
Note repayment.................... 421
-------
Balances at March 31, 1998........ $ 7,136
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 75
NATCO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 475 $ 4,581 $ 6,273
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Change in equity of minority interest................... (14) 129 (11)
Deferred income tax provision........................... 40 (408) (565)
Depreciation and amortization expense................... 731 862 1,322
Noncash interest expense................................ 1,077 925 1,031
Interest cost on postretirement benefit liability....... 932 957 1,048
Gain on sale of property, plant and equipment........... (73) (285) (397)
Gain on sale of investment.............................. (6,320) -- --
Loss (gain) on revaluation of postretirement benefit
liability.............................................. 2,273 1,466 159
Noncash compensation expense............................ -- 1,241 86
Other, net.............................................. -- 107 242
Change in assets and liabilities:
(Increase) decrease in restricted cash................ 23 45 (141)
(Increase) decrease in trade accounts receivable...... 4,991 (9,297) 347
(Increase) decrease in inventories.................... (313) (3,918) (4,126)
(Increase) decrease in due from affiliates, net....... (39) -- --
(Increase) decrease in prepaid expense and other
current assets....................................... 719 (13) (361)
(Increase) decrease in net assets of discontinued
operations........................................... (2,207) (537) 349
Increase (decrease) in other current liabilities,
net.................................................. (835) 2,157 (42)
Increase (decrease) in accounts payable............... (2,340) 3,091 (3,371)
Increase (decrease) in accrued expenses............... (1,142) (246) 757
Increase (decrease) in customer advances and other.... (2,394) 202 513
------- ------- --------
Net cash provided by (used in) operating
activities.......................................... (4,416) 1,059 3,113
------- ------- --------
Cash flows from investing activities:
Proceeds from sale of investment.......................... 10,343 --
Capital expenditures for property, plant and equipment.... (1,108) (1,159) (1,256)
Proceeds from sales of property, plant and equipment...... 309 361 1,075
Acquisition, net of working capital acquired.............. -- -- (22,955)
Increase in due from director............................. -- -- (1,576)
------- ------- --------
Net cash provided by (used in) investing
activities.......................................... 9,544 (798) (24,712)
------- ------- --------
Cash flows from financing activities:
Net advances under revolving credit agreements............ 2,804 6,843 8,867
Change in bank overdrafts................................. 725 (823) 2,435
Proceeds from notes receivable............................ -- -- 421
Proceeds from long-term debt.............................. -- 2,500 10,000
Proceeds from shareholder debt............................ -- -- 2,360
Repayments of long-term debt.............................. (9,825) (5,947) (11,529)
Purchase of treasury stock................................ (810) -- --
Purchase of warrants...................................... -- (3,100) --
Issuance of common stock.................................. -- -- 10,640
Payments on postretirement benefit liability.............. (484) (510) (621)
Other, net................................................ (81) 4 (913)
------- ------- --------
Net cash provided by (used in) financing
activities.......................................... (7,671) (1,033) 21,660
------- ------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (84) (201) (336)
------- ------- --------
Decrease in cash and cash equivalents....................... (2,627) (973) (275)
Cash and cash equivalents at beginning of year.............. 4,816 2,189 1,216
------- ------- --------
Cash and cash equivalents at end of year.................... $ 2,189 $ 1,216 $ 941
======= ======= ========
Cash payments for:
Interest.................................................. $ 2,589 $ 2,973 $ 2,101
======= ======= ========
Income taxes.............................................. $ 1,064 $ 260 $ 1,104
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 76
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION
NATCO Group Inc. (the Company), formerly Cummings Point Industries, Inc.,
was formed in June 1988 by Capricorn Investors, L.P. (Capricorn). Capricorn led
a group of investors who invested sufficient funds in the Company to enable the
Company to acquire three businesses from Combustion Engineering, Inc. (C-E). On
June 21, 1989, the Company acquired from C-E all of the outstanding common stock
of W. S. Tyler, Incorporated (Tyler), American Premier, Inc. (API) (formerly
Premier Refractories and Chemicals, Inc.), National Tank Company (NATCO), and
the net assets of certain foreign affiliates of the Company. The accompanying
consolidated financial statements and all related disclosures include the
results of operations of the Company and its majority-owned subsidiaries for the
years ended March 31, 1996, 1997 and 1998.
During 1992, the Company contributed its common stock investment in API to
American Premier Holdings, Inc. (APH) in exchange for all of the issued and
outstanding common stock of APH. Subsequently, API completed a merger
transaction and, as a result, the Company's ownership in APH was reduced to 50%.
In November 1993 and August 1994, the Company sold 50% of its remaining
investment in APH. An additional 25% was sold in March 1995 reducing the
Company's ownership in APH to 12.5%. The remaining investment was sold in August
1995.
During 1992, the Company contributed its common stock investment in Tyler
and $5,500 in cash to Process Technology Holdings, Inc. (PTH) in exchange for
all of the issued and outstanding common stock of PTH. In 1992 and 1993, PTH and
the Company sold certain shares of PTH common stock to third parties reducing
the Company's ownership to 95%.
During 1996, the Company formed NATCO Holdings, Inc. (NHI) and contributed
its investment in NATCO to NHI. Prior to the creation of NHI, NATCO Singapore
and NATCO--U.K. were subsidiaries of NATCO. Subsequent to the formation of NHI,
these entities are no longer subsidiaries of NATCO but are consolidated at the
NHI level. NHI remains wholly-owned by the Company.
On June 30, 1997, NATCO acquired Total Engineering Services Team, Inc.
(TEST).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Business
The Company's consolidated subsidiaries operate as:
-NATCO -- manufacturer of equipment, and provider of services for
separating gases, liquids and suspended solids with operations in the
United States, Canada, United Kingdom, Singapore, Japan, and Venezuela;
-TEST -- designs, manufactures and installs instrumentation and electrical
control systems for the petroleum industry with operations in the United
States, Republic of Kazakastan and Nigeria.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base and
their dispersion across many different geographies. The Company had revenues
from one customer that represented 14% of revenues for the year ended March 31,
1998.
F-7
<PAGE> 77
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Cash Equivalents
The Company considers all highly liquid investment instruments with
original maturities of three months or less to be cash equivalents.
Restricted Cash
At March 31, 1997 and 1998, $408, and $549, respectively, of cash was
pledged as collateral on outstanding letters of credit related to performance
and warranty guarantees, and was classified as restricted cash on the balance
sheet.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last in, first out (LIFO) method for NATCO domestic inventories,
average cost for TEST inventories and the first in, first out (FIFO) method for
all other inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less an allowance for
depreciation. Depreciation on plant and equipment is calculated using the
straight-line method over the estimated useful lives. Maintenance and repair
costs are expensed as incurred; renewals and betterments are capitalized. Upon
the sale or retirement of properties, the accounts are relieved of the cost and
the related accumulated depreciation, with any resulting profit or loss included
in income. The carrying values of property, plant and equipment by location are
reviewed at least annually or whenever there are indications that these assets
may be impaired.
Cost in Excess of Fair Value of Net Assets Acquired
The cost in excess of fair value of net assets acquired is being amortized
on a straight-line basis over 40 years. The Company assesses the recoverability
of this intangible asset by determining whether the amortization over its
remaining life can be recovered through undiscounted future operating cash
flows. Based on its most recent analysis, the Company believes that no material
impairment of cost in excess of fair value of net assets acquired exists at
March 31, 1998. Amortization expense for each of the years ended March 31, 1996,
1997 was $13, and for 1998 was $128. Accumulated amortization at March 31, 1997
and 1998 was $99 and $227.
Other Assets, Net
Other assets consist of prepaid pension assets, deposits of a long-term
nature, and deferred financing costs.
Deferred acquisition financing costs relating to the Company's various loan
agreements have been capitalized and are being amortized over the term of the
related debt agreements. Amortization expense for each of the years ended March
31, 1997 and 1998 was $38, and $262, respectively, and there was no amortization
expense in 1996.
Environmental Remediation Costs
The Company accrues environmental remediation costs based on estimates of
known environmental remediation exposure. Such accruals are recorded when the
cost of remediation is probable and estimable, even if significant uncertainties
exist over the ultimate cost of the remediation. Ongoing environmental
compliance costs, including maintenance and monitoring costs, are expensed as
incurred.
F-8
<PAGE> 78
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Revenue Recognition
Revenues from significant contracts (NATCO contracts greater than $250 and
longer than four months in duration and all TEST contracts and orders) are
recognized on the percentage of completion method. Earned revenue is based on
the percentage that incurred costs to date bear to total estimated costs after
giving effect to the most recent estimates of total cost. The cumulative impact
of revisions in total cost estimates during the progress of work is reflected in
the year in which these changes become known. Earned revenue reflects the
original contract price adjusted for agreed upon claim and change order revenue,
if any. Losses expected to be incurred on jobs in progress, after consideration
of estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known. Progress billings in accounts
receivable are currently due and exclude retentions until such amounts are due
in accordance with contract terms. Other revenues and related costs are
recognized when products are shipped or services are rendered to the customer.
Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provision of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Research and Development
Research and development costs are charged to operations in the year
incurred. The cost of equipment used in research and development activities
which has alternative uses is capitalized as equipment and not treated as an
expense of the period. Such equipment is depreciated over estimated lives of 5
to 10 years.
Warranty Costs
Estimated future warranty obligations related to products are charged to
cost of goods sold in the period in which the related revenue is recognized.
Additionally, the Company provides some of its customers with letters of credit
covering potential warranty claims. At March 31, 1997 and 1998, the Company had
$2,017 and $1,883, respectively in outstanding letters of credit related to
warranties.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-9
<PAGE> 79
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the future generation of taxable income during the periods in
which those temporary differences become deductible. Management has considered
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment.
Translation of Foreign Currencies
Financial statement amounts related to foreign operations are translated
into their United States dollar equivalents at exchange rates as follows: (1)
balance sheet accounts at year-end exchange rates and (2) statement of
operations accounts at the weighted average exchange rates for the period. The
gains or losses resulting from such translations are deferred as a separate
component of stockholders' equity.
Gains or losses from foreign currency transactions are reflected in the
consolidated statements of operations.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities and the amounts of revenues and expenses
recognized during the period to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform to the 1998 presentation.
Earnings per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share, which replaced primary and fully diluted
earnings per share with basic and diluted earnings per share. The Company
adopted the provisions of SFAS No. 128 in the fourth quarter of 1997 and all
previously reported earnings per share data have been restated. Under SFAS No.
128, the basic earnings per share calculation excludes the dilutive effect of
common stock equivalents in determining basic earnings per share. The diluted
earnings per common and common equivalent share are computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding. For the purposes of this calculation, outstanding employee stock
options are considered common stock equivalents. In conformity with Securities
and Exchange Commission requirements, common stock, options and warrants, or
other potentially dilutive instruments which have been issued for nominal
consideration during the periods covered by income
F-10
<PAGE> 80
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
statements presented are reflected in earnings per share calculations for all
periods presented. The following table presents earnings per common share
amounts computed using SFAS 128:
<TABLE>
<CAPTION>
PER SHARE
FISCAL YEAR ENDED MARCH 31, NET INCOME SHARES AMOUNTS
--------------------------- ---------- ------ ---------
<S> <C> <C> <C>
1996
Basic EPS................................................... $ 475 6,056 $0.08
=====
Effect of dilutive securities:
Options..................................................... 187
------ ----- -----
Diluted EPS................................................. $ 475 6,243 $0.08
====== ===== =====
1997
Basic EPS................................................... $4,581 6,032 $0.76
=====
Options..................................................... 339
------ ----- -----
Diluted EPS................................................. $4,581 6,371 $0.70
====== ===== =====
1998
Basic EPS................................................... $6,273 7,623 $0.82
=====
Effect of dilutive securities:
Options..................................................... 444
------ ----- -----
Diluted EPS................................................. $6,273 8,067 $0.78
====== ===== =====
</TABLE>
(3) CAPITAL STOCK
Common Stock
On June 25, 1997, the Board of Directors of the Company approved an
increase in the number of authorized common shares from 3,000 to 20,000,000. On
that date, the directors declared a 7,503 for one common stock split to be
effected by the distribution of 7,502 additional shares for each share of common
stock held by stockholders of record as of that date. On March 6, 1998, the
Board of Directors of the Company approved an increase in the number of
authorized common shares from 20,000,000 to 50,000,000. On that date, the
directors declared a 4 for 3 common stock split to be effected by the exchange
of four shares for every three shares of common stock held by stockholders of
record as of that date. All share data has been restated to reflect the effects
of this transaction.
(4) ACQUISITION
On June 30, 1997, NATCO completed the acquisition of Total Engineering
Services Team, Inc. (TEST) from Weatherford Enterra, Inc. for $22,475 in cash.
The funds used for the acquisition of TEST were provided by $10,640 in
additional equity and a $2,360 loan from Capricorn Investors II, L.P. (Capricorn
II) and proceeds from a new senior credit facility provided by a major
international bank.
The acquisition has been accounted for as a purchase and the results of
TEST have been included in the consolidated financial statements since the date
of the acquisition. The purchase agreement allowed for purchase price
adjustments and included a guarantee of collectibility for TEST accounts
receivable acquired at the purchase price date. The Company subsequently
received cash of $1,387 and $1,690 related to purchase price adjustments and the
reimbursement of uncollected accounts receivable of TEST, respectively, at the
end of the purchase price adjustment period. Cost in excess of fair value of net
assets acquired amounted to $7,197 and is being amortized over a forty (40) year
period.
F-11
<PAGE> 81
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The unaudited pro forma results including TEST for the years ended March
31, 1997 and 1998 below assume the acquisition occurred on April 1, 1996.
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues.................................................... $177,725 $213,682
Income from operations...................................... (49) 7,509
Net income (loss)........................................... (578) 5,796
Net income (loss) per share:
Basic..................................................... $ (0.10) $ 0.76
Diluted................................................... $ (0.09) $ 0.72
</TABLE>
Pro forma data does not purport to be indicative of the actual results if
these events actually occurred at the beginning of the periods presented and is
not intended to be a projection of future results. The pro forma results include
the amortization of cost in excess of fair value of net assets acquired ($180
annually). As part of its arrangement with its former parent company, TEST was
charged an amount to offset parent company overhead for corporate management,
accounting, human resources, and legal services. NATCO corporate overhead has
not increased as a result of the acquisition of TEST. Such amounts would be
duplicative or redundant to the overhead already incurred by NATCO, and
accordingly $943 and $250 have been eliminated for the years ended 1997 and
1998, respectively.
(5) INVENTORIES
Inventories consisted of the following amounts:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Finished goods.............................................. $ 3,525 $ 4,786
Work-in-process............................................. 8,037 8,122
Raw materials and supplies.................................. 5,399 10,064
------- -------
Inventories at FIFO............................... 16,961 22,972
Excess of FIFO over LIFO cost............................... (266) (265)
------- -------
$16,695 $22,707
======= =======
</TABLE>
At March 31, 1997 and 1998, inventories valued using the LIFO method
amounted to $11,213, and $15,628, respectively. During 1997 and 1998 there were
no reductions in the LIFO layers.
F-12
<PAGE> 82
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(6) COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Cost incurred on uncompleted contracts...................... $22,340 $54,396
Estimated earnings.......................................... 2,605 10,653
------- -------
24,945 65,049
Less billings to date....................................... 18,729 54,427
------- -------
$ 6,216 $10,622
======= =======
Included in accompanying balance sheets under the following
captions:
Trade accounts receivable.............................. $ 6,216 $11,596
Customer advances...................................... -- (974)
------- -------
$ 6,216 $10,622
======= =======
</TABLE>
(7) PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, were as follows:
<TABLE>
<CAPTION>
MARCH 31,
ESTIMATED USEFUL -----------------
LIVES (YEARS) 1997 1998
----------------- ------- ------
<S> <C> <C> <C>
Land and improvements.............................. -- $ 1,097 $1,232
Buildings and improvements......................... 20 to 40 5,785 7,093
Machinery and equipment............................ 3 to 12 6,554 6,910
Office furniture and equipment..................... 3 to 12 2,048 3,023
Less accumulated depreciation...................... (8,651) (8,926)
------- ------
$ 6,833 $9,332
======= ======
</TABLE>
Depreciation expense was $718, $811 and $1,168 for the years ended March
31, 1996, 1997 and 1998, respectively.
NATCO leases certain pieces of machinery and equipment to its customers,
generally for periods of one month to one year. The cost of leased machinery and
equipment is $2,450 and $2,332 and the related accumulated depreciation is
$1,814 and $1,785 at March 31, 1997 and 1998, respectively. Lease and rental
income of $938, $688 and $648 for the years ended March 31, 1996, 1997 and 1998,
respectively, are included in revenues.
(8) OTHER ASSETS, NET
Other assets consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------
1997 1998
---- ------
<S> <C> <C>
Deferred financing costs.................................... $ 95 $ 407
Deferred costs of public offering........................... -- 380
Prepaid pension asset....................................... 308 283
Other assets................................................ 98 81
---- ------
$501 $1,151
==== ======
</TABLE>
F-13
<PAGE> 83
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred financing costs are amortized over the life of the related debt
instruments (three and five years). Accumulated amortization amounted to $38 and
$132 at March 31, 1997 and March 31, 1998, respectively.
(9) ACCRUED LIABILITIES
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1998
------ -------
<S> <C> <C>
Accrued Liabilities:
Accrued compensation and benefits......................... $3,597 $ 7,700
Liability reserves........................................ 2,951 2,148
Warranty and product reserves............................. 1,219 1,685
Taxes..................................................... 910 684
Other..................................................... 761 1,356
------ -------
Totals............................................ $9,438 $13,573
====== =======
</TABLE>
(10) SHORT-TERM DEBT
At March 31, 1998 and 1997, NATCO-Canada had $4,130 and $3,796,
respectively, outstanding under a revolving credit agreement that is due on
demand and bears interest at prime plus 1/2% per annum (7.0% and 5.25% at March
31, 1998 and March 31, 1997, respectively). As of March 31, 1998 and 1997, the
maximum availability under the agreement was $4,931 ($7,000 Canadian) and $5,068
($7,000 Canadian), respectively. Availability is based on the collateral value
of accounts receivable and inventory, as defined in the agreement. As of March
31, 1998 and 1997, the Company had $801 and $1,272, respectively, in additional
credit available under this agreement. The loan is secured by collateral
mortgages on the subsidiary's property and plant, a general security agreement
over all equipment, and a general assignment of accounts receivable. The loan
contains various restrictive covenants which include, among others, restrictions
on capital asset additions, incurrences of additional debt, the requirement to
maintain certain financial ratios and restrictions on the aggregate of capital
expenditures and dividends paid in any one fiscal year not to exceed 50% of net
cash flow, which is defined as the sum of after-tax net profit plus depreciation
and amortization and taxes less payments made on long-term debt. As of March 31,
1998, NATCO-Canada was in compliance with all of the restrictive covenants.
At March 31, 1998 and 1997, NATCO had an EXIM bank working capital facility
for $5,000 and $3,000 respectively. The loans bear interest at prime, which was
8.5% at March 31, 1998 and 1997. Borrowings are based on the value of inventory
and accounts receivable. The bank facility is secured by specific project
inventory and receivables, a 90% guarantee from EXIM bank, and a second lien on
the assets pledged to the NATCO revolving credit bank loan. At March 31, 1998
and 1997, $17 and $2,064, respectively, had been drawn against these facilities.
F-14
<PAGE> 84
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(11) LONG-TERM DEBT
The consolidated borrowings of the Company are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Related parties
13% subordinated notes, with interest and principal payable
at maturity, due June 30, 2000............................ $ -- $ 8,226
11% subordinated note, with interest and principal payable
at maturity, due June 30, 2000............................ 9,411 --
18% subordinated notes due April 21, 1997................... 301 --
18% subordinated notes due July 31, 1997.................... 2,682 --
18% subordinated notes due July 31, 1997.................... 211 --
Bank & Other
Revolving credit bank loan with variable interest rate, due
June 30, 1999............................................. 4,975 --
Term loan with interest at prime plus 1.75% monthly payments
of principal and interest through June 30, 1999........... 2,007 --
Term loan with variable interest rate (8.69% at March 31,
1998) quarterly payments of principal ($357) and interest,
due June 30, 2002......................................... -- 8,929
Revolving credit bank loan with variable interest rate
(8.73% at March 31, 1998) quarterly payment of interest
due June 30, 2000......................................... -- 10,580
Industrial revenue bond, $50 due annually with balance due
September 1, 2005......................................... 815 765
Mortgage, with interest at prime plus 1%, (7.5% at March 31,
1998) quarterly payments of principal ($33) and interest
through May 2000.......................................... 1,093 936
Term loan with interest at prime plus 1% (7.5% at March 31,
1998) monthly payments of principal ($6) and interest
through February 2000..................................... 211 136
------- -------
Total............................................. 21,706 29,572
Less current installments......................... (3,953) (1,682)
------- -------
Long-term debt.................................... $17,753 $27,890
======= =======
</TABLE>
The aggregate annual future maturities of long-term debt are as follows as
of March 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $ 1,682
2000........................................................ 21,154
2001........................................................ 1,479
2002........................................................ 4,692
2003........................................................ 50
Thereafter.................................................. 515
</TABLE>
Parent Company
On December 11, 1991, Capricorn loaned $5,000 to the Company in the form of
an 11% subordinated note (the 11% Note). Interest is being deferred and added to
the principal amount, both of which are due on June 30, 2000. The 11% Note is
subordinated to all senior debt of the Company.
F-15
<PAGE> 85
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
During the period prior to June 1997, the maturity dates of these notes
were extended to 2000 and $4.6 million thereof was assumed, with the consent of
Capricorn, by PTH in connection with the distribution by the Company of the
capital stock of PTH to Capricorn. In conjunction with the refinancing of its
domestic debt facility, the remaining notes plus accrued but unpaid interest
held by Capricorn were exchanged for $5.1 million in principal amount of the
Company's 13% Subordinated Promissory Note due 2000 (the "Cap I Note").
In June 1997, the Company completed the refinancing of its domestic debt
facility, in part to finance the acquisition of TEST. At that time, Capricorn II
invested an aggregate of $13.0 million in the Company and received in exchange
2,113,334 shares of Common Stock and $2.4 million in principal amount of the
Company's 13% Subordinated Promissory Note due 2000 (the "Cap II Note"), the
terms of which are, except for the principal amount, identical to the Cap I
Note.
The 18% subordinated notes require quarterly interest payments at a rate of
13.5%, and the additional interest cost of 4.5% is added to the principal of the
loan quarterly. These notes were paid off during the fiscal year ended March 31,
1998.
Interest expense of $1,077, $925 and $1,031 has been recognized and added
to the balance of these loans during the years ended March 31, 1996, 1997 and
1998, respectively.
NATCO
On July 1, 1997, a new revolving credit facility was put into place. The
new credit facility provides for an $18,000 revolving credit line to finance
eligible accounts receivable and inventories, and a $10,000 term loan.
Indebtedness under the credit facility bears interest at a floating rate based
(at the Company's option) upon (i) the Base Rate with respect to Base Rate
Loans, plus the Margin Percentage or (ii) the London Interbank Offered Rate for
one, two, three or six months, plus the Margin Percentage. The Base Rate is the
greater of (i) the prime rate or (ii) the Federal Funds Rate plus 1/2 of 1%. The
Margin Percentage for Base Rate loans varies from 1.00% to 0.00% depending on
the Company's debt to capitalization ratio; and the Margin Percentage for
Eurodollar loans varies from 2.75% to 1.00% depending on the Company's debt to
capitalization ratio. The term borrowings mature on June 30, 2002, and the
revolving borrowings mature on June 30, 2000. This agreement contains
restrictive covenants, including restrictions on NATCO redeeming, retiring, or
otherwise acquiring, directly or indirectly, any equity interest in the Company
or any subsidiary, or making any distributions of any property or cash to the
Company in excess of an agreed sum ($1,900 in fiscal year 1998) without prior
lender approval, and requires commitment fees in accordance with standard
banking practices and has been guaranteed by the Company. As of March 31, 1998,
the Company was in compliance with all restrictive covenants. Also related to
the TEST acquisition financing, the Company forgave $2,000 of subordinated debt
owed to the Company by NHI.
At March 31, 1997, NATCO, NHI and the Company participated in a revolving
credit agreement which was collateralized by all of the assets of the Company,
NHI and NATCO, and was guaranteed by the Company. The agreement provided for
maximum borrowings of $9,500 and an additional term loan of $2,500. The maximum
borrowing amount was based on the collateral value of accounts receivable and
inventory and increased in proportion to principal payments on the term loan. At
March 31, 1997, the interest rate on the revolving credit facility was 10%
(prime plus 1 1/2%). The interest rate on the term loan was 10 1/4% (prime plus
1.75%), and interest was payable monthly along with monthly principal payments
of $42. The revolving credit agreement contained various restrictive covenants
which included, among others, restrictions on capital asset additions,
incurrence of additional debt and the requirements to maintain certain financial
ratios. The maturity date of both loans was June 30, 1999. NATCO had letters of
credit outstanding under the revolving credit facility totaling $3,182 at March
31, 1997. These letters of credit constitute contract performance and warranty
collateral and expire at various dates through June 1998.
F-16
<PAGE> 86
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The industrial revenue bond is secured by plant, real property, and
equipment of NATCO and is also guaranteed by NATCO. Interest ranges from 7.3% to
8.5%, payable semiannually. The net book value of the related property was $439
at March 31, 1998.
NATCO-Canada borrowed $1,283 and $61 under a bankers acceptance and
mortgage, respectively, to finance the purchase of land and buildings from
Tyler. This was done to simplify the corporate structure, reduce borrowing costs
and foreign exchange risk, and enhance the overall corporate tax position. The
bankers acceptance matured on May 18, 1995, and was paid with the proceeds of an
additional borrowing on the mortgage of the land and buildings in the amount of
$1,283. The bankers acceptance, mortgage and term loan are secured by collateral
mortgages on a NATCO subsidiary's property and plant, a general security
agreement over all equipment, and a general assignment of accounts receivable.
The bank loan, mortgage and term loan contain various restrictive covenants
which include, among others, restrictions on capital asset additions and
incurrence of additional debt, and the requirements to maintain certain
financial ratios. As of March 31, 1998, the Company was in compliance with all
restrictive covenants.
Dividend Restrictions
With respect to its domestic credit facility, NATCO has agreed that it will
not at any time redeem, retire or otherwise acquire, directly or indirectly, any
equity interest in the Company or any subsidiary, or make any distributions of
any property or cash to the Company in excess of $1,900 for fiscal year 1998
without prior lender approval.
The Company's Canadian loan facility contains various restrictive covenants
which include, but are not limited to, restrictions on the aggregate of capital
expenditures and/or dividends paid in any one fiscal year not to exceed 50% of
net cash flow, defined as the sum of after tax net profit plus
depreciation/amortization and deferred taxes less payments made on long term
debt. For the fiscal year ended March 31, 1998, NATCO-Canada was restricted from
making any such payments in excess of $1,699.
(12) INCOME TAXES
Income tax expense (benefit) consisted of the following components:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $ (538) $ (711) $ (319)
State.................................................. -- -- --
Foreign................................................ 68 756 2,226
------ ------ ------
(470) 45 1,907
------ ------ ------
Deferred:
Federal................................................ 490 (323) (511)
State.................................................. (450) (85) (54)
Foreign................................................ -- -- --
------ ------ ------
40 (408) (565)
------ ------ ------
$ (430) $ (363) $1,342
====== ====== ======
</TABLE>
F-17
<PAGE> 87
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Temporary differences related to the following items that give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1998
------ -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefit liability.......................... $5,551 $ 5,774
Accrued liabilities....................................... 2,279 3,195
Net operating loss carryforwards.......................... -- 493
Contract reserves......................................... 296 225
Accounts receivable....................................... 161 334
Property, plant and equipment............................. 203 40
Other..................................................... 52 --
------ -------
Total deferred tax assets......................... $8,542 $10,061
====== =======
Deferred tax liabilities:
Inventory................................................. $1,063 $ 1,201
Property, plant and equipment............................. 161 --
Pension assets............................................ 121 108
------ -------
Total deferred tax liabilities.................... 1,345 1,309
------ -------
Net deferred tax assets........................... $7,197 $ 8,752
====== =======
</TABLE>
At March 31, 1997 and 1998, the Company did not record a valuation
allowance related to its deferred tax assets because it is the opinion of
management that future operations will more likely than not generate taxable
income to realize the deferred tax assets.
Income tax expense differs from the amount computed by applying the U.S.
federal income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1997 1998
------ ----- ------
<S> <C> <C> <C>
Income tax expense (benefit) computed at statutory rate... $ (260) $(568) $2,328
State income tax expense net of federal income tax
effect.................................................. (450) (85) (54)
Foreign income tax expense net of federal income tax
effect.................................................. 68 10 289
Foreign losses for which no tax benefit is currently
available............................................... 1,073 530 31
Tax benefit of foreign losses not previously claimed...... (595) (1,507)
Permanent differences..................................... 54 60 130
Other..................................................... (320) (310) 125
------ ----- ------
$ (430) $(363) $1,342
====== ===== ======
</TABLE>
A provision has not been made for U.S. income taxes that would be payable
if undistributed earnings of foreign subsidiaries were distributed to the
Company in the form of dividends, since it is management's intention to reinvest
such earnings permanently in the related foreign operations. At March 31, 1998,
such amounts were not significant.
Federal income tax returns for fiscal years beginning with 1995 are open
for review by the Internal Revenue Service.
F-18
<PAGE> 88
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(13) STOCKHOLDERS' EQUITY
Stock Appreciation Rights and Options
During 1994, NATCO approved a new National Tank Company Stock Appreciation
Rights Plan (the NATCO Plan). The NATCO Plan provides that officers and other
key employees may be granted rights to the appreciation in the market of a
stated number of shares of common stock of NATCO. Market value is determined by
a committee of the Board of Directors. The maximum number of rights that may be
granted under the NATCO Plan is 500,000, with 33,334 rights entitling the holder
to the appreciation in one share of the common stock of NATCO. The rights will
become 100% vested to the holder over a three-year period from the date of
grant. At March 31, 1997, there were 290,080 rights vested and 390,005 rights
outstanding. Compensation expense has been adjusted in connection with the plan
for the years ended March 31, 1997 and 1998 to reflect expense in the amounts of
$1,241 and $86 respectively.
Only July 1, 1997, the Board of Directors approved the conversion of the
outstanding stock appreciation rights issued under the National Tank Company
Stock Appreciation Rights Plan to individual stock options. The options granted
during fiscal 1998 were at fair market value, therefore no compensation expense
was recorded.
Stock Option Plans
The Company has stock option plans which provide for the issuance of
options to key employees and directors of the Company. Such plans authorize the
issuance of options to purchase up to an aggregate of 760,000 shares of Common
Stock, with vesting periods of up to four years and maximum option terms of 10
years. As of March 31, 1998, options to purchase approximately 746,666 shares
are available for issue.
The following table summarizes the transactions of the company's stock
option plans for the three year period ended March 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
STOCK OPTIONS STOCK APPRECIATION AVERAGE
SHARES RIGHTS EXERCISE PRICE
------------- ------------------ --------------
<S> <C> <C> <C>
Balance at March 31, 1995.......... 555,555 340,004 $1.47
Granted.......................... -- 50,001 $2.22
Exercised........................ -- --
Cancelled........................ -- --
--------- --------- -----
Balance at March 31, 1996.......... 555,555 390,005 $1.51
Granted.......................... 185,186 -- $3.58
Exercised........................ -- --
Cancelled........................ -- --
--------- --------- -----
Balance at March 31, 1997.......... 740,741 390,005 $1.85
Granted.......................... 424,369 -- $5.15
Exercised........................ -- --
Cancelled........................ -- --
--------- --------- -----
Conversion of Stock Appreciation
Rights to Stock Options.......... 390,005 (390,005)
Balance at March 31, 1998.......... 1,555,115 -- $2.75
--------- --------- -----
Price range $1.47-$2.22 (weighted
average contractual life of 8.60
years)........................... 945,560 1.51
Price range $3.58-$5.03 (weighted
average contractual life of 7.45
years)........................... 596,221 4.58
Price $8.81 (weighted average
contractual life of 10 years).... 13,334 8.81
</TABLE>
F-19
<PAGE> 89
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WEIGHTED
STOCK OPTIONS STOCK APPRECIATION AVERAGE
SHARES RIGHTS EXERCISE PRICE
------------- ------------------ --------------
<S> <C> <C> <C>
Exercisable Options
March 31, 1996................... 740,001 $1.47
March 31, 1997................... 1,030,745 1.86
March 31, 1998................... 1,279,778 2.26
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the minimum value method of this statement
under the assumptions of a risk free rate of 7% and an expected life of options
of 7.5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share for the years ending March 31 were
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net earnings -- as reported.............................. $ 475 $4,581 $6,273
Net earnings -- pro forma................................ 429 4,530 6,203
Earnings per share -- as reported........................ $ 0.08 $ 0.76 $ 0.82
Earnings per share -- pro forma.......................... 0.07 0.75 0.81
</TABLE>
Because the statement provides for pro forma amounts for options granted
beginning in 1995, the pro forma expense will likely increase in future years as
the new option grants become subject to the pricing model.
Preferred Stock Rights Plan
Each outstanding share of the Company's common stock carries a stock
purchase right (right) issued pursuant to a dividend distribution declared by
the Company's Board of Directors and distributed to stockholders of record on
May 5, 1998. When exercisable, each right entitles the stockholder to buy one
share of the Company's common stock at an exercise price of $72.50. The rights
will become exercisable following the tenth day after a person or group
announces acquisition of 15% or more of the Company's common stock or announces
commencement of a tender offer, the consummation of which would result in
ownership by the person or group of 15% or more of the common stock. The Company
will be entitled to redeem the rights at $.01 per right at any time on or before
the 10th day following the acquisition by a person or group of 15% or more of
the Company's common stock.
If, prior to redemption of the rights, the Company is acquired in a merger
or other business combination in which the Company is the surviving corporation,
or a person or group acquires 15% or more of the Company's common stock, each
right owned by a holder of less than 20% of the common stock will entitle its
owner to purchase, at the right's then current exercise price, a number of
shares of common stock of the Company having a fair market value equal to twice
the right's exercise price. If the Company sells more than 50% of its assets or
earning power or is acquired in a merger or other business combination in which
it is not the surviving corporation, the acquiring person must assume the
obligations under the rights and the rights will become exercisable to acquire
common stock of the acquiring person at the discounted price.
F-20
<PAGE> 90
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(14) EMPLOYEE BENEFITS
Defined Benefit Plans
A subsidiary of NATCO sponsors a defined benefit pension plan covering
certain union employees. The benefits are based primarily on years of service or
a combination of years of service and employees' pay near retirement. Plan
assets consist principally of marketable equity securities and fixed income
investments.
Net periodic pension expense of the defined benefit plans for the years
ended March 31, 1996, 1997 and 1998, is as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 38 $ 23 $ 34
Interest cost on projected benefit obligation............... 25 29 31
Actual return on plan assets................................ (78) (99) (87)
Net amortization, deferrals and settlements................. 41 56 35
---- ---- ----
Net periodic pension expense...................... $ 26 $ 9 $ 13
==== ==== ====
</TABLE>
The funded status of the plan at December 31, 1997 (the most recent
valuation date) was as follows:
<TABLE>
<S> <C>
Actuarial present value of:
Accumulated benefit obligation (all of which is vested)..... $(418)
=====
Projected benefit obligation................................ $(418)
Plan assets at fair market value............................ 646
-----
Excess of plan assets over projected benefit obligation... 228
Unrecognized net loss....................................... 55
-----
Prepaid pension asset at December 31, 1997.................. $ 283
=====
</TABLE>
The projected benefit obligation was calculated using an assumed weighted
average discount rate of 9.0% and 8.5% for 1996, and 1997, respectively. The
assumed long-term rate of return on assets was 9.0% for both years.
Deferred Compensation Plan
TEST adopted a deferred compensation plan (the TEST Plan) effective July 1,
1995 to provide incentives and rewards to certain individuals. Awards are
payable in five equal annual installments plus any earnings which have been
allocated to a participant's account. The Company has elected not to make any
additional awards for the plan year beginning January 1, 1998. As of March 31,
1998, the total amount owed under the TEST Plan was $666. This balance presently
accrues earnings at the prime rate plus 1%. The Company intends to terminate the
plan in July 1998, and accordingly, will pay out all amounts owed to
participants at that time.
Defined Contribution Plans
The Company and its subsidiaries each have defined contribution pension
plans covering substantially all nonunion hourly and salaried employees who have
completed six months of service. Employee contributions of up to 3% of each
covered employee's compensation are matched 100% by the Company.
F-21
<PAGE> 91
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In addition, the Company may contribute up to an additional 3% of such
compensation as a profit sharing contribution. Company contributions totaled
$658, $604 and $959 for the years ended March 31, 1996, 1997 and 1998,
respectively.
Postretirement Benefits
The Company provides certain health care and life insurance benefits for
employees retired at June 21, 1989, for which an estimated discounted liability
was recorded at the date of acquisition from C-E. The plan is funded on a
current basis.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation as of March 31, 1997 and 1998 were 7.5% and
7.0%, respectively. As a result of a change in experience factors during 1997,
the obligation was increased by $1,466 during 1997. The Company has elected to
recognize actuarial gains and losses immediately; accordingly, the increases are
reported separately in the statement of operations as (gain) loss on revaluation
of postretirement benefit liability.
For measurement purposes, annual rates of increase of 4.5% to 8.5% in the
per capita cost of covered health care benefits were assumed. The health care
cost trend rate assumption has a significant effect on the amount of the
obligation and periodic cost reported. An increase in the assumed health care
cost trend rate by 1% each year would increase the accumulated postretirement
benefit obligation as of March 31, 1998 by $1,272.
As a condition of the acquisition agreement with C-E, C-E will reimburse
the Company for annual costs in excess of $755 (adjusted for inflation) for ten
years following the acquisition date ending June 21, 1999. For the year ended
March 31, 1997 and 1998, the aggregate benefits paid for these retired employees
was $1,659 and $1668, respectively, of which $1,149 and $1,047, respectively,
was reimbursed by C-E.
Net periodic postretirement benefit cost represents interest cost on the
accumulated postretirement benefit obligation. Since all participants are
retired, there is no service cost. The postretirement benefit cost charged to
the statement of operations for the years ended March 31, 1996, 1997 and 1998
was $932, $957 and $1,048, respectively, representing interest costs associated
with accreting the liability.
(15) OPERATING LEASES
The Company and its subsidiaries lease various facilities and equipment
under noncancellable operating lease agreements. These leases expire on various
dates through 2003.
Future minimum lease payments required under operating leases that have
remaining noncancellable lease terms in excess of one year at March 31, 1998,
are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
MARCH 31, LEASES
- ------------------------------------------------------------ ---------
<S> <C>
1999................................................... $2,551
2000................................................... 2,123
2001................................................... 1,690
2002................................................... 793
2003................................................... 103
Thereafter............................................. --
------
Total minimum lease payments...................... $7,260
======
</TABLE>
Total expense for operating leases for the years ended March 31, 1996, 1997
and 1998 was $1,920, $2,241 and $2,563, respectively.
F-22
<PAGE> 92
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Lease and rental income of $938, $688 and $648 are included in revenues for
the years ending March 31, 1996, 1997 and 1998, respectively.
(16) RELATED PARTIES
In June 1989, the Company entered into an agreement with Capricorn
Management, G.P. (Capricorn Management) whereby a contingent fee would be paid
to Capricorn Management upon the occurrence of certain events as defined in the
agreement. During 1997, the fee of $374 was paid. No further fee is payable
thereunder, and accordingly, no additional liability was recorded at March 31,
1997.
The Company has contracted to pay $350 per year plus certain out-of-pocket
expenses to Capricorn Management to reimburse it for costs and expenses incurred
by it to perform certain management and other responsibilities. The fee is
payable quarterly, in advance. Subsequent to March 31, 1997, the fee was reduced
to $75 per year beginning July, 1997.
Employees of Capricorn Management participate in various NATCO benefit
plans for which Capricorn Management reimburses the Company. In addition, the
Company from time to time is billed by its vendors for Capricorn Management
expenses. As of March 31, 1998, Capricorn Management owed the Company $230 for
these services. For fiscal years ended March 31, 1996, 1997, and 1998, PTH paid
$225, $218, and $95, respectively to the Company for tax consulting and analysis
services. The Company currently provides tax consulting and analysis services to
PTH for $7 per month.
On November 1, 1989, two officers purchased 420,168 shares of common stock
from the Company for $285 in cash and personal notes of $419. The interest rates
on the notes were based on the 3-month commercial paper rate until the officers
left the Company and entered into option agreements (see below), at which time
the interest rate became 18%. Interest is payable annually in arrears and the
notes were due November 15, 1996. Accrued interest receivable of $2 is included
with the notes receivable balance at March 31, 1997. During the fiscal year
ended March 31, 1998 both notes were paid in full.
Effective March 31, 1994, Capricorn entered into an option agreement with a
former officer and 7.5% shareholder of the Company (see above), as a
renegotiation of a previous employment agreement. The shareholder had the option
to exchange the Company's common stock for an equivalent value of certain
Capricorn investments as of December 31, 1993 and a note from the Company. On
May 10, 1995, the stockholder exercised the option to exchange a portion of the
Company's common stock for an 18% subordinated note for $1,400 (see note 11).
During fiscal year 1997, Capricorn purchased the above note from the holder.
Effective December 31, 1994, Capricorn entered into a second option
agreement with a former officer and 2.5% stockholder of the Company (see above).
The option, which enabled the stockholder to exchange common stock for a
specified interest in a note from the Company, was exercised on May 10, 1995 for
an 18% subordinated note for $1,330 (see note 11). Also, during fiscal year
1997, Capricorn purchased $1,079 of the note from the note holder. During the
fiscal year ended March 31, 1998, Capricorn purchased the remaining portion of
the note.
In April 1995, the Company purchased 150 shares of PTH stock from a former
officer of PTH for $248. In August 1995, PTH purchased the shares for an equal
amount from the Company.
In May 1995, the Company repurchased 4% of its common stock from a
stockholder for cash of $810 and a 9% promissory note in the amount of $810. The
Company also paid accrued interest on an 18% investor note the stockholder had
in exchange for a reduction in the interest rate to 9%.
During 1997, the Company loaned a director of the Company $1,525. The note
bears interest until maturity at 10%, payable annually, and the principal is due
March 31, 1998. At the Company's option, the note may be repaid with shares of
the common stock of the Company.
F-23
<PAGE> 93
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
An executive officer of the Company has an employment agreement whereby he
is entitled to a bonus upon the occurrence of any sale or public offering of the
Company. Such bonus will equal one and one-half percent (1.5%) of the value of
all securities owned by stockholders of the Company prior to the sale or
offering, including Common Stock valued at the price per share received in
either the sale or public offering, and any debt held by such stockholders. The
Company contemplates an offering to occur in July 1998 that would trigger a
bonus payment. Based on an assumed initial public offering price of $ ,
the amount of the bonus is estimated to be $ million.
(17) DISCONTINUED OPERATIONS -- PTH
PTH manufactures vibrating screens, rock crushing equipment, conveyor
components and screening media with operations in the United States, Canada, and
Scotland. On June 30, 1997 the Company completed the tax-free spin-off of PTH by
distributing the 14,250 shares of PTH stock that it owned to Capricorn I as the
holder of its common stock.
The spin-off distribution reduced stockholders' equity by $4,558 which
represents the net assets of PTH at the date of spin-off including the
assumption of $4,576 of debt owed by the Company to Capricorn and the
forgiveness of $2,347 of intercompany balances.
The historical results for discontinued operations include an allocation of
the Company's nonspecific interest expense based on the ratio of net assets for
PTH divided by the sum of net assets of the Company, plus all the Company's
debt. Debt and interest expense directly incurred by NATCO was excluded from the
ratio. Interest expense for the Company attributable to the PTH operations and
included in the profit and loss from discontinued operations for the years
ending 1996 and 1997 was $919 and $676, respectively. For the year ending March
31, 1998, up to and including the disposal date of June 30, 1997, this amount
was $285.
The Company and PTH have entered into a tax sharing agreement with
provisions for determining responsibility for tax liabilities of PTH for the
years that PTH was included in the Company's consolidated tax returns. Income
taxes have been allocated to PTH based on its pretax income and calculated on a
separate company basis pursuant to the requirements of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Income taxes
allocated to PTH for the years ending 1996, 1997, and 1998, were $831, $2,982,
and $395, respectively.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
DISCONTINUED OPERATIONS 1996 1997 1998
----------------------- ------- ------- -------
<S> <C> <C> <C>
Revenues.............................................. $87,936 $86,664 $13,541
Income before income taxes and minority interest...... 1,676 314 1,162
Income tax provision (benefit)........................ 831 (825) 395
Minority interest..................................... 34 39 --
------- ------- -------
Income from operations................................ 811 1,100 767
Gain on disposal of division of discontinued
operations, net of income taxes..................... -- 4,788 --
------- ------- -------
Total discontinued operations............... $ 811 $ 5,888 $ 767
======= ======= =======
</TABLE>
F-24
<PAGE> 94
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
NET ASSETS OF DISCONTINUED OPERATIONS 1997 1998
------------------------------------- -------- --------
<S> <C> <C>
Current assets.............................................. $ 21,504 $ --
Property, plant and equipment, net.......................... 8,978 --
Other assets................................................ 6,507 --
Current liabilities......................................... (12,054) --
Other liabilities........................................... (15,452) --
-------- --------
Net assets of discontinued operations............. $ 9,483 $ --
======== ========
</TABLE>
The 1996, 1997 and 1998 financial statements and related notes have been
reclassified to present financial information for these businesses as
discontinued operations. The results of operations for both businesses have been
classified as discontinued operations in the consolidated statements of income
and are shown net of related income tax expense. The remaining assets and
liabilities of discontinued operations have been classified in the consolidated
balance sheet as a current asset "Net assets of discontinued operations" as of
March 31, 1997.
(18) COMMITMENTS AND CONTINGENCIES
In June 1997, the Company, in connection with a financing effected to
provide funds for the acquisition of TEST and other corporate purposes,
distributed all of the outstanding stock of PTH then owned by the Company to its
then sole stockholder, Capricorn. In connection with the distribution, the
Company received an opinion of counsel to the effect that the distribution would
be tax-free to both the Company and Capricorn. Tax-free treatment of the
distribution depends, in part, upon the underlying facts and circumstances at
the time of the distribution. There can be no assurance that the Internal
Revenue Service will agree with the Company's and its counsel's interpretation
of such facts and circumstances. If the Internal Revenue Service were to
challenge the tax-free treatment of the distribution and such challenge were
ultimately to prevail, the Company would be treated as recognizing gain with
respect to the distribution in an amount equal to the excess of the fair market
value of the PTH stock at the time of the distribution over its tax basis to the
Company. Such treatment could have a material adverse effect on the Company's
results of operations and financial condition.
(19) LITIGATION
In the ordinary course of business, the Company and its subsidiaries are
parties to litigation, some of which relate to litigation that was outstanding
at June 21, 1989, and that involve substantial amounts. In connection with
contractual provisions of the acquisition agreement between the Company and C-E,
the Company is indemnified against certain losses related to litigation or
incidences that existed at June 21, 1989.
At March 31, 1998, in the opinion of management, and based on consultation
with legal counsel, there are no matters pending or threatened which will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
(20) OFFICE CLOSURE
During 1996, NHI closed its Singapore office and operations ceased on March
1, 1996. The Company recorded charges of $637 at March 31, 1996, which
represented the costs to close the office.
During 1997, NHI began winding down the operations of its UK subsidiary.
These activities include, transferring the net assets and employees at the
Company's parts and service business to a new U.S. subsidiary, and resolving
pending warranty, vendor and leasehold issues. Included in the March 31, 1998
statement of operations is a charge of $282 recognized as the estimated cost to
exit these activities, which principally consists of lease termination costs,
and professional fees associated with winding down the operation.
F-25
<PAGE> 95
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(21) GEOGRAPHIC INFORMATION
The Company operates in one industry segment, wellhead equipment, systems
and services used in the production of oil and gas. The Company's geographic
data for continuing operations for the fiscal years ended March 31, 1996, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
UNITED UNITED CORPORATE &
STATES CANADA KINGDOM OTHER ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1996
Revenues from unaffiliated
customers......................... $ 69,876 $21,773 $12,950 $ 8,125 $ -- $112,724
Revenues from affiliates............ 881 1,516 82 110 (2,589) --
-------- ------- ------- ------- ------- --------
Revenues............................ $ 70,757 $23,289 $13,032 $ 8,235 $(2,589) $112,724
-------- ------- ------- ------- ------- --------
Operating income (loss)............. $ 5,793 $ 1,634 $(2,737) $(1,130) $(2,240) $ 1,320
Identifiable assets................. $ 34,943 $ 8,777 $ 3,628 $ 3,275 $(1,049) $ 49,574
Discontinued assets................. 8,946
--------
Total assets.............. $ 58,520
--------
1997
Revenues from unaffiliated
customers......................... $ 92,518 $28,099 $ 3,464 $ 2,576 $ -- $126,657
Revenues from affiliates............ 1,385 3,896 443 120 (5,844) --
-------- ------- ------- ------- ------- --------
Revenues............................ $ 93,903 $31,995 $ 3,907 $ 2,696 $(5,844) $126,657
-------- ------- ------- ------- ------- --------
Operating income (loss)............. $ 416 $ 2,895 $(1,247) $ 294 $(2,283) $ 75
Identifiable assets................. $ 45,357 $15,397 $ 2,408 $ 1,165 $(2,109) $ 62,218
Discontinued assets................. 9,483
--------
Total assets.............. $ 71,701
--------
1998
Revenues from unaffiliated
customers......................... $132,004 $59,701 $ 4,772 $ 5,546 $ -- $202,023
Revenues from affiliates............ 909 20 327 202 (1,458) --
-------- ------- ------- ------- ------- --------
Revenues............................ $132,913 $59,721 $ 5,099 $ 5,748 $(1,458) $202,023
-------- ------- ------- ------- ------- --------
Operating income (loss)............. $ 6,458 $ 6,634 $(1,793) $ 1,179 $(2,778) $ 9,700
Identifiable assets................. $ 73,884 $19,875 $ 4,792 $ 1,582 $(2,109) $ 98,024
</TABLE>
Corporate expenses consist of corporate overhead and research and
development expenses. Included in operating income for the United States in 1996
is a $6,320 gain on sale of investment. Revenue from one customer in Canada for
1998 amounted to $19,923. The contract was awarded to NATCO Canada principally
as the result of sales efforts made by NATCO Corporate personnel located in the
United States.
F-26
<PAGE> 96
NATCO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(22) SUBSIDIARY STATEMENT
The following consolidated statements of income and summary balance sheet
information have been derived from the audited accounts of the Company's
principal operating subsidiary, National Tank Company, whose operations are
conducted in the United States, Canada, Venezuela and Japan.
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $95,386 $123,346 $200,780
Cost of goods sold.......................................... 73,382 97,020 158,880
------- -------- --------
Gross profit...................................... 22,004 26,326 41,900
Selling, general and administrative expenses................ 17,666 19,308 27,959
------- -------- --------
Income before interest, taxes, depreciation and
other expenses.................................. 4,338 7,018 13,941
Depreciation and amortization expense....................... 664 799 1,268
Interest expense, net....................................... 495 762 2,012
Loss on revaluation of retiree medical liability............ 370 287 --
Loss on receivable with affiliate........................... 789 -- --
Other, net.................................................. 278 408 541
------- -------- --------
Income before income taxes........................ 1,742 4,762 10,120
Income tax expense.......................................... 678 1,000 2,936
------- -------- --------
Net income........................................ $ 1,064 $ 3,762 $ 7,184
======= ======== ========
Current assets.............................................. $29,617 $ 45,463 $ 71,398
Noncurrent assets........................................... 6,348 9,089 16,569
------- -------- --------
Total assets...................................... $35,965 $ 54,552 $ 87,967
======= ======== ========
Current liabilities......................................... $24,980 $ 35,606 $ 45,014
Noncurrent liabilities...................................... 4,276 8,610 19,433
Stockholders' equity........................................ 6,709 10,336 23,520
------- -------- --------
Total liabilities and stockholders' equity........ $35,965 $ 54,552 $ 87,967
======= ======== ========
</TABLE>
(23) SUBSEQUENT EVENTS (UNAUDITED)
In March 1998, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 relating to the initial public
offering of its Common Stock. The Company has entered into an agreement to
purchase the common stock of the Cynara Company (Cynara) from Cynara's common
stockholders. The closing of the Cynara acquisition will occur concurrently with
and is a condition to, the closing of that offering which is expected to occur
in July 1998. Cynara uses hollow fiber membranes to separate carbon dioxide from
streams of fluids produced from oil and gas reservoirs. Cynara designs,
constructs, sells, leases, or owns and operates commercial carbon dioxide
separation plants in the Gulf Coast region of the U.S., Southeast Asia, and
South America. Cynara either sells equipment to or contracts with operators of
such reservoirs to perform such separations on a fee basis.
The Company intends to account for the acquisition under the purchase
method of accounting. The purchase price of $20,193 is subject to certain
purchase price adjustments as outlined in the purchase agreement. The purchase
of Cynara will be financed with cash generated from the Company's initial public
offering ($7,500) as well as the issuance of 906,667 shares of the Company's
Common Stock.
F-27
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Total Engineering Services Team, Inc.:
We have audited the accompanying balance sheets of Total Engineering
Services Team, Inc. (the Company) as of December 31, 1996 and 1995 and the
related statements of income, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Total Engineering Services
Team, Inc. as of December 31, 1996 and December 31, 1995 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
January 29, 1998
F-28
<PAGE> 98
TOTAL ENGINEERING SERVICES TEAM, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Accounts receivable....................................... $13,387 $ 9,646 $13,463
Inventories............................................... 4,816 8,085 3,943
Prepaid expenses and other................................ 166 148 255
Deferred tax assets....................................... 521 566 606
------- ------- -------
Total current assets.............................. 18,890 18,445 18,267
------- ------- -------
Property, plant and equipment:
Land...................................................... 107 329 329
Machinery and equipment................................... 1,226 1,576 1,686
Buildings and improvements................................ 1,080 2,002 2,036
------- ------- -------
2,413 3,907 4,051
------- ------- -------
Less accumulated depreciation............................. 311 692 896
------- ------- -------
2,102 3,215 3,155
------- ------- -------
Goodwill, net............................................... 579 562 555
Noncompete agreements, net.................................. 157 -- --
Deposits.................................................... 248 54 48
------- ------- -------
Total assets...................................... $21,976 $22,276 $22,025
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,261 $ 1,525 $ 1,908
Cash overdraft............................................ 768 644 1,185
Accrued liabilities....................................... 2,573 5,005 2,682
Income taxes payable...................................... 1,206 2,039 363
Payable to Parent Company................................. 4,070 1,272 3,854
------- ------- -------
Total current liabilities......................... 10,878 10,485 9,992
Deferred tax liability...................................... -- 4 --
Stockholders' equity:
Common stock, $10 par value, 2,000 shares authorized, 100
shares issued and outstanding.......................... 1 1 1
Additional paid-in capital................................ 7,833 7,833 7,833
Retained earnings......................................... 3,264 3,953 4,199
------- ------- -------
Total stockholders' equity........................ 11,098 11,787 12,033
Commitments and contingencies
------- ------- -------
Total liabilities and stockholders' equity........ $21,976 $22,276 $22,025
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 99
TOTAL ENGINEERING SERVICES TEAM, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
----------------------------- JUNE 30,
1994 1995 1996 1997
------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................................... $33,645 $42,434 $53,969 $22,905
Direct costs...................................... 25,767 33,652 45,317 18,381
------- ------- ------- -------
Gross profit.................................... 7,878 8,782 8,652 4,524
Operating expenses................................ 4,489 6,274 6,992 3,868
------- ------- ------- -------
Operating income................................ 3,389 2,508 1,660 656
Other income and expenses:
Interest expense................................ (153) (155) (224) (88)
Other........................................... 179 188 2 7
------- ------- ------- -------
Income before income taxes.............. 3,415 2,541 1,438 575
Income tax expense................................ 1,085 573 749 329
------- ------- ------- -------
Net income.............................. $ 2,330 $ 1,968 $ 689 $ 246
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 100
TOTAL ENGINEERING SERVICES TEAM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993.................... $ 1 $5,235 $2,786 $ 8,022
Purchase adjustment.............................. -- 2,598 (3,820) (1,222)
Net income....................................... -- -- 2,330 2,330
--- ------ ------ -------
Balances at December 31, 1994.................... 1 7,833 1,296 9,130
Net income....................................... -- -- 1,968 1,968
--- ------ ------ -------
Balances at December 31, 1995.................... 1 7,833 3,264 11,098
Net income....................................... -- -- 689 689
--- ------ ------ -------
Balances at December 31, 1996.................... 1 7,833 3,953 11,787
Net income (unaudited)........................... -- -- 246 246
--- ------ ------ -------
Balances at June 30, 1997 (unaudited)............ $ 1 $7,833 $4,199 $12,033
=== ====== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 101
TOTAL ENGINEERING SERVICES TEAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED
--------------------------------- JUNE 30,
1994 1995 1996 1997
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 2,330 $ 1,968 $ 689 $ 246
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 67 249 381 204
Deferred income taxes............................. 116 (435) (41) (44)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable................................... (1,816) (656) 3,741 (3,817)
(Increase) decrease in inventories.............. (639) (675) (3,269) 4,142
(Increase) decrease in prepaid expenses and
other assets................................. 46 (70) 18 (107)
Increase (decrease) in accounts payable......... 212 (1,057) (736) 383
Increase (decrease) in accrued liabilities...... 581 (1,871) 2,432 (2,323)
Increase (decrease) in income taxes payable..... (361) 1,058 833 (1,676)
------- ------- ------- -------
Net cash provided by (used in) operating
activities................................. 536 (1,489) 4,048 (2,992)
------- ------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment........... -- (962) (1,494) (144)
Business acquisition................................. -- (3,300) -- --
Goodwill............................................. -- -- 17 7
Other noncurrent assets.............................. 293 101 351 6
------- ------- ------- -------
Net cash provided by (used in) investing
activities................................. 293 (4,161) (1,126) (131)
Cash flows from financing activities:
Increase (decrease) in payable to parent company..... (1,438) 5,226 (2,798) 2,582
Increase (decrease) in overdraft..................... 344 424 (124) 541
------- ------- ------- -------
Net cash (used in) provided by financing
activities................................. (1,094) 5,650 (2,922) 3,123
------- ------- ------- -------
Net decrease in cash and cash equivalents.............. (265) -- -- --
Cash and cash equivalents at beginning of year......... 265 -- -- --
------- ------- ------- -------
Cash and cash equivalents at end of year............... -- -- -- --
======= ======= ======= =======
Cash payments for:
Interest............................................. -- -- -- --
======= ======= ======= =======
Income taxes......................................... -- -- -- --
======= ======= ======= =======
Noncash transactions -- issuance of note payable to
affiliate to purchase land and buildings............. -- $ 3,300 -- --
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 102
TOTAL ENGINEERING SERVICES TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND REPORTING
(a) Nature of Business
Total Engineering Services Team, Inc. (the Company) was incorporated on May
15, 1970 in Louisiana and designs, manufactures and installs instrumentation and
electrical control systems for the petroleum industry.
On August 15, 1994, the Company's parent Total Energy Services, Inc.
(Total), was acquired by Enterra Corporation (Enterra). As a result of the
purchase and the subsequent merger of Enterra with Weatherford, the Company
became a wholly-owned subsidiary of Weatherford Enterra, Inc.
On June 30, 1997, the Company was acquired by National Tank Company
(NATCO). As a result of the purchase, the Company is a wholly-owned subsidiary
of NATCO.
(b) Business Acquisitions
On August 1, 1995, the Company acquired for approximately $3.3 million
substantially all the assets and assumed substantially all of the liabilities of
Production Management Controls System (PMCS) in a transaction accounted for as a
purchase. The excess of the aggregate purchase price of PMCS over the fair value
of the net assets acquired was recognized as goodwill. PMCS provided
instrumentation and electrical design, fabrication, installation, start-up and
commissioning of control systems for oil and gas production facilities located
offshore in the Gulf of Mexico.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Inventory
Inventory, which consist of materials, are valued at average cost which
does not exceed market.
(b) Property, Plant and Equipment
Property, plant and equipment are depreciated using the straight-line
method over their respective useful lives which range from 3 to 31 years. The
costs of ordinary maintenance and repairs are expensed, while renewals and
betterments are capitalized.
Effective April 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of.
Accordingly, in the event that facts and circumstances indicate that property,
plant and equipment may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future cash flows
associated with the asset is compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow was necessary.
Adoption of this standard did not have a material effect on the financial
positions or results of operations of the Company.
(c) Income Taxes
Income taxes are determined by the Company in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109 and are included in the
consolidated income tax return of the parent company. For financial reporting
purposes, the Company records income tax expense or benefit as if a separate
return was filed.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
F-33
<PAGE> 103
TOTAL ENGINEERING SERVICES TEAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
income in the period that includes the enactment date.
(d) Goodwill
Goodwill represents the excess of the aggregate purchase price paid by the
Company in an acquisition accounted for as a purchase over the fair life of the
net assets acquired. Goodwill is amortized on a straight-line basis over a
period of 40 years.
(e) Cash Equivalents
Test considers all highly liquid investment instruments with original
maturities of three months or less to be cash equivalents.
(f) Revenue Recognition
Revenues from significant long-term contracts are recognized on the
percentage-of-completion method. Earned revenue is based on the percentage that
incurred costs to date bear to total estimated costs. Revenues and profits on
all other sales are recorded as shipments are made. If estimated total costs on
any contracts or work-in-process indicate a loss, the entire estimated loss is
recognized immediately.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenues recognized in excess of amounts billed and are included in
trade accounts receivable. Billings in excess of costs and estimated earnings on
uncompleted contracts represent billings in excess of revenues recognized and
are included in customer advances.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ -----------
<S> <C> <C> <C>
Work-in-process........................................ $3,620 $6,735 $2,282
Raw materials and supplies............................. 1,196 1,350 1,661
------ ------ ------
Total........................................ $4,816 $8,085 $3,943
====== ====== ======
</TABLE>
F-34
<PAGE> 104
TOTAL ENGINEERING SERVICES TEAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
(4) PROPERTY, PLANT AND EQUIPMENT
The cost of ordinary maintenance and repairs are expensed, while renewals
and betterments are capitalized. Depreciation on property and equipment is
computed for financial reporting purposes using the straight-line method over
the estimated useful lives of the assets.
<TABLE>
<CAPTION>
USEFUL LIFE
-----------
<S> <C>
Land........................................................ --
Buildings and improvements.................................. 20 years
Machinery and equipment..................................... 5 years
</TABLE>
(5) DUE TO PARENT
Following the acquisition of the Company from Enterra in 1994, the Company
has maintained its cash management with the parent company. The parent company
has provided funding for working capital and expenditure requirements. During
1996, the company paid $1,064 of corporate services to the parent company
corresponding to: tax, legal, human resources and audit consultation, financial
planning and cash management, among others. These payments were based on a fixed
monthly fee determined by the parent company. In addition, on August 1995, the
Company borrowed approximately $3.3 million for the purchase of Production
Management Control System. No specific maturity date was established.
(6) INCOME TAXES
Income tax expense (benefit) consisted of the following components:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Year ended December 31, 1994:
U.S. federal........................................... $ 681 $ 251 $ 932
State and local........................................ 116 37 153
------ ----- ------
$ 797 $ 288 $1,085
====== ===== ======
Year ended December 31, 1995:
U.S. federal........................................... $ 860 $(379) $ 481
State and local........................................ 148 (56) 92
------ ----- ------
$1,008 $(435) $ 573
====== ===== ======
Year ended December 31, 1996:
U.S. federal........................................... $ 645 $ (37) $ 608
State and local........................................ 145 (4) 141
------ ----- ------
$ 790 $ (41) $ 749
====== ===== ======
</TABLE>
A reconciliation of the provision for income taxes follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Provision for federal income taxes at 34%................ $1,161 $ 864 $ 489
State and foreign income taxes........................... 116 148 147
Permanent differences.................................... (510) -- --
Other.................................................... 318 (439) 113
------ ------ ------
$1,085 $ 573 $ 749
====== ====== ======
</TABLE>
F-35
<PAGE> 105
TOTAL ENGINEERING SERVICES TEAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued liabilities....................................... $502 $560
Other..................................................... 19 6
---- ----
Total gross deferred tax assets........................... 521 566
Deferred tax liabilities:
Other..................................................... -- 4
---- ----
$521 $562
==== ====
</TABLE>
In assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
deductible differences for the year ended December 31, 1996.
(7) COMMITMENTS AND CONTINGENCIES
(a) The Company is obligated under various operating leases. Rent expense under
these operating leases for the years ended December 31, 1994, 1995 and 1996
and six months ended June 30, 1997 was approximately $427, 402, $290 and
$104, respectively.
Minimum future rental payments are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 69
1999........................................................ 58
2000........................................................ 43
----
$170
====
</TABLE>
(b) The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operation, or liquidity.
(8) SUBSEQUENT EVENTS
Effective June 30, 1997, the Company was acquired by NATCO Group Inc. for
approximately $20 million.
F-36
<PAGE> 106
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Cynara Company
We have audited the accompanying balance sheets of the Cynara Company (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1997 and the period from March 5, 1996 (date of inception) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1997 and 1996, and the results of its operations and its cash flows for the year
ended December 31, 1997 and the period from March 5, 1996 (date of inception) to
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 27, 1998,
except for Note 15, as to which the date is
May 29, 1998
F-37
<PAGE> 107
THE CYNARA COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ MARCH 31
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash................................................. $ 646,714 $ 2,556,540 $ 556,080
Restricted cash...................................... -- 262,000 262,000
Accounts receivable.................................. 1,089,524 347,270 2,218,072
Stockholder advances................................. 101,579 -- --
Inventories.......................................... 1,545,493 2,631,753 1,943,663
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. 191,788 620,579 3,550,397
Prepaids and other current assets.................... 200,395 210,955 140,011
---------- ----------- -----------
Total current assets......................... 3,775,493 6,629,097 8,670,223
Property, plant, and equipment, net.................... 4,055,091 8,798,151 9,314,959
Loan origination fees.................................. 161,662 92,625 99,449
Other assets........................................... 67,500 52,500 48,750
---------- ----------- -----------
Total assets................................. $8,059,746 $15,572,373 $18,133,381
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 883,845 $ 1,836,602 $ 2,359,322
Accrued compensation and benefits.................... 308,707 442,794 419,192
Stockholder distributions payable.................... -- 263,189 823,762
Billings in excess of costs and estimated earnings on
uncompleted contracts............................. -- 235,878 --
Other accrued liabilities............................ 425,022 943,759 845,869
Common stock warrants liability...................... 60,903 493,480 493,480
Current maturities of long-term debt................. 969,599 1,300,000 1,625,000
---------- ----------- -----------
Total current liabilities.................... 2,648,076 5,515,702 6,566,625
Long-term debt......................................... 3,784,798 7,138,000 7,974,616
Stockholders' equity:
Class A common stock, voting, $.001 par value:
Authorized shares -- 90,000
Issued and outstanding shares -- 50,000........... 50 50 50
Class B common stock, nonvoting, $.001 par value:
Authorized shares -- 10,000
Issued and outstanding shares -- None............. -- -- --
Additional paid-in capital........................... 1,659,377 1,659,377 1,659,377
Retained earnings (accumulated deficit).............. (32,555) 1,259,244 1,932,713
Total stockholders' equity................... 1,626,872 2,918,671 3,592,140
---------- ----------- -----------
Total liabilities and stockholders' equity... $8,059,746 $15,572,373 $18,133,381
========== =========== ===========
</TABLE>
See accompanying notes.
F-38
<PAGE> 108
THE CYNARA COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1996 THREE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED MARCH 31
TO DECEMBER 31 DECEMBER 31 -----------------------
1996 1997 1997 1998
------------------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Construction projects and module
revenues......................... $ 996,125 $13,814,684 $1,039,386 $5,242,364
Processing services and other
revenues......................... 3,041,497 4,811,948 1,540,648 1,011,258
---------- ----------- ---------- ----------
4,037,622 18,626,632 2,580,034 6,253,622
Cost of revenues:
Construction projects and module
revenues......................... 701,552 8,339,673 650,556 2,639,976
Processing services and other
revenues......................... 1,566,211 3,276,574 638,468 1,209,573
---------- ----------- ---------- ----------
2,267,763 11,616,247 1,289,024 3,849,549
---------- ----------- ---------- ----------
Gross profit.......................... 1,769,859 7,010,385 1,291,010 2,404,073
Operating expenses:
Research and development............ 116,656 309,237 54,968 87,227
Management fees to related party.... 86,624 327,940 75,000 98,593
Selling, general, and
administrative................... 1,183,625 3,150,287 638,695 779,098
---------- ----------- ---------- ----------
Total operating expenses.... 1,386,905 3,787,464 768,663 964,918
---------- ----------- ---------- ----------
Operating income...................... 382,954 3,222,921 522,347 1,439,155
Interest expense...................... (341,712) (1,233,989) (170,123) (205,113)
Other income, net..................... 3,352 43,637 4,792 --
Equity loss in Partnership............ (9,082) -- -- --
---------- ----------- ---------- ----------
Net income.................. $ 35,512 $ 2,032,569 $ 357,016 $1,234,042
========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-39
<PAGE> 109
THE CYNARA COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
CLASS A CLASS A ADDITIONAL EARNINGS TOTAL
COMMON STOCK COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT) EQUITY
------------ ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Common stock issued at March 5,
1996 (date of inception)....... 16,320 $16 $ 59,411 $ -- $ 59,427
Issuance of common stock.... 33,680 34 1,599,966 -- 1,600,000
Distributions to
stockholders.............. -- -- -- (68,067) (68,067)
Net income.................. -- -- -- 35,512 35,512
------ --- ---------- ---------- ----------
Balance at December 31, 1996..... 50,000 50 1,659,377 (32,555) 1,626,872
Distributions to
stockholders................ -- -- -- (740,770) (740,770)
Net income..................... -- -- -- 2,032,569 2,032,569
------ --- ---------- ---------- ----------
Balance at December 31, 1997..... 50,000 50 1,659,377 1,259,244 2,918,671
Distributions to stockholders
(unaudited)................. -- -- -- (560,573) (560,573)
Net income (unaudited)......... -- -- -- 1,234,042 1,234,042
------ --- ---------- ---------- ----------
Balance at March 31, 1998
(unaudited).................... 50,000 $50 $1,659,377 $1,932,713 $3,592,140
====== === ========== ========== ==========
</TABLE>
See accompanying notes.
F-40
<PAGE> 110
THE CYNARA COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1996
(DATE OF THREE MONTHS
INCEPTION) TO YEAR ENDED ENDED MARCH 31
DECEMBER 31 DECEMBER 31 ------------------------
1996 1997 1997 1998
------------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 35,512 $ 2,032,569 $ 357,016 $ 1,234,042
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 429,600 1,175,780 257,757 532,226
Amortization of loan origination fees
and debt discount.................... 69,188 212,140 7,600 4,875
Loss on disposal of fixed assets........ -- 52,365 -- --
Common stock warrants revaluation....... -- 432,577 -- --
Equity loss in Partnership.............. 9,082 -- -- --
Change in assets and liabilities:
Restricted cash...................... -- (262,000) -- --
Accounts receivable.................. 482,608 742,254 396,650 (1,870,802)
Inventory............................ 67,774 (1,086,260) (182,734) 688,090
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... (191,788) (428,791) 191,788 (2,929,818)
Prepaids and other current assets.... (184,738) (10,560) 85,608 70,944
Accounts payable..................... 453,534 952,757 (494,210) 522,720
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... -- 235,878 987,917 (235,878)
Other accrued liabilities............ 411,183 652,824 (272,352) (121,492)
Other................................ -- -- -- (11,699)
----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities.............................. 1,581,955 4,701,533 1,335,040 (2,116,792)
INVESTING ACTIVITIES
Capital expenditures...................... (360,848) (3,601,205) (153,102) (1,045,284)
Acquisition, net of cash acquired......... (6,589,297) (2,355,000) -- --
----------- ----------- ---------- -----------
Net cash used in investing activities..... (6,950,145) (5,956,205) (153,102) (1,045,284)
FINANCING ACTIVITIES
Proceeds from revolving loans and term
loans................................... 6,700,000 13,288,000 -- 1,161,616
Payments on revolving loans and long-term
loans................................... (1,900,000) (9,650,000) (550,000) --
Loan origination fees..................... (215,550) (97,500) -- --
Issuance of common stock.................. 1,600,000 -- -- --
Issuance of common stock warrants......... 100 -- -- --
Distributions to stockholders............. (169,646) (376,002) -- --
----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities.............................. 6,014,904 3,164,498 (550,000) 1,161,616
----------- ----------- ---------- -----------
Increase (decrease) in cash............... 646,714 1,909,826 631,938 (2,000,460)
Cash at beginning of period............... -- 646,714 646,714 2,556,540
----------- ----------- ---------- -----------
Cash at end of period..................... $ 646,714 $ 2,556,540 $1,278,652 $ 556,080
=========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-41
<PAGE> 111
THE CYNARA COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
The Cynara Company, formerly RHRK Holdings, Inc., was incorporated on March
5, 1996 as an S corporation by Robert J. Hamaker ("Hamaker") and Ralph M. Kelly
("Kelly"). Hamaker and Kelly each contributed his 5% limited interest in a
partnership known as The Cynara Company (the "Partnership") in exchange for
8,160 shares each of Class A common stock of the company. Effective July 1,
1996, concurrent with the acquisition described in Note 3, the company changed
its name to The Cynara Company (the "Company").
The Company uses hollow fiber membranes to separate CO(2) from streams of
fluids produced from oil and gas reservoirs. The Company designs, constructs,
sells, leases, or owns and operates commercial CO(2) separation plants using
this process in the Gulf Coast region of the U.S., Southeast Asia, and South
America. The Company either sells equipment to or contracts with operators of
such reservoirs to perform such separations on a fee basis.
Effective July 1, 1996, concurrent with the acquisition described in Note
3, a group of individual investors (collectively, "HHDS&P" or the "Majority
Stockholders") individually purchased a total of 33,680 shares of the Company's
Class A common stock for $1.6 million. Concurrently, Hamaker and Kelly each
individually sold certain of his Class A common stock to an individual HHDS&P
investor, resulting in the Majority Stockholders controlling 80% of the
outstanding shares of Class A common stock, with Hamaker and Kelly each
controlling 10%.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Information
The financial statements included herein as of March 31, 1998, and for the
three months ended March 31, 1998 and 1997 are unaudited, and, in the opinion of
management, the information furnished reflects all material adjustments,
consisting of normal recurring adjustments necessary for a fair statement of the
results for the interim periods presented.
Revenue Recognition
The Company accounts for earnings from long-term construction contracts on
the percentage-of-completion method of accounting. Under the
percentage-of-completion method, earnings on contracts-in-process are recognized
based on the percentage of estimated total earnings that costs incurred bear to
currently estimated total costs on each contract, commencing when sufficient
progress has been made to estimate final results with reasonable accuracy.
Provisions are made for the full amounts of anticipated losses in the period in
which they are first determinable. Costs and estimated earnings on
contracts-in-process in excess of amounts billed are reported as a current
asset. Amounts billed on contracts-in-process in excess of related costs and
estimated earnings are reported as a current liability.
Revenues from CO(2) separation services are based on volumes processed and
revenues from membrane module sales are recognized when the modules are shipped.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity date of three months or less to be cash equivalents.
F-42
<PAGE> 112
THE CYNARA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets.
Expenditures for major improvements which extend the lives of property and
equipment are capitalized, while minor replacements, maintenance, and repairs
are charged to operations as incurred.
Research and Development Costs
The costs of materials and equipment that are acquired for research and
development activities, and which have alternative future uses, are capitalized
and depreciated over the period of future benefit. All other research and
development costs are charged to operations as incurred.
Inventories
Inventories are stated at the lower of cost or market value, using average
cost for raw materials and standard cost for work-in-progress and finished
membrane modules, which approximates actual cost.
Use of Estimates
Management is required to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's policy is to
evaluate each customer's financial condition and determine the amount of credit
to be extended. The Company sells to a limited number of customers, primarily in
the petrochemical industry. Collateral is generally not required on these
receivables. At December 31, 1997 and 1996, there were no allowances for
doubtful accounts.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
3. ACQUISITION
Effective July 1, 1996, the Company purchased Dow's 90% interest in the
Partnership and certain other assets (primarily inventory and certain
Pittsburgh, California, membrane manufacturing plant assets) from Dow. The
acquisition was accounted for under the purchase method of accounting, whereby
all of the assets and liabilities acquired were adjusted to their fair values at
the acquisition date, which approximated the purchase price. The tentative
purchase price at July 1, 1996 was $7.1 million and consisted of $6.3 million in
cash, assumption of certain liabilities of $454,000, and acquisition costs of
$300,000. Effective immediately prior to the acquisition on July 1, 1996, the
Partnership distributed certain net liabilities of approximately $174,000 to the
Company. The final purchase price was contingent upon the resolution of an
operating agreement with Pennzoil for CO(2) separation services at the SACROC
Unit, as more fully described in Note 4. In August 1997, the Company negotiated
a new operating agreement with Pennzoil and was required to pay an additional
cash consideration of $2,355,000, resulting in a total purchase price of
$9,455,000. The additional purchase price was allocated to the SACROC Unit. The
financial statements reflect all operations of the acquired entity from July 1,
1996 through.
F-43
<PAGE> 113
THE CYNARA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CO(2) SEPARATION SERVICES
The Partnership had an operating agreement with Pennzoil (assumed from
Chevron U.S.A., Inc., in 1994) to provide CO(2) separation services at a
facility in Snyder, Texas (the "SACROC Unit"). Separation services began at the
SACROC Unit in December 1983 and the agreement expired in August 1993, with
automatic annual renewals. In May 1996, Pennzoil notified the Partnership of its
intent to terminate the agreement effective September 1, 1996. The Company, as
successor to the Partnership, continued to provide CO(2) separation services at
the SACROC Unit on a month-to-month basis until August 1997. In August 1997, the
Company entered into a new agreement with Pennzoil to provide such services. The
agreement expires February 2008, with automatic annual renewals unless either
party provides written notice of termination at least 90 days prior to the
renewal date.
In August 1996, the Company began operations under an agreement with Texaco
to provide CO(2) separation services at a facility in Paradis, Louisiana (the
"Paradis Unit"). The agreement expires July 31, 2001, with automatic annual
renewals unless either party provides written notice of termination at least 90
days prior to the renewal date.
Approximately $3.3 million and $1.3 million of total revenues resulted from
separation services at the SACROC Unit and Paradis Unit, respectively, for the
year ended December 31, 1997. Approximately $2.3 million and $500,000 of total
revenues resulted from separation services at the SACROC Unit and Paradis Unit,
respectively, for the period from March 5, 1996 (date of inception) to December
31, 1996.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
In January 1997, the Company entered into a long-term construction contract
valued at approximately $18.2 million with Unocal Thailand, Ltd. ("Unocal"). The
contract is estimated to be completed in the second quarter of 1998. At December
31, 1997, the Company has issued a $1.5 million letter of credit for the benefit
of Unocal, which reduces the available borrowing base under the revolving loan
described in Note 8.
In July 1997, the Company entered into a long-term construction contract
valued at approximately $2.6 million with Total Exploration and Production
Thailand ("Total"). The contract is estimated to be completed in the second
quarter of 1998. At December 31, 1997, the Company has restricted cash of
$262,000 to secure its performance on this contract.
For the year ended December 31, 1997, approximately $12.6 million and
$601,000 of the Company's revenues resulted from the contracts with Unocal and
Total, respectively.
Unaudited
In March 1998, management lowered the estimated cost to complete the Unocal
contract. As a result, the Company determined the contract to be approximately
92% complete for purposes of revenue recognition compared to 84% complete prior
to the revision in estimate. This change in estimate resulted in a $1.5 million
revenue recognition adjustment.
F-44
<PAGE> 114
THE CYNARA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
MARCH 31
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $ 171,375 $ 335,895 $ 460,737
Work-in-progress............................... 183,155 420,458 255,938
Finished goods................................. 1,190,963 1,875,400 1,226,988
---------- ---------- ----------
$1,545,493 $2,631,753 $1,943,663
========== ========== ==========
</TABLE>
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1996 1997
------------- ---------- -----------
<S> <C> <C> <C>
Leasehold improvements..................... Up to 5 years $ 184,269 $ 188,446
Machinery and equipment.................... 5 years 4,054,932 8,854,407
Furniture and fixtures..................... 7 years 58,134 112,311
Computers and office equipment............. 5 years 158,566 296,156
Construction-in-progress................... 21,290 907,269
---------- -----------
4,477,191 10,358,589
Less accumulated depreciation.............. 422,100 1,560,438
---------- -----------
Property, plant, and equipment, net........ $4,055,091 $ 8,798,151
========== ===========
</TABLE>
Depreciation expense for the year ended December 31, 1997 and for the
period from March 5, 1996 (date of inception) to December 31, 1996 was
$1,161,000 and $436,000, respectively. During 1997, the Company disposed of
certain fixed assets which were used primarily in an older manufacturing
process. The loss on disposal of such assets was approximately $52,000 and is
netted with other income in the statement of operations.
F-45
<PAGE> 115
THE CYNARA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Term loan with Bank One Capital Partners II, LTD ("BOCP");
interest payable quarterly at a rate of 12%, principal
payable in quarterly installments of $250,000 commencing
March 31, 1997, due July 1, 2001, secured by all assets of
the Company............................................... $4,500,000 --
Revolving loan with BOCP; interest payable monthly at a rate
of prime plus 1 1/2%, due the earlier of July 1, 1998 or
the date the term loan is paid in full, secured by all
assets of the Company..................................... 300,000 --
Term loan with Bank One; interest payable quarterly at a
rate of 9.5%, principal payable in quarterly installments
of $325,000 commencing March 31, 1998, due December 31,
2002, secured by all assets of the Company................ -- $7,000,000
Revolving loan with Bank One; interest payable monthly at a
rate of 8.5%, due October 8, 1999, secured by all assets
of the Company............................................ -- 1,438,000
Less debt discount.......................................... 45,603 --
---------- ----------
4,754,397 8,438,000
Less current maturities, including related debt discount.... 969,599 1,300,000
---------- ----------
Long-term debt due after one year........................... $3,784,798 $7,138,000
========== ==========
</TABLE>
Upon resolution of the SACROC operating agreement, as more fully described
in Note 4, the Company refinanced all of its outstanding borrowings with Bank
One. The debt agreement provides for a term loan of $7.0 million and a revolving
loan not to exceed $6.0 million. The Company has issued a $1.5 million letter of
credit which reduces the available borrowing base under the revolving loan. A
commitment fee of 0.5% is charged on the unused portion of the revolving loan.
In 1997, the Company paid loan origination fees of approximately $98,000, which
are being amortized to interest expense over five years. The revolving loan is
subject to certain borrowing base requirements based primarily on current asset
balances. The existing debt agreement provides, among other things, for the
maintenance of certain minimums, as defined, for working capital, net worth,
liquidity, and cash flow coverage of debt service.
Scheduled maturities of the Company's long-term debt are as follows for the
years ending December 31:
<TABLE>
<S> <C>
1998............................................. $1,300,000
1999............................................. 2,738,000
2000............................................. 1,300,000
2001............................................. 1,300,000
2002 and thereafter.............................. 1,800,000
----------
$8,438,000
==========
</TABLE>
The Company paid interest of $464,000 and $259,000 during the year ended
December 31, 1997 and for the period from March 5, 1996 (date of inception) to
December 31, 1996, respectively. The carrying value of the Company's long-term
debt approximates its fair value, as the interest rates on outstanding
borrowings approximate the market rate.
9. INCOME TAXES
The stockholders have elected to treat the Company as an S corporation, as
defined by the Internal Revenue Code. In general, the corporate income or loss
of an S corporation is allocated to the stockholders for
F-46
<PAGE> 116
THE CYNARA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
inclusion in their personal federal income tax returns. As a result, federal
income taxes are not reflected in these financial statements.
10. COMMITMENTS
The Company leases certain equipment and facilities under operating leases
that expire at various dates through 2002. Minimum rental commitments under all
noncancelable leases with an initial term in excess of one year are payable as
follows:
<TABLE>
<S> <C>
1998............................................. $ 493,035
1999............................................. 244,255
2000............................................. 152,530
2001............................................. 152,530
2002............................................. 152,530
----------
$1,194,880
==========
</TABLE>
Total rental expense charged to operations during the year ended December
31, 1997 and for the period from March 5, 1996 (date of inception) to December
31, 1996 was $523,775 and $233,174, respectively.
From time to time, the Company is subject to claims arising in the ordinary
course of business. In the opinion of management, the ultimate outcome of these
claims is not expected to have a material adverse effect on the financial
statements.
11. RELATED PARTY TRANSACTIONS
The Company entered into a management services agreement with HHDS&P
whereby the Company pays monthly management fees to HHDS&P for certain
management services provided. Unpaid management fees and expenses were
approximately $188,000 and $38,000 at and 1996, respectively.
12. STOCKHOLDERS AGREEMENT
The Company entered into a Stockholders Agreement (the "Agreement") on July
1, 1996 with the holders of its outstanding shares of common stock and BOCP. The
Agreement provides the stockholders and BOCP the right of first refusal to
purchase the selling stockholder's shares. The Agreement also provides the
stockholders and BOCP the right of co-sale when a selling stockholder elects a
third-party offer when such selling shares are not purchased under the right of
first refusal. The Agreement further states that the Majority Stockholders may
require, with 30 days' written notice, the other stockholders and BOCP to sell
their shares to a purchaser on the same terms and for the same price that the
Majority Stockholders have agreed to sell their shares.
The Agreement provides Hamaker and Kelly the right, if terminated for any
reason other than for cause, to require the Company to purchase all of their
outstanding shares. Conversely, the Agreement also provides the Company the
option, if Hamaker or Kelly is terminated for cause, to purchase all of the
outstanding shares held by the terminated employee. The put or call option price
per share shall be the fair market value per share of the Company on a fully
diluted basis, as mutually determined by the parties or a financial institution.
The Agreement allows quarterly distributions to be made to the
stockholders, to the extent permitted under the Company's debt agreement, to
satisfy the stockholder's aggregate federal and state income tax liability
incurred in respect to the income of the Company. The Company may require
stockholders to refund distributions in excess of the stockholders' aggregate
tax liability, or the Company may reduce the first distribution of the following
year. During the year ended December 31, 1997, the Company distributed cash of
$376,000, and an additional $263,000 is recorded as stockholder distributions
payable in the balance sheet.
F-47
<PAGE> 117
THE CYNARA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the period from March 5, 1996 (date of inception) to December 31, 1996,
the Company distributed cash of $170,000 to stockholders, of which $102,000 is
recorded as stockholder advances in the balance sheet.
The Agreement allows stockholders to exchange their shares of Class A
voting common stock for Class B nonvoting common stock and vice versa upon
written request.
The Agreement shall terminate upon the earlier of the following: (1) the
sale, transfer, or disposition by Hamaker, Kelly, and BOCP of all their shares;
(2) an initial public offering of the Company's common stock; (3) the sale or
transfer of all of the outstanding common stock to a third-party offeror; or (4)
June 30, 2006.
13. COMMON STOCK WARRANTS AND OPTIONS
Concurrent with the execution of its debt agreement with BOCP, the Company
issued 1,282 common stock warrants to BOCP in exchange for $100. The proceeds of
the debt and detachable warrants were allocated between the debt and warrants,
resulting in a debt discount. The common stock warrants entitle BOCP the right
to purchase 1,282 shares of Class B nonvoting common stock at $.01 per share.
The warrants also have put rights, which entitle the holder to require the
Company to purchase all of the outstanding warrants or warrant shares at the put
price. The put price is determined based on the fair value, as mutually agreed
by the parties or based on defined formulas. The warrants are recorded at their
estimated put price at December 31, 1997, based on the consideration expected to
be received in conjunction with the proposed merger (as more fully described in
Note 15), and are included in liabilities in the balance sheet. The warrants
expire on October 8, 2002.
BOCP also has common stock options to purchase 3,846.15 shares of Class B
common stock from the Majority Stockholders at an exercise price of $52.26 per
share.
14. BENEFIT PLAN
The Company has a 401(k) defined contribution retirement plan covering all
eligible employees. This plan allows for employees to defer up to 16% of their
compensation, with the Company matching 50% of the first 10% of the
participant's contribution. In addition, the Company may make a discretionary
contribution at the end of the plan year. Participants are immediately and fully
vested in employer contributions. The Company's matching contribution charged to
operations for the year ended December 31, 1997 and for the period from March 5,
1996 (date of inception) to December 31, 1996 was $83,000 and $32,000,
respectively.
15. SUBSEQUENT EVENT
In March 1998, management announced an agreement in principle to merge the
business of the Company with NATCO Group, Inc. ("NATCO"). The transaction is
expected to be completed in June 1998 and is contingent on NATCO's successful
initial public offering anticipated to occur in June 1998. Upon completion,
NATCO will own 100% of the Company's capital stock. The Company has obtained
approval of the proposed transaction with the holder of outstanding borrowings.
F-48
<PAGE> 118
===============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES UNDER ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 17
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Consolidated Financial
Data................................ 20
Unaudited Condensed Pro Forma
Financial Statements................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 36
The Cynara Acquisition................ 46
Management............................ 47
Certain Transactions.................. 55
Principal and Selling Stockholders.... 58
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 63
Description of Bank Credit
Facilities.......................... 63
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 68
Available Information................. 68
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
===============================================================================
SHARES
[LOGO]
NATCO GROUP INC.
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
SIMMONS & COMPANY
INTERNATIONAL
, 1998
===============================================================================
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 24,249
NASD filing fee............................................. 8,720
NYSE listing fee............................................ 84,600
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 400,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Printing expenses........................................... 85,000
Transfer Agent fees......................................... 15,000
Miscellaneous............................................... 22,431
----------
TOTAL............................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, a Delaware
corporation has the power, under specified circumstances, to indemnify its
directors, officers, employees and agents in connection with threatened, pending
or completed actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in right of the
corporation), brought against them by reason of the fact that they were or are
such directors, officers, employees or agents, against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in any
such action, suit or proceeding. Article Eleventh of the Restated Certificate of
Incorporation of the Registrant provides that the Registrant may indemnify any
director, officer, employee or agent of the Registrant to the fullest extent
permitted by the Delaware General Corporation Law as the same exists or may be
hereafter amended. Article VI of the Registrant's Bylaws provides that the
Registrant shall indemnify each person who is or was made a party to any actual
or threatened civil, criminal, administrative or investigative action, suit or
proceeding because such person is or was an officer or director of the
Registrant or is a person who is or was serving at the request of the Registrant
as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service
relating to employee benefit plans, to the fullest extent permitted by the
Delaware General Corporation Law as it existed at the time the indemnification
provisions of the Registrant's Bylaws were adopted or as may be thereafter
amended.
Article VI of the Registrant's Bylaws also provide that the Registrant may
maintain insurance, at its own expense, to protect itself and any director,
officer, employee or agent of the Registrant or of another entity against any
expense, liability, or loss, regardless of whether the Registrant would have the
power to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
certificate of incorporation may contain a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for its or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law (relating to liability for unauthorized
acquisitions or redemptions of, or dividends on, capital stock) or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Tenth of the Registrant's Certificate of Incorporation contains such a
provision.
II-1
<PAGE> 120
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 30, 1997, the Registrant issued $2,359,864 in principal amount of
its 13% Subordinated Promissory Notes due 2000 and 1,585,000 shares of Common
Stock to Capricorn Investors II, L.P. in consideration of the payment to the
Registrant of $13,000,000. In so doing, the Registrant relied on the provisions
of Section 4(2) of the Securities Act in claiming exemption for the offering,
sale and delivery of such securities from the registration provisions of the
Securities Act.
On , 1998, Capricorn Investors, Ltd. and Capricorn Investors II,
L.P. delivered to the Registrant $5,084,501 and $2,359,864, respectively, in
principal amount of the Registrant's 13% Subordinated Notes due 2000 in exchange
for the issuance by the Registrant to such limited partnerships out of
authorized but unissued Common Stock 1,010,333 shares and 468,925 shares,
respectively. In so doing, the Registrant relied on the provisions of Section
3(a)(9) of the Securities Act in claiming exemption from the registration
provisions of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
1.1* -- Form of Underwriting Agreement.
2.1 -- Agreement and Plan of Merger dated as of March 26, 1998
among the Company and the stockholders of The Cynara
Company.
2.2 -- Stock Purchase Agreement dated as of May 7, 1997 among
Enterra Petroleum Equipment Group, Inc., National Tank
Company and Weatherford Enterra, Inc.
3.1 -- Certificate of Incorporation of the Company, as amended
and restated.
3.2 -- Certificate of Designations of Series A Junior
Participating Preferred Stock.
3.3 -- Bylaws of the Company, as amended and restated.
4.1* -- Specimen Common Stock certificate.
4.2* -- Rights Agreement dated as of May 15, 1998 between the
Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent.
4.3* -- Draft of Registration Rights Agreement among the Company
and the stockholders of The Cynara Company.
4.4* -- Form of Registration Rights Agreement among the Company,
Capricorn Investors, L.P. and Capricorn Investors II,
L.P.
4.5* -- Form of lock-up letter to the Underwriters from certain
directors and officers of the Company.
5.1* -- Form of Opinion of Vinson & Elkins L.L.P.
10.1 -- 1998 Director Plan.
10.2 -- Form of Nonemployee Director's Stock Option Agreement.
10.3 -- 1998 Employee Plan.
10.4 -- International Revolving Loan Agreement dated as of June
30, 1997 between the Company and Chase Bank of Texas,
N.A.
10.5* -- Commitment Letter dated November 24, 1994 from The Bank
of Nova Scotia to NATCO Canada, Ltd.
10.6* -- Service and Reimbursement Agreement dated as of July 1,
1997 between the Company and Capricorn Management, G.P.
10.7 -- Term Loan Facility and Revolving Loan Facility dated June
30, 1997 between the Company and Chase Bank of Texas,
N.A.
10.8 -- Loan Agreement dated as of October 8, 1997 between The
Cynara Company and Bank One Texas, N.A.
</TABLE>
II-2
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
10.9 -- Form of Indemnification Agreement between the Company and
its officers and directors.
10.10 -- Securities Exchange Agreement dated as of March 5, 1998
among the Company, Capricorn Investors, L.P. and
Capricorn Investors II, L.P.
10.11* -- Form of Stockholders' Agreement among the Company,
Capricorn Investors, L.P. and Capricorn Investors II,
L.P.
10.12 -- Employment Agreement dated as of July 31, 1997 between
the Company and Nathaniel A. Gregory.
10.13* -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Nathaniel A. Gregory, as amended by
Amendment No. 1 to Stock Option Agreement dated as of May
, 1998.
10.14 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Patrick M. McCarthy.
10.15 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and William B. Wiener III.
10.16 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Frank Smith.
10.17 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Frank Smith.
10.18 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and David Volz.
21.1 -- List of subsidiaries of the Company.
23.1* -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of Ernst & Young LLP.
23.3* -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto).
24.1 -- Powers of Attorney.
27.1* -- Financial Data Schedule.
99.1 -- Consent of George K. Hickox, Jr. to serve as director.
</TABLE>
- ---------------
* Filed herewith.
All other exhibits have previously been filed.
(b) Consolidated Financial Statement Schedules, Years ended March 31, 1996,
1997 and 1998.
All other schedules are omitted because the required information is
inapplicable or the information is presented in the Consolidated Financial
Statements or related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 122
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on the 9th day of June, 1998.
NATCO GROUP INC.
By: /s/ NATHANIEL A. GREGORY
----------------------------------
Nathaniel A. Gregory
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on June 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S> <C>
/s/ NATHANIEL A. GREGORY Chairman of the Board and Chief
- ----------------------------------------------------- Executive Officer (Principal
Nathaniel A. Gregory Executive Officer)
/s/ WILLIAM B. WIENER III Senior Vice President and Chief
- ----------------------------------------------------- Financial Officer (Principal
William B. Wiener III Financial Officer)
/s/ STEPHEN J. GOODLAND Vice President and Controller
- ----------------------------------------------------- (Principal Accounting Officer)
Stephen J. Goodland
* Director
- -----------------------------------------------------
Herbert S. Winokur, Jr.
* Director
- -----------------------------------------------------
E. Hale Staley
* Director
- -----------------------------------------------------
Patrick M. McCarthy
* Director
- -----------------------------------------------------
Howard I. Bull
* Director
- -----------------------------------------------------
Keith K. Allan
</TABLE>
*By: /s/ WILLIAM B. WEINER III
-------------------------------
William B. Weiner III, as
attorney-in-fact
II-5
<PAGE> 124
SCHEDULE II
NATCO GROUP INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS COLLECTIONS BALANCE AT
BEGINNING CHARGED TO AND END
OF PERIOD ALLOWANCE WRITE-OFFS OF PERIOD
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year Ended March 31, 1997:
Allowance for doubtful accounts receivable... $572 $127 $(191) $508
==== ==== ===== ====
Year Ended March 31, 1998:
Allowance for doubtful accounts receivable... $508 $ 60 $ 397 $965
==== ==== ===== ====
</TABLE>
S-1
<PAGE> 125
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
1.1* -- Form of Underwriting Agreement.
2.1 -- Agreement and Plan of Merger dated as of March 26, 1998
among the Company and the stockholders of The Cynara
Company.
2.2 -- Stock Purchase Agreement dated as of May 7, 1997 among
Enterra Petroleum Equipment Group, Inc., National Tank
Company and Weatherford Enterra, Inc.
3.1 -- Certificate of Incorporation of the Company, as amended
and restated.
3.2 -- Certificate of Designations of Series A Junior
Participating Preferred Stock.
3.3 -- Bylaws of the Company, as amended and restated.
4.1* -- Specimen Common Stock certificate.
4.2* -- Rights Agreement dated as of May 15, 1998 between the
Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent.
4.3* -- Draft of Registration Rights Agreement among the Company
and the stockholders of The Cynara Company.
4.4* -- Form of Registration Rights Agreement among the Company,
Capricorn Investors, L.P. and Capricorn Investors II,
L.P.
4.5* -- Form of lock-up letter to the Underwriters from certain
directors and officers of the Company.
5.1* -- Form of Opinion of Vinson & Elkins L.L.P.
10.1 -- 1998 Director Plan.
10.2 -- Form of Nonemployee Director's Stock Option Agreement.
10.3 -- 1998 Employee Plan.
10.4 -- International Revolving Loan Agreement dated as of June
30, 1997 between the Company and Chase Bank of Texas,
N.A.
10.5* -- Commitment Letter dated November 24, 1994 from The Bank
of Nova Scotia to NATCO Canada, Ltd.
10.6* -- Service and Reimbursement Agreement dated as of July 1,
1997 between the Company and Capricorn Management, G.P.
10.7 -- Term Loan Facility and Revolving Loan Facility dated June
30, 1997 between the Company and Chase Bank of Texas,
N.A.
10.8 -- Loan Agreement dated as of October 8, 1997 between The
Cynara Company and Bank One Texas, N.A.
10.9 -- Form of Indemnification Agreement between the Company and
its officers and directors.
10.10 -- Securities Exchange Agreement dated as of March 5, 1998
among the Company, Capricorn Investors, L.P. and
Capricorn Investors II, L.P.
10.11* -- Form of Stockholders' Agreement among the Company,
Capricorn Investors, L.P. and Capricorn Investors II,
L.P.
10.12 -- Employment Agreement dated as of July 31, 1997 between
the Company and Nathaniel A. Gregory.
10.13* -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Nathaniel A. Gregory, as amended by
Amendment No. 1 to Stock Option Agreement dated as of May
, 1998.
10.14 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Patrick M. McCarthy.
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
10.15 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and William B. Wiener III.
10.16 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Frank Smith.
10.17 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and Frank Smith.
10.18 -- Stock Option Agreement dated as of July 31, 1997 between
the Company and David Volz.
21.1 -- List of subsidiaries of the Company.
23.1* -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of Ernst & Young LLP.
23.3* -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto).
24.1 -- Powers of Attorney.
27.1* -- Financial Data Schedule.
99.1 -- Consent of George K. Hickox, Jr. to serve as director.
</TABLE>
- ---------------
* Filed herewith.
All other exhibits have previously been filed.
<PAGE> 1
Exhibit 1.1
____________ Shares
NATCO Group Inc.
Common Stock
UNDERWRITING AGREEMENT
June __, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
SIMMONS & COMPANY INTERNATIONAL
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
NATCO Group Inc., a Delaware corporation (the "COMPANY"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and Capricorn Partners, L.P., a Delaware limited partnership
(the "SELLING STOCKHOLDER"), proposes to sell to the several Underwriters, an
aggregate of ___________ shares of the common stock, par value $0.01 per share,
of the Company (the "FIRM SHARES"), of which ________ shares are to be issued
and sold by the Company and ________ shares are to be sold by the Selling
Stockholder. The Company also proposes to issue and sell to the several
Underwriters not more than an additional _______ shares of its common stock, par
value $0.01 per share, (the "ADDITIONAL SHARES") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter referred to collectively as the "SHARES". The common
stock, par value $0.01 per share, is hereinafter referred to as the "COMMON
STOCK." The Company and the Selling Stockholder are hereinafter sometimes
referred to collectively as the "SELLERS."
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
<PAGE> 2
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering the offering, sale and delivery of
additional shares of Common Stock (a "RULE 462(B) REGISTRATION STATEMENT"),
then, unless otherwise specified, any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
__________ Firm Shares, (ii) the Selling Stockholder agrees to sell _________
Firm Shares and (iii) each Underwriter agrees, severally and not jointly, to
purchase from each Seller at a price per Share of $______ (the "PURCHASE PRICE")
the number of Firm Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Firm Shares to be sold by such Seller as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto bears to the total
number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
2
<PAGE> 3
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period the Company may (i) grant stock options and
restricted stock pursuant to the Company's existing stock option and incentive
plans described in the Prospectus, (ii) issue shares of Common Stock upon the
exercise of any option or warrant or the conversion of any security outstanding
on the date hereof and (iii) issue shares of Common Stock in connection with the
Cynara Acquisition as described in the Prospectus. The Company also agrees not
to file any registration statement with respect to any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
for a period of 180 days after the date of the Prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation;
provided, however, that the Company may file and cause to become effective under
the Act one or more registration statements on Form S-8 relating to the
offering, sale and delivery of shares of Common Stock pursuant to outstanding
stock options or other employee benefit plans or interests in such employee
benefit plans. In addition, the Selling Stockholder agrees that, for a period of
180 days after the date of the Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any demand
for, or exercise any right with respect to, the registration of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock. The Company shall, prior to or concurrently with the execution
of this Agreement, deliver an agreement executed by (i) the Selling Stockholder,
(ii) each of the directors and executive officers of the Company and (iii) each
stockholder listed on Annex I hereto to the effect that such person will not,
during the period commencing on the date such person signs such agreement and
ending 180 days after the date of the Prospectus, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in
any of the transactions described in the first sentence of this paragraph or (B)
make any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
3
<PAGE> 4
SECTION 4. Delivery and Payment. The Shares shall be evidenced by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Sellers of the Purchase Price therefore by wire transfer
of Federal or other funds immediately available in New York City. The
certificates representing the Shares shall be made available for inspection not
later than 9:30 a.m., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date (as defined below), as the
case may be, at the office of DTC or its designated custodian (the "DESIGNATED
OFFICE"). The time and date of delivery and payment for the Firm Shares shall be
9:00 a.m., New York City time, on ________, 1998 or such other time on the same
or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and
the Company shall agree in writing. The time and date of delivery and payment
for the Firm Shares are hereinafter referred to as the "CLOSING DATE". The time
and date of delivery and payment for any Additional Shares to be purchased by
the Underwriters shall be 9:00 a.m., New York City time, on the date specified
in the applicable exercise notice given by you pursuant to Section 2 or such
other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and date
of each delivery and payment for any Additional Shares are hereinafter referred
to as an "OPTION CLOSING DATE."
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Vinson & Elkins L.L.P., 1001 Fannin Street,
Suite 2300, Houston, Texas 77002 and the shares shall be delivered at the
Designated Office, all on the Closing Date or such Option Closing Date, as the
case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement, of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation of any proceeding for either of such purposes, (iii) when any
amendment to the Registration Statement becomes effective, (iv) if the Company
is required to file a Rule 462(b) Registration Statement after the effectiveness
of this
4
<PAGE> 5
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below that makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or that requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four (4) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably or promptly object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or supplement
to the Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Promptly after the Registration Statement becomes effective and
from time to time thereafter for such period as in the opinion of counsel for
the Underwriters a prospectus is required by law to be delivered in connection
with sales by an Underwriter or a dealer, to furnish in New York City to each
Underwriter and any dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or dealer may
reasonably request.
(e) If, during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
5
<PAGE> 6
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or to taxation as to
matters and transactions other than those relating to the Prospectus, the
Registration Statement, any preliminary prospectus or the offering or sale of
the Shares, in any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period beginning
after the effective date of the Registration Statement that shall satisfy the
provisions of Section 11(a) of the Act, and to advise you in writing when such
statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries (as set forth on
Schedule II attached hereto) as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and the Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the
6
<PAGE> 7
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and reasonable fees and disbursements of
counsel for the Underwriters in connection with such registration or
qualification and memoranda relating thereto), (v) the filing fees and
disbursements of counsel for the Underwriters in connection with the review and
clearance of the offering of the Shares by the National Association of
Securities Dealers, Inc. (including disbursements of counsel up to $10,000),
(vi) all fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to the listing of the Shares on the NYSE, (vii) the cost
of printing certificates representing the Shares, (viii) the costs and charges
of any transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company and the
Selling Stockholder hereunder for which provision is not otherwise made in this
Section. The provisions of this Section shall not supersede or otherwise affect
any agreement that the Company and the Selling Stockholder may otherwise have
for allocation of such expenses among themselves. Except as expressly otherwise
provided in this Section 5 or in Section 8 or 12 herein, the Underwriters shall
pay all of their own costs, expenses, fees and taxes incurred in connection with
the offering, sale and delivery of the Shares, including the fees and expenses
of their counsel, stock transfer fees on resale of any of the Shares by them and
any advertising expenses incurred in connection therewith.
(j) To use its best efforts to list, subject to notice of issuance, the
Shares on the NYSE and to maintain the listing of the Shares on the NYSE for a
period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 p.m., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
7
<PAGE> 8
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 p.m., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or, to the knowledge of the
Company, threatened by the Commission.
(b)(i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not, as the effective date of such amendment, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement)
and the Prospectus comply as to form and, as amended or supplemented, if
applicable, will comply as to form in all material respects with the Act, (iii)
if the Company is required to file a Rule 462(b) Registration Statement after
the effectiveness of this Agreement, such Rule 462(b) Registration Statement and
any amendments thereto, when they become effective, (A) 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 statements therein not misleading and
(B) will comply as to form in all material respects with the Act and (iv) the
Prospectus, at the date first delivered to investors, does not contain and, as
amended or supplemented, if applicable, will not as of such date of amendment or
supplement contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
8
<PAGE> 9
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholder) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and nonassessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) All the outstanding shares of capital stock of each of the
Company's Significant Subsidiaries (as defined in Rule 405 of the Act and as
further set forth on Schedule III attached hereto) have been duly authorized and
validly issued and are fully paid and nonassessable, and are owned by the
Company, directly or indirectly through one or more subsidiaries, free and clear
of any security interest, claim, lien, encumbrance or adverse interest of any
nature, except as otherwise disclosed in the Registration Statement.
(h) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained in
the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or is in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
9
<PAGE> 10
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except an order declaring the Registration
Statement effective by the Commission and such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company or any of its
subsidiaries is or could be a party or to which any of their respective property
is or could be subject that are required to be described in the Registration
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), the protection of human health and safety, any
provisions of the Employee Retirement Income Security Act of 1974, as amended,
or any provisions of the Foreign Corrupt Practices Act or the rules and
regulations promulgated thereunder, except for such violations which, singly or
in the aggregate, would not have a material adverse effect on the business,
prospects, financial condition or results of operation of the Company and its
subsidiaries, taken as a whole.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, those required under
any applicable Environmental Laws, as are necessary to own, lease, license and
operate its properties and to conduct its business, except where the failure to
have
10
<PAGE> 11
any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) that allows or, after notice or
lapse of time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where such failure
to be valid and in full force and effect or to be in compliance, the occurrence
of any such event or the presence of any such restriction would not, singly or
in the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(n) Except for any costs or liabilities accrued or disclosed in the
consolidated financial statements of the Company included in the Registration
Statement, there are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) that would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(o) This Agreement has been duly authorized, executed and delivered by
the Company.
(p) KPMG Peat Marwick LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act. Ernst &
Young LLP are independent public accountants with respect to The Cynara Company
as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration
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Statement present fairly in accordance with generally accepted accounting
principles the information required to be stated therein; and the other
financial and statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) are, in
all material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(s) Except as set forth in the Registration Statement, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
results of operations, business, management or prospects of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, absolute or contingent.
(u) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(v) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them that, in either case, is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries that are material to the business of the Company
and its subsidiaries are held by them under valid and enforceable leases with
such
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<PAGE> 13
exceptions as do not materially interfere with the use made and proposed to be
made of such property and buildings by the Company and its subsidiaries, in each
case except as described in the Prospectus.
(w) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by
them in connection with the business now operated by them except where the
failure to own or possess or otherwise be able to acquire such intellectual
property would not, singly or in the aggregate, have a material adverse effect
on the business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole; and neither the Company nor any
of its subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of such intellectual property
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(x) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that would not
have a material adverse effect on the business, prospects, financial conditions
or results of operations of the Company and its subsidiaries, taken as a whole.
(y) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries, on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of its
subsidiaries, on the other hand, that is required by the Act to be described in
the Registration Statement or the Prospectus but is not so described.
(z) The pro forma financial statements of the Company and its
subsidiaries and the related notes thereto set forth in the Registration
Statement and the Prospectus (and any supplement or amendment thereto) have been
prepared on a basis consistent with the historical financial statements of the
Company and its subsidiaries, give effect to the assumptions used in the
preparation thereof on a reasonable basis and in good faith and present fairly
the historical and proposed transactions contemplated by the Registration
Statement and the Prospectus. Such pro forma financial statements have been
prepared in accordance with the applicable requirements of Rule 11-02 of
Regulation S-X
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<PAGE> 14
promulgated by the Commission. The other pro forma financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any supplement or amendment thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with the pro forma
financial statements.
(aa) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or threatened against the Company or
any of its subsidiaries before the National Labor Relations Board or any state
or local labor relations board or (ii) strike, labor dispute, slowdown or
stoppage pending or, to the knowledge of the Company, threatened against the
Company or any of its subsidiaries, except for such actions specified in clause
(i) or (ii) above, which, singly or in the aggregate, would not have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. To the best of
the Company's knowledge, no collective bargaining organizing activities are
taking place with respect to the Company or any of its subsidiaries.
(bb) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(cc) All material tax returns required to be filed by the Company and
its subsidiaries in any jurisdiction have been filed, other than those filings
being contested in good faith, and all material taxes, including withholding
taxes, penalties and interest, assessments, fees and other charges due pursuant
to such returns or pursuant to any assessment received by the Company or any of
its subsidiaries have been paid, other than those being contested in good faith
and for which adequate reserves have been provided.
SECTION 7. Representations and Warranties of the Selling Stockholder.
The Selling Stockholder represents and warrants to each Underwriter that:
(a) The Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good title to such Shares, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever. Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will
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<PAGE> 15
pass to the Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder in the manner provided
herein and therein.
(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder.
(e) The execution, delivery and performance of this Agreement by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and the consummation of the transactions
contemplated hereby will not (i) require any consent, approval, authorization or
other order of, or qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue Sky laws of the
various states), (ii) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the organizational documents of such
Selling Stockholder, or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder or any property of such Selling Stockholder is bound or
(iii) violate or conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or agency having
jurisdiction over such Selling Stockholder or any property of such Selling
Stockholder.
(f) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) At any time during the period described in Section 5(d), if there
is any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
(h) Each certificate signed by or on behalf of such Selling Stockholder
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to the
Underwriters as to the matters covered thereby.
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<PAGE> 16
SECTION 8. Indemnification. (a) The Sellers, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages, liabilities and judgments (including, without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action, that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or caused by 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, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished in writing to the Company by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter who failed to deliver a
Prospectus (as then amended or supplemented, provided by the Company to the
several Underwriters in the requisite quantity and on a timely basis to permit
proper delivery on or prior to the Closing Date) to the person asserting any
losses, claims, damages and liabilities and judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, or caused by 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, if such material misstatement or omission or
alleged material misstatement or omission was cured in such Prospectus and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. Notwithstanding the foregoing, the
aggregate liability of the Selling Stockholder pursuant to this Section 8(a)
shall be limited to an amount equal to the total proceeds (before deducting
underwriting discounts and commissions and expenses) received by the Selling
Stockholder from the Underwriters for the sale of the Shares sold by the Selling
Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, the Selling
Stockholder and each person, if any, who controls the Selling Stockholder within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Sellers to such Underwriter but
only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
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<PAGE> 17
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it that are different from or additional to those available to the
indemnifying party. In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for (i) the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all Underwriters, their
officers and directors and all persons, if any, who control any Underwriter
within the meaning of either Section 15 of the Act or Section 20 of the Exchange
Act, (ii) the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for the Company, its directors, its officers who
sign the Registration Statement and all persons, if any, who control the Company
within the meaning of either such Section and (iii) the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
the Selling Stockholder and all persons, if any, who control the Selling
Stockholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. If any of the following
become an indemnified party and chooses to exercise its right as provided herein
to employ separate counsel, that right shall, (i) in the case of the
Underwriters, their officers and directors and such control persons of any
Underwriters, be exercised in writing by Donaldson, Lufkin & Jenrette Securities
Corporation, (ii) in the case of the Company and such directors, officers and
control persons of the Company, be exercised in writing by the Company and (iii)
in the case of the Selling Stockholder and such control persons of the Selling
Stockholder, be
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exercised in writing by the Selling Stockholder. The indemnifying party shall
indemnify and hold harmless any indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business days
after the indemnifying party shall have received a request from the indemnified
party for reimbursement for the fees and expenses of counsel (in any case where
such fees and expenses are at the expense of the indemnifying party) and prior
to the date of such settlement, the indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request for
reimbursement (other than the payment of amounts being disputed in good faith)
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
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
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<PAGE> 19
Company or the Selling Stockholder on the one hand or the Underwriters on the
other hand and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any matter, including any
action, that could have given rise to such losses, claims, damages, liabilities
or judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) The Selling Stockholder hereby designates NATCO Group Inc.,
Brookhollow Central III, 2950 North Loop West, Suite 700, Houston, Texas 77092,
as its authorized agent, upon which process may be served in any action which
may be instituted in any state or federal court in the State of New York by any
Underwriter, any director or officer of any Underwriter or any person
controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and the Selling Stockholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to the Selling Stockholder, at the address for notices specified in
Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
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(a) All the representations and warranties of the Company contained in
this Agreement that are qualified as to materiality shall be true and correct on
the Closing Date and all such representations and warranties of the Company that
are not so qualified shall be true and correct in all material respects on the
Closing Date, in each case with the same force and effect as if made on and as
of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Nathaniel A. Gregory and William B. Wiener III, in their
capacities as the Chairman and Chief Executive Officer and Chief Financial
Officer, respectively, of the Company, confirming (i) the matters set forth in
Sections 6(t), 9(a) and 9(b), (ii) that the Company has complied with all of the
agreements and satisfied all of the conditions herein contained and required to
be complied with or satisfied by the Company on or prior to the Closing Date,
(iii) that all the representations and warranties of the Company contained in
this Agreement that are qualified as to materiality shall be true and correct on
the Closing Date with respect to The Cynara Company and its subsidiaries and
(iv) all such representations and warranties of the Company that are not
qualified as to materiality shall be true and correct in all material respects
on the Closing Date with respect to The Cynara Company and its subsidiaries.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii) is material and adverse and, in your judgment, makes it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
(e) All the representations and warranties of the Selling Stockholder
contained in this Agreement shall be true and correct in all material respects
on the Closing Date with the same force and effect as if made on and as of the
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Closing Date and you shall have received on the Closing Date a certificate dated
the Closing Date from the Selling Stockholder to such effect and to the effect
that the Selling Stockholder has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied by the Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Vinson & Elkins L.L.P. counsel for the Company, to the effect that:
(i) each of the Company and its Significant Subsidiaries has
been duly incorporated, is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation and has
the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly
qualified and is in good standing as a foreign corporation authorized
to do business in each jurisdiction in which the nature of its business
or its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole;
(iii) all the outstanding shares of capital stock of the
Company (including the Shares to be sold by the Selling Stockholder)
have been duly authorized and validly issued and are fully paid,
nonassessable and not subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will be validly issued, fully paid and nonassessable, and the issuance
of such Shares will not be subject to any preemptive or similar rights;
(v) all of the outstanding shares of capital stock of each of
the Company's Significant Subsidiaries have been duly authorized and
validly issued and are fully paid and nonassessable, and are owned by
the Company, directly or indirectly through one or more subsidiaries,
free and clear (to such counsel's knowledge) of any security interest,
claim, lien, encumbrance or adverse interest of any nature;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
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(viii) the Registration Statement has become effective under
the Act, no stop order suspending its effectiveness has been issued and
no proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
(ix) the statements under the captions "Risk Factors," "Shares
Eligible for Future Sale," "Business," "Certain Transactions,"
"Description of Bank Credit Facilities" and "Description of Capital
Stock" in the Prospectus and Items 14 and 15 of Part II of the
Registration Statement, insofar as such statements constitute a summary
of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal
matters, documents and proceedings;
(x) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to the best of such
counsel's knowledge after due inquiry, neither the Company nor any of
its subsidiaries is in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
material to the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective property is
bound;
(xi) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue Sky
laws of the various states), (B) conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the charter
or by-laws of the Company or any of its subsidiaries or any indenture,
loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective property is
bound, (C) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the Company, any of its
subsidiaries or their respective property or (D) result in the
suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization;
(xii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the
Company
22
<PAGE> 23
or any of its Significant Subsidiaries is or could be a party or to
which any of their respective property is or could be subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described, or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not so described or filed as
required;
(xiii) to the best of such counsel's knowledge after due
inquiry, neither the Company nor any of its subsidiaries has violated
any Environmental Law, any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or any provisions of the Foreign
Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the
aggregate, would not have a material adverse effect on the business,
prospects, financial condition or results of operation of the Company
and its subsidiaries, taken as a whole;
(xiv) each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary
to own, lease, license and operate its respective properties and to
conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly or
in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole; each such Authorization is
valid and in full force and effect and each of the Company and its
subsidiaries is in compliance with all the terms and conditions thereof
and with the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event has
occurred (including, without limitation, the receipt of any notice from
any authority or governing body) which allows or, after notice or lapse
of time or both, would allow, revocation, suspension or termination of
any such Authorization or results or, after notice or lapse of time or
both, would result in any other impairment of the rights of the holder
of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its
subsidiaries; except where such failure to be valid and in full force
and effect or to be in compliance, the occurrence of any such event or
the presence of any such restriction would not, singly or in the
aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole;
23
<PAGE> 24
(xv) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xvi) to the best of such counsel's knowledge after due
inquiry, there are, except as disclosed in the Registration Statement,
no contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement; and
(xvii) (A) the Registration Statement and the Prospectus and
any supplement or amendment thereto (except for the financial
statements and other financial data included therein as to which no
opinion need be expressed) comply as to form with the Act, (B) no facts
have come to the attention of such counsel that lead them to believe
that at the time the Registration Statement became effective or on the
date of this Agreement, the Registration Statement and the prospectus
included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
The opinion of Vinson & Elkins L.L.P. described in Section 9(f) above
shall be rendered to you at the request of the Company and shall so state
therein.
(g) You shall have received on the Closing Date an opinion
(satisfactory to your and counsel for the Underwriters), dated the Closing Date,
of O'Melveny & Myers LLP, counsel to the Selling Stockholder, to the effect
that:
(i) The Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder pursuant to this Agreement and
has good and clear title to such Shares, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever;
(ii) The Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney
of such Selling Stockholder and to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder in the manner
provided herein and therein;
24
<PAGE> 25
(iii) upon delivery of and payment for the Shares to be sold
by the Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever; and
(iv) the execution, delivery and performance of this Agreement
of the Selling Stockholder by such Selling Stockholder, the compliance
by the Selling Stockholder with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (A)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except
such as may be required under the securities or Blue Sky laws of the
various states), (B) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the organizational
documents of the Selling Stockholder or any indenture, loan agreement,
mortgage, lease or other agreement or instrument to which the Selling
Stockholder is a party or by which any property of the Selling
Stockholder is bound or (C) violate or conflict with any applicable law
or any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Selling
Stockholder or any property of such Selling Stockholder.
The opinion of O'Melveny & Myers LLP described in Section 9(g) above
shall be rendered to you at the request of the Selling Stockholder and shall so
state therein.
(h) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the
Underwriters, as to certain matters agreed to between you and such firm.
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), counsel for the Company and counsel for the Underwriters may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification except as specified.
(i) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from KPMG Peat Marwick LLP and Ernst &
Young LLP, independent public accountants, containing the information and
statements of the type ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
25
<PAGE> 26
(j) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(k) The Shares shall have been duly listed, subject to notice of
issuance, on the NYSE.
(l) The Company and the Selling Stockholder shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Stockholder, as the case may be, on or prior to the Closing Date.
(m) All conditions precedent to the closing of the Cynara Acquisition
(as defined in the Prospectus) shall have been satisfied or waived, except for
the payment of the purchase price by the Company, which shall be paid
contemporaneously with the Closing.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred since the effectiveness of the Agreement: (i) any outbreak or
escalation of hostilities or other national or international calamity or crisis
or change in economic conditions or in the financial markets of the United
States or elsewhere that, in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus, (ii) the suspension or material
limitation of trading in securities or other instruments on the New York Stock
Exchange, the American Stock Exchange, the Chicago Board of Options Exchange,
the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq
National Market or limitation on prices for securities or other instruments on
any such exchange or the Nasdaq National Market, (iii) the suspension of trading
of any securities of the Company on any exchange or in the over-the-counter
market, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects,
or will materially and adversely affect, the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, (v) the declaration of a banking
26
<PAGE> 27
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in your opinion has a material adverse effect
on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you,
the Company and the Selling Stockholder for purchase of such Firm Shares are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholder. In any such case which does not result in termination of
this Agreement, either you or the Sellers shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
27
<PAGE> 28
SECTION 11. Agreements of the Selling Stockholder. The Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by the Selling Stockholder
to the Underwriters.
(b) To do and perform all things to be done and performed by the
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to NATCO
Group Inc., Brookhollow Central III, 2950 North Loop West, Suite 700, Houston,
Texas 77092, (ii) if to the Selling Stockholder, to Capricorn Partners, L.P., 30
East Elm Street, Greenwich, Connecticut 06830; attn. Mr. Herbert S. Winokur, Jr.
and (iii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin &
Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholder and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, the Selling Stockholder or any person controlling the Selling
Stockholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of counsel) incurred by them. Notwithstanding
any termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the reasonable
fees and disbursements of counsel) incurred by them in connection with enforcing
their rights hereunder (including, without limitation, pursuant to Section 8
hereof).
28
<PAGE> 29
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Stockholder, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
29
<PAGE> 30
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholder and the several Underwriters.
Very truly yours,
NATCO GROUP INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
THE SELLING STOCKHOLDER
CAPRICORN PARTNERS, L.P.
By: Capricorn Holdings, G.P.,
its General Partner
By: Winokur Holdings, Inc.
its General Partner
By:
------------------------------------
Herbert S. Winokur, Jr.
Manager
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
SIMMONS & COMPANY INTERNATIONAL
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-----------------------------
Title:
--------------------------
<PAGE> 31
SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
Smith Barney Inc.
Simmons & Company International
------------------
Total
==================
<PAGE> 32
SCHEDULE II
Subsidiaries
As of the date hereof, the list of the Company's subsidiaries includes:
On the Closing Date, the Company's subsidiaries will also include The
Cynara Company.
<PAGE> 33
Annex I
Capricorn Investors, L.P.
Capricorn Investors II, L.P.
Nathaniel A. Gregory
Patrick M. McCarthy
William B. Weiner III
Frank Smith
James Crittall
David Volz
Herbert S. Winokur, Jr.
E. Hale Staley
Howard I. Bull
Keith K. Allan
George K. Hickox, Jr.
Richard D. Peters
i
<PAGE> 1
EXHIBIT 4.1
<TABLE>
<S> <C> <C>
INCORPORATED UNDER THE LAWS COMMON STOCK
OF THE STATE OF DELAWARE PAR VALUE $.01
NUMBER SHARES
C
THIS CERTIFICATE IS TRANSFERABLE CUSIP 63227W 10 4
IN NEW YORK, NY AND RIDGEFIELD PARK, NJ SEE REVERSE FOR CERTAIN DEFINITIONS
NATCO GROUP INC.
THIS CERTIFIES THAT:
NATCOGROUP
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
NATCO GROUP INC. (hereinafter referred to as the "Corporation") transferable on the books of the Corporation by
the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate and the shares represented hereby are issued under and shall be subject to all of the provisions
[SEAL] of the Certificate of Incorporation of the Corporation and any amendments thereto, copies of which are on file
with the Corporation and the Transfer Agent to all of which the holder by acceptance hereof, assents. This
certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the seal of the Corporation and the signatures of its duly authorized officers.
DATED
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT
BY AND REGISTRAR
AUTHORIZED SIGNATURE
/s/ WILLIAM B. WIENER III /s/ NATHANIEL A. GREGORY
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
</TABLE>
<PAGE> 2
This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Rights Agreement between NATCO Group Inc. and a Rights
Agent dated as of May 15, 1998 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at the
principal executive offices of NATCO Group Inc. Under certain circumstances as
set forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. NATCO Group
Inc. will mail to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. As described in the
Rights Agreement, Rights issued to or acquired by any Acquiring Person (as
defined in the Rights Agreement) shall, under certain circumstances, become
null and void.
NATCO GROUP INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE
CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION OR EITHER
TRANSFER AGENT.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ______________Custodian_____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right
of survivorship and not as tenants under Uniform Gifts to Minors
in common
Act __________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[____________________________________]__________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated:
NOTICE: X _________________________________________
THE SIGNATURE(S) TO (SIGNATURE)
THIS ASSIGNMENT MUST --]
CORRESPOND WITH THE
NAME(S) AS WRITTEN X _________________________________________
UPON THE FACE OF THE (SIGNATURE)
CERTIFICATE IN EVERY
PARTICULAR, WITHOUT -------------------------------------------
ALTERATION OR THE SIGNATURE(S) SHOULD BE GUARANTEED BY
ENLARGEMENT OR ANY AN ELIGIBLE GUARANTOR INSTITUTION
CHANGE WHATSOEVER. (BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
--------------------------------------------
<PAGE> 1
EXHIBIT 4.2
NATCO GROUP INC.
(FORMERLY CUMMINGS POINT INDUSTRIES, INC.)
AND
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
RIGHTS AGENT
RIGHTS AGREEMENT
DATED AS OF MAY 15, 1998
<PAGE> 2
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
NATCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RECITALS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Certain Definitions. . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent. . . . . . . . . . . . . . . . . 7
Section 3. Issue of Right Certificates. . . . . . . . . . . . . . . . 7
Section 4. Form of Right Certificates. . . . . . . . . . . . . . . . . 9
Section 5. Execution, Authentication and Delivery. . . . . . . . . . . 10
Section 6. Registration, Registration of Transfer and Exchange. . . . . 10
Section 7. Mutilated, Destroyed, Lost and Stolen Right Certificates. . . . 11
Section 8. Exercise of Rights; Purchase Price; Expiration Date of Rights. 12
Section 9. Cancellation and Destruction of Right Certificates. . . . . . . 13
Section 10. Reservation and Availability of Shares . . . . . . . . . . . . 13
Section 11. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 12. Adjustment of Purchase Price, Number of Shares or Number of
Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 13. Certificate of Adjusted Purchase Price or Number of Shares. 20
Section 14. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 15. Fractional Rights and Fractional Shares. . . . . . . . . . . 22
Section 16. Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . 23
Section 17. Agreement of Right Holders. . . . . . . . . . . . . . . . . . . 24
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 18. Right Certificate Holder Not Deemed a Stockholder . . . . . . . 24
Section 19. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . 24
Section 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . . . 25
Section 21. Merger or Consolidation or Change of Name of Rights Agent . . . 26
Section 22. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . 27
Section 23. Issuance of New Right Certificates . . . . . . . . . . . . . . 28
Section 24. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 25. Mandatory Redemption and Exchange . . . . . . . . . . . . . . . 29
Section 26. Notice of Certain Events. . . . . . . . . . . . . . . . . . . . 30
Section 27. Securities Laws Registrations . . . . . . . . . . . . . . . . . 31
Section 28. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 29. Supplements and Amendments. . . . . . . . . . . . . . . . . 32
Section 30. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 31. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . 32
Section 32. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 33. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 34. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 35. Descriptive Headings. . . . . . . . . . . . . . . . . . . . . . 33
Section 36. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 33
- ---------------------
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
Exhibit A -- Form of Right Certificate
Exhibit B -- Certificate of Designation, Rights and Preferences of Series A
Junior Participating Preferred Stock
Exhibit C -- Summary of Rights to Purchase Preferred Stock
</TABLE>
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<PAGE> 5
This RIGHTS AGREEMENT, dated as of May 15, 1998 is between NATCO Group
Inc., a Delaware corporation and formerly named Cummings Point Industries, Inc.
(the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey
limited liability company, as Rights Agent.
RECITALS:
The Board of Directors of the Company has authorized and declared a
dividend distribution of one Right (as hereinafter defined) for each share of
Common Stock (as hereinafter defined) of the Company outstanding at the Close
of Business on the Record Date (as such terms are hereinafter defined) and has
authorized the issuance of one Right with respect to each share of Common Stock
that shall hereafter be issued out of authorized but unissued Common Stock or
out of treasury between the Record Date and the earlier of the Distribution
Date or the Expiration Date (as such terms are hereinafter defined) or the
date, if any, on which such Rights are redeemed.
Each Right will initially represent the right to purchase, upon the
terms and subject to the conditions hereinafter set forth, one one-hundredth of
a share of Series A Junior Participating Preferred Stock of the Company, having
the rights and preferences set forth in the form of Certificate of Designation,
Rights and Preferences of Series A Junior Participating Preferred Stock
attached hereto as Exhibit B.
The Board of Directors of the Company has directed that the terms and
conditions under which the Rights are to be distributed, including without
limitation those affecting the exercise thereof, the securities or other
property to be acquired thereby and the purchase price to be paid therefor,
shall be set forth in a written agreement between the Company and a rights
agent made for the benefit of the holders of the Rights to the extent so
provided therein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
Section 1. (a) Certain Definitions. For purposes of this
Agreement, the following terms shall have the meanings indicated:
"Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the Voting Shares of the Company then
outstanding, but shall not include the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or any Subsidiary of
the Company or any entity holding Voting Shares for or pursuant to any
such plan. Notwithstanding the foregoing, no Person shall become an
"Acquiring Person" as the result of an acquisition of Voting Shares by
the Company which, by reducing the number of shares outstanding,
increases the proportionate number of shares beneficially owned by such
Person to 15% or more of the Voting Shares of the Company then
outstanding; provided, however, that, if a Person shall become the
Beneficial Owner of 15% or more of the Voting Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after
such share purchases by the Company and at a time when such Person is
the Beneficial Owner of 15% or more of the Voting Shares of the Company
then outstanding, become the
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Beneficial Owner of any additional Voting Shares of the Company, then
such Person shall be deemed to be an "Acquiring Person".
Notwithstanding the foregoing, any Person who has reported or is
required to report such ownership (but who is the Beneficial Owner of
less than 20% of the outstanding Common Shares of the Company) on
Schedule 13G under the Exchange Act (or any comparable or successor
reporting form) or on Schedule 13D under the Exchange Act (or any
comparable or successor reporting form) which Schedule 13D does not
state any intention or reserve the right to control or influence the
management or policies of the Company or engage in any of the actions
specified in Item 4 of such Schedule (other than the disposition of the
Common Shares) and, within ten Business Days of being requested by the
Company to advise it regarding the same, certifies to the Company that
such Person acquired Common Shares in excess of 14.9% of the outstanding
Common Shares of the Company inadvertently or without knowledge of the
terms of the Rights and who, together with all such Person's Affiliates
and Associates, thereafter does not acquire additional Common Shares
while being the Beneficial Owner of 15% or more of the outstanding
Common Shares of the Company shall not be deemed to be an "Acquiring
Person"; provided, however, that, if the Person requested so to certify
fails to do so within ten Business Days, then such Person shall become
an Acquiring Person immediately after such ten day period.
"Agreement" shall mean this Rights Agreement as hereafter amended
from time to time.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act as in effect on the date of this
Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "own beneficially" any securities which (without duplication):
(i) such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether
such right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, rights, warrants,
options or otherwise;
(ii) such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of
or has "beneficial ownership" of (as determined pursuant to Rule 13d-3
of the General Rules and Regulations under the Exchange Act, including
any such right or ownership obtained pursuant to any agreement,
arrangement or understanding, whether or not in writing; or
(iii) are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or
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Associates has any agreement, arrangement or understanding (whether or
not in writing) for the purpose of acquiring, holding, voting or
disposing of any securities of the Company;
provided, however, that, for purposes of each clause of this definition,
a Person shall not be deemed the Beneficial Owner of, or to own
beneficially, any securities (A) tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; (B) issuable upon the exercise of
Rights at any time prior to the Shares Acquisition Date; (C) as a
result of any agreement, arrangement or understanding to vote such
security if such agreement, arrangement, or understanding (1) arises
solely from a revocable proxy or consent given to such Person in
response to a public proxy or consent solicitation made pursuant to, and
in accordance with, the applicable provisions of the General Rules and
Regulations under the Exchange Act and (2) is not also then reportable
on Schedule 13D under the Exchange Act (or any comparable or successor
report); or (D) acquired by a Person engaged in business as an
underwriter of securities through such Person's participation in good
faith in a firm commitment underwriting until the expiration of forty
days after the date of such acquisition.
Notwithstanding anything in this definition to the contrary, the
phrase "then outstanding", when used with reference to a Person's
Beneficial Ownership of securities of the Company (or to the number of
such securities "beneficially owned"), shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in the State of Texas are
authorized or obligated by law or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M.,
Houston time, on such date; provided, however, that, if such date is not
a Business Day it shall mean 5:00 P.M., Dallas time, on the next
succeeding Business Day.
"Closing Price", with respect to any security, shall mean the
last sale price, regular way, on a specific Trading Day or, in case no
such sale takes place on such Trading Day, the average of the closing
bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange
or, if such security is not then listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the such security is
listed or admitted to trading or, if such security is not then listed or
admitted to trading on any national securities exchange, the last quoted
price or, if not so quoted, the average of the high bid and low asked
prices in the
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over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotations System or such other
system then in use, or, if on any such Trading Day such security is not
quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market
in such security selected by the Board of Directors of the Company. If
such security is not publicly held or so listed or traded, "Closing
Price" shall mean the fair value per unit of such security as determined
in good faith by the Board of Directors of the Company, whose
determination shall be described and the Closing Price set forth in a
statement filed with the Rights Agent.
"Common Shares" when used with reference to the Company shall
mean shares of capital stock of the Company which have no preference
over any other class of stock with respect to dividends or assets, which
are not redeemable at the option of the Company and with respect to
which no sinking, purchase or similar fund is provided and shall
initially mean the shares of Common Stock, par value $0.01 per share, of
the Company. "Common Shares" when used with reference to any Person
other than the Company shall, if used with reference to a corporation,
mean the capital stock (or equity interest) with the greatest voting
power of such other Person or, if such other Person is a Subsidiary of
another Person, the Person or Persons which ultimately control such
first-mentioned Person and, if used with reference to any other Person,
mean the equity interest in such Person (or, if the net worth determined
in accordance with generally accepted accounting principles of another
Person which controls such first-mentioned Person is greater than such
first-mentioned Person, then such other Person) with the greatest voting
power or managerial power with respect to the business and affairs of
such Person.
"Common Stock" shall mean the Common Stock, par value $0.01 per
share, of the Company.
"Company" shall mean NATCO Group Inc., a Delaware corporation,
and its successors.
"Company Order" means a written request or order signed in the
name of the Company by its Chairman of the Board, its President or a
Vice President, and by its Treasurer, an Assistant Treasurer, its
Secretary or an Assistant Secretary, and delivered to the Rights Agent.
"Corporate Trust Office" means the principal office of the Rights
Agent at which it administers its corporate trust business, which, in
the case of ChaseMellon Shareholder Services, L.L.C., shall, until
hereafter changed, be its office at 2323 Bryan Street, Dallas, Texas.
"Cynara Merger" shall mean the merger contemplated by that
certain Agreement and Plan of Merger dated as of March 26, 1998, between
the Company and The Cynara Company.
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"DGCL" shall have the meaning ascribed to such term in the
Recitals to this Agreement.
"Distribution Date" shall mean the earlier of (i) the tenth
Business Day after the Shares Acquisition Date or (ii) the tenth
Business Day (or such later date as may be determined by action of the
Board of Directors prior to such time as any Person becomes an Acquiring
Person) after the date of commencement by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the
Company or any Subsidiary of the Company, or any entity holding Voting
Shares for or pursuant to the terms of any such plan) of, or after the
date of the first public announcement of the intention of any Person
(other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any
entity holding Voting Shares for or pursuant to the terms of any such
plan) to commence, a tender or exchange offer the consummation of which
would result in any Person becoming the Beneficial Owner of 15% or more
of the then outstanding Voting Shares of the Company; provided, however,
that an event described in clause (ii) of this definition above shall
not cause the occurrence of the Distribution Date if the Board of
Directors of the Company shall, prior to such tenth Business Day (or
such later date as described in clause (ii) above), determine that such
tender or exchange offer is spurious, unless, thereafter, the Board of
Directors of the Company shall make a contrary determination, in which
event the Distribution Date shall occur on the later to occur of such
tenth Business Day (or such later date as described in clause (ii)
above) and the date of such latter determination.
"Effective Date" shall mean May 15, 1998.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor statute thereto.
"Final Expiration Date" shall mean the Close of Business on May
15, 2008.
"Initial Public Offering" shall mean an offering, sale and
delivery of shares of Common Stock in a distribution firmly underwritten
by one or more underwriters and registered pursuant to the registration
provisions of the Securities Act.
"Person" shall mean any individual, firm, corporation,
partnership, limited partnership, trust or other entity, and shall
include any successor (by merger or otherwise ) of such entity.
"Preferred Shares" shall mean shares of the Company's currently
authorized Series A Junior Participating Preferred Stock, without par
value.
"Principal Party" shall have the meaning ascribed to such term in
Section 14(b).
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"Purchase Price" shall mean the price at which the holder of a
Right may, subject to the terms and conditions of this Agreement,
purchase one one-hundredth (1/100) of a Preferred Share (which,
initially, is as set forth in Section 8(b) hereof), as such price shall
be adjusted pursuant to the terms of this Agreement.
"Record Date" shall mean May 15, 1998.
"Redemption Date" shall mean the time at which the Rights are
redeemed pursuant to Section 24 herein or the time at which all of the
Rights are mandatorily redeemed and exchanged pursuant to Section 25
hereof.
"Redemption Price" shall have the meaning specified in Section
24(b) herein.
"Right" shall mean one preferred share purchase right which
initially represents the right of the registered holder thereof to
purchase one one-hundredth (1/100) of a Preferred Share upon the terms
and subject to the conditions herein set forth.
"Right Certificate" shall mean a certificate, in substantially
the form of Exhibit A attached to this Rights Agreement, evidencing the
Rights registered in the name of the holder thereof.
"Rights Agent" shall mean ChaseMellon Shareholder Services,
L.L.C., a New Jersey limited liability company, and any successor
thereto appointed in accordance with the terms hereof, in its capacity
as agent for the Company and the holders of the Rights pursuant to this
Agreement.
"Rights Register" and "Rights Registrar" shall have the meanings
specified in Section 6.
"Securities Act" shall mean the federal Securities Act of 1933,
as amended.
"Shares Acquisition Date" shall mean the first date of public
announcement (which for purposes of this definition shall include a
report filed pursuant to Section 13(d) or Section 16(a) of the Exchange
Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.
"Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the outstanding capital stock or other
equity interests having ordinary voting power in the election of
directors or similar officials is owned, directly or indirectly, by such
Person.
"Trading Day" shall mean a day on which the principal national
securities exchange on which any of the Voting Shares of the Company are
listed or admitted to trading is open
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for the transaction of business or, if none of the Voting Shares of the
Company is listed or admitted to trading on any national stock exchange,
a Business Day.
"Voting Shares" shall mean (i) the Common Shares of the Company
and (ii) any other shares of capital stock of the Company entitled to
vote generally in the election of directors or entitled to vote together
with the Common Shares in respect of any merger or consolidation of the
Company, any share exchange, any sale of all or substantially all of the
Company's assets, any other reorganization or recapitalization or any
liquidation, dissolution or winding up of the Company. Whenever any
provision of this Agreement requires a determination of whether a number
of Voting Shares comprising a specified percentage of such Voting Shares
is, was or will be beneficially owned or has been voted, tendered,
acquired, sold or otherwise disposed of or a determination of whether a
Person has offered or proposed to acquire a number of Voting Shares
comprising such specified percentage, the number of Voting Shares
comprising such specified percentage of Voting Shares shall, subject to
the provisions of the definition in this Section 1(a) of "Beneficial
Owner", in every such case be deemed to be the number of Voting Shares
comprising the specified percentage of all the Company's then
outstanding Voting Shares.
"Wholly-Owned Subsidiary" of a Person shall mean any corporation
or other entity all the outstanding capital stock or other equity
interests of which having ordinary voting power in the election of
directors or similar officials (other than directors' qualifying shares
or similar interest) are owned, directly or indirectly, by such Person.
(b) Rules of Construction. Unless the context otherwise requires, as
used in this Agreement: (a) a term has the meaning ascribed to it; (b) an
accounting term not otherwise defined has the meaning ascribed to it in
accordance with GAAP; (c) "or" is not exclusive; (d) "including" means
"including without limitation;" (e) words in the singular include the plural;
(f) words in the plural include the singular; (g) words applicable to one
gender shall be construed to apply to each gender; (h) the terms "hereof,"
"herein," "hereby," "hereto" and derivative or similar words refer to this
entire Agreement; and (i) the term "Section" shall refer to the specified
Section of this Agreement.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company in accordance with the terms
and conditions hereof, and the Rights Agent hereby accepts such appointment.
The Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable.
Section 3. Issue of Right Certificates. (a) From and after the
date of this Agreement until the Distribution Date, (i) outstanding Rights will
be evidenced (subject to the provisions of paragraph (b) of this Section 3) by
the certificates for outstanding Common Shares of the Company and not by
separate Right Certificates, and (ii) the right to receive Right Certificates
will be transferable only in connection with the transfer of Common Shares of
the Company. As soon as practicable after the Distribution Date, the Rights
Agent will send, by first-class, insured, postage-
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prepaid mail, to each record holder of Common Shares of the Company as of the
Close of Business on the Distribution Date, at the address of such holder shown
on the stock transfer records of the Company, a Right Certificate evidencing
one Right for each Common Share so held. From and after the Distribution Date,
the Rights will be evidenced solely by such Right Certificates
(b) As promptly as practicable following the Record Date, the Company
will send a copy of a Summary of Rights to Purchase Preferred Stock, in
substantially the form attached hereto as Exhibit C (the "Summary of Rights"),
by first-class, postage prepaid mail, to each record holder of the Common
Shares as of the Close of Business on the Record Date, at the address of such
holder shown on the records of the Company. With respect to certificates for
the Common Shares outstanding on the Record Date, until the Distribution Date,
the Rights will be evidenced by such certificates registered in the names of
the holders thereof together with a copy of the Summary of Rights attached
thereto. Until the earlier of the Distribution Date or the Expiration Date,
the surrender for transfer of any certificate representing Common Shares in
respect of which Rights have been issued, with or without a copy of the Summary
of Rights attached thereto, shall also constitute the transfer of the Rights
associated with such Common Shares.
(c) The Company agrees that, at any time after the date of this
Agreement and prior to the Distribution Date that it issues any of its Common
Shares upon original issue or out of treasury, it will concurrently distribute
to the holder of such Common Shares one Right for each such Common Share, which
Right shall be subject to the terms and provisions of this Agreement and will
evidence the right to purchase the same number of one one-hundredths of a
Preferred Share at the same Purchase Price as the Rights then outstanding.
(d) Certificates for Common Shares of the Company issued after the
date of this Rights Agreement, including those issued pursuant to the Cynara
Merger and the Initial Public Offering, but prior to the earliest of the
Distribution Date, the Redemption Date and the Final Expiration Date, whether
upon registration of transfer or exchange of such Common Shares outstanding on
the date of this Agreement or upon original issue or out of treasury
thereafter, shall have impressed on, printed on, written on or otherwise
affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between NATCO Group
Inc. and a Rights Agent dated as of May 15, 1998 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive
offices of NATCO Group Inc. Under certain circumstances as set forth in
the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. NATCO
Group Inc. will mail to the holder of this certificate a copy of the
Rights Agreement without charge after receipt of a written request
therefor. As described in the Rights Agreement, Rights issued to or
acquired by any Acquiring Person (as defined in the Rights Agreement)
shall, under certain circumstances, become null and void.
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With respect to certificates evidencing Common Shares of the Company
outstanding on the date of this Agreement or issued with the foregoing legend,
until the Distribution Date, outstanding Rights associated with the Common
Shares of the Company represented by such certificates shall be evidenced by
such certificates alone, and the surrender of any such certificate for
registration of transfer or exchange of the Common Shares evidenced thereby
shall also constitute surrender for registration of transfer or exchange of
outstanding Rights (as such Rights have been or shall be amended and
supplemented) associated with the Common Shares represented thereby.
(e) Until the Distribution Date (or, if earlier, the Redemption Date
or Final Expiration Date), the surrender for registration of transfer or
exchange of any certificate for Common Shares of the Company outstanding as of
the Close of Business on the date of this Agreement or issued hereafter shall
also constitute the surrender for registration of transfer or exchange of the
outstanding Rights associated with the Common Shares represented thereby.
(f) If the Company purchases or acquires any of its Common Shares
after the date hereof but prior to the Distribution Date, any Rights associated
with such Common Shares shall be deemed canceled and retired so that the
Company shall not be entitled to exercise any Rights associated with the Common
Shares which are no longer outstanding.
Section 4. Form of Right Certificates. The form of Right
Certificates (and the forms of election to purchase Preferred Shares (or other
securities) and of assignment to be printed on the reverse thereof) shall in
form and substance be substantially the same as Exhibit A hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Rights may from time to time be listed or as may be necessary to conform to
usage. Subject to the provisions of Section 23 hereof, the Right Certificates,
whenever issued, shall be dated as of the date of authentication thereof, but,
regardless of any adjustments of the Purchase Price or the number of Preferred
Shares (or other securities) as to which a Right is exercisable (whether
pursuant to this Agreement or any future amendments or supplements to this
Agreement), or both, occurring after the Effective Date and prior to the date
of such authentication, such Right Certificates may, on their face, without
invalidating or otherwise affecting any such adjustment, expressly entitle the
holders thereof to purchase such number of Preferred Shares at the Purchase
Price per one one-hundredth (1/100) of a Preferred Share as to which a Right
would be exercisable if the Distribution Date were the date of this Agreement;
no adjustment of the Purchase Price or the number of Preferred Shares (or other
securities) as to which a Right is exercisable, or both, effected subsequent to
the date of authentication of any Right Certificate shall be invalidated or
otherwise affected by the fact that such adjustment is not expressly reflected
on the face or in the provisions of such Right Certificate.
Pending the preparation of definitive Right Certificates, the Company
may execute, and upon Company Order the Rights Agent shall authenticate and
send, by first-class, insured, postage-prepaid mail, to each record holder of
Common Shares of the Company as of the Close of Business on the
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Distribution Date, temporary Right Certificates which are printed,
lithographed, typewritten, mimeographed or otherwise produced substantially of
the tenor of the definitive Right Certificates in lieu of which they are issued
and with such appropriate insertions, omissions, substitutions and other
variations as the officers executing such Right Certificates may determine, as
evidenced by their execution of such Right Certificates.
If temporary Right Certificates are issued, the Company will cause
definitive Right Certificates to be prepared without unreasonable delay. After
the preparation of definitive Right Certificates, the temporary Right
Certificates shall be exchangeable for definitive Right Certificates, upon
surrender of the temporary Right Certificates at the Corporate Trust Office of
the Rights Agent, without charge to the holder. Upon surrender for
cancellation of any one or more temporary Right Certificates, the Company shall
execute and the Rights Agent shall authenticate and deliver in exchange
therefor one or more definitive Right Certificates, evidencing a like number of
Rights. Until so exchanged, the temporary Right Certificates shall in all
respects be entitled to the same benefits under this Agreement as definitive
Right Certificates.
Section 5. Execution, Authentication and Delivery. The Right
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President or one of its Vice Presidents, under its corporate seal
reproduced thereon attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Right Certificates
may be manual or facsimile.
Right Certificates bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased
to hold such offices prior to the authentication and delivery of such Right
Certificates or did not hold such offices at the date of authentication of such
Right Certificates. At any time and from time to time after the execution and
delivery of this Agreement and prior to the Distribution Date, the Company may
deliver Right Certificates executed by the Company to the Rights Agent for
authentication, together with a Company Order for the authentication and
delivery of such Right Certificates, and the Rights Agent in accordance with
such Company Order shall authenticate and deliver such Right Certificates as in
this Agreement provided and not otherwise.
No Right Certificate shall be entitled to any benefit under this
Agreement or be valid or obligatory for any purpose unless there appears on
such Right Certificate a certificate of authentication substantially in the
form provided for herein executed by the Rights Agent by manual signature, and
such certificate upon any Right Certificate shall be conclusive evidence and
the only evidence that such Right Certificate has been duly authenticated and
delivered hereunder.
Section 6. Registration, Registration of Transfer and Exchange. From
and after the Distribution Date and prior to the earlier of the Redemption Date
and the Final Expiration Date, the Company shall cause to be kept at the
Corporate Trust Office of the Rights Agent a Rights Register (a "Rights
Register") in which, subject to such reasonable regulations as it may
prescribe, the
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Company shall provide for the registration of Right Certificates and of
transfers of Rights. The Rights Agent is hereby appointed the registrar and
transfer agent (the "Rights Registrar") for the purpose of registering Right
Certificates and transfers of Rights as herein provided and the Rights Agent
agrees to maintain such Rights Register in accordance with such regulations so
long as it continues to be designated as Rights Registrar hereunder.
Upon surrender to the Rights Agent for registration of transfer of any
Right Certificate, the Company shall execute, and the Rights Agent shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Right Certificates evidencing a like number of
Rights.
At the option of the holder, Right Certificates may be exchanged for
other Right Certificates upon surrender of the Right Certificates to be
exchanged to the Rights Agent. Whenever any Right Certificates are so
surrendered for exchange, the Company shall execute, and the Rights Agent shall
authenticate and deliver, the Right Certificates that the holder making the
exchange is entitled to receive.
All Right Certificates issued upon any registration of transfer or
exchange of Right Certificates shall be the valid obligations of the Company,
evidencing the same Rights, and entitled to the same benefits under this
Agreement, as the Right Certificates surrendered upon such registration of
transfer or exchange.
Every Right Certificate presented or surrendered for registration of
transfer or exchange shall (if so required by the Company or the Rights Agent)
be duly endorsed, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Rights Registrar duly executed, by the
holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Right Certificates, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Right Certificates,
other than exchanges not involving any transfer.
The provisions of this Section 6 shall be subject to the provisions of
Section 15.
Section 7. Mutilated, Destroyed, Lost and Stolen Right Certificates.
If any mutilated Right Certificate is surrendered to the Rights Agent, the
Company shall execute and the Rights Agent shall authenticate and deliver in
exchange therefor a new Right Certificate of like tenor, for a like number of
Rights and bearing a registration number not contemporaneously outstanding.
If there shall be delivered to the Company and the Rights Agent (i)
evidence to their satisfaction of the destruction, loss or theft of a Right
Certificate and (ii) such security or indemnity, if any, as may be required by
them to save each of them and any agent of either of them harmless, then, in
the absence of notice to the Company or the Rights Agent that such Right
Certificate has
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been acquired by a bona fide purchaser, the Company shall execute and upon its
request the Rights Agent shall authenticate and deliver, in lieu of any such
destroyed, lost or stolen Right Certificate, a new Right Certificate of like
tenor, for a like number of Rights and bearing a registration number not
contemporaneously outstanding.
Upon the issuance of any new Right Certificate under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Rights Agent) connected
therewith.
Every new Right Certificate issued pursuant to this Section in lieu of
any destroyed, lost or stolen Right Certificate shall constitute an additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Right Certificate shall be at any time enforceable by anyone, and shall
be entitled to all the benefits of this Agreement equally and proportionately
with any and all other Right Certificates duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Right Certificates.
Section 8. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at its Corporate Trust Office, together with
payment of the Purchase Price for each one one-hundredth (1/100) of a Preferred
Share (or other securities) as to which the Rights are exercised, at or prior
to the earliest of (i) the Close of Business on the Final Expiration Date, (ii)
the time of redemption on the Redemption Date or (iii) the time at which such
Rights are mandatorily redeemed and exchanged as provided in Section 25 hereof.
(b) The Purchase Price for each one one-hundredth (1/100) of a
Preferred Share pursuant to the exercise of a Right shall initially be seventy-
two and fifty/100ths dollars ($ 72.50), shall be subject to adjustment from
time to time as provided in Sections 12 and 14 hereof and shall be payable in
lawful money of the United States of America in accordance with paragraph (c)
below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the securities to be purchased and an amount
equal to any applicable transfer tax required to be paid by the holder of such
Right Certificate in accordance with Section 10 in cash, or by certified check
or cashier's check payable to the order of the Company, the Rights Agent shall
thereupon promptly (i) (A) requisition from any transfer agent of the Preferred
Shares (or other securities) certificates for such number of one one-hundredths
of a Preferred Share (or other securities) as are to be purchased and
registered in such name or names as may be designated by the registered holder
of such Right
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<PAGE> 17
Certificate or, if appropriate, in the name of a depositary agent or its
nominee, and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, and (B) requisition from a depositary agent
appointed by the Company, if any, depositary receipts representing such number
of one one-hundredths of a Preferred Share as are to be purchased and
registered in such name or names as may be designated by such holder (in which
case certificates for the Preferred Shares represented by such receipts shall
be deposited by the transfer agent with such depositary agent), and the Company
hereby directs such depositary agent to comply with all such requests, (ii)
when appropriate, requisition from the Company the amount of cash to be paid in
lieu of issuance of fractional shares in accordance with Section 15, (iii)
promptly after receipt of such certificates or depositary receipts registered
in such name or names as may be designated by such holder, cause the same to be
delivered to or upon the order of the registered holder of such Right
Certificate and (iv) when appropriate, after receipt, promptly deliver such
cash to or upon the order of such holder.
(d) If the registered holder of the Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equal to the Rights remaining unexercised shall be issued by the Rights
Agent to the registered holder of such Right Certificate or to his duly
authorized assigns, subject to the provisions of Section 15 hereof.
Section 9. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer or
exchange shall, if surrendered to the Company or to any of its other agents, be
delivered to the Rights Agent for such purpose and for cancellation or, if
surrendered to the Rights Agent for such purpose, shall be canceled by it. No
Right Certificates shall be authenticated in lieu of or in exchange for any
Right Certificates canceled as provided in this Section except as expressly
permitted by any of the provisions of this Agreement. The Company shall
deliver to the Rights Agent for cancellation, and the Rights Agent shall so
cancel, any other Right Certificate purchased or acquired by the Company. The
Rights Agent shall deliver all canceled Right Certificates to the Company, or
shall, pursuant to a Company Order, destroy such canceled Right Certificates
and in such case shall deliver a certificate of destruction thereof to the
Company.
Section 10. Reservation and Availability of Shares. The Company
covenants and agrees that it will cause to be reserved and kept available out
of its authorized and unissued Preferred Shares or any Preferred Shares held in
its treasury, the number of Preferred Shares that will be sufficient to permit
the exercise in full of all outstanding Rights.
The Company further covenants and agrees that it will, from and after
the Distribution Date, cause to be reserved and kept available out of its
authorized and unissued Common Shares or any Common Shares held in its
treasury, the number of Common Shares of the Company that will be sufficient to
permit the exercise in full of all outstanding Rights if adjusted pursuant to
Section 12(a)(ii).
The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all Preferred Shares or Common Shares of the
Company issued upon exercise of Rights shall (subject to payment of the
Purchase Price) be duly authorized, validly issued, fully paid and
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<PAGE> 18
nonassessable. The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges that
may be payable in respect of the issuance or delivery of the Right Certificates
or of any Preferred Shares (or depositary receipts therefor) or Common Shares
of the Company upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax that may be payable in respect of any transfer
or delivery of Right Certificates to a Person other than, or in respect of the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares or Common Shares of the Company upon exercise of Rights evidenced by
Right Certificates in a name other than that of, the registered holder of the
Right Certificate evidencing Rights surrendered for transfer or exercise or to
issue or deliver any certificates or depositary receipts for Preferred Shares
or Common Shares of the Company upon the exercise of any Rights until any such
tax shall have been paid (any such tax being payable by the holder of such
Right Certificate at the time of surrender thereof) or until it has been
established to the Company's reasonable satisfaction that no such tax is due.
Section 11. Record Date. Each Person in whose name any certificate
for Preferred Shares or Common Shares of the Company is issued upon the
exercise of, or upon mandatory redemption and exchange of, Rights shall for all
purposes be deemed to have become the holder of record of the Preferred Shares
or Common Shares represented thereby on, and such certificate shall be dated,
(i) in the case of the exercise of Rights, the date upon which the Right
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and any applicable transfer taxes) was made, or (ii) in the
case of the mandatory redemption and exchange of Rights, the date of such
mandatory redemption and exchange; provided, however, that, if the date of such
surrender and payment or mandatory redemption and exchange is a date upon which
the transfer books of the Company for its Preferred Shares or Common Shares, as
the case may be, are closed, such Person shall be deemed to have become the
record holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which such transfer books of the Company are open.
Prior to the exercise of (or the mandatory redemption and exchange of) the
Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a holder of Preferred Shares (or Common Shares of the
Company) for which the Rights shall be exercisable, including the rights to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 12. Adjustment of Purchase Price, Number of Shares or Number
of Rights. The Purchase Price, the number and kind of shares of capital stock
of the Company covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 12.
(a) (i) If the Company shall at any time (A) declare a dividend on
the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding
Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller
number of Preferred Shares or (D) issue any shares of its capital stock in a
reclassification of the Preferred Shares (including any such reclassification
in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), except as otherwise provided in this
Section 12(a), the Purchase Price in effect at the
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<PAGE> 19
time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of shares
of capital stock issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised thereafter shall be entitled to receive,
upon payment of the Purchase Price for the number of one one-hundredths of a
Preferred Share for which a Right was exercisable immediately prior to such
date, the aggregate number and kind of shares of capital stock which, if such
Right had been duly exercised immediately prior to such date (at a time when
the Preferred Shares transfer books of the Company were open), such holder
would have acquired upon such exercise and been entitled to receive upon
payment or effectuation of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the consideration
to be paid upon the exercise of one Right be less than the aggregate par value
of the shares of capital stock of the Company issuable upon exercise of one
Right. If an event occurs which would require an adjustment under both Section
12(a)(i) and Section 12(a)(ii), the adjustment provided for in this Section
12(a)(i) shall be in addition to, and shall be made prior to, any adjustment
required pursuant to Section 12(a)(ii).
(ii) Subject to action of the Board of Directors of the Company
pursuant to Section 25 of this Agreement, if any Person shall become an
Acquiring Person, each other holder of a Right shall, from and after the Close
of Business on the tenth Business Day after the Shares Acquisition Date, have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (y) 50% of
the then current per share market price of the Company's Common Shares
(determined pursuant to Section 12(d)) on the date such Person became an
Acquiring Person. If any Person shall become an Acquiring Person and the
Rights shall then be outstanding, the Company shall not take any action which
would eliminate or diminish the benefits intended to be afforded by the Rights.
Notwithstanding any other provision of this Agreement, from and after
the time any Person shall become an Acquiring Person, any Rights that are or
were acquired or beneficially owned by any such Acquiring Person (or any
Associate or Affiliate of such Acquiring Person) shall be null and void and any
holder of such Rights shall thereafter have no right to exercise such Rights
under any provision of this Agreement. No Right Certificate shall be issued
pursuant to this Agreement that represents Rights beneficially owned by an
Acquiring Person whose Rights would be null and void pursuant to the preceding
sentence or by any Associate or Affiliate thereof; no Right Certificate shall
be issued at any time upon the transfer of any Rights to an Acquiring Person
whose Rights would be null and void pursuant to the preceding sentence or to
any Associate or Affiliate thereof or to any nominee (acting in its capacity as
such) of such Acquiring Person, Associate or Affiliate; and any Right
Certificate delivered to the Rights Agent for transfer to an Acquiring Person
whose Rights would be null and void pursuant to the preceding sentence or to
any Associate or Affiliate thereof or to any nominee (acting in its capacity as
such) of such Acquiring Person, Associate or Affiliate shall be canceled.
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<PAGE> 20
(iii) If on or after the Distribution Date there shall not be
sufficient Common Shares of the Company issued but not outstanding, or
authorized but unissued, to permit the exercise in full of all outstanding
Rights in accordance with the foregoing subparagraph (ii), the Company agrees
to take all such action as is within its power, including appropriate action by
its Board of Directors, as may be necessary to amend the Company's charter to
authorize additional Common Shares for issuance upon exercise of the Rights.
If, notwithstanding the foregoing, the shareholders shall not approve an
amendment to the Company's charter authorizing such additional Common Shares,
the adjustment prescribed in Section 12(a)(ii) shall not be made but, in lieu
thereof, each holder of a Right shall thereafter have the right to receive,
upon exercise thereof in accordance with the terms of this Agreement, such
number of one one-hundredths of Preferred Shares as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the number of
one one-hundredths of a Preferred Share for which a Right is then exercisable
and dividing that product by (y) 50% of the then current per share market price
of one one-hundredth of a Preferred Share (determined pursuant to Section
12(d)) on the date such Person became an Acquiring Person.
(b) If the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into or exchangeable for Preferred Shares
or equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (together with any additional consideration required upon
conversion or exchange in the case of a security convertible into or
exchangeable for Preferred Shares or equivalent preferred shares), less than
the current per share market price of the Preferred Shares (determined pursuant
to Section 12(d) on such record date), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of Preferred Shares outstanding on such record date
plus the number of Preferred Shares which the aggregate offering price of the
total number of Preferred Shares and/or equivalent preferred shares so to be
offered (together with the aggregate of any additional consideration required
upon conversion or exchange in the case of any convertible or exchangeable
securities so to be offered) would purchase at such current market price and
the denominator of which shall be the number of Preferred Shares outstanding on
such record date plus the number of additional Preferred Shares and/or
equivalent preferred shares to be offered for subscription or purchase (or into
or for which the convertible or exchangeable securities so to be offered are
initially convertible or exchangeable); provided, however, that in no event
shall the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company issuable
upon exercise of one Right. In case all or part of such subscription or
purchase price may be paid in a form other than cash, the value of such
consideration shall be as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed with
the Rights Agent. Preferred Shares owned by or held for the account of the
Company or any of its Subsidiaries shall not be deemed outstanding for the
purpose of any computation described in this Section 12(b). The adjustment
described in this Section 12(b) shall be made successively whenever such record
date is fixed; and, if none of such rights, options or warrants is so issued,
the Purchase Price shall be
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<PAGE> 21
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) If the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 12(b)), the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the then current per share market price of the
Preferred Shares (determined pursuant to Section 12(d)) on such record date,
less the fair market value (as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent) of the portion of the assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right
be less than the aggregate par value of the shares of capital stock of the
Company to be issued upon the exercise of one Right. Such adjustments shall be
made successively whenever such a record date is fixed; and, if such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, the "current
per share market price" of the Common Shares on any date shall be deemed to be
the average of the daily Closing Prices per share of such Common Shares for the
30 consecutive Trading Days immediately prior to such date; provided, however,
that, if the issuer of such Common Shares shall announce (A) a dividend or
distribution on such Common Shares payable in such Common Shares or securities
convertible into such Common Shares or (B) any subdivision, combination or
reclassification of such Common Shares, and the ex-dividend date for such
dividend or distribution, or the record date for such subdivision, combination
or reclassification, shall occur during such period of 30 Trading Days, then,
and in each such case, for the purposes of determining the current per share
market price of the Common Shares, such 30 consecutive Trading Day period shall
be reduced to the period commencing on the Trading Day immediately following
the ex-dividend or record date and ending on the Trading Day immediately
preceding the date of determination.
(ii) For the purpose of any computation hereunder, the "current
per share market price" of the Preferred Shares shall be determined in the same
manner as set forth above for Common Shares in paragraph (i) of this Section
12(d). If the current per share market price of the Preferred Shares cannot be
determined in the manner provided above, the "current per share market price"
of the Preferred Shares shall be conclusively deemed to be the current per
share market price of the Common Shares (determined in the manner provided
above) multiplied by one hundred.
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<PAGE> 22
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments that by reason of this Section
12(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 12
shall be made to the nearest cent or to the nearest ten-thousandth of a Common
Share or other share or one-millionth of a Preferred Share, as the case may be,
and references herein to the "number of one one-hundredths of a Preferred
Share" (or similar phrases) shall be construed to include fractions of one
one-hundredth of a Preferred Share. Notwithstanding the first sentence of this
Section 12(e), any adjustment required by this Section 12 shall be made no
later than the earlier of (i) three years from the date of the transaction that
requires such adjustment or (ii) the thirtieth day preceding the Final
Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 12(a),
the holder of any Right thereafter exercised shall become entitled to receive
any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
shares contained in this Section 12, and the provisions of this Agreement,
including Sections 8, 10, 11 and 14, with respect to the Preferred Shares shall
apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall, whether or not the Right
Certificate evidencing such Rights reflects such adjusted Purchase Price,
evidence the right to purchase, at the adjusted Purchase Price, the number of
one one-hundredths of a Preferred Share purchasable from time to time hereunder
upon exercise of the Rights, all subject to further adjustment as provided
herein.
(h) Unless the Company shall have exercised its election as provided
in Section 12(i), upon each adjustment of the Purchase Price pursuant to
Section 12(b) or 12(c), each Right outstanding immediately prior to the making
of such adjustment shall thereafter evidence the right to purchase, at the
adjusted Purchase Price per one one-hundredth of a Preferred Share, that number
of one one-hundredths of a Preferred Share obtained by (i) multiplying (x) the
number of one-hundredths of a share covered by a Right immediately prior to
this adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights outstanding in lieu of any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each Right outstanding after such adjustment of
the number of Rights shall be exercisable for the number of one one-hundredths
of a Preferred Share for which a right was exercisable immediately prior to
such adjustment of the Purchase Price. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained
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<PAGE> 23
by dividing the Purchase Price in effect immediately prior to adjustment of the
Purchase Price by the Purchase Price in effect immediately after adjustment of
the Purchase Price. The Company shall make a public announcement of its
election to adjust the number of Rights, indicating the record date for the
adjustment, and, if known at the time, the amount of the adjustment to be made.
This record date may be the date on which the Purchase Price is adjusted or any
day thereafter, but, if the Right Certificates have been issued, shall be at
least 10 days later than the date of the public announcement. (Until such
record date, however, any adjustment in the number of one one-hundredths of a
Preferred Share for which a Right shall be exercisable made as required by this
Agreement shall remain in effect.) If Right Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 12(i),
the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Right Certificates on such record date Right Certificates
evidencing, subject to Section 15 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Right Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Right Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Right Certificates so to be
distributed shall be issued, executed and authenticated in the manner provided
for herein and shall be registered in the names of the holders of record of
Right Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one one-
hundredths of a Preferred Share that were expressed in the initial Right
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-hundredth of the amount of consideration per
Preferred Share determined by the Board of Directors of the Company to be
capital, or below one one-hundredth of the par value, if any, per Preferred
Share issuable upon exercise of the Rights, the Company agrees to take such
corporate action as is within its power, including appropriate action by its
Board of Directors, and that is, in the opinion of its counsel, necessary in
order that the Company may validly and legally issue fully paid and
nonassessable one one-hundredths of Preferred Shares at such adjusted Purchase
Price.
(l) In any case in which this Section 12 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
of the Preferred Shares or other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares or other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other
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<PAGE> 24
appropriate instrument evidencing such holder's right to receive such
additional securities upon the occurrence of the event requiring such
adjustment.
(m) Anything in this Section 12 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 12, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any combination or subdivision of the Preferred Shares, issuance
wholly for cash of any of the Preferred Shares at less than the current market
price, issuance wholly for cash of Preferred Shares or securities which by
their terms are convertible into or exchangeable for Preferred Shares,
dividends on Preferred Shares payable in Preferred Shares or issuance of
rights, options or warrants referred to in subsection (b) of this Section 12,
hereafter effected by the Company to holders of its Preferred Shares shall not
be taxable to such shareholders.
(n) If at any time prior to the Distribution Date, the Company shall
(i) declare or pay any dividend on the Common Shares of the Company payable in
such Common Shares or (ii) effect a subdivision or combination of such Common
Shares (by reclassification or otherwise than by payment of dividends in Common
Shares) into a greater or lesser number of Common Shares, then in any such case
(A) the number of one one-hundredths of a Preferred Share purchasable after
such event upon proper exercise of each Right shall be determined by
multiplying the number of one one-hundredths of a Preferred Share so
purchasable immediately prior to such event by a fraction, the numerator of
which is the number of Common Shares of the Company outstanding immediately
before such event and the denominator of which is the number of such Common
Shares outstanding immediately after such event, and (B) each such Common Share
outstanding immediately after such event shall have issued with respect to it
that number of Rights which each such Common Share outstanding immediately
prior to such event had issued with respect to it. The adjustment provided for
in this Section 12(n) shall be made successively whenever such a dividend is
declared or paid or such a subdivision or combination is effected. If an event
occurs which would require an adjustment under Section 12(a)(ii) and this
Section 12(n), the adjustments provided for in this Section 12(n) shall be in
addition and prior to any adjustment required pursuant to Section 12(a)(ii).
Section 13. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 12 or 14 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Common Shares of the Company and the Preferred Shares a copy of such
certificate and (c) mail a brief summary thereof to each holder of record of a
Right Certificate in accordance with Section 28 hereof.
Section 14. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. (a) If, directly or indirectly, at any time after a Person has
become an Acquiring Person, (i) the Company shall consolidate with, or merge
with and into, any other Person, (ii) any Person shall merge with and into the
Company and the Company shall be the continuing or surviving corporation of
such merger and, in connection with any such merger, all or part of the Common
Shares of the Company shall
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<PAGE> 25
be changed into or exchanged for stock or other securities of any other Person
(or the Company) or cash or any other property, or (iii) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one or a series of two or more transactions, assets of
the Company or its Subsidiaries which constitute more than 50% of the assets or
which produce more than 50% of the earning power or cash flow of the Company
and its Subsidiaries (taken as a whole) to any Person other than the Company or
one or more of its Wholly-Owned Subsidiaries, then, and in each such case, the
Company agrees that, as a condition to engaging in any such transaction, it
will make or cause to be made proper provision so that (i) each holder of a
Right (except as otherwise provided herein) shall thereafter have the right to
receive, upon the exercise thereof in accordance with the terms of this
Agreement and in lieu of Preferred Shares, such number of Common Shares of the
Principal Party (as such term is hereinafter defined) as shall be equal to the
result obtained by (X) multiplying the then current Purchase Price by the
number of one one-hundredths of a Preferred Share for which a Right is then
exercisable (without taking into account any adjustment previously made
pursuant to Section 12(a)(ii)) and dividing that product by (Y) 50% of the
current per share market price of the Common Shares of such other Person
(determined pursuant to Section 12(d)) on the date of consummation of such
consolidation, merger, sale or transfer; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such consolidation,
merger, sale or transfer, all the obligations and duties of the Company
pursuant to this Agreement; (iii) the term "Company," as used herein, shall
thereafter be deemed to refer to such Principal Party; and (iv) the Principal
Party shall take such steps (including the reservation of a sufficient number
of shares of its Common Shares in accordance with Section 10) in connection
with such consummation as may be necessary to assure that the provisions hereof
shall thereafter be applicable, as nearly as reasonably may be, in relation to
the Common Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not enter into any transaction of the kind referred to in this
Section 14 if at the time of such transaction there are outstanding any rights,
warrants, instruments or securities or any agreement or arrangements which, as
a result of the consummation of such transaction, would substantially diminish
or otherwise eliminate the benefits intended to be afforded by the Rights. The
provisions of this Section 14 shall similarly apply to successive mergers or
consolidations or sales or other transfers. For the purposes of this Section
14, 50% of the assets of the Company and its Subsidiaries shall be determined
by reference to the book value of such assets as set forth in the most recent
consolidated balance sheet of the Company and its Subsidiaries (which need not
be audited) and 50% of the earning power or cash flow of the Company and its
Subsidiaries shall be determined by reference to the mathematical average of
the operating income or cash flow, respectively, resulting from the operations
of the Company and its Subsidiaries for the two most recent full fiscal years
as set forth in the consolidated and consolidating financial statements of the
Company and its Subsidiaries for such years; provided, however, that, if the
Company has, during such period, engaged in one or more transactions to which
purchase accounting is applicable, such determination shall be made by
reference to the pro forma operating income of the Company and its Subsidiaries
giving effect to such transactions as if they had occurred at the commencement
of such two-year period.
(b) The term "Principal Party" shall mean: (i) in the case of any
transaction described in clause (i) or (ii) of the first sentence of Section
14(a), the Person that is the issuer of any securities
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into which Common Shares of the Company are converted in such merger or
consolidation, and, if no securities are so issued, the Person that is the
other party to such merger or consolidation; and (ii) in the case of any
transaction described in clause (iii) of the first sentence of Section 14(a),
the Person that is the party receiving the greatest portion of the assets
transferred pursuant to such transaction or transactions; provided, however,
that in any such case (1) if the Common Shares of such Person are not at such
time and have not been continuously over the preceding twelve months registered
under Section 12 of the Exchange Act and such Person is a direct or indirect
subsidiary of another Person the Common Shares of which is and has been so
registered, the term "Principal Party" shall refer to such other Person; and
(2) in case such Person is a Subsidiary, directly or indirectly, of more than
one Person, the Common Shares of two or more of which are and have been so
registered, the term "Principal Party" shall refer to whichever of such Persons
is the issuer of the Common Shares having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized Common Shares which have not been issued or reserved for issuance to
permit the exercise in full of the Rights in accordance with this Section 14
and unless prior thereto the Company and such Principal Party shall have
executed and delivered to the Rights Agent a supplemental agreement to this
Agreement providing for the terms set forth in subsections (a) and (b) of this
Section 14 and further providing that, as soon as practicable after the date of
any consolidation, merger, sale or transfer of assets referenced in the first
sentence of Section 14(a), the Principal Party shall: (i) prepare and file a
registration statement under the Securities Act with respect to the Rights and
the securities purchasable upon exercise of the Rights on an appropriate form,
and shall use its best efforts to cause such registration statement to (A)
become effective as soon as practicable after such filing and (B) remain
effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the Final Expiration Date; and (ii) shall deliver to
holders of the Rights historical financial statements for the Principal Party
and each of its Affiliates that comply in all respects with the requirements
for registration of a class of securities under the Exchange Act. The
provisions of this Section 14 shall similarly apply to successive mergers,
consolidations, sale or other transfers of assets. If an event subject to this
Section 14 shall occur at any time after the occurrence of an event subject to
Section 12(a)(ii), the Rights that have not theretofore been exercised shall
thereafter become exercisable in the manner described in Section 14(a).
Section 15. Fractional Rights and Fractional Shares. (a) the Company
shall not be required to issue or distribute Right Certificates which evidence
fractional Rights. If, on the Distribution Date or thereafter, as a result of
any adjustment effected pursuant to Section 12(i) or otherwise hereunder, a
Person would otherwise be entitled to receive a Right Certificate evidencing a
fractional Right, the Company shall, in lieu thereof, pay or cause to be paid
to such Person an amount in cash equal to the same fraction of the current
market value of a whole Right. For the purpose of this Section 15(a), the
current market value of a whole Right shall be the Closing Price of the Rights
for the Trading Day immediately prior to the date on which such fractional
Rights would have been otherwise issuable.
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<PAGE> 27
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions that are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
that evidence fractional Preferred Shares (other than fractions that are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred
Share may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it, provided that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depository shares. If, on the Distribution Date or
thereafter, as a result of any adjustment effected hereunder in the number of
one one-hundredths of a Preferred Share as to which a Right has become
exercisable, a Person would otherwise be entitled to receive a fractional
Preferred Share that is not an integral multiple of one one-hundredth of a
Preferred Share, the Company shall, in lieu thereof, pay to such Person at the
time such Right is exercised as herein provided an amount in cash equal to the
same fraction (that is not an integral multiple of one one-hundredth of a
Preferred Share) of the current market value of one Preferred Share. For
purposes of this Section 15(b), the current market value of a Preferred Share
shall be the Closing Price of a Preferred Share for the Trading Day immediately
prior to the date of such exercise.
(c) Should any adjustment contemplated by Section 12(a)(ii) or any
mandatory redemption and exchange contemplated by Section 25 occur, the Company
shall not be required to issue fractions of Common Shares of the Company upon
exercise of the Rights or to distribute certificates that evidence fractional
Common Shares. If, after any such adjustment or mandatory redemption and
exchange, a Person would otherwise be entitled to receive a fractional Common
Share of the Company upon exercise of any Right Certificate or upon mandatory
redemption and exchange as contemplated by Section 25, the Company shall, in
lieu thereof, pay to such Person at the time such Right is exercised as herein
provided or upon such mandatory redemption and exchange an amount in cash equal
to the same fraction of the current market value of one Common Share. For
purposes of this Section 15(c), the current market value of a Common Share of
the Company shall be the Closing Price of such a Common Share for the Trading
Day immediately prior to the date of such exercise or the date of such
mandatory redemption and exchange.
(d) The holder of a Right by the acceptance thereof expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise or mandatory redemption and exchange of a Right (except as provided
above).
Section 16. Rights of Action. (a) All rights of action in respect of
the obligations and duties owed to the holders of the Rights under this
Agreement are vested in the registered holders of the Rights; and, without the
consent of the Rights Agent or of the holder of any other Rights, any
registered holder of any Rights may, in his own behalf and for his own benefit,
enforce, and may institute and maintain any suit, action or proceeding,
judicial or otherwise, against the Company to enforce, or otherwise to act in
respect of, such holder's right to exercise such Rights in the manner provided
in the Right Certificate evidencing such Rights and in this Agreement. Without
limiting
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<PAGE> 28
the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
(b) No right or remedy herein conferred upon or reserved to the
registered holder of Rights is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy, whether hereunder or otherwise, shall not
prevent the concurrent assertion or employment of any other appropriate right
or remedy.
(c) No delay or omission of any registered holder of Rights to
exercise any right or remedy accruing hereunder shall impair any such right or
remedy or constitute a waiver of any default hereunder or an acquiescence
therein. Every right and remedy given hereunder or by law to such holders may
be exercised from time to time, and as often as may be deemed expedient, by
such holders.
Section 17. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares
of the Company;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if
surrendered at the Corporate Trust Office of the Rights Agent duly
endorsed or accompanied by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the
Distribution Date, the associated Common Shares certificate) is
registered as the absolute owner thereof and of the Rights evidenced
thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the associated Common Shares certificate made by
anyone other than the Company or the Rights Agent) for all purposes, and
neither the Company nor the Rights Agent shall be affected by any notice
to the contrary.
Section 18. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right (whether or not then evidenced by a Right
Certificate) shall be entitled to vote, receive dividends or be deemed for any
purpose to be the holder of Preferred Shares, Common Shares of the Company or
any other securities of the Company which may at any time be issuable on the
exercise (or mandatory redemption and exchange) of the Rights represented
thereby, nor shall anything contained herein or in any Right Certificate be
construed to confer upon any such holder, as such,
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<PAGE> 29
any of the rights of a stockholder of the Company, including any right to vote
for the election of directors or upon any matter submitted to stockholders at
any meeting thereof, to give or withhold consent to any corporate action, to
receive notice of meetings or other actions affecting stockholders (except as
provided in Section 26) or to receive dividends or subscription rights until
the Right or Rights evidenced by such Right Certificate shall have been
exercised (or mandatorily redeemed and exchanged) in accordance with the
provisions hereof.
Section 19. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless against, any loss, liability or expense, incurred
without negligence, bad faith or willful misconduct on the part of the Rights
Agent, for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for, or
in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Right Certificate or
certificate for Preferred Shares, Common Shares of the Company or other
securities of the Company, Company Order, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be executed and, where necessary, verified or acknowledged, by the
proper person or persons, or otherwise upon the advice of its counsel as set
forth in Section 20 hereof.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board,
the President, any Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or any Assistant Secretary of the Company and delivered to the Rights
Agent; and such certificate shall be full authorization to the Rights Agent for
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<PAGE> 30
any action taken or suffered in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company or any
other Person only for its own negligence, bad faith or willful misconduct.
Anything herein to the contrary notwithstanding, in no event shall the Rights
Agent be liable for special, indirect, consequential or incidental loss or
damage of any kind whatsoever (including without limitation lost profits), even
if the Rights Agent has been advised of the likelihood of such loss or damage.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its authentication thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not have any responsibility with respect
to the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or with respect to the validity
or execution of any Right Certificate (except its authentication thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including
the Rights becoming void pursuant to Section 12(a)(ii) hereof) or any
adjustment in the terms of the Rights (including the manner, method, or amount
thereof) provided for in Sections 3, 12, 14, 24 and 25, or the ascertainment of
the existence of facts that would require any such change or adjustment (except
with respect to the exercise of Rights evidenced by Right Certificates after
actual notice that such change or adjustment is required); nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares or Common Shares to be
issued pursuant to this Agreement or any Right Certificate or as to whether any
Preferred Shares or Common Shares will, when issued, be duly authorized,
validly issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with instructions of any
such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become
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<PAGE> 31
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Rights Agent under this Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other
capacity for the Company.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss of the Company resulting from any such act,
default, neglect or misconduct, provided that reasonable care was exercised in
the selection and continued employment thereof.
Section 21. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may
be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any corporation succeeding to the corporate
trust business of the Rights Agent or any successor Rights Agent, shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties
hereto, provided that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 22. If at the time such
successor Rights Agent shall succeed to the agency created by this Agreement
any of the Right Certificates shall have been authenticated but not delivered,
any such successor Rights Agent may adopt the authentication of the predecessor
Rights Agent and deliver such Right Certificates so authenticated, and, if at
that time any of the Right Certificates shall not have been authenticated, any
successor Rights Agent may authenticate such Right Certificates either in the
name of the predecessor Rights Agent or in the name of the successor Rights
Agent; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
If at any time the name of the Rights Agent shall be changed and at such
time any of the Right Certificates shall have been authenticated but not
delivered, the Rights Agent may adopt the authentication under its prior name
and deliver Right Certificates so authenticated; and, in case at that time any
of the Right Certificates shall not have been authenticated, the Rights Agent
may authenticate such Right Certificates either in its prior name or in its
changed name; and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Agreement.
Section 22. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer
agent for the Common Shares of the Company and the Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent for the
Common Shares of the Company and the Preferred Shares by
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<PAGE> 32
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the registered holder of a Right Certificate
(or, prior to the Distribution Date, of Common Shares), then any registered
holder of a Right Certificate (or, prior to the Distribution Date, of Common
Shares) may apply to any court of competent jurisdiction for the appointment of
a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be a corporation or other legal entity
organized, doing business and in good standing under the laws of the United
States or of any state of the United States, which is authorized to exercise
corporate securities transfer powers in the State of Texas and has at the time
of its appointment as Rights Agent a combined capital and surplus of at least
$25 million. After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent for the Common Shares of the Company and the Preferred Shares, and mail a
notice thereof in writing to the registered holders of the Right Certificates.
Failure to give any notice provided for in this Section 22, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent,
as the case may be.
Section 23. Issuance of New Right Certificates. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Purchase Price per share and the number or kind or
class of shares or other securities purchasable under the Right Certificates
made in accordance with the provisions of this Agreement.
Section 24. Redemption. (a) The Rights may be redeemed by action of
the Board of Directors of the Company pursuant to paragraph (b) of this Section
24, or may be redeemed and exchanged by action of the Board of Directors of the
Company pursuant to Section 25 herein, but shall not be redeemed in any other
manner.
(b) The Board of Directors of the Company may, at its option, at any
time prior to the Close of Business on the Shares Acquisition Date redeem all
but not less than all the then outstanding Rights at a cash redemption price of
one cent ($0.01) per Right, appropriately adjusted to reflect any adjustment in
the number of Rights outstanding pursuant to Section 12(i) herein (such
redemption price being hereinafter referred to as the "Redemption Price"). Any
such redemption of the Rights by the Board of Directors may be made effective
at such time, on such basis and with such conditions as the Board of Directors
in its sole discretion may establish.
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<PAGE> 33
(c) The right of the registered holders of Right Certificates to
exercise the Rights evidenced thereby or, if the Distribution Date has not
theretofore occurred, the inchoate right of the registered holders of Rights to
exercise the same shall, without notice to such holders or to the Rights Agent
and without further action, terminate and be of no further force or effect
effective as of the time of adoption by the Board of Directors of the Company
of a resolution authorizing and directing the redemption of the Rights pursuant
to paragraph (b) of this Section 24 (or, alternatively, if the Board of
Directors qualified such action as to time, basis or conditions, then at such
time, on such basis and with such conditions as the Board of Directors may have
established pursuant to such paragraph (b)); thereafter, the only right of the
holders of Rights shall be to receive the Redemption Price. The Company shall
promptly give public notice of any redemption resolution pursuant to paragraph
(b) of this Section 24; provided, however, that the failure to give, or any
defect in, any such notice shall not affect the validity of such redemption.
Within 10 days after the adoption of any redemption resolution pursuant to
paragraph (b) of this Section 24, the Company shall give notice of such
redemption to the holders of the then outstanding Rights by mailing such notice
to all such holders at their last addresses as they appear upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agents for the Common Shares of the Company. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of redemption shall state
the method by which the payment of the Redemption Price will be made.
(d) Neither the Company nor any of its Affiliates or associates may
acquire (other than, in the case of such Affiliates and Associates, in their
capacity as holders of Common Shares of the Company), redeem or purchase for
value any Rights at any time in any manner other than as specifically set forth
in this Section 24 or in Section 25 herein, and other than in connection with
the purchase of Common Shares of the Company prior to the Distribution Date.
Section 25. Mandatory Redemption and Exchange. (a) The Board of
Directors of the Company may, at its option, at any time after the Close of
Business on the Shares Acquisition Date, issue Common Shares of the Company in
mandatory redemption of, and in exchange for, all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become null and void pursuant to the provisions of Section 12(a)(ii) hereof) at
an exchange ratio of one Common Share for each two Common Shares for which each
Right is then exercisable pursuant to the provisions of Section 12(a)(ii)
hereof. Notwithstanding the foregoing, the Board of Directors shall not be
empowered to effect such redemption and exchange at any time after any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or any such Subsidiary, or any entity holding Voting Shares
for or pursuant to the terms of any such plan) together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of 50% or more of the
Voting Shares then outstanding.
(b) As of the Close of Business on such date as the Board of
Directors of the Company shall order the mandatory redemption and exchange of
any Rights pursuant to subsection (a) of this Section 25 and without any
further action and without any notice, the right to exercise such Rights shall
terminate and the only right thereafter of a holder of such Rights shall be to
receive such number of Common Shares as is provided in paragraph (a) of this
Section 25. The Company shall
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<PAGE> 34
promptly give public notice of any such redemption and exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such redemption and exchange. The Company promptly
shall mail a notice of any such redemption and exchange to all the holders of
such Rights at their last addresses as they appear upon the registry books of
the Rights Agent. Any notice which is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the notice. Each
such notice of mandatory redemption and exchange shall state the method by
which the redemption and exchange of the Common Shares for Rights will be
effected and, in the event of any partial redemption and exchange, the number
of Rights which will be redeemed and exchanged. Any partial redemption and
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become null and void pursuant to the provisions of Section
12(a)(ii) hereof) held by each holder of Rights.
(c) If there shall not be sufficient Common Shares of the Company
issued but not outstanding, or authorized but unissued, to permit a mandatory
redemption and exchange of Rights in accordance with the provisions of this
Section 25, the Company agrees to take all such action as is within its power,
including appropriate action by its Board of Directors, as may be necessary to
amend the Company's charter to authorize additional Common Shares for issuance
upon such mandatory redemption and exchange. If, notwithstanding the
foregoing, the shareholders shall not approve an amendment to the Company's
charter authorizing such additional Common Shares, the Company, at its option,
may substitute Preferred Shares (or equivalent preferred shares, as such term
is defined in Section 12(b) hereof) for Common Shares of the Company, at the
initial rate of one one-hundredth of a Preferred Share (or equivalent preferred
share) for each Common Share, as appropriately adjusted.
Section 26. Notice of Certain Events. If the Company shall, on or
after the Distribution Date, propose (a) to pay any dividend or other
distribution payable in stock of any class of the Company or any Subsidiary of
the Company to the holders of its Preferred Shares, (b) to distribute to the
holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (c) to make any other distribution to the
holders of its Preferred Shares (other than a regular quarterly cash dividend),
(d) to effect any reclassification of its Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred
Shares), (e) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of more than
50% of the assets or earning power or cash flow of the Company and its
Subsidiaries (determined as provided in Section 14 herein) to, any other Person
(other than the Company or a Wholly-Owned Subsidiary or Wholly-Owned
Subsidiaries), (f) to effect the liquidation, dissolution or winding up of the
Company or (g) if the Rights have theretofore become exercisable with respect
to Common Shares of the Company pursuant to Section 12(a)(ii) herein, to
declare or pay any dividend or other distribution on the Common Shares payable
in Common Shares or in stock of any other class of the Company or any
Subsidiary of the Company or to effect a subdivision or combination of the
Common Shares (by reclassification or otherwise than by payment of dividends in
Common Shares) then, in each such case, the Company shall give to each holder
of a Right Certificate, in accordance with Section 28 hereof, notice of such
proposed action, which shall specify the date of authorization of such action
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<PAGE> 35
by the Board of Directors of the Company and (i) the record date for such
dividend or other distribution or (ii) the date on which such reclassification,
consolidation, merger, sale, transfer, liquidation, dissolution, winding up,
subdivision or combination is to take place and the date of participation
therein by the holders of the Common Shares of the Company or the Preferred
Shares, or both, if any such date is to be fixed. Such notice shall be so
given in the case of any action covered by clause (a), (b) or (g) above at
least 20 days prior to the record date for determining holders of the Preferred
Shares or of the Common Shares of the Company, as the case as may be, for
purposes of such action, and, in the case of any such other action, at least 20
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Preferred Shares or Common Shares
of the Company, as the case may be, whichever shall be the earlier.
If any of the events set forth in Section 12(a)(ii) of this Agreement
shall occur, then, in any such case, the Company shall as soon as practicable
thereafter give to each holder of a Right Certificate, in accordance with
Section 28 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Section 12(a)(ii) hereof.
Section 27. Securities Laws Registrations. To the extent legally
required, the Company agrees that it will prepare and file, no later than the
Distribution Date, and will use its best efforts to cause to be declared
effective, a registration statement under the Securities Act of 1933, as
amended, registering the offering, sale and delivery of the Preferred Shares
issuable upon exercise of the Rights, and the Company will, thereafter, use its
best efforts to maintain such registration statement (or another) continuously
in effect so long as any Rights remain outstanding and exercisable with respect
to Preferred Shares. Should the Rights become exercisable with respect to
securities of the Company or one of its Subsidiaries other than Preferred
Shares, the Company agrees that it will, to the extent legally required,
promptly thereafter prepare and file, or cause to be prepared and filed, and
will use its best efforts to cause to be declared effective, a registration
statement under such Act registering the offering, sale and delivery of such
other securities and the Company will, thereafter, use its best efforts to
maintain such registration statement (or another) continuously in effect so
long as any outstanding Rights are exercisable with respect to such securities.
The Company further agrees to use its best efforts, from and after the
Distribution Date, to qualify or register for sale the Preferred Shares or
other securities of the Company or one of its Subsidiaries issuable upon
exercise of the Rights under the securities or "blue sky" laws (to the extent
legally required thereunder) of all jurisdictions in which registered holders
of Right Certificates reside determined by reference to the Rights Register.
Section 28. Notices. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given to made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
-31-
<PAGE> 36
NATCO Group Inc.
2950 North Loop West
Suite 750
Houston, Texas 77096
Attention: Secretary
Subject to the provisions of Section 22 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.L.C.
2323 Bryan Street
Dallas, Texas
Attention: Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the Rights
Register of the Company or, prior to the Distribution Date, on the stock
transfer records for the Common Shares of the Company.
Section 29. Supplements and Amendments. The Company and the Rights
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Right Certificates in order to cure any ambiguity,
to correct or supplement any provision contained herein that may be defective
or inconsistent with any other provisions herein or to make any other
provisions in regard to matters or questions arising hereunder that the Company
and the Rights Agent may deem necessary or desirable, including extending the
Final Expiration Date and, provided that at the time of such amendment or
supplement the Distribution Date has not occurred, the period during which the
Rights may be redeemed; provided, however, that, after the Distribution Date,
any such amendment or supplement shall not materially and adversely affect the
interests of the holders of Right Certificates. Without limiting the
foregoing, the Board of Directors of the Company may by resolution adopted at
any time prior to such time as any Person becomes an Acquiring Person amend
this Agreement to lower the threshold set forth in the definitions of Acquiring
Person and Distribution Date in Section 1 from 15% to a percentage not less
than the greater of (i) any percentage greater than the largest percentage of
the outstanding Voting Shares then known to the Company to be beneficially
owned by any Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or any Subsidiary of the Company, or any
entity holding Voting Shares for or pursuant to the terms of any such plan),
and (ii) 10%.
Section 30. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
-32-
<PAGE> 37
Section 31. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights.
Section 32. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 33. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 34. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 35. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 36. Effective Date. This Rights Agreement shall become
effective at the opening of business on the Effective Date.
-33-
<PAGE> 38
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
NATCO GROUP INC.
Attest:
By /s/ CHARLES J. ROBERTSON By /s/ WILLIAM B. WIENER
------------------------------ ------------------------------
Title: Asst. Secretary Sr. Vice President
CHASEMELLON SHAREHOLDER SERVICES,
L.L.C.
As Rights Agent
Attest:
By /s/ BARBARA J. ROBBINS, VP By /s/ R. JOHN DAVIS, VP
------------------------------ ------------------------------
Title: Authorized Officer Authorized Officer
-34-
<PAGE> 39
EXHIBIT A
(Form of Right Certificate)
Certificate No. R- __________ Rights
NOT EXERCISABLE AFTER MAY 15, 2008 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01
PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY
OWNED BY ACQUIRING PERSONS (AS DEFINED IN SECTION 1 OF THE RIGHTS
AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME
NULL AND VOID.
Right Certificate
NATCO GROUP INC.
This certifies that , or registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement dated as of May 15, 1998 (the "Rights
Agreement") between NATCO Group Inc., a Delaware corporation ("the Company"),
and ChaseMellon Shareholder Services, L.L.C., a limited
liability company (the "Rights Agent"), to purchase from the Company at any
time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M. (Dallas time) on May 15, 2008 at the
Corporate Trust Office of the Rights Agent, one one-hundredth (1/100) of a
fully paid nonassessable share of Series A Junior Participating Preferred
Stock, without par value (the "Preferred Shares"), of the Company, at a
purchase price of seventy-two and 50/100ths dollars ($72.50) per one one-
hundredth (1/100) of a Preferred Share (the "Purchase Price"), upon
presentation and surrender of this Right Certificate with the Form of Election
to Purchase duly executed. The number of Rights evidenced by this Right
Certificate (and the number of Preferred Shares which may be purchased upon
exercise thereof) set forth above, and the Purchase Price per share set forth
above, are the number and Purchase Price as of May 15, 1998, based on the
Preferred Shares as constituted at such date.
As provided in the Rights Agreement, the Purchase Price and the number
of one one-hundredths of a Preferred Share that may be purchased upon the
exercise of Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the occurrence of certain events.
The Right Certificate is subject to all the terms, provisions ad
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and to which Rights Agreement reference
is hereby made for a full description of the rights, limitations
A-1
<PAGE> 40
of rights, obligations, duties and immunities hereunder of the Rights Agent,
the Company and the holders of the Right Certificates. Copies of the Rights
Agreement are on file at the principal executive offices of the Company and the
Corporate Trust Office of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender hereof at the Corporate Trust Office of the Rights Agent, may be
exchanged for another Right Certificate or Right Certificates of like tenor
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate (i) may be redeemed by the Company at a redemption price of
one cent ($0.01) per Right or (ii) may be mandatorily redeemed and exchanged by
the Company in whole or in part for Preferred Shares or shares of the Company's
common stock, par value $0.01 per share.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a
cash payment will be made as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company that may at any time be issuable on the
exercise hereof, not shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company, including any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
to give or withhold consent to any corporate action, to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Rights Agreement) or to receive dividends or subscription rights, until the
Right or Rights evidenced by this Right Certificate shall have been exercised
or such Right or Rights shall have been mandatorily redeemed and exchanged by
the Company as provided in the Rights Agreement.
This Right Certificate shall not be entitled to any benefit under the
Rights Agreement or be valid or obligatory for any purpose until it shall have
been authenticated by the Rights Agent.
A-2
<PAGE> 41
WITNESS the facsimile signatures of the proper officers of the Company
and its corporate seal.
Dated as of _____________________, 19___.
<TABLE>
<S> <C>
ATTEST: NATCO GROUP INC.
By
- -------------------------------- ----------------------------
Secretary
</TABLE>
Authentication:
This is one of the Right Certificates referred to in the within-mentioned
Rights Agreement.
ChaseMellon Shareholder Services, L.L.C., as Rights Agent
By:
-----------------------------
Authorized Signature
A-3
<PAGE> 42
(Form of Reverse Side of Right Certificate)
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate)
FOR VALUE RECEIVED hereby sells,
-----------------------------
assigns and transfers unto
------------------------------------------------
- ---------------------------------------------------------------------------
(Please print name and address of transferee)
- ---------------------------------------------------------------------------
this Right Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________________
Attorney, to transfer the within Right Certificate on the books of the within-
named corporation, with full power of substitution.
Dated: ____________________, 19___.
-----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States of America.
- ----------------------------------------------------------------------------
(To be executed if a statement is correct)
The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement).
-----------------------------------
Signature
(Form of Reverse Side of Right Certificate -- continued)
A-4
<PAGE> 43
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate)
To: NATCO GROUP INC.
The undersigned hereby irrevocably elects to exercise
____________ Rights represented by this Right Certificate to purchase the
Preferred Shares (or other securities) issuable upon the exercise of such
Rights and requests that certificates for such Preferred Shares (or for such
other securities) be issued in the name of:
Please insert social security
or other identifying number:
-----------------------------------------------
- ----------------------------------------------------------------------------
(Please print name and address)
- ----------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number:
-----------------------------------------------
- ----------------------------------------------------------------------------
(Please print name and address)
- ----------------------------------------------------------------------------
Dated: _____________, 19___ ---------------------------
Signature
(Form of Reverse Side of Right Certificate -- continued)
Signature Guaranteed:
A-5
<PAGE> 44
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
-----------------------------------------------------------------------------
(To be executed if statement is correct)
The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement).
------------------------------------
-----------------------------------------------------------------------------
NOTICE
The signature in the foregoing Forms of Assignment and Election must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
If the certification set forth above in the Form of Assignment or the
Form of Election to Purchase, as the case may be, is not completed, the Company
and the Rights Agent will deem the beneficial owner of the Rights evidenced by
this Right Certificate to be an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement) and such Assignment or Election
will not be honored.
A-6
<PAGE> 45
NATCO GROUP INC.
SUMMARY TERMS OF
STOCKHOLDER RIGHTS PLAN
ADOPTION OF PLAN;
TRANSFER OF RIGHTS;
RIGHTS CERTIFICATES: The Board of Directors has declared a dividend of
one Right for each share of Common Stock
outstanding. After the adoption of the Plan and
until the Distribution Date (as defined below),
the Rights are attached to and trade with the
Common Stock. After the Distribution Date, the
Rights detach; separate Rights certificates are
issued; and the Rights trade independently of the
Common Stock.
DISTRIBUTION DATE: The Distribution Date occurs and the Rights detach
on the earlier of the following:
(1) The tenth calendar day after the public
announcement that a person, including affiliates
and associates (an "Acquiring Person"), has
acquired beneficial ownership of 15% or more of
the Common Stock (the date of such public
announcement being referred to as the "Stock
Acquisition Date").
(2) The tenth business day (subject to extension
by the Board of Directors) after the commencement
of a tender offer or exchange offer for Common
Stock if, upon consummation thereof, the offeror,
including affiliates and associates, would be an
Acquiring Person.
EXERCISABILITY: The Rights become exercisable after the
Distribution Date. The Rights, in all likelihood,
would still not be exercised by the holders (since
the Purchase Price would likely still exceed the
market price) unless and until one of the Flip-In
or Flip- Over Events (described below) were to
occur.
After the Distribution Date, each Right entitles
the holder to purchase a unit consisting of one
one-hundredth of a share of Series A Junior
Participating Preferred Stock (one unit would be
essentially economically equivalent to one share
of Common Stock) at a fixed price (the "Purchase
Price"). (See below for a summary of the terms of
the Junior Participating Preferred Stock.) The
Purchase Price ($72.50 per one one-
<PAGE> 46
hundredth of a share of Junior Participating
Preferred Stock) was determined by the Board when
the Plan was adopted and reflects the view of the
Board, with the advice of its investment bankers,
as to the potential long-term value of the Common
Stock over the life of the Plan.
FLIP-IN: If any person, including affiliates and
associates, becomes the beneficial owner of 15% or
more of the Common Stock and thus becomes an
Acquiring Person (a "Flip-In Event"), then each of
the Rights (other than Rights held by the
Acquiring Person and certain transferees) "flips
in" and becomes a Right to acquire, upon payment
of the Purchase Price, Common Stock of the Company
having a value (based on the average market price
over a 30-day period prior to the Flip-In Event)
equal to twice the Right's Purchase Price. The
Rights held by the Acquiring Person and certain
transferees become null and void.
If the Company does not have enough authorized
Common Stock, the Rights become exercisable with
respect to the Junior Participating Preferred
Stock permitting the holder to acquire such number
of one one-hundredths of a share of Junior
Participating Preferred Stock as have a value
equal to twice the Purchase Price.
EXCHANGE OPTION: After a Flip-In Event occurs and prior to a
person's becoming the beneficial owner of 50% or
more of the Common Stock, the Continuing Directors
may, in lieu of allowing the Rights to be
exercised, issue in exchange for, and in mandatory
redemption of, all or any pro rata portion of the
Rights one share of Common Stock or one
one-hundredth of a share of Junior Participating
Preferred Stock (or certain equivalent securities)
for each Right so exchanged.
FLIP-OVER EVENTS: If, on or after the Stock Acquisition Date, the
Company is acquired in a merger or other business
combination (e.g., the Company does not survive or
the Common Stock is changed or exchanged), or 50%
or more of the Company's assets or earning power
(on a consolidated basis) is sold or transferred
in one transaction or a series of related
transactions ("Flip- Over Events"), each Right
"flips over" and requires that provision be made
so as to entitle the holder to acquire, upon
payment of the Purchase Price, common stock of the
other party to the transaction having a market
value equal to twice the Purchase Price.
<PAGE> 47
REDEMPTION: Rights are redeemable for $.01 per Right by action
of the Board of Directors at any time prior to the
tenth day following the Stock Acquisition Date.
AMENDMENT: Terms of the Rights may be amended by the Board of
Directors (1) prior to the Distribution Date in
any manner and (2) from and after the Distribution
Date in any manner not adverse to the interests of
Rights holders.
VOTING: The Rights have no voting power.
EXPIRATION: The Plan and the Rights expire 10 years from the
date of the Plan's adoption.
<PAGE> 1
EXHIBIT 4.3
DRAFT: 5/20/98
Cynara
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated May __, 1998 by and between NATCO
Group Inc., a Delaware corporation (the "Company"), and the undersigned holders
of Common Stock of the Company (the "Designated Stockholders").
R E C I T A L S:
Cap I owns of record and beneficially, after giving effect to the
Stock Split, 4,553,334 shares (68.3%) of the outstanding Common Stock.
Cap II owns of record and beneficially, after giving effect to the
Stock Split, 2,113,334 shares (31.7%) of the outstanding Common Stock.
Together, Cap I and Cap II own of record and beneficially, as of the
date of this Agreement, all the outstanding Common Stock.
The Company, Cap I and Cap II are parties to that certain Securities
Exchange Agreement dated as of March 5, 1998 pursuant to which (i) Cap I and
Cap II have agreed to sell to the Company, and the Company has agreed to
purchase, certain outstanding promissory notes of the Company in exchange for
the issuance by the Company of additional shares of Common Stock and (ii) Cap I
and Cap II will, upon consummation of the transactions contemplated thereby,
own of record and beneficially an aggregate of 5,563,667 shares and 2,582,259
shares, respectively, of Common Stock.
Cap I and Cap II have entered into a Registration Rights Agreement of
even date herewith between the Company and such stockholders which contains
terms and provisions substantially similar to those herein (the "Capricorn
Registration Rights Agreement").
On March 26, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") dated that date with The Cynara Company, a
Delaware corporation ("Cynara"), pursuant to which Cynara will be merged with
and into a subsidiary of the Company (the "Merger").
The consummation of the Merger is conditioned upon concurrent
consummation of the initial public offering of Common Stock by the Company (the
"Initial Public Offering").
It is a further condition to consummation of the Merger that the
stockholders of Cynara who will become stockholders of the Company upon
consummation of the Merger shall have entered into a registration rights
agreement as contemplated by the Merger Agreement.
<PAGE> 2
NOW, THEREFORE, for and in consideration of the foregoing, the mutual
covenants and agreements contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
Section 1. Definitions and Usage.
A. Definitions. The terms defined in this Section, wherever
used in this Agreement, shall, unless the context otherwise requires, have the
respective meanings hereinafter specified.
"Affected Stockholders" shall mean each Stockholder all or a portion
of whose shares of Common Stock have been included in a Registration Statement
filed with the Commission pursuant to the provisions of this Agreement.
"Agreement" shall mean this Registration Rights Agreement.
"Cap I" shall have the meaning ascribed to such term in the first
paragraph of this Agreement.
"Cap II" shall have the meaning ascribed to such term in the first
paragraph of this Agreement.
"Capricorn Registration Rights Agreement" shall have the meaning
ascribed to such term in the recitals to this Agreement.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Common Stock" shall mean the Company's authorized Common Stock, par
value $.01 per share.
"Company" shall mean NATCO Group Inc., a Delaware corporation, and any
successor corporation by merger, consolidation or otherwise and any parent
corporation resulting from the merger or consolidation of the Company with or
into a subsidiary of another corporation.
"Cynara" shall mean The Cynara Corporation, a Delaware corporation.
"Designated Stockholders" shall have the meaning ascribed to such term
in the recitals to this Agreement.
"Earnout Shares" shall mean Conditional Accelerated Earnout Shares,
Accelerated Earnout Shares and Earnout Shares as those terms are defined in the
Merger Agreement.
"Effective Period" shall mean such period as shall be required under
the provisions of the Securities Act and the Securities Act Rules for delivery
of a prospectus meeting the requirements of Section 10(a) of the Securities Act
to any Person purchasing Common Stock in connection with
REGISTRATION RIGHTS AGREEMENT
2
<PAGE> 3
an Underwritten Public Offering or a Market Public Offering; provided, however,
that such period shall not include any delivery requirement with respect to the
distribution by an underwriter of its unsold allotment relating to an
Underwritten Public Offering.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, as the same shall be in effect at the date of any determination to be
made hereunder.
"Exchange Act Rules" shall mean the rules and regulations promulgated
by the Commission under the Exchange Act, as the same shall be in effect at the
date of any determination to be made hereunder.
"Initial Public Offering" shall have the meaning ascribed to such term
in the recitals to this Agreement.
"Market Public Offering" shall mean a public offering for cash of
shares of Common Stock into an existing trading market for outstanding shares
of Common Stock at other than a fixed price on or through the facilities of a
national securities exchange or to or through a market maker otherwise than on
an exchange, but in any case pursuant to a Registration Statement filed and
declared effective under the Securities Act and the Securities Act Rules.
"Merger" shall have the meaning ascribed to such term in the recitals
to this Agreement.
"Merger Agreement" shall have the meaning ascribed to such term in the
recitals to this Agreement.
"Notice of Registration Request" shall mean a written notice given by
the Company pursuant to Section 2.A or 4.A to each Stockholder that did not
send the applicable Registration Request, notifying such Stockholders that the
applicable Registration Request has been received by the Company and briefly
advising such Stockholders that they have the right to request Registration for
the distribution of their holdings of Common Stock, subject to the terms and
provisions of this Agreement.
"Person" shall mean an individual, a corporation, a partnership, a
trust, an unincorporated organization or a government or any agency or
political subdivision thereof.
"Primary Distribution" shall mean an Underwritten Public Offering of
Common Stock offered, sold and delivered by the Company.
"Primary Distribution Registration Statement" shall mean a
Registration Statement filed by the Company and declared effective under the
Securities Act and the Securities Act Rules relating to a Primary Distribution.
REGISTRATION RIGHTS AGREEMENT
3
<PAGE> 4
"Public Offering" shall mean either an Underwritten Public Offering or
a Market Public Offering.
"Registrable Shares" shall mean shares of Common Stock owned of record
by any Stockholder as to which such Stockholder has requested Registration
pursuant to the provisions of Section 2.A, 3.B or 4.A.
"Registration" shall mean the registration under the registration
provisions of the Securities Act of the offering, sale and delivery of shares
of Common Stock.
"Registration Expenses" shall mean the expenses associated with the
preparation and filing of any registration statement pursuant to Section 2.B,
3.C or 4.B herein and any sale covered thereby (including the reasonable fees
and expenses of legal counsel to the Affected Stockholders, fees related to
blue sky qualifications and filing fees in respect of the National Association
of Securities Dealers, Inc.), but excluding underwriting discounts or
commissions in respect of shares of Common Stock to be sold by the Affected
Stockholders.
"Registration Request" shall mean a written notice from a Stockholder
requesting that the Company file a Registration Statement with respect to an
Underwritten Public Offering pursuant to Section 2.A herein or with respect to
a Public Offering pursuant to Section 4.A herein.
"Registration Period" shall mean the period of time from the decision
of the Company to prepare and file a Registration Statement to and including
the effective date of such Registration Statement.
"Registration Statement" shall mean a registration statement filed on
Form S-1, S-2 or S-3 (or any successor form) under the registration provisions
of the Securities Act and the Securities Act Rules.
"Request Period" shall mean a period of ten business days after
receipt of a Notice of Registration Request from the Company pursuant to
Section 2.A or 4.A by each Stockholder that did not send the applicable
Registration Request.
"Secondary Distribution" shall mean an Underwritten Public Offering of
Common Stock offered, sold and delivered by shareholders of the Company other
than the Stockholders, but including the holders of Common Stock acquired
pursuant to the Merger and subject to the Capricorn Registration Rights
Agreement.
"Secondary Distribution Registration Statement" shall mean a
Registration Statement filed by the Company and declared effective under the
Securities Act and the Securities Act Rules relating to a Secondary
Distribution, including a distribution requested by the shareholders subject to
the Capricorn Registration Rights Agreement.
REGISTRATION RIGHTS AGREEMENT
4
<PAGE> 5
"Securities Act" shall mean the Securities Act of 1933, as amended, as
the same shall be in effect at the date of any determination to be made
hereunder.
"Securities Act Rules" shall mean the rules and regulations
promulgated by the Commission pursuant to the Securities Act, as the same shall
be in effect at the date of any determination to be made hereunder.
"Stockholders" shall mean any or all of the Designated Stockholders
and any assignee of shares of Common Stock theretofore held by either of them
(other than any assignee who acquires such shares of Common Stock pursuant to a
Public Offering); provided, however, that such assignee has agreed to be bound
by the provisions of this Agreement in accordance with Section 14 herein.
"Stock Split" shall mean the four-for-three split of the outstanding
Common Stock effected by amendment to the Company's Certificate of
Incorporation on March __, 1998.
"Supplemental Registration Request" shall mean a written notice given
by any Stockholder pursuant to the provisions of Section 2.B, 3.B or 4.A
herein, in which the Stockholder advises the Company as to the number of shares
of Common Stock that the Stockholder wishes to include in the applicable
Registration and in which the Stockholder agrees to (i) the specified method of
distribution, (ii) if applicable, the designated managing underwriter and (iii)
provide to the Company all such information as may be required by the Company
pursuant to Section 6 herein.
"Underwritten Public Offering" shall mean a firm commitment
underwritten public offering for cash of shares of Common Stock pursuant to a
Registration Statement filed and declared effective under the Securities Act
and the Securities Act Rules.
B. Rules of Construction. Unless the context otherwise
requires, as used in this Agreement: (a) a term has the meaning ascribed to
it; (b) "or" is not exclusive; (c) "including" means "including without
limitation;" (d) words in the singular include the plural; (e) words in the
plural include the singular; (f) words applicable to one gender shall be
construed to apply to each gender; (g) the terms "hereof," "herein," "hereby,"
"hereto" and derivative or similar words refer to this entire Agreement; and
(h) the term "Section" shall refer to the specified Section of this Agreement.
Section 2. Registration Rights.
A. Registration Request. If the Company shall receive a
Registration Request from a Stockholder requesting that the Company file a
Registration Statement relating to an Underwritten Public Offering of shares
of Common Stock owned by such Stockholder, the Company shall give promptly (and
in any event within ten business days) a Notice of Registration Request to each
other Stockholder of the receipt of the Registration Request, enclosing a copy
of the Registration Request. During the Request Period, the other Stockholders
shall be entitled to give a Supplemental Registration Request to the Company in
which any or all such Stockholders request that the
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Company register pursuant to the Securities Act and the Securities Act Rules
all or any portion of the shares of Common Stock owned by such Stockholders to
be distributed in an Underwritten Public Offering.
B. Required Registration. At the end of the Request Period, the
Company shall, subject to the provisions of Section 2.C herein, prepare as
promptly as practicable and file a Registration Statement with respect to the
distribution in accordance with the applicable method of distribution of the
Registrable Shares to be included therein and use its best efforts to cause the
Registration Statement to become effective under the Securities Act in
accordance with the Securities Act Rules,.
C. Suspension of Obligations. The Company's obligations under
Section 2.B herein to prepare and file a Registration Statement and to seek its
effectiveness shall be subject to the following provisions:
i. The Company shall be required to file no more than one
(1) Registration Statement pursuant to Section 2.A herein and one (1)
Registration Statement pursuant to Section 4.B herein.
ii. The Company's obligations to prepare, file and seek
effectiveness of a requested Registration Statement shall be
suspended:
(a) if the aggregate number of Registrable Shares
to be included in such requested Registration Statement is
less than 250,000 shares of the then issued and outstanding
Common Stock;
(b) in any case, during the period from the time
that it gives a Notice of Intent to File to Stockholders that
it is preparing to file a Primary Distribution Registration
Statement until 90 days (or such shorter period as to which
the managing underwriter of the Primary Distribution to which
the Primary Distribution Registration Statement relates shall
consent in writing) have lapsed following the effective date
of a Primary Distribution Registration Statement under the
Securities Act; provided, however, that (A) such Notice of
Intent to File is given prior to the time of receipt by the
Company of a Registration Request by any Stockholder and (B)
that the Company shall use its best efforts to cause such
Primary Distribution Registration Statement to be declared
effective as promptly as practicable; and provided, further,
that the obligation to file a Registration Statement on behalf
of any Stockholder shall be reinstated if the Company does not
file a Primary Distribution Registration Statement within 30
days after giving the Notice of Intent to File;
(c) in any case, during the period from the time
that it gives a Notice of Intent to File to Stockholders that
it is preparing to file a Secondary Distribution Registration
Statement (other than for the account of any of the
Stockholders) until 90 days (or such shorter period as to
which the managing underwriter of a Secondary
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Distribution effected by means of a Secondary Distribution
Registration Statement shall consent in writing) have lapsed
following the effective date of the Secondary Distribution
Registration Statement under the Securities Act; provided,
however, that (A) such Notice of Intent to File is given prior
to time of receipt by the Company of a Registration Request by
any Stockholder and (B) that the Company shall use its best
efforts to cause such Secondary Distribution Registration
Statement to be declared effective as promptly as practicable;
and provided further that the obligation to file a
Registration Statement on behalf of any Stockholder shall be
reinstated if the Company does not file a Secondary
Distribution Registration Statement within 30 days after
giving the Notice of Intent to File; or
(d) if at the time of receipt by the Company of a
Registration Request the Company has material inside
information as to which it believes it has a valid business
purpose in refraining from disclosing publicly for the time
being and that current public disclosure of such information
would have a material adverse effect on the Company, for a
period commencing with the date of receipt of the Registration
Request and ending on the earlier of (a) 60 days after such
receipt of the Registration Request; (b) the public
announcement of such material inside information; or (c) the
date on which the Company gives the Stockholder who issued the
Registration Request a notice that suspension of its
obligation is no longer required; provided, however, that the
same material inside information shall not constitute a basis
for continuation of this suspension period.
iii. A Registration Statement filed pursuant to a
Registration Request made under Section 2.B herein shall first include
all Registrable Shares requested to be included by any and all
Stockholders and, only after such inclusion, may include Common Stock
being sold for the account of the Company or any other security
holders. Any Common Stock to be offered on behalf of the Company or
such other security holders will be included in such Registration
Statement only to the extent that, in the reasonable opinion of the
managing underwriter for the Underwritten Public Offering of
Registrable Shares on behalf of Stockholders, such inclusion will not
materially adversely affect the distribution of Registrable Shares on
behalf of such Stockholders.
D. The selection of an underwriter for an Underwritten Public
Offering of Registrable Shares by Stockholders shall be subject to the approval
of the Company, which shall not be unreasonably withheld.
E. For purposes of Section 2.C(i) herein, if a requested
Registration Statement is filed and the Company otherwise complies with its
obligations hereunder, and
i. the Registration Statement is withdrawn with the consent
of the Affected Stockholders as a result of a delay in the offering
requested by the Company, then no requested Registration Statement
shall be deemed to have been filed; or
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ii. the Affected Stockholders cease to prosecute the Public
Offering subject thereto actively and in good faith, the Company shall
have the right to withdraw the Registration Statement without the
consent of the Affected Stockholders and the requested Registration
Statement shall be deemed to have been filed.
Section 3. Incidental/"Piggy-back" Registration.
A. Notice of Intent to File. If the Company at any time
proposes to file a Primary Distribution Registration Statement or a Secondary
Distribution Registration Statement (other than for the account of one or more
Stockholders) under the Securities Act relating to an Underwritten Public
Offering of Common Stock that would permit the inclusion therein of shares of
Common Stock to be distributed in accordance with the method of distribution
contemplated by such Registration Statement, the Company shall give to each
Stockholder a Notice of Intent to File promptly after a determination has been
made by the Company to prepare and file such Registration Statement, but in any
event not less than ten days before the filing with the Commission of such
Registration Statement, which notice shall set forth the intended method of
distribution (including the name of the managing underwriter) of the securities
proposed to be registered. The Notice of Intent to File shall include an offer
to include in such filing, subject to the other provisions of this Agreement,
such amount of Registrable Shares as each Stockholder may request.
B. Supplemental Registration Request. If any Stockholder wishes
to have Registrable Shares (including Earnout Shares) registered pursuant to
this Section 3, it shall advise the Company by giving a Supplemental
Registration Request within 20 days after the date of receipt of the Notice of
Intent to File (or such shorter period, but in any event not less than ten
days, as the Company shall specify in its Notice of Intent to File), setting
forth the amount of Registrable Shares for which Registration is requested.
C. Registration Obligation. Subject to the provisions of the
next sentence, the Company shall include all Registrable Shares specified in
the Supplemental Registration Requests received by it in accordance with
Subsection B of this Section 3. If, however, the managing underwriter of the
proposed Primary Distribution or Secondary Distribution shall advise the
Company in writing that, in the reasonable opinion of such managing
underwriter, the inclusion in the Registration Statement of the aggregate
number of shares of Common Stock requested by the Stockholders to be included
in the Primary Distribution or Secondary Distribution would materially
adversely affect such distribution of securities, then the Company shall so
advise the Affected Stockholders and the number of such shares of Common Stock
included in the Registration Statement shall be reduced to the number
acceptable to such managing underwriter and such reduced number of shares shall
be allocated pro rata among the Affected Stockholders. If any Stockholder does
not agree to the terms of underwriting of such Primary Distribution or
Secondary Distribution, the shares of Common Stock owned by such Stockholder
shall be excluded therefrom by written notice from the Company or such managing
underwriter.
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D. Underwriting Agreement. Any obligation of the Company to
include shares of Common Stock of any Stockholder in a Registration Statement
prepared and filed pursuant to this Subsection 3 shall be conditioned upon the
agreement of such Stockholder to enter into an underwriting agreement with the
Company, other security holders, if any, and the managing underwriter of the
Primary Distribution or the Secondary Distribution of the type described in
Subsection (H) of Section 5.
Section 4. Special Registration Right. Pursuant to the terms of
the Merger Agreement, the Designated Stockholders may in the future receive
Earnout Shares and, in order to provide liquidity to the Designated
Stockholders who receive such Earnout Shares, the Company has agreed to provide
a special right of Registration with respect to such Earnout Shares as in this
Section 4 provided.
A. Notices. If, at any time during the term hereof, (i) some or
all of the Stockholders receive the record and beneficial ownership of Earnout
Shares, whether from the Company upon original issue pursuant to the Merger
Agreement or from one or more Designated Stockholders upon assignment not
involving a Public Offering, (ii), in the opinion of counsel reasonably
satisfactory to the Company, all or part of such Earnout Shares may not be sold
by such Stockholders without registration under the Securities Act or reliance
on an exemption from the registration provisions thereof (other than Section
4(1) of the Securities Act) and (iii) the Company shall receive a Registration
Request from one or more such Stockholders requesting that the Company file a
Registration Statement relating to a Public Offering of shares of Common Stock
owned by such Stockholder or Stockholders, then the Company shall give promptly
(and in any event within ten business days) a Notice of Registration Request to
each other Stockholder who, to the knowledge of the Company, holds Earnout
Shares of the receipt of the Registration Request, enclosing a copy of the
Registration Request. During the Request Period, such other Stockholders shall
be entitled to give a Supplemental Registration Request to the Company in which
any or all such Stockholders request that the Company register pursuant to the
Securities Act and the Securities Act Rules all or any portion of the shares of
Common Stock owned by such Stockholders.
B. Preparation and Filing. After the Request Period, the
Company shall, subject to the provisions of Section 2.C herein, prepare as
promptly as practicable and file a Registration Statement with respect to the
offering, sale and delivery by the Stockholders of all or any part of the
shares of Common Stock constituting Earnout Shares in accordance with the
applicable method of distribution of the Registrable Shares to be included
therein specified in the and use its best efforts to cause the Registration
Statement to become effective under the Securities Act in accordance with the
Securities Act Rules. If so requested by such Affected Stockholders, the
Registration Statement shall be filed pursuant to Rule 415 (relating to "shelf
registration statements") of the Securities Act Rules.
C. Distribution. The applicable method of distribution of the
Registrable Shares shall be as requested by the Affected Stockholders and the
methods of distribution may include, without limitation, a distribution by one
or more broker-dealers named in the Registration Statement "at the market"
pursuant to a Market Public Offering. The Company agrees that it will amend
the
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Registration Statement or supplement the prospectus to include any material
information with respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such information in the
Registration Statement.
D. Limitations. The preparation and filing of a Registration
Statement pursuant to this Section 4 and the offering, sale and delivery of
Registrable Shares pursuant thereto shall be subject to the following
limitations:
i. The Company shall be obligated to prepare, file and cause
to become effective only one Registration Statement pursuant to this
Section 4.
ii. Only Earnout Shares, whether received by a Designated
Stockholder from the Company upon original issue pursuant to the
Merger Agreement or received by another Stockholder from a Designated
Stockholder upon an assignment not involving a Public Offering, may be
included in a Registration Statement filed pursuant to this Section 4,
and no sales of such shares shall be effected by the Affected
Stockholders under such Registration Statement prior to the delivery
to the Company of a certificate of the Affected Stockholders to such
effect.
iii. The proposed and actual filing by the Company of a
Registration Statement pursuant to this Section 4 shall not entitle
any Stockholder to registration rights pursuant to Section 3 herein.
iv. The offering, sale and delivery of Registrable Shares
pursuant to any Registration Statement filed pursuant to Rule 415
(relating to "shelf registration statements") of the Securities Act
Rules under this Section 4 shall be suspended if, at the time of any
offering, sale and delivery pursuant to a shelf registration
statement, the Company has material inside information as to which it
believes it has a valid business purpose in refraining from disclosing
publicly for the time being and that current public disclosure of such
information would have a material adverse effect on the Company. Such
suspension period shall commence upon notice by the Company to the
Affected Stockholders and shall continue until the earlier of (a) the
expiration of 60 days thereafter; (b) the public announcement of such
material inside information; or (c) the date on which the Company
gives the Affected Stockholders notice that such suspension is no
longer required; provided, however, that the same material inside
information shall not constitute a basis for continuation of this
suspension period.
v. The Company shall be obligated to maintain the
effectiveness of a Registration Statement filed pursuant to Rule 415
(relating to "shelf registration statements") of the Securities Act
Rules under this Section 4 until the third anniversary of the
effective date thereof and no longer.
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Section 5. Registration Procedures. If the Company is required
by the provisions of Section 2, 3 or 4 to effect the Registration of any of the
Registrable Shares, the Company shall, as expeditiously as possible:
A. Prepare and file with the Commission a Registration Statement
with respect to such shares of Common Stock and use its best efforts to cause
such Registration Statement to become and, subject to Subsection C of this
Section 5, remain effective.
B. Prepare and file with the Commission during the Registration
Period such amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to permit such
Registration Statement to become effective in accordance with the Securities
Act and the Securities Act Rules and to ensure that such Registration Statement
and the prospectus used in connection therewith comply with the disclosure
standards of Section 11 of the Securities Act and Section 10(b) of the Exchange
Act and that such prospectus complies with Section 10 of the Securities Act, in
each case during the Effective Period.
C. Subject to the provisions of Section 4.D herein, use its best
efforts to maintain the effectiveness of such Registration Statement and to
ensure compliance of the prospectus contained therein with Section 10(a) of the
Securities Act for the Effective Period.
D. Furnish to each Affected Stockholder (i) such number of copies of
such Registration Statement and of each amendment and supplement thereto (in
each case including all exhibits), such number of copies of the prospectus
included in such Registration Statement (including each preliminary prospectus,
summary prospectus and prospectus supplement), in conformity with the
requirements of the Securities Act, and such other documents as such Affected
Stockholder may reasonably require in order to facilitate the offering, sale
and delivery or other disposition of the Registrable Shares owned by such
Affected Stockholder and (ii), during the Registration Period and the Effective
Period, copies of any written correspondence or memoranda relating to oral
communications in each case with the Commission and copies of any request by
the Commission for any amendment of or supplement to the Registration Statement
or the prospectus included therein or for additional information.
E. Use its best efforts to register or qualify the Common Stock
covered by such Registration Statement under the securities or blue sky laws of
such jurisdictions as the managing underwriter of such Distribution may
reasonably request (excluding, however, any jurisdiction in which the filing
would subject the Company to additional tax liability and any jurisdiction in
which the Company would thereby be required to execute a general consent to
service of process) and use all reasonable efforts to do such other acts and
things as may be required to enable the Affected Stockholders to consummate the
public sale or other disposition in such jurisdictions of the Registrable
Shares owned by such Affected Stockholders.
F. Make available to its holders of Common Stock, as soon as
reasonably practicable, an earnings statement covering the period of at least
12 months, but not more than 18 months,
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beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
G. Notify each Affected Stockholder immediately if the Company shall
become aware at any time during the Effective Period that the prospectus
included in the Registration Statement, as such prospectus may be amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading in light of the circumstances then
existing, and at the request of any Affected Stockholder to prepare promptly
and to furnish to each Affected Stockholder such number of copies of an amended
or supplemental prospectus as may be necessary so that, as thereafter delivered
to the purchasers of such Registrable Shares, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading in the light of the circumstances then existing.
H. Enter into such agreements (including an underwriting agreement
in customary form and containing customary provisions relating to legal
opinions and accountants' letters, representations and warranties and mutual
indemnification and contribution between the Company and the underwriters for
the Affected Stockholders) and use all reasonable efforts to take such other
actions as the Affected Stockholders may reasonably request in order to
expedite or facilitate the disposition of such Registrable Shares.
I. Make available for inspection by the Affected Stockholders, by
any underwriter participating in any distribution to be effected pursuant to
such Registration Statement and by any attorney, accountant or other agent
retained by Affected Stockholders or any such underwriter all pertinent
financial and other records, pertinent corporate documents and properties of
the Company and cause all of the Company's officers, directors and employees to
supply all such information requested by the Affected Stockholders, such
underwriter, attorney, accountant or agent, as is reasonably needed in
connection with such Registration.
6. Expenses; Limitations on Registration. The Registration
Expenses relating to any Registration effected by the Company pursuant to this
Agreement shall be for the account of the Company; provided, however, that any
and all underwriting discounts and commissions attributable to the sale of the
shares of Common Stock of the Affected Stockholders shall be for the account of
the Affected Stockholders.
For purposes of this Section 6, the Company shall be obligated to pay
the fees and expenses of only one law firm representing the Affected
Stockholders. If more than one such firm shall represent the Affected
Stockholders in connection with a Registration under this Agreement, the
Affected Stockholders shall notify the Company as to which firm shall be deemed
to represent the Affected Stockholders for purposes of this Section 6.
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Section 7. Stockholders' Information. The Affected
Stockholders shall provide all information reasonably requested by the Company
for inclusion in any Registration Statement to be filed hereunder. The actual
provision of such information shall be a condition precedent to the obligation
of the Company to take any action pursuant to this Agreement in respect of the
Registration of Registrable Shares of any Affected Stockholder.
Section 8. Indemnification.
A. In connection with the Registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Company agrees to
indemnify and hold harmless each Affected Stockholder, its partners, directors,
officers and employees, and each other Person, if any, who controls such
Affected Stockholder within the meaning of Section 15 of the Securities Act,
against any losses, claims, damages or liabilities, joint or several, to which
such Affected Stockholder or any such partner, director, officer, employee or
controlling Person may become subject under the Securities Act or any other
statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or any alleged untrue statement of a material fact
contained in the Registration Statement or the prospectus included therein at
the time the Registration Statement is declared effective or any omission or
alleged omission of a material fact required to be stated therein or necessary
in order to make the statements therein not misleading or (ii) any untrue
statement of a material fact or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus, the
prospectus included therein or any amendment or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein
or necessary in order to make the statements concerning the Company therein, in
the light of the circumstances under which they were made, not misleading and
shall reimburse each Affected Stockholder and each such partner, director,
officer, employee and controlling Person for any legal or other expenses
reasonably incurred by such Affected Stockholder or such partner, director,
officer employee or controlling Person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement, preliminary prospectus, prospectus, or amendment
or supplement in reliance upon and in conformity with written information
furnished by or on behalf of an Affected Stockholder to the Company expressly
for use therein; and provided, further, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission in any preliminary prospectus if such
untrue statement or alleged untrue statement or omission or alleged omission
was corrected in the final prospectus included in the Registration Statement at
the time it became effective and the Affected Stockholder, in the case of a
Distribution Public Offering, or the managing underwriter, in the case of an
Underwritten Public Offering, failed to provide the final prospectus as
required by the Securities Act and the Securities Act Rules. Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of any Affected Stockholder or any such
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partner, director, officer, employee or controlling Person, and shall survive
the transfer of such securities by any Affected Stockholder.
B. Each Affected Stockholder agrees to indemnify and hold harmless
the Company, its directors, officers and employees, each other Person, if any,
who controls the Company and each other Affected Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company,
any such director, officer or employee, any such controlling Person or such
other Affected Stockholder may become subject under the Securities Act or any
other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or any alleged untrue statement of a material fact
contained in the Registration Statement or the prospectus included therein at
the time the Registration Statement is declared effective or any omission or
alleged omission of a material fact required to be stated therein or necessary
in order to make the statements therein not misleading or (ii) any untrue
statement of a material fact or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus, the
prospectus included therein or any amendment or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein
or necessary in order to make the statements concerning the Company therein, in
the light of the circumstances under which they were made, not misleading, in
each case to the extent, but only to the extent, that such alleged untrue
statement or alleged omission was made in such Registration Statement,
preliminary prospectus, prospectus, amendment or supplement in reliance upon
and in conformity with written information furnished by or on behalf of an
Affected Stockholder to the Company expressly for use therein, and shall
reimburse the Company or such director, officer, employee or other Person for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such loss, claim, damage, liability or action.
C. Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding involving a
claim referred to in Subsections (A) and (B) of this Section 8, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided, that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligation
under this Subsection C to the extent the indemnifying party is not materially
prejudiced by such failure. In case any such action is brought against an
indemnified party, the indemnified party shall permit the indemnifying party to
assume the defense of such action or proceeding, provided that counsel for the
indemnifying party, who shall conduct the defense of such action or proceeding,
shall be approved by the indemnified party (whose approval shall not be
unreasonably withheld) and the indemnified party may participate in such
defense (in which case, such participation shall be at such indemnified party's
expense, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified party and the indemnifying party shall exist
in respect of such claim, in which event the indemnifying party shall pay the
reasonable fees and expense of separate counsel for the indemnified party). No
indemnifying party shall consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. The indemnifying party shall
not, in
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connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm for all
indemnified parties. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent.
D. Indemnification similar to that specified in the preceding
Subsections of this Section 8 shall be given by the Company and each Affected
Stockholder (with such modifications as shall be appropriate) with respect to
liability related to any required registration or other qualification of
Registrable Shares under any Federal or state law or regulation of governmental
authority other than the Securities Act.
E. If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
Subsection (A) or (B) above, then the indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in Subsection (A) or (B) above, in
such proportion as is appropriate to reflect the relative fault of the Company,
on the one hand, and each Affected Stockholder, on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equity considerations. The
relative fault 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 Company or such Affected Stockholder and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Affected Stockholders agree
that it would not be just and equitable if contributions pursuant to this
Subsection (E) were to be determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this Subsection (E). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this Subsection (E) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim (which shall be limited as provided in Subsection (C) above if the
indemnifying party has assumed the defense of any such action in accordance
with the provisions thereof) which is the subject of this Subsection (E).
Notwithstanding the provisions of this Subsection (E), in respect of any loss,
claim, damage or liability based upon any untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a material fact which
relates to information other than information supplied by any Affected
Stockholder, no Affected Stockholder shall be required to contribute any amount
in excess of the amount by which the total price at which the Registrable
Shares offered by it and distributed to the public exceeds the amount of any
damages which such Affected Stockholder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation. Promptly after
receipt by an indemnified party under this Subsection (E) of notice of the
commencement of any action against such party in respect of which a claim for
contribution may be made against an indemnifying party under this Subsection
(E), such indemnified party shall notify the indemnifying party in writing of
the commencement thereof if the notice specified in Subsection (C) above has
not
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been given with respect to such action; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party under this Subsection (E) to the extent such omission is
not prejudicial.
Section 9. Public Availability of Information. The Company
shall comply with all public information reporting requirements of the
Commission, to the extent required from time to time to enable each Stockholder
to sell Registrable Shares without Registration under the Securities Act within
the limitation of the exemptions provided by (i) Rule 144 under the Securities
Act, as such Rule may be amended from time to time, or (ii) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of any
Stockholder, the Company will deliver to such Stockholder a written statement
as to whether it has complied with such requirements.
Section 10. Supplying Information. The Company shall cooperate
with each Stockholder in supplying such information as may be necessary for
such Stockholder to complete and file any information reporting forms presently
or hereafter required by the Commission as a condition to the availability of
an exemption from the Securities Act for the sale of any Registrable Shares.
Section 11. Specific Performance. Each party hereto acknowledges
and agrees that each other party hereto would be irreparably harmed and would
have no adequate remedy of law if any of the provisions of this Agreement were
not performed in accordance with their specific terms or were otherwise
breached. Accordingly, it is agreed that, in addition to any other remedies by
law or in equity which may be available, the parties hereto shall be entitled
to obtain preliminary and permanent injunctive relief with respect to any
breach or threatened breach of, or otherwise obtain specific performance of the
covenants and other agreements contained in this Agreement.
Section 12. Representations and Warranties of the Company. The
Company represents and warrants to each Stockholder that, as of the date of
this Agreement, (a) the Company 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 enter into this Agreement and to carry out
its obligations hereunder, (b) the execution and delivery of this Agreement by
the Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company and no other corporate proceedings on the part of
the Company are necessary to authorize this Agreement or any of the
transactions contemplated hereby, and (c) this Agreement has been duly executed
and delivered by the Company and constitutes a valid and binding obligation of
the Company, and, assuming that this Agreement constitutes a valid and binding
obligation of each of the Designated Stockholders, is enforceable against the
Company in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium, fraudulent conveyance and similar laws
affecting creditors' rights generally from time to time and to general
principles of equity, and except as the enforceability thereof may be limited
by considerations of public policy.
Section 13. Representations and Warranties of Cap I and Cap II.
Each of the Designated Stockholders represents and warrants to the Company
that, as of the date of this Agreement, (a) to
REGISTRATION RIGHTS AGREEMENT
16
<PAGE> 17
the extent it is a legal entity, it is an organization duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization and has the organizational power and authority to enter into this
Agreement and to carry out its obligations hereunder, (b) to the extent it is a
legal entity, the execution and delivery of this Agreement by such Stockholder
and the consummation by such Stockholder of the transactions contemplated
hereby have been duly authorized by all necessary organizational action on the
part of such Stockholder and no other organizational proceedings on the part of
such Stockholder are necessary to authorize this Agreement or any of the
transactions contemplated hereby, and (c) this Agreement has been duly executed
and delivered by such Stockholder and constitutes a valid and binding
obligation of such Stockholder and, assuming that this Agreement constitutes a
valid and binding obligation of the Company, is enforceable against such
Stockholder in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium, fraudulent conveyance and similar laws
affecting creditors' rights generally from time to time and to general
principles of equity, and except as the enforceability thereof may be limited
by considerations of public policy.
Section 14. Expiration. This Agreement and the rights,
benefits, duties and obligations hereunder of the parties hereto and their
successors and permitted assigns shall expire and be of no further force or
effect on May 31, 2004.
Section 15. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or transmitted by telex, telegram or facsimile transmission or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to any Designated Stockholder, to such Designated
Stockholder at the address of such Designated Stockholder
set forth on Annex A hereto
with a copy to:
Reed Smith Shaw & McClay
One Liberty Place
Philadelphia, PA 19103
Attn.: Ms. Lori L. Lasher
Facsimile: (215) 851-
(b) if to the Company, to:
NATCO Group, Inc.
Brookhollow Central III
2950 North Loop West
Suite 750
Houston, Texas 77092
Attn.: Nathaniel A. Gregory, Chairman and Chief
Executive Officer
REGISTRATION RIGHTS AGREEMENT
17
<PAGE> 18
Facsimile No.: (713) 683-7814
with a copy to:
Vinson & Elkins L.L.P.
First City Tower
1001 Fannin Street
Houston, Texas 77002-6760
Attn.: William E. Joor III
Facsimile No.: (713) 615-5201
Section 16. Benefit and Assignment.
(a) The terms and conditions of this Agreement shall
inure to the benefit of and be binding on the parties hereto and their
respective successors and permitted assigns; provided, however, that,
except as otherwise provided in this Section, this Agreement shall not
be assignable by any party hereto except by operation of Law or with
the prior express written consent of the other parties hereto.
Nothing in this Agreement, express or implied, is intended to confer
upon any party, other than the parties hereto and their respective
successors and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
(b) If any Designated Stockholder shall transfer and
assign shares of Common Stock to any Person otherwise than in an
Underwritten Public Offering, such Designated Stockholder (or any
Person who shall be a transferee or assignee pursuant to this
subsection (b)), as the case may be, may assign such portion of its
rights and benefits under this Agreement as is necessary to permit
such Person to act as a Stockholder hereunder; provided, however, that
such Person shall agree in writing to be bound by the duties and
obligations of a Stockholder hereunder.
Section 17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard
to the application of doctrines of conflicts of law.
Section 18. Counterparts. This Agreement may be executed in any
number of counterparts, which together shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their officers thereunto duly authorized.
NATCO GROUP, INC.
REGISTRATION RIGHTS AGREEMENT
18
<PAGE> 19
BY:_____________________________________
Nathaniel A. Gregory
Chairman and Chief Executive Officer
THE DESIGNATED COMPANY STOCKHOLDERS
________________________________________
William R. Dimeling
________________________________________
Robert J. Hamaker
________________________________________
Douglas P. Heller
________________________________________
George K. Hickox, Jr.
________________________________________
Ralph M. Kelly
________________________________________
Steven G. Park
________________________________________
Richard R. Schreiber
________________________________________
John C. Tuten, Jr.
THE 1998 TRUST FOR JODY SMITH HAMAKER
By:_____________________________________
Name:______________________________
Title:_____________________________
BANC ONE CAPITAL PARTNERS II, LTD.
By:_____________________________________
Name: Earle J. Bensing
Title: Authorized Signer
REGISTRATION RIGHTS AGREEMENT
19
<PAGE> 1
EXHIBIT 4.4
Cap I and Cap II
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated June __, 1998 by and between NATCO
Group Inc., a Delaware corporation (the "Company"), and Capricorn Partners,
Ltd., a Delaware limited partnership ("Cap I"), and Capricorn Partners II,
Ltd., a Delaware limited partnership ("Cap II").
R E C I T A L S:
Cap I owns of record and beneficially, after giving effect to the
Stock Split, 4,553,334 shares (68.3%) of the outstanding Common Stock.
Cap II owns of record and beneficially, after giving effect to the
Stock Split, 2,113,334 shares (31.7%) of the outstanding Common Stock.
Together, Cap I and Cap II own of record and beneficially, as of the
date of this Agreement, all the outstanding Common Stock.
The Company, Cap I and Cap II are parties to that certain Securities
Exchange Agreement dated as of March 5, 1998 pursuant to which (i) Cap I and
Cap II have agreed to sell to the Company, and the Company has agreed to
purchase, certain outstanding promissory notes of the Company in exchange for
the issuance by the Company of additional shares of Common Stock and (ii) Cap I
and Cap II will, upon consummation of the transactions contemplated thereby,
own of record and beneficially an aggregate of 5,563,667 shares and 2,582,259
shares, respectively, of Common Stock.
On March 26, 1998, the Company entered into an Agreement and Plan of
Merger dated that date with The Cynara Company, a Delaware corporation
("Cynara"), pursuant to which Cynara will be merged with and into a subsidiary
of the Company (the "Merger").
The stockholders of Cynara have entered into a Registration Rights
Agreement of even date herewith between the Company and such stockholders which
contains terms and provisions substantially similar to those herein (the
"Cynara Registration Rights Agreement").
The consummation of the Merger is conditioned upon concurrent
consummation of the initial public offering of Common Stock by the Company (the
"Initial Public Offering").
Cap I and Cap II have entered into various agreements in order to
facilitate consummation of the Merger and the Initial Public Offering.
NOW, THEREFORE, for and in consideration of the foregoing, the mutual
covenants and agreements contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
<PAGE> 2
Section 1. Definitions and Usage.
A. Definitions. The terms defined in this Section, wherever
used in this Agreement, shall, unless the context otherwise requires, have the
respective meanings hereinafter specified.
"Affected Stockholders" shall mean each Stockholder all or a portion
of whose shares of Common Stock have been included in a Registration Statement
filed with the Commission pursuant to the provisions of this Agreement.
"Agreement" shall mean this Registration Rights Agreement.
"Cap I" shall have the meaning ascribed to such term in the first
paragraph of this Agreement.
"Cap II" shall have the meaning ascribed to such term in the first
paragraph of this Agreement.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Common Stock" shall mean the Company's authorized Common Stock, par
value $.01 per share.
"Company" shall mean NATCO Group Inc., a Delaware corporation, and any
successor corporation by merger, consolidation or otherwise and any parent
corporation resulting from the merger or consolidation of the Company with or
into a subsidiary of another corporation.
"Cynara" shall mean The Cynara Corporation, a Delaware corporation.
"Cynara Registration Rights Agreement" shall have the meaning ascribed
to such term in the recitals to this Agreement.
"Distribution Public Offering" shall mean a distribution (as such term
is used in the Securities Act and the Securities Act Rules) of Common Stock by
Cap I or Cap II to its general and limited partners pursuant to a Registration
Statement filed and declared effective under the Securities Act and the
Securities Act Rules.
"Effective Period" shall mean such period as shall be required under
the provisions of the Securities Act and the Securities Act Rules for delivery
of a prospectus meeting the requirements of Section 10(a) of the Securities Act
to any Person purchasing Common Stock in connection with an Underwritten Public
Offering, a Distribution Public Offering or a Market Public Offering, as the
case may be; provided, however, that such period shall not include any delivery
requirement with respect to the distribution by an underwriter of its unsold
allotment relating to an Underwritten Public Offering.
REGISTRATION RIGHTS AGREEMENT
2
<PAGE> 3
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, as the same shall be in effect at the date of any determination to be
made hereunder.
"Exchange Act Rules" shall mean the rules and regulations promulgated
by the Commission under the Exchange Act, as the same shall be in effect at the
date of any determination to be made hereunder.
"Initial Public Offering" shall have the meaning ascribed to such term
in the recitals to this Agreement.
"Market Public Offering" shall mean a public offering for cash of
shares of Common Stock into an existing trading market for outstanding shares
of Common Stock at other than a fixed price on or through the facilities of a
national securities exchange or to or through a market maker otherwise than on
an exchange, but in any case pursuant to a Registration Statement filed and
declared effective under the Securities Act and the Securities Act Rules.
"Merger" shall have the meaning ascribed to such term in the recitals
to this Agreement.
"Notice of Registration Request" shall mean a written notice given by
the Company pursuant to Section 2.A to the Stockholder that did not send the
applicable Registration Request or pursuant to Section 2.B to all Stockholders
(other than the Stockholder who sent the applicable Registration Request), in
each case notifying such Stockholders that the applicable Registration Request
has been received by the Company and briefly advising such Stockholders that
they have the right to request Registration for the distribution of their
holdings of Common Stock, subject to the terms and provisions of this
Agreement.
"Person" shall mean an individual, a corporation, a partnership, a
trust, an unincorporated organization or a government or any agency or
political subdivision thereof.
"Primary Distribution" shall mean an Underwritten Public Offering of
Common Stock offered, sold and delivered by the Company.
"Primary Distribution Registration Statement" shall mean a
Registration Statement filed by the Company and declared effective under the
Securities Act and the Securities Act Rules relating to a Primary Distribution.
"Public Offering" shall mean either a Distribution Public Offering, a
Market Public Offering or an Underwritten Public Offering
"Registrable Shares" shall mean shares of Common Stock owned of record
by any Stockholder as to which such Stockholder has requested Registration
pursuant to the provisions of Section 2.A, 2.B, 3.B or 4.A.
REGISTRATION RIGHTS AGREEMENT
3
<PAGE> 4
"Registration" shall mean the registration under the registration
provisions of the Securities Act of the offering, sale and delivery of shares
of Common Stock.
"Registration Expenses" shall mean the expenses associated with the
preparation and filing of any registration statement pursuant to Section 2.C,
3.C or 4.A herein and any sale covered thereby (including the reasonable fees
and expenses of legal counsel to the Affected Stockholders, fees related to
blue sky qualifications and filing fees in respect of the National Association
of Securities Dealers, Inc.), but excluding underwriting discounts or
commissions in respect of shares of Common Stock to be sold by the Affected
Stockholders.
"Registration Request" shall mean a written notice from a Stockholder
requesting that the Company file a Registration Statement with respect to a
Distribution Public Offering pursuant to Section 2.A herein, an Underwritten
Public Offering pursuant to Section 2.B herein or a Public Offering pursuant to
Section 4.A herein, in which the Stockholder advises the Company as to the
number of shares of Common Stock that the Stockholder wishes to include in the
applicable Registration and in which the Stockholder agrees to (i) the
specified method of distribution, (ii), in the case of an Underwritten Public
Offering, the designated managing underwriter and (iii) agrees to provide to
the Company all such information as may be required by the Company pursuant to
Section 6 herein.
"Registration Period" shall mean the period of time from the decision
of the Company to prepare and file a Registration Statement to and including
the effective date of such Registration Statement.
"Registration Statement" shall mean a registration statement filed on
Form S-1, S-2 or S-3 (or any successor form) under the registration provisions
of the Securities Act and the Securities Act Rules.
"Request Period" shall mean a period of ten business days after
receipt pursuant to Section 2.A by the Stockholder that did not send the
applicable Registration Request or after receipt pursuant to Section 2.B by all
Stockholders (other than the Stockholder who sent the applicable Registration
Request) of the Notice of Registration Request.
"Secondary Distribution" shall mean an Underwritten Public Offering of
Common Stock offered, sold and delivered by shareholders of the Company other
than the Stockholders, but including the holders of Common Stock acquired
pursuant to the Merger and subject to the Cynara Registration Rights Agreement.
"Secondary Distribution Registration Statement" shall mean a
Registration Statement filed by the Company and declared effective under the
Securities Act and the Securities Act Rules relating to a Secondary
Distribution, including a distribution requested by the shareholders subject to
the Cynara Registration Rights Agreement.
REGISTRATION RIGHTS AGREEMENT
4
<PAGE> 5
"Securities Act" shall mean the Securities Act of 1933, as amended, as
the same shall be in effect at the date of any determination to be made
hereunder.
"Securities Act Rules" shall mean the rules and regulations
promulgated by the Commission pursuant to the Securities Act, as the same shall
be in effect at the date of any determination to be made hereunder.
"Stockholders" shall mean Cap I and Cap II, Nathaniel A. Gregory,
Winokur, any limited partner of Cap I or Cap II and its affiliates (in the
cases of Winokur, any such limited partner and its affiliates, to the extent
that, upon receipt of shares of Common Stock distributed by Cap I or Cap II,
such shares constitute "restricted securities" within the meaning of Rule 144
of the Securities Act Rules or for so long as such Person is deemed to be an
"affiliate" of the Company within the meaning of that term as used in the
Securities Act Rules), any other assignee of shares of Common Stock theretofore
held by any of them (other than any assignee who acquires such shares of Common
Stock pursuant to a Public Offering); provided, however, that any such assignee
has agreed to be bound by the provisions of this Agreement in accordance with
Section 14 herein.
"Stock Split" shall mean the four-for-three split of the outstanding
Common Stock effected by amendment to the Company's Certificate of
Incorporation on March 6, 1998.
"Supplemental Registration Request" shall mean a written notice given
by any Stockholder pursuant to the provisions of Section 2.A, 2.B or 3.B
herein, in which the Stockholder advises the Company as to the number of shares
of Common Stock that the Stockholder wishes to include in the applicable
Registration and in which the Stockholder agrees to (i) the specified method of
distribution, (ii), in the case of an Underwritten Public Offering, the
designated managing underwriter and (iii) agrees to provide to the Company all
such information as may be required by the Company pursuant to Section 6
herein.
"Underwritten Public Offering" shall mean a firm commitment
underwritten public offering for cash of shares of Common Stock pursuant to a
Registration Statement filed and declared effective under the Securities Act
and the Securities Act Rules.
"Winokur" shall mean Herbert S. Winokur, Jr. or any legal entity of
which Mr. Winokur is the predominant beneficial owner.
B. Rules of Construction. Unless the context otherwise
requires, as used in this Agreement: (a) a term has the meaning ascribed to
it; (b) "or" is not exclusive; (c) "including" means "including without
limitation;" (d) words in the singular include the plural; (e) words in the
plural include the singular; (f) words applicable to one gender shall be
construed to apply to each gender; (g) the terms "hereof," "herein," "hereby,"
"hereto" and derivative or similar words refer to this entire Agreement; and
(h) the term "Section" shall refer to the specified Section of this Agreement.
REGISTRATION RIGHTS AGREEMENT
5
<PAGE> 6
Section 2. Registration Rights.
A. Distribution Registration Request. If the Company shall
receive a Registration Request from Cap I or Cap II on or after ____________,
1998 (180 days after IPO) requesting that the Company file a Registration
Statement relating to a Distribution Public Offering of shares of Common Stock
owned by such Stockholder, the Company shall, if the other Stockholder (Cap I
or Cap II) has not theretofore distributed its holdings of Common Stock to its
partners in complete or partial liquidation) give promptly (and in any event
within ten business days) a Notice of Registration Request to the Stockholder
that did not send the Registration Request of the receipt of the Registration
Request, enclosing a copy of the Registration Request. During the Request
Period, the other Stockholder shall be entitled to give a Supplemental
Registration Request to the Company in which such Stockholder requests that the
Company register pursuant to the Securities Act and the Securities Act Rules
the shares of Common Stock owned by such Stockholder to be distributed in a
Distribution Public Offering.
B. Registration Request. If the Company shall receive a
Registration Request from a Stockholder requesting that the Company file a
Registration Statement relating to an Underwritten Public Offering of shares
of Common Stock owned by such Stockholder, the Company shall give promptly (and
in any event within ten business days) a Notice of Registration Request to each
other Stockholder of the receipt of the Registration Request, enclosing a copy
of the Registration Request. During the Request Period, the other Stockholders
shall be entitled to give a Supplemental Registration Request to the Company in
which any or all such Stockholders request that the Company register pursuant
to the Securities Act and the Securities Act Rules all or any portion of the
shares of Common Stock owned by such Stockholders to be distributed in an
Underwritten Public Offering.
C. Required Registration. At the end of the Request Period in
the case of a Registration Request made pursuant to Section 2.A or 2.B herein,
the Company shall, subject to the provisions of Section 2.D herein, prepare as
promptly as practicable and file a Registration Statement with respect to the
distribution in accordance with the applicable method of distribution of the
Registrable Shares to be included therein and use its best efforts to cause the
Registration Statement to become effective under the Securities Act in
accordance with the Securities Act Rules,.
D. Suspension of Obligations. The Company's obligations under
Section 2.C and Section 4.A herein to prepare and file a Registration Statement
and to seek its effectiveness shall be subject to the following provisions:
i. The Company shall be required to file no more than an
aggregate of five (5) Registration Statements pursuant to Section 2.A
and Section 2.B and one (1) Registration Statement pursuant to Section
4.A herein.
ii. The Company's obligations to prepare, file and seek
effectiveness of a requested Registration Statement shall be
suspended:
REGISTRATION RIGHTS AGREEMENT
6
<PAGE> 7
(a) in the case of an Underwritten Public Offering,
if the aggregate number of Registrable Shares to be included
in such requested Registration Statement is less than 750,000
shares of the then issued and outstanding Common Stock;
(b) in any case, during the period from the time
that it gives a Notice of Intent to File to Stockholders that
it is preparing to file a Primary Distribution Registration
Statement until 90 days (or such shorter period as to which
the managing underwriter of the Primary Distribution to which
the Primary Distribution Registration Statement relates shall
consent in writing) have lapsed following the effective date
of a Primary Distribution Registration Statement under the
Securities Act; provided, however, that (A) such Notice of
Intent to File is given prior to the time of receipt by the
Company of a Registration Request by any Stockholder and (B)
that the Company shall use its best efforts to cause such
Primary Distribution Registration Statement to be declared
effective as promptly as practicable; and provided further
that the obligation to file a Registration Statement on behalf
of any Stockholder shall be reinstated if the Company does not
file a Primary Distribution Registration Statement within 30
days after giving the Notice of Intent to File;
(c) in any case, during the period from the time
that it gives a Notice of Intent to File to Stockholders that
it is preparing to file a Secondary Distribution Registration
Statement (other than for the account of any of the
Stockholders) until 90 days (or such shorter period as to
which the managing underwriter of a Secondary Distribution
effected by means of a Secondary Distribution Registration
Statement shall consent in writing) have lapsed following the
effective date of the Secondary Distribution Registration
Statement under the Securities Act; provided, however, that
(A) such Notice of Intent to File is given prior to time of
receipt by the Company of a Registration Request by any
Stockholder and (B) that the Company shall use its best
efforts to cause such Secondary Distribution Registration
Statement to be declared effective as promptly as practicable;
and provided further that the obligation to file a
Registration Statement on behalf of any Stockholder shall be
reinstated if the Company does not file a Secondary
Distribution Registration Statement within 30 days after
giving the Notice of Intent to File; or
(d) in any case, if at the time of receipt by the
Company of a Registration Request the Company has material
inside information as to which it believes it has a valid
business purpose in refraining from disclosing publicly for
the time being and that current public disclosure of such
information would have a material adverse effect on the
Company, for a period commencing with the date of receipt of
the Registration Request and ending on the earlier of (a) 60
days after such receipt of the Registration Request; (b) the
public announcement of such material inside information; or
(c) the date on which the Company gives the Stockholder who
issued the Registration Request a notice that suspension of
its obligation is no longer
REGISTRATION RIGHTS AGREEMENT
7
<PAGE> 8
required; provided, however, that the same material inside
information shall not constitute a basis for continuation of
this suspension period.
iii. A Registration Statement filed pursuant to a
Registration Request made under Section 2.B herein shall first include
all Registrable Shares requested to be included by any and all
Stockholders and, only after such inclusion, may include Common Stock
being sold for the account of the Company or any other security
holders. Any Common Stock to be offered on behalf of the Company or
such other security holders will be included in such Registration
Statement only to the extent that, in the reasonable opinion of the
managing underwriter for the Underwritten Public Offering of
Registrable Shares on behalf of Stockholders, such inclusion will not
materially adversely affect the distribution of Registrable Shares on
behalf of such Stockholders.
E. The selection of an underwriter for an Underwritten Public
Offering of Registrable Shares by Stockholders shall be subject to the approval
of the Company, which shall not be unreasonably withheld.
F. For purposes of Section 2.D(i) herein, if a requested
Registration Statement is filed and the Company otherwise complies with its
obligations hereunder, and
i. the Registration Statement is withdrawn with the consent
of the Affected Stockholders as a result of a delay in the offering
requested by the Company, then no requested Registration Statement
shall be deemed to have been filed; or
ii. the Affected Stockholders cease to prosecute the Public
Offering subject thereto actively and in good faith, the Company shall
have the right to withdraw the Registration Statement without the
consent of the Affected Stockholders and the requested Registration
Statement shall be deemed to have been filed.
Section 3. Incidental/"Piggy-back" Registration.
A. Notice of Intent to File. If the Company at any time
proposes to file a Primary Distribution Registration Statement or a Secondary
Distribution Registration Statement (other than for the account of one or more
Stockholders) under the Securities Act relating to an Underwritten Public
Offering of Common Stock that would permit the inclusion therein of shares of
Common Stock to be distributed in accordance with the method of distribution
contemplated by such Registration Statement, the Company shall give to each
Stockholder a Notice of Intent to File promptly after a determination has been
made by the Company to prepare and file such Registration Statement, but in any
event not less than ten days before the filing with the Commission of such
Registration Statement, which notice shall set forth the intended method of
distribution (including the name of the managing underwriter) of the securities
proposed to be registered. The Notice of Intent to File shall include an offer
to include in such filing, subject to the other provisions of this Agreement,
such amount of Registrable Shares as each Stockholder may request.
REGISTRATION RIGHTS AGREEMENT
8
<PAGE> 9
B. Supplemental Registration Request. If any Stockholder wishes
to have Registrable Shares registered pursuant to this Section 3, it shall
advise the Company by giving a Supplemental Registration Request within 20 days
after the date of receipt of the Notice of Intent to File (or such shorter
period, but in any event not less than ten days, as the Company shall specify
in its Notice of Intent to File), setting forth the amount of Registrable
Shares for which Registration is requested.
C. Registration Obligation. Subject to the provisions of the
next sentence, the Company shall include all Registrable Shares specified in
the Supplemental Registration Requests received by it in accordance with
Subsection B of this Section 3. If, however, the managing underwriter of the
proposed Primary Distribution or Secondary Distribution shall advise the
Company in writing that, in the reasonable opinion of such managing
underwriter, the inclusion in the Registration Statement of the aggregate
number of shares of Common Stock requested by the Stockholders to be included
in the Primary Distribution or Secondary Distribution would materially
adversely affect such distribution of securities, then the Company shall so
advise the Affected Stockholders and the number of such shares of Common Stock
included in the Registration Statement shall be reduced to the number
acceptable to such managing underwriter and such reduced number of shares shall
be allocated pro rata among the Affected Stockholders. If any Stockholder does
not agree to the terms of underwriting of such Primary Distribution or
Secondary Distribution, the shares of Common Stock owned by such Stockholder
shall be excluded therefrom by written notice from the Company or such managing
underwriter.
D. Underwriting Agreement. Any obligation of the Company to
include shares of Common Stock of any Stockholder in a Registration Statement
prepared and filed pursuant to this Subsection 3 shall be conditioned upon the
agreement of such Stockholder to enter into an underwriting agreement with the
Company, other security holders, if any, and the managing underwriter of the
Primary Distribution or the Secondary Distribution of the type described in
Subsection (H) of Section 5.
Section 4. Special Registration Right.
A. Preparation and Filing. If at any time during the term
hereof, Winokur acquires the record and beneficial ownership of Common Stock
from Cap I or Cap II, (ii) in the opinion of counsel, reasonably satisfactory
to the Company, all or part of such shares may not be sold by Winokur without
registration under the Securities Act or reliance on an exemption from the
registration provisions thereof (other than Section 4(1) of the Securities Act)
and (iii) Winokur desires in good faith to pledge all or a portion of such
shares as collateral for borrowings by Winoker from one or more lenders
("Lenders"), then, upon receipt by the Company of a Registration Request from
Winokur or the Lenders, the Company shall, subject to the provisions of Section
2.D herein, prepare as promptly as practicable and file a Registration
Statement with respect to the offering, sale and delivery by the Lenders of all
or any part of the shares of Common Stock pledged by Winokur to the Lenders in
accordance with the applicable method of distribution of the Registrable Shares
to be included therein and use its best efforts to cause the Registration
Statement to become effective under the Securities Act in accordance with the
Securities Act Rules. If so requested by Winokur
REGISTRATION RIGHTS AGREEMENT
9
<PAGE> 10
or the Lenders, the Registration Statement shall be filed pursuant to Rule 415
(relating to "shelf registration statements") of the Securities Act Rules.
B. Distribution. The applicable method of distribution of the
Registrable Shares shall be as requested by the Lenders (or Winokur on behalf
of the Lenders) and the methods of distribution may include a distribution by
one or more broker-dealers named in the Registration Statement "at the market"
pursuant to a Market Public Offering. The Company agrees that it will amend
the Registration Statement or supplement the prospectus to include any material
information with respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such information in the
Registration Statement.
C. Limitations. The preparation and filing of a Registration
Statement pursuant to this Section 4 and the offering, sale and delivery of
Registrable Shares pursuant thereto shall be subject to the following
limitations:
i. The Company shall be obligated to prepare, file and cause
to become effective only one Registration Statement pursuant to this
Section 4.
ii. The only offering, sale and delivery of Registrable
Shares under such Registration Statement shall be for the account of
the Lenders after a foreclosure of the lien against such shares
following a default in payment of the borrowings made against such
collateral, and no sales of such shares shall be effected by the
Lenders under such Registration Statement prior to the delivery to the
Company of a certificate of the Lenders to such effect.
iii. The proposed and actual filing by the Company of a
Registration Statement pursuant to this Section 4 shall not entitle
any Stockholder to registration rights pursuant to Section 3 herein.
iv. The offering, sale and delivery of Registrable Shares
pursuant to any Registration Statement filed pursuant to Rule 415
(relating to "shelf registration statements") of the Securities Act
Rules under this Section 4 shall be suspended if, at the time of any
offering, sale and delivery pursuant to a shelf registration
statement, the Company has material inside information as to which it
believes it has a valid business purpose in refraining from disclosing
publicly for the time being and that current public disclosure of such
information would have a material adverse effect on the Company. Such
suspension period shall commence upon notice by the Company to Winokur
and the Lenders and shall continue until the earlier of (a) the
expiration of 60 days thereafter; (b) the public announcement of such
material inside information; or (c) the date on which the Company
gives Winokur and the Lenders notice that such suspension is no longer
required; provided, however, that the same material inside information
shall not constitute a basis for continuation of this suspension
period.
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<PAGE> 11
v. The Company shall be obligated to maintain the
effectiveness of a Registration Statement filed pursuant to Rule 415
(relating to "shelf registration statements") of the Securities Act
Rules under this Section 4 until the third anniversary of the
effective date thereof and no longer.
D. Benefits. Upon receipt by the Company of a Registration
Request under this Section 4, the Lenders shall have the benefits of an
Affected Stockholder under Sections 5, 6, 7 and 8 of this Agreement and of a
Stockholder under Sections 9, 10 and 16 of this Agreement.
Section 5. Registration Procedures. If the Company is required
by the provisions of Section 2, 3 or 4 to effect the Registration of any of the
Registrable Shares, the Company shall, as expeditiously as possible:
A. Prepare and file with the Commission a Registration Statement
with respect to such shares of Common Stock and use its best efforts to cause
such Registration Statement to become and, subject to Subsection C of this
Section 5, remain effective.
B. Prepare and file with the Commission during the Registration
Period such amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to permit such
Registration Statement to become effective in accordance with the Securities
Act and the Securities Act Rules and to ensure that such Registration Statement
and the prospectus used in connection therewith comply with the disclosure
standards of Section 11 of the Securities Act and Section 10(b) of the Exchange
Act and that such prospectus complies with Section 10 of the Securities Act, in
each case during the Effective Period.
C. Subject to the provisions of Section 4.C herein, use its best
efforts to maintain the effectiveness of such Registration Statement and to
ensure compliance of the prospectus contained therein with Section 10(a) of the
Securities Act for the Effective Period.
D. Furnish to each Affected Stockholder (i) such number of copies of
such Registration Statement and of each amendment and supplement thereto (in
each case including all exhibits), such number of copies of the prospectus
included in such Registration Statement (including each preliminary prospectus,
summary prospectus and prospectus supplement), in conformity with the
requirements of the Securities Act, and such other documents, as such Affected
Stockholder may reasonably require in order to facilitate the offering, sale
and delivery or other disposition of the Registrable Shares owned by such
Affected Stockholder and (ii), during the Registration Period and the Effective
Period, copies of any written correspondence or memoranda relating to oral
communications in each case with the Commission and copies of any request by
the Commission for any amendment of or supplement to the Registration Statement
or the prospectus included therein or for additional information.
E. Use its best efforts to register or qualify the Common Stock
covered by such Registration Statement under the securities or blue sky laws of
such jurisdictions as the managing underwriter of
REGISTRATION RIGHTS AGREEMENT
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<PAGE> 12
such Distribution may reasonably request (excluding, however, any jurisdiction
in which the filing would subject the Company to additional tax liability and
any jurisdiction in which the Company would thereby be required to execute a
general consent to service of process) and use all reasonable efforts to do
such other acts and things as may be required to enable the Affected
Stockholders to consummate the public sale or other disposition in such
jurisdictions of the Registrable Shares owned by such Affected Stockholders.
F. Make available to its holders of Common Stock, as soon as
reasonably practicable, an earnings statement covering the period of at least
12 months, but not more than 18 months, beginning with the first month after
the effective date of the Registration Statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act.
G. Notify each Affected Stockholder immediately if the Company shall
become aware at any time during the Effective Period that the prospectus
included in the Registration Statement, as such prospectus may be amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading in light of the circumstances then
existing, and at the request of any Affected Stockholder to prepare promptly
and to furnish to each Affected Stockholder such number of copies of an amended
or supplemental prospectus as may be necessary so that, as thereafter delivered
to the purchasers of such Registrable Shares, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading in the light of the circumstances then existing.
H. Enter into such agreements (including an underwriting agreement
in customary form and containing customary provisions relating to legal
opinions and accountants' letters, representations and warranties and mutual
indemnification and contribution between the Company and the underwriters for
the Affected Stockholders) and use all reasonable efforts to take such other
actions as the Affected Stockholders may reasonably request in order to
expedite or facilitate the disposition of such Registrable Shares.
I. Make available for inspection by the Affected Stockholders, by
any underwriter participating in any distribution to be effected pursuant to
such Registration Statement and by any attorney, accountant or other agent
retained by Affected Stockholders or any such underwriter all pertinent
financial and other records, pertinent corporate documents and properties of
the Company and cause all of the Company's officers, directors and employees to
supply all such information requested by the Affected Stockholders, such
underwriter, attorney, accountant or agent, as is reasonably needed in
connection with such Registration.
6. Expenses; Limitations on Registration. The Registration
Expenses relating to any Registration effected by the Company pursuant to this
Agreement shall be for the account of the Company; provided, however, that any
and all underwriting discounts and commissions attributable
REGISTRATION RIGHTS AGREEMENT
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<PAGE> 13
to the sale of the shares of Common Stock of the Affected Stockholders shall be
for the account of the Affected Stockholders.
For purposes of this Section 6, the Company shall be obligated to pay
the fees and expenses of only one law firm representing the Affected
Stockholders. If more than one such firm shall represent the Affected
Stockholders in connection with a Registration under this Agreement, the
Affected Stockholders shall notify the Company as to which firm shall be deemed
to represent the Affected Stockholders for purposes of this Section 6.
Section 7. Stockholders' Information. The Affected
Stockholders shall provide all information reasonably requested by the Company
for inclusion in any Registration Statement to be filed hereunder. The actual
provision of such information shall be a condition precedent to the obligation
of the Company to take any action pursuant to this Agreement in respect of the
Registration of Registrable Shares of any Affected Stockholder.
Section 8. Indemnification.
A. In connection with the Registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Company agrees to
indemnify and hold harmless each Affected Stockholder, its partners, directors,
officers and employees, and each other Person, if any, who controls such
Affected Stockholder within the meaning of Section 15 of the Securities Act,
against any losses, claims, damages or liabilities, joint or several, to which
such Affected Stockholder or any such partner, director, officer, employee or
controlling Person may become subject under the Securities Act or any other
statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or any alleged untrue statement of a material fact
contained in the Registration Statement or the prospectus included therein at
the time the Registration Statement is declared effective or any omission or
alleged omission of a material fact required to be stated therein or necessary
in order to make the statements therein not misleading or (ii) any untrue
statement of a material fact or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus, the
prospectus included therein or any amendment or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein
or necessary in order to make the statements concerning the Company therein, in
the light of the circumstances under which they were made, not misleading and
shall reimburse each Affected Stockholder and each such partner, director,
officer, employee and controlling Person for any legal or other expenses
reasonably incurred by such Affected Stockholder or such partner, director,
officer employee or controlling Person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement, preliminary prospectus, prospectus, or amendment
or supplement in reliance upon and in conformity with written information
furnished by or on behalf of an Affected Stockholder to the Company expressly
for use therein; and provided, further, that the Company shall not be liable in
any such case to the extent that
REGISTRATION RIGHTS AGREEMENT
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<PAGE> 14
any such loss, claim, damage, liability or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission in any preliminary prospectus if such untrue statement or alleged
untrue statement or omission or alleged omission was corrected in the final
prospectus included in the Registration Statement at the time it became
effective and the Affected Stockholder, in the case of a Distribution Public
Offering, or the managing underwriter, in the case of an Underwritten Public
Offering, failed to provide the final prospectus as required by the Securities
Act and the Securities Act Rules. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of any Affected
Stockholder or any such partner, director, officer, employee or controlling
Person, and shall survive the transfer of such securities by any Affected
Stockholder.
B. Each Affected Stockholder agrees to indemnify and hold harmless
the Company, its directors, officers and employees, each other Person, if any,
who controls the Company and each other Affected Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company,
any such director, officer or employee, any such controlling Person or such
other Affected Stockholder may become subject under the Securities Act or any
other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or any alleged untrue statement of a material fact
contained in the Registration Statement or the prospectus included therein at
the time the Registration Statement is declared effective or any omission or
alleged omission of a material fact required to be stated therein or necessary
in order to make the statements therein not misleading or (ii) any untrue
statement of a material fact or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus, the
prospectus included therein or any amendment or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein
or necessary in order to make the statements concerning the Company therein, in
the light of the circumstances under which they were made, not misleading, in
each case to the extent, but only to the extent, that such alleged untrue
statement or alleged omission was made in such Registration Statement,
preliminary prospectus, prospectus, amendment or supplement in reliance upon
and in conformity with written information furnished by or on behalf of an
Affected Stockholder to the Company expressly for use therein, and shall
reimburse the Company or such director, officer, employee or other Person for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such loss, claim, damage, liability or action.
C. Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding involving a
claim referred to in Subsections (A) and (B) of this Section 8, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided, that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligation
under this Subsection C to the extent the indemnifying party is not materially
prejudiced by such failure. In case any such action is brought against an
indemnified party, the indemnified party shall permit the indemnifying party to
assume the defense of such action or proceeding, provided that counsel for the
indemnifying party, who shall conduct the defense of such action or proceeding,
shall be approved by the indemnified party (whose approval shall not be
REGISTRATION RIGHTS AGREEMENT
14
<PAGE> 15
unreasonably withheld) and the indemnified party may participate in such
defense (in which case, such participation shall be at such indemnified party's
expense, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified party and the indemnifying party shall exist
in respect of such claim, in which event the indemnifying party shall pay the
reasonable fees and expense of separate counsel for the indemnified party). No
indemnifying party shall consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. The indemnifying party shall
not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate
firm for all indemnified parties. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent.
D. Indemnification similar to that specified in the preceding
Subsections of this Section 8 shall be given by the Company and each Affected
Stockholder (with such modifications as shall be appropriate) with respect to
liability related to any required registration or other qualification of
Registrable Shares under any Federal or state law or regulation of governmental
authority other than the Securities Act.
E. If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
Subsection (A) or (B) above, then the indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in Subsection (A) or (B) above, in
such proportion as is appropriate to reflect the relative fault of the Company,
on the one hand, and each Affected Stockholder, on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equity considerations. The
relative fault 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 Company or such Affected Stockholder and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Affected Stockholders agree
that it would not be just and equitable if contributions pursuant to this
Subsection (E) were to be determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this Subsection (E). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this Subsection (E) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim (which shall be limited as provided in Subsection (C) above if the
indemnifying party has assumed the defense of any such action in accordance
with the provisions thereof) which is the subject of this Subsection (E).
Notwithstanding the provisions of this Subsection (E), in respect of any loss,
claim, damage or liability based upon any untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a material fact which
relates to information other than information supplied by any Affected
Stockholder, no Affected Stockholder shall be required to contribute any amount
in excess of the amount by which the total price at which the Registrable
Shares offered by it and distributed to the public exceeds the
REGISTRATION RIGHTS AGREEMENT
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<PAGE> 16
amount of any damages which such Affected Stockholder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. Promptly after receipt by an indemnified party under this
Subsection (E) of notice of the commencement of any action against such party
in respect of which a claim for contribution may be made against an
indemnifying party under this Subsection (E), such indemnified party shall
notify the indemnifying party in writing of the commencement thereof if the
notice specified in Subsection (C) above has not been given with respect to
such action; but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party under
this Subsection (E) to the extent such omission is not prejudicial.
Section 9. Public Availability of Information. The Company
shall comply with all public information reporting requirements of the
Commission, to the extent required from time to time to enable each Stockholder
to sell Registrable Shares without Registration under the Securities Act within
the limitation of the exemptions provided by (i) Rule 144 under the Securities
Act, as such Rule may be amended from time to time, or (ii) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of any
Stockholder, the Company will deliver to such Stockholder a written statement
as to whether it has complied with such requirements.
Section 10. Supplying Information. The Company shall cooperate
with each Stockholder in supplying such information as may be necessary for
such Stockholder to complete and file any information reporting forms presently
or hereafter required by the Commission as a condition to the availability of
an exemption from the Securities Act for the sale of any Registrable Shares.
Section 11. Specific Performance. Each party hereto acknowledges
and agrees that each other party hereto would be irreparably harmed and would
have no adequate remedy of law if any of the provisions of this Agreement were
not performed in accordance with their specific terms or were otherwise
breached. Accordingly, it is agreed that, in addition to any other remedies by
law or in equity which may be available, the parties hereto shall be entitled
to obtain preliminary and permanent injunctive relief with respect to any
breach or threatened breach of, or otherwise obtain specific performance of the
covenants and other agreements contained in this Agreement.
Section 12. Representations and Warranties of the Company. The
Company represents and warrants to each Stockholder that, as of the date of
this Agreement, (a) the Company 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 enter into this Agreement and to carry out
its obligations hereunder, (b) the execution and delivery of this Agreement by
the Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company and no other corporate proceedings on the part of
the Company are necessary to authorize this Agreement or any of the
transactions contemplated hereby, and (c) this Agreement has been duly executed
and delivered by the Company and constitutes a valid and binding obligation of
the Company, and, assuming that this Agreement
REGISTRATION RIGHTS AGREEMENT
16
<PAGE> 17
constitutes a valid and binding obligation of each of Cap I and Cap II, is
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent
conveyance and similar laws affecting creditors' rights generally from time to
time and to general principles of equity, and except as the enforceability
thereof may be limited by considerations of public policy.
Section 13. Representations and Warranties of Cap I and Cap II.
Each of Cap I and Cap II represents and warrants to the Company that, as of the
date of this Agreement, (a) it is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the organizational power and authority to enter into this Agreement and to
carry out its obligations hereunder, (b) the execution and delivery of this
Agreement by such Stockholder and the consummation by such Stockholder of the
transactions contemplated hereby have been duly authorized by all necessary
organizational action on the part of such Stockholder and no other
organizational proceedings on the part of such Stockholder are necessary to
authorize this Agreement or any of the transactions contemplated hereby, and
(c) this Agreement has been duly executed and delivered by such Stockholder and
constitutes a valid and binding obligation of such Stockholder and, assuming
that this Agreement constitutes a valid and binding obligation of the Company,
is enforceable against such Stockholder in accordance with its terms, subject
to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent
conveyance and similar laws affecting creditors' rights generally from time to
time and to general principles of equity, and except as the enforceability
thereof may be limited by considerations of public policy.
Section 14. Expiration. This Agreement and the rights,
benefits, duties and obligations hereunder of the parties hereto and their
successors and permitted assigns shall expire and be of no further force or
effect on the 180th day after the later to occur of (i) May 31, 2004 and (ii)
the first date on which each and all of Cap I, Cap II, Nathaniel A. Gregory
and, to the extent that Winokur has acquired the record and beneficial
ownership of shares of Common Stock from Cap I or Cap II, Winokur is able to
sell shares of Common Stock subject hereto in reliance upon the exemption from
the registration provisions of the Securities Act contained in Rule 144(k) or
any successor Securities Act Rule.
Section 15. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or transmitted by telex, telegram or facsimile transmission or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Cap I, to:
Capricorn Holdings, L.L.C.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Manager
Telecopy No.: (203) 861-6671
REGISTRATION RIGHTS AGREEMENT
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<PAGE> 18
with a copy to:
O'Melveny & Myers LLP
153 E. 53rd Street
53rd Floor
New York, New York 10022-4611
Attn.: Mr. Drake Tempest
Facsimile: (212) 326-2061
(b) if to Cap II, to:
Capricorn Holdings, L.L.C.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Manager
Telecopy No.: (203) 861-6671
with a copy to:
O'Melveny & Myers LLP
153 E. 53rd Street
53rd Floor
New York, New York 10022-4611
Attn.: Mr. Drake Tempest
Facsimile: (212)
(c) if to the Company, to:
NATCO Group, Inc.
Brookhollow Central III
2950 North Loop West
Suite 750
Houston, Texas 77092
Attn.: Nathaniel A. Gregory, Chairman and Chief
Executive Officer
Facsimile No.: (713) 683-7814
with a copy to:
Vinson & Elkins L.L.P.
First City Tower
1001 Fannin Street
Houston, Texas 77002-6760
Attn.: William E. Joor III
Facsimile No.: (713) 615-5201
Section 16. Benefit and Assignment.
REGISTRATION RIGHTS AGREEMENT
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<PAGE> 19
(a) The terms and conditions of this Agreement shall
inure to the benefit of and be binding on the parties hereto and their
respective successors and permitted assigns; provided, however, that,
except as otherwise provided in this Section, this Agreement shall not
be assignable by any party hereto except by operation of Law or with
the prior express written consent of the other parties hereto.
Nathaniel A. Gregory shall be a third party beneficiary of the rights
of a Stockholder hereunder. Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties
hereto, their respective successors and permitted assigns and
Nathaniel A. Gregory, any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
(b) If Cap I or Cap II shall transfer and assign shares
of Common Stock to any Person otherwise than in Distribution Public
Offering or an Underwritten Public Offering, Cap I or Cap II (or any
Person who shall be a transferee or assignee pursuant to this
subsection (b)), as the case may be, may assign such portion of its
rights and benefits under this Agreement as is necessary to permit
such Person to act as a Stockholder hereunder; provided, however, that
such Person shall agree in writing to be bound by the duties and
obligations of a Stockholder hereunder.
Section 17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard
to the application of doctrines of conflicts of law.
Section 18. Counterparts. This Agreement may be executed in any
number of counterparts, which together shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their officers thereunto duly authorized.
NATCO GROUP INC.
BY:
--------------------------------
Nathaniel A. Gregory
Chairman and Chief Executive Officer
CAPRICORN INVESTORS, L.P.
By: Capricorn Holdings, G.P.,
its general partner
By: Winokur Holdings, Inc.,
its general partner
REGISTRATION RIGHTS AGREEMENT
19
<PAGE> 20
By: ________________________
Herbert S. Winokur, Jr.
President.
CAPRICORN INVESTORS II, L.P.
By: Capricorn Holdings, LLC,
its general partner
By: __________________________
Herbert S. Winokur, Jr.
Manager
REGISTRATION RIGHTS AGREEMENT
20
<PAGE> 1
Exhibit 4.5
___________, 1998
Donaldson, Lufkin & Jenrette Securities Corporation
Smith Barney Inc.
Simmons & Company International
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
The undersigned understands that Donaldson, Lufkin & Jenrette
Securities Corporation, Smith Barney Inc. and Simmons & Company International,
as representatives of the several underwriters (the "UNDERWRITERS"), propose to
enter into an Underwriting Agreement with NATCO Group Inc. (the "COMPANY"),
providing for the initial public offering (the "INITIAL PUBLIC OFFERING") of
common stock, par value $0.01 per share (the "COMMON STOCK") of the Company.
To induce the Underwriters that may participate in the Initial Public
Offering to continue their efforts in connection with the Initial Public
Offering, the undersigned, during the period commencing on the date hereof and
ending 180 days after the date of the final prospectus relating to the Initial
Public Offering:
(i) agrees not to (x) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
(including, without limitation, shares of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock owned by the
undersigned or of which the undersigned has the power to dispose) or (y) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (x) or (y)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation other than as gifts to family members or
transfers from a partnership to its partners; provided that, any such
transferee executes a written instrument under which such transferee agrees to
abide by the provisions hereunder for the period remaining
<PAGE> 2
hereunder after such transfer; and
(ii) agrees not to make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to enter into the agreements set forth herein, and
that, upon request, the undersigned will execute any additional documents
necessary or desirable in connection with the enforcement hereof. All
authority herein conferred or agreed to be conferred shall survive the death or
incapacity of the undersigned and any obligations of the undersigned shall be
binding upon the heirs, personal representatives, successors, and assigns of
the undersigned.
Very truly yours,
---------------------------
(Name - Please Type)
(Address)
(Social Security or Taxpayer Identification No.)
<PAGE> 3
Number of shares of Common Stock owned:
Certificate Numbers:
Certificate Numbers:
<PAGE> 1
EXHIBIT 5.1
VINSON & ELKINS
ATTORNEYS AT LAW DRAFT June 8, 1998
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
1001 FANNIN STREET
HOUSTON, TEXAS 77002-6760
TELEPHONE (713) 758-2222
FAX (713) 758-2346
WRITER'S TELEPHONE WRITER'S FAX
(713) 758-2222 (713) 758-2346
June ___, 1998
NATCO Group Inc.
Brookhollow Central III
2950 North Loop West, Suite 750
Houston, Texas 77092
Ladies and Gentlemen:
We are acting as counsel for NATCO Group Inc., a Delaware corporation
(the "Company"), in connection with the proposed offer and sale by the Company
and Capricorn Investors, L.P. (the "Selling Stockholder") to the Underwriters
(the "Underwriters"), pursuant to the prospectus forming a part of a
Registration Statement on Form S-1, File No. 333-48851, originally filed with
the Securities and Exchange Commission on March 30, 1998 (such Registration
Statement, as amended at the effective date thereof, being referred to herein as
the "Registration Statement"), of an aggregate of ___________ shares of Common
Stock, par value $.01 per share ("Common Stock"), of the Company, together with
a maximum of __________ shares of Common Stock which may be sold to the
Underwriters pursuant to the over-allotment option provided in the Underwriting
Agreement. Capitalized terms used but not defined herein have the meanings set
forth in the Registration Statement.
We are rendering this opinion as of the time the Registration Statement
becomes effective in accordance with Section 8(a) of the Securities Act of 1933,
as amended. In connection with this opinion, we have assumed that the
Registration Statement, and any amendments thereto (including post-effective
amendments), will have become effective and the shares of Common Stock will be
issued and sold in compliance with applicable federal and state securities laws
and in the manner described in the Registration Statement and the applicable
prospectus.
In connection with the opinion expressed herein, we have examined,
among other things, the Amended and Restated Certificate of Incorporation and
the bylaws of the Company, as amended and restated, the records of corporate
proceedings that have occurred prior to the date hereof with respect to the
Offering, the Registration Statement and the form of Underwriting Agreement to
be executed among the Company, Donaldson, Lufkin & Jenrette Securities
Corporation, Smith Barney Inc. and Simmons & Company International, as
Representatives of the several Underwriters. We have also reviewed such
questions of law as we have deemed necessary or appropriate.
HOUSTON DALLAS WASHINGTON, D.C. AUSTIN MOSCOW LONDON SINGAPORE
<PAGE> 2
NATCO Group Inc.
Page 2
June ___, 1998
Based upon the foregoing, we are of the opinion that (i) the shares of
Common Stock proposed to be issued and sold by the Company to the Underwriters
have been validly authorized for issuance and, upon the issuance and delivery
thereof in accordance with the provisions of the Underwriting Agreement
(assuming that it is executed in the form reviewed by us), and as set forth in
the Registration Statement, will be validly issued, fully paid and nonassessable
and (ii) the shares of Common Stock proposed to be sold by the Selling
Stockholder to the Underwriters, when they were issued to the Selling
Stockholder, were duly authorized, validly issued and fully paid and
nonassessable.
This opinion is limited in all respects to the General Corporation Law
of the State of Delaware.
We hereby consent to the statements with respect to us under the
heading "Legal Matters" in the prospectus forming a part of the Registration
Statement and to the filing of this opinion as an exhibit to the Registration
Statement, but we do not thereby admit that we are within the class of persons
whose consent is required under the provisions of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
issued thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE> 3
EXHIBIT 10.11
DRAFT: 5/20/98
STOCKHOLDERS' AGREEMENT
This Stockholders' Agreement (this "Agreement") is made on the _____
day of May, 1998 by and among Capricorn Investors, L.P., a Delaware limited
partnership ("Cap I"), Capricorn Investors II, L.P., a Delaware limited
partnership ("Cap II"), and NATCO Group Inc., a Delaware corporation (the
"Company") and shall become effective on the Effective Date (as defined herein).
R E C I T A L S:
Cap I and Cap II own 5,563,667 shares (68.3%) and 2,582,259 shares
(31.7%), respectively, of the Company's outstanding Common Stock, par value
$0.01 per share (the "Common Stock").
Cap I, Cap II and the Company entered into a Stockholders' Agreement
dated as of June 30, 1997 (the "Original Stockholders' Agreement").
Cap I, Cap II and the Company desire to terminate the Original
Shareholders' Agreement and to enter into this Agreement to provide for the
nomination of certain directors of the Company.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
hereinafter expressed and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Definitions.
"Agreement", "hereof", "hereunder", and words of similar
import shall refer to this Stockholders' Agreement, as it may be amended from
time to time.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Certificate of Incorporation" shall mean the Certificate of
Incorporation of the Company, as amended and restated from time to time.
"Class II Director" means a director of the Company who has
been elected to the Board of Directors as a member of the second class of
directors pursuant to Article Thirteenth of the Certificate of Incorporation.
"Class III Director" means a director of the Company who has
been elected to the Board of Directors as a member of the third class of
directors pursuant to Article Thirteenth of the Certificate of Incorporation.
"Class III Election Date" shall mean the date on which members
of the third class of the Board of Directors stand for election in accordance
with the Certificate of Incorporation.
"Company" shall mean NATCO Group Inc., a Delaware
corporation.
<PAGE> 4
"Effective Date" shall mean the date on which the Registration
Statement of the Company on Form S-1 (File No. 333-48851) filed in connection
with the initial public offering of the Common Stock shall have been declared
effective by the Securities and Exchange Commission.
"Qualification Date" shall mean the date that is one hundred
twenty (120) days prior to the first anniversary of the date that the proxy
statement was first delivered to the stockholders of the Company in connection
with the annual meeting of the stockholders of the Company for the year prior to
the year in which the annual meeting is being held, except that if no proxy
statement was released to the stockholders of the Company in connection with the
annual meeting of the stockholders of the Company for the prior year, the date
that is one hundred fifty (150) days prior to the date of the annual meeting of
the stockholders of the Company.
"Qualified Nominee" shall mean any individual who has not, in
the five years preceding the date of the annual meeting of the stockholders at
which such individual is running for a position on the Board of Directors, been:
(i) convicted in a criminal proceeding or is a named subject of a pending
criminal proceeding (excluding traffic violations and other minor offenses),
(ii) the subject of any order, judgment or decree not subsequently reversed,
suspended or vacated of any court of competent jurisdiction permanently or
temporarily enjoining such individual from engaging in any type of business
practice or engaging in any activity in connection with the purchase or sale of
any security, or (iii) found by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have violated any federal
or state securities law and such judgment or finding has not been subsequently
reversed or vacated.
2. Termination of Original Stockholders' Agreement.
The parties hereby terminate the Original Stockholders' Agreement
effective as of the Effective Date and agree that the force and effect of each
provision of the Original Stockholders' Agreement and all rights and obligations
arising thereunder are hereby terminated and revoked as of the date hereof and
that none of the parties hereto shall have any liabilities or obligations to the
other parties hereto or any other parties as a result of such termination of the
Original Stockholders' Agreement.
3. Nomination of Directors.
(a) For so long as Cap I and Cap II own an aggregate of twenty percent
(20%) or more of the outstanding Common Stock as of the relevant Qualification
Date, the Company, acting through its Board of Directors, shall, subject to the
other provisions of this Agreement, be obligated to nominate for election to the
Board of Directors, as members of the slate of nominees for election to the
Board of Directors proposed by the management of the Company in its proxy
statement at each annual meeting of stockholders of the Company (or special
meeting in lieu thereof) at which Class III Directors are to be elected, one
Qualified Nominee designated by Cap I and one Qualified Nominee designated by
Cap II, each as a Class III Director.
(b) If the number of Class III Directors is increased to more than two
(2), the Company shall only be obligated to nominate the two Qualified Nominees
so designated by Cap I and Cap II for such class.
-2-
<PAGE> 5
(c) Upon the occurrence of a vacancy in the Board of Directors that
results from the removal or resignation of a designee of either Cap I or Cap II,
the Company, acting through its Board of Directors, shall be obligated to elect
a Qualified Nominee designated by Cap I or Cap II, as the case may be, to fill
such vacancy.
(d) If Cap I or Cap II shall not continue to own of record at least
five percent (5%) of the outstanding Common Stock on any Qualification Date, the
rights of such limited partnership under Section 3(a) shall be exercised by the
limited partnership that continues to own more than five percent (5%) of the
outstanding Common Stock.
(e) Cap I and Cap II shall notify the Company in writing of their
designees to the Board of Directors no later than thirty (30) days after the
Qualification Date in the case of Section 3(a) above and no later than ten (10)
days after the occurrence of a vacancy in the case of Section 3(c) above.
(f) The Company, upon receipt of the notice of the designees of Cap I
and Cap II pursuant to Section 3(a), shall use all reasonable efforts to solicit
proxies from its stockholders in favor of the election of such designees.
(g) The Company shall not be obligated to nominate, or solicit proxies
from its stockholders in favor of the election of, any individual that is not a
Qualified Nominee.
4. Covenant Regarding Class III Directors.
The Company covenants and agrees that it shall not reduce the number of
Class III Directors to less than two (2) by amendment of the Certificate of
Incorporation or bylaws of the Company or otherwise during the term of this
Agreement.
5. Specific Performance.
The parties hereto each acknowledge and agree that, in the event of any
breach of this Agreement, each non-breaching party would be irreparably harmed
and could not be made whole by monetary damages. It is accordingly agreed that
such parties, in addition to any other remedy to which they may be entitled at
law or in equity, shall be entitled to compel specific performance of this
Agreement in any action instituted in the United States District Court for the
Southern District of New York, or, if such court would not have jurisdiction for
such action, in any court of the United States or any state having subject
matter jurisdiction. The parties hereto each consent to personal jurisdiction in
any such action brought in the United States District Court for the Southern
District of New York. In no event shall the Company be obligated to violate the
federal securities laws of the United States, the Certificate of Incorporation
or the Bylaws of the Company in order to perform any of its obligations under
this Agreement.
6. Entire Agreement; Amendments.
This Agreement contains the entire understanding of the parties with
respect to the subject matter of this Agreement. There are no restrictions,
agreements, promises, warranties, covenants,
-3-
<PAGE> 6
or undertakings other than those expressly set forth herein or therein. This
Agreement supersedes all prior agreements and understandings among the parties
with respect to its subject matter. This Agreement may not be amended except by
an instrument in writing signed on behalf of all of the parties hereto. Any
agreement on the part of a party hereto to any extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
7. Interpretation.
The section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8. Notice.
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered by hand or transmitted by telex, telegram or
facsimile transmission to the other party or mailed by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
To the Company: NATCO Group Inc.
Brookhollow Central III
2950 North Loop West, Suite 700
Houston, Texas 77092
Attn: Nathaniel A. Gregory
Chairman of the Board
and Chief Executive Officer
Telecopy No.: (713) 683-7841
To Cap I: Capricorn Holdings, L.L.C.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Manager
Telecopy No.: (203) 861-6671
To Cap II: Capricorn Holdings, L.L.C.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Manager
Telecopy No.: (203) 861-6671
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications hereunder shall be
effective when actually received by the addressee.
-4-
<PAGE> 7
9. Termination.
This Agreement shall terminate in its entirety on the earlier to occur
of (i) the tenth anniversary hereof, and (ii) the date on which Cap I and Cap II
own, in the aggregate, less than twenty percent (20%) of the outstanding Common
Stock.
10. Governing Law.
This Agreement shall be governed by and construed in all respects in
accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of laws thereof which might refer such interpretation to
the laws of a different state or jurisdiction.
11. Counterparts.
This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
-5-
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
as of the date first above written.
NATCO GROUP INC.
By:
--------------------------------------
Nathaniel A. Gregory
Chairman and Chief Executive Officer
CAPRICORN INVESTORS, L.P.
By: Capricorn Holdings, G.P.,
its general partner
By: Winokur Holdings, Inc.,
its general partner
By:
----------------------------------
Herbert S. Winokur, Jr.
President
CAPRICORN INVESTORS II, L.P.
By: Capricorn Holdings, LLC,
its general partner
By:
----------------------------------
Herbert S. Winokur, Jr.
Manager
<PAGE> 1
EXHIBIT 10.5
[SCOTIABANK LETTERHEAD]
November 24, 1994
Natco Canada Ltd.
Dear Sir:
We are pleased to confirm that subject to acceptance by you, The Bank of
Nova Scotia (the "Bank") will make available to Natco Canada Ltd. (the
"Borrower"), credit facilities on the terms and conditions set out in the
attached Terms and Conditions Sheet and Schedule "A".
If the arrangements set out in this letter and in the attached Terms and
Conditions Sheet and Schedule "A" (collectively the "Commitment Letter") are
acceptable to you, please sign the enclosed copy of this letter in the space
indicated below and return the letter to us by the close of business on
December 16, 1994 after which date this offer will lapse.
We sincerely appreciate being given the opportunity to bid for your
business. We are most interested in developing a relationship and assure you
that should you decide to transfer your account to us, we will do our utmost to
ensure that you benefit from your decision. If we can be of any further
assistance to you on this proposal, please feel free to contact us. We look
forward to a long and mutually rewarding association.
Yours very truly,
/s/ I.C. MACDONELL /s/ J.F. MCEWEN
I.C. MacDonell J.F. McEwen
Account Manager Assistant General Manager
& Centre Manager
The arrangements set out above and in the attached Terms and Conditions
Sheet and Schedule "A" (collectively the "Commitment Letter") are hereby
acknowledged and accepted by:
NATCO CANADA LIMITED
- ------------------------------------
Name
By: /s/ LEON WEHMEYER /s/
- ------------------------------------
Title: President Controller
Date: Dec. 16, '94
- ------------------------------------
<PAGE> 2
Page 1
TERMS AND CONDITIONS
CREDIT NUMBER: 01 AUTHORIZED AMOUNT: $5,000,000
- --------------------------------------------------------------------------------
TYPE
Operating
PURPOSE
General operating requirements
CURRENCY
Canadian dollars
AVAILMENT
The Borrower may avail the Credit by way of direct advances evidenced by
Agreement re: Operating Credit Line and/or Bankers' Acceptances in
Canadian dollars (in multiples of $100,000 and having terms of maturity of
30 to 180 days without grace) at the Borrower's option.
Carve-out: $1,500,000 for Letters of Guarantee and/or Standby Letters
of Credit for terms up to 18 months.
INTEREST RATE
The Bank's Prime Lending Rate from time to time, plus 1/2% per annum with
interest payable monthly.
ACCEPTANCE FEE
The Bank's Commercial Bankers' Acceptance Fee, (subject to revision at any
time), plus 1/2% per annum, subject to a minimum fee of $100 per
transaction, payable at the time of each acceptance.
COMMISSION (LETTERS OF GUARANTEE & STANDBY LETTERS OF CREDIT)
1 1/8% per annum, calculated on the issue amount, based on increments of
30 days or multiples thereof, from date of issuance to expiry date.
Periods of less than 30 days will be counted as a thirty day increment.
The amount is subject to the Bank's minimum fee as well as revision at any
time and is payable upon issuance.
OTHER FEES
A Commitment Fee of $5,000 is payable upon acceptance of this commitment.
A Standby Fee of 1/4% per annum on the daily unused portion of the Credit
is payable monthly from the date of acceptance of this commitment.
<PAGE> 3
Page 2
PAYMENT
Advances are repayable on demand.
CREDIT NUMBER: 02 AUTHORIZED AMOUNT: $1,885,000
- --------------------------------------------------------------------------------
TYPE
Non-revolving
PURPOSE
To assist with the purchase of a Shepard Road, Calgary property for
$2,900,000.
CURRENCY
Canadian dollars
AVAILMENT
The Borrower may avail the Credit by way of direct advances evidenced by
Demand Promissory Notes and/or Bankers' Acceptances in Canadian dollars (in
multiples of $100,000 and having terms of maturity of 30 to 360 days
without grace) at the Borrower's option.
INTEREST RATE
The Bank's Prime Lending Rate from time to time, plus 1% per annum with
interest payable monthly.
ACCEPTANCE FEE
The Bank's Commercial Bankers' Acceptance Fee, (subject to revision at any
time), plus 1% per annum, subject to a minimum fee of $100 per transaction,
payable at the time of each acceptance.
FIXED RATE OPTION
The Borrower has the option to fix the interest rate for the balance of the
term of the loan at any time until July 31, 1995, subject to availability.
Rates will be quoted upon request.
DRAWDOWN
The loan is to be fully drawn down by February 2, 1995.
REPAYMENT
The advance is repayable in 19 equal quarterly installments of principal
($47,125) commencing within 90 days of drawdown, with a final payment of
the balance of principal and interest then outstanding due at the end of
the term.
The term of the loan is 5 years and the amortization is 10 years.
<PAGE> 4
Page 3
PREPAYMENT
Prepayment is permitted without penalty at any time in whole or in part
when loans are availed at a floating rate of interest.
Prepayment of the loan in whole or in part when availed at a fixed rate of
interest, is permitted at any time on payment of an amount equal to the
greater of:
i) three months simple interest at the rate applicable to the loan on
the principal amount prepaid; and
ii) the amount, if any, by which interest at the rate applicable to the
loan exceeds interest at the prevailing rate at the time of
prepayment calculated on the amount of the principal prepayment for
the remaining term of the loan. The "prevailing rate at the time of
prepayment" is defined as that rate at which the Bank would then lend
to the Borrower, based on the same security, for the remaining term
of the loan.
Prepayments are to be applied against installments of principal in the
inverse order of their maturities.
CREDIT NUMBER: 03 AUTHORIZED AMOUNT: $500,000
- --------------------------------------------------------------------------------
TYPE
Non-revolving
PURPOSE
To supplement Working Capital.
CURRENCY
Canadian dollars
AVAILMENT
The Borrower may avail the Credit by way of direct advances evidenced by
Demand Promissory Notes.
INTEREST RATE
The Bank's Prime Lending Rate from time to time, plus 1% per annum with
interest payable monthly.
FIXED RATE OPTION
The Borrower has the option to fix the interest rate for the balance of
the term of the loan at any time until July 31, 1995, subject to
availability. Rates will be quoted upon request.
DRAWDOWN
The loan is to be fully drawn down by February 2, 1995.
<PAGE> 5
Page 4
REPAYMENT
The advance is repayable in 59 equal monthly installments of principal
($8,333) commencing within 30 days of drawdown, with a final payment of
the balance of the principal and interest then outstanding due in the 60th
month.
PREPAYMENT
Prepayment is permitted without penalty at any time in whole or in part
when loans are availed at a floating rate of interest.
Prepayment of the loan in whole or in part, when availed at a fixed rate
of interest, is permitted at any time on payment of an amount equal to the
greater of:
i) three months simple interest at the rate applicable to the loan on
the principal amount prepaid; and
ii) the amount, if any, by which interest at the rate applicable to the
loan exceeds interest at the prevailing rate at the time of
prepayment calculated on the amount of the principal prepayment for
the remaining term of the loan. The "prevailing rate at the time of
prepayment" is defined as that rate at which the Bank would then lend
to the Borrower, based on the same security, for the remaining term
of the loan.
Prepayments are to be applied against installments of principal in the
inverse order in their maturities.
GENERAL SECURITY, TERMS, AND CONDITIONS APPLICABLE TO ALL CREDITS
GENERAL SECURITY
The following security, evidenced by documents in form satisfactory to the
Bank and registered or recorded as required by the Bank, is to be provided
prior to any advances or availment being made under the Credits:
General Assignment of Book Debts.
Security under Section 427 of the Bank Act with appropriate insurance
coverage, loss, if any, payable to the Bank.
General Security Agreement over all present and future personal
property, incorporating a fixed charge over all machinery and
equipment having a current book value of $10,000 per unit or more,
with appropriate insurance coverage, loss if any, payable to the Bank.
Collateral Mortgage in the amount of $1,885,000 providing a first
fixed charge over 9423 Shepard Road S.E., Calgary, Alberta (Lot 1,
Plan 9112035), with replacement cost fire insurance coverage, loss,
if any, payable to the Bank as mortgagee.
Collateral Mortgage in the amount of $200,000 providing a first
fixed charge over property in Nisku, Alberta, with replacement cost
fire insurance coverage, loss, if any, payable to the Bank as
mortgagee.
Agreement re Operating Credit Line.
<PAGE> 6
Postponement Agreement covering an amount of $5,000,000 supported
by respective promissory note(s).
Bankers' Acceptance Agreement
Reimbursement Agreement for Letter of Guarantee.
Reimbursement Agreement for Standby Letter of Credit.
GENERAL CONDITIONS
Until all debts and liabilities under the Credit(s) have been discharged in
full, the following conditions will apply in respect of the Credits:
Operating loans, Bankers' Acceptances, Letters of Guarantee and
Standby Letters of Credit are not to exceed at any time the
"Borrowing Base" which is defined as the sum of:
75% of good quality Canadian trade accounts receivable (excluding
accounts over 90 days, advance payments, holdbacks, accounts due by
employees, offsets and inter-company accounts).
75% of U.S. trade accounts receivable approved by the Bank, less
advance payments and holdbacks.
90% of EDC (or equivalent) insured accounts receivable, less advance
payments and holdbacks.
90% of accounts receivable secured by confirmed Letters of Credit
acceptable to the Bank.
50% of raw materials and finished goods inventory, less security
interests or charges held by other parties, specific payables which
have or may have priority over the Bank's security and unpaid
inventory received from suppliers during the past 30 days. Advances
against inventory are limited to $1,000,000.
The ratio of current assets to current liabilities is to be
maintained at all times at 1.25:1 or better.
The ratio of Debt (including deferred taxes) to Tangible Net Worth
(TNW) is not to exceed 2.65:1.
TNW is defined as the sum of share capital, earned and contributed
surplus and postponed funds less (i) amounts due from
officers/affiliates, (ii) investments in affiliates, and (iii)
intangible assets as defined by the Bank.
Without the Bank's prior written consent:
The aggregate of capital expenditures and/or dividends paid in
any one fiscal year is not to exceed 50% of net cash flow,
defined as the sum of after tax net profit plus depreciation/
amortization and deferred taxes less payments made on long term
debt.
Guarantees or other contingent liabilities are not to be entered
into and assets are not to be further encumbered.
<PAGE> 7
Page 6
No change in ownership is permitted.
No mergers, acquisitions or change in the Borrower's line of
business are permitted.
All banking business is to be conducted with the Bank.
Additional terms and conditions in Schedule A are to apply.
CONDITIONS PRECEDENT
The following, evidenced by documents in form satisfactory to the Bank, is
to be provided prior to any advances or availment being made under the
Credits:
Copy Agreement of Purchase and Sale relative to 9423 Shepard Road
S.E., Calgary, Alberta.
A Level I Environmental Assessment of 9423 Shepard Road S.E., Calgary,
Alberta completed by a consultant acceptable to the Bank.
Formal consent and release from the Bank of America relative to the
Borrower's assets, and its guarantee liabilities for loans of National
Tank Company and Cummings Point Inc.
GENERAL BORROWER REPORTING CONDITIONS
Until all debts and liabilities under the Credits have been discharged in
full, the Borrower will provide the Bank with the following:
Annual Audited Unconsolidated Financial Statements, within 90 days of
the Borrower's fiscal year end, duly signed.
Quarterly Interim Financial Statements within 30 days of period end.
Annual Audited Consolidated Financial Statements of National Tank
Company, within 150 days of the fiscal year end, duly signed.
A Statement of Security monthly, to include information on inventory,
accounts receivable and accounts payable, within 20 days of period
end.
Monthly Aged Listing of Receivables within 30 days of period end.
Aged listing of accounts payable upon request.
<PAGE> 8
Page 7
SCHEDULE A
ADDITIONAL TERMS AND CONDITIONS APPLICABLE
TO ALL CREDITS
Calculation and Payment of Interest
1. Interest on loans/advances made in Canadian dollars will be calculated on
a daily basis and payable monthly on the 22nd day of each month (unless
otherwise stipulated by the Bank). Interest shall be payable not in
advance on the basis of a calendar year for the actual number of days
elapsed both before and after demand of payment or default and/or
judgment.
Interest on Overdue Interest
2. Interest on overdue interest shall be calculated at the same rate as
interest on the loans/advances in respect of which interest is overdue,
but shall be compounded monthly and be payable on demand, both before and
after demand and judgement.
Calculation and Payment of Bankers' Acceptance Fee
3. The fee for the acceptance of each Bankers' Acceptance will be payable on
the face amount of each Bankers' Acceptance at the time of acceptance of
each draft calculated on the basis of a calendar year for the actual
number of days elapsed from and including the date of acceptance to the
due date of the draft.
Calculation and Payment of Standby Fee
4. Standby fees shall be calculated daily and payable monthly on the basis
of a calendar year for Canadian dollar credits and on the basis of a 360
day year for U.S. dollar credits from the date of acceptance by the
Borrower of this Commitment Letter.
Environment
5. The Borrower agrees:
(a) to obey all applicable laws and requirements of any federal,
provincial, or any other governmental authority relating to the
environment and the operation of the business activities of the
Borrower;
(b) to allow the Bank access at all times to the business premises of the
Borrower to monitor and inspect all property and business activities
of the Borrower;
(c) to notify the Bank from time to time of any business activity
conducted by the Borrower which involves the use or handling of
hazardous materials or wastes or which increases the environmental
liability of the Borrower in any material manner;
(d) to notify the Bank of any proposed change in the use or occupation of
the property of the Borrower prior to any change occurring;
<PAGE> 9
Page 8
(e) to provide the Bank with immediate written notice of any environmental
problem and any hazardous materials or substances which have an
adverse effect on the property, equipment, or business activities of
the Borrower and with any other environmental information requested by
the Bank from time to time;
(f) to conduct all environmental remedial activities which a commercially
reasonable person would perform in similar circumstances to meet its
environmental responsibilities and if the Borrower fails to do so, the
Bank may perform such activities; and
(g) to pay for any environmental investigations, assessments or remedial
activities with respect to any property of the Borrower that may be
performed for or by the Bank from time to time.
If the Borrower notifies the Bank of any specified activity or change or
provides the Bank with any information pursuant to subsections (c), (d), or
(e), or if the Bank receives any environmental information from other
sources, the Bank, in its sole discretion, may decide that an adverse
change in the environmental condition of the Borrower or any of the
property, equipment, or business activities of the Borrower has occurred
which decision will constitute, in the absence of manifest error,
conclusive evidence of the adverse change. Following this decision being
made by the Bank, the Bank shall notify the Borrower of the Bank's decision
concerning the adverse change.
If the Bank decides or is required to incur expenses in compliance or to
verify the Borrower's compliance with applicable environmental or other
regulations, the Borrower shall indemnify the Bank in respect of such
expenses, which will constitute further advances by the Bank to the
Borrower under this Agreement.
Initial Drawdown
6. The right of the Borrower to obtain the initial drawdown under the Credits
is subject to the condition precedent that there shall not have been any
material adverse changes in the financial condition or the environmental
condition of the Borrower or any guarantor of the Borrower.
Periodic Review
7. The obligation of the Bank to make further advances or other accommodation
available under any Credit of the Borrower under which the indebtedness or
liability of the Borrower is payable on demand, is subject to periodic
review and to no adverse change occurring in the financial condition or the
environmental condition of the Borrower or any guarantor.
Evidence of Indebtedness
8. The Bank's accounts, books and records constitute, in the absence of
manifest error, conclusive evidence of the advances made under this Credit,
repayments on account thereof and the indebtedness of the Borrower to the
Bank.
<PAGE> 10
Page 9
Acceleration
9. (a) All indebtedness and liability of the Borrower to the Bank payable on
demand, is repayable by the Borrower to the Bank at any time on
demand;
(b) All indebtedness and liability of the Borrower to the Bank not payable
on demand, shall, at the option of the Bank, become immediately due
and payable, the security held by the Bank shall immediately become
enforceable, and the obligation of the Bank to make further advances
or other accommodation available under the Credits shall terminate, if
any one of the following Events of Default occurs:
(i) the Borrower fails to make when due, whether on demand or at a
fixed payment date, by acceleration or otherwise, any payment
of interest, principal, fees, commissions or other amounts
payable to the Bank;
(ii) there is a breach by the Borrower of any other term or
condition contained in this Commitment Letter or in any other
agreement to which the Borrower and the Bank are parties;
(iii) any default occurs under any security listed in this Commitment
Letter under the headings "Specific Security" or "General
Security" or under any other credit, loan or security agreement
to which the Borrow is a party;
(iv) any bankruptcy, re-organization, compromise, arrangement,
insolvency or liquidation proceedings or other proceedings for
the relief of debtors are instituted by or against the Borrower
and, if instituted against the Borrower, are allowed against or
consented to by the Borrower or are not dismissed or stayed
within 60 days after such institution;
(v) a receiver is appointed over any property of the Borrower or
any judgement or order or any process of any court becomes
enforceable against the Borrower or any property of the
Borrower or any creditor takes possession of any property of
the Borrower;
(vi) any adverse change occurs in the financial condition of the
Borrower;
(vii) any adverse change occurs in the environmental condition of:
(A) the Borrower; or
(B) any property, equipment, or business activities of the
Borrower.
Costs
10. All costs, including legal and appraisal fees incurred by the Bank relative
to security and other documentation, shall be for the account of the
Borrower and may be charged to the Borrower's deposit account when
submitted.
<PAGE> 1
EXHIBIT 10.6
SERVICE AND REIMBURSEMENT AGREEMENT
Agreement dated as of July 1, 1997 by and between Capricorn
Management, G.P., a Delaware general partnership ("CM"), and NATCO Group Inc.,
a Delaware corporation ("NATCO").
WHEREAS, CM has in prior periods provided certain services and
received certain reimbursements from NATCO, its predecessors and subsidiaries;
and
WHEREAS, CM and NATCO wish to set forth a written agreement or to
such services and reimbursements in future periods;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter contained, the parties hereto agree as follows:
1. During the term of this Agreement, CM shall provide NATCO with advisory,
information and research services, administrative support and use of office
facilities at 30 East Elm Street, Greenwich, Connecticut.
2. CM shall provide the services described in Section 1 commencing July 1,
1997 and shall continue to do so until termination of this Agreement as
provided in Section 5.
3. As compensation hereunder during the term of this Agreement, NATCO shall
pay to CM a payment of $75,000 per year, payable in advance in quarterly
installments of $18,750 on January 1st, April 1st, July 1st and October 1st
of each year, commencing July 1, 1997.
In addition to the payments described above in this Section 3, CM will also
be entitled to have NATCO reimburse it for all reasonable out-of-pocket
expenses incurred by CM and/or its officers and employees in support of
NATCO as NATCO may from time to time request.
4. Neither CM nor any its affiliates nor any of the partners, directors,
employees and agents of any of the foregoing (collectively, the
"Indemnified Parties") shall have any liability (whether direct or
indirect, in contract or tort or otherwise) to NATCO for any losses,
claims, damages, liabilities or expenses (including reasonable attorneys'
fees) (collectively, "Damages") asserted against or incurred by NATCO or
any of the employees, agents or third parties providing services to NATCO
arising out of, resulting from or in connection with any of the services or
facilities to be provided by CM pursuant to this Agreement. NATCO will, to
the maximum extent permitted by law, indemnify any and all of the
Indemnified Parties for any and all Damages, judgments, interest on such
judgments, fines, penalties, charges, costs, amount paid in settlement and
reasonable attorneys' fees incurred in investigating, preparing or
defending any action, claim, suit, inquiry, proceeding, investigation or
appeal taken form the foregoing
<PAGE> 2
by or before any court or governmental, administrative or other regulatory
agency, body or commission, whether pending or threatened, whether or not
any Indemnified Party is or may be party thereto, including interest on any
of the foregoing, which arise out of, relate to or are in connection with
any of the services or facilities to be provided by CM pursuant to this
Agreement (collectively, "Indemnified Damages"), except for any such
Indemnified Damages to the extent such Indemnified Damages are found by a
court of competent jurisdiction to have resulted primarily from the gross
negligence or willful misconduct of the Indemnified Party seeking
indemnification.
5. This Agreement shall expire on June 30, 1998 unless terminated earlier by
(i) the dissolution of either of the parties, or (ii) the mutual consent of
the parties. Notwithstanding the foregoing, the Agreement shall be extended
automatically for one additional year unless either party notifies the
other party in writing at least thirty (30) days in advance of its
scheduled expiration that the Agreement will be allowed to expire according
to this Section 5.
2
<PAGE> 3
In witness whereof, the parties hereto have executed this Service and
Reimbursement Agreement as of the day first above written.
CAPRICORN MANAGEMENT, G.P.
by Winokur & Associates, Inc.
by /s/ Herbert S. Winokur
----------------------------
(Managing General Partner)
NATCO Group Inc.
by /s/ NATHANIEL A. GREGORY
----------------------------
Nathaniel A. Gregory
3
<PAGE> 1
EXHIBIT 10.11
DRAFT: 5/20/98
STOCKHOLDERS' AGREEMENT
This Stockholders' Agreement (this "Agreement") is made on the _____
day of May, 1998 by and among Capricorn Investors, L.P., a Delaware limited
partnership ("Cap I"), Capricorn Investors II, L.P., a Delaware limited
partnership ("Cap II"), and NATCO Group Inc., a Delaware corporation (the
"Company") and shall become effective on the Effective Date (as defined herein).
R E C I T A L S:
Cap I and Cap II own 5,563,667 shares (68.3%) and 2,582,259 shares
(31.7%), respectively, of the Company's outstanding Common Stock, par value
$0.01 per share (the "Common Stock").
Cap I, Cap II and the Company entered into a Stockholders' Agreement
dated as of June 30, 1997 (the "Original Stockholders' Agreement").
Cap I, Cap II and the Company desire to terminate the Original
Shareholders' Agreement and to enter into this Agreement to provide for the
nomination of certain directors of the Company.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
hereinafter expressed and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Definitions.
"Agreement", "hereof", "hereunder", and words of similar
import shall refer to this Stockholders' Agreement, as it may be amended from
time to time.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Certificate of Incorporation" shall mean the Certificate of
Incorporation of the Company, as amended and restated from time to time.
"Class II Director" means a director of the Company who has
been elected to the Board of Directors as a member of the second class of
directors pursuant to Article Thirteenth of the Certificate of Incorporation.
"Class III Director" means a director of the Company who has
been elected to the Board of Directors as a member of the third class of
directors pursuant to Article Thirteenth of the Certificate of Incorporation.
"Class III Election Date" shall mean the date on which members
of the third class of the Board of Directors stand for election in accordance
with the Certificate of Incorporation.
"Company" shall mean NATCO Group Inc., a Delaware
corporation.
<PAGE> 2
"Effective Date" shall mean the date on which the Registration
Statement of the Company on Form S-1 (File No. 333-48851) filed in connection
with the initial public offering of the Common Stock shall have been declared
effective by the Securities and Exchange Commission.
"Qualification Date" shall mean the date that is one hundred
twenty (120) days prior to the first anniversary of the date that the proxy
statement was first delivered to the stockholders of the Company in connection
with the annual meeting of the stockholders of the Company for the year prior to
the year in which the annual meeting is being held, except that if no proxy
statement was released to the stockholders of the Company in connection with the
annual meeting of the stockholders of the Company for the prior year, the date
that is one hundred fifty (150) days prior to the date of the annual meeting of
the stockholders of the Company.
"Qualified Nominee" shall mean any individual who has not, in
the five years preceding the date of the annual meeting of the stockholders at
which such individual is running for a position on the Board of Directors, been:
(i) convicted in a criminal proceeding or is a named subject of a pending
criminal proceeding (excluding traffic violations and other minor offenses),
(ii) the subject of any order, judgment or decree not subsequently reversed,
suspended or vacated of any court of competent jurisdiction permanently or
temporarily enjoining such individual from engaging in any type of business
practice or engaging in any activity in connection with the purchase or sale of
any security, or (iii) found by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have violated any federal
or state securities law and such judgment or finding has not been subsequently
reversed or vacated.
2. Termination of Original Stockholders' Agreement.
The parties hereby terminate the Original Stockholders' Agreement
effective as of the Effective Date and agree that the force and effect of each
provision of the Original Stockholders' Agreement and all rights and obligations
arising thereunder are hereby terminated and revoked as of the date hereof and
that none of the parties hereto shall have any liabilities or obligations to the
other parties hereto or any other parties as a result of such termination of the
Original Stockholders' Agreement.
3. Nomination of Directors.
(a) For so long as Cap I and Cap II own an aggregate of twenty percent
(20%) or more of the outstanding Common Stock as of the relevant Qualification
Date, the Company, acting through its Board of Directors, shall, subject to the
other provisions of this Agreement, be obligated to nominate for election to the
Board of Directors, as members of the slate of nominees for election to the
Board of Directors proposed by the management of the Company in its proxy
statement at each annual meeting of stockholders of the Company (or special
meeting in lieu thereof) at which Class III Directors are to be elected, one
Qualified Nominee designated by Cap I and one Qualified Nominee designated by
Cap II, each as a Class III Director.
(b) If the number of Class III Directors is increased to more than two
(2), the Company shall only be obligated to nominate the two Qualified Nominees
so designated by Cap I and Cap II for such class.
-2-
<PAGE> 3
(c) Upon the occurrence of a vacancy in the Board of Directors that
results from the removal or resignation of a designee of either Cap I or Cap II,
the Company, acting through its Board of Directors, shall be obligated to elect
a Qualified Nominee designated by Cap I or Cap II, as the case may be, to fill
such vacancy.
(d) If Cap I or Cap II shall not continue to own of record at least
five percent (5%) of the outstanding Common Stock on any Qualification Date, the
rights of such limited partnership under Section 3(a) shall be exercised by the
limited partnership that continues to own more than five percent (5%) of the
outstanding Common Stock.
(e) Cap I and Cap II shall notify the Company in writing of their
designees to the Board of Directors no later than thirty (30) days after the
Qualification Date in the case of Section 3(a) above and no later than ten (10)
days after the occurrence of a vacancy in the case of Section 3(c) above.
(f) The Company, upon receipt of the notice of the designees of Cap I
and Cap II pursuant to Section 3(a), shall use all reasonable efforts to solicit
proxies from its stockholders in favor of the election of such designees.
(g) The Company shall not be obligated to nominate, or solicit proxies
from its stockholders in favor of the election of, any individual that is not a
Qualified Nominee.
4. Covenant Regarding Class III Directors.
The Company covenants and agrees that it shall not reduce the number of
Class III Directors to less than two (2) by amendment of the Certificate of
Incorporation or bylaws of the Company or otherwise during the term of this
Agreement.
5. Specific Performance.
The parties hereto each acknowledge and agree that, in the event of any
breach of this Agreement, each non-breaching party would be irreparably harmed
and could not be made whole by monetary damages. It is accordingly agreed that
such parties, in addition to any other remedy to which they may be entitled at
law or in equity, shall be entitled to compel specific performance of this
Agreement in any action instituted in the United States District Court for the
Southern District of New York, or, if such court would not have jurisdiction for
such action, in any court of the United States or any state having subject
matter jurisdiction. The parties hereto each consent to personal jurisdiction in
any such action brought in the United States District Court for the Southern
District of New York. In no event shall the Company be obligated to violate the
federal securities laws of the United States, the Certificate of Incorporation
or the Bylaws of the Company in order to perform any of its obligations under
this Agreement.
6. Entire Agreement; Amendments.
This Agreement contains the entire understanding of the parties with
respect to the subject matter of this Agreement. There are no restrictions,
agreements, promises, warranties, covenants,
-3-
<PAGE> 4
or undertakings other than those expressly set forth herein or therein. This
Agreement supersedes all prior agreements and understandings among the parties
with respect to its subject matter. This Agreement may not be amended except by
an instrument in writing signed on behalf of all of the parties hereto. Any
agreement on the part of a party hereto to any extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
7. Interpretation.
The section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8. Notice.
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered by hand or transmitted by telex, telegram or
facsimile transmission to the other party or mailed by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
To the Company: NATCO Group Inc.
Brookhollow Central III
2950 North Loop West, Suite 700
Houston, Texas 77092
Attn: Nathaniel A. Gregory
Chairman of the Board
and Chief Executive Officer
Telecopy No.: (713) 683-7841
To Cap I: Capricorn Holdings, L.L.C.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Manager
Telecopy No.: (203) 861-6671
To Cap II: Capricorn Holdings, L.L.C.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Manager
Telecopy No.: (203) 861-6671
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications hereunder shall be
effective when actually received by the addressee.
-4-
<PAGE> 5
9. Termination.
This Agreement shall terminate in its entirety on the earlier to occur
of (i) the tenth anniversary hereof, and (ii) the date on which Cap I and Cap II
own, in the aggregate, less than twenty percent (20%) of the outstanding Common
Stock.
10. Governing Law.
This Agreement shall be governed by and construed in all respects in
accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of laws thereof which might refer such interpretation to
the laws of a different state or jurisdiction.
11. Counterparts.
This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
-5-
<PAGE> 6
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
as of the date first above written.
NATCO GROUP INC.
By:
--------------------------------------
Nathaniel A. Gregory
Chairman and Chief Executive Officer
CAPRICORN INVESTORS, L.P.
By: Capricorn Holdings, G.P.,
its general partner
By: Winokur Holdings, Inc.,
its general partner
By:
----------------------------------
Herbert S. Winokur, Jr.
President
CAPRICORN INVESTORS II, L.P.
By: Capricorn Holdings, LLC,
its general partner
By:
----------------------------------
Herbert S. Winokur, Jr.
Manager
<PAGE> 1
EXHIBIT 10.13
EXHIBIT A
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF
THE OPTIONS GRANTED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR
SALE, TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT
AND ANY APPLICABLE STATE SECURITIES LAWS.
THIS STOCK OPTION AGREEMENT, dated as of this 31st day of July, 1997, by
and between Cummings Point Industries, a corporation existing under the laws of
the State of Delaware (hereinafter referred to as "NATCO") and Nathaniel A.
Gregory (hereinafter referred to as "the Executive").
W I T N E S S E T H
-------------------
WHEREAS, the Executive and a subsidiary of NATCO entered into an
employment agreement dated March 15, 1994, as amended on the 31st day of July,
1996 (the "Previous Employment Agreement"), under which the Executive has
agreed to employment by such subsidiary under certain terms and conditions, and
under which the Executive is entitled to certain compensation, including
various provisions for special bonus compensation, under certain terms and
conditions;
WHEREAS, the Executive and NATCO wish to update, clarify, and amend the
Previous Employment Agreement, primarily to substitute employment by NATCO in
place of existing employment by a subsidiary, to specify terms and conditions
for such employment and for Executive's compensation, including various
provisions for special bonus compensation, and to further modify other
provisions as necessary;
WHEREAS, the Executive and NATCO are therefore simultaneously herewith
entering into an Employment Agreement (the "Employment Agreement") which
supersedes the Previous Employment Agreement;
WHEREAS, the Executive and NATCO entered into a stock option agreement
dated March 15, 1994, as amended on the 31st day of July, 1996 (the "Previous
Stock Option Agreement"), under which the Executive received options to
purchase shares of common stock in a subsidiary of NATCO under certain terms
and conditions;
WHEREAS, the Executive and NATCO wish to update, clarify and amend the
Previous Stock Option Agreement, primarily to substitute options to purchase
shares of common stock in NATCO in place of existing options to purchase
subsidiary stock, to specify terms and conditions for such options and to
further modify other provisions as necessary;
and WHEREAS, in order to provide the Executive with an incentive to
devote his best skills and efforts to the success of NATCO, NATCO deems it to
be in its best interests to provide the Executive with Options to purchase
shares of NATCO;
1
<PAGE> 2
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and conditions herein and in the Employment Agreement contained, the
parties hereto hereby agree as follows:
1. Options.
(a) Subject to the terms and upon the conditions contained herein, the
Executive shall have the right, privilege, and option to purchase 416,666 shares
of common stock of NATCO at a purchase price of $1.96 per share (the "First
Option"). The Executive may partially exercise the First Option.
(b) Subject to the terms and upon the conditions contained herein, the
Executive shall have the additional right, privilege, and option to purchase
138,889 shares of common stock of NATCO at a purchase price of $4.77 per share
(the "Second Option"). The Executive may partially exercise the Second Option.
(c) Subject to the terms and upon the conditions contained herein, the
Executive shall have the additional right, privilege, and option to purchase
123,272 shares of common stock of NATCO at a purchase price of $6.71 per share
(the "Third Option"). The Executive may partially exercise the Third Option.
(d) If, at any time during the Period of Active Employment, capital is
raised by NATCO through the offer and sale of Equity Securities to an
Unaffiliated Party, the Executive shall have the option to purchase Equity
Securities of the type being offered and sold equivalent to an additional five
(5) percent of the aggregate amount of Equity Securities being sold to
Unaffiliated Parties other than the Executive at a purchase price equal to the
purchase price at which such Equity Securities are sold (the "Fourth Option",
and together with the First, Second and Third Option, the "Options"). For
purposes of this Section 1(d), an "Unaffiliated Party" is any person other than
Capricorn Investors, L.P., or Capricorn Investors II, L.P., or any of their
affiliates, and "Equity Securities" shall mean any stock or similar security or
any security convertible, with or without consideration, into such security, or
carrying any warrant, option or right to subscribe for or purchase such a
security, or any such warrant, option or right. The Executive may exercise this
option in whole or in part.
(e) If subsequent to the date of this Agreement the Company shall declare
and pay any stock dividend or shall divide or combine the outstanding Common
Stock through any stock split, stock combination or other recapitalization, the
number of shares and purchase price for shares under the Options shall be
appropriately adjusted to reflect such stock dividend, stock split, stock
combination or other recapitalization.
(f) If the Company shall at any time issue (i) shares of common stock
(other than common stock issued to the Company's employees and directors
pursuant to stock option agreements), (ii) rights or warrants to subscribe for
or purchase shares of common stock (other than options issued to the Company's
employees and directors) or other securities of the Company convertible into or
exchangeable for shares of common stock ("Convertible Securities"), or (iii)
Convertible Securities, in each case at a purchase, exercise or conversion price
per share (taking into account, in cases (ii) and (iii), any consideration
received by the Company for such rights, warrants or Convertible Securities, the
value of such consideration, if
2
<PAGE> 3
other than cash, to be determined in good faith by the Board of Directors) less
than the fair value or average market price per share of the common stock on
the applicable record date (in cases where the issuance is to all shareholders)
or issuance date (in other cases), then in each such case, the number of shares
thereafter issuable upon exercise of the Options after such record or issuance
date, as the case may be, shall be determined by multiplying the number of
shares issuable upon exercise of the Options on the date immediately preceding
such record or issuance date, as the case may be, by a fraction, the numerator
of which shall be the sum of the number of shares of common stock outstanding
on such record or issuance date and the number of additional shares of common
stock so offered for subscription or purchase in connection with such rights or
warrants or issuable upon conversion of such Convertible Securities, and the
denominator of which shall be the sum of the number of shares of common stock
outstanding on such record or issuance date and the number of shares of common
stock which the aggregate offering price of the total number of shares so
offered or so issuable would purchase at such average market price; provided,
however, if all the shares of common stock offered in cases (i), (ii) or (iii),
as the case may be, are not delivered (whether upon their offering, the
exercise of such rights or warrants or the conversion of such Convertible
Securities) upon the termination of the offering or the expiration of such
rights or warrants or the conversion option of such Convertible Securities, as
the case may be, the number of shares issuable upon exercise of the Options
shall thereafter be readjusted to the number of shares which would have been in
effect had the numerator and the denominator of the foregoing fraction and the
resulting adjustment been made based upon the number of shares of common stock
actually delivered rather than upon the number of shares of common stock
offered for subscription or purchase or issuable upon conversion. Such
adjustment shall be made whenever common stock or any such rights, warrants or
Convertible Securities are issued to all holders of the common stock, and shall
become effective, as the case may be, on the date of issuance or retroactive to
the record date for determination of shareholders entitled to receive the
common stock or such warrants, rights or Convertible Securities.
2. TIME OF EXERCISE OPTIONS.
Subject to the terms and upon the conditions contained herein, the Options
may be exercised at any time prior to the earlier to occur of termination of the
Options pursuant to Section 5 hereof and (i) seven (7) years from the 31st day
of July 1996 in the case of the First and Second Options, (ii) seven (7) years
from the 31st day of July 1997 in the case of the Third Option, or (iii) seven
(7) years from the date on which Equity Securities are sold in the case of the
Fourth Option (the "Option Period").
3. METHOD OF EXERCISE.
(a) The Options may be exercised only within the Option Period and
only (1) by notice in writing of the Executive's exercise of the Options,
delivered to the Chief Financial Officer of NATCO or mailed by registered or
certified mail, return receipt requested, postage pre-paid, addressed to the
Chief Financial Officer of NATCO, c/o National Tank Company, Brookhollow Central
III, Suite 750, 2950 North Loop West, Houston, Texas 77092, and (2) by
contemporaneous payment to NATCO of the full amount of the purchase price of the
common stock being purchased by the Executive pursuant to these Options
(together with any amount which is necessary to satisfy any applicable federal,
state or local tax requirements), by certified check or official bank check
payable to the order of NATCO.
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<PAGE> 4
(b) NATCO may require of the Executive at the time the Options are
exercised, that the Executive make or enter into representations and agreements
as may be necessary or desirable, in the opinion of NATCO, in order to assure
compliance with the terms of this Stock Option Agreement and all applicable
federal and state securities laws and stock exchange regulations.
(c) NATCO shall make immediate delivery of all shares purchased by the
Executive upon the exercise of the Option, provided that if any law or
regulation requires NATCO to take any action with respect to the shares being
purchased by the Executive pursuant to these Options, then the date of delivery
of such shares shall be extended for the period necessary to take such action.
4. STOCKHOLDERS AGREEMENT.
In the event the Executive exercises the Options and purchases shares of
common stock of NATCO, the Executive shall be subject to the terms of the
Stockholders Agreement dated the 30th day of June, 1997, by and among Capricorn
Investors, L.P., Capricorn Investors II, L.P. and Cummings Point Industries,
Inc., attached hereto as Exhibit B.
5. TERMINATION OF OPTIONS.
(a) The Options, to the extent not heretofore exercised, shall terminate
and cease to be exercisable on the date on which the first of the following
events occurs:
(l) one year after the termination of the Executive's employment with
NATCO pursuant to Section 1(e)(l) or Section 1(e)(2) of the Employment
Agreement;
(2) the termination of the Executive's employment with NATCO pursuant
to Section 11(a) of the Employment Agreement;
(3) the sale of all of the common stock of NATCO to any party or
parties other than the Executive, regardless of whether such sale is
effected in a single transaction or a series of related or unrelated
transactions and provided that NATCO gives the Executive written notice at
least 30 days prior to any transaction that would result in the termination
of the Executive's Options pursuant to this Section 5(a)(3); or
(4) expiration of the Option Period as provided in Section 2 of this
Stock Option Agreement.
6. NON-TRANSFERABILITY OF OPTIONS.
The Options may not be sold, hypothecated, transferred or otherwise
disposed of, and may only be exercised by the Executive, or his estate
provided that the estate exercises such Options within two years of the
Executive's death. If the Executive's estate exercises the Options, the estate
shall be bound by all conditions, restrictions, and limitations that otherwise
would have applied to the Executive had the Executive exercised the Options.
4
<PAGE> 5
7. NO RIGHTS AS STOCKHOLDER.
The Executive shall have none of the rights of a stockholder of NATCO with
respect to any of the shares of common stock issuable under the Options unless
and until such shares of common stock have been purchased by the Executive in
accordance with the terms and conditions of this Stock Option Agreement.
8. REPRESENTATION AS TO INVESTMENT.
The Executive represents and warrants to NATCO that all shares purchased
under this Stock Option Agreement shall be acquired for the Executive's own
account and not with a view to distribution. The Executive acknowledges that the
Executive may not sell, assign, transfer or otherwise dispose of any shares
purchased under this Stock Option Agreement, or of any of his right, title or
interest therein, in the absence of either a registration statement under the
Securities Act of 1933, as amended (the "Act") or an exemption from the
registration provisions of the Act, and agrees that certificates representing
the shares may contain a legend to such effect. The exercise of these Options
and the delivery of shares hereunder is contingent upon NATCO being furnished by
the Executive with a statement in writing at the time of such exercise
confirming the accuracy of the foregoing representation and warranty.
9. NOTICE.
All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive, to him at:
Nathaniel A. Gregory
Frost Road
Greenwich, Connecticut 06830
If to NATCO, to it at:
Cummings Point Industries
30 East Elm Street
Greenwich, Connecticut 06830
Attention: President
With a copy to:
O'Melveny & Myers
Citicorp Center
153 East 53rd Street
New York, New York 10022-4611
Attention: Drake Tempest, Esq.
5
<PAGE> 6
With a further copy to:
Vinson & Elkins (to be provided)
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications hereunder (including
without limitation, notice of the Executive's election to purchase the Options)
shall be effective when actually received by the addressee.
10. Amendment.
This Stock Option Agreement may only be modified, supplemented or amended
by a written instrument executed by the party against whom which enforcement of
such modification, supplement or amendment is sought.
11. Headings.
The headings contained herein are for the sole purpose of convenience of
reference, and shall not in any way limit or affect the meaning or
interpretation of any of the terms or provisions of this Stock Option Agreement.
12. Governing Law.
This Stock Option Agreement shall be governed by and construed in
accordance with the laws of the State of New York without reference to
principles of conflict of laws.
In witness whereof, the parties hereto have executed this Agreement as of
the date first above written.
CUMMINGS POINT INDUSTRIES NATHANIEL A. GREGORY
By /s/ Herbert S. Winokur /s/ Nathaniel A. Gregory
---------------------------- ----------------------------------
Title:
------------------------
6
<PAGE> 7
AMENDMENT NO. 1
TO
STOCK OPTION AGREEMENT
This AMENDMENT NO. 1 (this "Amendment") to that certain STOCK OPTION
AGREEMENT (the "Stock Option Agreement") dated as of July 31, 1997 by and
between Cummings Point Industries, Inc. (now NATCO Group Inc.), a Delaware
corporation ("NATCO") and Nathaniel A. Gregory (the "Executive") is itself dated
as of May __, 1998 by and between NATCO and the Executive.
RECITALS:
As of July 31, 1997, NATCO and the Executive entered into an Employment
Agreement (the "Employment Agreement") that amended and restated a prior
employment agreement between NATCO and the Executive dated as of July 31, 1996.
In connection with the execution and delivery of the Employment
Agreement, NATCO and the Executive entered into the Stock Option Agreement which
amended and restated a prior stock option agreement between NATCO and the
Executive dated as of July 31, 1996.
NATCO is currently planning to effect an initial public offering of its
common stock, par value $0.01 per share (the "Common Stock") and NATCO and the
Executive have determined that certain provisions of the Stock Option Agreement,
while appropriate in the context of a privately owned company, are inconsistent
with the Executive's responsibilities as the chief executive officer of a
publicly owned company.
Accordingly, the Executive is voluntarily agreeing to delete those
provisions from the Stock Option Agreement effective as of the Effective Date
(as hereinafter defined).
NOW, THEREFORE, the parties hereto, for and in consideration of the
premises, the mutual covenants and agreements hereinafter set forth and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, agree as follows:
1. Amendments. Effective as of the Effective Date, the Stock Option
Agreement shall be amended in the following respects:
(a) The first sentence of subsection (c) of Section 1 of the
Stock Option Agreement is hereby amended so as to be and read,
in its entirety, as follows:
<PAGE> 8
"Subject to the terms and upon the conditions contained
herein, the Executive shall have the additional right,
privilege and option to purchase 123,272 shares of common
stock of NATCO at a purchase price of $6.71 per share (the
"Third Option", and, together with the First and Second
Options, the "Options")."
(b) Subsection (d) of Section 1 of the Stock Option Agreement
is hereby deleted in its entirety from the Stock Option
Agreement and such provision shall, from and after the
Effective Date, be null and void and of no further force or
effect.
2. Definitions.
(a) "Commission" shall mean the United States Securities and
Exchange Commission.
(b) "Effective Date" shall mean the effective date, as ordered
by the Commission, of that certain Registration Statement on
Form S-1 filed by NATCO with the Commission with respect to
the offering, sale and delivery of the Common Stock to be sold
in the Initial Public Offering.
3. Confirmation of Other Provisions. The parties hereto confirm that
each provision of the Stock Option Agreement, other than those expressly amended
hereby, is hereby ratified and shall remain in full force and effect.
4. Headings. The headings contained herein are for the sole purpose of
convenience of reference and shall not in any way limit or affect the meaning or
interpretation of any of the terms or provisions of this Amendment.
In Witness Whereof, the parties hereto have executed this Amendment as
of the date first above written.
NATCO GROUP INC.
(formerly Cummings Point Industries, Inc.)
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
------------------------------------------
Nathaniel A. Gregory
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NATCO Group Inc.
(formerly Cummings Point Industries, Inc.)
We consent to the use of our reports on the consolidated financial statements of
NATCO Group Inc. as of March 31, 1997 and 1996 and for each of the years in the
three-year period ended March 31, 1997 and on the financial statements of Total
Engineering Services Team, Inc. as of December 31, 1996 and 1995 and for each of
the years in the three-year period ended December 31, 1996, included herein and
to the reference to our firm under the heading "Experts" in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Houston, Texas
June 9, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 27, 1998, except for Note 15, as to which
the date is May 29, 1998, with respect to the financial statements of The Cynara
Company included in the Registration Statement (Form S-1 No. 333-48851) and
related Prospectus of NATCO Group Inc. for the registration of its common stock.
/s/ ERNST & YOUNG LLP
Houston, Texas
June 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1490
<SECURITIES> 0
<RECEIVABLES> 43,945
<ALLOWANCES> 887
<INVENTORY> 22,707
<CURRENT-ASSETS> 73,963
<PP&E> 9,332
<DEPRECIATION> 8,926
<TOTAL-ASSETS> 98,024
<CURRENT-LIABILITIES> 47,804
<BONDS> 29,572
0
0
<COMMON> 67
<OTHER-SE> 7,069
<TOTAL-LIABILITY-AND-EQUITY> 98,024
<SALES> 202,023
<TOTAL-REVENUES> 202,023
<CGS> 160,266
<TOTAL-COSTS> 29,246
<OTHER-EXPENSES> 2,811
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 2,992
<INCOME-PRETAX> 6,848
<INCOME-TAX> 1,342
<INCOME-CONTINUING> 5,506
<DISCONTINUED> 767
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,273
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.78
</TABLE>
