<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1998.
REGISTRATION NO. 333-49947
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
SPECIALTY PRODUCTS & INSULATION CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 5033 23-1713012
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
----------------
1097 COMMERCIAL AVENUE, P.O. BOX 576, EAST PETERSBURG, PENNSYLVANIA 17520-
0576 (717) 569-3900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MR. RONALD L. KING
SPECIALTY PRODUCTS & INSULATION CO.
1097 COMMERCIAL AVENUE,
P.O. BOX 576
EAST PETERSBURG, PENNSYLVANIA 17520-0576
(717) 569-3900
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS A. RALPH, ESQ. JAMES M. PAPADA III, ESQ.
CHRISTOPHER G. KARRAS, ESQ. DEAN M. SCHWARTZ, ESQ.
DECHERT PRICE & RHOADS STRADLEY, RONON, STEVENS & YOUNG,
4000 BELL ATLANTIC TOWER, 1717 ARCH LLP
STREET 2600 ONE COMMERCE SQUARE
PHILADELPHIA, PENNSYLVANIA 19103- PHILADELPHIA, PENNSYLVANIA 19103-
2793 7098
(215) 994-4000 (215) 564-8000
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 16, 1998
PROSPECTUS
2,000,000 SHARES
SPECIALTY PRODUCTS
& INSULATION CO.
[LOGO OF SPECIALITY PRODUCTS APPEARS HERE]
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by Specialty Products & Insulation Co. (the "Company"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price per share will
be between $10.00 and $12.00. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "SPIE."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON
PAGE 8.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................... $ $ $
- --------------------------------------------------------------------------------
Total(3)..................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted to the Underwriters an option, exercisable for 30
days from the date of the Offering, to purchase up to an aggregate of
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior
sale, when, as and if issued to and accepted by them, subject to their right to
reject any order in whole or in part and to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject offers in whole or in part. It is expected that delivery of certificates
for the shares will be made at the offices of Legg Mason Wood Walker,
Incorporated, Baltimore, Maryland on or about , 1998.
LEGG MASON WOOD WALKER ADVEST, INC.
INCORPORATED
, 1998
<PAGE>
[Graphic portrays map of United States showing locations of Company service
centers. Text below maps reads as follows: "Our national service center
network supplies customers around the world with a wide range of products and
services from leading manufacturers of specialty construction materials."]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. For purposes of this Prospectus, the "Company" refers to
Specialty Products & Insulation Co. and its consolidated subsidiary, unless the
context otherwise requires. Unless otherwise indicated, the information
contained in this Prospectus (i) gives effect to the spin-off of the Company
from its parent, Irex Corporation ("Irex"), through the pro rata distribution
of 100% of the capital stock of the Company to the shareholders of Irex (the
"Separation"), (ii) gives effect to the recapitalization of each share of the
Company's previously issued common stock into 291.3547 shares of Common Stock
and (iii) assumes no exercise of the Underwriters' over-allotment option in
connection with the Offering.
THE COMPANY
Specialty Products & Insulation Co. is a leading national distributor and
fabricator of mechanical insulation, architectural/acoustical products and
specialty products to commercial and industrial markets. The Company also
offers customized fabrication, export and other value-added services related to
its core product lines. The Company operates through a national network of 52
distribution centers, including seven fabrication facilities, at strategically
chosen locations in 21 states. Through this network, the Company offers
approximately 25,000 stock keeping units ("SKUs") to more than 9,000 customers,
including specialty contractors, facility owners, general contractors, original
equipment manufacturers ("OEMs"), exporters and supply houses. The Company's
principal product categories include piping and equipment insulation as well as
acoustical ceilings and specialty wall panels for use in new construction,
maintenance, renovation and repair.These categories include the products of
more than 150 manufacturers including Armstrong World Industries, Owens
Corning, Johns Manville, Dow Chemical and Pittsburgh Corning. Since commencing
operations in the early 1980s, the Company has experienced significant growth
as a result of its ability to capitalize on industry changes including,
principally, the increased reliance on distributors by manufacturers and
customers. Net sales of the Company increased from $118.4 million in 1995 to
$158.5 million in 1997, and operating income grew from $4.1 million in 1995 to
$7.0 million in 1997. In the first three months of 1998, net sales and
operating income totalled $42.7 million and $1.4 million, respectively, as
compared to $36.3 million and $1.1 million, respectively, in the first three
months of 1997.
Significant changes in the Company's markets have resulted in the emergence
of an independent distribution channel. Independent distribution has reduced
duplicate functions performed by both manufacturers and customers, allowing
them to devote greater resources to their core competencies. Manufacturers have
been able to reduce logistical costs, lower marketing expenses and better
manage inventories by outsourcing the distribution function to independent
distributors. Customers have also been able to lower operating costs, reduce
their number of supply sources and gain high-quality, value-added services
through the utilization of independent distributors. This evolution has
produced markets which are highly fragmented and populated by many smaller
local and regional distributors. However, the Company believes the industry is
undergoing a significant trend toward consolidation as both manufacturers and
customers seek to enhance efficiencies and reduce costs while maintaining high
levels of product and service quality. The Company believes that large,
national distributors with significant purchasing power, integrated information
systems and relatively low infrastructure costs can offer greater value to
customers and will be well positioned to exceed market growth rates in this
industry.
Two key components of the Company's growth strategy have been acquisitions
and openings of distribution and service centers ("distribution centers").
Historically, the Company grew as it solidified its presence in regional
markets. More recently, the Company has implemented a growth strategy that is
being executed on a national scale. Through targeted acquisitions and
distribution center openings, the Company pursues opportunities to expand its
presence in new geographic areas with strong growth characteristics. This
strategy enables the Company to further penetrate existing markets, broaden its
product and service capabilities and take
3
<PAGE>
advantage of current industry dynamics. For the five-year period ended December
31, 1997, the Company acquired 11 distribution operations, including three from
affiliates, which together contributed approximately $13.2 million, or 8.3%, of
the Company's 1997 net sales. During the same period, the Company opened 10
distribution centers, which together contributed approximately $12.3 million,
or 7.8%, of the Company's 1997 net sales. Since January 1, 1998, the Company
has completed one acquisition and opened three distribution centers.
The Company is focused on its traditional strengths as a broadly based
national distributor and fabricator of mechanical insulation,
architectural/acoustical products, specialty products and value-added services.
The Company is committed to capitalizing on the expertise, knowledge and
experience it has developed in these core markets to increase market share and
profitability. In addition, the Company's operating strategy includes the
following key elements:
. Superior Customer Service. With distribution centers and sales forces in
each area that it serves, the Company provides its customers with rapid
delivery and localized service. The Company believes that providing a high
level of customer service leads to long-term relationships with its
customers.
. National Network of Distribution Centers. The Company believes its national
distribution network enables the Company to attract customers that have
multiple locations, participate with key vendors in the development of
national marketing and sales strategies, achieve geographic diversification
and facilitate best-practice benchmarking as well as innovation and
knowledge-sharing within the Company.
. Strong Supplier Relationships. The Company believes its national presence,
financial strength and partnering philosophy have enabled the Company to
become the preferred distributor for many of its suppliers. The Company
works with its suppliers to develop common expansion programs as well as
customer-oriented product solutions.
. Low Cost of Operations. The Company believes that its volume of purchases
and desirability as a vendor enable it to obtain purchase terms that are as
favorable as those available to other large competitors. The Company is also
able to realize advantages from the economies of large-scale operation in
the areas of administrative processing, information systems, financing
terms, technical expertise, inventory and working capital management.
. Innovative and Committed Employees. Management believes the Company's
corporate culture and values allow it to attract, develop and retain
innovative and committed employees. The Company's senior management has an
average of approximately 10 years' experience with the Company, and many of
its sales and service staff have been working in the same markets for 10
years or more.
The Company believes that its operating strategy provides a foundation for
growth in each of the markets in which it participates. See "Business--Growth
Strategy." The Company's growth strategy includes the following key elements:
. Increase Sales of Existing and Accessory Products. Management believes the
Company's strengths and operating strategies will lead to increased sales to
its existing customer base. The Company believes acquisitions, the opening
of new distribution centers and other strategic initiatives will generate
additional sales of existing products to new customers.
. Open New Distribution Centers. The Company expects to continue to open new
distribution centers as a result of new market opportunities, customer
service requirements, supplier initiatives and strategic opportunities. As
the Company continues to broaden its national distribution network, the
Company believes that it will be able to capitalize on operating
efficiencies and the benefits of large-scale operation.
. Continue Acquisitions. The Company is committed to continuing its strategy
to acquire distribution businesses with strong market positions, supplier
support or attractive customer bases. Acquisitions allow the Company to
accelerate revenue growth, expand its geographical presence, add product
lines and technical expertise and achieve greater operating efficiencies.
4
<PAGE>
. Emphasize National Accounts. Management believes that the Company's national
distribution network gives the Company a competitive advantage in securing
national and multi-regional customers seeking to reduce vendors, outsource
non-core operations, integrate supply and gain value-added services such as
procurement and material management.
. Add Product Lines. The Company intends to leverage its core product and
technical expertise to add product lines which are complementary to those
currently offered. The Company believes that its existing national
distribution infrastructure enables it to add new product lines without
incurring significant additional cost.
The Company's executive offices are located at 1097 Commercial Avenue, East
Petersburg, Pennsylvania 17520, and its telephone number is (717) 569-3900.
RECENT ACQUISITION
On March 1, 1998, the Company acquired certain assets relating to mechanical
insulation distribution and fabrication operations of Extol of Texas, Inc. in
Houston and Corpus Christi, Texas ("Extol") for approximately $5.6 million in
cash. The acquisition was financed by borrowings from Irex. For the year ended
December 31, 1997, Extol generated sales of approximately $13.2 million. See
"Acquisition and Expansion Background." The Company has entered into a letter
of intent to purchase certain assets of a mechanical insulation fabricator with
fiscal year 1997 net sales of approximately $4.0 million.
SEPARATION FROM PARENT
Since commencing operations in 1982, the Company has been a wholly owned
subsidiary of Irex. Through its operating subsidiaries other than the Company,
Irex is primarily engaged in the business of specialty contracting throughout
the United States and Canada. In January 1998 Irex announced plans to effect
the Separation through a pro rata distribution of 100% of the capital stock of
the Company to the shareholders of Irex. The Separation will occur immediately
prior to consummation of the Offering, and the Offering is conditioned upon the
consummation of the Separation. Immediately following the Separation and the
Offering, all of the capital stock of the Company will be owned by the
shareholders of Irex who receive shares of Common Stock in the Separation and
by new shareholders who purchase Common Stock in the Offering. See "Separation
from Irex."
The decision to effect the Separation is based on a number of factors. The
Separation will provide both corporations with greater managerial, operational
and financial flexibility to focus on and respond to changing market conditions
in their respective business environments. The Company also believes that its
ability to pursue and finance acquisitions and other business opportunities
will be enhanced if the Company operates independently. Furthermore, financial
advisors have advised Irex and the Company that equity capital necessary to
meet the business needs of Irex and the Company can be most effectively raised
through an initial public offering of the stock of the Company following its
Separation from Irex, rather than through a stock offering by either Irex or
the Company while Irex continues to hold a substantial equity interest in the
Company. In addition, management believes the Separation will assist the
Company in serving certain customers. Through the specialty contracting
businesses operated by its other subsidiaries, Irex competes with customers
whose business is solicited by the Company, and the Company believes these
customers will be more likely to purchase products from the Company after it is
independent from Irex. The Separation will also enable the Company to provide
its management and employees with incentive compensation in the form of direct
and indirect equity ownership in the Company.
In connection with the Separation, the Company will enter into several
agreements with Irex and its subsidiaries setting forth the terms and
conditions of the Separation and governing certain interim and longer-term
relationships between the companies. See "Separation from Irex--Agreements with
Irex."
5
<PAGE>
THE OFFERING
Common Stock offered by the
Company........................ 2,000,000 shares
Common Stock to be outstanding
after the Offering............. 4,913,547 shares(1)
Use of Proceeds................. For the repayment of certain indebtedness,
including indebtedness incurred to pay a
dividend to Irex in connection with the
Separation, and working capital and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market Symbol... The Common Stock has been approved for
quotation on the Nasdaq National Market under
- -------- the symbol "SPIE."
(1) Does not include up to 491,355 shares of Common Stock that may be subject
to a stock option plan which the Company expects to adopt prior to the
consummation of the Offering. See "Management--Stock Options" and
"Description of Capital Stock."
RISK FACTORS
See "Risk Factors" beginning on page 8 for a discussion of certain
information that should be considered by prospective purchasers of the Common
Stock offered hereby.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary historical and pro forma consolidated
financial information of the Company as of and for the periods indicated. The
pro forma balance sheet information assumes the Offering closed on March 31,
1998. The pro forma income statement information assumes the Offering closed as
of January 1, 1997. The summary consolidated financial information should be
read in conjunction with the "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and the
related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $118,395 $141,800 $158,510 $36,280 $42,669
---------- ---------- ---------- ---------- ---------
Gross profit............ 25,892 31,110 34,252 7,725 9,360
---------- ---------- ---------- ---------- ---------
Operating income........ 4,051 6,348 7,023 1,137 1,368
Interest expense, net... 1,840 1,854 1,939 448 516
---------- ---------- ---------- ---------- ---------
Income before income
taxes.................. 2,211 4,494 5,084 689 852
Income tax provision.... 918 1,810 2,077 281 349
---------- ---------- ---------- ---------- ---------
Net income.............. $ 1,293 $ 2,684 $ 3,007 $ 408 $ 503
========== ========== ========== ========== =========
Net income per share--
basic.................. $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Net income per share--
diluted................ $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Weighted average number
of common shares
outstanding--basic..... 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
Weighted average number
of common shares
outstanding--diluted... 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
PRO FORMA INCOME
STATEMENT DATA (1):
Operating income........ $ 7,023 $ 1,368
Interest expense, net... 1,123 339
---------- ---------
Income before income
taxes.................. 5,900 1,029
Income tax provision.... 2,412 422
---------- ---------
Net income.............. $ 3,488 $ 607
========== =========
Net income per share--
basic.................. $ 0.71 $ 0.12
Net income per share--
diluted................ $ 0.71 $ 0.12
Weighted average number
of common shares
outstanding--basic..... 4,913,547 4,913,547
Weighted average number
of common shares
outstanding--diluted... 4,913,547 4,913,547
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF MARCH 31, 1998
----------------------- -------------------------------------
ACTUAL ACTUAL PRO FORMA (3) AS ADJUSTED (4)
----------------------- ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $11,266 $10,471 $ (19) $14,735
Total assets............ 47,651 53,743 53,743 53,743
Total long-term debt
(2).................... 26,493 27,792 27,792 18,722
Shareholder's equity.... 9,180 9,587 (903) 18,657
</TABLE>
- --------
(1) Gives pro forma effect to the sale of the Common Stock offered hereby and
the application of the estimated net proceeds as described in "Use of
Proceeds" as if such transactions had occurred on January 1, 1997. See "Use
of Proceeds."
(2) Total long-term debt includes notes payable to affiliate (both the long-
term and current portions) and payable to affiliates, excluding the
dividend payable to Irex.
(3) Represents actual data as of March 31, 1998 as adjusted to give effect to
the $10.5 million planned dividend to Irex.
(4) Represents actual data as of March 31, 1998 as adjusted to give pro forma
effect to the sale of Common Stock offered hereby and the application of
the net proceeds therefrom as described in "Use of Proceeds." See "Use of
Proceeds."
7
<PAGE>
RISK FACTORS
In evaluating an investment in the Common Stock offered hereby, prospective
investors should carefully consider the following risk factors as well as the
other information set forth elsewhere in this Prospectus.
LACK OF INDEPENDENT OPERATING HISTORY
Concurrent with the Offering, the Company will separate from Irex pursuant
to the Separation. Prior to the Separation, the Company operated as a wholly
owned subsidiary of Irex, historically relied on Irex for various financial,
administrative and managerial services necessary for its operations and
maintained a minimal executive, financial and administrative staff. After the
Separation, the Company will maintain its own lines of credit and banking
relationships and perform its own financial, administrative and managerial
functions without the benefit of such services, and Irex will have no
obligation to provide assistance to the Company except pursuant to certain
agreements as described in "Separation from Irex--Agreements with Irex." While
management believes that the Separation will have a positive impact on the
Company, the Company may encounter financial, administrative, managerial or
other difficulties as a result of its lack of independent operating history or
the discontinuance of its reliance on the financial and other services of
Irex. No assurance can be given that the Company, as an independent entity,
will achieve operating results comparable to those prior to the Separation.
See "Separation from Irex."
LIMITATIONS ON ABILITY TO RAISE EQUITY CAPITAL AND POTENTIAL DEPENDENCE ON
DEBT FINANCING
In order to preserve the tax-free status of the Separation, the Company's
future ability to issue Common Stock may be limited under federal income tax
laws for a period of two years following consummation of the Separation. The
Company's limited ability to issue capital stock during such period (including
its ability to issue Common Stock in connection with acquisitions) may require
the Company to rely on other financing sources, such as bank credit facilities
or debt offerings. Although the Company believes it can obtain financing
necessary to maintain its acquisition and growth program, reliance on such
alternative financing sources could adversely affect the Company's ability to
continue its acquisition program, create significant debt service obligations
and create other risks for the Company and its shareholders. No assurance can
be given that the Company will be able to obtain the capital it will need to
meet its operating needs and finance its acquisition program. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Growth Strategy."
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS; ABILITY TO MANAGE GROWTH
The Company's growth strategy contemplates further acquisitions of
distribution and related businesses. The Company's future success is
dependent, in part, upon its ability to identify, finance and acquire suitable
businesses on favorable terms and then to integrate and manage the acquired
businesses quickly and successfully. Acquisitions involve special risks,
including risks associated with unanticipated liabilities, diversion of
management attention, possible adverse effects on earnings resulting from
increased goodwill amortization, potential increased interest costs,
dependence on retention, hiring and training of key personnel and difficulties
relating to the integration of the acquired businesses. Although the Company
believes that it can successfully implement its acquisition program, there can
be no assurance that the Company will be able to identify or acquire
acceptable acquisition candidates on terms favorable to the Company and in a
timely manner to the extent necessary to fulfill the Company's growth
strategy. The Company's ability to achieve and manage its growth will depend
on a number of factors, including the availability of working capital to
support such growth, existing and emerging competition and the Company's
ability to maintain sufficient profit margins. Continued growth could place
additional demands on the Company's administrative, operational and financial
resources. Furthermore, the Company's ability to pay for acquisitions with
stock may be materially limited in the two-year period following the
Separation and the Company's ability to implement its acquisition program may
be adversely affected as a result. There can be no assurance that the Company
will be able to continue to achieve or manage growth effectively, or that
future acquisitions will not have an adverse effect upon the Company's
8
<PAGE>
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Growth Strategy."
SEASONALITY; INDUSTRY AND ECONOMIC CYCLES
The Company's business is seasonal. The Company has in the past experienced
seasonal fluctuations in sales and operating results from quarter to quarter.
Operating results are weakest in the first calendar quarter because of the
effects of winter weather on commercial and industrial construction and the
consequent reduction in sales of mechanical insulation and
architectural/acoustical products. Fluctuations in the Company's quarterly
sales and operating results could result in significant volatility in, and
otherwise adversely affect, the market price of the Common Stock. See
"Management's Discussion of Financial Condition and Results of Operations--
Seasonality and Quarterly Results of Operations."
Some of the principal markets for the products and services offered by the
Company are subject to cyclical economic fluctuations that generally affect
pricing, availability and demand for mechanical insulation and
architectural/acoustical products. Cyclical fluctuations could also affect
growth rates in the markets served by the Company's customers, the
availability of products from vendors and the availability of suitable
acquisition candidates. As a result, changes in general economic conditions
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Seasonality and Cyclicality."
DEPENDENCE ON SUPPLIER RELATIONSHIPS
The Company's distribution operations are materially dependent on its
relationships with its suppliers. Generally, distribution agreements between
the Company and its suppliers may be terminated without cause by the suppliers
at any time. As a result, even the largest of the Company's suppliers could
terminate the flow of its products to the Company at any time and the Company
would have to obtain substitute products to maintain its reserves. Although
management believes that the Company can maintain its relationships with its
suppliers for the foreseeable future, there can be no assurance that it will
be able to do so. The termination or limitation by any key supplier of its
relationship with the Company could have a material adverse effect on the
Company's business, operating results and financial condition.
POTENTIAL RISKS DUE TO CHANGES IN INDUSTRY TRENDS
The distribution industry is undergoing significant change. Historically,
distributors of mechanical insulation and architectural/acoustical products
served primarily as suppliers and extensions of manufacturers' sales forces.
In recent years, both manufacturers and customers have been increasingly
relying on distributors such as the Company to reduce purchasing costs and
provide a broad range of value-added services. As customers increasingly seek
low-cost alternatives to traditional methods of purchasing and sources of
supply, they are, among other things, reducing the number of their suppliers.
Although the Company believes it can maintain current customer relationships,
there can be no assurance that the Company will not lose customers, including
key accounts, as existing customers reduce the number of distributors with
which they do business. Also, distributors are consolidating to achieve
economies of scale and increase efficiencies. This consolidation trend could
cause the industry to become more competitive. The failure by the Company to
respond effectively to such consolidation and increased competition or to
other changes in the industry could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Industry Overview."
DEPENDENCE ON IREX INFORMATION SYSTEMS; POTENTIAL SYSTEMS CONVERSION; YEAR
2000 ISSUE
The Company utilizes and will continue to utilize information systems
provided by Irex, which play an integral role in product tracking, pricing and
availability; order processing and shipping; distribution center operations;
purchasing; inventory management; financial reporting; and other financial and
operational functions. The Company will enter into an agreement with Irex
pursuant to which Irex will provide information system services to the Company
for three years following the Separation. During such period the Company
intends to
9
<PAGE>
evaluate its existing and future information system requirements and examine
its options for obtaining such services. These options include, among others,
continuing the existing relationship with Irex or replacing the Company's
current systems. If the Company decides to install new information systems,
there can be no assurance that it will be able to successfully implement,
integrate and operate such systems without experiencing unanticipated delays,
complications and expenses. Significant disruptions in the Company's
information systems or the failure to successfully complete a conversion to
new information systems on a timely basis could result in operational and
financial disruptions and adversely affect the Company's business, operating
results and financial condition. See "Business--Information Systems."
The Company does not expect to have material exposure to Year 2000
conversion risks following the installation of an upgrade to its information
system software scheduled for October 1998. This planned upgrade has been
installed and tested by the software system vendor in other information
systems and, as a result, the Company believes its information systems will be
Year 2000 compliant following the upgrade. The Company is presently unable to
determine the effects of Year 2000 compliance by its suppliers and customers,
and the failure of suppliers or customers to address such issues effectively
could have a material adverse effect on the Company. See "Business--
Information Systems."
POTENTIAL LIABILITY FOR TAXES RELATED TO THE SEPARATION
In connection with the Separation, the Company will enter into a tax sharing
and indemnification agreement with Irex (the "Tax Agreement"). Under the Tax
Agreement the Company will be restricted, for a period of two years following
the date of the Separation, from engaging in certain transactions, including
certain issuances of stock, redemptions of stock or ceasing to engage in its
trade or business, without first obtaining either a ruling from the Internal
Revenue Service or an opinion from nationally recognized tax counsel that such
transaction will not affect the tax-free nature of the Separation to Irex or
its shareholders. The Tax Agreement also requires the Company to indemnify
Irex and its shareholders for tax liabilities that may be incurred by Irex or
its shareholders as a result of actions that the Company may undertake
following the Separation and that cause the Separation to be treated as a
taxable transaction to Irex or its shareholders. Under recently enacted
changes to the Internal Revenue Code applicable to spin-off distributions, a
distributing corporation (Irex) will recognize gain on the appreciation in the
stock of the distributed corporation (the Company) if the distribution is part
of a plan or series of related transactions pursuant to which one or more
persons acquire, directly or indirectly, 50% or more of the voting power or
value of the stock of either corporation. There is a rebuttable presumption
that any acquisitions of stock (including acquisitions through stock issuances
by the Company) occurring during the period beginning two years before and
ending two years after the Separation are part of such a plan (or series if
related transactions). Such presumption may be rebutted by establishing that
the Separation and acquisitions of such stock are not pursuant to a plan or
series of related transactions. Although the Company does not expect these
restrictions to materially inhibit its operations or growth opportunities, if
there is a final determination that any or all of the distributions of Common
Stock effected in connection with the Separation are taxable, the Company
could become liable for a portion of any taxes due in connection with the
Separation to the extent that such tax liability cannot be collected from Irex
or the remaining members of the Irex consolidated group. The Company will also
be required to indemnify Irex and its subsidiaries for specified tax
liabilities otherwise imposed upon or attributable to the Company related to
the Company for periods prior to the Separation. See "Separation from Irex--
Agreements with Irex--Tax Sharing and Indemnification Agreement."
LACK OF ARM'S-LENGTH BARGAINING ON AGREEMENTS WITH IREX
The Company will enter into certain agreements with Irex and its
subsidiaries (the "Separation Agreements") in connection with the Separation
which will set forth the terms of the Separation, the right to utilize Irex's
information system, tax sharing and indemnification, and benefits sharing.
Although management of the Company believes that the terms of the Separation
Agreements will be fair to the Company, the terms of the Separation Agreements
will be fixed between Irex and the Company when they are parent and subsidiary
and not independent parties negotiating on an arm's-length basis. Accordingly,
there is no assurance that the
10
<PAGE>
terms of the Separation Agreements will be as favorable to the Company as
those that might be obtained from an unaffiliated third party.
POTENTIAL INFLUENCE OF CHAIRMAN OF THE BOARD OF DIRECTORS
Upon completion of the Offering and Separation, W. Kirk Liddell will
beneficially own approximately 5.5% of the Company's outstanding Common Stock.
In addition, approximately 5.5% of the Company's outstanding Common Stock will
be held by a custodian for Mr. Liddell's minor children. See "Principal
Shareholders." Mr. Liddell will become Chairman of the Board of Directors of
the Company prior to consummation of the Offering. He is also President, Chief
Executive Officer and a director of Irex and the beneficial owner of
approximately 9.3% of issued and outstanding Irex common stock. As a result of
his share ownership of and positions with Irex and the Company, Mr. Liddell
will be in a position to influence the business and affairs of Irex and the
Company. To the extent the Company and Irex have differing interests, Mr.
Liddell could be presented with conflicts of interests in his roles as a
director of each company. There can be no assurance that actions of the
Company taken in the context of such conflicts of interests will be as
favorable to the Company as actions taken in the absence of such conflicts.
BENEFITS TO IREX AND ITS AFFILIATES AS A RESULT OF THE SEPARATION AND OFFERING
Irex and its affiliates other than the Company, none of which will be
affiliated with the Company following the Separation and the Offering, will
receive the following benefits as a result of the Separation and Offering:
(i) a $10.5 million cash dividend to be paid by the Company to Irex
immediately prior to the Separation, which dividend will be paid by executing
a note to Irex to be repaid with proceeds of the Offering; (ii) payment of
approximately $9.1 million of debt owed by the Company to Irex or affiliates
of Irex, which will be paid with proceeds of the Offering; and (iii) payment
of $17.8 million owed to Irex pursuant to an intercompany account which the
Company intends to pay with funds borrowed from a credit facility which it
will enter into upon consummation of the Offering. See "Use of Proceeds" and
"Separation from Irex."
COMPETITION
The Company's markets are fragmented and highly competitive, and feature
numerous distribution channels, including national, regional and local
distributors, and local supply houses as well as direct sales by
manufacturers. Many of the Company's competitors are smaller businesses that
sell to customers in a limited geographic area, but the Company also competes
against several significant regional distributors. Certain of the Company's
competitors sell identical or equivalent products at competitive prices, and
the Company also competes on the basis of responsiveness to the needs of
customers for quality service, product diversity and availability. There can
be no assurance that the Company will be able to compete successfully in the
markets in which it operates.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are highly dependent on the skills, experience and
efforts of its Chief Executive Officer and senior management, and the Company
may depend on the senior management of any significant businesses it acquires
in the future. Although prior to the Offering the Company intends to enter
into employment agreements containing confidentiality and non-competition
provisions with its Chief Executive Officer and other members of its senior
management, the business and prospects of the Company could be adversely
affected if any of these persons does not continue in his position, and the
Company is unable to attract and retain a qualified replacement. See
"Management."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Pennsylvania law and the Company's restated articles
of incorporation and bylaws could make it more difficult for a third party to
acquire, or could discourage a third party from attempting to acquire, control
of the Company. Although the Company has opted out of Subchapters E, G and H
of Chapter
11
<PAGE>
25 of the Pennsylvania Business Corporation Law of 1988, as amended (the
"PBCL"), the Company is governed by Subchapter F of Chapter 25 of the PBCL,
which prohibits the Company from engaging in a "business combination" with an
"interested shareholder" for a period of five years after the date of the
transaction as a result of which such shareholder became an "interested
shareholder," unless the business combination is approved in a prescribed
manner. The Company's restated articles of incorporation divide the Board of
Directors into three classes, each serving a staggered three-year term. By
extending the period of time required to re-elect or replace the entire Board
of Directors, such classification may have the effect of discouraging persons
seeking to effect a takeover or assume control of the board. In addition,
shares of the Company's Preferred Stock, par value $.01 per share (the
"Preferred Stock"), may be issued by the Board of Directors without
shareholder approval on such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The
rights of the holders of the Common Stock may be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The Company has no current plans to issue any
shares of Preferred Stock and may be otherwise limited in its ability to issue
Preferred Stock in the two-year period following the Separation. However, the
potential issuance of Preferred Stock could have the effect of delaying,
deterring or preventing a change of control of the Company. See "Description
of Capital Stock--Preferred Stock" and "Description of Capital Stock--Certain
Provisions of the Pennsylvania Business Corporation Law."
ABSENCE OF PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for inclusion on the Nasdaq
National Market, there can be no assurance that an active or liquid trading
market in the Common Stock will develop upon completion of 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 Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. The market price for shares of the Company's Common
Stock may be highly volatile and may be significantly affected by such factors
as quarter-to-quarter variations in the Company's results of operations,
changes in general market conditions and other factors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations and Seasonality" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering and Separation could adversely affect the market price
for the Common Stock. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will
have on the market price of the Common Stock prevailing from time to time. The
number of outstanding shares of Common Stock available for sale in the public
market will be limited by (i) contractual agreements between the Company and
certain shareholders of the Company not to sell for two years the shares of
Common Stock received by them in the Separation; (ii) the lock-up agreements
under which the Company, its officers and directors, and certain Company
shareholders have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this Prospectus without the
prior written consent of Legg Mason Wood Walker, Incorporated, on behalf of
the Underwriters; (iii) limitations relating to the tax-free status of the
Separation (see "--Limitations on Ability Raise Equity Capital and Dependence
on Debt Financing"); and (iv) applicable restrictions under the Securities Act
of 1933, as amended (the "Securities Act"). Upon the consummation of the
Offering, the 2,194,064 shares of Common Stock distributed in the Separation
to nonaffiliates of the Company will be eligible for resale. An additional
719,483 shares of Common Stock will be distributed to affiliates of the
Company and will become eligible for resale following expiration of the
foregoing agreements and restrictions. See "Shares Eligible for Future Sale."
Sales of substantial amounts of Common Stock, including those shares eligible
for sale following the Offering and Separation and those eligible for sale
following the expiration of the foregoing agreements and restrictions, or the
perception that such sales could occur, could adversely affect the prevailing
market price of the Common Stock.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be approximately $19.6 million (approximately $22.6 million in
the event the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $11.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company intends to use such
proceeds as follows: (i) to repay approximately $6.3 million of long-term
debt, of which $6.2 million will be paid to Irex; (ii) to repay approximately
$2.8 million of other indebtedness to Irex; (iii) to repay indebtedness
incurred by the declaration of a $10.5 million dividend to Irex in connection
with the Separation; and (iv) for working capital and general corporate
purposes. Rates of interest of the debt to be repaid with such proceeds range
from 6.63% to 9.25% per annum, and the maturity dates of such debt extend from
December 1, 1998 to July 10, 2009. For additional information on the terms of
such debt, see note 7 to the consolidated financial statements of the Company
included elsewhere in this Prospectus. For additional information on the
dividend to Irex, see "Separation from Irex."
DIVIDEND POLICY
The Company does not plan to pay dividends on its Common Stock in the
foreseeable future and plans to retain any future earnings to finance its
operations and expand its business. Any future determination as to the payment
of cash dividends will be at the discretion of the Company's Board of
Directors and will depend, among other factors, upon the Company's earnings,
financial condition and capital requirements and the terms of the Company's
financing agreements. In addition, the Company's future financing agreement
may contain limitations on the payment of cash dividends.
13
<PAGE>
DILUTION
The net tangible book value (tangible assets minus total liabilities) of the
Company as of March 31, 1998 was $8.0 million, or $2.74 per share of
outstanding Common Stock. After giving effect to the sale of the 2,000,000
shares of Common Stock offered by the Company hereby at an assumed initial
offering price of $11.00 per share (and deducting the estimated underwriting
discount and offering expenses), the pro forma net tangible book value of the
Company as of March 31, 1998 would have been approximately $17.1 million, or
$3.47 per share. This change represents an immediate increase in net tangible
book value of $0.73 per share to the existing shareholders of the Company (the
"Existing Shareholders") and an immediate dilution of $7.53 per share to
investors purchasing shares of Common Stock in this Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $11.00
Net tangible book value per share before this Offering..... $ 2.74
Increase in net tangible book value per share attributable
to this Offering.......................................... 0.73
------
Net tangible book value per share after this Offering........ 3.47
------
Dilution per share to new investors.......................... $ 7.53
======
</TABLE>
The following table summarizes as of March 31, 1998 the differences between
the Existing Shareholders and investors purchasing shares of Common Stock in
this Offering with respect to the number of shares of Common Stock distributed
to Irex shareholders in the Separation or purchased from the Company in the
Offering (assuming no exercise of the Underwriters' over-allotment option),
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES DISTRIBUTED
OR PURCHASED TOTAL CONSIDERATION
--------------------- -------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 2,913,547 59.3% $ -- -- $ --
New investors........... 2,000,000 40.7% 22,000,000 100.0% 11.00
----------- ------- ----------- -----
Total................. 4,913,547 100.0% $22,000,000 100.0%
=========== ======= =========== =====
</TABLE>
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998 and as adjusted to give effect to the Separation
and the sale of 2,000,000 shares of Common Stock offered by the Company in the
Offering at an assumed initial public offering price of $11.00 per share,
after deducting the estimated underwriting discounts and commissions and
estimated Offering expenses payable by the Company, and the application of
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------
AS
ACTUAL PRO FORMA (1) ADJUSTED (2)
------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt............ $ 1,450 $ 1,450 $ --
======= ======= =======
Payable to affiliates........................ $21,536 $21,536 $18,722
======= ======= =======
Long-term debt:
Notes payable to affiliate................. $ 4,742 $ 4,742 $ --
Other...................................... 64 64 --
------- ------- -------
Total long-term debt..................... $ 4,806 $ 4,806 $ --
------- ------- -------
Shareholder's equity:
Common Stock............................... $ 29 $ 29 $ 49
Paid in surplus............................ 974 974 20,514
Retained earnings.......................... 8,584 (1,906) (1,906)
------- ------- -------
Total shareholder's equity............... $ 9,587 $ (903) $18,657
------- ------- -------
Total capitalization..................... $14,393 $ 3,903 $18,657
======= ======= =======
</TABLE>
- --------
(1) Adjusted to give effect to the planned dividend to Irex.
(2) Adjusted to reflect (i) the Separation, (ii) the sale of 2,000,000 shares
of Common Stock by the Company at an assumed initial public offering price
of $11.00 per share and (iii) the application of approximately
$19.6 million of the net proceeds to the repayment of indebtedness (both
long-term and payable to affiliates) as well as the repayment of
indebtedness in connection with the declaration of a dividend in the
amount of $10.5 million to Irex immediately prior to the Separation.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial information presented below as of and for the years
ended December 31, 1996 and December 31, 1997, and for the year ended December
31, 1995 has been derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. This information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's consolidated financial
statements and related notes included elsewhere in this Prospectus. The
historical financial information as of and for the years ended December 31,
1993 and December 31, 1994 and for the three months ended March 31, 1997 and
March 31, 1998 and as of December 31, 1995 and March 31, 1998 have been
derived from the unaudited consolidated financial statements of the Company
and, in the opinion of management, include all adjustments (consisting only of
normal, recurring adjustments) necessary to present fairly the information set
forth therein.
The pro forma financial information has been prepared on the basis of
certain assumptions and estimates and may not be indicative of the results
that would have been achieved if the recapitalization and the Offering had
been effected on the dates indicated or that may be achieved in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $89,396 $101,895 $118,395 $141,800 $158,510 $36,280 $42,669
---------- ---------- ---------- ---------- ---------- --------- ---------
Gross profit........... 18,937 21,564 25,892 31,110 34,252 7,725 9,360
Selling, general, and
administrative
expense............... 17,426 18,957 21,841 24,762 27,229 6,588 7,992
---------- ---------- ---------- ---------- ---------- --------- ---------
Operating income....... 1,511 2,607 4,051 6,348 7,023 1,137 1,368
Interest expense, net.. 913 1,194 1,840 1,854 1,939 448 516
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before income
taxes................. 598 1,413 2,211 4,494 5,084 689 852
Income tax provision... 216 655 918 1,810 2,077 281 349
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income ............ $ 382 $ 758 $ 1,293 $ 2,684 $ 3,007 $ 408 $ 503
========== ========== ========== ========== ========== ========= =========
Net income per share-
basic................. $ 0.13 $ 0.26 $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Net income per share-
diluted............... $ 0.13 $ 0.26 $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Weighted average number
of common shares
outstanding--basic.... 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
Weighted average number
of common shares
outstanding--diluted.. 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
PRO FORMA INCOME
STATEMENT DATA (1):
Operating income....... $ 7,023 $ 1,368
Interest expense, net.. 1,123 339
---------- ---------
Income before income
taxes................. 5,900 1,029
Income tax provision... 2,412 422
---------- ---------
Net income............. $ 3,488 $ 607
========== =========
Net income per share--
basic................. $ 0.71 $ 0.12
Net income per share--
diluted............... $ 0.71 $ 0.12
Weighted average number
of common shares
outstanding--basic.... 4,913,547 4,913,547
Weighted average number
of common shares
oustanding--diluted... 4,913,547 4,913,547
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1998
------------------------------------- -------------------------------------
1993 1994 1995 1996 1997 ACTUAL PRO FORMA (3) AS ADJUSTED (4)
------- ------ ------ ------- ------- ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $10,198 $9,166 $9,839 $10,804 $11,266 $10,471 $ (19) $14,735
Total assets........... 28,480 31,814 36,026 38,935 47,651 53,743 53,743 53,743
Total long-term debt
(2)................... 19,055 20,819 22,996 22,370 26,493 27,792 27,792 18,722
Shareholder's equity... 3,279 3,655 4,200 6,421 9,180 9,587 (903) 18,657
</TABLE>
- --------
(1) Adjusted to reflect the reduction in interest expense and the
corresponding income tax related to the reduction in long-term debt and
payable to affiliates from the estimated net proceeds of the Offering as
if it had occurred on January 1, 1997.
(2) Total long-term debt is composed of:
(a) Long-term debt with an affiliate ($8,550 from 1993 through 1995, $7,364
in 1996, $6,178 in 1997 and $6,178 in 1998) and other long-term debt
($94 in 1997 and $78 in 1998).
(b) Payable to affiliates. This balance was $10,505 in 1993, $12,269 in
1994, $14,446 in 1995, $15,006 in 1996, $20,221 in 1997 and $21,536 in
1998.
(3) Represents actual data as of March 31, 1998 as adjusted to give effect to
the planned $10.5 million dividend to Irex.
(4) Adjusted to reflect (i) the Separation, (ii) the sale of 2,000,000 shares
of Common Stock by the Company at an assumed initial public offering price
of $11.00 per share and (iii) the application of approximately
$19.6 million of the net proceeds to the repayment of indebtedness (both
long-term and payable to affiliates) as well as the repayment of
indebtedness incurred in connection with the declaration of a $10.5
million dividend to Irex immediately prior to the Separation.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements appearing elsewhere in this Prospectus.
The Company is a leading distributor and fabricator of mechanical
insulation, architectural/acoustical products and specialty products and
services for the commercial and industrial markets. The Company has developed
a national network of 52 distribution centers, including seven fabrication
facilities, at strategically chosen locations in 21 states. Through this
network, the Company distributes a variety of mechanical insulation,
architectural/acoustical products and numerous specialty products to customers
for use in the new construction, renovation and maintenance sectors of
industrial and commercial markets. The markets in which the Company competes
have generally exhibited steady and relatively non-cyclical growth due to the
Company's geographic diversity and broad customer base. The Company provides
products and services to customers in a range of industries, including the
general commercial construction, utilities, petro-chemical, pulp and paper,
cold storage, chemical, marine and original equipment manufacturing
industries, among others.
Historically, the supply markets in which the Company operates have been
highly fragmented and populated by many smaller local and regional
distributors. The industry has begun a trend toward consolidation due
principally to the economies of scale realized by large distributors, the
increasing demand by customers for fewer sources of supply, the benefits of
volume purchasing by larger vendors and demands by customers for additional
value-added services which require substantial investments in technology,
human resources and infrastructure. The Company believes that those
distributors which develop the capabilities and strengths to take advantage of
these trends will be well-positioned to gain market share.
In order to capitalize on its core competencies and take advantage of market
opportunities, the Company has adopted a growth strategy which focuses
primarily on acquiring and opening new distribution centers. The Company
initially adopted a growth strategy to strengthen its presence in regional
markets and has recently begun to implement its strategy on a national scale.
For the three-year period ended December 31, 1997, the Company acquired seven
distribution operations and opened six new distribution centers. Through
targeted acquisitions and distribution center openings, the Company is able to
expand its geographic presence into new markets, meet supplier initiatives and
customer service requirements, pursue strategic opportunities, broaden its
product and service capabilities and take advantage of current industry
dynamics. Distribution centers opened through start-ups or acquisitions during
the three-year period ended December 31, 1997 accounted for approximately
37.2% of the $40.1 million increase in the Company's net sales during that
period. The Company believes that future results of operations will depend in
large part on the Company's ability to continue to make acquisitions on
attractive terms and open new distribution centers in strategic locations, and
then to successfully integrate and manage these new facilities.
Newly opened distribution centers typically generate an operating loss
during the first one to two years of operations. A greater number of
distribution center openings by the Company in the two-year period ended
December 31, 1997 resulted in a higher percentage of facility and personnel
expenses in 1997 as compared to 1996. However, as the Company generates
incremental volume through acquired or newly opened distribution centers, the
Company believes it will realize improvement in its operating margins by
carrying its fixed costs over a larger revenue base.
On January 19, 1998, Irex announced the Separation. The transaction will
provide the Company with increased flexibility to fund and execute its growth
strategy of internal expansion and acquisitions. The Company's participation
in a consolidating industry, where customers and suppliers desire
relationships with fewer distributors that can provide a range of value-added
products and services, affords additional growth opportunities. The spin off
will create a management team and capital structure devoted solely to
capitalizing on these opportunities. The Company has entered into an agreement
with Irex which provides, among other things,
18
<PAGE>
for Irex to continue to provide information services to the Company for a
three-year period following the Separation. See "Separation from Irex."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of income expressed as a percentage
of net sales:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------- ------------
1995 1996 1997 1997 1998
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 78.1% 78.1% 78.4% 78.7% 78.1%
------- ------- ------- ----- -----
Gross profit...................... 21.9% 21.9% 21.6% 21.3% 21.9%
Selling, general and
administrative expenses.......... 18.4% 17.4% 17.2% 18.2% 18.7%
------- ------- ------- ----- -----
Operating income.................. 3.5% 4.5% 4.4% 3.1% 3.2%
Interest expense, net............. 1.6% 1.3% 1.2% 1.2% 1.2%
------- ------- ------- ----- -----
Income before income taxes........ 1.9% 3.2% 3.2% 1.9% 2.0%
Income tax provision.............. 0.8% 1.3% 1.3% 0.8% 0.8%
------- ------- ------- ----- -----
Net income........................ 1.1% 1.9% 1.9% 1.1% 1.2%
======= ======= ======= ===== =====
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Net Sales. The Company's net sales increased $6.4 million, or 17.6%, to
$42.7 million in the three months ended March 31, 1998 from $36.3 million in
the three months ended March 31, 1997. Of this increase, approximately $4.6
million, or 71.9%, resulted from the opening of five new distribution centers
and three acquisitions in 1997 and 1998. The remaining $1.8 million, or 28.1%,
is accounted for through volume growth in existing operations.
Gross Profit. Gross profit increased $1.6 million, or 21.2%, to $9.4 million
in the three months ended March 31, 1998 from $7.7 million in the three months
ended March 31, 1997. As a percentage of net sales, gross profit also
increased to 21.9% from 21.3% over the same period. This increase was
primarily the result of two recent acquisitions in the relatively higher
margin fabrication and industrial mechanical markets. Sales of products
shipped directly from manufacturers, which generate lower margins, decreased
by $2.0 million in the period.
Selling, General and Administrative Expenses ("SG&A"). SG&A increased 21.3%
to $8.0 million in the three months ended March 31, 1998 from $6.6 million in
the three months ended March 31, 1997. As a percentage of net sales, SG&A
increased to 18.7% from 18.2% over the same period. The higher level of SG&A
is a result of a greater number of acquisitions and new distribution center
openings since December 31, 1996. New distribution centers typically require
expenditures in advance of full revenue generation.
It is the Company's practice to determine the need for specific reserves
based on a review by management of accounts exceeding certain parameters based
on the aging and amount of the receivable balances. Through this review,
management determines the reserve need based on factors including the overall
customer's business viability, payment history, the Company's prior
relationship with the customer and the amount of the Company's legal
protection. The general reserve is determined through the application of a
factor to the overall accounts receivable balance as well as an estimate by
management based on the overall condition of the accounts receivable balance.
This estimate is based on factors such as the overall aging of the receivable
balances, historical experience and current conditions.
19
<PAGE>
In the first quarter of 1997, the condition of the receivable balance
remained fairly constant with that as of December 31, 1996. In the first
quarter of 1998, management's review of specific accounts resulted in an
increase in the specific reserve based on activity within these accounts since
December 31, 1997. As a result, the provision for bad debts increased by
$75,000 for the three months ended March 31, 1998.
Interest Expense. Interest expense was $0.5 million in the three months
ended March 31, 1998 as compared to $0.4 million in the three months ended
March 31, 1997. The long-term notes payable to affiliate accounted for $0.2
million of interest expense in both years. The remainder of $0.3 million in
1998 and $0.2 million in 1997 represented the Irex interest charge allocated
to the Company based on the monthly balance in the payable to affiliates
account. The recent acquisitions and increased levels of inventory and
accounts receivable were funded through short-term borrowings with Irex.
Income Tax Provision. The effective tax rate was 41.0% in the three months
ended March 31, 1998 and 40.8% in the three months ended March 31, 1997. The
Company's tax return is included in the consolidated income tax return of
Irex. However, the Company's income tax provision in 1998 and 1997 is based on
the amount which would have resulted had the Company filed a separate tax
return.
Acquisitions. During the first quarter of 1998, the Company purchased
certain assets of Extol of Texas, Inc. ("Extol") in Houston and Corpus
Christi, Texas. The transaction closed on March 1, 1998 and accounted for
sales of $1.2 million in the quarter ended March 31, 1998. In fiscal year
1997, Extol had net sales of approximately $13.2 million. The quarter ended
March 31, 1998 also included the results of operations of Constructions
Systems, Inc. from which the Company purchased certain assets on December 8,
1997. Net sales for the first quarter 1998 aggregated $2.4 million.
SUBSEQUENT EVENTS
On May 13, 1998, the Company executed a letter of intent to purchase certain
assets of a mechanical insulation fabricator with fiscal year 1997 sales of
approximately $4.0 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. The Company's net sales increased $16.7 million, or 11.8%, to
$158.5 million in 1997 from $141.8 million in 1996. Of this increase,
approximately 34.4% was attributable to sales volume from six distribution
centers opened in 1996 and 1997. Growth from existing operations accounted for
approximately 39.0% of the increase in net sales as volume remained strong
across each of the Company's primary lines of business. Export sales, which
primarily consist of sales to domestic exporters and are included in the
growth from existing operations, comprised 10.0% of the Company's net sales
and contributed $5.0 million of this increase. The remaining increase in net
sales, representing $4.4 million, resulted from six acquisitions completed
during the two-year period ended December 31, 1997.
Gross Profit. Gross profit increased 10.1% to $34.3 million in 1997 from
$31.1 million in 1996. As a percentage of net sales, the gross profit
decreased slightly to 21.6% from 21.9% in 1996. The slight decrease was
primarily the result of greater sales of products shipped directly from
manufacturers to the customers ("direct-ship business"), which generate lower
margins for the Company. Management does not expect direct-ship business to
increase as a percentage of total sales.
Selling, General and Administrative Expenses. SG&A primarily consist of
personnel-related expenses and facility lease and operating expenses. SG&A
increased 10.0%, to $27.2 million in 1997 from $24.8 million in 1996. As a
percentage of net sales, SG&A decreased to 17.2% in 1997 from 17.4% in 1996.
The improvement was generally the result of a decrease in the provision for
losses on accounts receivable as the Company has made significant efforts
toward improving the quality of its credit portfolio. This decrease in the
loss provision was partially offset by increases in personnel and facility
lease expenses due to newly opened distribution centers.
20
<PAGE>
The allowance for doubtful accounts at December 31, 1997 reflects the
improved condition of the receivable balances through a concentrated effort by
management to improve the credit quality and collection process. The success
of this overall effort is evidenced by the reduction in the days sales
outstanding from 64.9 days at December 31, 1996 to 63.5 days at December 31,
1997. As a result of this improvement, the allowance balance was reduced,
favorably impacting the total provision for 1997.
The method used to establish the non-specific reserve during this same
period remained unchanged.
Interest Expense, Net. Interest expense was $1.9 million in both 1997 and
1996. A portion of the interest expense was attributable to the long-term
notes payable to affiliate, which accounted for $0.7 million of interest
expense in both 1997 and 1996. The remaining interest expense was primarily
associated with the payable to affiliates account. Based upon the activity in
this account, Irex charged the Company interest of $1.2 million in 1997 and
$1.1 million in 1996.
Income Tax Provision. The effective tax rate was 40.9% in 1997 and 40.3% in
1996. The Company's tax return is included in the consolidated income tax
return filed by Irex. However, the Company's income tax provision is based on
the amount which would have resulted had the Company filed a separate tax
return.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. The Company's net sales increased $23.4 million, or 19.8%, to
$141.8 million in 1996 from $118.4 million in 1995. Higher sales volume at
existing centers accounted for approximately 80.9% of the increase. Export
sales, included in the growth from existing centers, increased to $11.0
million in 1996 from $2.0 million in 1995. The increase in export sales was
primarily the result of sales made to two domestic exporters of products
destined for Russia. Three distribution centers opened in 1996 contributed
approximately 7.5% of the increase. The remaining increase in net sales,
representing $2.7 million, resulted from four acquisitions completed during
the two-year period ended December 31, 1996.
Gross Profit. Gross profit increased 20.2% to $31.1 million in 1996 from
$25.9 million in 1995. As a percentage of net sales, the gross profit remained
stable at 21.9% in both 1996 and 1995. An increase in direct-ship business,
which carries lower gross margins, was offset by higher gross margins on the
sales of fabricated products.
Selling, General and Administrative Expenses. SG&A increased 13.4% to $24.8
million in 1996 from $21.8 million in 1995. The increase was primarily
attributable to higher personnel expenses from the opening of new distribution
centers, the pursuit of new industrial customers in the Southwest and the
securing of a new national account as reflected in the increase in sales
volume. However, as a percentage of net sales, SG&A decreased to 17.4% in 1996
from 18.4% in 1995. This decrease was primarily due to the ability of the
Company to increase sales without a corresponding increase in its overhead
structure.
Interest Expense, Net. Interest expense remained relatively unchanged in
1995 and 1996 at $1.9 million. A portion of the interest expense was
attributable to the long-term notes payable to affiliate, which accounted for
interest expense of $0.7 million in 1996 and $0.8 million in 1995. The
remaining interest expense was primarily associated with the payable to
affiliates account. Based upon the activity in this account, Irex charged the
Company interest of $1.1 million in 1996 and $1.0 million in 1995.
Income Tax Provision. The effective tax rate was 40.3% in 1996 and 41.5% in
1995. The Company's tax return is included in the consolidated income tax
return filed by Irex. However, the Company's income tax provision is based on
the amount which would have resulted had the Company filed a separate tax
return.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents certain unaudited quarterly data from the
Company's consolidated statements of income for each of the last nine fiscal
quarters. In the opinion of the Company's management, this quarterly
21
<PAGE>
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Prospectus and includes all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the unaudited quarterly results set forth herein. The Company's
quarterly results may be subject to fluctuation; thus, the operating results
for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $32,553 $35,187 $37,689 $36,371 $36,280 $37,553 $41,548 $43,129 $42,669
Cost of net sales....... 25,494 27,570 29,659 27,967 28,555 29,376 32,450 33,877 33,309
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 7,059 7,617 8,030 8,404 7,725 8,177 9,098 9,252 9,360
Selling, general and
administrative
expenses............... 5,825 6,087 6,067 6,783 6,588 6,585 6,822 7,234 7,992
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income........ $ 1,234 $ 1,530 $ 1,963 $ 1,621 $ 1,137 $ 1,592 $ 2,276 $ 2,018 1,368
======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
(AS A PERCENTAGE OF NET SALES)
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net sales....... 78.3 78.4 78.7 76.9 78.7 78.2 78.1 78.5 78.1
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 21.7 21.6 21.3 23.1 21.3 21.8 21.9 21.5 21.9
Selling, general and
administrative
expenses............... 17.9 17.3 16.1 18.6 18.2 17.5 16.4 16.8 18.7
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 3.8% 4.3% 5.2% 4.5% 3.1% 4.3% 5.5% 4.7% 3.2%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. The primary factor that may affect the
Company's quarterly operating results is lower sales volumes in the first
quarter due to winter weather conditions in certain regions of the country,
which reduces the number of new construction, renovation and maintenance
projects and consequently decreases demand for the Company's products and
services.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily relied on cash flow from operations and borrowings
from the Company's affiliates prior to the Separation to finance its
operations. During the quarter ended March 31, 1998, net cash provided by
operating activities totalled $4.4 million as compared to $0.9 million in the
first quarter of 1997. The increase was primarily a result of an increase in
accounts payable and the increase in accounts receivable as a result of sales.
Net cash used for investing activities totalled $5.7 million in the first
quarter of 1998 as compared to $0.1 million in the comparable period in 1997.
The 1998 period reflects the acquisition which resulted in goodwill of
approximately $0.7 million which will be amortized over 15 years. The net cash
provided from financing activities in the first quarter of 1998 was a result
of borrowings from affiliates.
Net cash provided by operating activities totaled $1.2 million during 1997
compared to $1.9 million during 1996. The decrease was primarily attributable
to an increase in accounts receivable, partially offset by an increase in
accounts payable, each of which resulted from the Company's higher sales
volume. While the balance for receivables and inventories has increased as a
result of the growth in sales and the number of distribution centers, the
Company's focus on effective asset management has led to an improvement in
both accounts receivable turnover and inventory turnover. Receivables
turnover, calculated using 12-month average balance for accounts receivable,
improved to 5.7x in 1997 from 5.2x in 1995. Inventory turnover, exclusive of
sales shipped directly from manufacturers to customers, increased to 7.2x in
1997 from 6.7x in 1995.
22
<PAGE>
Net cash used for investing activities totaled $4.0 million in 1997 and $0.8
million in 1996. The Company completed three acquisitions in the fourth
quarter of 1997 for aggregate cash consideration of $3.5 million, which
collectively resulted in goodwill of approximately $0.9 million that is being
amortized principally on a straight-line basis over 15 years. Capital
expenditures totaled $0.6 million in each of 1997 and 1996.
Net cash provided by financing activities totaled $3.2 million in 1997
compared to net cash used of $1.1 million in 1996. The $4.2 million change was
attributable to an increase in the Company's payable to affiliates account.
During 1997 and 1996, the Company made debt repayments of $1.2 million to an
affiliate of the Company.
As of March 31, 1998 the Company had, and as of the date of this Prospectus
the Company has, no material commitments for capital expenditures.
The Company expects to enter into a four-year committed revolving credit
facility agreement in connection with and prior to consummation of the
Offering. The credit facility is expected to provide an aggregate of $30
million in senior unsecured debt at an interest rate subject to quarterly
adjustment to reflect the Company's debt level as a function of its operating
results. The Company expects that funds from operations and availability under
the credit facility will be sufficient to meet its working capital and growth
strategy requirements for the foreseeable future. The remaining net proceeds
of the Offering after payment of the debt incurred to pay the dividend to Irex
will be utilized to repay long-term and a portion of the short-term borrowings
from Irex. Long-term borrowings from Irex currently are approximately $6.2
million. The Company plans to utilize funding from the credit facility to
repay the short-term borrowings from affiliates and for general working
capital. The credit facility will also be utilized to finance acquisitions
including related working capital requirements. The Company is currently
evaluating the utilization of an interest rate swap to effectively convert a
portion of the funding to a fixed rate.
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations in recent years. There can be no assurance, however,
that the Company's business will not be affected by inflation in the future.
YEAR 2000 ISSUE
The Company utilizes information systems owned and maintained by Irex. The
Company's ability to conduct its day-to-day operations is dependent in part on
an integrated software program and data-based system, which serves as a
critical tool in carrying out functions in several key areas of the business,
including inventory management, pricing, sales, financial reporting and
personnel administration.
The Company has entered into an agreement with Irex pursuant to which Irex
will continue to provide information services to the Company on a fee for
services basis for a three-year period subsequent to the Separation. See
"Separation from Irex--Agreements with Irex."
The Company has reviewed all of its current computer applications with
respect to the Year 2000 issue. The Company believes all of its relevant
applications will be Year 2000 compliant following the installation of an
upgrade to the system software scheduled for October 1998. The Company
believes that any additional costs with respect to Year 2000 compliance will
not be material to the Company. The Company is unable to determine the effects
of Year 2000 compliance by its suppliers and customers.
23
<PAGE>
ACQUISITION AND EXPANSION BACKGROUND
Two key components of the Company's growth strategy have been acquisitions
and the opening of distribution centers. Historically, the Company grew as it
solidified its presence in regional markets by opening new distribution
centers or acquiring business operations with well-developed market positions.
More recently, the Company has begun to implement a growth strategy executed
on a national scale. Through targeted acquisitions and distribution center
openings, the Company pursues opportunities to expand its presence in new
geographic areas with strong growth characteristics. The Company believes that
being a broadly based national distributor provides it with a competitive
advantage over regional and local competitors, especially in servicing
customers with multiple locations that desire a single-supplier relationship.
This strategy has enabled the Company to further penetrate existing markets,
broaden its product and service capabilities and take advantage of current
industry dynamics. The Company believes that these components of its growth
strategy have been significant factors in producing compound annual growth
rates in net sales and operating income of 14.6% and 57.7%, respectively, for
the five-year period ended December 31, 1997.
For the five-year period ended December 31, 1997, the Company acquired 11
distribution operations (including three from affiliates), which together
contributed approximately $13.2 million, or 8.3%, to the Company's 1997 net
sales. During the same period, the Company opened 10 distribution centers,
which together contributed approximately $12.3 million, or 7.8%, to the
Company's 1997 net sales. Since January 1, 1998, the Company has completed one
acquisition and opened three distribution centers. The Company has entered
into a letter of intent to purchase certain assets of a mechanical insulation
fabricator with fiscal year 1997 net sales of approximately $4.0 million.
The Company pursues acquisitions and opens distribution centers as the
result of strategic opportunities. In addition, the Company's approach to
acquisitions and distribution center openings is influenced by the following
factors:
Expand Product Lines and Broaden Technical Expertise. The Company is able
to expand its product lines and broaden its technical expertise through
acquisitions. The Company believes that its national infrastructure allows
it to add new product lines and capabilities for existing customers without
incurring significant additional cost.
Service Customer Requirements. The Company opens distribution centers and
pursues acquisitions in regions where it can better serve its existing
customers' product requirements. Once operational, the Company seeks to
drive incremental volume through these locations.
Pursue Market Opportunities. The Company opens distribution centers in
locations where it believes volume levels can support stand-alone
operations. Such opportunities may result from general economic growth in
particular regions or product lines, inadequate servicing of markets by
competitors and other factors identified in the Company's experience.
Respond to Supplier Initiatives. Acquisitions and distribution center
openings also result from the Company's strong relationships with its
suppliers. Through these relationships the Company becomes an integral part
of suppliers' expansion strategies. The Company works together with its
suppliers to serve their common growth strategies and increase its market
share.
The Company's management has significant experience integrating acquired and
newly opened operations into its nationwide business. Following acquisitions,
the Company attempts to eliminate redundancies, conform inventory and
administrative practices, streamline administrative functions and systems,
leverage purchasing power and improve asset management. Similarly, new
distribution centers are opened with the goal of increasing operating
efficiencies. Once a site and operating management have been identified for a
new location, the Company expects new distribution centers can be operational
within 30 days after investments of approximately $25,000 in start-up costs
and approximately $50,000 in initial inventory. Historically, the Company has
found
24
<PAGE>
that successful new distribution center operations, on average, break even
during the second year and become profitable during the third year after start-
up.
The following table sets forth the number of distribution centers opened and
the number of acquisitions completed, as well as associated net sales for the
five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR OF OPERATION
-------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New centers opened................. 4 0 0 3 3
Cumulative total since January 1,
1993............................. 4 4 4 7 10
Acquisitions completed (1)......... 1 3 1 3 3
Cumulative total since January 1,
1993............................. 1 4 5 8 11
REVENUE SOURCES:
New centers opened since 1993..... $ 2,475 $ 4,775 $ 4,399 $ 7,074 $ 12,346
Acquisitions completed since
1993............................. 508 1,300 5,125 7,802 13,173
Operations existing prior to
1993............................. 86,413 95,820 108,871 126,924 132,991
------- -------- -------- -------- --------
TOTAL REVENUE.................... $89,396 $101,895 $118,395 $141,800 $158,510
======= ======== ======== ======== ========
</TABLE>
- --------
(1) Includes two acquisitions in 1996 and one acquisition in 1993 from
affiliates.
The following table sets forth brief summaries of acquisitions completed by
the Company since January 1, 1997:
<TABLE>
<CAPTION>
NET SALES IN LAST
FULL FISCAL YEAR
PRIOR TO
DATE ACQUISITION ACQUISITION PRINCIPAL BUSINESSES
- ------------- ------------------------------ ----------------- --------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
October 1997 Common Stock of Richlar $ 2,602 Precision die cutting,
Industries, Inc., lamination and specialty
East Syracuse, New York fabrication
December 1997 Certain Assets of Construction $ 9,305 Distribution of architectural/
Systems, Inc., Houston, Texas acoustical (including specialty
drywall and metal studs) and
specialty products from two
strategic service centers
December 1997 Certain Assets of R.E. Kramig, $ 500 (1) Distribution of mechanical
Louisville, Kentucky insulation products primarily to
the industrial market
March 1998 Certain Assets of $ 13,196 Mechanical insulation
Extol of Texas, Inc., Houston fabrication and distribution to
and Corpus Christi, Texas the industrial market
</TABLE>
- --------
(1) Estimated by management of the Company.
25
<PAGE>
The following table sets forth the distribution centers that have been
opened since 1993 as well as 1997 net sales of each.
<TABLE>
<CAPTION>
YEAR OPENED DISTRIBUTION CENTER 1997 NET SALES (1)
----------- -------------------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
1993 Ft. Worth, Texas $1,624
Ft. Myers, Florida (2) 266
Ft. Lauderdale, Florida 2,178
1996 Oklahoma City, Oklahoma 947
Austin, Texas 2,159
Charleston, West Virginia 2,529
1997 Bridgeport, Connecticut 362
Newark, Delaware (2) 135
Charleston, South Carolina 1,321
1998 Augusta, Georgia Not applicable
Pittsburgh, Pennsylvania Not applicable
Nashville, Tennessee Not applicable
</TABLE>
- --------
(1) Figures reflect sales for all operations, including operations added as a
result of expansion since the opening date.
(2) Satellite operation of nearby primary facility.
26
<PAGE>
BUSINESS
INTRODUCTION
Specialty Products & Insulation Co. is a leading national distributor and
fabricator of mechanical insulation, architectural/acoustical products and
specialty products to commercial and industrial markets. The Company also
offers customized fabrication, export and other value-added services related
to its core product lines. The Company operates through a national network of
52 distribution centers, including seven fabrication facilities, at
strategically chosen locations in 21 states. Through this network, the Company
offers approximately 25,000 stock keeping units to more than 9,000 customers,
including specialty contractors, facility owners, general contractors,
original equipment manufacturers ("OEMs"), exporters and supply houses. The
Company's principal product categories include piping and equipment insulation
as well as acoustical ceilings and specialty wall panels, and include the
products of more than 150 manufacturers including Armstrong World Industries,
Owens Corning, Johns Manville, Dow Chemical and Pittsburgh Corning. Since
commencing operations in the early 1980s, the Company has experienced
significant growth as a result of its ability to capitalize on industry
changes including, principally, the increased reliance on distributors by
manufacturers and customers. Net sales of the Company increased from $118.4
million in 1995 to $158.5 million in 1997, and operating income grew from $4.1
million in 1995 to $7.0 million in 1997. In the first three months of 1998,
net sales and operating income totalled $42.7 million and $1.4 million,
respectively, as compared to $36.3 million and $1.1 million respectively, in
the first three months of 1997.
INDUSTRY OVERVIEW
The Company competes in the highly fragmented and consolidating commercial
and industrial segment of the building products industry. The Company broadly
defines its two core markets as mechanical insulation, consisting primarily of
pipe, duct and equipment insulation and architectural/acoustical products,
consisting primarily of acoustical ceiling systems, fiberglass-reinforced
panels and other wall and ceiling products. The Company participates in the
commercial and industrial markets by supplying products for use in (i) new
construction, (ii) renovation of existing facilities, (iii) ongoing
maintenance and (iv) OEM applications.
The channels of supply in the Company's markets have experienced significant
change. In the early 1980s, product sales in the Company's markets were
characterized by direct sales from manufacturers to contractors who in turn
sold the products to other contractors and end-users. An expanding and
increasingly diverse customer base made it difficult for the typical
manufacturer to directly serve its entire potential customer universe. Also,
as manufacturers realized opportunities to enhance profitability and improve
returns on capital, the need for independent distributors evolved. Through
this evolution, independent distributors have enabled manufacturers to reduce
logistical expenses, lower marketing expenses and better manage inventories.
In addition, customers began to utilize independent distribution sources in
order to lower costs, reduce supply sources and gain high-quality, value-added
services. Customers are increasingly outsourcing non-core business functions
to distributors able to provide value-added services such as procurement,
delivery and inventory management. The emergence of the distribution channel
has reduced duplicate functions performed by both manufacturers and customers,
thereby affording them more resources for their core competencies.
The evolution toward independent distribution has produced an industry
populated by many smaller local and regional distributors. The Company
believes the industry is now starting to undergo a significant trend toward
consolidation of these smaller distributors as both suppliers and customers
seek to enhance efficiencies, focus on their core competencies and reduce
costs while maintaining high levels of product and service quality. The
Company believes that those distributors that develop the capabilities and
strengths to satisfy these demands will be well positioned to exceed market
growth rates in this industry. Specifically, the Company believes that large,
national distributors with significant volumes, sophisticated information
systems and relatively low infrastructure costs can offer more value to
customers and therefore gain higher market share.
27
<PAGE>
Key customer categories in the markets served by the Company include the
following:
Specialty Contractors, such as insulation and acoustical contractors,
constitute the primary customer segment for the installation and
maintenance of mechanical insulation and architectural/acoustical systems.
The Company believes specialty contractors are increasingly developing
long-term relationships with distributors in order to improve labor
productivity, eliminate inventories and reduce material handling costs.
Facility Owners, such as manufacturing and process plants, large
retailers, universities and other institutions, represent a growing source
of business for distributors as these customers increasingly separate
material and labor purchases and perform their own maintenance and new
construction. The Company believes that facility owners with locations
nationwide value distributors that can provide products and services to
multiple locations.
General Contractors, such as mechanical contractors and engineering
firms, are increasingly purchasing materials for their projects and
performing their own insulation work. The Company believes these customers
seek distributors with strong sourcing capabilities, processes and
information systems.
Original Equipment Manufacturers, such as manufacturers of appliances,
modular office equipment and air conditioning systems, benefit from the
purchasing, fabrication, material handling, inventory management,
procurement and delivery capabilities of larger distributors.
Exporters, representing purchasers of materials required for projects
overseas, benefit from the product knowledge, purchasing power,
consolidation capabilities and delivery flexibility of large distributors.
Supply Houses, such as plumbing wholesalers, are generally distributors
in specialized fields that re-sell products to other customer groups. These
customers include specialty and integrated suppliers that may benefit from
the purchasing, warehousing and service capabilities of larger, more
sophisticated distributors.
Mechanical Insulation Products. The mechanical insulation product market
includes thermal insulation materials and systems for use in the commercial
and industrial sectors of the construction industry as well as OEM
applications. Mechanical insulation is used in new construction, maintenance,
renovation and upgrades of manufacturing facilities, process plants,
commercial buildings and mechanical equipment. These products enable customers
to improve the performance of their mechanical systems and products, reduce
energy costs, decrease emissions, such as carbon dioxide and sulfur dioxide,
and improve the comfort and safety of the work environment. According to the
American Society of Heating, Refrigerating and Air Conditioning Engineers
("ASHRAE"), current insulation practices in the United States often result in
the under-insulation of equipment, commercial buildings and industrial
facilities. If such equipment, buildings and facilities were insulated at the
ASHRAE standard, the Company believes that significant reductions in energy
consumption, utility costs and carbon dioxide emissions could be achieved.
Architectural/Acoustical Products. The architectural/acoustical product
market includes ceiling panels and grid systems and specialty wall panels for
the new construction, renovation and retail market segments. These products
are used in commercial office buildings, education facilities, health care
institutions, entertainment complexes and correctional facilities. Independent
estimates forecast that the strongest areas of future growth in the
nonresidential construction market include hotels, educational and public
administration facilities. The ceiling systems segment includes acoustical and
decorative ceilings and suspension systems. Ceiling systems provide an array
of design option benefits to the customer such as acoustic performance, fire
resistance, humidity resistance, light reflectance and durability or ease of
maintenance. The specialty wall segment includes decorative, acoustical and
specialized panels designed for specific uses such as trade show dividers,
modular office systems and kitchen, bath and clean room environments. Many
specialty products are included within this market, the largest component
being passive firestop and fire protection products which are used in new
construction and renovation projects for occupancy safety and property
protection.
OPERATING STRATEGY
The Company is focused on its traditional strengths as a broadly based
national distributor and fabricator of mechanical insulation,
architectural/acoustical products, specialty products and value-added
services. The
28
<PAGE>
Company is committed to capitalizing on the expertise, knowledge and
experience its has developed in these core markets to increase market share
and profitability. In addition, the Company's operating strategy includes the
following key elements:
Superior Customer Service. Customers choose suppliers based, in significant
part, on the quality of the service provided. With distribution and sales
forces in each area that it serves, the Company provides its customers with
rapid delivery and localized service. The Company believes its well-trained,
technically competent workforce provides a level of customer service that
leads to long-term relationships with its customers. The Company also believes
that the ongoing assessment of customer satisfaction is critical in the
distribution industry. The Company has implemented a customer satisfaction
survey program and is committed to the ongoing measurement of customer
satisfaction.
National Network of Distribution Centers. Management believes the Company's
national distribution network provides a platform for growth and
profitability. The Company's 51 distribution centers combine warehouse and
office facilities at strategically chosen locations in 21 states. This
national network enables the Company to (i) attract customers that have
multiple locations and provide them with services from multiple distribution
centers within a single service agreement; (ii) participate with key vendors
in the development of national marketing and sales strategies; (iii) achieve
geographic diversification to lessen the impact of reduced demand in any given
region; and (iv) facilitate best-practice benchmarking as well as innovation
and knowledge-sharing within the Company. Management believes the Company's
national network provides it with a unique competitive advantage.
Strong Supplier Relationships. The Company believes that it has excellent
and long-term relationships with its major suppliers. The Company believes its
national presence, financial strength and partnering philosophy have enabled
the Company to become the preferred distributor for many of its suppliers. The
Company works with its suppliers to develop common expansion programs as well
as customer-oriented product solutions.
Low Cost of Operations. The Company believes that its volume of purchases
and desirability as a vendor enable it to obtain purchase terms that are as
favorable as those available to other large competitors. The Company is also
able to realize advantages from the economies of large-scale operation in the
areas of administrative processing, information systems, financing terms,
technical expertise, inventory and working capital management.
Innovative and Committed Employees. Management believes the Company's
corporate culture and values provide it with a competitive advantage. The
Company is focused on recruiting, developing and retaining highly innovative
and committed employees. The Company's senior management has an average of
approximately 10 years' experience with the Company, and many of its sales and
service staff have been working in the same markets for 10 years or more.
GROWTH STRATEGY
The Company believes that its operating strategy provides a foundation for
growth in each of the markets in which it participates. The Company's growth
strategy includes the following key elements:
Increase Sales of Existing and Accessory Products. Management believes the
Company's strengths and operating strategies will lead to increased sales of
existing products to its existing customer base. In addition, the Company
believes that expansion through acquisitions, new distribution center openings
and other strategic initiatives will generate additional sales of existing
products to new customers. Through improved sales efforts, the Company is also
focused on increasing sales of accessory products, such as adhesives and
tools, which are related to its core product lines and customer requirements.
Open New Distribution Centers. The Company expects to continue to open new
distribution centers as a result of new market opportunities, customer service
requirements, supplier initiatives and strategic opportunities.
29
<PAGE>
As the Company continues to broaden its national distribution network through
additional openings, the Company believes it will be able to capitalize on
operating efficiencies and the benefits of a large-scale operation.
Continue Acquisitions. The Company is committed to continuing its
acquisition program to acquire distribution businesses with strong market
positions, supplier support or attractive customer bases. Acquisitions allow
the Company to accelerate revenue growth, expand its geographical presence and
add product lines and technical expertise. The distribution industry continues
to consolidate, and management believes the Company will be able to capitalize
on significant growth opportunities through acquisitions of smaller regional
and local distribution operations.
Emphasize National Accounts. The Company has implemented a national accounts
marketing program directed at facility owners and general contractors.
Management believes that the Company's national distribution network gives the
Company a competitive advantage in securing national and multi-regional
customers seeking to reduce vendors, outsource non-core operations, integrate
supply and gain value-added services such as procurement and material
management.
Add Product Lines. The Company intends to leverage its core product and
technical expertise to add product lines which are complementary to those
currently offered. The Company believes that its existing national
distribution infrastructure enables it to add new product lines without
incurring significant additional cost. For example, the Company utilized its
expertise in both of its core product lines to enter the passive fire
protection market.
PRODUCTS AND SERVICES
The Company offers complete lines of mechanical insulation,
architectural/acoustical products and specialty products as well as customized
fabrication solutions and other value-added services, enabling it to satisfy a
broad range of customer requirements. In all, the Company offers approximately
25,000 stock keeping units from more than 70 product lines, including those of
the leading manufacturers in the industries it serves. The Company believes it
offers significant depth and breadth in its core product lines throughout its
nationwide operations, enabling customers to satisfy most, if not all, of
their product needs through a single source.
In addition, as the distribution industry continues to evolve and
consolidate, customers are increasingly relying on the Company to perform
various value-added services in connection with product distribution. The
Company's fabrication business represents its most significant value-added
service to customers. Its fabrication capabilities extend across all major
product lines and include custom-fitted pipe covering, decorative wall panels
and precision die-cutting. The Company also offers a range of other value-
added services, including energy audits, technical advice, materials handling
and electronic order processing.
30
<PAGE>
The following table sets forth representative samples of the products and
services offered by the Company in its four principal product and service
categories as a percentage of the Company's 1997 net sales from each category:
<TABLE>
<CAPTION>
PRODUCT/SERVICE % OF AGGREGATE 1997
CATEGORY REPRESENTATIVE PRODUCTS REPRESENTATIVE SERVICES NET SALES
- ------------------------ ------------------------ ------------------------ -------------------
<S> <C> <C> <C>
Mechanical Insulation Calcium Silicate, Delivery, Electronic 46.7%
Products Cellular Glass, Processing, Energy
Fiberglass, Jacketing, Audits, Fabrication,
Mineral Fiber, Rigid Innovative Supply
Polyurethane Foam, Agreements, Quantity
Polystyrene Rubber Definition, Product
Shipment Consolidation,
Technical Advice
Architectural/Acoustical Acoustical and Delivery, Electronic 38.3%
Products Decorative Ceiling Processing, Fabrication,
Systems, Acoustical and Quantity Definition,
Decorative Wall Panels, Material Management,
Building Insulation, Product Shipment
Drywall, Fiberglass Consolidation, Technical
Reinforced Panels, Advice
Interior Doors, Metal
Studs
Fabrication Services Acoustical Decorative Customized Fabrication 11.0%
and Display Panels, Solutions, Delivery,
Lamination, OEM Electronic Processing,
Products, Insulation Material Management,
Pipe Covering, Equipment Private Label
Segments and Fittings, Fabrication, Product
Pipe and Tank Wrap, Shipment Consolidation
Precision Die Cutting,
Pre-Cut Insulation
Jacketing
Specialty Products Passive Firestop/Fire Delivery, Quantity 4.0%
Proofing Systems, Floor Definition, Electronic
Covering, Exterior Processing, Material
Insulation Finish Management, Product
Systems Training, Product
Shipment Consolidation,
Technical Advice
</TABLE>
CUSTOMERS
The Company currently serves more than 9,000 customers, including specialty
contractors, facility owners, general contractors, OEMs, exporters and supply
houses. The Company's top 10 customers (including two affiliates) in terms of
net sales accounted for approximately 17% of net sales in 1997, and no single
customer accounted for more than 5% of net sales in 1997.
DISTRIBUTION NETWORK
The Company's distribution network is organized into eight regional
territories encompassing 52 distribution centers in 21 states. Regional
managers are members of the Company's senior management team and have
responsibility for overall operations within each region. Each individual
service center has its own customer-focused team that typically consists of a
branch manager, outside and inside sales representatives and customer service
representatives who include distribution center driver teams and support
staff. The Company's branches are organized as autonomous, decentralized units
and are capable of meeting local market needs as well as offering competitive
prices within the Company's overall policies. Each branch handles one or more
of the
31
<PAGE>
Company's product groups and operates as a separate profit center. Branch
managers have the authority and responsibility, within Company guidelines, to
set pricing and tailor the facility's product offering and mix, as well as the
nature of services offered to meet the local market environment. In addition,
each branch manager is responsible for purchasing, maintenance of adequate
inventory levels, cost controls and customer relations. Common accounting,
information systems, insurance, tax and other administrative functions are
provided at the corporate level to eliminate duplicate administrative
expenses.
SALES AND MARKETING
The Company has approximately 88 outside sales representatives, including
branch managers, and 87 inside sales/customer service representatives.
Generally, the inside sales/customer service representatives support the
outside sales representatives and have independent sales responsibility,
including specific customer service and order entry duties. Each outside sales
representative works in an assigned sales territory associated with one of the
Company's 52 distribution facilities and is actively supported by the branch
and regional teams. National accounts are supported by two specialists and the
Company's senior management in conjunction with the total distribution
network. All sales representatives are employees of the Company and are
generally compensated on a salary and incentive-based compensation
arrangement. The incentive portion of the salesperson's compensation is based
on a return-on-assets model and averages above 20% of base compensation.
The Company also markets its products through sales brochures, customer
events, occasional sales promotions, and its Internet web site at
http://www.spi-co.com.
The Company's return and allowance policy generally provides for the return
of standard inventoried products that do not satisfy customer requirements,
provided they are in resalable condition, or products which do not meet
quality standards. Special-order and fabricated products cannot be returned.
The customer is responsible for applicable freight costs and a handling charge
may be levied against the return, depending upon the Company's agreement with
the customer. The Company's suppliers maintain similar policies with the
Company. The Company's experience with returns and allowances has not had a
material effect on the Company's business or financial condition.
SUPPLIERS
The Company has a broad base of approximately 150 suppliers that includes
all major manufacturers in the industries the Company serves. The Company's
leading suppliers of mechanical insulation include Owens-Corning Fiberglas,
Johns Manville, Armstrong World Industries, Dow Chemical, CertainTeed, H.B.
Fuller, Pittsburgh Corning, Thermal Ceramics, Calsilite Group, Childers
Products, RPR Industries and RBX Corporation, among others. The Company's
leading suppliers of architectural/acoustical products include Armstrong World
Industries, STO, National Gypsum, Kemlite, Lasco and Sequentia, among others.
INFORMATION SYSTEMS
The Company utilizes information systems owned and maintained by Irex. The
systems use software that unites the Company's distribution centers and
integrates product tracking, pricing and availability; order processing and
shipping; distribution center operations; purchasing; inventory management;
receivables management; financial reporting; and other financial and
operational functions. A new release of the system software has been fully
tested by other customers of the system vendor and is scheduled to be
installed in 1998 to address Year 2000 compliance issues and provide other
function upgrades. See "Risk Factors--Dependence On Information Systems;
Systems Conversion; Year 2000 Issue."
The Company has entered into an agreement with Irex pursuant to which Irex
will continue to provide information system services to the Company on a fee-
for-services basis for a three-year period following consummation of the
Offering and Separation. During such period the Company intends to evaluate
its existing and future information system requirements and examine its
options for obtaining such services. These options
32
<PAGE>
include, among others, continuing the existing relationship with Irex or
replacing the Company's current systems. See "Separation from Irex--Agreements
with Irex--Corporate Separation Agreement."
COMPETITION
The Company's markets are highly competitive. Historically, the markets in
which the Company participates have been highly fragmented and populated by a
large number of smaller, local and regional distributors operating in single
geographic areas. These smaller, often owner-operated, distributors have
constituted the principal competition to the Company, but other significant
competitors include regional distributors as well as manufacturers selling
directly to end-users. Certain of the Company's competitors sell identical or
equivalent products at competitive prices, and the Company also competes on
the basis of responsiveness to the needs of customers for product quality,
service, product diversity, and availability.
SEASONALITY AND CYCLICALITY
The Company's business is seasonal and in the past has experienced seasonal
fluctuations in sales and operating results from quarter to quarter. Operating
results are weakest in the first calendar quarter because of the effects of
winter weather on commercial and industrial construction and the consequent
reduction in sales of mechanical insulation and architectural/acoustical
products. Fluctuations in the Company's quarterly sales and operating results
could result in significant volatility in, and otherwise adversely affect, the
market price of the Common Stock. See "Management's Discussion of Financial
Condition and Results of Operations--Seasonality and Quarterly Results of
Operations."
Some of the principal markets for the products and services offered by the
Company are subject to cyclical economic fluctuations that generally affect
pricing, availability and demand for mechanical insulation and
architectural/acoustical products. Cyclical fluctuations can also affect
growth rates in the markets served by the Company's customers, the
availability of products from vendors and the availability of suitable
acquisition candidates. As a result, changes in general economic conditions
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Seasonality; Industry and
Economic Cycles."
EMPLOYEES
On May 20, 1998, the Company had 556 employees, including 138 sales
representatives, 245 distribution center, delivery, clerical and support
personnel, 113 fabrication personnel and 60 supervisors and managers,
including the Company's executive officers. None of the Company's employees is
covered by a collective bargaining agreement. Management considers the
Company's relations with its employees to be good.
33
<PAGE>
PROPERTIES
The Company leases all of its office and distribution center space. The
typical distribution center lease is for a three- to five-year term and
requires the Company to pay all ongoing expenses such as taxes, utilities,
insurance and maintenance expenses. The following table sets forth certain
information with respect to the Company's significant distribution and
fabrication facilities:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE
-------- --------------
<S> <C>
Atlanta, Georgia......................................... 24,600
Benicia, California...................................... 26,417
Camden, New Jersey....................................... 30,000
Charleston, South Carolina............................... 20,000
Chicago, Illinois........................................ 32,093
Dallas, Texas............................................ 19,840
Indianapolis, Indiana.................................... 21,000
Philadelphia, Pennsylvania............................... 20,000
Syracuse, New York....................................... 22,000
Tampa, Florida........................................... 22,338
</TABLE>
The Company's corporate headquarters are located in approximately 8,900
square feet of leased office space in East Petersburg, Pennsylvania.
LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation. In the
ordinary course of its business, the Company is from time to time involved in
various contractual, warranty, product liability and other cases and claims.
None of the cases currently pending are expected, individually or in the
aggregate, to have a material adverse effect on the Company's business,
operating results or financial condition.
REGULATORY MATTERS
The Company's operations and properties are subject to federal, state, local
and foreign laws, regulations and ordinances relating to the use, storage,
handling, generation, transportation, treatment, emission, release, discharge
and disposal of certain materials, substances and wastes, including laws
pertaining to employee health and safety in connection with the foregoing.
Based upon the Company's experience to date, the Company believes that the
future cost of compliance with existing environmental and employee health and
safety laws, regulations and ordinances will not have a material adverse
effect on the Company's business, operating results or financial condition.
However, future events, such as changes in existing laws and regulations or
their interpretation, may give rise to additional compliance costs or
liabilities that could have a material adverse effect on the Company's
business, operating results and financial condition. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies
of regulatory agencies or stricter or different interpretations of existing
laws, may require additional expenditures by the Company that may be material.
34
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Ronald L. King.......... 54 President, Chief Executive Officer and Director
Michael J. Hughes....... 42 Vice President, Chief Financial Officer, Secretary and Treasurer
Daniel D. Bofinger...... 40 Vice President and Regional Manager
Michael T. Conner....... 45 Vice President and Regional Manager
Michael C. Feehery...... 40 Vice President and Regional Manager
Gregory S. Ganster...... 32 Vice President and Regional Manager
Raymond J. Horan........ 47 Vice President and Regional Manager
Charles F. Schattgen.... 46 Vice President and Regional Manager
W. Kirk Liddell*........ 48 Chairman of the Board of Directors
William W. Adams*(1).... 64 Director
David C. Kleinman*(1)... 62 Director
Wilson D. 68 Director
McElhinny*(2)..........
G. Clay von 56 Director
Seldeneck*(1)..........
John O. Shirk*(2)....... 54 Director
</TABLE>
- --------
* Has agreed to become a member of the Board of Directors and the indicated
committee prior to consummation of the Offering.
(1) Member of the Audit and Finance Committee.
(2) Member of the Compensation and Benefits Committee.
Ronald L. King has been President and Chief Executive Officer of the Company
since June 1997. He previously served as Executive Vice President of the
Company since 1993. Prior to joining the Company, Mr. King was President of
Distribution International and held senior management positions with the Anco
Industries group of companies. He has recently been elected President of the
World Insulation & Acoustic Congress Organization and is a past president of
the National Insulation Association.
Michael J. Hughes became Vice President, Chief Financial Officer, Secretary
and Treasurer of the Company in April 1998. From 1996 until joining the
Company he was Senior Vice President, Investment Banking, of Berwind
Financial, L.P., a regional investment banking firm based in Philadelphia,
Pennsylvania. From 1990 to 1996, Mr. Hughes was Senior Vice President-External
Finance for Meridian Bancorp, Inc.
Daniel D. Bofinger has been Regional Manager, with responsibility for
central Pennsylvania and New England, since 1992 and has been a Vice President
of the Company since 1996. Mr. Bofinger joined the Company in 1982 as a
production superintendent, and became manager of the Lancaster Fabrication
Division in 1986.
Michael T. Conner has been Vice President and Regional Manager of the
Company, with responsibility for the Midwest, since 1996. He joined the
Company in 1986 as a sales representative and served as branch manager of the
Company's Indianapolis operations until his promotion to his current position.
35
<PAGE>
Michael C. Feehery has been Vice President and Regional Manager of the
Company, with responsibility for the Southwest, since 1996. He joined the
Company in 1989 and was branch manager from 1990 until his promotion to his
current position.
Gregory S. Ganster has been Vice President of the Company since 1998 and
Regional Manager of the Company, with responsibility for the Chicago region,
since 1996. He joined the Company in 1992 and was branch manager of the
Company's Elk Grove, Illinois facility from 1995 until his promotion to his
current position. He was previously employed by Armstrong World Industries.
Raymond J. Horan has been Vice President and Regional Manager of the
Company, with responsibility for the mid-Atlantic region, since 1996. He
joined the Company in 1987 as branch manager for the Company's Chicago
operations. Mr. Horan previously held various sales position with the ceilings
division of Armstrong World Industries.
Charles F. Schattgen has been Vice President and Regional Manager of the
Company, with responsibility for the Southeast, since 1991. He joined the
Company in 1985 as branch manager and became area manager in 1987. Before
joining the Company, Mr. Schattgen was employed by Owens Corning Fiberglas.
W. Kirk Liddell will become Chairman of the Board of Directors of the
Company prior to consummation of the Offering. Since 1984 he has been
President, Chief Executive Officer and a director of Irex Corporation, the
parent of the Company prior to the Offering and Separation. Mr. Liddell also
serves on the boards of directors of High Industries, Inc., Penn Fuel Gas,
Inc., the Pennsylvania Chamber of Business and Industry and the Lancaster
Alliance and is President of the Economic Development Company of Lancaster
County.
G. Clay von Seldeneck will become a director of the Company prior to
consummation of the Offering. Mr. von Seldeneck is Managing Director of Snyder
& Company, a private investment banking firm based in Philadelphia,
Pennsylvania. Snyder & Company has performed services for Irex and the Company
in connection with the Offering and the Separation. Prior to joining Snyder &
Company in 1987 Mr. von Seldeneck was Senior Vice President and Chief
Financial Officer for Fidelity Mutual Life Group.
William W. Adams will become a director of the Company prior to consummation
of the Offering. Mr. Adams is former Chairman and President of Armstrong World
Industries, Inc. Mr. Adams joined Armstrong in 1956 and was elected an
Executive Vice President and member of the Armstrong Board of Directors in
1982. He was named Chairman and President in 1988 and retired on January 1,
1995. Mr. Adams is a Director Emeritus of Bell Atlantic Corporation and a
director of High Industries, Inc., Irex Corporation, the National Association
of Corporate Directors and the Lancaster Alliance. He also serves on the
Senior Executive Committee of SCP Private Equity Partners, and is a member of
the Advisory Board of Boardroom Consultants.
David C. Kleinman will become a director of the Company prior to
consummation of the Offering. Since 1971 Mr. Kleinman has been an Adjunct
Professor of Strategic Management at the University of Chicago Graduate School
of Business. Mr. Kleinman is a director of The Acorn Funds, Plymouth Tube
Company, Wisconsin Paper and Products Company, InterAmericas Communications
Corporation, Organics Management Company, Sonic Foundry, Inc. and Irex
Corporation.
Wilson D. McElhinny will become a director of the Company prior to
consummation of the Offering. Before retiring in 1990, Mr. McElhinny was
Chairman, President and Chief Executive Office of Hamilton Bank, and a member
of the Management Committee of Hamilton's parent company, CoreStates Financial
Corporation. He previously served as President and Vice Chairman of CoreStates
Bank, and remains a member of CoreStates Bank's Advisory Board. Mr. McElhinny
is the Chairman of Irex Corporation and a director of The Hunt Corporation,
Reading Eagle Company, Educators Mutual Life Insurance Company, Wohlsen
Construction Company and Production Finance, Inc.
John O. Shirk will become a director of the Company prior to consummation of
the Offering. He has been a partner in the law firm of Barley, Snyder, Senft &
Cohen, LLP, Lancaster, Pennsylvania, since 1973 and was
36
<PAGE>
managing partner from 1983 to 1994. The Company intends to retain Barley,
Snyder, Senft & Cohen, LLP following the Separation and the Offering. Mr.
Shirk is a director of the Economic Development Company of Lancaster County,
EDC Finance Corporation, Harrisburg Area Community College Foundation, Fulton
Financial Corporation, The Horst Group, Inc., Educators Mutual Life Insurance
Company and Irex Corporation.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Directors not affiliated with the Company are paid an annual fee of $10,000
for serving on the Board of Directors, a fee of $1,000 for attending each
Board of Directors meeting and a fee of $1,000 for attending each meeting of a
committee of the Board of Directors not held concurrently with a board
meeting. Committee chairs receive an additional annual fee of $1,000 and the
Chairman of the Board of Directors receives an additional annual fee of
$15,000. Directors are reimbursed for expenses incurred in connection with
meetings of the Board of Directors or committees thereof. All payments of
annual fees are made in Common Stock of the Company, payable following the
annual shareholders' meeting during the year for which such payment is made.
Meeting fees may, at the option of the director, be paid in cash or in Common
Stock of the Company. Common Stock for director payments shall be valued based
on the average of daily closing prices during the three-month period preceding
such valuation. Directors may defer payments of Common Stock pursuant to a
deferred payment plan the Company expects to adopt prior to consummation of
the Offering.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ended December 31, 1997,
certain information regarding the cash compensation paid by the Company, as
well as certain other compensation paid or accrued for such year, to the
executive officers of the Company named below (the "named executive
officers"), in all capacities in which they served:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
STOCK OPTION
AWARDS (1) ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (# SHARES) COMPENSATION (2)
--------------------------- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
Ronald L. King.............. $ 135,000 $ 70,101 200 $8,009
President and Chief
Executive Officer
Charles F. Schattgen........ $ 84,540 $ 31,855 150 $6,094
Vice President and Regional
Manager
Raymond J. Horan............ $ 84,000 $ 31,651 150 $6,053
Vice President and Regional
Manager
</TABLE>
- --------
(1) All options granted were for Irex common stock pursuant to the Irex
Corporation Non-Qualified Stock Option Plan.
(2) Includes matching payments paid by Irex pursuant to Irex's 401(k) plan and
Irex's Employee Stock Ownership Plan.
The following table provides information pertaining to individual grants of
options to purchase Irex common stock made by Irex to the named executive
officers during 1997:
37
<PAGE>
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
STOCK
OPTIONS % OF ALL OPTIONS EXERCISE GRANT DATE
GRANTED (1) GRANTED TO ALL PRICE EXPIRATION PRESENT
(# SHARES) EMPLOYEES (PER SHARE) DATE VALUE (2)
----------- ---------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Ronald L. King.......... 200 4.3% $21.875 12/31/07 $1,040
Charles F. Schattgen.... 150 3.3% $21.875 12/31/07 $ 780
Raymond J. Horan........ 150 3.3% $21.875 12/31/07 $ 780
</TABLE>
- --------
(1) All options granted were options to purchase Irex common stock pursuant to
the Irex Corporation Non-Qualified Stock Option Plan. As of May 19, 1998,
there were 418,584 shares of Irex common stock outstanding.
(2) The grant date present value was calculated using the Black-Scholes option
pricing model with the following assumptions: (i) expected volatility of
23.0%, (ii) a risk-free interest rate of 6.1%, (iii) expected life of
three years and (iv) no dividend yield.
The following table sets forth certain information with respect to
unexercised options to purchase common stock of Irex held by the named
executive officers at the end 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NAME UNEXERCISED OPTIONS(1) IN-THE-MONEY OPTIONS (1)
---- ------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald L. King.............. 1,000 350 $11,375 $1,931
Charles F. Schattgen........ 1,000 300 $ 5,688 $1,650
Raymond J. Horan............ 750 300 $ 5,688 $1,650
</TABLE>
- --------
(1) All options are options to purchase Irex common stock pursuant to the Irex
Corporation Non-Qualified Stock Option Plan.
STOCK OPTION PLAN
Prior to consummation of the Offering, the Company intends to adopt the 1998
Specialty Products & Insulation Co. Stock Option Plan (the "Plan"), which is
expected to provide for the granting of non-qualified stock options
("Options") to certain officers and key employees of the Company. The Plan
will also permit the Company to issue qualified stock options, stock
appreciation rights and restricted stock. The Plan will be administered by the
Compensation and Benefits Committee of the Board of Directors of the Company
(the "Compensation and Benefits Committee"). The aggregate maximum number of
shares of Common Stock available for awards of Options under the Plan will be
491,355 shares, subject to adjustment to reflect changes in the Company's
capitalization. The Company intends to award approximately 25% of the maximum
number of Options available under the Plan during the first year after the
Plan is adopted and may award the remaining Options available under the Plan
during the following nine years. No awards can be made under the Plan more
than 10 years after the date it is adopted.
The exercise price of the Options will be determined by the Compensation and
Benefits Committee in its discretion, provided that the exercise price of any
Option cannot be less than the fair market value of a share of Common Stock on
the date such Option is granted. Options will vest and may be exercised three
years after the date of grant. No Option may be exercised more than 10 years
after the date of grant. The Options may not be exercised following
termination of the grantee's employment with the Company, except that in the
event a grantee's employment terminates due to death, disability or
retirement, options held by such grantee or his or her estate shall be
exercisable, if vested at the time of termination of employment, for a period
of twelve months, twelve months and three months, respectively, after
termination.
In connection with the Offering, the Compensation and Benefits Committee is
expected to approve the grant of Options to certain officers and employees of
the Company to purchase an aggregate of 124,500 shares of
38
<PAGE>
Common Stock under the Plan, including grants of Options to purchase 55,000
shares, 8,000 shares and 8,000 shares of Common Stock to Messrs. King,
Schattgen and Horan, respectively. The exercise price of these options is
expected to be at the offering price.
401(K) PLAN
Prior to consummation of the Offering the Company expects to adopt the
Employees' Savings Incentive Plan (the "401(k) Plan"). The 401(k) Plan is a
savings and retirement plan intended to satisfy the tax qualification
requirements of Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). Subject to certain terms and conditions of the 401(k)
Plan, substantially all of the Company's employees who are employed on the
date of the consummation of the Separation and who are compensated on the
basis of a monthly salary will be immediately eligible to participate in the
401(k) Plan. Thereafter, salaried employees will be eligible to participate in
the 401(k) Plan on the January 1 or July 1 coincident with or next following
the date on which the employee is hired by the Company. Eligible employees may
contribute between 2% and 15% of their compensation to the 401(k) Plan on a
pre-tax or after-tax basis.
The Company will make matching contributions to the 401(k) Plan each year
equal to 100% of the first 3%, and 50% of the second 3%, of each participant's
compensation that is contributed to the 401(k) Plan either on a pre-tax or
after-tax basis. In addition, the Company, in it discretion, may make profit-
sharing contributions each year in cash or Common Stock of the Company. Any
profit-sharing contributions made by the Company will be allocated to each
participant's account under the 401(k) Plan in a proportionate amount based on
the participant's compensation for the year in relation to all participants'
compensation for the year. All Company and employee contributions to the
401(k) Plan are allocated to a participant's individual account.
All Company and employee contributions to the 401(k) Plan plus the earnings
thereon are 100% vested. Employees may direct the investment of their accounts
to various investment funds. The 401(k) Plan provides for hardship withdrawals
and loans to participants. The trustee of the 401(k) Plan is Vanguard
Fiduciary Trust Company.
EXECUTIVE INCENTIVE PLAN
The Company's Executive Incentive Plan provides certain officers of the
Company with annual incentive cash bonus awards based on achievement of
certain pre-established quantitative and qualitative goals. The goal of the
Executive Incentive Plan is to reward executives for superior performance and
for exceeding the Company's predetermined financial and business goals. To be
eligible under the Executive Incentive Plan, a participant must be a full-time
regular employee on the date of payments.
INSURANCE AND INDEMNIFICATION
Prior to the Separation, the Company intends to obtain directors' and
officers' insurance against certain liabilities such persons may incur on
behalf of the Company. For a discussion of the limitations on liability of the
Company's directors and the indemnification by the Company of such directors
set forth in the Company's bylaws , see "Description of Capital Stock--
Limitation on Liability and Indemnification."
EMPLOYMENT AGREEMENTS
Prior to consummation of the Offering, the Company expects to enter into
employment agreements with Ronald L. King, Michael J. Hughes and each of the
executive officers of the Company. The agreement with Mr. King provides that
Mr. King will serve as the President of the Company for a period of three
years after the date of the agreement. Under the agreement, the Company or Mr.
King may terminate Mr. King's employment with or without cause. If Mr. King's
employment is terminated by the Company without cause, the Company must
continue to pay Mr. King's salary at the time of termination for the remainder
of the term of the agreement. Mr. King is subject to a non-competition
covenant for the term of the agreement. The agreements with the executive
39
<PAGE>
officers of the Company are similar to the agreement with Mr. King, except
that the term of each such agreement is one year.
Prior to consummation of the Offering, the Company also expects to enter
into executive severance agreements with each of Mr. King and Mr. Hughes (each
an "Executive") which protect them in the event of a change of control of the
Company. If a change of control occurs within 10 years after the consummation
of the Separation, and the Executive's employment is terminated within two
years after such a change of control (other than as a result of death,
disability, cause or certain "good reasons" as defined in the agreements), the
Company must pay a lump sum severance payment equal to two times the
Executive's annual salary plus two times the average of the Executive's two
most recent incentive compensation payments. The Company also agrees to
provide benefits to the Executive substantially similar to those received
prior to termination for 24 months after the date of termination.
40
<PAGE>
PRINCIPAL SHAREHOLDERS
As of the date of this Prospectus, all of the Company's capital stock is
owned by Irex. Immediately following the Separation and the Offering, all of
the Company's capital stock will be owned by the shareholders of Irex who
receive shares of Common Stock in the Separation and by new shareholders who
purchase Common Stock in the Offering. See "Separation from Irex." The
following table sets forth certain information known to the Company regarding
the beneficial ownership of the Company's Common Stock immediately following
consummation of the Separation and the Offering with respect to (i) each
person who the Company expects will become the beneficial owner of more than
5% of the outstanding Common Stock, (ii) each director and named executive
officer of the Company and (iii) all directors and executive officers of the
Company as a group. Unless otherwise specified, each person set forth below
has sole voting and investment power with respect to the shares reported.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
NUMBER OF SHARES COMMON STOCK BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNED
---------------- --------------------- -------------------------
<S> <C> <C>
James E. Hipolit (2)
c/o Irex Corporation
120 North Lime Street
Lancaster, Pennsylvania
17608........................ 303,851 6.1%
David F. Andrew, W. Kirk
Liddell and
Jane E. Pinkerton, Trustees
of the Irex Corporation
Employees' Savings Incentive
Plan (3)
c/o Irex Corporation
120 North Lime St.
Lancaster, Pennsylvania 17608 300,876 6.1%
W. Kirk Liddell (4)
c/o Irex Corporation
120 North Lime Street
Lancaster, Pennsylvania
17608........................ 272,127 5.5%
Ronald L. King (5)............ 15,311 *
Michael J. Hughes............. -- --
William W. Adams.............. 14,671 *
David C. Kleinman............. 18,792 *
Wilson D. McElhinny........... 20,413 *
G. Clay von Seldeneck......... -- --
John O. Shirk (6)............. 32,266 *
Charles F. Schattgen (5)...... 16,306 *
Raymond J. Horan (5).......... 11,970 *
All directors and executive
officers as a group (5)...... 415,632 8.5%
</TABLE>
- --------
*Less than 1%.
(1) Based on beneficial ownership of Irex common stock as of May 19, 1998 and
after giving effect to (i) the recapitalization of the Common Stock of the
Company prior to the Separation, (ii) the distribution of Common Stock to
Irex shareholders effected in connection with the Separation and (iii) the
Offering.
(2) Includes 31,548 shares with respect to which Mr. Hipolit will have sole or
share voting and investment power and a total of 272,303 shares to be held
by Mr. Hipolit as custodian for the minor children of W. Kirk Liddell
under the Pennsylvania Uniform Transfers to Minors Act. Mr. Hipolit
disclaims beneficial ownership of the shares he will hold as custodian.
41
<PAGE>
(3) Based on Irex estimates of the number of shares of Common Stock to remain
in the Irex Corporation Employees' Savings Incentive Plan following the
transfer of certain of the plan's assets in connection with the
Separation. See "Separation from Irex--Agreements with Irex--Benefits
Sharing Agreement." Under the terms of the plan, the trustees of the plan
will have voting and investment power over the shares of Common Stock
reported.
(4) Includes 173,177 shares with respect to which Mr. Liddell will have sole
voting and investment power and 98,950 shares held by Mr. Liddell's
spouse, with respect to which Mr. Liddell disclaims beneficial ownership.
Does not include shares owned by the minor children of Mr. Liddell held by
Mr. Hipolit as custodian, as reported above.
(5) In connection with the Separation and the Offering, the Company expects to
grant options to purchase an aggregate of 124,500 shares of Common Stock
to certain officers and employees of the Company under the Company's stock
option plan, including grants of options to Messrs. King, Schattgen and
Horan to purchase 55,000 shares, 8,000 shares and 8,000 shares,
respectively. The options will be granted upon and following consummation
of the Separation and the Offering. See "Management--Stock Option Plan"
and "Separation from Irex--Agreements with Irex--Benefits Sharing
Agreement." All of the options have limitations on exercise and none are
included in the table above.
(6) Includes 10,342 shares with respect to which Mr. Shirk will have sole
voting and investment power, 3,828 shares held by Mr. Shirk's spouse, 696
shares held by Mr. Shirk as custodian under the Pennsylvania Uniform
Transfers to Minors Act and 17,400 shares held by Barley, Synder, Senft &
Cohen, LLP, of which Mr. Shirk is a partner.
SEPARATION FROM IREX
BACKGROUND AND REASONS FOR THE SEPARATION
Since commencing operations in 1982, the Company has been a wholly owned
subsidiary of Irex. Through its operating subsidiaries other than the Company,
Irex is primarily engaged in the business of specialty contracting throughout
the United States and Canada. In January 1998 Irex announced plans to effect
the Separation through a pro rata distribution of 100% of the capital stock of
the Company to the shareholders of Irex. The Separation will occur immediately
prior to the consummation of the Offering, and the Offering is conditioned
upon the consummation of the Separation. Immediately following the Separation
and the Offering, all of the capital stock of the Company will be owned by the
shareholders of Irex who receive shares of Common Stock in the Separation and
by new shareholders who purchase Common Stock in the Offering.
The decision to effect the Separation is based on a number of factors. The
Separation will provide both corporations with greater managerial, operational
and financial flexibility to focus on and respond to changing market
conditions in their respective business environments. The Company also
believes that its ability to pursue and finance acquisitions and other
business opportunities will be enhanced if the Company operates independently.
The Separation will provide the Company with direct access to capital markets,
subject to certain limitations for a two-year period following the Separation.
See "Risk Factors--Limitations on Ability to Raise Equity Capital and
Dependence on Alternative Financing." As a separate entity, the Company will
not be subject to Irex's capital structure restrictions and will be in a
better position to fund its operating and growth strategies. Furthermore,
financial advisors have advised Irex and the Company that equity capital
necessary to meet the business needs of Irex and the Company can be most
effectively raised through an initial public offering of the stock of the
Company following its Separation from Irex, rather than through a stock
offering by either Irex or the Company while Irex continues to hold a
substantial equity interest in the Company. In addition, management believes
the Separation will assist the Company in serving certain customers. Through
the specialty contracting businesses operated by its other subsidiaries, Irex
competes with customers whose business is solicited by the Company, and the
Company believes these customers will be more likely to purchase products from
the Company after it is independent from Irex. The Separation will also enable
the Company to provide its management and employees with incentive
compensation in the form of direct and indirect equity ownership in the
Company.
42
<PAGE>
Immediately prior to consummation of the Separation, the Company will
declare a dividend to Irex in the amount of $10.5 million. This amount
corresponds to $10.5 million of outstanding Preferred Stock of Irex which will
remain Irex's obligation following the Separation. The Company has not had and
will not have any obligations or liabilities under the Preferred Stock
following the Separation. The Company will pay the dividend by executing a
note to Irex and the resulting indebtedness will be repaid with a portion of
the proceeds of the Offering. See "Use of Proceeds." In connection with the
Separation and the Offering, the Company will also pay approximately $9.1
million of debt owed by the Company to an affiliate which will be paid with
proceeds from the Offering, and approximately $17.8 million owed to Irex
pursuant to an intercompany account which the Company intends to pay with
borrowed funds from a credit facility.
Another subsidiary of Irex, ACandS, Inc. ("ACandS"), is engaged in the
thermal insulation contracting business. ACandS has been the subject of
numerous lawsuits seeking damages for injuries allegedly caused by exposure to
asbestos contained in insulation products installed or sold by ACandS before
1974. The Company has never been named as a defendant in any asbestos-related
lawsuit, nor has any asbestos-related claim been made against it. The
Company's involvement with the thermal insulation contracting business has
been minimal, and, in the Company's opinion, it has no material liability in
connection with that involvement. The Company believes that adequate insurance
coverage is available to ACandS and its affiliated companies, including the
Company, for asbestos-related suits.
AGREEMENTS WITH IREX
In connection with the Separation and the Offering, the Company will enter
into several agreements with Irex and its subsidiaries setting forth certain
interim and longer-term relationships between the companies. The following
summaries of the principal terms of these agreements are qualified in their
entirety by reference to the full text of such agreements. See "Additional
Information."
Corporate Separation Agreement. Prior to the consummation of the Separation
and the Offering, the Company and Irex and its subsidiaries (collectively, the
"Irex Companies") will enter into a separation agreement (the "Separation
Agreement") which sets forth certain agreements with respect to the Separation
and certain agreements between the Company and the Irex Companies governing
the relationship between them following the Separation and the Offering.
Pursuant to the Separation Agreement, Irex will provide the Company with
access to Irex's management information systems for a three-year period
following consummation of the Offering. Under the agreement, access to system
hardware and software and related support services maintained by Irex will be
made available on a quarterly fee basis based on a formula that takes into
account the Company's relative use of the system. The agreement also provides
for the Company to utilize customization capabilities of system programmers
employed by Irex on an hourly fee basis. The Separation Agreement also
provides reciprocal indemnification provisions between the Irex Companies and
the Company, pursuant to which the Irex Companies agree to indemnify the
Company for liabilities relating to their businesses arising at any time, and
the Company agrees to indemnify the Irex Companies for liabilities relating to
its business arising after December 23, 1981. The agreement also includes
provisions governing certain workers' compensation and liability insurance
payments, pursuant to which Irex will maintain responsibility for processing
payment claims occurring as a result of incidents involving the Company's
employees and arising prior to the date of the Separation, and the Company
will indemnify Irex for payments made by Irex as a result of such claims (up
to the amount of the deductible stated in the workers' compensation insurance
policies governing such claims). The agreement also provides for the Company
to reimburse Irex for all third-party expenses incurred in connection with the
Separation and Offering, including attorneys' and accountants' fees and
expenses, filing fees, listing fees, printing costs and similar items.
Pursuant to the Separation Agreement, intercompany accounts among Irex, Irex
affiliates and the Company will be settled as of the date of consummation of
the Separation. As of March 31, 1998, the settlement of those accounts would
result in a payment of $21.5 million from the Company to Irex.
Tax Sharing and Indemnification Agreement. Prior to the consummation of the
Separation, the Company and Irex will enter into a tax sharing and
indemnification agreement (the "Tax Agreement"). Pursuant to the Tax
Agreement, (i) the Company will generally be indemnified for tax liabilities
of any consolidated, combined
43
<PAGE>
and unitary group of corporations that includes Irex and/or its subsidiaries
(including the Company) (an "Irex Group") for periods prior to the
consummation of the Separation other than specified tax liabilities
attributable to the income or operations of the Company, (ii) the Company will
indemnify Irex and its subsidiaries for any other specified tax liabilities of
the Irex Group or the Company related to the Company for periods prior to the
consummation of the Separation, (iii) the Company will be restricted, for a
period of two years following the date of the consummation of the Separation,
from engaging in certain transactions (certain issuances of stock, redemptions
of stock or ceasing to engage in its trade or business) without first
obtaining either a ruling from the Internal Revenue Service or an opinion from
nationally recognized tax counsel that the transaction will not affect the
tax-free nature of the Separation to Irex or its shareholders and (iv) the
Company will be required to indemnify Irex and its shareholders for tax
liabilities that may be incurred by Irex or its shareholders as a result of
actions that the Company may undertake following the Separation and that cause
the Separation to be treated as a taxable transaction to Irex or its
shareholders. The Company does not expect these restrictions to materially
inhibit its operations or growth opportunities.
Irex and the Company will receive an opinion of Dechert Price & Rhoads,
counsel to Irex and the Company, that for U.S. federal income tax purposes the
Separation should qualify as a tax-free spin-off. The opinion of counsel will
be based on certain assumptions and the accuracy of factual representations
made by Irex and the Company. Neither Irex nor the Company is aware of any
present facts or circumstances which should cause such representations and
assumptions to be untrue. However, the opinion of counsel is not binding on
either the Internal Revenue Service ("IRS") or the courts. A ruling has not
been, and will not be, sought from the IRS with respect to the U.S. federal
income tax consequences of the Separation, and it is possible that the IRS may
take the position that the Separation does not qualify as a tax-free spin-off.
See "Risk Factors--Potential Liability for Taxes Related to the Separation."
Benefits Sharing Agreement. Prior to the consummation of the Separation, the
Company and Irex will enter into a benefits sharing agreement (the "Benefits
Agreement") to set forth the manner in which assets and liabilities under
employee benefit plans and other employment-related liabilities will be
divided between them. In general, the Company will be responsible for
compensation and employee benefits relating to both its active and former
employees. Irex will generally remain responsible for compensation and
employee benefits relating to its active and former employees. The Company's
401(k) Plan will receive a transfer of plan assets from the Irex Employees'
Savings Incentive Plan equal to the account balances of the Company's active
and former employees. See "Management--401(k) Plan." Prior to the Separation,
Irex will amend its pension plan to cease future benefit accruals. In
connection with the Separation, the Company will make a payment to Irex for a
portion of the unfunded accrued liability under the Irex pension plan
attributable to the Company's employees and former employees. The Company does
not currently intend to sponsor a pension plan for periods immediately
following the Separation.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
and qualified in its entirety by reference to the Company's Restated Articles
of Incorporation, which have been filed as an exhibit to the Registration
Statement which includes this Prospectus.
As of the date of this Prospectus, after giving effect to the stock split
effected in connection with the Separation and the Offering, there are
2,913,547 shares of Common Stock issued and outstanding, all of which are held
of record by Irex and all of which will be distributed to the shareholders of
Irex common stock in the Separation. No shares of Preferred Stock are issued
or outstanding.
COMMON STOCK
The Company is authorized to issue up to 15 million shares of Common Stock,
par value $.01 per share ("Common Stock").
44
<PAGE>
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by shareholders. Shareholders do not have cumulative
voting rights in the election of directors, meaning that the holders of a
majority of the shares entitled to vote in any election of directors may elect
all of the directors standing for election. Shareholders do not have the
preemptive right to purchase newly issued Common Stock before it is offered to
others by the Company. The bylaws provide that special meetings of the
shareholders of the Company may be called only by the Board of Directors.
Generally, whenever any corporate action is to be taken by vote of the
shareholders of the Company, or by vote of a class of such shareholders of the
Company, it shall be authorized upon receiving the affirmative vote of a
majority of the votes cast by such shareholders, or by such class of
shareholders, entitled to vote thereon.
PREFERRED STOCK
The Company is authorized to issue up to 15 million shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by law, without further shareholder approval, to issue such shares
of Preferred Stock in one or more series, with such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be established by the Board of Directors at the time of issuance.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. The issuance of shares of
Preferred Stock could result in securities outstanding that would have
preference over the Common Stock with respect to dividends and in liquidation
and that could (upon conversion or otherwise) enjoy all of the rights of the
Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by third persons to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise, by making such attempts more difficult to achieve
or more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock. There are no agreements or
understandings for the issuance of Preferred Stock, and the Company has no
plans to issue any shares of Preferred Stock. See "Risk Factors--Anti-Takeover
Provisions."
CERTAIN PROVISIONS OF THE PENNSYLVANIA BUSINESS CORPORATION LAW
The Company is governed by Subchapter F of Chapter 25 of the PBCL. The
Company's restated articles of incorporation provide that the Company shall
not be governed by Subchapters E, G and H of Chapter 25 of the PBCL.
Subchapter F may have an anti-takeover effect and may delay, defer or prevent
a tender offer or takeover attempt that a shareholder might consider in his or
her best interest, including those attempts that might result in a premium
over the market price for the shares held by shareholders. In general,
Subchapter F delays for five years and imposes conditions upon "business
combinations" between an "interested shareholder" and the Company, unless
prior approval of the Board of Directors is given. The term "business
combination" is defined broadly to include various merger, consolidation,
division, exchange or sale transactions, including transactions utilizing the
Company's assets for purchase price amortization or refinancing purposes. An
"interested shareholder," in general, would be a beneficial owner of shares
entitling that person to cast at least 20% of the votes that all shareholders
would be entitled to cast in an election of directors of the Company. The
Company is also governed by other provisions of the PBCL which are designed to
support the validity of actions taken by the Board of Directors in response to
takeover bids, including specifically the board's authority to "accept, reject
or take no action" with respect to a takeover bid, and permitting the
unfavorable disparate treatment of a takeover bidder. Another provision of the
PBCL gives the directors broad discretion in considering the best interests of
the Company, including a provision which permits the board, in taking any
action, to consider various corporate interests, including employees,
suppliers, clients and communities in which the corporation is located, the
short and long-term interests of the corporation and the resources, intent and
conduct of any person seeking to acquire control of the corporation. These
provisions may have the effect of making more difficult and thereby
discouraging attempts to acquire control of the Company in a transaction that
the board or directors determines not to be in the best interests of the
Company.
45
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the PBCL, the Company's bylaws provide that a director shall
not be personally liable for monetary damages for any action taken, or any
failure to take any action, unless (i) the director has breached or failed to
perform the duties of his office under Section 8363 of the Pennsylvania
Directors Liability Act (relating to standard of care and justifiable
reliance) and (ii) the breach or failure to perform constitutes improper self-
dealing, willful misconduct or recklessness. Such limitation on liability does
not apply to the responsibility or liability of a director pursuant to any
criminal statute or the liability of a director for the payment of taxes
pursuant to local, state or federal law. In addition, the bylaws provide that
the Company shall indemnify any person who is a party or is threatened to be
made a party to any lawsuit or claim for damages arising by reason of the fact
that he is or was a director, officer or employee of the Company or any
subsidiary.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. No predictions can be made with respect to the effect, if any, that
public sales of shares of the Common Stock or the availability of shares for
sale will have on the market price of the Common Stock after this Offering.
Sales of substantial amounts of the Common Stock in the public market
following this Offering, or the perception that sales may occur, could
adversely affect the market price of the Common Stock or the ability of the
Company to raise capital through a sale of its equity securities.
Upon completion of the Separation and the Offering, 4,913,547 shares of
Common Stock will be outstanding (5,213,547 shares will be outstanding if the
Underwriters' over-allotment option is exercised in full). The 2,000,000
shares of Common Stock sold in the Offering (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act,
unless acquired by an "affiliate" of the Company. An "affiliate" is defined in
Rule 144 promulgated by the Commission under the Securities Act ("Rule 144")
generally as a person who by equity ownership or otherwise controls, is
controlled by or is under common control with the Company. The 2,913,547
shares of Common Stock distributed to shareholders of Irex in the Separation
will be freely tradable following the Separation and Offering, except for
approximately 719,483 such shares distributed to affiliates of the Company,
which shares will be subject to (i) lock-up agreements entered into in
connection with the Separation (see below) and (ii) Rule 144, except for the
holding period requirement of Rule 144(d), absent registration or another
appropriate exemption under the Securities Act.
In general, Rule 144 will permit an affiliate or a person who has held
restricted shares for more than one year to sell within any three-month period
a number of shares that does not exceed the greater of 1% of the then-
outstanding shares of Common Stock or the average weekly trading volume of
such stock during the four calendar weeks preceding such sale, provided that
the Company has either filed certain periodic reports with the Commission or
made publicly available certain information concerning itself and provided
that such sales are made in normal "brokers' transactions" or in transactions
directly with a "market maker" without the solicitation of buy orders by the
brokers or such affiliates. A person who is deemed not to be an affiliate of
the Company at any time during the three months preceding a sale and who has
held restricted shares for more than two years may sell such shares under Rule
144 without regard to the volume limitations described above.
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "SPIE." Sales of substantial amounts of Common Stock
in the public market, including sales under Rule 144, could have a depressing
effect on the price of the Common Stock.
46
<PAGE>
LOCK-UP AGREEMENTS
In connection with the Separation, certain shareholders will agree, subject
to certain exceptions, not to register for sale or offer, sell or transfer any
shares of Common Stock for a period of two years following consummation of the
Separation. These agreements will cover shares of Common Stock received by
such shareholders in the Separation. In addition, in connection with the
Offering, certain shareholders will agree, subject to certain exceptions, not
to register for sale or offer, sell or transfer any shares of Common Stock for
a period of 180 days after the date of this Prospectus without the prior
written consent of Legg Mason Wood Walker, Incorporated. These agreements will
cover all of the approximately 719,483 shares of Common Stock held by such
shareholders. See "Separation from Irex" and "Underwriting."
47
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, Legg Mason Wood Walker, Incorporated and Advest, Inc. (the
"Representatives") expect to severally agree, subject to the terms and
conditions of the Underwriting Agreement, to purchase a total of 2,000,000
shares of Common Stock from the Company. The number of shares of Common Stock
that each Underwriter has agreed to purchase is set forth opposite its name
below. The Underwriters are committed to purchase all of such shares if any
are purchased. Under certain circumstances the commitments of non-defaulting
Underwriters may be increased. The names of the several Underwriters and the
respective number of shares to be purchased by each of them are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Legg Mason Wood Walker, Incorporated..................................
Advest, Inc...........................................................
---------
Total............................................................... 2,000,000
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price per share set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share, and the Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to other
dealers. After the commencement of the public offering of the shares of Common
Stock, the offering price and concession may be changed. The Company has
agreed to indemnify the several Underwriters against certain liabilities which
may be incurred in connection with the Offering, including liabilities under
the Securities Act.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 300,000 shares of Common Stock from the Company at the same price
per share as the public offering price. The Underwriters may exercise such
option only to cover over-allotments in the sale of the shares of Common Stock
that the Underwriters have agreed to purchase. To the extent the Underwriters
exercise this option, each of the Underwriters has a firm commitment, subject
to certain conditions, to purchase the same percentage of the option shares as
the number of shares to be purchased and offered by that Underwriter as shown
in the above table bears to the 2,000,000 shares of Common Stock initially
offered hereby.
All of the directors and executive officers of the Company expect to agree
with the Representatives not to sell or dispose of any shares owned by them
without the consent of the Representatives for a period of 180 days after the
date of this Prospectus. See "Shares Eligible for Future Sale."
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Common Stock in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended, during the two business
day period before the commencement of offers of sales of the Common Stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as such. In general, a passive market maker must
display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters to bid for and purchase
the Common Stock. As an exception to these rules, the Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions
48
<PAGE>
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If Underwriters create a short position in the Common Stock in connection
with the offering thereof (i.e., if they sell more shares of Common Stock than
are set forth on the cover page of the Prospectus), the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives also may elect to reduce any short position by exercising all
or part of the over-allotment option described in the Prospectus.
The Representatives also may impose a penalty bid on certain Underwriters.
This means that if the Representatives purchase Common Stock in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Common Stock, they may reclaim the amount of the selling concession from
the Underwriters who sold those shares as part of this Offering.
In general, purchases of Common Stock for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the Common Stock to
be higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of the Common
Stock to the extent that it were to discourage resales of the Common Stock by
purchasers in this Offering.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor the Underwriters make any representation
that the Representatives will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Dechert Price & Rhoads, Philadelphia,
Pennsylvania. Certain matters in connection with this Offering will be passed
upon for the Underwriters by Stradley, Ronon, Stevens & Young, LLP,
Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") under
the Securities Act with respect to the securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain items of which are omitted as permitted by the rules and regulations
of the Commission. Statements made in this Prospectus as to the contents of
any agreement or other document referred to herein are not necessarily
complete, and reference is made to the copy of such agreement or other
document filed as an exhibit or schedule to the Registration Statement and
each such statement shall be deemed qualified in its entirety by such
reference. For further information, reference is made to the Registration
Statement and to the exhibits and schedules filed therewith, which are
available for inspection without charge at
49
<PAGE>
the public reference facilities maintained by the Commission in Room 1024, 450
Fifth Street, N.W, Washington, D.C. 20549. Copies of the material containing
this information may be obtained from the Commission upon payment of the
prescribed fees.
After consummation of the Offering, the Company will be subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, in accordance therewith, will be
required to file proxy statements, reports and other information with the
Commission. The Registration Statement, as well as any such report, proxy
statement and other information filed by the Company with the Commission, may
be inspected and copied at the public reference facilities maintained by the
Commission in Room 1024, 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 Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish to its shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm accompanied by an opinion expressed by such independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information in each case prepared
in accordance with generally accepted accounting principles.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus that are not related to
historical results are forward-looking statements. Actual results may differ
materially from those projected or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed under "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
Further, certain forward-looking statements are based upon assumptions as to
future events that may not prove to be accurate. These forward-looking
statements involve risks and uncertainties including, but not limited to,
those set forth under "Risk Factors."
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F- 2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F- 3
Consolidated Statements of Income for the years ended December 31, 1995,
1996 and 1997........................................................... F- 4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995,
1996 and 1997........................................................... F- 5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997..................................................... F- 6
Notes to Consolidated Financial Statements as of December 31, 1996 and
1997 and
for the years ended December 31, 1995, 1996 and 1997.................... F- 7
Unaudited Condensed Consolidated Statements of Income for the three
months ended
March 31, 1997 and 1998................................................. F-16
Unaudited Condensed Consolidated Balance Sheets as of March 31, 1997 and
1998.................................................................... F-17
Unaudited Condensed Consolidated Statements of Cash Flows for the three
months ended
March 31, 1997 and 1998................................................. F-18
Notes to Unaudited Condensed Consolidated Financial Statements........... F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Specialty Products & Insulation Co.:
We have audited the accompanying consolidated balance sheets of Specialty
Products & Insulation Co. (a Pennsylvania corporation and a wholly owned
subsidiary of Irex Corporation) and subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule 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 Specialty Products &
Insulation Co. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and
qualifying accounts is presented for purposes of complying with the Securities
and Exchange Commission rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen, LLP
Lancaster, Pennsylvania
March 16, 1998, except with respect
to certain information in Note 11,
as to which the date is June 12, 1998.
F-2
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 1997
------------------------------ -----------------------
PRO FORMA
1996 1997 (SEE NOTE 12)
-------------- -------------- -----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents............ $ 78 $ 345 $ 345
Receivables, less
reserves of $466 in
1997 and $994 in 1996.. 22,769 27,635 27,635
Inventories of materials
and supplies........... 13,117 15,667 15,667
Prepaid expenses........ 408 173 173
Deferred income taxes... 930 1,100 1,100
-------------- -------------- --------------
Total current assets.. 37,302 44,920 44,920
Property and Equipment, at
cost:
Buildings and
improvements........... 1,153 1,315 1,315
Machinery and
equipment.............. 2,655 2,996 2,996
-------------- -------------- --------------
3,808 4,311 4,311
Less accumulated
depreciation........... (2,242) (2,543) (2,543)
-------------- -------------- --------------
1,566 1,768 1,768
Other Assets.............. 67 963 963
-------------- -------------- --------------
$ 38,935 $ 47,651 $ 47,651
============== ============== ==============
LIABILITIES AND
SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of long-
term notes payable to
affiliates
and other long-term
debt................... $ 1,436 $ 1,455 $ 1,455
Accounts payable........ 6,261 7,360 7,360
Payable to affiliates... 15,006 20,221 20,221
Accrued liabilities..... 2,746 4,108 4,108
Accrued income taxes.... 1,049 510 510
Dividend payable to Irex
Corporation............ -- -- 10,490
-------------- -------------- --------------
Total current
liabilities.......... 26,498 33,654 44,144
Deferred Income Taxes..... 88 -- --
Long-term notes payable to
affiliates, less current
portion.................. 5,928 4,742 4,742
Long-term debt, less
current portion.......... -- 75 75
Shareholder's Equity:
Preferred stock, $0.01
par value per share;
15,000,000 shares
authorized; none
issued................. -- -- --
Common stock, $0.01 par
value per share;
15,000,000 shares
authorized; 2,913,547
issued and
outstanding............ 29 29 29
Paid-in surplus......... 974 974 974
Retained earnings....... 5,418 8,177 (2,313)
-------------- -------------- --------------
Total shareholder's
equity............... 6,421 9,180 (1,310)
-------------- -------------- --------------
$ 38,935 $ 47,651 $ 47,651
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.............................. $ 118,395 $ 141,800 $ 158,510
Cost of sales.......................... 92,503 110,690 124,258
------------ ------------ ------------
Gross profit......................... 25,892 31,110 34,252
Selling, general and administrative
expenses.............................. 21,841 24,762 27,229
------------ ------------ ------------
Operating income..................... 4,051 6,348 7,023
Interest expense, net.................. 1,840 1,854 1,939
------------ ------------ ------------
Income before income taxes........... 2,211 4,494 5,084
Income tax provision................... 918 1,810 2,077
------------ ------------ ------------
Net income........................... $ 1,293 $ 2,684 $ 3,007
============ ============ ============
Net income per share--basic............ $ 0.44 $ 0.92 $ 1.03
============ ============ ============
Net income per share--diluted.......... $ 0.44 $ 0.92 $ 1.03
============ ============ ============
Weighted average shares outstanding--
basic................................. 2,913,547 2,913,547 2,913,547
============ ============ ============
Weighted average shares outstanding--
diluted............................... 2,913,547 2,913,547 2,913,547
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PAID-IN
COMMON STOCK SURPLUS RETAINED EARNINGS
------------ ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1, 1995................. $ 29 $974 $2,652
Net income............................. -- -- 1,293
Distribution to parent................. -- -- (748)
---- ---- ------
Balance, December 31, 1995............... 29 974 3,197
Net income............................. -- -- 2,684
Distribution to parent................. -- -- (463)
---- ---- ------
Balance, December 31, 1996............... 29 974 5,418
Net income............................. -- -- 3,007
Distribution to parent................. -- -- (248)
---- ---- ------
Balance, December 31, 1997............... $ 29 $974 $8,177
==== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income..................................... $ 1,293 $ 2,684 $ 3,007
Reconciliation of net income to net cash
provided by (used for) operating activities--
Depreciation and amortization................ 514 558 640
Deferred income tax (benefit) provision...... (6) (191) 364
Provision for losses on accounts receivable.. 830 1,120 71
(Gain) loss on sale of assets................ (2) 75 15
(Increase) decrease in assets--
Receivables.................................. (3,387) (1,590) (3,672)
Inventories.................................. (755) (1,934) (1,204)
Other prepaid expenses....................... 31 (182) 248
Other assets................................. (23) -- --
Increase (decrease) in liabilities--
Accounts payable............................. 640 39 1,042
Accrued liabilities and other................ 501 499 1,134
Accrued income taxes......................... 261 776 (495)
-------- -------- --------
Net cash (used for) provided by operating
activities................................ (103) 1,854 1,150
-------- -------- --------
Cash Flows From Investing Activities:
Additions to property and equipment............ (413) (559) (559)
Proceeds from sales of property and equipment.. 79 24 4
Acquisitions of certain businesses, net of cash
acquired
Assets, net of liabilities assumed.......... (961) (120) (2,523)
Intangibles.................................. -- (60) (930)
Other investing................................ -- (62) (33)
-------- -------- --------
Net cash used for investing activities..... (1,295) (777) (4,041)
-------- -------- --------
Cash Flows From Financing Activities:
Payments on long-term debt..................... -- (1,186) (1,186)
Increase in payable to affiliates.............. 1,429 97 4,344
-------- -------- --------
Net cash provided by (used for) financing
activities................................ 1,429 (1,089) 3,158
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 31 (12) 267
Cash and Cash Equivalents, Beginning of Year..... 59 90 78
-------- -------- --------
Cash and Cash Equivalents, End of Year........... $ 90 $ 78 $ 345
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Specialty Products & Insulation Co. and subsidiary (the Company), a wholly-
owned subsidiary of Irex Corporation (Irex) (See Note 11), is a distribution
and fabrication business that competes in the large and highly fragmented
building products industry. The Company broadly defines its two core markets
as mechanical insulation, consisting of pipe, duct, and equipment insulation
for commercial and industrial customers, and architectural/acoustical
products, consisting primarily of acoustical ceilings, fiberglass reinforced
panel, and other wall and ceiling products.
Basis of Presentation
The consolidated financial statements reflect the results of operations,
financial position, changes in shareholder's equity and cash flows of the
Company. The consolidated financial statements have been prepared using the
historical basis in the assets and liabilities and historical results of
operations of the Company.
The Company receives certain administrative and management services provided
by Irex. The cost of these services has been allocated to the Company based on
the estimated utilization of those services through a management fee. These
services are discussed further in Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Specialty
Products & Insulation Co. and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Estimates and Assumptions
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 and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally on a first-in, first-out (FIFO) basis. Included in inventory cost
are material costs and costs directly associated with the fabrication of the
Company's products.
Reserves for Certain Self-Insured Business Risks
The Company is self-insured against a portion of its workers' compensation
and other insurance risks. The process of determining reserve requirements for
losses within its self-insured retention limits utilizes historical trends,
involves an evaluation of claim frequency, severity and other factors and also
includes the effect of future inflation.
F-7
<PAGE>
Income Taxes
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are recognized using enacted tax rates,
for the estimated future tax effects of temporary differences between the
financial reporting and tax bases of assets and liabilities.
Property and Equipment
Property and equipment are depreciated using principally the straight-line
method over the following estimated useful lives of the assets. Expenditures
for maintenance and repairs are expensed as incurred.
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIVES
-------------- ----------------------
<S> <C>
Buildings......................................... 15 to 30 years
Leasehold improvements............................ 3 to 10 years
Machinery and equipment........................... 3 to 7 years
</TABLE>
Other Assets
Other assets consist of goodwill and other intangibles. Goodwill, which
represents the excess of cost over fair value of the net assets of acquired
businesses, is being amortized on a straight-line basis principally over 15
years. The Company develops operating income projections and evaluates the
recoverability and amortization period of goodwill using these projections.
Based upon management's current assessment, the estimated remaining
amortization period of goodwill is appropriate and the remaining balance is
fully recoverable. There was no unamortized goodwill at December 31, 1996. At
December 31, 1997, unamortized goodwill was $842,000.
Revenue Recognition
Sales are recorded as orders are shipped or picked up by the customer and
are reported net of discounts and returns. Sales include the revenue related
to products shipped directly from the manufacturer to the customer as the
purchasing terms are similar to other products purchased and the Company bears
the credit risk related to the sale. These sales represent approximately 14%,
16% and 16% of the total net sales reported in 1995, 1996 and 1997,
respectively.
Supplemental Cash Flow Information
The Company's state income tax payments, net of refunds, were $28,000,
$131,000 and $280,000 in 1995, 1996 and 1997, respectively. Interest on the
notes payable to affiliate and the payable to affiliates account are charged
to the payable to affiliates account.
Concentration of Credit Risk and Business
The Company is primarily engaged in the distribution of mechanical
insulational and architectural/acoustical products throughout the United
States.
The Company grants credit to customers after a thorough review of their
financial condition. The concentration of credit risk with respect to accounts
receivable is limited due to the Company's large customer base located
throughout the United States. For the years ended December 31, 1995, 1996, and
1997, no one customer accounted for more than 10% of sales.
The Company purchases materials for resale from a limited number of major
suppliers. Such concentration is normal for the industry and does not
represent an unreasonable risk or vulnerability to the Company.
F-8
<PAGE>
3. ACQUISITIONS:
On October 17, 1997, the Company acquired all of the issued and outstanding
stock of Richlar Industries, Inc. (Richlar), located in East Syracuse, New
York, for cash consideration of approximately $866,000. Richlar is primarily
engaged in the business of precision die cutting, lamination, and specialty
fabrication.
On December 8, 1997, the Company acquired certain assets of Construction
Systems, Inc. (CSI), located in Houston, Texas, for cash consideration of
approximately $2,374,000. CSI was primarily engaged in the distribution of
architectural/acoustical products and specialty products from two distribution
centers in Houston, Texas.
On December 24, 1997, the Company acquired certain assets of the Louisville,
Kentucky distribution center of R. E. Kramig and Company, Inc. (Kramig) for
cash consideration of approximately $213,000. Kramig was primarily engaged in
the distribution of mechanical insulation.
The acquisitions were accounted for using the purchase method of accounting,
and the financial statements reflect the results of operations and cash flows
of the operation from the dates of the acquisitions. Had the acquisitions
occurred at the beginning of the periods presented, sales and net income would
not have been materially different from reported results.
In January 1995, the Company acquired from Distribution International (DI),
the assets of four distribution centers in North Carolina and Tennessee for
cash consideration of approximately $961,000. DI was primarily engaged in the
distribution of mechanical insulation from these four distribution centers.
4. INCOME TAXES:
The Company's tax return is included in the consolidated federal income tax
returns of Irex. The current and deferred tax expense recorded by the Company
is based on what such amounts would have been had it filed a separate tax
return. All federal income tax payments are made by Irex.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Deferred income taxes are computed based on the differences between
financial reporting and income tax reporting bases of assets and liabilities
using enacted tax rates. The impact of changes in tax rates is reflected in
income in the period in which the change is enacted. In conformity with SFAS
109, deferred tax assets are classified based on the financial reporting
classification of the related liabilities and assets which give rise to
temporary book/tax differences. Deferred taxes relate to the following
temporary differences:
<TABLE>
<CAPTION>
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Insurance reserves......................................... $ 77 $ 574
Bad debt reserves.......................................... 387 181
Uniform cost capitalization on inventories................. 404 435
Other...................................................... (26) (89)
------ --------
$ 842 $ 1,101
====== ========
</TABLE>
The Company has determined that no valuation allowance for the deferred tax
asset is required as of December 31, 1996 and 1997 as it is considered more
likely than not that such benefits will be realized in the future through the
combination of carryback availability, certain tax planning strategies that
would allow for acceleration of deductible temporary differences to utilize
remaining carryback availability and through expected future taxable income.
F-9
<PAGE>
Income tax provision (benefit) consists of :
<TABLE>
<CAPTION>
1995 1996 1997
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal.............................................. $782 $1,608 $1,396
State................................................ 142 393 317
---- ------ ------
Total currently payable............................ 924 2,001 1,713
---- ------ ------
Deferred:
Federal.............................................. (35) (135) 297
State................................................ 29 (56) 67
---- ------ ------
Total deferred..................................... (6) (191) 364
---- ------ ------
Total.................................................. $918 $1,810 $2,077
==== ====== ======
</TABLE>
The effective income tax rate is different from the statutory Federal income
tax rate as indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.......................... 34.0% 34.0% 34.0%
State income taxes ($171,000, $337,000 and $384,000),
net of federal benefit.................................... 5.1 5.0 5.0
Meals and entertainment.................................... 2.4 1.3 1.9
---- ---- ----
Effective income tax rate................................ 41.5% 40.3% 40.9%
==== ==== ====
</TABLE>
5. EMPLOYEE BENEFIT PLANS:
Pension Plans
The Company's salaried employees participate in Irex's noncontributory
defined benefit pension plan. The benefits under the plan are based on years
of service and salary levels. Irex's policy is to fund pension costs in
accordance with the requirements of the Employee Retirement Income Security
Act of 1974. The Company receives an allocation of the plan's expenses from
Irex. In 1995, 1996, and 1997, the Company's share of the plan's total expense
was $230,000, $245,000, and $165,000, respectively. The Company will not
participate in the plan following its separation from Irex. All liabilities
associated with the plan will remain with Irex. The following table sets forth
the Plan's funded status and related amounts recognized in the consolidated
balance sheet of Irex and subsidiaries at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $5,568 and $6,629, respectively............ $ 6,039 $ 6,986
======= =======
Projected benefit obligation for service rendered to
date................................................... $ 7,698 $ 8,760
Plan assets at fair value............................... (7,528) (8,759)
------- -------
Projected benefit obligation in excess of plan assets... 170 1
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions............................................ 275 840
------- -------
Accrued pension cost.................................... $ 445 $ 841
======= =======
</TABLE>
F-10
<PAGE>
Assumptions used were as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Weighted average discount rates.................................. 7.75% 7.25%
Rates of increase in future compensation levels.................. 5.00% 5.00%
Expected long-term rate of return on assets...................... 8.50% 8.50%
</TABLE>
The Company also maintains a defined contribution plan for its hourly-paid
employees. Company contributions to the plan are based on a percentage of
eligible employees' compensation. The expense for this plan was $69,000 in
1995, $108,000 in 1996, and $105,000 in 1997.
Postretirement Benefits Other Than Pensions
In addition to the pension plans, the Company's retired employees
participate in an Irex-sponsored plan that provides certain health care
benefits. Active salaried employees who were at least age 55 and had 10 years
of consecutive service at January 1, 1990, are eligible for these benefits
upon retirement. Also, active salaried employees of the Company whose age plus
years of service equaled at least 55 at January 1, 1990, are eligible for
these benefits upon retirement when they attain age 62 as long as such
employees have either 20 years of service or their age plus years of service
equals 90 upon retirement. Cash payments of up to $60 per month are given to
retirees over age 65 to purchase supplemental Medicare coverage. Eligible
retirees under age 65 are fully covered by Irex's insurance plan. The number
of retirees under age 65 currently participating in the plan is not
significant. Also the number of active employees of the Company who may become
eligible is not significant; further, the Company will not participate in the
plan following its separation from Irex. All liabilities associated with the
plan will remain with Irex.
The expected cost of these benefits is charged to expense during the years
that the employees render service. The transition obligation is being
amortized over 20 years. In 1995, 1996, and 1997 the Company's share of the
Plan's total expense was $22,000, $29,000, and $15,000, respectively.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet of Irex and subsidiaries at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Vested benefit obligation............................. $ 798 $ 798
Non-vested benefit obligation......................... 158 129
------- -------
956 927
Plan assets at fair value.............................. (51) --
------- -------
Accumulated postretirement benefit obligation in excess
of plan assets........................................ 905 927
Unrecognized transition obligation..................... (769) (721)
Unrecognized net gain.................................. 340 289
------- -------
Accrued postretirement benefit liability............... $ 476 $ 495
======= =======
</TABLE>
For measurement purposes, a 13% annual rate of increase in the per capita
cost of covered health care benefits was assumed for calendar 1997; the rate
was assumed to decrease to 10% in 1998 and 7% for 2001 and remain level
thereafter. Due to the provisions of the plan, increasing the assumed health
care cost trend rates by one percentage point in each year would not have a
significant impact on the accumulated postretirement benefit obligation or the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1997.
F-11
<PAGE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 7.25% at December 31, 1996 and
1997, respectively. The expected long-term rate of return on assets was 8.50%
at December 31, 1996.
Other
The Company has an incentive compensation plan covering substantially all of
its officers and key employees. The amount of incentive compensation is
dependent upon the rate of return on assets of the Company and the particular
regional or branch office. Total incentive compensation expense was $1,012,000
for 1995, $1,335,000 for 1996, and $1,428,000 for 1997.
Substantially all of the Company's salaried employees are covered by defined
contribution savings incentive and employee stock ownership plans (ESOP)
maintained by Irex. Contributions to the savings incentive plan are based on a
percentage of employee contributions to the plan, while ESOP contributions are
discretionary. The Company's share of these plans' total expense was $256,000
in 1995, $299,000 in 1996, and $259,000 in 1997.
6. INCOME PER COMMON SHARE:
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128 "Earnings Per Share." SFAS No. 128 requires dual presentation
of basic and diluted earnings per share on the face of the income statement
for all entities with complex capital structures. The Company's basic income
per share is calculated as income available to shareholders divided by the
weighted average number of shares outstanding. Earnings per share have been
retroactively restated to reflect the 291.4 to 1 stock split-up effected in
the form of a dividend discussed in Note 11. For diluted income per share,
there are no common stock equivalents.
7. BORROWINGS:
Long-term notes payable to affiliates consists of the following at December
31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
9.25% unsecured notes payable to affiliate due in equal
annual installments
from May 1, 1996 to 2002................................... $ 7,114 $ 5,928
Unsecured note payable at prime commercial rate due to
affiliate on
December 1, 1998........................................... 250 250
------- -------
Total..................................................... 7,364 6,178
Less current portion...................................... 1,436 1,436
------- -------
$ 5,928 $ 4,742
======= =======
</TABLE>
Prime commercial rate is determined by the rate in effect on the previous
December 1 and June 1.
Other long-term debt is comprised of three unsecured notes totalling $94,000
as of December 31, 1997, with interest rates ranging from 6.63% to 8.16%,
payable in monthly and annual installments through July 10, 2009. As of
December 31, 1997, the current portion of other long-term debt is $19,000.
Other long-term debt was $0, as of December 31, 1996.
Interest expense for the notes payable to affiliate was $790,000 in 1995,
$725,000 in 1996, and $679,000 in 1997.
Any unpaid principal balance on each of the notes payable to affiliate may
be prepaid in whole or in part without premium or penalty provided that at the
time of any such prepayment all interest accrued to the date of prepayment on
the portion of the principal balance be simultaneously paid and all
prepayments be made on December 31 unless otherwise agreed by the holder.
F-12
<PAGE>
Long-term borrowings maturing during the next five years are as follows (in
thousands):
<TABLE>
<S> <C>
1998.............................................................. $1,455
1999.............................................................. 1,200
2000.............................................................. 1,192
2001.............................................................. 1,192
2002.............................................................. 1,192
</TABLE>
The payables to affiliates account, within current liabilities, includes the
Company's cumulative cash borrowings from Irex and affiliates. Interest
expense was $1,048,000 in 1995, $1,132,000 in 1996 and $1,249,000 in 1997. The
weighted average interest rate for the years ended December 31, 1995, 1996 and
1997 was 8%.
8. COMMITMENTS AND CONTINGENCIES:
The Company leases distribution centers and sales offices under
noncancelable operating lease agreements. Rental expense for all operating
leases was $2,866,000 in 1995, $2,983,000 in 1996 and $3,624,000 in 1997. As
of December 31, 1997, the future minimum rental commitments under
noncancelable operating leases that have terms in excess of one year are as
follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $2,615
1999............................................................. 1,936
2000............................................................. 1,525
2001............................................................. 1,020
2002............................................................. 583
Subsequent years................................................. 299
------
Total minimum rental obligations............................... $7,978
======
</TABLE>
The Company is involved from time to time in various claims and litigation
arising in the ordinary course of its business. Management believes the
outcome of such claims and litigation will not materially affect the Company's
long-term business, financial position or results of operations.
The Company, together with other subsidiaries of Irex, has guaranteed
certain obligations of Irex, which at December 31, 1997 totaled $27,604,000.
Such guarantees with respect to the Company will terminate upon completion of
the separation transaction discussed in Note 11.
9. ACCRUED LIABILITIES:
The components of accrued liabilities as of December 31, 1996 and 1997 are
as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Salaries and wages......................................... $ 1,295 $ 1,404
Workers' compensation, general and auto liability
insurance................................................. -- 1,263
Other...................................................... 1,451 1,441
------- -------
$ 2,746 $ 4,108
======= =======
</TABLE>
At December 31, 1996, an affiliate of the Company maintained the reserves
for workers' compensation, general and auto liability insurance. See note 10.
10. RELATED PARTIES:
The Company sells its products to the specialty contracting subsidiaries of
Irex. Sales to those affiliates are included in the Company's net sales as
reflected in the consolidated statements of income. Net sales to the Company's
affiliates were $10,682,000, $12,383,000 and $9,301,000 in 1995, 1996 and
1997, respectively.
F-13
<PAGE>
Irex provides various administrative and management services to its
affiliates, including the Company. These services include, among others,
management and maintenance of the information systems, legal, credit and risk
management, cash management, tax, accounting and personnel administration.
Irex allocates these costs to its affiliates through a combination of the
estimated utilization of the services provided or as a percentage of net
sales. Amounts allocated to the Company in excess of the actual costs incurred
by Irex for these services are shown in the statements of shareholder's equity
as a distribution to parent. Collectively, the allocation of the actual costs
incurred by Irex for these services are reflected as selling, general and
administrative expenses in the Company's consolidated statements of income.
Management believes the methodology used to allocate the costs of these
services is reasonable. As such, the Company was charged and has included
$1,616,000, $1,815,000 and $2,542,000 in 1995, 1996 and 1997, respectively, as
selling, general and administrative expenses in the consolidated statements of
income. Amounts allocated to the Company in excess of the actual costs
incurred by Irex for these services, in the amount of $748,000, $463,000 and
$248,000 in 1995, 1996 and 1997, respectively, are shown in the statements of
shareholder's equity as a distribution to parent.
Irex administers the Company's insurance program. Prior to 1997, the
reserves for workers' compensation and other insurance risks were not
reflected on the consolidated balance sheet of the Company. As indicated in
note 9 above, an affiliate of the Company maintained these reserves and made
payments on behalf of the Company. The appropriate charges to the Company were
recognized in the payable to affiliates account. The Company's expense related
to workers' compensation and other insurance programs was $484,000 in 1995,
$501,000 in 1996 and $606,000 in 1997.
The Company's cash transactions flow through a consolidated banking
arrangement that is maintained by Irex. The Company, in the normal course of
business, receives credit for cash deposited or charges for working capital
needed. The payable to affiliates account, at December 31, 1997, includes the
Company's cumulative cash borrowings from Irex and affiliates. Based upon the
activity within the payable to affiliates account, the Company is charged
interest expense from Irex. Interest expense was $1,048,000 in 1995,
$1,132,000 in 1996 and $1,249,000 in 1997.
11. SUBSEQUENT EVENTS:
Separation
On January 19, 1998, Irex announced its intention to spin off Specialty
Products & Insulation Co. to its shareholders. Irex's Board of Directors, at
its February 26, 1998 meeting, approved the proposed transaction in which
shareholders of Irex Common stock will receive a dividend of the Company's
Common stock. This dividend is expected to be a tax-free distribution to
current shareholders of Irex Common stock. The transaction is expected to be
completed in the second or third quarter of 1998.
Concurrent with the spin off transaction described above, the Company
intends to file a registration statement on Form S-1 with the Securities and
Exchange Commission for purposes of registering shares of common stock.
On April 9, 1998, the Company filed Restated Articles of Incorporation which
increased the authorized number of shares of common stock to 15,000,000,
changed the common stock par value to $0.01 and authorized 15,000,000 shares
of Preferred stock at $0.01 par value. These changes have been retroactively
reflected in the accompanying financial statements.
In conjunction with the above transactions, the Company expects to enter
into several agreements with Irex.
.Corporate Separation Agreement--Pursuant to this agreement, Irex will
provide management information system services to the Company. These
services will be provided subject to a quarterly or hourly fee. In
addition, certain indemnifications, excluding tax related items, between
the Company and Irex are defined in this agreement.
F-14
<PAGE>
.Tax Sharing and Indemnification Agreement--Tax related indemnifications
between the Company and Irex are defined within this agreement. These
indemnifications relate to the periods before and after the transactions
described above.
.Benefits Sharing Agreement--This agreement addresses the division of
employee benefit plans and other employment-related liabilities between the
Company and Irex.
Prior to the spin-off described above, the Company will declare a 291.4 to 1
stock split up effected in the form of a dividend. The stock split-up has been
retroactively reflected in the accompanying financial statements.
Acquisition
On March 1, 1998, the Company acquired the assets of Extol of Texas, Inc.
(Extol), located in Houston, Texas, for cash consideration of approximately
$5,558,000. Extol is primarily engaged in the distribution and fabrication of
commercial and industrial insulation systems, and other specialty products.
12. PRO FORMA INFORMATION (UNAUDITED):
The unaudited pro forma consolidated balance sheet of the Company as of
December 31, 1997 reflects the planned dividend (estimated at $10,490,000) to
be made to Irex through the execution of a note payable to Irex and
subsequently paid from the net proceeds of the Offering. See "Use of
Proceeds." Pursuant to the requirements of the Securities and Exchange
Commission, the dividend has been reflected in the pro forma balance sheet
without giving effect to any receipt of the net proceeds from the Offering. In
addition, pursuant to the requirements of the Securities and Exchange
Commission, the pro forma income per share data giving effect to the number of
shares whose proceeds were used to in effect pay the dividend on both a basic
and diluted basis is $0.78. Pro forma weighted average shares outstanding on
both a basic and diluted basis was 3,867,184.
F-15
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1998
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................ $ 36,280 $ 42,669
Cost of sales............................................ 28,555 33,309
---------- ----------
Gross profit........................................... 7,725 9,360
Selling, general and administrative expenses............. 6,588 7,992
---------- ----------
Operating income....................................... 1,137 1,368
Interest expense, net.................................... 448 516
---------- ----------
Income before income taxes............................. 689 852
Income tax provision..................................... 281 349
---------- ----------
Net income............................................. $ 408 $ 503
========== ==========
Net income per share--basic.............................. $ 0.14 $ 0.17
========== ==========
Net income per share--diluted............................ $ 0.14 $ 0.17
========== ==========
Weighted average shares outstanding--basic............... 2,913,547 2,913,547
========== ==========
Weighted average shares outstanding--diluted............. 2,913,547 2,913,547
========== ==========
</TABLE>
See notes to the condensed consolidated financial statements.
F-16
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
DEC. 1998
31, MARCH 31, PRO FORMA
1997 1998 (SEE NOTE 7)
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 345 $ 264 $ 264
Receivables, net............................... 27,635 30,735 30,735
Inventories of materials and supplies.......... 15,667 17,499 17,499
Prepaid expenses............................... 173 223 223
Deferred income taxes.......................... 1,100 1,100 1,100
------- ------- -------
Total current assets.......................... 44,920 49,821 49,821
------- ------- -------
Property and Equipment, net..................... 1,768 2,328 2,328
------- ------- -------
Other Assets.................................... 963 1,594 1,594
------- ------- -------
$47,651 $53,743 $53,743
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term notes payable to
affiliates and other
long-term debt................................ $ 1,455 $ 1,450 $ 1,450
Accounts payable............................... 7,360 11,618 11,618
Payable to affiliates.......................... 20,221 21,536 21,536
Accrued liabilities............................ 4,108 3,977 3,977
Accrued income taxes........................... 510 769 769
Dividend payable to Irex Corporation........... -- -- 10,490
------- ------- -------
Total current liabilities..................... 33,654 39,350 49,840
------- ------- -------
Long-term notes payable to affiliates, less
current portion................................ 4,742 4,742 4,742
Long-term debt, less current portion............ 75 64 64
Shareholder's Equity:
Preferred stock, $0.01 par value per share;
15,000,000 shares authorized; none issued..... -- -- --
Common stock, $0.01 par value per share;
15,000,000 shares authorized; 2,913,547 issued
and outstanding............................... 29 29 29
Paid-in surplus................................ 974 974 974
Retained earnings.............................. 8,177 8,584 (1,906)
------- ------- -------
Total shareholder's equity.................... 9,180 9,587 (903)
------- ------- -------
$47,651 $53,743 $53,743
======= ======= =======
</TABLE>
See notes to the condensed consolidated financial statements.
F-17
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................... $ 408 $ 503
Reconciliation of net income to net cash provided by
operating activities
Depreciation and amortization.............................. 151 182
Provision for losses on accounts receivable................ 98 173
(Increase) decrease in assets--
Receivables................................................ (675) (1,160)
Inventories................................................ (777) 370
Other prepaid expenses..................................... 138 (50)
Increase (decrease) in liabilities--
Accounts payable........................................... 2,105 4,258
Accrued income taxes....................................... 140 259
Accrued liabilities and other.............................. (660) (131)
------ -------
Net cash provided by operating activities................ 928 4,404
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.......................... (104) (130)
Acquisitions of certain business
Assets..................................................... -- (4,908)
Intangibles................................................ -- (650)
------ -------
Net cash used for investing activities................... (104) (5,688)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt................................... -- (16)
Increase in payable to affiliates............................ (75) 1,219
------ -------
Net cash (used for) provided by financing activities..... (75) 1,203
------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 749 (81)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 78 345
------ -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 827 $ 264
====== =======
</TABLE>
See notes to the condensed consolidated financial statements.
F-18
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION:
Specialty Products & Insulation Co. (the Company) is a wholly owned
subsidiary of Irex Corporation (Irex). The consolidated financial
statements of the Company include the accounts of Specialty Products &
Insulation Co. and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosure normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements should be read in conjunction
with the Company's annual audited financial statements for the year ended
December 31, 1997.
The financial information presented herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results for the
interim periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the full year.
2. RELATED PARTIES:
The Company sells its products to the specialty contracting subsidiaries of
Irex. Sales to those affiliates are included in the Company's net sales as
reflected in the consolidated statements of income. Net sales to the
Company's affiliates were $2,787,000 and $1,940,000, in the three months
ended March 31, 1997 and 1998, respectively.
Irex provides various administrative and management services to its
affiliates, including the Company. These services include, among others,
management and maintenance of the information systems, legal, credit and
risk management, cash management, tax, accounting and personnel
administration. Irex allocates these costs to its affiliates through a
combination of the estimated utilization of the services provided or as a
percentage of net sales. Amounts allocated to the Company in excess of the
actual costs incurred by Irex for these services are shown in the
statements of shareholder's equity as a distribution to parent.
Collectively, the allocation of the actual costs incurred by Irex for these
services are reflected as selling, general and administrative expenses in
the Company's consolidated statements of income. Management believes the
methodology used to allocate the cost of these services is reasonable. As
such, the Company was charged and has included $618,000 and $627,000 in the
three months ended March 31, 1997 and 1998, respectively, as selling,
general and administrative expenses in the consolidated statements of
income. Amounts allocated to the Company in excess of the actual costs
incurred by Irex for these services, $86,000 and $96,000 in the three
months ended March 31, 1997 and 1998, respectively, are considered to be a
distribution to parent.
3. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company's state income tax payments, net of refunds, were $107,000 and
$99,000 for the first three months of 1997 and 1998, respectively. Interest
on the notes payable to affiliate and the payable to affiliates account are
charged to the payable to affiliates account.
F-19
<PAGE>
4. SEPARATION:
On January 19, 1998, Irex announced its intention to spin off Specialty
Products & Insulation Co. to its shareholders. Irex's Board of Directors,
at its February 26, 1998 meeting approved the proposed transaction in which
shareholders of Irex common stock will receive a dividend of the Company's
common stock. This dividend is expected to be a tax-free distribution to
current shareholders of Irex common stock. The transaction is expected to
be completed in the second or third quarter of 1998.
On April 9, 1998, the Company filed Restated Articles of Incorporation,
which increased the authorized number of common stock to 15,000,000,
changed the common stock par value to $0.01 and authorized 15,000,000
shares of preferred stock at $0.01 par value. These changes have been
retroactively reflected in the accompanying financial statements.
On April 10, 1998, the Company filed a registration statement with the
Securities and Exchange Commission relating to the initial public offering
of 2,000,000 shares of common stock. The spin-off described above will
occur immediately prior to the initial public offering. Following the spin-
off and initial public offering, the Company will be an independent
company.
Prior to the spin-off described above, the Company will declare a 291.4 to
1 stock split-up effected in the form of a dividend. The stock split-up has
been retroactively reflected in the accompanying financial statements.
5. CREDIT FACILITY:
Subject to completion of the offering and certain other conditions,
including execution of appropriate loan documentation, the Company executed
commitment letters related to a credit facility. The credit facility is an
unsecured line of credit aggregating $30 million with interest rates
related to short term rates.
6. ACQUISITIONS:
On March 1, 1998, the Company acquired the assets of Extol of Texas, Inc.
(Extol), located in Houston, Texas, for cash consideration of approximately
$5,558,000. Extol is primarily engaged in the distribution and fabrication
of commercial and industrial insulation systems, and other specialty
products. The acquisition was accounted for using the purchase method of
accounting, and the financial statements reflect the results of operations
and cash flows of the operation from the date of acquisition. Had the
acquisition occurred at the beginning of the periods presented, sales and
net income would not have been materially different from reported results.
On May 13, 1998, the Company executed a letter of intent to purchase
certain assets of a mechanical insulation fabricator with fiscal year 1997
sales of approximately $4.0 million.
7. PRO FORMA INFORMATION:
The unaudited pro forma consolidated balance sheet of the Company as of
March 31, 1998, reflects the planned dividend (estimated at $10,490,000) to
be made to Irex through the execution of a note payable to Irex and
subsequently paid from the net proceeds of the initial public offering.
Pursuant to the requirements of the Securities and Exchange Commission, the
dividend has been reflected in the pro forma balance sheet without giving
effect to any receipt of the net proceeds of the initial public offering.
In addition, pursuant to the requirements of the Securities and Exchange
Commission, the pro forma income per share data giving effect to the number
of shares whose proceeds were used to in effect pay the dividend on both a
basic and diluted basis is $0.13. Pro forma weighted average shares
outstanding on both a basic and diluted basis are 3,867,184.
F-20
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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.
------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Dilution.................................................................. 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Acquisition and Expansion Background...................................... 24
Business.................................................................. 27
Management................................................................ 35
Principal Shareholders.................................................... 41
Separation from Irex...................................................... 42
Description of Capital Stock.............................................. 44
Shares Eligible for Future Sale........................................... 46
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Additional Information.................................................... 49
Cautionary Statement Regarding Forward-Looking Statements................. 50
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
[LOGO OF SPECIALITY PRODUCTS APPEARS HERE]
SPECIALTY PRODUCTS &
INSULATION CO.
COMMON STOCK
PROSPECTUS
LEGG MASON WOOD WALKER
INCORPORATED
ADVEST, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 8,142
NASD Filing Fee.................................................. $ 3,260
Nasdaq Filing Fee................................................ $ 56,970
Blue Sky Fees and Expenses....................................... $ 2,870
Legal Fees and Expenses.......................................... $464,000
Accounting Fees and Expenses..................................... $225,000
Registrar and Transfer Agent Fees................................ $ 2,300
Printing and Engraving Expenses.................................. $151,100
Miscellaneous.................................................... $ 54,982
--------
Total.......................................................... $968,624
</TABLE>
--------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Bylaws of the Company provide that the Company shall indemnify any
person who is a party or is threatened to be made a party to any lawsuit or
claim for damages arising by reason of the fact that he is or was a director,
officer or employee of the Company or any subsidiary. The Company intends to
obtain directors' and officers' insurance against certain liabilities such
persons may incur on behalf of the Company.
Pennsylvania law permits the Registrant to provide similar indemnification
to employees and agents who are not directors or officers. The determination
of whether an individual meets the applicable standard of conduct may be made
by the disinterested directors, independent legal counsel or the stockholders.
Pennsylvania law also permits indemnification in connection with a proceeding
brought by or in the right of the Registrant to procure a judgment in its
favor. To the extent that an indemnification for liabilities arising under the
Securities Act is permitted to directors, officers, or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in that Act and is therefore unenforceable.
The Underwriting Agreement provides for indemnification by the Underwriters
of the registrant and its directors, officers and controlling persons for
certain liabilities, including liabilities arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not issued any unregistered securities within the past three
years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Restated Articles of Incorporation of the Company
3.2+ Bylaws of the Company
4.1 Specimen Common Stock Certificate
5.1 Opinion of Dechert Price & Rhoads
10.1 Form of Corporate Separation Agreement
10.2 Form of Tax Sharing and Indemnification Agreement
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3 Form of Benefits Sharing Agreement
10.4 Form of 1998 Specialty Products & Insulation Co. Stock Option Plan
10.5 Form of Executive Severance Agreement of Ronald L. King
10.6 Form of Employment Agreement of Ronald L. King
10.7 Form of Executive Severance Agreement of Michael J, Hughes
10.8 Form of Employment Agreement of Charles F. Schattgen
10.9 Form of Employment Agreement of Raymond J. Horan
10.10 Form of Deferred Payment Agreement for Director
10.11 Form of Incentive Compensation Plan
10.12 Form of Credit Agreement
11.0 Statement Regarding Computation of Per Share Earnings
21.1+ Subsidiary of the Registrant
23.1 Consent of Arthur Andersen LLP (included on page II-5)
23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1)
24.1+ Power of Attorney
27.1+ Financial Data Schedule
99.1+ Consent of W. Kirk Liddell
99.2+ Consent of William W. Adams
99.3+ Consent of David C. Kleinman
99.4+ Consent of Wilson D. McElhinny
99.5+ Consent of G. Clay von Seldeneck
99.6+ Consent of John O. Shirk
99.7+ Consent of Michael J. Hughes
</TABLE>
--------
+ Previously filed.
(b) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted because they are not required or applicable,
or because the information is included in the consolidated financial
statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
(a) 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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
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 Act
and will be governed by the final adjudication of such issue.
II-2
<PAGE>
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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 the purpose of determining any liability under the Securities Act
of 1933, 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of East Petersburg and Commonwealth of
Pennsylvania on June 16, 1998.
Ronald L. King
By: _________________________________
RONALD L. KING
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
Ronald L. King President, Chief
- ------------------------------------- Executive Officer June 16, 1998
RONALD L. KING and Director
(principal
executive officer)
Michael J. Hughes Vice President,
- ------------------------------------- Chief Financial June 16, 1998
MICHAEL J. HUGHES Officer, Secretary
and Treasurer
(principal
financial and
principal
accounting officer)
II-4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Specialty Products & Insulation Co.
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Lancaster, Pennsylvania
June 16, 1998
II-5
<PAGE>
SCHEDULE II
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT PROVISION BALANCE
BEGINNING CHARGED ACCOUNTS AT END
OF YEAR TO EXPENSE WRITTEN OFF OF YEAR
---------- ---------- ----------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful Accounts..... $700 $ 830 $(936) $594
YEAR ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts..... $594 $1,120 $(720) $994
YEAR ENDED DECEMBER 31, 1997
Allowance for Doubtful Accounts..... $994 $ 71 $(599) $466
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE NO.
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.......................
3.1+ Restated Articles of Incorporation of the Company....
3.2+ Bylaws of the Company................................
4.1 Specimen Common Stock Certificate....................
5.1 Opinion of Dechert Price & Rhoads....................
10.1 Form of Corporate Separation Agreement...............
10.2 Form of Tax Sharing and Indemnification Agreement....
10.3 Form of Benefits Sharing Agreement...................
10.4 Form of 1998 Specialty Products & Insulation Co.
Stock Option Plan...................................
10.5 Form of Executive Severance Agreement of Ronald L.
King................................................
10.6 Form of Employment Agreement of Ronald L. King.......
10.7 Form of Executive Severance Agreement of Michael J.
Hughes..............................................
10.8 Form of Employment Agreement of Charles F.
Schattgen...........................................
10.9 Form of Employment Agreement of Raymond J. Horan.....
10.10 Form of Deferred Payment Agreement for Director......
10.11 Form of Incentive Compensation Plan..................
10.12 Form of Credit Agreement.............................
11.0 Statement Regarding Computation of Per Share
Earnings............................................
21.1+ Subsidiary of the Registrant.........................
23.1 Consent of Arthur Andersen LLP (included on page II-
5)..................................................
23.2 Consent of Dechert Price & Rhoads (included in
Exhibit 5.1)........................................
24.1+ Power of Attorney (included on Signature Page).......
27.1+ Financial Data Schedule..............................
99.1+ Consent of W. Kirk Liddell...........................
99.2+ Consent of William W. Adams..........................
99.3+ Consent of David C. Kleinman.........................
99.4+ Consent of Wilson D. McElhinny.......................
99.5+ Consent of G. Clay von Seldeneck.....................
99.6+ Consent of John O. Shirk.............................
99.7+ Consent of Michael J. Hughes.........................
</TABLE>
--------
+ Previously filed.
<PAGE>
EXHIBIT 1.1
2,000,000 Shares
SPECIALTY PRODUCTS & INSULATION CO.
Common Stock
FORM OF
UNDERWRITING AGREEMENT
----------------------
June __, 1998
LEGG MASON WOOD WALKER, INCORPORATED
ADVEST, INC.
As Representatives of the several Underwriters
c/o Legg Mason Wood Walker, Incorporated
1735 Market Street, Suite 1100
Philadelphia, Pennsylvania 19103
Ladies and Gentlemen:
Specialty Products & Insulation Co., a Pennsylvania corporation (the
"Company"), proposes to sell an aggregate of 2,000,000 shares (the "Firm
Shares") of the Company's Common Stock, $.01 par value per share (the "Common
Stock"), to you and to the other underwriters named in Schedule I (collectively,
the "Underwriters"), for whom you are acting as representatives (the
"Representatives"). The Company has also agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional 300,000
shares of Common Stock (the "Option Shares") on the terms and for the purposes
set forth in Section 1(b). The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares."
Irex Corporation, a Pennsylvania corporation ("Irex"), as the parent
corporation of the Company, will distribute as a tax-free dividend the currently
outstanding shares of the Company's Common Stock to Irex stockholders in
connection with the initial public offering of the Shares (the "Distribution").
Immediately prior to the Distribution, the Company will declare a dividend in
the approximate amount of $10,500,000 to Irex (the "Dividend"). Accordingly,
Irex, pursuant to its relationship with the Company and the Distribution and
Dividend in connection with the initial public offering of the Shares, hereby
joins this Agreement as a party and agrees to the representations, warranties
and covenants herein.
<PAGE>
The initial public offering price per share for the Shares and the
purchase price per share for the Shares to be paid by the several Underwriters
shall be agreed upon by the Company, Irex and the Representatives, acting on
behalf of the several Underwriters, and such agreement shall be set forth in a
separate written instrument substantially in the form of Exhibit A attached
hereto (the "Price Determination Agreement").
The offering of the Shares will be governed by this Agreement, as
supplemented by the Price Determination Agreement. From and after the date of
the execution and delivery of the Price Determination Agreement, this Agreement
shall be deemed to incorporate, and, unless the context otherwise indicates, all
references contained herein to "this Agreement" and to the phrase "herein" shall
be deemed to include the Price Determination Agreement.
The Company and Irex confirm as follows their respective agreements
with the Representatives and the several other Underwriters.
1. Agreement to Sell and Purchase.
------------------------------
(a) On the basis of the respective representations, warranties
and agreements of the Company and Irex herein contained and subject to all the
terms and conditions of this Agreement, (i) the Company agrees to sell to the
several Underwriters and (ii) each of the Underwriters, severally and not
jointly, agrees to purchase from the Company, at the purchase price per share
for the Firm Shares to be agreed upon by the Representatives, the Company and
Irex in accordance with Section 1(c) hereof and set forth in the Price
Determination Agreement, the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I, plus such additional number of Firm Shares
that such Underwriter may become obligated to purchase pursuant to Section 8
hereof. Schedule I may be attached to the Price Determination Agreement.
(b) Subject to all the terms and conditions of this Agreement,
the Company grants the Option to the several Underwriters to purchase, severally
and not jointly up to 300,000 Option Shares from the Company at the same price
per share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 45th day after the date of the Price Determination
Agreement, upon written or telegraphic notice (the "Option Shares Notice") by
the Representatives to the Company no later than 12:00 noon, New York City time,
at least two and no more than five business days before the date specified for
closing in the Option Shares Notice (the "Option Closing Date") setting forth
the aggregate number of Option Shares to be purchased and the time and date for
such purchase. On the Option Closing Date, the Company will issue and sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice, and each Underwriter will purchase such percentage of the Option Shares
as is equal to the percentage of Firm Shares that such
-2-
<PAGE>
Underwriter is purchasing, as adjusted by the Representatives in such manner as
they deem advisable to avoid fractional shares.
(c) The initial public offering price per share for the Firm
Shares and the purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be agreed upon and set forth in the Price
Determination Agreement. The Company has elected to rely on Rule 430A (as
hereinafter defined). In the event such price has not been agreed upon and the
Price Determination Agreement has not been executed by the close of business on
the fourteenth business day following the date on which the Registration
Statement (as hereinafter defined) becomes effective, this Agreement shall
terminate forthwith, without liability of any party to any other party except
that Section 6 shall remain in effect.
2. Delivery and Payment. Delivery of the Firm Shares shall be made
--------------------
to the Representatives for the accounts of the Underwriters at the office of
Legg Mason Wood Walker, Incorporated, 1735 Market Street, Suite 1100,
Philadelphia, Pennsylvania 19103, against payment of the purchase price therefor
by wire transfer of Federal Funds or similar same day funds to an account
designated in writing by the Company to Legg Mason Wood Walker, Incorporated at
least one business day prior to the Closing Date (as hereinafter defined). Such
payment shall be made at 10:00 a.m., New York City time, on the third business
day (or fourth business day, if the Price Determination Agreement is executed
after 4:30 p.m.) after the date on which the first bona fide offering of the
Shares to the public is made by the Underwriters or at such time on such other
date, not later than ten business days after such date, as may be agreed upon by
the company and the Representatives (such date is hereinafter referred to as the
"Closing Date").
To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above) will
take place at the offices specified above for the Closing Date at the time and
date (which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form
and shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection on the business day prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with
the issuance and delivery of the Firm Shares and Option Shares by the Company to
the respective Underwriters shall be borne by the Company. The Company will pay
and save each Underwriter and any subsequent holder of the Shares harmless from
any and all liabilities with respect to or resulting from any failure or delay
in paying Federal and state
-3-
<PAGE>
stamp and other transfer taxes, if any, which may be payable or determined to be
payable in connection with the original issuance or sale to such Underwriter of
the Firm Shares and Option Shares.
3. Representations and Warranties of the Company and Irex. Each of
------------------------------------------------------
the Company and Irex represents, warrants and covenants to each Underwriter
that:
(a) A registration statement (Registration No. 333-49947) on
Form S-1 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
preliminary prospectus have been delivered to the Representatives. The term
"Registration Statement" means the registration statement as amended at the time
it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A or Rule 434 of the Rules and Regulations. If the Company files a
registration statement to register a portion of the Shares and relies on Rule
462(b) of the Rules and Regulations for such registration statement to become
effective upon filing with the Commission (the "Rule 462 Registration
Statement"), then any reference to the "Registration Statement" shall be deemed
to include the Rule 462 Registration Statement, as amended from time to time.
The term "Prospectus" means the prospectus as first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus included in the Registration Statement at
the Effective Date.
(b) On the Effective Date, the date the Prospectus is first
filed with the Commission pursuant to Rule 424(b)(if required), at all times
subsequent to and including the Closing Date and, if later, the Option Closing
Date and when any post-effective amendment to the Registration Statement becomes
effective or any amendment or supplement to the Prospectus is filed with the
Commission, the Registration Statement and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did or will comply with all applicable provisions of the Act and the
Rules and Regulations and will contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement or any such
amendment did or will contain any 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. At the Effective Date, the date the
Prospectus or any
-4-
<PAGE>
amendment or supplement to the Prospectus is filed with the Commission and at
the Closing Date and, if later, the Option Closing Date, the Prospectus did not
or will not contain statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or omissions made
in reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives specifically for
inclusion in the preliminary prospectus, the Registration Statement or the
Prospectus. The Company has not distributed any offering material in connection
with the offering or sale of the Shares other than the Registration Statement,
the preliminary prospectus, the Prospectus or any other materials, if any,
permitted by the Act.
(c) The only subsidiary (as defined in the Rules and
Regulations) of the Company is the subsidiary listed on Exhibit 21.1 to the
Registration Statement (the "Subsidiary"). Each of Irex, the Company and its
Subsidiary are, and at the Closing Date will be, a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation. The Company and its Subsidiary have, and at the Closing Date will
have, full power and authority to conduct all the activities conducted by it, to
own or lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. The Company and its
Subsidiary are, and at the Closing Date will be, duly licensed or qualified to
do business and in good standing as a foreign corporation in all jurisdictions
in which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such licensing or qualification necessary.
All of the outstanding shares of capital stock of the Subsidiary have been duly
authorized and validly issued, and are fully paid and non-assessable and are
owned by the Company free and clear of all liens, encumbrances and claims
whatsoever. Except for the stock of the Subsidiary and as disclosed in the
Registration Statement, the Company does not own, and at the Closing Date will
not own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in any
firm, partnership, joint venture, limited liability company, association or
other entity. Complete and correct copies of the certificate of incorporation
and of the by-laws of the Company and its Subsidiary and all amendments thereto
have been delivered to the Representatives, and no changes therein will be made
subsequent to the date hereof and prior to the Closing Date or, if later, the
Option Closing Date.
(d) The outstanding shares of Common Stock have been, and the
Shares to be issued and sold by the Company upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be subject
to any preemptive or similar right. The description of the Common Stock in the
Registration Statement and the Prospectus is, and at the Closing Date will be,
complete and accurate in all respects. Except as set forth in the Prospectus,
the Company does not have outstanding, and at the Closing Date will not have
outstanding, any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contracts or
commitments to issue or sell, any shares of Common Stock, any shares of capital
stock of any Subsidiary or any such warrants, convertible securities or
obligations.
-5-
<PAGE>
(e) The financial statements and schedules included in the
Registration Statement and the Prospectus present fairly the consolidated
financial condition of the Company as of the respective dates thereof and the
consolidated results of operations and cash flows of the Company for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed in the Prospectus. The pro forma
financial statements and other pro forma financial information included in the
Registration Statement or the Prospectus (i) present fairly in all material
respects the information shown therein, (ii) have been prepared in accordance
with the Commission's rules and guidelines with respect to pro forma financial
statements and (iii) have been properly computed on the bases described therein.
The assumptions used in the preparation of the pro forma financial statements
and other pro forma financial information included in the Registration Statement
or the Prospectus are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein. No other financial statements or schedules of the Company are required
by the Act or the Rules and Regulations to be included in the Registration
Statement or the Prospectus. Arthur Andersen LLP (the "Accountants") who have
reported on such financial statements and schedules, are independent accountants
with respect to the Company as required by the Act and the Rules and
Regulations. Any statements required to be included in the Registration
Statement with respect to the Accountants pursuant to Rule 509 of Regulations S-
K of the Rules and Regulations are true and correct in all material respects.
(f) Except as set forth in financial statements and schedules
included in the Registration Statement and the Prospectus, or which were
incurred in the ordinary course of business, the Company has no liabilities,
obligations or commitments of any nature, matured or unmatured, fixed or
contingent or otherwise.
(g) The Company 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 authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (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 existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and prior to the
Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) there has not been and will not have been any
change in the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiary, taken as
a whole (a "Material Adverse Effect"), or any change in the capitalization of
the Company, arising for any reason whatsoever, (ii) neither the Company nor its
Subsidiary has incurred nor will it incur any material liabilities or
obligations, direct or contingent, nor has
-6-
<PAGE>
it entered into nor will it enter into any material transactions other than
pursuant to this Agreement and the transactions referred to herein and (iii) the
Company has not and will not have paid or declared any dividends or other
distributions of any kind on any class of its capital stock.
(i) The Company is not an "investment company" or an "affiliated
person" "controlled" by an investment company within the meaning of the
Investment Company Act of 1940, as amended.
(j) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the best
knowledge of the Company, threatened against or affecting the Company or its
Subsidiary or any of their respective officers in their capacity as such, before
or by any Federal or state court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding might result in Material Adverse Effect.
(k) Each of the Company and its Subsidiary has (i) all
governmental licenses, permits, consents, orders, approvals and other
authorizations as are necessary to carry on its business as contemplated in the
Prospectus, except for such licenses, permits, consents, orders, approvals and
authorizations the absence of which would not result in a Material Adverse
Effect, and is not aware that it does not possess any licenses, permits,
consents, orders, approvals and authorizations, (ii) complied in all respects
with all laws, regulations and orders applicable to it or its business and (iii)
performed all its obligations required to be performed by it, and is not, and at
the Closing Date will not be, in default under any indenture, mortgage, deed of
trust, voting trust agreement, loan agreement, bond, debenture, note agreement,
lease, contract or other agreement or instrument (collectively, a "contract or
other agreement") to which it is a party or by which its property is bound or
affected. To the best knowledge of the Company and its Subsidiary, no other
party under any contract or other agreement to which it is a party is in default
in any respect thereunder. Neither the Company nor its Subsidiary is, nor at the
Closing Date will either of them be, in violation of any provision of its
certificate of incorporation or by-laws. Neither the Company nor Irex is aware
that the Company and its Subsidiary does not have all governmental licenses,
permits, consents, orders, approvals and other authorizations necessary to carry
on its business as contemplated in the Prospectus, and is not aware of any
noncompliance with such laws, regulations and orders applicable to it or its
business.
(l) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
in connection with the authorization, issuance, transfer, sale or delivery of
the Shares by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the taking by
the Company of any action contemplated hereby, except such as have been obtained
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the by-laws and rules of the National
-7-
<PAGE>
Association of Securities Dealers, Inc. (the "NASD") in connection with the
purchase and distribution by the Underwriters of the Shares to be sold by the
Company.
(m) Each of Irex and the Company have full corporate power and
authority to enter into this Agreement. This Agreement has been duly authorized,
executed and delivered by Irex and the Company and constitutes a valid and
binding agreement of each of them and is enforceable against Irex and the
Company in accordance with the terms hereof. The performance of this Agreement
and the consummation of the transactions contemplated hereby and the application
of the net proceeds from the offering and sale of the Shares to be sold by the
Company in the manner set forth in the Prospectus under "Use of Proceeds" will
not result in the creation or imposition of any lien, charge or encumbrance upon
any of the assets of the Company or its Subsidiary pursuant to the terms or
provisions of, or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any other party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, the certificate of incorporation or by-laws of the Company or
its Subsidiary, any contract or other agreement to which the Company or its
Subsidiary is a party or by which the Company or its Subsidiary or any of its
properties is bound or affected, or violate or conflict with any judgment,
ruling, decree, order, statute, rule or regulation of any court or other
governmental agency or body applicable to the business or properties of the
Company or its Subsidiary.
(n) The Company and its Subsidiary have good and marketable
title to all properties and assets described in the Prospectus as owned by it,
free and clear of all liens, charges, encumbrances or restrictions, except such
as are described in the Prospectus or are not material to the business of the
Company or its Subsidiary. Each of the Company and the Subsidiary has valid,
subsisting and enforceable leases for the properties described in the Prospectus
as leased by it, with such exceptions as are not material and do not materially
interfere with the use made and proposed to be made of such properties by the
Company and such Subsidiary.
(o) There is no document or contract of a character required to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or its Subsidiary is a party
have been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof.
(p) No statement, representation, warranty or covenant made by
the Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Representatives pursuant to Section 5 of
this Agreement was or will be, when made, inaccurate, untrue or incorrect.
-8-
<PAGE>
(q) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(r) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement.
(s) Prior to the Closing Date, the Shares will be duly
authorized for quotation on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market").
(t) There is no state of facts that might reasonably be expected
to result in any supplier to the Company or its Subsidiary failing to deliver or
delaying delivery of goods, services, or other products to the Company or its
Subsidiary, except for failures or delays that would not result in a Material
Adverse Effect.
(u) Neither the Company nor its Subsidiary has received any
notice whether written or oral, from any supplier of the Company or its
Subsidiary of termination of a distribution agreement between the Company or its
Subsidiary and such supplier.
(v) The Company has not received any notice, whether written or
oral, from any customer, or person or entity using any product of the Company or
its Subsidiary to return any products of the Company or its Subsidiary in
material quantities, whether arising from an alleged defect or shortcoming in
the Company's or its Subsidiary's products or otherwise, which in the aggregate
are equal to or greater than $50,000.
(w) The contemplated installation of an upgrade to the
information system software is scheduled to be installed during 1998, and will
cause, to the best knowledge of the Company, the information systems and
accompanying computer software and components utilized by the Company to (i)
manage, manipulate, input, accept, process, store and output data involving
four-digit year dates, including single century formulae and multi-century
formulae, (ii) accurately process date data from, into and between the 20th and
21st centuries and the years 1999 and 2000 and leap year calculations, (iii)
provide that date-related functionalities and data fields include the indication
of century, as applicable, (iv) when used in combination with other information
technology, process date data as provided for herein if the other information
technology accurately processes and properly exchanges date data with it, and
(v) not cause any other item that is otherwise Year 2000 compliant to fail to be
Year 2000 compliant. After due investigation, the Company has no reason to
believe that such upgrade to the information system software will not perform as
described in subsections (i) through (v) of this paragraph.
-9-
<PAGE>
(x) The Company and its Subsidiary are in compliance with all
federal, state and local employment and labor laws, including, but not limited
to, laws relating to non-discrimination in hiring, promotion and pay of
employees; no labor dispute with the employees of the Company or its Subsidiary
exists or, to the best knowledge of the Company, is imminent or threatened; and
the Company is not aware of any existing, imminent or threatened labor dispute
or disturbance by its employees or the employees of its Subsidiary or any of
their principal suppliers, manufacturers or contractors that could result in a
Material Adverse Effect.
(y) The Company and its Subsidiary are in compliance in all
material respects with all rules and regulations promulgated by the Occupational
Health and Safety Administration ("OSHA") and there are no ongoing
investigations or reviews by OSHA.
(z) The Company and its Subsidiary own, or are licensed or
otherwise have the full exclusive right to use the 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 (collectively, "patent
and proprietary rights") presently employed by them or which are necessary in
connection with the conduct of the business now operated by them, and neither
the Company nor its Subsidiary has received any written notice or otherwise has
actual knowledge of any infringement of or conflict with asserted rights of
others or any other claims with respect to any patent or proprietary rights, or
of any basis for rendering any patent and proprietary rights invalid or
inadequate to protect the interest of the Company or its Subsidiary any of
which, if the subject of an unfavorable decision might likely result in a
Material Adverse Effect.
(aa) Neither the Company nor its Subsidiary nor, to the Company's
best knowledge, any employee or agent of the Company or its Subsidiary has made
any payment of funds of the Company or its Subsidiary or received or retained
any funds in violation of any law, rules or regulation or in a transaction of a
character required to be disclosed in the Prospectus.
(ab) The Company and its Subsidiary (i) are in compliance with
any and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
imposing liability or standards of conduct concerning any Hazardous Material (as
hereinafter defined)("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (iii) are in compliance with all
terms and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, individually or in the
aggregate, result in a material adverse effect on the condition (financial or
otherwise) or on the earnings, business, properties, business
-10-
<PAGE>
prospects or operations of the Company and its Subsidiary, taken as a whole.
The term "Hazardous Material" means (A) any "hazardous substance" as defined by
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, (B) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended , (C) any petroleum or petroleum
product, (D) any polychlorinated biphenyl and (E) any pollutant or contaminant
or hazardous, dangerous, or toxic chemical, material, waste or substance
regulated under or within the meaning of any other Environmental Law.
(ac) Except as set forth in the Registration Statement and the
Prospectus there are no costs and liabilities associated with or arising in
connection with Environmental Laws as currently in effect (including, without
limitation, costs of compliance herewith) which would, singly or in the
aggregate, have a Material Adverse Effect.
(ad) The Company maintains insurance with respect to its
properties and business of the types and in amounts generally deemed adequate
for its business and consistent with insurance coverage maintained in similar
companies and businesses, all of which insurance is in full force and effect.
There is and will continue to be insurance in effect and available with respect
to past operations of the Company and any predecessor, and its Subsidiary and
any liabilities with respect thereto.
(ae) The Company has filed all federal, state and foreign income
and franchise tax returns and has paid all taxes shown as due thereon (except
those that if not so filed or paid would not result in a Material Adverse
Effect), other than taxes which are being contested in good faith and for which
adequate reserves have been established in accordance with generally accepted
accounting principles ("GAAP"); and the Company has no knowledge of any tax
deficiency which has been asserted or threatened against the Company. There are
no tax returns of the Company or its Subsidiary that are currently being audited
by state, local or federal taxing authorities or agencies (and with respect to
which the Company or any Subsidiary has received notice), where the findings of
such audit, if adversely determined, would result in a Material Adverse Effect.
(af) With respect to each employee benefit plan, program and
arrangement (including, without limitation, any "employee benefit plan" as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained or contributed to by the Company, or with
respect to which the Company could incur any liability under ERISA
(collectively, the "Benefit Plan"), no event has occurred and, to the best
knowledge of the Company, there exists no condition or set of circumstances, in
connection with which the Company could be subject to any liability under the
terms of such Benefit Plan, applicable law (including, without limitation, ERISA
and the Internal Revenue Code of 1986, as amended) or any applicable agreement
that could result in a Material Adverse Effect.
(ag) The Distribution of the Company Common Stock to the Irex
stockholders will qualify as a tax-free distribution exempt from Federal and
State income tax.
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<PAGE>
No consent, approval, authorization or order, or any filing or declaration with,
any court or governmental agency or body is required in connection with the
Distribution, the Dividend or in connection with the taking by Irex or the
Company of any action contemplated thereby, except such as have been obtained
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations thereunder and as may be required under state
securities or Blue Sky laws. Each of Irex and the Company has the corporate
power and corporate authority to effect the Distribution and the Dividend,
respectively. Prior to the Closing Date, the Distribution will have been duly
authorized by Irex, and the Distribution will have been consummated immediately
prior to or simultaneous with the first sale of the Shares to the public. Prior
to the Closing Date, the Dividend will have been duly authorized by the Company.
The performance of the Distribution, the Dividend and consummation of the
transactions contemplated thereby will not result in the creation or imposition
of any lien, charge or encumbrance upon any of the assets of the Company or its
Subsidiary pursuant to the terms of the provisions of, or, except insofar as the
Company has obtained consents result in the breach or violation of any of the
terms or provisions of, constitute a default under, give any other party a right
to terminate any of its obligations under, or result in the acceleration of any
obligation under, the Articles of Incorporation or By-Laws of the Company or its
Subsidiary, any contract or other agreement to which the Company or its
Subsidiary is a party or by which the Company or its Subsidiary or any of its
properties is bound or affected, the result of any of which would have a
Material Adverse Effect, or violate or conflict with any judgment, ruling,
decree, order, statute, rule or regulation of any court or other governmental
agency or body applicable to the business or properties of the Company or its
Subsidiary.
4. Agreements of the Company and Irex. The Company and Irex (as
----------------------------------
to Section 4(j)) agree, severally and not jointly, with the several Underwriters
as follows:
(a) The Company will not, either prior to the Effective Date
or thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective, and will notify the Representatives
promptly, and will confirm such advice in writing, (1) when the Registration
Statement has become effective and when any post-effective amendment thereto
become effective, (2) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (3) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose or the threat thereof, (4) of the happening of any
event during the period mentioned in the second sentence of Section 4(e) that in
the judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances under which they are made, not
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<PAGE>
misleading and (5) of receipt by the Company or any representative of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any preliminary prospectus or the Prospectus. If at
any time the Commission shall issue any order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible moment. The Company
will use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and to notify the
Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives, without
charge, two signed copies of the Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, copies of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(e) On the Effective Date, and until the Prospectus is no
longer required by law to be delivered in connection with sales by an
Underwriter or dealer, the Company will deliver to each of the Underwriters,
without charge, as many copies of the Prospectus or any amendment or supplement
thereto as the Representatives may reasonably request. The Company consents to
the use of the Prospectus or any amendment or supplement thereto by the several
Underwriters and by all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for any period of time
thereafter during which the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall occur which
in the judgment of the Company or counsel to the Underwriters should be set
forth in the Prospectus in order to make any statement therein, in the light of
the circumstances under which it was made, not misleading, or if it is necessary
to supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement or
amendment thereto, and will deliver to each of the Underwriters, without charge,
such number of copies thereof as the Representatives may reasonably request.
(f) Prior to any public offering of the Shares by the
Underwriters, the Company will cooperate with the Representatives and counsel to
the Underwriters in connection with the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of such
jurisdiction as the Representatives may request; provided, that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action which would subject it to
general service of process in any jurisdiction where it is not now so subject or
where it would be subject to taxation as a foreign corporation where it is not
so subject.
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<PAGE>
(g) During the period of five years commencing on the
Effective Date, the Company will furnish to the Representatives and each other
Underwriter who may so request copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will furnish to
the Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of
its securities as soon as may be practicable but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in which
the Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12 months ended commencing after
the Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will pay,
or reimburse if paid by the Representatives, all costs and expenses incident to
the performance of the obligations of the Company under this Agreement,
including but not limited to costs and expenses of or relating to (1) the
preparation, printing and filing of the Registration Statement and exhibits to
it, each preliminary prospectus, the Prospectus and any amendment or supplement
to the Registration Statement or the Prospectus, (2) the preparation and
delivery of certificates representing the Shares, (3) the printing and
reproduction of this Agreement, the Agreement Among Underwriters, any Dealer
Agreements, and any Underwriters' Questionnaire, (4) furnishing (including costs
of shipping, mailing and courier) such copies of the Registration Statement, the
Prospectus and any preliminary prospectus, and all amendments and supplements
thereto, as may be requested for use in connection with the offering and sale of
the Shares by the Underwriters or by dealers to whom Shares may be sold, (5) the
listing of the Shares on the Nasdaq National Market, (6) any filings required to
be made by the Underwriters with the NASD, and the fees, disbursements and other
charges of counsel for the Underwriters in connection therewith, (7) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to Section
4(f), including the fees, disbursements and other charges of counsel to the
Underwriters in connection therewith, and the preparation and printing of
preliminary, supplemental and final Blue Sky memoranda, (8) counsel to the
Company and counsel to Irex, (9) the transfer agent for the Shares and (10) the
Accountants. Except as otherwise provided herein, the Underwriters will pay
their own expenses, including the fees and expenses of their counsel.
(j) If this Agreement shall be terminated by the Company or
Irex pursuant to any of the provisions hereof (otherwise than pursuant to
Section 8) or if for any reason the Company or Irex shall be unable to perform
its obligations hereunder, the Company and Irex, jointly and severally, will
reimburse the several Underwriters for all out-
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<PAGE>
of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) reasonably incurred by them in connection herewith.
(k) The Company will not at any time, directly or
indirectly, take any action intended, or which might reasonably be expected, to
cause or result in, or which will constitute, stabilization of the price of the
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the
offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under "Use of Proceeds" and shall file such reports with
the Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(m) During the period of 180 days commencing at the Closing
Date, the Company will not, without the prior written consent of Legg Mason Wood
Walker, Incorporated, directly or indirectly, sell, offer to sell, grant any
option for the sale of, or otherwise dispose of, any shares of Common Stock or
securities convertible into Common Stock, other than to the Underwriters
pursuant to this Agreement and other than pursuant to employee benefit plans,
provided, that the Company will not grant options to purchase shares of Common
Stock pursuant to such employee benefit plans at a price less than the initial
public offering price.
(n) The Company will use its best efforts to cause each of
its executive officers, directors and each person whom the Company expects will
become the beneficial owner of more than 5% of the outstanding shares of Common
Stock immediately following the delivery of the Shares purchased hereby to enter
into agreements with the Representatives in the form set forth in Exhibit C to
the effect that they will not, for a period of 180 days after the date of the
Prospectus, without the prior written consent of Legg Mason Wood Walker,
Incorporated, directly or indirectly, offer to sell, sell, contract to sell,
grant any option, or otherwise dispose of, or require the Company to file with
the Commission a registration statement under the Securities Act to register any
shares of Common Stock or securities convertible into or exchangeable for Common
Stock, or warrants or other rights to acquire shares of Common Stock of which
the Company or any of such executive officers, directors, and more than 5%
beneficial owner is now, or in the future may become, the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act), other than to the
Underwriters pursuant to this Agreement and other than pursuant to employee
benefit plans, provided, that the Company will not grant options to purchase
shares of Common Stock pursuant to such employee benefit plans at a price less
than the initial public offering price.
5. Conditions of the Obligations of the Underwriters. In
-------------------------------------------------
addition to the execution and delivery of the Price Determination Agreement, the
obligations of each Underwriter hereunder are subject to the following
conditions:
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<PAGE>
(a) Notification that the Registration Statement has become
effective shall be received by Legg Mason Wood Walker, Incorporated not later
than 5:00 p.m., New York City time, on the date of this Agreement or at such
later date and time as shall be consented to in writing by Legg Mason Wood
Walker, Incorporated and all filings required by Rule 424 and Rule 430A of the
Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or, to the knowledge of the Company or the
Underwriters, threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or, to the
knowledge of the Company or the Underwriters, threatened or contemplated by the
Commission or the authorities of any such jurisdiction, and (iii) after the date
hereof no amendment or supplement to the Registration Statement or the
Prospectus shall have been filed unless a copy thereof was first submitted to
Legg Mason Wood Walker, Incorporated and Legg Mason Wood Walker, Incorporated
did not object thereto in good faith, and Legg Mason Wood Walker, Incorporated
shall have received certificates, dated the Closing Date and the Option Closing
Date and signed by the Chief Executive Officer of the Company and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief), to the effect of clauses (i) and
(ii).
(c) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been, and no development shall have occurred which could reasonably be expected
to result in, a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, in each case other than as set
forth in or contemplated by the Registration Statement and the Prospectus, and
in the judgment of Legg Mason Wood Walker, Incorporated any such development
makes it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the initial public offering price.
(d) Since the effectiveness of the Registration Statement,
there shall have been no litigation or other proceeding instituted against the
Company or its Subsidiary or any of their respective officers or directors in
their capacities as such, before or by any Federal, state or local court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign, in which litigation or proceeding an unfavorable ruling,
decision or finding could result in a Material Adverse Effect.
(e) Each of the representations and warranties of the
Company and Irex contained herein shall be true and correct in all material
respects at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, as if made at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, and all covenants and agreements
herein contained to be performed on the part of the Company and Irex and all
conditions herein contained to be fulfilled or complied with by the Company at
or prior to
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<PAGE>
the Closing Date and, with respect to the Option Shares, at or prior to the
Option Closing Date, shall have been duly performed, fulfilled or complied with.
(f) The Representatives shall have received opinions, each
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, with such qualifications and limitations which are customary, from
Dechert Price & Rhoads, counsel to the Company and Irex, substantially to the
effect set forth in Exhibits D-1 and D-2, and from James E. Hipolit, Esq.,
General Counsel to Irex and the Company, substantially to the effect set forth
in Exhibit D-3.
(g) The Representatives shall have received an opinion,
dated the Closing Date and the Option Closing Date, from Stradley, Ronon,
Stevens & Young, LLP, counsel to the Underwriters, with respect to the
Registration Statement, the Prospectus and this Agreement, which opinion shall
be satisfactory in all respects to Legg Mason Wood Walker, Incorporated.
(h) On the date of the Prospectus, the Accountants shall
have furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to Legg
Mason Wood Walker, Incorporated, confirming that they are independent
accountants with respect to the Company as required by the Act and the Rules and
Regulations and with respect to the financial and other statistical and
numerical information contained in the Registration Statement. At the Closing
Date and, as to the Option Shares, the Option Closing Date, the Accountants
shall have furnished to the Representatives a letter, dated the date of its
delivery, which shall confirm, on the basis of a review in accordance with the
procedures set forth in the letter from the Accountants, that nothing has come
to their attention during the period from the date of the letter referred to in
the prior sentence to a date (specified in the letter) not more than five days
prior to the Closing Date and the Option Closing Date which would require any
change in their letter dated the date of the Prospectus, if it were required to
be dated and delivered at the Closing Date and the Option Closing Date.
(i) At the Closing Date and, as to the Option Shares, the
Option Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to Legg Mason Wood Walker, Incorporated, to the effect
that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the
date of such certificate, such documents are true and correct in all
material respects and do not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
untrue or misleading and (B) since the Effective Date, no event has
occurred as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein not untrue or misleading
in any material respect.
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<PAGE>
(ii) Each of the representations and warranties of
the Company contained in this Agreement are, at the time such certificate
is delivered, true and correct in all material respects;
(iii) Each of the covenants required herein to be
performed by the Company on or prior to the date of such certificate has
been duly, timely and fully performed and each condition herein required to
be complied with by the Company on or prior to the delivery of such
certificate has been duly, timely and fully complied with; and
(iv) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has not been, and no development has occurred which could reasonably
be expected to result in, a Material Adverse Effect, whether or not arising
from transactions in the ordinary course of business, in each case other
than as set forth in or contemplated by the Registration Statement and the
Prospectus.
(v) At the Closing Date and, as to the Option
Shares, the Option Closing Date, there shall have been furnished to the
Representatives an accurate certificate, dated the date of its delivery,
signed by Irex, in form and substance satisfactory to Legg Mason Wood
Walker, Incorporated, to the effect that the representations and warranties
of Irex contained herein are true and correct in all material respects on
and as of the date of such certificate as if made on and as of the date of
such certificate, and each of the covenants and conditions required herein
to be performed or complied with by Irex on or prior to the date of such
certificate has been duly, timely and fully performed or complied with.
(j) On or prior to the Closing Date, Legg Mason Wood Walker,
Incorporated shall have received the executed agreements referred to in Section
4(n).
(k) The Shares shall be qualified for sale in such states as
Legg Mason Wood Walker, Incorporated may reasonably request, each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date and the Option Closing Date.
(l) Prior to the Closing Date, the Shares shall have been
duly authorized for quotation on the Nasdaq National Market.
(m) The NASD shall have approved the underwriting terms and
arrangements and such approval shall not have been withdrawn or limited.
(n) The Company and Irex shall have furnished to the
Representatives such certificates, in addition to those specifically mentioned
herein, as the Representatives may have reasonably requested as to the accuracy
and completeness at the
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<PAGE>
Closing Date and the Option Closing Date of any statement in the Registration
Statement or the Prospectus as to the accuracy at the Closing Date and the
Option Closing Date of the representations and warranties of the Company and
Irex herein, as to the performance by the Company and Irex of their respective
obligations hereunder, or as to the fulfillment of the conditions concurrent and
precedent to the obligations hereunder of the Representatives.
(o) The Distribution and the Dividend shall have been
effected and no proceeding shall be pending or threatened with respect to such
Distribution and the Dividend.
6. Indemnification
---------------
(a) The Company and Irex, jointly and severally, will
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person, if any, who controls each
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, liabilities, expenses
and damages (including, without limitation, any and all investigative, legal and
other expenses reasonably incurred in connection with, and any and all amounts
paid in settlement of, any action, suit or proceeding between any of the
indemnified parties and any indemnifying parties or between any indemnified
party and third party, or otherwise, or any claim asserted, provided, with
respect to such amounts paid in settlement, such settlement is effected with the
written consent of the Company), as and when incurred, to which any Underwriter,
or any such person, may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of or
are based on (i) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or in any application or other document executed by or on behalf of
the Company or based on written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the shares under the
securities laws thereof or filed with the Commission, (ii) the omission to state
in such document a material fact required to be stated in it or necessary to
make the statements in it not misleading, (iii) any inaccuracy in the
representations and warranties of the Company or Irex contained herein, or in
any certificate by or on behalf of the Company or its officers delivered
pursuant hereto, or (iv) any failure of the Company or Irex to perform its
obligations hereunder, or under law or failure by Irex to effect the
Distribution for any reason whatsoever, provided that the Company and Irex will
not be liable to the extent that such loss, claim, liability, expense or damage
arises from the sale of the Shares in the public offering to any person by an
Underwriter and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus, and
provided, further, that with respect to the preliminary prospectus, the
foregoing indemnity agreement shall not
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<PAGE>
inure to the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Shares, or any person controlling
such Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 4(e) hereof and a copy of the Prospectus (as
then amended or supplemented if the Company shall have furnished any amendments
or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. This indemnity
agreement will be in addition to any liability that the Company or Irex might
otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company and Irex, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
director of the Company and each officer of the Company who signs the
Registration Statement to the same extent as the foregoing indemnity from the
Company and Irex to each Underwriter, but only insofar as losses, claims,
liabilities, expenses or damages arise out of or are based on any untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives on behalf of such Underwriter
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus. The Company and Irex acknowledge that information that the
Underwriters have so furnished is limited to the last paragraph of the cover
page of the Prospectus, the paragraph appearing at the bottom of the inside
front-cover page of the Prospectus concerning stabilization and information
appearing under the caption "Underwriting" in the Prospectus. This indemnity
will be in addition to any liability that each Underwriter might otherwise have;
provided, however, that in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discounts and
commissions received by such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section 6 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 6, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying party
will not relieve it from any liability that it may have to any indemnified party
under the foregoing provisions of this Section 6 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that it
elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be
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<PAGE>
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (1) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (2)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(3) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (4) the indemnifying party
has not in fact employed counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees, disbursements and other charges of
counsel will be at the expense of the indemnifying party or parties. It is
understood that the indemnifying party or parties shall not, in connection with
any proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees, disbursements and other charges of more than one separate
firm admitted to practice in such jurisdiction at any one time for all such
indemnified party or parties. All such fees, disbursements and other charges
will be reimbursed by the indemnifying party promptly as they are incurred. An
indemnifying party will not be liable for any settlement of any action or claim
effected without its written consent (which consent will not be unreasonably
withheld). No indemnifying party shall, without the prior written consent of
each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated by this Section 6 (whether or not any indemnified party
is a party thereto), unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising or
that may arise out of such claim, action or proceeding. Notwithstanding any
other provision of this Section 6(c), if at any time an indemnified party shall
have requested an indemnifying party to reimburse the indemnified party for fees
and expenses of counsel, such indemnifying party agrees that it shall be liable
for any settlement effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, Irex or the Underwriters,
the Company, Irex and the Underwriters will contribute to the total losses,
claims, liabilities, expenses and damages (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in
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<PAGE>
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company or Irex from persons other
than the Underwriters, such as persons who control the Company or Irex within
the meaning of the Act, officers of the Company who signed the Registration
Statement and directors of the Company, who also may be liable for contribution)
to which the Company or Irex and any one or more of the Underwriters may be
subject in such proportion as shall be appropriate to reflect the relative
benefits received by the Company and Irex on the one hand and the Underwriters
on the other. The relative benefits received by the Company and Irex on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and Irex bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. If, but only if, the
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company and Irex, on the
one hand, and the Underwriters, on the other, with respect to the statements or
omissions which resulted in such loss, claim, liability, expense or damage, or
action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Representatives on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, Irex and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 6(d) were to be 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 into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, liability,
expense or damage, or action in respect thereof, referred to above in this
Section 6(d) shall be deemed to include, for purpose of this Section 6(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6(d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts and
commissions received by it, and no person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 6(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 6(d), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 6(d), will notify any such
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<PAGE>
party or parties from whom contribution may be sought, but the omission so to
notify will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 6(d).
Except for a settlement entered into pursuant to the last sentence of Section
6(c) hereof, no party will be liable for contribution with respect to any action
or claim settled without its written consent (which consent will not be
unreasonably withheld).
(e) The respective indemnity and contribution agreements contained in
this Section 6 and the representations and warranties contained in this
Agreement of the Company and Irex, on the one hand, and the Underwriters on the
other hand, shall remain operative and in full force and effect regardless of
(i) any investigation made by or on behalf of the Company, Irex or the
Underwriters, (ii) delivery and acceptance of any of the Shares and payment
therefor or (iii) any termination of this Agreement.
7. Termination. The obligations of the several Underwriters under this
-----------
Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from Legg Mason Wood Walker, Incorporated, without liability on
the part of any Underwriter to the Company or Irex, if, prior to delivery and
payment for the Shares (or the Option Shares, as the case may be), in the sole
judgment of the Representatives, (i) there has been, since the respective dates
as of which information is given in the Registration Statement, any change
resulting in a Material Adverse Effect, (ii) trading in any of the equity
securities of the Company shall have been suspended by the Commission, the NASD
or by the Nasdaq Stock Market, (iii) trading in securities generally on the
Nasdaq National Market shall have been suspended or limited or minimum or
maximum prices shall have been generally established on such exchange or on the
Nasdaq National Market, or additional material governmental restrictions, not in
force on the date of this Agreement, shall have been imposed upon trading in
securities generally by such exchange or by order of the Commission or the NASD
or any court or other governmental authority, (iv) a general banking moratorium
shall have been declared by either Federal or New York State authorities or (v)
any material adverse change in the financial or securities markets in the United
States or in political, financial or economic conditions in the United States or
any outbreak or material escalation of hostilities or declaration by the United
States of a national emergency or war or other calamity or crisis shall have
occurred, the effect of any of which is such as to make it, in the sole judgment
of the Representatives, impracticable or inadvisable to market the Shares on the
terms and in the manner contemplated by the Prospectus.
8. Substitution of Underwriters. If any one or more of the Underwriters
----------------------------
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Firm Shares, the other
Underwriters shall be obligated, severally, to purchase the Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Firm Shares which
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<PAGE>
they have respectively agreed to purchase pursuant to Section I bears to the
aggregate number of Firm Shares which all such non-defaulting Underwriters have
so agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no event shall the maximum number of Firm Shares which
any Underwriter has become obligated to purchase pursuant to Section I be
increased pursuant to this Section 9 by more than one-ninth of the number of
Firm Shares agreed to be purchased by such Underwriter without the prior written
consent of such Underwriter. If any Underwriter or Underwriters shall fail or
refuse to purchase any Firm Shares and the aggregate number of Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase exceeds one-tenth of the aggregate number of the Firm Shares and
arrangements satisfactory to the Representatives, the Company and the Committee
for the 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, or the Company or Irex for the purchase or sale of any
Shares under this Agreement. In any such case either the Representatives or the
Company and the Committee 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 in the Prospectus or in any other
documents or arrangements may be effected. Any action taken pursuant to this
Section 9 shall not relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
9. Miscellaneous. Notice given pursuant to any of the provisions of this
-------------
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, to Specialty Products & Insulation Co., 1097
Commercial Avenue, P.O. Box 576, East Petersburg, Pennsylvania 17520, Attention:
Ronald L. King, with a copy to Irex, (b) if to Irex, to Irex Corporation, 120
North Lime Street, P.O. Box 1268, Pennsylvania 17608, Attention: W. Kirk
Liddell, with a copy to the Company, and if to either the Company or Irex, with
a copy to Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street,
Philadelphia, Pennsylvania 19103, Attention: Thomas A. Ralph, or (c) if to the
Underwriters, to Legg Mason Wood Walker, Incorporated at the offices of Legg
Mason Wood Walker, Incorporated, 1735 Market Street, Suite 1100, Philadelphia,
Pennsylvania 19103, Attention: Corporate Finance Department, with a copy to
Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square, Philadelphia,
Pennsylvania 19103, Attention: James M. Papada, III. Any such notice shall be
effective only upon receipt. Any notice under Section 8 or 9 may be made by
telex or telephone, but if so made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, Irex and of the controlling persons, directors and
officers referred to in Section 6, and their respective successors and assigns,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall
not include a purchaser, as such purchaser, of Shares from any of the several
Underwriters.
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<PAGE>
With respect to any obligation of the Company and Irex to make any payment,
to indemnify for any liability or to reimburse for any expense, notwithstanding
the fact that such obligation is a joint and several obligation of the Company
and Irex, the Underwriters (or any other person to whom such payment,
indemnification or reimbursement is owed) may pursue the Company with respect
thereto prior to pursuing Irex.
The respective representations, warranties and agreements of the Company,
Irex and the several Underwriters contained herein or in certificates or other
instruments delivered pursuant hereto, shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any of them
or any of their controlling persons and shall survive delivery of and payment
for the Shares hereunder and any termination of this Agreement.
Any action required or permitted to be taken by the Representatives under
this Agreement may be taken by them jointly or by Legg Mason Wood Walker,
Incorporated.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company, Irex and the Underwriters each hereby irrevocably waive any
right they may have to a trial by jury in respect of any claim based upon or
arising out of this Agreement or the transactions contemplated hereby.
This Agreement may not be amended or otherwise modified or any provision
hereof waived except by an instrument in writing signed by Legg Mason Wood
Walker, Incorporated, the Company and Irex.
This Agreement, together with the Price Determination Agreement,
constitutes the entire agreement of the parties hereto and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
The Section headings herein are for the convenience of the parties only and
shall not affect the construction or interpretation of this Agreement.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, Irex and the several Underwriters.
Very truly yours,
SPECIALTY PRODUCTS & INSULATION CO.
By:___________________________________
Name: Ronald L. King
Title: President
IREX CORPORATION
By:___________________________________
Name: W. Kirk Liddell
Title: President
Confirmed as of the date
first above mentioned:
Acting on behalf of themselves
and as the Representatives
of the several underwriters
named in Schedule I hereof.
LEGG MASON WOOD WALKER, INCORPORATED
By:_______________________
Name:
Title:
ADVEST, INC.
By:_______________________
Name:
Title:
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<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Name of Firm Shares
Underwriters to be Purchased
------------ ---------------
Legg Mason Wood Walker, Incorporated
Advest, Inc.
Total ................................. _______________
_______________
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<PAGE>
EXHIBIT A
SPECIALTY PRODUCTS & INSULATION CO.
-----------------------------------
__________________
PRICE DETERMINATION AGREEMENT
-----------------------------
June __, 1998
LEGG MASON WOOD WALKER, INCORPORATED
ADVEST, INC.
As Representatives of the several Underwriters
c/o Legg Mason Wood Walker, Incorporated
1735 Market Street, Suite 1100
Philadelphia, Pennsylvania 19103
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated June __, 1998
(the "Underwriting Agreement"), among Specialty Products & Insulation Co., a
Pennsylvania corporation (the "Company"), Irex Corporation, a Pennsylvania
corporation ("Irex"), and the several Underwriters named in Schedule I thereto
or hereto (the "Underwriters"), for whom Legg Mason Wood Walker, Incorporated
and Advest, Inc. are acting as representatives (the "Representatives"). The
Underwriting Agreement provides for the purchase by the Underwriters from the
Company, subject to the terms and conditions set forth therein, of an aggregate
of 2,000,000 shares (the "Firm Shares") of the Company's common stock, par value
$.01 per share. This Agreement is the Price Determination Agreement referred to
in the Underwriting Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the undersigned
agree with the Representatives as follows:
The initial public offering price per share for the 2,000,000 Shares
shall be $_________.
The purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be $_________ representing an amount equal to the
initial public offering price set forth above, less $__________ per share.
<PAGE>
Each of the Company and Irex represent and warrant to each of the
Underwriters that the representations and warranties set forth in Section 3 of
the Underwriting Agreement are accurate as though expressly made at and as of
the date hereof.
As contemplated by the Underwriting Agreement, attached as Schedule I
is a completed list of the several Underwriters, which shall be a part of this
Agreement and the Underwriting Agreement.
THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF THE COMMONWEALTH OF
PENNSYLVANIA WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH LAW.
If the foregoing is in accordance with your understanding of the
agreement among the Underwriters, the Company and Irex, please sign and return
to the Company a counterpart hereof, whereupon this instrument along with all
counterparts and together with the Underwriting Agreement shall be a binding
agreement among the Underwriters, the Company and Irex in accordance with its
terms and the terms of the Underwriting Agreement.
Very truly yours,
SPECIALTY PRODUCTS & INSULATION CO.
By:___________________________________
Name:
Title:
IREX CORPORATION
By:___________________________________
Name: W. Kirk Liddell
Title: President
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<PAGE>
Confirmed as of the date
first above mentioned:
Acting on behalf of themselves
and as the Representatives of
the several Underwriters named
in Schedule I hereof.
LEGG MASON WOOD WALKER, INCORPORATED
By:______________________
Name:
Title:
ADVEST, INC.
By:______________________
Name:
Title:
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<PAGE>
EXHIBIT C
LOCK-UP LETTER
LEGG MASON WOOD WALKER, INCORPORATED
ADVEST, INC.
As Representatives of the several Underwriters
c/o Legg Mason Wood Walker, Incorporated
1735 Market Street, Suite 1100
Philadelphia, Pennsylvania 19103
Ladies and Gentlemen:
In consideration of the agreement of the several Underwriters, for which
Legg Mason Wood Walker, Incorporated and Advest, Inc. (the "Representatives")
intend to act as Representatives, to underwrite a proposed public offering (the
"Offering") of shares of Common Stock, par value $.01 per share (the "Common
Stock") of Specialty Products & Insulation Co., a Pennsylvania corporation, as
contemplated by a registration statement with respect to such shares filed with
the Securities and Exchange Commission on Form S-1 (Registration No. 333-49947),
the undersigned hereby agrees that the undersigned will not, for a period of 180
days after the date of the Prospectus (as defined in the Underwriting Agreement
between the Company, Irex Corporation and the Underwriters), without the prior
written consent of the Representatives, directly or indirectly, offer, sell,
contract to sell, grant any option to purchase, or otherwise dispose (or
announce the offer, sale, contract of sale, grant of any option to purchase or
other disposition) of any shares of Common Stock, or any securities convertible
into or exchangeable or exercisable for shares of Common Stock of the Company
(such securities being referred to herein as "Rights"), other than pursuant to
bona fide gifts to persons who agree in writing with the Representative to be
bound by the balance of such 180-day restriction. The foregoing restriction is
expressly agreed to preclude the holder of any such shares of Common Stock or
Rights from engaging in any hedging or other transaction which is designed to or
reasonably expected to lead to or result in such disposition during such 180-day
period, even if such shares of Common Stock or Rights would be disposed of by
someone other than such holder. Such prohibited hedging or other transactions
would include, without limitation, any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any such shares of Common Stock or
Rights or with respect to any security (other than a broad-based market basket
or index) that includes, relates to or derives any significant part of its value
from such shares of Common Stock or Rights. The
<PAGE>
undersigned agrees and consents to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Common Stock or Rights
held by such person except in compliance with this restriction.
Very truly yours,
By:_____________________________________
Print Name:_____________________________
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<PAGE>
EXHIBIT D-1
[ FORM OF OPINION OF COUNSEL TO THE COMPANY AND IREX ]
Each of Irex, the Company and its Subsidiary is a corporation incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and each has full corporate power and corporate authority to
conduct all the activities conducted by it, to own or lease all the assets owned
or leased by it and to conduct its business as described in the Registration
Statement and the Prospectus. The Company is the sole record owner and, to our
knowledge, the sole beneficial owner of all of the capital stock of its
Subsidiary.
All of the outstanding shares of Common Stock have been, and the Shares,
when paid for by the Underwriters in accordance with the terms of the Agreement,
will be, duly authorized, validly issued, fully paid and nonassessable and will
not be subject to any preemptive or similar right under (i) the statutes,
judicial and administrative decisions and the rules and regulations of the
governmental agencies of the Commonwealth of Pennsylvania, (ii) the Company's
articles of incorporation or by-laws or (iii) any instrument, document, contract
or other agreement listed on Schedule A attached hereto. Except as described in
the Registration Statement or the Prospectus, to our knowledge, there is no
commitment or arrangement to issue, and there are no outstanding options,
warrants or other rights calling for the issuance of, any share of capital stock
of the Company or any Subsidiary to any person or any security or other
instrument that by its terms is convertible into, exercisable for or
exchangeable for capital stock of the Company.
No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of the Agreement by the Company or in connection with the taking by
the Company of any action contemplated thereby, except such as have been
obtained under the Act and the Rules and Regulations and such as may be required
under state securities or "Blue Sky" laws or by the by-laws and rules of the
NASD in connection with the purchase and distribution by the Underwriters of the
Shares to be sold by the Company. All references in this opinion to the
Agreement shall include the Price Determination Agreement.
The authorized, issued and outstanding capital stock of the Company
conforms in all material respects to the description thereof set forth in the
Registration Statement and the Prospectus under the caption "Description of
Capital Stock." The form of certificate used to
<PAGE>
evidence the Common Stock is in due and proper form and complies with all
applicable statutory requirements.
The Registration Statement and the Prospectus comply in all material
respects as to form with the requirements of the Act (except that we express no
opinion as to financial statements, schedules or exhibits and other financial or
statistical data contained in the Registration Statement or the Prospectus).
To our knowledge, any instrument, document, lease, license, contract or
other agreement (collectively, "Documents") required to be described or referred
to in the Registration Statement or the Prospectus has been in all material
respects correctly described or referred to therein and any Document required to
be filed as an exhibit to the Registration Statement has been filed as an
exhibit thereto, no default exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any Document
filed or required to be filed as an exhibit to the Registration Statement.
To our knowledge, except as disclosed in the Registration Statement or the
Prospectus, no person or entity has the right to require the registration under
the Act of shares of Common Stock or other securities of the Company by reason
of the filing or effectiveness of the Registration Statement.
To our knowledge, the Company is not in violation of, or in default with
respect to, any law, rule, regulation, order, judgment or decree, except as may
be described in the Prospectus or such as in the aggregate do not now have and
will not in the future have a Material Adverse Effect.
All descriptions in the Prospectus of statutes, regulations or legal or
governmental proceedings are accurate in all material respects and fairly
present the information required to be shown.
No consent, approval, authorization or order, or any filing or declaration
with, any court or governmental agency or body is required in connection with
the Distribution and the Dividend or in connection with the taking by Irex or
the Company of any action contemplated thereby, except such as have been
obtained under the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder and as may be required under state securities or Blue
Sky laws. Each of Irex and the Company has the corporate power and corporate
authority to effect the Distribution and Dividend, respectively. The
Distribution has been duly authorized by Irex and the Dividend has been duly
authorized by the Company. The performance of the Distribution, Dividend, and
consummation of the transactions contemplated thereby will not result in the
creation or imposition of any lien, charge or encumbrance upon any of the assets
of the Company or its Subsidiary pursuant to the terms of the provisions of,
result in the breach or violation of any of the terms or provisions of,
constitute a default under, give any other party a right to terminate any of its
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<PAGE>
obligations under, or result in the acceleration of any obligation under, the
articles of incorporation or by-laws of the Company or its Subsidiary, or, to
our knowledge, any contract or other agreement listed on Schedule A attached
hereto, or violate or conflict with any statute, rule or regulation, or to our
knowledge violate or conflict with any judgment, ruling, decree or order, of any
court or other governmental agency or body applicable to the business or
properties of the Company or its Subsidiary.
The Company has full corporate power and corporate authority to enter into
the Agreement, and the Agreement has been duly authorized, executed and
delivered by the Company, is a valid and binding agreement of the Company and,
except as the enforcement thereof may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable principles,
and except as to the enforceability of rights to indemnification or contribution
thereunder as to which no opinion is expressed, is enforceable against the
Company in accordance with the terms thereof.
The execution and delivery by the Company of, and the performance by the
Company of its agreements in, the Agreement do not and will not (i) violate the
articles of incorporation or by-laws of the Company, (ii) breach or result in a
default under, cause the time for performance of any obligation to be
accelerated under, or result in the creation or imposition of any lien, charge
or encumbrance upon any of the assets of the Company or its Subsidiary pursuant
to the terms of any indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement, capital lease or other evidence of indebtedness of
which we have knowledge, or any Document listed on Schedule A attached hereto
(iii) breach or otherwise violate any existing obligation of the Company under
any court or administrative order, judgment or decree of which we have knowledge
or (iv) violate applicable provisions of any statute or regulation in the
Commonwealth of Pennsylvania or of the United States, which violation could
result in a Material Adverse Effect.
The Company is not an "investment company" or an "affiliated person"
"controlled" by an investment company within the meaning of the Investment
Company Act of 1940, as amended.
The Shares have been duly authorized for quotation on the Nasdaq National
Market System.
We hereby confirm to you that we have been advised by the Commission that
the Registration Statement has become effective under the Act and that no order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose has been instituted or to our knowledge is
threatened, pending or contemplated.
-3-
<PAGE>
We have participated in the preparation of the Registration Statement and
the Prospectus and, without passing upon or assuming any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, nothing has come to our attention that causes us to believe that, both
as of the Effective Date and as of the Closing Date and the Option Closing Date,
the Registration Statement, or any amendment thereto, contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that any Prospectus or any amendment or supplement thereto at the
time such Prospectus was issued, at the time any such amended or supplemented
Prospectus was issued, at the Closing Date and the Option Closing Date,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances in which they were made, not
misleading (except that we express no opinion as to financial statements,
schedules and other financial data contained in the Registration Statement or
the Prospectus).
-4-
<PAGE>
SCHEDULE A
----------
Corporate Separation Agreement
Tax Sharing and Indemnification Agreement
Benefits Sharing Agreement
1988 Specialty Products & Insulation Co. Stock Option Plan
Executive Severance Agreement of Ronald L. King
Executive Severance Agreement of Michael J. Hughes
Employment Agreement of Ronald L. King
Employment Agreement of Charles J. Schattgen
Employment Agreement of Raymond J. Horan
Employment Agreement of Daniel D. Bofinger
Employment Agreement of Michael T. Conner
Employment Agreement of Michael C. Feehery
Employment Agreement of Gregory S. Ganster
Deferred Payment Agreement for Director
Incentive Compensation Plan
Credit Agreement
Real Property Leases to which the Company is a party (except for the lease in
connection with the premises located in Cincinnati, Ohio; Beneca, CA and
Chicago)
Stock Purchase Agreement with Richlar Industries, Inc.
<PAGE>
EXHIBIT D-2
[ FORM OF TAX OPINION OF COUNSEL TO THE COMPANY AND IREX ]
<PAGE>
Exhibit D-2
[FORM OF TAX OPINION OF COUNSEL TO THE COMPANY AND IREX]
(i) No gain or loss will be recognized by either Irex or SPI in
connection with the Distribution of 100% of the SPI Common
Stock to the holders of Irex common stock;
(ii) No gain or loss will be recognized by the holders of Irex
common stock upon the receipt of the SPI Common Stock pursuant
to the Distribution;
(iii) The tax basis of the shares of Irex common stock in the hands
of each holder of such stock will be allocated between the SPI
and Irex common stock held by such shareholder following the
Distribution in proportion to their relative fair market
values; and
(iv) The holding period of the SPI Common Stock received by each
holder of Irex common stock in the Distribution will include
the period during which the holder held the shares of Irex
common stock with respect to which the Distribution is made,
provided that the Irex common stock is held as a capital asset
on the date of the Distribution.
<PAGE>
EXHIBIT D-3
[ FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY ]
No default exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any instrument,
document, lease, license, contract or other agreement (collectively,
"Documents") described or referred to in the Registration Statement or the
Prospectus.
The Company is not in violation of, or in default with respect to, any law,
rule, regulation, order, judgment or decree, except as may be described in the
Prospectus or such as in the aggregate do not now have and will not in the
future have a Material Adverse Effect.
The performance of the Distribution, Dividend, and consummation of the
transactions contemplated thereby will not result in the creation or imposition
of any lien, charge or encumbrance upon any of the assets of the Company or its
Subsidiary pursuant to the terms of the provisions of, result in the breach or
violation of any of the terms or provisions of, constitute a default under, give
any other party a right to terminate any of its obligations under, or result in
the acceleration of any obligation under, any contract or other agreement to
which the Company or its Subsidiary is a party or by which the Company or its
Subsidiary or any of its properties is bound or affected, other than a default
on the Company's guarantees of Irex loans which will be cured upon Irex's
repayment of the loans with the proceeds of the Dividend and the Company's
repayment of its Irex debt, or violate or conflict with any judgement, ruling,
decree or order of any court or other governmental agency or body applicable to
the business or properties of the Company or its Subsidiary.
The execution and delivery by the Company of, and the performance by the
Company of its agreements in, the Agreement do not and will not breach or result
in a default under, cause the time for performance of any obligation to be
accelerated under, or result in the creation or imposition of any lien, charge
or encumbrance upon any of the assets of the Company or any of its Subsidiary
pursuant to the terms of, (A) any indenture, mortgage, deed of trust, loan
agreement, bond, debenture, note agreement, capital lease or other evidence of
indebtedness of which we have knowledge, (B) any Document filed as an exhibit to
the Registration Statement, (iii) breach or otherwise violate any existing
obligation of the Company under any court or administrative order, judgment or
decree of which I have knowledge.
There are no legal or governmental proceedings pending to which the Company
is a party or of which any property or assets of the Company is the subject,
and, to my knowledge, no such proceedings are threatened or contemplated by
governmental authorities or other third parties which are likely to have a
Material Adverse Effect.
-7-
<PAGE>
Exhibit 4.1
-----------
[FORM OF FACE OF SECURITY]
SPECIALTY PRODUCTS & INSULATION CO.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
Common Stock, Par Value $.01 Per Share
NUMBER SHARES
---------------------- -----------------
CUSIP: 847508 10 8
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
------------------------------------------------------------
is the owner of
-------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
SPECIALTY PRODUCTS & INSULATION CO. (THE "CORPORATION"), transferable only on
the books of the Corporation by the holder hereof in person or by Attorney upon
surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned by the Transfer Agent
and registered by the Registrar.
IN WITNESS WHEREOF, Specialty Products & Insulation Co. has caused this
Certificate to be signed in facsimile by its duly authorized officers and its
facsimile Corporate Seal to be hereunto affixed.
Dated:
---------------------
/s/ Michael J. Hughes /s/ Ronald L. King
SECRETARY/TREASURER AND CHIEF [SEAL] PRESIDENT AND CHIEF
FINANCIAL OFFICER EXECUTIVE OFFICER
<PAGE>
[FORM OF REVERSE OF SECURITY]
SPECIALTY PRODUCTS & INSULATION CO.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
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 ______ UNIF TRAN MIN ACT - _______ Custodian
(Cust) (Minor) (Cust)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act ______ _______ under Uniform Transfers to Minors Act
(State) (Minor)
JT TEN - as joint tenants with right of ______
survivorship and not as tenants in common (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
including postal zip code of assignee)
_________ Shares of the Common 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: The signature to this assignment must
correspond with the name as written upon the face
of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
Signature(s) Guaranteed:
By:
-----------------------------------------------
THIS SIGNATURE SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (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.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE>
Exhibit 5.1
-----------
DECHERT PRICE & RHOADS
4000 Bell Atlantic Tower, 1717 Arch Street
Philadelphia, PA 19103
June 12, 1998
Specialty Products & Insulation Co.
1097 Commercial Avenue
Post Office Box 576
East Petersburg, Pennsylvania 17520-0576
Re: 2,300,000 Shares of Common Stock, as described in the
Registration Statement on Form S-1
(Registration No. 333-49947)
-----------------------------------------------------
Gentlemen and Ladies:
We have acted as your counsel in connection with the registration
under the Securities Act of 1933, as amended, of an aggregate of 2,300,000
shares of your Common Stock, par value $.01 per share (the "Shares") pursuant to
the above-referenced registration statement (the "Registration Statement"). The
Shares are to be sold pursuant to an underwriting agreement, (the "Underwriting
Agreement"), among Specialty Products & Insulation Co. (the "Company") and Legg
Mason Wood Walker Incorporated and Advest, Inc. as representatives of the
several underwriters (the "Underwriters"), the form of which is included as
Exhibit 1.1 to the Registration Statement.
We have participated in the preparation of the Registration Statement
and have reviewed the proposed form of the Underwriting Agreement, and we have
examined such corporate records and documents, certificates of officers and
matters of law as we have considered appropriate to enable us to give this
opinion.
Based upon the foregoing, it is our opinion that the Shares have been
duly authorized and, when delivered to the Underwriters against payment therefor
in accordance with the terms of the Underwriting Agreement, will be validly
issued, fully paid and non-assessable.
We hereby consent to the reference to our firm under the caption
"Legal Matters" in the Prospectus portion of the Registration Statement and to
the filing of this opinion as Exhibit 5.1 to the Registration Statement.
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE>
Exhibit 10.1
------------
FORM OF CORPORATE SEPARATION AGREEMENT
--------------------
IREX CORPORATION, ACandS, INC.,
CENTIN, LLC, SPACECON, LLC
AND
SPECIALTY PRODUCTS & INSULATION CO.
_______________, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Definitions..........................................................1
2. Spin-Off And Ipo.....................................................2
3. Management Of The Businesses.........................................2
4. Financing Arrangements...............................................2
5. Intercompany Accounts................................................3
6. Employee Benefit Plans...............................................3
7. Real Estate Arrangements.............................................3
8. Computer Support.....................................................3
9. Health Insurance.....................................................6
10. Liability And Worker's Compensation Insurance.......................6
11. Bonds...............................................................6
12. Tax Agreements......................................................7
13. Closing Balance Sheet And Settlement Arrangements...................7
14. Time Of Payments....................................................7
15. Other Shared Arrangements...........................................7
17. No Time Limitations On Adjustments..................................7
17. Indemnification.....................................................7
18. Non-Compete.........................................................8
19. Offset..............................................................8
20. Confidentiality....................................................9
21. Dispute Resolution..................................................9
22. Access To Books And Records.........................................9
23. Miscellaneous.......................................................9
(a) Severability..............................................10
(b) No Third Party Beneficiaries..............................10
(c) Incorporation By Reference................................10
(d) Notices...................................................10
(e) Entire Agreement..........................................11
(f) Governing Law; Jurisdiction...............................11
(g) Amendments, Waivers And Consents..........................11
(h) Effect Of Headings........................................11
(i) Counterparts..............................................12
(j) Survival..................................................12
(k) Assignment................................................12
- i -
<PAGE>
CORPORATE SEPARATION AGREEMENT
------------------------------
THIS CORPORATE SEPARATION AGREEMENT ("Agreement") made this ______ day of
_______________________, 1998 between IREX CORPORATION, a Pennsylvania
corporation ("Irex"), its wholly owned contracting subsidiaries, ACANDS, INC. a
Delaware corporation ("ACandS"), CENTIN, LLC, a Delaware limited liability
company ("CENTIN"), SPACECON, LLC, a Delaware limited liability company
("Spacecon") (ACandS, CENTIN and Spacecon are collectively referred to herein as
the "Contracting Subsidiaries" and Irex, ACandS, CENTIN and Spacecon, as the
"Irex Group"), and SPECIALTY PRODUCTS & INSULATION CO., a Pennsylvania
corporation ("SPI").
WITNESSETH:
WHEREAS, Irex is a holding company which owns the Contracting Subsidiaries,
which are engaged in the specialty contracting business, and SPI, which is
engaged in the distribution of mechanical insulation and architectural products
(the "Distribution Business");
WHEREAS, the Board of Directors of Irex has determined that it is in the
best corporate interest of Irex and its subsidiaries for SPI to operate as an
independent company;
WHEREAS, Irex shall accomplish the separation of SPI (the "Separation")
through a tax-free spin-off (the "Spin-off") of 100 percent of the common stock
of SPI to the shareholders of Irex;
WHEREAS, immediately preceding the Spin-off, SPI shall pay to Irex a
special dividend (the "Special Dividend") in the amount of $10,490,000 and
immediately thereafter shall effect an underwritten initial public offering (the
"IPO") of its common stock;
WHEREAS, the Irex Group and SPI wish to enter various arrangements
concerning their operations after the Separation, with such arrangements to be
made, to the extent possible, as though they were made on an arms-length basis;
and
WHEREAS, the Irex Group and SPI wish to enter into agreements relating to
the Separation, including agreements concerning previous participation in shared
or common arrangements and programs.
NOW, THEREFORE, in consideration of the premises contained herein, and upon
the terms and conditions hereinafter set forth, each of the parties, intending
to be legally bound, agrees as follows:
1. Definitions. As used in this Agreement, the following terms shall
-----------
have the following meanings:
<PAGE>
(a) "Closing Balance Sheet" shall mean the balance sheet of SPI as of
the Closing Date reflecting the Spin-off, the IPO and the Special Dividend and
the transactions contemplated herein.
(b) "Closing Date" shall mean the closing date of the IPO.
2. Spin-off and IPO. The Irex Group and SPI acknowledge and agree that
-----------------
considerable cooperation among them will be necessary to effect the Spin-off and
the IPO, and the parties agree to use their best efforts to effect such
transactions. Irex will pay all ongoing third-party expenses incurred in
connection with the Spin-off and the IPO as they are billed, including
attorneys' and accountants' fees and expenses, filing fees, listing fees,
printing costs and similar items; SPI will reimburse Irex for all such third-
party expenses on the Closing Date. The fees of the investment bankers and
financial advisors shall be paid directly by SPI out of the proceeds of the IPO,
except that SPI shall reimburse Irex for any previous payments by Irex to the
investment bankers and financial advisors relating to the Spin-off and IPO.
3. Management of the Businesses. Irex and SPI acknowledge that the
----------------------------
services of employees of the other may be necessary after the Closing Date in
connection with the transition which will occur as part of the Separation.
Thus, each agrees, to the extent possible, to make its employees available to
the other in connection with such transition; provided, however, that (a) a
party shall not be required to unreasonably disrupt its own business in order to
provide such services and (b) to the extent that such services require a
significant commitment of the employee's time, the party receiving such service
shall reimburse the other party the reasonable value of such services. Neither
Irex nor SPI will seek reimbursement for the services of an employee unless it
has notified the other of its intention to seek such reimbursement, and of the
proposed rate of reimbursement, prior to performance of the services.
4. Financing Arrangements.
----------------------
(a) As of the Closing Date, the bank loans, letter of credit
commitments, surety agreements and other financial obligations of Irex
(collectively, the "Irex Financial Commitments") shall be the sole
responsibility of Irex, and SPI shall have no liability under the Irex Financial
Commitments. Irex shall obtain or cause to be obtained all appropriate
releases, terminations and satisfactions necessary to fully release SPI from any
and all liability in connection with the Irex Financial Commitments from and
after the Closing Date, including, without limitation, under any guaranties,
liens or security interests SPI may have previously given, executed or granted
in connection with the Irex Financial Commitments.
(b) SPI shall be responsible for all funding arrangements relating to
its business beginning as of the Closing Date and Irex shall have no liability
in connection with such arrangements. SPI shall use its best efforts to
establish satisfactory financing arrangements for
-2-
<PAGE>
line of credit and letter of credit facilities in minimum amounts of $20 million
and $1 million, respectively.
5. Intercompany Accounts.
---------------------
(a) Except for amounts payable under the lease described in Section
7(a) hereof, all accounts receivable and payable between the parties shall be
verified as of the Closing Date and such accounts shall be "netted" and settled
as of the Closing Date.
(b) Irex and SPI shall establish separate bank deposit accounts prior
to the Closing Date. Notwithstanding any other provision of this Agreement, if
the Irex Group or SPI receives payment on an account receivable of the other, it
shall advise the other of such receipt within one (1) business day of learning
of the receipt, and shall remit payment to the other within three (3) business
days.
6. Employee Benefit Plans.
----------------------
Obligations concerning employee benefit plans shall be governed by the
Benefits Sharing Agreement dated ________________________ between Irex and SPI.
7. Real Estate Arrangements.
------------------------
(a) From and after the Closing Date, SPI shall be entitled to continue
to occupy and use the premises presently occupied and used by SPI located at 265
Harrisburg Avenue, Lancaster, Pennsylvania pursuant to the lease agreement
between Irex and SPI dated December 30, 1992, as amended, which Lease shall
continue in full force and effect in accordance with the terms and conditions
thereof.
(b) As of the Closing Date, SPI shall have vacated, and thereafter
shall have no right to occupy, any of Irex's premises located on Lime Street,
Lancaster, Pennsylvania.
8. Computer Support. Irex has provided, and continues to provide, SPI
----------------
with use of, access to and support for certain computer resources consisting of:
(i) Irex's computer mainframe and related equipment and notes server; (ii)
Irex's JDEdwards software applications, its communications software allowing
remote access to the JDEdwards system, its Lotus Notes server software and other
related software; and (iii) programming and communication services in connection
with the software applications provided (the "Computer System"). Applications
available to SPI through the Computer System include, but are not limited to,
Address Book, Electronic Mail, Accounts Receivable, Accounts Payable, General
Ledger, Financial Reporting, Payroll, Fixed Assets, Inventory Management, Sales
Order Processing, Sales Analysis, Purchasing and Human Resources. For the
period provided for in this Agreement (the "Service Period"), Irex will continue
to provide SPI with such use, access and support, provided that Irex may
outsource hardware, software or support services currently provided in-house at
its sole discretion. SPI will
-3-
<PAGE>
comply with the non-financial terms, such as confidentiality obligations, of
Irex's agreements with Computer System vendors during the Service Period.
(a) During the Service Period, Irex warrants to SPI that the response
time, service specifications, and operating capacity of the Computer System will
be similar or better in all material respects than that available to SPI prior
to the Closing Date. To the extent that the vendor of the frame relay network
which Irex is installing provides Irex with guarantees concerning improved
response time, Irex will provide those guarantees to SPI.
(b) In the event that the Computer System at any time fails to operate
according to the warranted response time, service specifications or operating
capacity, Irex will employ its reasonable best efforts to timely address the
problem, giving due regard to the impact on SPI's business. Irex, however,
shall not be responsible for any loss to SPI resulting from failure of the
Computer System to operate according to warranty. SPI's sole remedy for such
failure shall be the correction of the failure and a reduction in its payments
to Irex for Computer Systems Costs (as defined herein) for the period of
failure.
(c) In no event shall Irex be responsible for consequential or
incidental damages in connection with the Computer System. Irex shall make
available to SPI, or, if necessary, assert on behalf of SPI, any claim which may
be available against any Irex vendor for deficiencies in the service provided to
SPI, provided that SPI shall pay the cost of asserting such claim.
(d) Irex shall make available to SPI any upgrades which Irex
determines to accept or acquire from its vendors concerning the Computer System.
During the Service Period, Irex will include SPI in the evaluation process of
any enhancements, modifications or new releases announced by its software
vendors, including access to the test environment prior to implementation
thereof, and will give reasonable consideration to the interests of SPI in
making upgrade decisions. Irex will upgrade to all new releases, modifications
or enhancements necessary to maintain support from the vendor thereof.
(e) As compensation for the services provided by Irex under this
Section 9, SPI will pay, on a monthly basis, a prorata share of Irex's Computer
System Costs, as defined herein. This proration will be based, for each
calendar month, beginning on the Closing Date, for charges of World Technology
Services LLD ("WTS") and JDEdwards on the ratio of SPI concurrent users as
defined by Irex's agreements with these vendors to total concurrent users as so
defined. The remaining Computer System Costs will be allocated each calendar
month based on the ratio of SPI input/output transactions as recorded by World
Technology Services for the three most recent months for which data is available
and attributable to SPI to the total input/output transactions recorded for all
users for these months. In the event that a dispute arises concerning the
amount of Computer System Costs chargeable to SPI, Irex will continue to provide
the computer services specified in this Agreement while the dispute resolution
procedure is pending.
-4-
<PAGE>
(f) "Computer System Costs" shall mean all costs incurred for the
services of WTS or a replacement vendor of IBM AS 400 services, all costs for
the use of JDEdwards software, and all other costs attributable to operation of
the MIS function as determined by the Irex accounting system on a basis
consistent with that used to allocate MIS costs on the Closing Date, excluding
the cost of programmers, whether in-house or third party, except to the extent
any programmer's time is attributable to work substantially beneficial to both
Irex and SPI, and excluding the cost of telecommunications for field locations.
(g) SPI will also pay to Irex on a monthly basis the actual cost of
all programmers' time and field telecommunication costs attributable to its
projects or its locations. In-house programmers' time will be quoted to SPI at
hourly rates reasonably reflecting the compensation and overhead attributable to
each programmer. Third-party programmers' time, other than time included within
Computer System Costs, and field telecommunication costs will be charged at
invoiced cost. Programmers' time will not be charged to SPI unless it has been
authorized in writing by an individual designated by SPI to Irex as having the
responsibility to authorize such time. SPI will also reimburse Irex for the
cost of the materials, equipment and software purchased at SPI's request for use
at SPI's locations in connection with the Computer System. Costs chargeable to
SPI will not be included in Computer System Costs.
(h) Irex will acquire and maintain all software licenses necessary to
permit SPI's use of the Computer System, provided, however, that any additional
hardware required by SPI at field locations after the Closing Date, and any
software licenses required for installation of software directly in such field
units will be paid for by SPI.
(i) The parties understand and agree that the existing Computer System
is set up to service the number of field locations and volume of business being
performed by SPI, Irex, and other Irex subsidiaries as of the Closing Date. In
the event that SPI grows to the extent that the existing Computer System must be
significantly reconfigured to handle this growth, the pricing provided for
herein will be renegotiated to more fairly and accurately account for such
changed circumstances.
(j) Irex understands that the software which WTS will use and the
JDEdwards upgrade Irex will install during 1998 are Year 2000 compliant, and
will resolve any remaining Year 2000 problems in the Computer System which are
not related to specific PC's or PC software. Irex will make available to SPI
the benefit of any Year 2000 warranties and certifications it receives from WTS,
JDEdwards and other vendors.
(k) This agreement for computer services shall extend for two (2)
years from the Closing Date unless terminated by the mutual consent of the
parties (the "Service Period"). SPI may, in its sole discretion, continue the
Service Period for a third year by giving Irex six months written notice of its
intention to so continue. If SPI desires to continue with the agreement after
the third Service Period year, Irex and SPI will attempt in good faith to
negotiate
-5-
<PAGE>
an extension, provided that SPI will give Irex notice at least six months prior
to the end of the term whether or not it desires to negotiate such an extension.
9. Health Insurance. For periods prior to the Closing Date, Irex has
----------------
maintained health insurance programs covering employees of both Irex and its
subsidiaries, including SPI. The cost of these programs is determined in part
by the actual cost of claims, for which Irex receives periodic bills or credits.
SPI shall reimburse Irex for any increased cost after the Closing Date
associated with these programs which are attributable to SPI claims, and Irex
shall return to SPI any decreased cost after the Closing Date attributable to
SPI claims.
10. Liability and Worker's Compensation Insurance. Irex is the lead named
---------------------------------------------
insured on policies of liability insurance including general liability,
automobile liability and worker's compensation insurance providing coverage for
periods prior to the Closing Date for which Irex's subsidiaries, including SPI,
are also named insureds. The cost of these programs is determined in part by
the actual paid or incurred cost of claims. After the Closing Date, Irex will
provide administration for these policies.
SPI will reimburse Irex for any increased cost after the Closing Date
associated with these policies which is attributable to SPI claims, and Irex
will refund to SPI any decreased cost after the Closing Date associated with
these policies attributable to SPI claims. These programs require letters of
credit or other collateral for unfunded incurred losses and unfunded incurred
but not reported losses ("IBNR"). SPI will also reimburse Irex for the cost of
any collateral required by unfunded SPI incurred losses and IBNR developed from
SPI losses. Irex will keep SPI advised concerning the handling of SPI claims,
and will offer to SPI the exercise of settlement authority over SPI claims, to
the extent such authority is available to Irex under the policies. Irex will
not authorize settlement of any claims, the costs of which would be reimbursable
by SPI hereunder, in an amount exceeding the claims handler's authority
established in their existing Service Contracts without the approval of SPI.
Nothing contained in this section will require SPI to pay any claim or costs for
which it is indemnified pursuant to Section 17 herein.
11. Bonds. Irex and SPI currently maintain bonds through a bonding
-----
program which provides bonding capacity for Irex and its subsidiaries, including
SPI. After the Closing Date, SPI will make required payments relating to the
renewal of SPI Bonds and the members of the Irex Group will make required
payments relating to the renewal of bonds for any of them. To the extent any
member of the Irex Group is liable for any payment made on an SPI Bond or SPI is
liable for any payment made on an Irex bond or bond of any other Irex
subsidiary, the party for whose benefit the bond was obtained shall indemnify
the other party for any payments made on such Bonds. Credits received on bond
premiums paid prior to the Closing Date will be returned to the company for
which the bond was obtained.
-6-
<PAGE>
12. Tax Agreements. Obligations of the parties with respect to taxes
--------------
shall be governed by the Tax Sharing and Indemnification Agreement dated
__________________ between Irex and SPI.
13. Closing Balance Sheet and Settlement Arrangements. Irex and SPI shall
-------------------------------------------------
settle all amounts due between the parties as a result of the Special Dividend,
the payment of expenses associated with the Spin-off and the IPO pursuant to
Section 2 herein, and the settlement of the intercompany accounts pursuant to
Section 5 herein on the Closing Date, using the best data then available. Any
required adjustments shall be made within forty-five (45) days after the Closing
Date. Disputes concerning settlement of accounts shall be resolved as provided
in Section 21 herein.
14. Time of Payments. All payments required of either party herein other
----------------
than those relating to intercompany account adjustments, or the Special
Dividend, or the payment of expenses associated with the Spin-off and the IPO
will be made within 30 days of the date invoiced or otherwise requested.
Amounts to be credited shall be paid within 30 days of the date a refund is
actually received, if from a third party, or the amount of the credit is
determined, if internal to SPI or the Irex Group. The foregoing, however, shall
not apply to payments or credits for materials purchased by the Contracting
Subsidiaries from SPI after the Closing Date; such purchases are outside the
scope of this agreement and will be independently provided for.
15. Other Shared Arrangements. The parties acknowledge that any other
-------------------------
shared or common arrangements which have not been identified and addressed
herein by the parties as of this date shall be resolved in a manner consistent
with the arrangements set forth herein.
16. No Time Limitations on Adjustments. The provisions herein pertaining
----------------------------------
to payments or credits for increased or decreased costs relating to liability
insurance, and health insurance will continue indefinitely, so long as any
claims covered by this Agreement are open.
17. Indemnification.
---------------
(a) SPI shall indemnify, hold harmless and defend Irex and the
Contracting Subsidiaries from any and all damages, loss, liability, cost or
expense, including attorneys fees, arising from or related to: (i) business
conducted by SPI on or after December 24, 1981; and (ii) the breach by SPI of
any representation, warranty or covenant of this agreement, subject to any
limitations provided for herein.
(b) Each member of the Irex Group shall jointly and severally
indemnify, hold harmless and defend SPI from any and all loss, liability, cost
or expense, including attorneys' fees, arising from or related to (i) business
conducted by any of them at any time; (ii) any business conducted by any party
to this Agreement prior to December 24, 1981; and (iii) the breach by any of
them of any representation, warranty or covenant of this agreement, subject to
any limitations provided for herein. Without limiting the generality of the
foregoing, each member of the Irex
-7-
<PAGE>
Group shall indemnify, hold harmless and defend SPI from any and all damages,
loss, liability, cost or expense, including attorneys' fees, arising from or
relating to the installation, sale, use, handling or removal of asbestos-
containing products by any member of the Irex Group and any liability any member
of the Irex Group has assumed concerning the installation, sale, use, handling
or removal of asbestos-containing products.
(c) The party seeking indemnity under this paragraph 17 (the
"Indemnified Party") shall provide the party from which indemnity is sought (the
"Indemnifying Party") with prompt notice of any notice, demand, claim, suit or
proceeding which may result in an indemnity obligation ("Indemnified Claim").
Upon receipt of such notice, the Indemnifying Party shall immediately undertake
the defense of such Indemnified Claim, and pay all out of pocket costs and
expenses associated therewith. The Indemnifying Party shall keep the
Indemnified Party informed of all developments concerning the Indemnified Claim,
and shall afford the Indemnified Party the opportunity, at the Indemnified
Party's expense, to associate counsel in the defense of the Indemnified Claim if
it so chooses. The Indemnified Party shall provide the Indemnifying Party with
any necessary cooperation in the defense of the Indemnified Claim. So long as
it agrees to make prompt payment, the Indemnifying Party may settle, compromise
or resolve the Indemnified Claim for any amount which it determines appropriate.
No delay in giving notice shall relieve a party of any liability hereunder
unless the party is materially and adversely affected by the delay.
(d) Nothing contained in subparagraph (a) and (b) above shall affect
the obligation of SPI, for warranties for materials sold by SPI to the
Contracting Subsidiaries. The warranties shall be as provided at the time of
sale, and shall be unaffected by this agreement.
18. Non-Compete. For a period of five (5) years from the Closing Date,
-----------
the Irex Group, and any business or entity owned or controlled in whole or in
part by any of them shall not distribute any mechanical insulation, acoustical
ceiling, passive fire protection and related or ancillary products in
competition with SPI, and SPI and any business or entity owned or controlled by
it in whole or in part shall not engage in any insulation contracting, interior
finish, contracting, asbestos, lead or hazardous material abatement contracting,
or any related specialty contracting in competition with any member of the Irex
Group. It shall not be a violation of this agreement for any member of the Irex
Group to continue any outright sale operation which it is conducting on the
Closing Date from the same location and on the same scale, or to make incidental
or opportunistic material sales. The parties agree that remedies at law are
inadequate for a breach of this provision, and that, in addition to any other
available remedies, the party seeking to enforce this provision may obtain an
injunction against any breach hereof.
19. Offset. In the event that any member of the Irex Group fails to pay
------
an obligation to SPI when due, SPI may offset any sum which it owes to any
member of the Irex Group against the unpaid obligation. In the event that SPI
fails to pay an obligation to any member of the Irex Group when due, any member
of the Irex Group may offset any sum which it owes SPI against the unpaid
obligation.
-8-
<PAGE>
20. Confidentiality. Each of the parties, for itself and all of its
---------------
present or future affiliates, hereby agrees that it and all present and future
affiliates will not in any manner, directly or indirectly, singly or jointly,
intentionally or negligently disclose to any unauthorized party any Confidential
Proprietary Information of the other party. "Confidential Proprietary
Information" is defined to mean confidential information including, without
limitation, trade secrets, client lists and other confidential and proprietary
client information, marketing and business plans, pricing methods, methods of
recruiting procedures, innovative techniques and other confidential and
proprietary information of the other party. For the purposes of the foregoing,
Confidential Proprietary Information shall not include:
(i) information which is or becomes generally available to
the public other than as a result of a disclosure by a party;
(ii) information which was already known to a party on a
nonconfidential basis prior to being furnished to a party by other party;
(iii) information independently developed by a party; or
(iv) information which becomes available to a party on a
nonconfidential basis from another source if such source was not known to such
party to be subject to any prohibition against transmitting the information.
21. Dispute Resolution. All controversies or claims arising out of or
------------------
relating to this Agreement shall be settled in the first instance by non-binding
mediation between the parties using mutually agreeable professional mediation
services and, failing a resolution through mediation within thirty (30) days of
demand for same, thereafter by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association and the laws of the
Commonwealth of Pennsylvania. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. All
arbitration proceedings shall take place in the Commonwealth of Pennsylvania.
The results of such arbitration shall be binding upon both parties. Until such
arbitration is finally concluded, the provisions of this Agreement shall remain
in full force and effect.
22. Access to Books and Records. Subject to the provisions of Section 20
---------------------------
herein, each party shall grant the other party access to its books and records
as necessary to allow the other party to conduct its business, file government
returns, conduct litigation, or for any other legitimate purpose. Irex will
grant SPI such access to books and records of Irex pertaining to insurance
policies and programs, tax returns, computer services and other relevant matters
as is necessary for SPI to verify the accuracy of billings to SPI pursuant to
this Agreement.
23. Miscellaneous.
-------------
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<PAGE>
(a) Severability. If any provision of this Agreement is held invalid
------------
or unenforceable, either in its entirety or by virtue of its scope or
application to given circumstances, such provision shall thereupon be deemed
modified only to the extent necessary to render the same valid, or not
applicable to given circumstances, or excised from this Agreement, as the
situation may require, and this Agreement shall be construed and enforced as if
such provision had been included herein as so modified in scope or application
or had not been included herein, as the case may be.
(b) No Third Party Beneficiaries. Neither this Agreement nor any
----------------------------
provisions set forth herein is intended to, or shall, create any rights nor
confer any benefits upon any person other than the parties hereto.
(c) Incorporation by Reference. The Exhibits to this Agreement
--------------------------
constitute integral parts of this Agreement and are hereby incorporated into
this Agreement by this reference. The text of the Exhibits shall prevail over
the description of such documents or the provisions hereof in this Agreement.
(d) Notices. All notices, demands, consents or other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been given when personally delivered, when sent by registered or certified mail,
return receipt requested, postage prepaid, or when sent via prepaid overnight
courier, addressed to their respective addresses as set forth below or to such
other place as the parties hereto shall specify by notice to the other parties
hereto given in the manner required above. Any notice, demand, consent or other
communication given hereunder in the manner required above shall be deemed to
have been effected and received as of the date hand-delivered or, if mailed,
three days after the date so mailed, or if sent via overnight courier, the next
business day.
If to any member of the Irex Group: Irex Corporation
120 North Lime Street
Lancaster, PA 17608
Attn: W.K. Liddell,
President and Chief Executive Officer
With a copy to: James E. Hipolit, Esquire
Sr. Vice President & General Counsel
Irex Corporation
120 North Lime Street
P. O. Box 1268
Lancaster, PA 17603
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<PAGE>
If to SPI: Specialty Products & Insulation Co.
1097 Commercial Avenue
P. O. Box 576
East Petersburg, PA 17520-0576
Attn: Ronald L. King, President
With a copy to: Wanda S. Whare, Esquire
Corporate Counsel
Specialty Products & Insulation Co.
1097 Commercial Avenue
P. O. Box 576
East Petersburg, PA 17520-0576
(e) Entire Agreement. All prior negotiations, discussions and
----------------
agreements of, by and between the parties and/or their representatives,
concerning the subject matter hereof, whether in writing or by parol, are herein
merged and engrossed, and except for this Agreement and the Benefit Sharing
Agreement and Tax Sharing and Indemnification Agreements and other agreements,
documents and instruments contemplated hereby and thereby, there are and shall
be no other agreements and/or understandings by the parties other than as
contained herein or therein or in a subsequent amendment or rider executed by
the parties with all of the formalities hereto.
(f) Governing Law; Jurisdiction. This Agreement shall be governed by,
---------------------------
and construed and enforced in accordance with, the laws of the Commonwealth of
Pennsylvania, as from time to time constituted and without regard to the
conflicts of laws principles thereof. Subject to Section 21, the parties agree
that any action brought in connection with this Agreement shall be maintained
only in The Court of Common Pleas of Lancaster County or The United States
District Court for the Eastern District of Pennsylvania, or a court to which an
appeal from any such court could be taken. The parties consent to the exclusive
personal jurisdiction of such courts for all such purposes.
(g) Amendments, Waivers and Consents. Any provision in this Agreement
--------------------------------
to the contrary notwithstanding, changes in or additions to this Agreement may
be made, and compliance with any covenant or provision herein set forth may be
omitted or waived, with the written consent of the parties hereto.
(h) Effect of Headings. The section headings contained herein are for
------------------
convenience of reference only and in no way shall they be held to nor shall they
affect the construction hereof.
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<PAGE>
(i) Counterparts. This Agreement may be executed in counterparts, all
------------
of which together shall constitute a single agreement.
(j) Survival. All agreements made by the parties in this Agreement,
--------
or in any certificates or other documents delivered pursuant hereto, shall
survive the Closing Date.
(k) Assignment. This Agreement shall not be assignable by either
----------
party without the prior written approval of the other party. To the extent
assignable, this Agreement shall be binding upon, and inure to the benefit of,
the parties hereto and their successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Corporate Separation
Agreement the day and year first above written.
IREX CORPORATION
By:
-------------------------------------
Attest:
----------------------
Secretary
ACandS, INC.
By:
-------------------------------------
Attest:
----------------------
Secretary
CENTIN, LLC
By:
-------------------------------------
Attest:
----------------------
Secretary
SPACECON, LLC
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<PAGE>
By:
-------------------------------------
Attest:
----------------------
Secretary
SPECIALTY PRODUCTS &
INSULATION CO.
By:
-------------------------------------
Attest:
----------------------
Secretary
-13-
<PAGE>
Exhibit 10.2
------------
FORM OF TAX SHARING AND INDEMNIFICATION AGREEMENT
-------------------------------------------------
THIS IS A TAX SHARING AND INDEMNIFICATION AGREEMENT (the "Agreement"),
dated as of the Effective Date, made by and among Irex Corporation, a
Pennsylvania corporation ("IREX") on behalf of itself and each member of the
IREX Post-Distribution Group, Specialty Products & Insulation Co., a
Pennsylvania corporation ("SPI"), on behalf of itself and each member of the SPI
Group, and their respective successors.
Background
----------
A. IREX has determined to effect the Distribution;
B. IREX and SPI have received the Tax Opinion regarding the tax
treatment of the Distribution;
C. The parties are entering into this Agreement: to insure the
continuing effectiveness of the Tax Opinion; to provide for the parties'
respective liabilities for Taxes; to provide certain indemnities; and to provide
for various administrative matters relating to Taxes including: (1) the
preparation and filing of Tax Returns along with the payment of Taxes shown due
and payable thereon, (2) the retention and maintenance of relevant records
necessary to prepare and file appropriate Tax Returns, as well as the provision
for appropriate access to those records by the parties to this Agreement, (3)
the conduct of audits, examinations, and proceedings by appropriate governmental
entities which could result in a redetermination of Taxes, and (4) the
cooperation of all parties with one another in order to fulfill their duties and
responsibilities under this Agreement and under the Code and other applicable
law; and
D. It is the intent of the parties that IREX shall economically bear
the burden of all Taxes imposed upon or attributable to the activities and
operations of IREX and its affiliates other than the members of the SPI Group,
including any Taxes attributable to the operations of IREX and its affiliates
other than the members of the SPI Group that are due under any consolidated,
combined or unitary Tax Return (or group relief or similar arrangement) that
includes one or more members of the SPI Group and at least one member of the
IREX Pre-Distribution Group (an "IREX Consolidated Return") and that the SPI
Group shall economically bear the burden of substantially all Taxes otherwise
imposed upon or attributable to the members of the SPI Group, including
substantially all Taxes payable with respect to an IREX Consolidated Return that
are attributable to the income or operations of a member of the SPI Group.
Terms
-----
THEREFORE, in consideration of the mutual promises, covenants, and
conditions contained in this Agreement, and intending to be legally bound
hereby, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. As used in this Agreement (including the
introduction and Background section hereof), the following definitions apply
(such meanings to be equally applicable to both the singular and plural focus of
the terms involved):
ADJUSTMENT means any proposed or final change in the Tax Liability of
a taxpayer.
AFFILIATE means, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
AFFILIATED PERSON has the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
ASSOCIATES has the meaning ascribed to such term in the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
BENEFICIAL OWNERSHIP has the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
CODE means the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
CONTINUATION PERIOD means the period commencing on the Effective Date
and ending on the seventh anniversary of the close of the taxable year of IREX
in which the Distribution occurs.
CORPORATE SEPARATION AGREEMENT means the Corporate Separation
Agreement among IREX, SPI and their affiliates entered into as of _________,
1998 in connection with the Distribution.
DISTRIBUTION means the distribution of SPI common stock to the holders
of IREX common stock.
EFFECTIVE DATE means the date on which the Distribution occurs.
FINAL DETERMINATION means the final resolution of any Tax matter. A
Final Determination shall result from the first to occur of:
1. the expiration of 30 days after the IRS' acceptance of a Waiver of
Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of
Overassessment on Form 870 or 870-AD (or any successor comparable form) (the
2
<PAGE>
"Waiver"), except as to reserved matters specified therein, or the expiration of
30 days after acceptance by any other taxing authority of a comparable agreement
or form under the laws of any other jurisdiction, including state, local, and
foreign jurisdictions; unless, within such period, the taxpayer gives notice to
the other party to this Agreement of the taxpayer's intention to attempt to
recover all or part of any amount paid pursuant to the Waiver by the filing of a
timely claim for refund;
2. a decision, judgment, decree, or other order by a court of
competent jurisdiction that is not subject to further judicial review (by appeal
or otherwise);
3. the execution of a closing agreement under Code section 7121, or
the acceptance by the IRS of an offer in compromise under Code section 7122, or
comparable agreements under the laws of any other jurisdiction, including state,
local, and foreign jurisdictions; except as to reserved matters specified
therein;
4. the expiration of the time for filing a claim for refund or for
instituting suit in respect of a claim for refund that was disallowed in whole
or part by the IRS or any other taxing authority;
5. the expiration of the applicable statute of limitations; or
6. an agreement by the parties hereto that a Final Determination has
been made.
GROUP has the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
INDEMNIFIED LIABILITY is defined at Section 8.1.
INDEMNIFIED PARTY is defined at Section 7.1.
INDEMNIFYING PARTIES is defined at Section 7.1.
INITIAL PUBLIC OFFERING means the initial public offering of SPI
common stock following the Distribution.
IREX CONSOLIDATED RETURN has the meaning set forth in paragraph D of
the Background section hereof.
IREX GROUP means, as of any relevant date, IREX and its Subsidiaries,
determined as of such date.
3
<PAGE>
IREX POST-DISTRIBUTION GROUP means the members of the IREX Group at an
applicable point in time following the Effective Date.
IREX PRE-DISTRIBUTION GROUP means the members of the IREX Group at any
applicable point in time prior to and including the Effective Date.
IRS means the U. S. Internal Revenue Service.
IRS INTEREST RATE means the rate of interest imposed from time to time
on underpayments of income tax pursuant to Code section 6621(a)(2).
NON-PRIMARY PARTY is defined at Section 4.2(a).
OPINION OF COUNSEL means an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to IREX, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to IREX.
PERSON means any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
PRE-DISTRIBUTION DIVIDEND means the $10,490,000 dividend paid by SPI
to IREX prior to the Distribution.
PRIMARY PARTY is defined at Section 4.2(a).
PROCEEDING is defined at Section 9.2(a).
RESTRICTED PERIOD means the two year period following the Effective
Date.
SPI BUSINESS means the business of distributing and fabricating
mechanical insulation, architectural/acoustical products and specialty products.
SPI GROUP means SPI and its wholly-owned subsidiary, Richlar
Industries, Inc.
SPI RETURNS has the meaning set forth in Section 2.2 hereof.
SUBSIDIARY means with respect to IREX or SPI, any Person of which IREX
or SPI, respectively, controls or owns, directly or indirectly, more than 50% of
the stock or other equity interest entitled to vote on the election of members
to the board of directors or similar governing body.
TAXES means all federal, state, local and foreign gross or net income,
gross receipts, withholding, payroll, franchise, transfer, sales, use, value
added, estimated or other taxes of any kind whatsoever or similar charges and
assessments, including all interest, penalties and additions imposed with
respect to such amounts which any member of the IREX Group or the SPI
4
<PAGE>
Group is required to pay, collect or withhold, together with any interest and
any penalties, additions or additional amounts imposed with respect thereto.
TAX BENEFIT means a reduction in the Tax Liability of a taxpayer for
any taxable period. Except as otherwise provided in this Agreement, a Tax
Benefit shall be deemed to have been realized or received from a Tax Item in a
taxable period only if and to the extent that the Tax Liability of the taxpayer
for such period, after taking into account the effect of the Tax Item on the Tax
Liability of such taxpayer in all other periods, is less than it would have been
if such Tax Liability were determined without regard to such Tax Item.
TAX ITEM means any item of income, gain, loss, deduction, credit,
recapture of credit, or any other item which may have the effect of increasing
or decreasing Taxes paid or payable. Without limiting the foregoing, Tax Items
of IREX shall include any income or gain that may be recognized by the IREX
Group in connection with the payment of the Pre-Distribution Dividend and any
triggering of any excess loss account with respect to the stock of SPI in
connection with the Distribution.
TAX LIABILITY means the net amount of Taxes due and paid or payable
for any taxable period, determined after applying all tax credits and all
applicable carrybacks or carryovers for net operating losses, net capital
losses, unused general business tax credits (of the applicable corporation and,
in the case of an IREX Consolidated Return, the other members of the IREX Group
included in such Tax Return), or any other Tax Items arising from a prior or
subsequent taxable period, and all other relevant adjustments.
TAX OPINION means the opinion delivered by Dechert Price & Rhoads
regarding the federal income tax consequences of the Distribution to IREX and
the shareholders of IREX.
TAX RETURNS means all reports, estimates, declarations of estimated
tax, information statements and returns relating to, or required to be filed in
connection with any Taxes, including information returns or reports with respect
to backup withholding and other payments to third parties.
UNQUALIFIED TAX OPINION means an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify the Distribution
from qualifying for tax-free treatment for the shareholders of IREX and any
member of the IREX Group under Code Section 355, assuming that the Distribution
would have qualified for tax free treatment if such transaction did not occur.
An Unqualified Tax Opinion may rely upon, and assume the accuracy of, any
representations contained in the Tax Opinion, and any representations contained
in an officer's certificate delivered by an officer of IREX or SPI to such tax
counsel in connection with the delivery of such Unqualified Tax Opinion.
5
<PAGE>
ARTICLE II
PREPARATION AND FILING OF TAX RETURNS
SECTION 2.1. IREX CONSOLIDATED RETURNS. IREX shall prepare and file,
or cause to be prepared and filed, all IREX Consolidated Returns. At least 45
days prior to the applicable filing deadline for any IREX Consolidated Return
that includes the income or operations of one or more members of the SPI Group,
IREX shall cause a draft of such return to be delivered to SPI together with a
reasonably detailed calculation of the portion of the Tax Liability for such
return that IREX has determined is attributable to the income or operations of
the members of the SPI Group.
SECTION 2.2. SPI RETURNS. SPI shall prepare and file, or cause to be
prepared and filed, all Tax Returns of or with respect to the members of the SPI
Group other than the IREX Consolidated Returns (the "SPI Returns").
SECTION 2.3. TAXABLE PERIOD ENDS ON EFFECTIVE DATE. The members of
the SPI Group shall be included in the federal consolidated income tax return of
the IREX Group for the taxable year that included the Effective Date. In
accordance with Treasury Regulations (S)1.1502-76(b)(ii), the taxable year of
the members of the SPI Group shall end for all federal income tax purposes on
the close of the Effective Date. The allocation of Tax Items of the members of
the SPI Group between the consolidated federal income tax return of the IREX
Group that includes the Effective Date and the separate federal income tax
return of the SPI Group for the taxable period beginning on the date immediately
following the Effective Date shall be determined in accordance with Treasury
Regulations (S)1.1502-76(b)(2)(i), without an election to allocate Tax Items
ratably pursuant to Treasury Regulations (S)1.1502-76(b)(2)(ii). Unless
prohibited under applicable law, a taxable period of a member of the SPI Group
that is included in any other IREX Consolidated Return that includes the
Effective Date shall end on the Effective Date and Tax Items shall be allocated
in a manner consistent with the allocation of Tax Items for federal income tax
purposes.
SECTION 2.4. ACCRUAL AT THE EFFECTIVE DATE. The intercompany accounts
to be settled as of the Effective Date pursuant to Section 5 of the Corporate
Separation Agreement shall include an accrual for the parties' good faith
estimate of the portion of each Tax Liability for any IREX Consolidated Return
that is attributable to the members of the SPI Group for the period up to and
including the Effective Date (the "Pre-Closing Accrual").
ARTICLE III
PAYMENT OF TAXES UPON FILING AND UPON SUBSEQUENT ADJUSTMENT
SECTION 3.1. TAXES GENERALLY. Except as provided in Section 3.2 and
Section 3.3 of this Agreement:
(a) IREX shall pay or cause to be paid and shall indemnify and hold the
members of the SPI Group harmless against all Tax Liabilities that
arise under each IREX Consolidated Return (i) to the extent
attributable to the Tax Items of the members
6
<PAGE>
of the IREX Group other than the members of the SPI Group, and (ii) to
the extent attributable to the Tax Items of the members of the SPI
Group provided that the Tax Liability attributable to such Tax Items
does not exceed the Pre-Closing Accrual for such Tax Liability. To the
extent the Pre-Closing Accrual for a Tax Liability specified in clause
(ii) of the preceding sentence exceeds the Tax Liability attributable
to the Tax Items of the members of the SPI Group, IREX shall promptly
reimburse SPI for such excess.
(b) SPI shall pay or cause to be paid and shall indemnify and hold IREX
and the members of the IREX Post-Distribution Group harmless against
all Tax Liabilities that arise (i) under each IREX Consolidated Return
to the extent attributable to the Tax Items of the members of the SPI
Group and to the extent the Tax Liability attributable to such Tax
Items exceeds the Pre-Closing Accrual for such Tax Liability and (ii)
under each SPI Return.
Notwithstanding the foregoing provisions of this Section 3.1, IREX and
the members of the IREX Post-Distribution Group shall be solely responsible for
and shall indemnify and hold the members of the SPI Group harmless against all
Tax Liabilities of the members of the SPI Group (or the portion of any Tax
Liability of any IREX Consolidated Return attributable to the members of the SPI
Group) that arise as a result of IREX's failure to file or failure to timely
file a Tax Return that includes a taxable period of a member of the SPI Group on
or before the Effective Date.
SECTION 3.2. STRADDLE PERIODS. If, for purposes of an IREX
Consolidated Return, a taxable period of a member of the SPI Group includes the
Effective Date but does not end on the Effective Date (as otherwise generally
provided under Section 2.3 of this Agreement), SPI shall (to the extent any such
Tax Liability exceeds the Pre-Closing Accrual) pay or cause to be paid and shall
indemnify and hold the IREX Post-Distribution Group harmless against the Tax
Liabilities attributable to the members of the SPI Group for the portion of such
tax period ending on the Effective Date. The determination of Tax Liabilities up
to and following the Effective Date shall be based upon an interim closing of
the books of the members of the SPI Group and an allocation of Tax Items as of
the close of the Effective Date in manner consistent with the allocation of Tax
Items for federal income tax purposes under Section 2.3.
SECTION 3.3. ADJUSTMENTS. If any Tax Return is examined by a taxing
authority and an Adjustment results from such examination, the party bearing
responsibility for such Taxes determined under Section 3.1 shall pay its share
of any additional Tax Liability resulting from the Adjustment, provided,
--------
however, that if the Adjustment that results in additional Tax Liability to one
- -------
party also results in a Tax Benefit to the other party, the party receiving such
Tax Benefit, to the extent it is equal to or less than the other party's
additional Tax Liability, shall pay such Tax Benefit to such other party within
30 days after such Tax Benefit is realized. Promptly after receiving notice from
the party having the Adjustment which results in additional Tax Liability, the
other party shall, to the extent permissible, make a claim for any Tax Benefit
resulting from such Adjustment, on an amended Tax Return or in a formal or
informal claim filed with the IRS, unless the amount of such Tax Benefit is
immaterial or unless otherwise agreed by
7
<PAGE>
the parties. If an Adjustment could be governed by both this Section
3.3 and Articles VII, VIII, or IX, those Articles will take precedence over this
Section 3.3.
ARTICLE IV
COOPERATION AND EXCHANGE OF INFORMATION; AUDITS AND ADJUSTMENTS
SECTION 4.1. TAX RETURN INFORMATION.
(a) SPI shall, and shall cause each member of the SPI Group to,
provide IREX with all information and other assistance reasonably requested by
IREX to enable the members of the IREX Post-Distribution Group to prepare and
file IREX Consolidated Returns required to be filed by them pursuant to this
Agreement.
(b) IREX shall, and shall cause each appropriate member of the IREX
Post-Distribution Group to, provide SPI with all information and other
assistance reasonably requested by SPI to enable SPI to prepare and file SPI
Returns required to be filed by them pursuant to this Agreement.
SECTION 4.2. AUDITS AND ADJUSTMENTS.
(a) Whenever IREX or SPI receives in writing from the IRS or any
other taxing authority notice of an Adjustment that may give rise to a payment
from the other party under this Agreement or otherwise affect the other party's
Taxes, IREX or SPI, as the case may be, shall give written notice of the
Adjustment to the other party within thirty (30) days of becoming aware of the
Adjustment but in no case later than ten (10) days before IREX or SPI, as the
case may be, is required to respond to the IRS or other taxing authority. The
party primarily liable for any Tax Liability with respect to the Adjustment
under Section 3.1 or Section 3.3 (the "Primary Party") at its own expense shall
have primary control over all matters relating to the Adjustment that may give
rise to a payment obligation by the Primary Party, provided, however, that the
-------- -------
other party (the "Non-Primary Party") may settle, partially settle, or otherwise
resolve any controversy involving the Non-Primary Party's return to which the
particular Adjustment relates, so long as the Non-Primary Party does not settle,
partially settle, or otherwise resolve the controversy in a manner inconsistent
with the Primary Party's position, without prior written consent, which may not
be unreasonably withheld, from the Primary Party.
(b) SPI agrees to reasonably cooperate with IREX, in the negotiation,
settlement, or litigation of any liability for Taxes of any member of the IREX
Post-Distribution Group.
(c) IREX agrees to reasonably cooperate with SPI in the negotiation,
settlement, or litigation of any liability for Taxes of any member of the SPI
Group.
(d) In the event of a conflict between the operation of this Section
4.2 and Articles VII, VIII, or IX, those Articles will take precedence over this
Section 4.2.
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For purposes of this Article IV, the term "party" shall refer to any member of
the IREX Post-Distribution Group and any member of the SPI Group, as the case
may be.
ARTICLE V
RETENTION OF RECORDS; STATUTES OF LIMITATIONS
SECTION 5.1. RETENTION OF RECORDS. IREX and SPI agree to retain the
appropriate records that may affect the determination of the liability for Taxes
of any member of the IREX Group or the SPI Group, respectively, until such time
as there has been a Final Determination with respect to such liability for
Taxes. A party may satisfy its obligations under the preceding sentence by
allowing the other party to duplicate records at such second party's request and
expense.
SECTION 5.2. STATUTE OF LIMITATIONS. IREX and SPI will notify each
other in writing of any waivers or extensions of the applicable statute of
limitations that may affect the period for which any materials, records, or
documents must be retained.
ARTICLE VI
REPRESENTATIONS AND COVENANTS
SECTION 6.1. REPRESENTATIONS.
(a) SPI has reviewed the materials submitted to Dechert Price &
Rhoads in connection with the Tax Opinion and, to the best of SPI's knowledge,
those materials, including, without limitation, any statements and
representations concerning SPI, its business operations, capital structure
and/or organization, are complete and accurate in all material respects. SPI
shall comply in all material respects with each such representation and
statement concerning SPI made in the materials so submitted and in the Tax
Opinion. Except as provided in Section 6.2(c), with respect to any
representation or statement made by or on behalf of SPI in connection with the
Tax Opinion and to the extent such representation or statement relates to future
actions or events under its control, SPI will not take any action during the
Restricted Period that would have caused such representation or statement to be
untrue if SPI had planned or intended to take such action at the time such
representation or statement was made by or on behalf of SPI.
(b) SPI hereby represents and warrants to IREX that SPI has no
intention to undertake any of the transactions set forth in Section 6.2(a)(ii)
nor does SPI have any intention to cease to engage in the active conduct of the
trade or business (within the meaning of Section 355(b)(2) of the Code) of the
SPI Business.
(c) IREX hereby represents and warrants that it has timely filed all
Tax Returns required to be filed with respect to the members of the SPI Group.
SECTION 6.2. COVENANTS.
(a) SPI covenants and agree with IREX that during the Restricted
Period:
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(i) SPI will continue to engage in the SPI Business and will
continue to maintain a substantial portion of its assets and
business operations as they existed prior to the
Distribution; provided that the foregoing shall not be
deemed to prohibit SPI from entering into or acquiring other
businesses or operations or from disposing of or shutting
down segments of the SPI Business so long as SPI continues
to engage in the SPI Business and continues to so maintain
such substantial portion of their assets and business
operations;
(ii) Except as provided in Section 6.2(c), neither SPI, nor any
of its Affiliates nor any of its or their respective
directors, officers or other representatives will undertake,
authorize, approve, recommend, permit, facilitate, or enter
into any contract, or consummate any transaction with
respect to:
(1) the issuance of SPI common stock (including any
issuance pursuant to the exercise of options, warrants,
rights or securities exercisable for, or convertible
into, SPI common stock) in a single transaction or in a
series of related or unrelated transactions or
otherwise or in the aggregate which would exceed
(taking into account the issuance of SPI common stock
in the Initial Public Offering and other issuances of
stock following the Distribution) 50% of the aggregate
voting power or value of the outstanding SPI common
stock immediately following the Distribution and prior
to the Initial Public Offering;
(2) any redemptions, repurchases or other acquisitions of
capital stock or other equity interest in SPI in a
single transaction or a series of related or unrelated
transactions, unless such redemptions, repurchases or
other acquisition satisfy the following requirements
under Section 4.05(1)(b) of Revenue Procedure 96-30:
(A) there is a "sufficient business purpose" for the
transaction,
(B) the stock to be purchased, redeemed or otherwise
acquired is widely held,
(C) the stock purchases or other acquisitions will be
made on the open market, and
(D) the amount of stock purchases, redemptions, or
other acquisitions in a single transaction or in a
series of
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related or unrelated transactions will not equal
or exceed an amount of stock representing 20% of
the outstanding stock of SPI immediately following
the Distributions.
(3) the dissolution, merger, or complete or partial
liquidation of SPI or any announcement of such action.
(b) In addition to the other representations, warranties, covenants
and agreements set forth in this Agreement, SPI will take, or refrain from
taking, as the case may be, such actions as IREX may reasonably request during
the Continuation Period as necessary to insure that the Distributions qualify
for the tax treatment stated in the Tax Opinion, including, without limitation,
such actions as IREX reasonably determines may be necessary to preserve the
conclusions of the Tax Opinion.
(c) Following the Distribution Date, SPI and its Affiliates may take
any action or engage in conduct otherwise prohibited by Section 6.2 so long as
prior to such action or conduct, as the case may be, IREX or SPI receives (A) a
ruling from the IRS in form and substance reasonably satisfactory to IREX and
upon which IREX can rely to the effect that the proposed action or conduct, as
the case may be, will not cause the Distributions to fail to qualify for the tax
treatment stated in the Tax Opinion, provided that the proposed action or
conduct that is the subject of the ruling is carried out in a manner consistent
with such ruling, or (B) an Opinion of Counsel in form and substance reasonably
satisfactory to IREX and upon which IREX can rely to the effect that the
proposed action or conduct, as the case may be, will not cause the Distribution
to fail to qualify for the tax treatment stated in the Tax Opinion.
ARTICLE VII
SPI INDEMNITY OBLIGATIONS
SECTION 7.1. SPI INDEMNITY. If SPI (the "Indemnifying Party") takes any action
prohibited by Article VI or violates a representation or covenant contained in
Article VI, and the Distribution fails to qualify for the tax treatment stated
in the Tax Opinion as a result of such action or violation, then the
Indemnifying Party shall indemnify and hold harmless IREX and
each member of the IREX Post-Distribution Group (collectively the "Indemnified
Party") against any and all Taxes imposed upon or incurred by the Indemnified
Party and/or its shareholders as a result of the failure.
SECTION 7.2. TENDER OFFER OR PURCHASE OFFER. Notwithstanding
anything to the contrary set forth in this Agreement, if, during the Restricted
Period, any Person or Group of Affiliated Persons or Associates acquires
Beneficial Ownership of SPI common stock (or any other class of outstanding SPI
stock) or commences a tender or other purchase offer for the capital stock of
SPI or initiates any other form of transaction to acquire directly or indirectly
SPI capital stock, upon consummation of which such Person or Group of Affiliated
Persons or Associates would acquire Beneficial Ownership of SPI common stock (or
any other class of outstanding SPI stock) such that the Distribution shall fail
to qualify for the tax treatment stated in
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the Tax Opinion primarily as a result of such acquisition, tender or other
purchase offer, or other form of transaction, then the Indemnifying Parties
shall indemnify and hold harmless the Indemnified Party against any and all
Taxes imposed upon or incurred by the Indemnified Party and/or its shareholders
as a result of the failure of the Distribution to so qualify.
SECTION 7.3. EFFECT OF SUPPLEMENTAL RULING OR OPINION OF COUNSEL. The
Indemnified Party shall be indemnified and held harmless under Section 7.1
without regard to the fact that the Indemnified Party may have received a
supplemental ruling from the IRS or an Opinion of Counsel as contemplated by
Section 6.2(c). The Indemnified Party shall be indemnified and held harmless
under Section 7.2 without regard to whether an acquisition of Beneficial
Ownership results from a transaction which is not prohibited under Article VI.
ARTICLE VIII
CALCULATION OF SPI INDEMNITY AMOUNTS
SECTION 8.1. AMOUNT OF INDEMNITY. The amount indemnified against
under Article VII ("Indemnified Liability") for a tax based on or determined
with reference to income shall be deemed to be the amount of the tax computed by
multiplying (i) the taxing jurisdiction's highest marginal tax rate applicable
to taxable income of corporations such as the Indemnified Party on income of the
character subject to tax and indemnified against under Article VII for the
taxable period in which the Distribution occurs, times (ii) the gain or income
of the Indemnified Party which is subject to tax in the taxing jurisdiction and
indemnified against under Article VII. In the case of an Indemnified Liability
attributable to a payment owed to a shareholder or shareholders of IREX, the
amount of the Indemnified Liability shall be equal to the amount so owed,
including without limitation, interest, costs, additions, expenses and
penalties. All amounts payable under this Agreement shall be grossed-up, based
on the tax rate referred to in clause (i) of the preceding sentence, so that the
Indemnified Party is made whole on an after-tax basis, taking into account
available Tax Benefits.
ARTICLE IX
PROCEDURAL ASPECTS OF SPI INDEMNITY
SECTION 9.1. GENERAL.
(a) If either the Indemnified Party or the Indemnifying Party
receives any written notice of deficiency, claim or adjustment or any other
written communication from a taxing authority that may result in an Indemnified
Liability, the party receiving such notice or communication shall promptly give
written notice thereof to the other party, provided that any delay by the
Indemnified Party in so notifying an Indemnifying Party shall not relieve the
Indemnifying Party of any liability hereunder, except to the extent (i) such
delay restricts the ability of the Indemnifying Party to contest the resulting
Indemnified Liability administratively or in the courts in accordance with
Section 9.2 and (ii) the Indemnifying Party is materially and adversely
prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after such
time as they obtain knowledge that any representative of a taxing authority has
begun to investigate or
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inquire into the Distribution (whether or not such investigation or inquiry is a
formal or informal investigation or inquiry), the party obtaining such knowledge
shall (i) notify the other party thereof, provided that any delay by the
Indemnified Party in so notifying the Indemnifying Party shall not relieve the
Indemnifying Party of any liability hereunder (except to the extent (A) such
delay restricts the ability of the Indemnifying Party to contest the resulting
Indemnified Liability administratively or in the courts in accordance with
Section 9.2 and (B) the Indemnifying Party is materially and adversely
prejudiced by such delay), (ii) consult with the other party from time to time
as to the conduct of such investigation or inquiry, (iii) provide the other
party with copies of all correspondence with such taxing authority or any
representative thereof pertaining to such investigation or inquiry, and (iv)
arrange for a representative of the other party to be present at all meetings
with such taxing authority or any representative thereof pertaining to such
investigation or inquiry.
SECTION 9.2. CONTESTS.
(a) Provided that (i) an Indemnifying Party shall furnish the
Indemnified Party with evidence reasonably satisfactory to the Indemnified Party
of its ability to pay the full amount of the Indemnified Liability and (ii) such
Indemnifying Party acknowledges in writing that the asserted liability is an
Indemnified Liability, such Indemnifying Party shall assume and direct the
defense or settlement of any tax examination, administrative appeal, hearing,
arbitration, suit or other proceeding (each a "Proceeding") commenced, filed or
otherwise initiated or convened to investigate or resolve the existence and
extent of such liability.
(b) If the Indemnified Liability is grouped with other unrelated
asserted liabilities or issues in the Proceeding, the parties shall use their
respective best efforts to cause the Indemnified Liability to be the subject of
a separate proceeding. If such severance is not possible, the Indemnifying Party
shall assume and direct and be responsible only for the matters relating to the
Indemnified Liability.
(c) Notwithstanding the foregoing, if at any time during a Proceeding
controlled by an Indemnifying Party pursuant to Section 9.2(a) such Indemnifying
Party fails to provide evidence reasonably satisfactory to the Indemnified Party
of its ability to pay the full amount of the Indemnified Liability or the
Indemnified Party reasonably determines, after due investigation, that such
Indemnifying Party could not pay the full amount of the Indemnified Liability,
then the Indemnified Party may assume control of the Proceedings upon 7 days
written notice.
(d) In addition to the amounts referred to in Section 7.1, an
Indemnifying Party shall pay all out-of-pocket expenses and other costs related
to the Indemnified Liability, including but not limited to fees for attorneys,
accountants, expert witnesses or other consultants retained by such Indemnifying
Party and/or the Indemnified Party. To the extent that any such expenses and
other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
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(e) An Indemnifying Party shall not pay (unless otherwise required by
a proper notice of levy and after prompt notification to the Indemnified Party
of receipt of notice and demand for payment), settle, compromise or concede any
portion of the Indemnified Liability without the written consent of the
Indemnified Party, which consent shall not be unreasonably withheld. An
Indemnifying Party shall, on a timely basis, keep the Indemnified Party informed
of all developments in the Proceeding and provide the Indemnified Party with
copies of all pleadings, briefs, orders, and other written papers.
(f) Any Proceeding which is not controlled or which is no longer
controlled by an Indemnifying Party pursuant to Section 9.2 shall be controlled
and directed exclusively by the Indemnified Party, and any related out-of-pocket
expenses and other costs incurred by the Indemnified Party, including but not
limited to, fees for attorneys, accountants, expert witnesses or other
consultants, shall be reimbursed by such Indemnifying Party. An Indemnified
Party will not be required to pursue the claim in federal district court, the
Court of Federal Claims or any state or foreign court if as a prerequisite to
such court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
such Indemnifying Party.
SECTION 9.3. TIME AND MANNER OF PAYMENT. An Indemnifying Party shall
pay to the Indemnified Party the amount of the Indemnified Liability and any
expenses or other costs indemnified against (less any amount paid directly by an
Indemnifying Party to the taxing authority) no less than seven (7) business days
prior to the date payment of the Indemnified Liability is to be made by any
party to the taxing authority (or, if applicable, to one or more IREX
shareholders). Such payment shall be paid by wire transfer of immediately
available funds to an account designated by the Indemnified Party by written
notice to an Indemnifying Party prior to the due date of such payment. If an
Indemnifying Party delays making payment beyond the due date hereunder, such
party shall pay interest on the amount unpaid at the IRS Interest Rate for each
day and the actual number of days for which any amount due hereunder is unpaid.
SECTION 9.4. REFUNDS. In connection with this Agreement, if an
Indemnified Party receives a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to such Indemnifying Party.
SECTION 9.5. COOPERATION. The parties shall cooperate with one
another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE X
RESOLUTION OF DISPUTES
SECTION 10.1 DISPUTES.
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(a) Resolution of any and all disputes arising from or in connection
with this Agreement, whether based on contract, tort, statute or otherwise,
including, but not limited to, disputes in connection with claims by third
parties (collectively, "Disputes"), shall be subject to the provisions of this
Section 10.1; provided, however, that nothing contained herein shall preclude
either party from seeking or obtaining (i) injunctive relief or (ii) equitable
or other judicial relief to enforce the provisions hereof or to preserve the
status quo pending resolution of Disputes hereunder.
(b) Either party may give the other party written notice of any
Dispute not resolved in the normal course of business. The parties shall attempt
in good faith to resolve any Dispute promptly by negotiation of executive who
have authority to settle the controversy. Within 30 days after delivery of the
notice, the foregoing executives of both parties shall meet at a mutually
acceptable time and place, and thereafter as often as they reasonably deem
necessary for a period not to exceed 15 days, to attempt to resolve the Dispute.
All reasonable requests for information made by one party to the other will be
honored. If the parties do not resolve the Dispute within such 45 day period
(the "Initial Mediation Period"), the parties shall attempt in good faith to
resolve the Dispute by negotiation between (a) in the case of IREX, the Chief
Executive Officer, and (b) in the case of SPI, the Chief Executive Officer
(collectively, the "Designated Officers"). Such officers shall meet at a
mutually acceptable time and place (but in any event no later than 15 days
following the expiration of the Initial Mediation Period) and thereafter as
often as they reasonably deem necessary for a period not to exceed 15 days, to
attempt to resolve the Dispute.
(c) If the Dispute has not been resolved by negotiation within 75
days of the first party's notice, or if the parties failed to meet within 30
days of the first party's notice, or if the Designated Officers failed to meet
within 60 days of the first party's notice, either party may commence any
litigation or other procedure allowed by law.
ARTICLE XI
GENERAL
SECTION 11.1. TERM OF THE AGREEMENT. This Agreement shall become
effective as of the Effective Date and, except as otherwise expressly provided
herein, shall continue in full force and effect indefinitely.
SECTION 11.2. INJUNCTIONS. The parties acknowledge that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. The parties hereto shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof in any court having jurisdiction,
such remedy being in addition to any other remedy to which they may be entitled
at law or in equity.
SECTION 11.3. ASSIGNMENT. Neither of the parties may assign or
delegate any of its rights or duties under this Agreement without the prior
written consent of the other party,
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which consent will not be unreasonably withheld. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
SECTION 11.4. FURTHER ASSURANCES. Subject to the provisions hereof,
the parties hereto shall make, execute, acknowledge, and deliver such other
instruments and documents, and take all such other actions, as may be reasonably
required in order to effectuate the purposes of this Agreement and to consummate
the transactions contemplated hereby. Subject to the provisions hereof, each of
the parties shall, in connection with entering into this Agreement, performing
its obligations hereunder and taking any and all actions relating hereto, comply
with all applicable laws, regulations, orders, and decrees, and promptly provide
the other parties with all such information as they may reasonably request in
order to be able to comply with the provisions of this sentence.
SECTION 11.5. WAIVERS. No failure or delay on the part of the parties
in exercising any power or right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such right or power, preclude
any other or further exercise thereof or the exercise of any other right or
power. No modification or waiver of any provision of this Agreement nor consent
to any departure by the parties therefrom shall in any event be effective unless
the same shall be in writing, and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given.
SECTION 11.6. CHANGE OF LAW. If, due to any change in applicable law
or regulations or their interpretation by any court of law or other governing
body having jurisdiction subsequent to the date of this Agreement, performance
of any provision of this Agreement or any transaction contemplated thereby shall
become impracticable or impossible, the parties hereto shall use their best
efforts to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such provision.
SECTION 11.7. CONFIDENTIALITY. Subject to any contrary requirement of
law and the right of each party to enforce its rights hereunder in any legal
action, each party agrees that it shall keep strictly confidential, and shall
cause its employees and agents to keep strictly confidential, any information
which it or any of its employees or agents may require pursuant to, or in the
course of performing its obligations under, any provision of this Agreement.
SECTION 11.8. HEADINGS. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
SECTION 11.9. COUNTERPARTS. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties hereto,
and each such executed counterpart shall be, and shall be deemed to be, an
original instrument.
SECTION 11.10. NOTICES. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to
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have been duly given or made upon receipt) by delivery by hand, by reputable
overnight courier service, by facsimile transmission, or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the addresses listed below:
IREX at: Irex Corporation
120 North Lime Street
Lancaster, Pennsylvania 17602
Attn.: General Counsel
Fax No. (717) 393-3872
SPI at: Specialty Products & Insulation Co.
1097 Commercial Avenue
P.O. Box 576
East Petersburg, PA 17520-0576
Attn.: Chief Financial Officer
Fax No. (717) 519-4046
or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by hand shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five (5) calendar days after the date the same is
mailed. Notice given by reputable overnight courier shall be deemed delivered on
the next following business day after the same is sent. Notice given by
facsimile transmission shall be deemed delivered on the day of transmission
provided telephone confirmation of receipt is obtained promptly after completion
of transmission.
SECTION 11.11. PRE-DISTRIBUTION EARNINGS AND PROFITS. IREX and SPI
agree to allocate pre-Distribution earnings and profits in accordance with
Treasury Regulation Section 1.312-10.
SECTION 11.12. COSTS AND EXPENSES. Unless otherwise specifically
provided herein, each party agrees to pay its own costs and expenses resulting
from the fulfillment of its respective obligations hereunder.
SECTION 11.13. CANCELLATION OF PRIOR TAX ALLOCATION OR TAX-SHARING
AGREEMENTS. Except as otherwise expressly provided herein, on or prior to the
Effective Date, IREX shall cancel or cause to be canceled all agreements (other
than this Agreement) providing for the allocation or sharing of Taxes to which
any member of the SPI Group would otherwise be bound following the Distribution.
SECTION 11.14. INTEREST ON LATE PAYMENTS. If a party delays making
any payment beyond the due date hereunder, such party shall pay interest on the
amount unpaid at the IRS Interest Rate for each day and the actual number of
days for which any amount due hereunder is unpaid.
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SECTION 11.15. GENERAL. This Agreement, including the attachments,
shall constitute the entire agreement between the parties hereto with respect to
the subject matter hereof and shall supersede all prior agreements and
undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. This Agreement may not be amended or modified
except (a) by an instrument in writing signed by, or on behalf of, the parties
or (b) by a waiver in accordance with Section 11.5. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and their
respective present and future subsidiaries, and nothing herein, express or
implied, is intended to or shall confer upon any third parties any legal or
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
SECTION 11.16. GOVERNING LAW AND SEVERABILITY. This Agreement shall
be governed by, and construed in accordance with, the laws of the Commonwealth
of Pennsylvania, applicable to contracts executed in and to be performed
entirely within that state. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed by their respective officers, each of whom is duly authorized, all
as of the Effective Date.
IREX CORPORATION
By:
--------------------------
Name:
Title:
SPECIALTY PRODUCTS & INSULATION CO.
By:
--------------------------
Name:
Title:
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Exhibit 10.3
------------
- --------------------------------------------------------------------------------
FORM OF BENEFITS SHARING AGREEMENT
BETWEEN
IREX CORPORATION AND SPECIALTY PRODUCTS & INSULATION CO.
DATED AS OF _________, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I -- DEFINITIONS......................................................1
ARTICLE II - ALLOCATION OF LIABILITIES........................................5
Section 2.1 IREX's Liability............................................5
Section 2.2 SPI's Liability.............................................5
ARTICLE III - RETIREMENT PLANS................................................5
Section 3.1 Defined Benefit Plan........................................5
Section 3.2 Defined Contribution Plans..................................6
ARTICLE IV - WELFARE BENEFIT PLANS............................................8
Section 4.1 General Principles..........................................8
Section 4.2 Establishment of Mirror Welfare Plans.......................9
Section 4.3 Long Term Disability........................................9
Section 4.4 Post-retirement Medical Benefits............................9
Section 4.5 Vacation and Sick Pay Liabilities...........................9
Section 4.6 Vendor Contracts............................................9
Section 4.7 Unemployment Compensation..................................10
Section 4.8 Transfer of Certain Assets.................................10
ARTICLE V - GENERAL..........................................................10
Section 5.1 Payment of and Accounting Treatment for Expenses and
Balance Sheet Amounts......................................10
Section 5.2 Accounting Adjustments.....................................10
Section 5.3 Notices....................................................11
Section 5.4 Amendment and Waiver.......................................11
Section 5.5 Sharing of Participant Information.........................11
Section 5.6 Entire Agreement...........................................11
Section 5.7 Parties in Interest........................................11
Section 5.8 No Third-Party Beneficiaries; No Termination of Employment.12
Section 5.9 Right to Amend or Terminate Any Plans......................12
Section 5.10 Fiduciary and Related Matters..............................12
Section 5.11 Effect if Distribution Does Not Occur......................12
Section 5.12 Relationship of Parties....................................12
Section 5.13 Affiliates.................................................12
Section 5.14 Requests for Internal Revenue Service Rulings and
Determinations and United States Department of
Labor Opinions.............................................12
Section 5.15 Further Assurances and Consents............................13
Section 5.16 Severability...............................................13
Section 5.17 Governing Law..............................................13
Section 5.18 Counterparts...............................................13
Section 5.19 Disputes...................................................13
Section 5.20 Interpretation.............................................13
Section 5.21 Headings...................................................14
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BENEFITS SHARING AGREEMENT
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This is a BENEFITS SHARING AGREEMENT, dated as of June ___, 1998 (the
"Agreement"), by and between IREX Corporation, a Pennsylvania corporation
(together with its successors and permitted assigns, "IREX"), and Specialty
Products & Insulation Co., a Pennsylvania corporation (together with its
successors and permitted assigns, "SPI") (collectively, the "Parties" or
individually, a "Party").
BACKGROUND
1. The Board of Directors of IREX has determined that it is in the
best interest of IREX and the stockholders of IREX to distribute (the
"Distribution") to the holders of IREX Common Stock (as defined herein) all of
the shares of SPI Common Stock (as defined herein).
2. IREX, SPI and certain of their affiliates have entered into a
Corporate Separation Agreement, of even date herewith (the "Distribution
Agreement"), and certain other agreements that will govern certain matters
relating to the Distribution and the relationship of IREX and SPI and their
respective subsidiaries and affiliates following the Distribution.
3. This Agreement sets forth the arrangements between the Parties
relating to employee benefits and compensation matters.
THEREFORE, in consideration of the foregoing premises and the mutual
agreements and covenants contained in this Agreement, the Parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
Definitions. The following words and phrases used in this Agreement
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shall have the meanings set forth below unless a different meaning is plainly
required by the context.
"Action" means any claim, demand, suit, counter suit, arbitration,
inquiry, proceeding or investigation by or before any Governmental Authority or
any arbitration or mediation tribunal, pending or threatened, known or unknown.
"ASO Contract" means an administrative services only contract, related
prior practice, or related understanding with a third-party administrator that
pertains to any IREX Welfare Plan.
"Close of the Distribution Date" means 11:59:59 P.M., Eastern Time, on
the Distribution Date.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Distribution Agreement" is defined in the Background Section to this
Agreement.
"Distribution Date" means June ____, 1998.
"Employee" means any individual who maintains a common-law employee-
employer relationship with a designated Person.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESOP" means the IREX Corporation Employees' Stock Ownership Plan, as
amended.
"ESOP Trust" means the trust maintained pursuant to the Agreement for
Trust under the ESOP dated November 22, 1985 between IREX, W.K. Liddell and J.E.
Pinkerton, as amended.
"Former IREX Employee" means an individual who previously maintained a
common-law employee-employer relationship with IREX or a member of the IREX
Group whose employment terminated for any reason (including retirement) before
the Distribution Date and who, as of the Distribution Date, is not employed by
IREX, a member of the IREX Group or SPI.
"Former SPI Employee" means an individual who previously maintained a
common-law employee-employer relationship with SPI whose employment terminated
for any reason (including retirement) before the Distribution Date and who, as
of the Distribution Date, is not employed by SPI, IREX or a member of the IREX
Group.
"Governmental Authority" means any federal, state or local court,
government, department, commission, board, bureau, agency, official or other
regulatory, administrative or governmental authority, including, without
limitation, the United States Department of Labor, the Internal Revenue Service,
and the Pension Benefit Guaranty Corporation.
"Group Insurance Policy" means a group insurance policy issued under
any IREX Welfare Plan.
"HMO Agreements" means contracts, letter agreements, practices and
understandings with HMOs that provide medical services under the any IREX
Welfare Plans.
"HMO" means a health maintenance organization that provides benefits
under any IREX Welfare Plans.
"Immediately after the Distribution Date" means 12:00 A.M., Eastern
Time, on the day after the Distribution Date.
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"IREX Common Stock" means the shares of capital stock, par value $1.00
per share, of IREX.
"IREX Director" means a person who is a member of the Board of
Directors of IREX on the Distribution Date.
"IREX Employee" means an individual who maintains a common-law
employee-employer relationship with IREX or any member of the IREX Group on the
Distribution Date.
"IREX Flex Plan" means the IREX Corporation Flexible Reimbursement
Accounts Plan, as amended.
"IREX Group" means the Subsidiaries of IREX, excluding SPI.
"IREX Savings Plan" means the IREX Corporation Employees' Savings
Incentive Plan, as amended.
"IREX Savings Plan Trust" means the trust maintained pursuant to the
Trust Agreement dated June 30, 1992 between IREX Corporation and Vanguard
Fiduciary Trust Company, as amended.
"Liabilities" means any and all losses, claims, charges, debts,
demands, actions, costs and expenses (including, without limitation,
administrative and related costs and expenses of any Plan, program or
arrangement), of any nature whatsoever, whether absolute or contingent, matured
or unmatured, liquidated or unliquidated, accrued or unaccrued, known or
unknown, whenever arising.
"Material Feature" means any feature of a Plan that could reasonably
be expected to be of material importance to the sponsoring employer or the
participants and beneficiaries of the Plan, which could include, without
limitation, depending on the type and purpose of the particular Plan, the class
or classes of employees eligible to participate in such Plan, the nature, type,
form, source, and level of benefits provided by the employer under such Plan and
the amount or level of contributions, if any, required to be made by
participants (or their dependents or beneficiaries) to such Plan or that is a
benefit, right or feature within the meaning of Code section 411(d)(6).
"Non-Employer Stock Fund" is defined in Section 3.2(g)(ii) of this
Agreement.
"Participating Company" means any Person (other than an individual)
that is participating in a Plan sponsored by SPI, IREX or a member of the IREX
Group, as the context requires.
"Pension Plan" means the IREX Corporation Employees' Retirement Income
Plan, as amended.
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"Pension Trust" means the IREX Corporation Employees' Retirement
Income Plan Trust dated September 5, 1985 between IREX and Provident National
Bank, as amended.
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity, or Governmental Authority.
"Plan" means any plan, policy, program, payroll practice, on-going
arrangement, contract, trust, insurance policy or other agreement or funding
vehicle, whether written or unwritten, providing benefits to IREX Employees,
Former IREX Employees, SPI Employees or Former SPI Employees.
"Retained Employees" means all IREX Employees and Former IREX
Employees.
"SPI Common Stock" means the outstanding shares of common stock, $.01
par value, of SPI.
"SPI Director" means a person who is a member of the Board of
Directors of SPI on the Distribution Date.
"SPI Employee" means an individual who maintains a common-law
employee-employer relationship with SPI on the Distribution Date.
"SPI Hourly Plan" means the Specialty Products and Insulation Co.
Defined Contribution Pension Plan for Hourly-Paid Employees.
"SPI Savings Plan" means the savings and retirement plan established
by SPI pursuant to Section 3.2(b).
"SPI Savings Plan Trust" means the trust to be established by SPI
pursuant to Section 3.2(c).
"Subsidiary" means, with respect to any specified Person, any
corporation or other legal entity of which such Person or any of its
Subsidiaries controls or owns, directly or indirectly, more than 50% of the
stock or other equity interest entitled to vote on the election of members to
the board of directors or similar governing body.
"Transferred Employees" means all SPI Employees and Former SPI
Employees.
"Welfare Plans" when immediately preceded by "IREX," means the welfare
benefit plans, programs, and policies listed in Part 1 of Appendix A to this
Agreement that are sponsored by IREX. When immediately preceded by "SPI,"
"Welfare Plans" means the welfare benefit plans, programs, and policies listed
in Part 2 of Appendix A to this Agreement that are sponsored by SPI for periods
Immediately after the Distribution Date.
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ARTICLE II
ALLOCATION OF LIABILITIES
Section 2.1 IREX's Liability. Effective Immediately after the
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Distribution Date and thereafter, IREX shall maintain responsibility to pay,
perform, fulfill and discharge, in accordance with their respective terms, all
of the Liabilities (regardless of when or where such Liabilities arose or arise
or were or are incurred) to or relating to the Retained Employees that arise out
of or relate to the employment relationship between IREX or any member of the
IREX Group and any Retained Employee, including but not limited to any
Liabilities that arise from the termination of such employment relationship. In
addition, except as provided below, Immediately after the Distribution Date and
thereafter, IREX shall maintain responsibility for the Liabilities to or
relating to Transferred Employees specifically set forth in Sections 3.1(c),
3.2(g), 4.3 and 4.4. However, with respect to the Liabilities relating to the
IREX Savings Plan set forth in Section 3.2(g), IREX shall retain such
Liabilities only until completion of the asset transfer provided for in Section
3.2(g).
Section 2.2 SPI's Liability'. Subject to Sections 3.1(c). 4.3 and 4.4,
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Immediately after the Distribution Date (except with respect to Liabilities
under the IREX Savings Plan whereupon this Section shall be effective
immediately following the asset transfer provided for in Section 3.2(g)), SPI
shall assume responsibility to pay, perform, fulfill and discharge, in
accordance with their respective terms, all of the Liabilities (regardless of
when or where such Liabilities arose or arise or were or are incurred) to or
relating to the Transferred Employees that arise out of or relate to the
employment relationship between IREX, any member of the IREX Group or SPI and
any Transferred Employee, including but not limited to any Liabilities that
arise from the termination of such employment relationship.
ARTICLE III
Retirement Plans
Section 3.1 Defined Benefit Plan.
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(a) Cease Benefit Accruals. Effective as of May 1, 1998, IREX amended the
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Pension Plan to cease all future benefit accruals. Thereafter, no IREX Employee,
SPI Employee or any other individual shall accrue additional benefits under the
Pension Plan.
(b) Pension Contribution. Prior to the Distribution Date, IREX shall make
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a contribution to the Pension Trust on behalf of SPI in the amount of $175,000.
Within 30 days after the Distribution Date, SPI shall reimburse IREX for the
full amount of the Pension Trust contribution.
(c) Assumption of Liabilities. Effective Immediately after the
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Distribution Date and thereafter, IREX shall retain all Liabilities with respect
to the Transferred Employees under the
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Pension Plan and except as provided in Section 3.1(b), SPI shall have no further
liability with respect to the Pension Plan.
(d) PBGC Intervention. In the event that at any time the Pension Benefit
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Guaranty Corporation ("PBGC") or any other Governmental Authority asserts that
the Distribution may provide justification for the PBGC to seek termination of
the Pension Plan pursuant to ERISA section 4042 or otherwise asserts that the
transaction may increase unreasonably the long-run loss to the PBGC (within the
meaning of ERISA section 4042(a)(4)) with respect to the Pension Plan, IREX
shall negotiate in good faith with the PBGC to resolve these issues and shall
hold SPI harmless from any Liabilities related to the resolution of such issues.
Section 3.2 Defined Contribution Plans.
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(a) Plan Merger. Effective as of May 1, 1998, IREX merged the ESOP with
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and into the IREX Savings Plan.
(b) Establishment of Mirror Savings Plans. Effective Immediately after the
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Distribution Date, SPI shall adopt the SPI Savings Plan, which shall be
qualified under Code section 401(a) and shall provide benefits to Transferred
Employees that are substantially similar in all Material Features to those
provided under the IREX Savings Plan immediately before the Distribution Date.
(c) Establishment of Mirror Savings Trust. Effective Immediately after the
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Distribution Date, SPI shall establish the SPI Savings Plan Trust, which shall
hold the assets of the SPI Savings Plan and shall be exempt from taxation under
Code section 501(a).
(d) Determination Letters. SPI shall apply to the Internal Revenue Service
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("IRS") for a favorable determination letter with respect to the tax-qualified
status of the SPI Savings Plan as soon as practicable after the Distribution
Date, and SPI shall make such amendments to the SPI Savings Plan as may be
required by the IRS in order for SPI to receive a favorable determination letter
with respect to the SPI Savings Plan.
(e) Appointment of Trustee/Recordkeeper. Effective Immediately after the
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Distribution Date, SPI shall use its reasonable best efforts to enter into such
agreements to accomplish the assumption of Liabilities and transfer of assets
outlined in this Section 3.2, the maintenance of the necessary participant
records, the appointment of Vanguard Fiduciary Trust Company as initial trustee
under the SPI Savings Plan, and the engagement of Vanguard Fiduciary Trust
Company as initial recordkeeper under the SPI Savings Plan.
(f) Retention of Liabilities. Until such time as the asset transfer
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provided for in Section 3.2(g) is completed, IREX shall retain all Liabilities
with respect to the Transferred Employees under the IREX Savings Plan.
Thereafter, all such Liabilities shall be the responsibility of SPI.
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(g) Transfer of IREX Savings Plan Assets.
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(i) Transfer of Assets to the SPI Savings Plan Trust. As soon
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as practicable after the Distribution Date, IREX shall cause the accounts of the
Transferred Employees under the IREX Savings Plan that are held by the IREX
Savings Plan Trust to be transferred to the SPI Savings Plan and the SPI Savings
Plan Trust, and SPI shall cause such transferred accounts to be accepted by such
plan and trust. The transfer of such accounts shall be made: (A) in kind, to the
extent the assets consist of investments in IREX Common Stock or SPI Common
Stock and (B) otherwise in cash, interests in mutual funds, securities, or other
property or in a combination thereof, as IREX and SPI shall mutually agree, but,
to the extent practicable, shall be invested initially in comparable investment
options in the SPI Savings Plans as such accounts were invested immediately
before the date of transfer. Any outstanding loan balance to a Transferred
Employee under the IREX Savings Plan shall be transferred with the underlying
accounts.
(ii) Non-Employer Stock Funds. Effective Immediately after the
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Distribution Date, a SPI Common Stock fund shall be added as an investment
option to the IREX Savings Plan and the SPI Savings Plan shall provide for both
an IREX Common Stock fund and a SPI Common Stock fund as investment options. The
SPI Common Stock fund in the IREX Savings Plan and the IREX Common Stock fund in
the SPI Savings Plan are each referred to as a "Non-Employer Stock Fund" with
respect to the applicable Plan. The Parties intend that the appropriate Plan
fiduciaries will determine for what period of time the applicable Non-Employer
Stock Fund remains an investment option under their respective Plans.
(iii) Provision of Disclosure Materials Relating to Non-Employer
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Stock Funds. Each Party shall provide to the other Party in a timely manner such
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proxy statements, annual reports, and other materials with respect to the
Party's stock held in the Non-Employer Stock Fund under the Plan of the other
Party as may be reasonably requested by the other Party.
(iv) Governmental Filings. IREX and SPI shall make any filings
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required under the Code or ERISA in connection with the transfer described in
this Section 3.2(g) in a timely manner. The Parties agree that the transfer
described in this Section 3.2(g) shall be made in accordance with section 414(1)
of the Code.
(h) SPI Hourly Plan. Effective Immediately after the Distribution Date and
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thereafter, SPI shall retain all Liabilities with respect to the SPI Hourly Plan
and neither IREX nor any member of the IREX Group shall have any further
Liability with respect to the SPI Hourly Plan.
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ARTICLE IV
WELFARE BENEFIT PLANS
Section 4.1 General Principles.
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(a) Assumption of Liabilities. Subject to Sections 4.3 and 4.4 no later
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than Immediately after the Distribution Date, all Transferred Employees shall
cease coverage under the IREX Welfare Plans and shall commence coverage under
the SPI Welfare Plans. Notwithstanding the preceding sentence, any claims that
have been incurred prior to the date that the Transferred Employees cease
coverage under the IREX Welfare Plans shall be shared between the Parties in
accordance with their historic practice.
(b) Continuation of Elections. SPI shall cause the SPI Welfare Plans to
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recognize and maintain all coverage and contribution elections made by
Transferred Employees under the IREX Welfare Plans in effect for the period
immediately before the Distribution Date and shall apply such elections under
the SPI Welfare Plans for the remainder of the period or periods for which such
elections are by their terms applicable. SPI shall provide coverage to
Transferred Employees under the SPI Welfare Plans without the need to undergo a
physical examination or otherwise provide evidence of insurability, and will
recognize and maintain all irrevocable assignments and elections made by
Transferred Employees in connection with any life insurance coverage under the
IREX Welfare Plans and any predecessor plans.
(c) Continuation of Co-Payments. SPI shall cause the SPI Welfare Plans to
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recognize and give credit for all amounts applied to deductibles, out-of-pocket
maximums, and other applicable benefit coverage limits for expenses that have
been incurred by Transferred Employees under the IREX Welfare Plans for the
remainder of the benefit limit year in which the Distribution Date occurs.
(d) Continuation of Maximum Benefits. SPI shall cause the SPI Welfare
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Plans to recognize and give credit for all benefits paid to Transferred
Employees under the IREX Welfare Plans, before and during the benefit limit year
in which the Distribution occurs, for purposes of determining when such persons
have reached their lifetime maximum benefits under the SPI Welfare Plans.
(e) COBRA and HIPAA Obligations. For periods before the Distribution Date,
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IREX shall be responsible for administering compliance with the continuation
coverage requirements for "group health plans" under Title X of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and the
portability requirements under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), with respect to Transferred Employees and
their beneficiaries and dependents. Effective Immediately after the Distribution
Date and thereafter, Transferred Employees and their beneficiaries and
dependents who have incurred a "qualifying event" (as defined in Code section
4980B) on or prior to the Distribution Date shall be entitled to COBRA coverage
under the SPI Welfare Plans and SPI shall be solely responsible for
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administering compliance with such COBRA and HIPAA requirements with respect to
these persons.
(f) Subrogation. If either IREX or SPI recovers any amounts through
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subrogation or otherwise for claims reimbursed to Transferred Employees and
their beneficiaries and dependents under any IREX Welfare Plan, the recovering
Party shall share with the other Party a portion of such recovery in accordance
with their historic practice.
Section 4.2 Establishment of Mirror Welfare Plans. Except as otherwise
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set forth in this Article IV, SPI shall take all actions necessary or
appropriate to establish, on or before the Distribution Date, SPI Welfare Plans
to provide each Transferred Employee with benefits substantially similar in all
Material Features to the benefits provided to him or her under the IREX Welfare
Plans immediately before the Distribution.
Section 4.3 Long Term Disability. Notwithstanding any provision in this
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Agreement to the contrary, responsibility for the long-term disability benefits
of any Former SPI Employee who is receiving such benefits on the Distribution
Date shall continue to be provided under the appropriate IREX Welfare Plan and
shall remain the sole responsibility of IREX.
Section 4.4 Post-retirement Medical Benefits. Notwithstanding any
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provision in this Agreement to the contrary, responsibility for the post-
retirement medical benefits of any Former SPI Employee who is receiving such
benefits on the Distribution Date shall continue to be provided under the
appropriate IREX Welfare Plan and shall remain the sole responsibility of IREX.
Section 4.5 Vacation and Sick Pay Liabilities. Effective Immediately
---------------------------------
after the Distribution Date, SPI shall assume all accrued Liabilities for
vacation and sick leave in respect of all Transferred Employees as of the
Distribution Date.
Section 4.6 Vendor Contracts.
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(a) Pre-Distribution Date Negotiation. Before the Distribution Date, IREX
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shall take such steps as are necessary under each ASO Contract, Group Insurance
Policy and HMO Agreement in existence as of the date of this Agreement to permit
SPI to participate in the terms and conditions of such ASO Contract, Group
Insurance Policy or HMO Agreement beginning Immediately after the Distribution
Date.
(b) Terms of SPI Participation. IREX shall determine, and shall promptly
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notify SPI of, the manner in which SPI's participation in the terms and
conditions of any ASO Contracts, Group Insurance Policies and HMO Agreements, as
set forth above is to be effectuated. SPI hereby authorizes IREX to act on its
behalf to extend to SPI the terms and conditions of the ASO Contracts, Group
Insurance Policies and HMO Agreements. SPI shall fully cooperate with IREX in
such efforts.
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(c) Premium/Administration Rates. IREX and SPI shall use their reasonable
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best efforts to cause each of the insurance companies, HMOs, paid provider
organizations and third-party administrators providing services and benefits
under the IREX Welfare Plans to maintain the premium and/or administrative
rates, based on the aggregate number of participants in both the IREX Welfare
Plans, and the SPI Welfare Plans after the Distribution Date.
(d) Management of the Vendor Contracts. Immediately after the Distribution
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Date, SPI shall be responsible for the management and control of the ASO
Contracts, Group Insurance Policies, HMO Agreements, and other vendor contracts
and relationships to the extent such contracts, policies and agreements apply to
the SPI Welfare Plans. Notwithstanding the foregoing, nothing contained in this
Section 4.6(d) shall permit SPI to direct any insurance carrier, third-party
vendor or claims administrator with respect to any contractual arrangement,
policy or agreement under any IREX Welfare Plan.
Section 4.7 Unemployment Compensation. Effective Immediately after the
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Distribution Date, SPI shall assume all Liabilities for Transferred Employees
related to any and all unemployment compensation matters under any law of any
state, territory, or possession of the U.S. or the District of Columbia and SPI
shall be fully responsible for the administration of all such claims. If SPI is
unable to assume any such Liability or the administration of any such claim
because of the operation of applicable state law or for any other reason, SPI
shall reimburse IREX for all such Liabilities.
Section 4.8 Transfer of Certain Assets. Following the Distribution Date,
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IREX and SPI periodically shall determine the amount of claims made by any
Transferred Employee under the IREX Flex Plan that exceed such Transferred
Employee's actual contributions to the IREX Flex Plan. Thereafter, to the extent
that a Transferred Employee's claims exceed such Transferred Employee's actual
contributions SPI shall make a cash payment of such amount to IREX.
ARTICLE V
GENERAL
Section 5.1 Payment of and Accounting Treatment for Expenses and Balance
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Sheet Amounts.
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(a) Balance Sheet Amounts. Effective Immediately after the Distribution
---------------------
Date, SPI shall assume any balance sheet liability for any Liabilities assumed
by it under this Agreement with respect to any Transferred Employee. The
determination of any balance sheet liability to be assumed by SPI under this
Section 6.1(b) shall be determined by IREX consistent with past accounting
practices, consistently applied.
Section 5.2 Accounting Adjustments. Prior to the Distribution Date, SPI
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has established on its books for financial accounting purposes liabilities and
reserves for retirement, welfare and other employee benefit plan obligations
that will be retained or assumed by SPI under
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this Agreement, and IREX has adjusted the liabilities and reserves on its
books for financial accounting purposes to take into account SPI' assumption or
retention of liabilities under this Agreement. Such adjustments have been made
on an estimated basis. After the Parties have finally calculated the actual
liabilities under this Agreement, each Party in accordance with their historic
practices shall appropriately adjust its liabilities and reserves to reflect the
amount of the liabilities and reserves that are properly allocable to that
Party. Neither Party shall have any obligation to make payments or transfer
assets to the other Party with respect to such adjustments.
Section 5.3 Notices. Any notice, demand, claim, or other communication
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under this Agreement shall be in writing and shall be given in accordance with
the provision for giving notice under the Distribution Agreement.
Section 5.4 Amendment and Waiver. This Agreement may not be altered or
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amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the Party or Parties to be charged with such amendment or waiver.
No waiver of any terms, provision or condition of or failure to exercise or
delay in exercising any rights or remedies under this Agreement, in any one or
more instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, provision, condition, right or remedy or as a waiver of
any other term, provision or condition of this Agreement.
Section 5.5 Sharing of Participant Information. IREX and SPI shall share
----------------------------------
with each other and their respective agents and vendors (without obtaining
releases) all participant information necessary for the efficient and accurate
administration of each of their respective Plans. IREX and SPI and their
respective authorized agents shall, subject to applicable laws on
confidentiality, be given reasonable and timely access to, and may make copies
of, all information relating to the subjects of this Agreement in the custody of
the other Party, to the extent necessary for such administration.
Section 5.6 Entire Agreement. This Agreement, together with the
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Distribution Agreement and the all other agreements between the Parties hereto
referred to therein (the "Ancillary Agreements"), constitute the entire
understanding of the Parties hereto with respect to the subject matter hereof,
superseding all negotiations, prior discussions and prior agreements and
understandings relating to such subject matter. To the extent that the
provisions of this Agreement are inconsistent with the provisions of the
Distribution Agreement or any Ancillary Agreement, the provisions of this
Agreement shall prevail.
Section 5.7 Parties in Interest. Neither of the Parties hereto may
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assign its rights or delegate any of its duties under this Agreement without the
prior written consent of each other Party (which consent shall not be
unreasonably withheld or delayed). This Agreement shall be binding upon, and
shall inure to the benefit of, the Parties hereto and their respective
successors and permitted assigns.
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Section 5.8 No Third-Party Beneficiaries; No Termination of Employment.
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No provision of this Agreement or the Distribution Agreement shall be construed
to create any right, or accelerate entitlement, to any compensation or benefit
whatsoever on the part of any Transferred Employee or other future, present, or
former employee of IREX, the IREX Group or SPI. Without limiting the generality
of the foregoing, neither the Distribution nor the termination of the
Participating Company status of SPI shall cause any employee to be deemed to
have incurred a termination of employment which entitles such individual to the
commencement of benefits under any of the IREX Plans.
Section 5.9 Right to Amend or Terminate Any Plans. Nothing in this
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Agreement other than those provisions specifically set forth herein to the
contrary shall preclude SPI, at any time after the Close of the Distribution
Date, from amending, merging, modifying, terminating, eliminating, reducing, or
otherwise altering in any respect any SPI Plan.
Section 5.10 Fiduciary and Related Matters. SPI acknowledges that
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Immediately after the Distribution Date IREX will not be a fiduciary with
respect to any SPI Plans. In addition, IREX acknowledges that Immediately after
the Distribution Date SPI will not be a fiduciary with respect to any IREX
Plans. The Parties each acknowledge that the other Party shall not be deemed to
be in violation of this Agreement if it fails to comply with any provisions
hereof based upon its good faith reasonable determination that to do so would
violate any applicable fiduciary duties or standards of conduct under ERISA or
other applicable law.
Section 5.11 Effect if Distribution Does Not Occur. If the Distribution
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does not occur, then all actions and events that are, under this Agreement, to
be taken or occur effective as of the Close of the Distribution Date,
Immediately after the Distribution Date, or otherwise in connection with the
Distribution, shall not be taken or occur except to the extent specifically
agreed to in writing by SPI and IREX.
Section 5.12 Relationship of Parties. Nothing in this Agreement shall be
-----------------------
deemed or construed by the Parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
Parties, it being understood and agreed that no provision contained herein, and
no act of the Parties, shall be deemed to create any relationship between the
Parties other than the relationship set forth herein.
Section 5.13 Affiliates. Each of IREX and SPI shall cause to be
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performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth in this Agreement to be performed by their respective
affiliates, other than the other Party.
Section 5.14 Requests for Internal Revenue Service Rulings and
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Determinations and United States Department of Labor Opinions. SPI shall
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cooperate fully with IREX on any issue relating to the transactions contemplated
by this Agreement for which IREX elects to seek a determination letter or
private letter ruling from the Internal Revenue Service or an advisory opinion
from the United States Department of Labor. IREX shall cooperate fully with SPI
with respect to any request for a determination letter or private letter ruling
from the Internal
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Revenue Service or advisory opinion from the United States Department of Labor
with respect to any of the SPI Plans relating to the transactions contemplated
by this Agreement.
Section 5.15 Further Assurances and Consents. In addition to the actions
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specifically provided for elsewhere in this Agreement, each of the Parties
hereto will use its reasonable efforts to (a) execute and deliver such further
instruments and documents and take such other actions as any other Party may
reasonably request in order to effectuate the purposes of this Agreement and to
carry out the terms hereof and (b) take, or cause to be taken, all actions, and
to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement; provided that no Party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to any
third Party from whom such consents, approvals and amendments are requested or
to take any action or omit to take any action if the taking of or the omission
to take such action would be unreasonably burdensome to the Party.
Section 5.16 Severability. The provisions of this Agreement are severable
------------
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the Parties as though such void, voidable or unenforceable
provision were not part hereof.
Section 5.17 Governing Law. Subject to U.S. federal law, this Agreement
-------------
shall be construed in accordance with, and governed by, the laws of the
Commonwealth of Pennsylvania, without regard to the conflicts of law rules of
such state.
Section 5.18 Counterparts. This Agreement may be executed in one or more
------------
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
Section 5.19 Disputes. Resolution of any and all disputes arising from or
--------
in connection with this Agreement, whether based on contract, tort, statute or
otherwise, including, without limitation, disputes in connection with claims by
third Parties shall be exclusively governed by and settled in accordance with
provisions identical to those set forth in Section 21 of the Distribution
Agreement, which Section is hereby incorporated by this reference.
Section 5.20 Interpretation. Words in the singular shall be held to
--------------
include the plural and vice versa and words of one gender shall be held to
include the other gender as the context requires. The terms "hereof," "herein,"
and "herewith" and words of similar import shall, unless otherwise stated, be
construed to refer to this Agreement as a whole (including all Appendices
hereto) and not to any particular provision of this Agreement. The word
"including" and words of similar import when used in this Agreement shall mean
"including, without limitation," unless
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<PAGE>
DP&R Draft
the context otherwise requires or unless otherwise specified. The word "or"
shall not be exclusive. References to any "Article," "Schedule" or "Section,"
without more, are to Articles, Schedules and Sections to or of this Agreement.
Section 5.21 Headings. The Article and Section headings contained in this
--------
Agreement are solely for the purpose of reference, are not part of the agreement
of the Parties hereto and shall not in any way affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed and delivered
this Agreement as of the day and year first above written.
IREX CORPORATION
By:
-------------------------------
Name:
Title:
SPECIALTY PRODUCTS AND INSULATION
CO.
By:
-------------------------------
Name:
Title:
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<PAGE>
DP&R Draft
APPENDIX A - WELFARE BENEFIT PLANS
----------------------------------
I. PART 1 - IREX WELFARE PLANS
---------------------------
Healthcare Coverage (medical and dental)
Basic Life Insurance
Supplemental Life Insurance
Basic Long Term Disability Insurance
Additional Long Term Disability Coverage
Voluntary Accidental Death and Dismemberment (AD&D) Insurance
Business Travel Insurance
Benefit Options Program
Flexible Reimbursement Account for Healthcare Expenses
Flexible Reimbursement Account for Dependent Care Expenses
Sick Leave
Paid Time Off
Vacation
II. PART 2 - SPI WELFARE PLANS
--------------------------
Healthcare Coverage (medical and dental)
Basic Life Insurance
Supplemental Life Insurance
Basic Long Term Disability Insurance
Additional Long Term Disability Coverage
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<PAGE>
DP&R Draft
Voluntary Accidental Death and Dismemberment (AD&D) Insurance
Business Travel Insurance
Benefit Options Program
Flexible Reimbursement Account for Healthcare Expenses
Flexible Reimbursement Account for Dependent Care Expenses
Sick Leave
Paid Time Off
Vacation
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<PAGE>
EXHIBIT 10.4
------------
FORM OF
SPECIALTY PRODUCTS & INSULATION CO.
1998 STOCK OPTION PLAN
----------------------
I. THE PLAN
1. Purpose. The purpose of this Plan is to provide a means whereby Specialty
--------
Products & Insulation Co. (the "Company") may, through the grant of stock
options, stock appreciation rights and/or restricted stock to Key Employees, as
defined below, attract and retain persons of ability as employees, and motivate
such persons to exert their best efforts on behalf of the Company or any present
or future Subsidiary thereof. As used herein, the term "Subsidiary" shall mean
any corporation which at the time an option, stock appreciation right or share
of restricted stock is granted under this Plan qualifies as a subsidiary of the
Company under the definition of "subsidiary corporation" contained in Section
424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or any
similar provision hereafter enacted, except that such term shall not include any
corporation which is classified as a foreign corporation pursuant to Section
7701 of the Code. The term "Key Employees" shall mean those employees (including
officers who are also employees) of the Company or of any Subsidiary, who, in
the judgment of the Committee defined in Section 2 below, are considered
especially important to the future of the Company. The options to purchase
Common Stock, $0.01 par value, of the Company ("Stock") granted under the Plan
("Options") are intended to be either incentive stock options within the meaning
of Section 422 of the Code ("Incentive Stock Options") or options that do not
meet the requirements for Incentive Stock Options ("Nonqualified Stock
Options").
2. Administration of the Plan. The Plan shall be administered by the
---------------------------
Compensation and Benefits Committee (the "Committee") of the Board of Directors
of the Company (the "Board"). The function of the Committee may be performed by
another standing committee of the Company's Board or a portion thereof (provided
that the members are qualified hereunder) and all references hereunder to the
Committee shall be deemed to refer to such committee or portion thereof. The
Committee shall consist of not less than two members of the Board, each of whom
shall be a "disinterested person" within the meaning of Rule 16b-3 (or any
successor rule or regulation) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Members of the Committee shall be
appointed by the Board and serve at the Board's pleasure. Each member of the
Committee shall be a member of the Board. Any vacancy occurring in the
membership of the Committee shall be filled by appointment by the Board. All
decisions and selections by the Committee pursuant to the provisions of the Plan
shall be made by a majority of its members. A member of the Committee who is
eligible to receive a stock option, stock appreciation right or share of
restricted stock under the Plan shall not vote on any question relating
specifically to that member. Any decision reduced to writing and signed by all
of the members shall be fully effective as if it had been unanimously made at a
duly held meeting of the Committee.
The Committee may interpret the Plan, prescribe, amend and rescind any
rules and regulations necessary or appropriate for the administration of the
Plan or for the continued qualification of any stock options granted to Key
Employees, and make such other determinations and take such other
1
<PAGE>
actions as it deems necessary or advisable. Without limiting the generality of
the foregoing, the Committee may, in its discretion, treat all or any portion of
any period during which a Key Employee is on military leave or on an approved
leave of absence from the Company or a Subsidiary as a period of employment by
the Company or such Subsidiary, as the case may be, and not as an interruption
of employment, for purposes of maintaining the Key Employee's continuous status
as an employee and accrual of rights under any Options. Any interpretation,
determination or other action made or taken by the Committee shall be final,
binding and conclusive.
II. OPTIONS
1. Options. Subject to the provisions of the Plan, the Committee may grant
--------
Options from time to time in accordance with provisions of this Article II.
2. Shares Subject to Options. Options may be granted by the Company from
-------------------------
time to time to Key Employees to purchase an aggregate of 491,355 shares of
Stock (subject to adjustment hereunder). The Company shall reserve said number
of shares for Options granted under the Plan subject to adjustment as provided
in Section 7 of Article IV. The shares issued upon the exercise of Options
granted under the Plan may be authorized and unissued shares or shares held by
the Company in its treasury. If any Options granted hereunder should expire or
become unexercisable for any reason without having been exercised in full, the
unpurchased shares which were subject to an Option shall, unless the Plan shall
have been terminated, be available for the grant of other Options under the
Plan.
3. Grant of Options to Key Employees. Subject to the provisions of the
----------------------------------
Plan, and in particular this Article II, the Committee shall (i) determine and
designate from time to time those Key Employees to whom Options are to be
granted and the number of shares of Stock to be optioned to each such employee
and (ii) determine the time or times when and the manner in which each Option
shall be exercisable and the duration of the exercise period. Notwithstanding
the above, no Option shall be granted pursuant to this Section 3 after the
expiration of ten (10) years from the effective date of the Plan as defined in
Section 5 of Article IV hereof, and no Option may be exercised prior to the
third anniversary of the date of grant.
Options need not be identical and in fixing the terms of any Option, the
Committee may take into account such individual factors bearing on the value of
an employee as it considers appropriate.
4. Terms and Conditions of Options. Each Option granted under the Plan to a
-------------------------------
Key Employee pursuant to Section 3 hereof shall be evidenced by an agreement
with the Optionee (the "Option Agreement") in a form approved by the Committee.
Each Option and the Option Agreement shall be subject to the following express
terms and conditions and to such other terms and conditions as the Committee may
deem appropriate.
(a) Option Period. Subject to the terms of Section 3 hereof, each
-------------
Option Agreement shall specify the period for which the Option thereunder is
granted and exercisable, as determined by the Committee, and shall provide that
the Option shall expire at the end of such period. In no event shall any Option
be exercisable after the expiration of ten (10) years from the date of grant
provided, however, that if the exercise price is determined pursuant to Section
4(c)(2) hereof, an Incentive Stock
2
<PAGE>
Option shall not be exercisable after the expiration of five (5) years from the
date of grant.
(b) Date of Grant. The date of grant of an Option to a Key Employee
--------------
under the Plan shall, for all purposes, be the date on which the Committee makes
the determination of granting such Option. Notice of the determination shall be
given to each Key Employee to whom an Option is so granted within a reasonable
time after the date of such grant.
(c) Option Price.
-------------
(1) The option price per share of Stock subject to an Incentive
Stock Option shall be determined by the Committee at the time the Incentive
Stock Option is granted and shall not be less than the fair market value of one
share of Stock on the date the Option is granted. The option price per share of
Stock subject to a Nonqualified Stock Option shall be determined by the
Committee at the time the Nonqualified Stock Option is granted and shall not be
less than the fair market value of one share of Stock on the date the Option is
granted; provided, however, that in the case of a Nonqualified Stock Option
granted within 60 days of the date the Company engages in its initial public
offering, the option price shall be the price per share in such offering. The
Committee shall have full authority to determine the fair market value of a
share of Stock. If the Stock is traded in the over-the-counter market, then such
fair market value shall be deemed to be the arithmetical mean between the asked
and the bid prices between the opening of the market and closing on such date,
as reported by any market makers in the Stock. If the Stock is traded on an
exchange, then such fair market value shall be deemed to be the arithmetical
mean of the high and low prices at which it is quoted or traded between the
opening of the market and closing on such day on the exchange on which it
generally has the greatest trading volume.
(2) If an Incentive Stock Option is granted to a Key Employee
then owning Stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or any Subsidiary taking into account the
attribution rules of Section 424(d) of the Code, then the Committee shall set
the Incentive Stock Option price per share of Stock at 110% of the Incentive
Stock Option price determined pursuant to subsection (1) hereof.
(d) Exercise of Incentive Stock Option.
-----------------------------------
(1) Subject to subsection (2) below, the Option Agreement may
provide that the Option may be exercised in such installments as the Committee
may determine during the option period.
(2) In the event the aggregate fair market value (determined at
the time the option is granted) of stock with respect to which Incentive Stock
Options are exercisable hereunder for the first time by any Key Employee during
any one calendar year (under this Plan and all other Incentive Stock Option
Plans of the Company or any Subsidiary) shall exceed $100,000, such options
shall be treated in part as Incentive Stock Options and in part as Nonqualified
Stock Options, taking options into account in the order in which they were
granted. In such a case, the Company may designate the shares of stock that are
to be treated as stock acquired pursuant to the exercise of an Incentive Stock
Option by issuing a separate certificate for such shares and identifying the
certificate as Incentive Stock Option shares in the stock transfer records of
the Company.
3
<PAGE>
(e) Exercise During Employment or Following Retirement, Termination,
----------------------------------------------------------------
Disability or Death. Unless otherwise provided in the terms of an Option
- -------------------
Agreement, an Option may be exercised by an Optionee only while the Optionee is
an employee of the Company or a Subsidiary and has maintained continuous status
as an employee since the date of the grant of the Option, except if the
Optionee's continuous employment ceases by reason of the Optionee's voluntary
termination of employment, retirement, involuntary termination due to staff
reduction or other internal reorganization, disability or death. If the
continuous employment of an Optionee ceases as a result of the Optionee's
voluntary termination of employment, retirement or involuntary termination due
to staff reduction or other internal reorganization, the Optionee may, but only
within a period of ninety (90) days beginning on the day following the date of
such termination of employment (and no later than the date the Option would
otherwise expire), exercise the option to the extent that Optionee was entitled
to exercise it at the date of such termination of continuous employment. If the
continuous employment of an Optionee is terminated as a result of the Optionee's
disability, such Optionee may, but only within a one (1) year period from the
date of such termination of employment (and no later than the date that the
Option would otherwise expire), exercise the option to the extent the Optionee
was entitled to exercise the Option immediately prior to the Optionee's
termination due to disability. If the continuous employment of an Optionee is
terminated as a result of the Optionee's death, such Option of the deceased
Optionee may be exercised, but only within one (1) year from the date of the
Optionee's death (and no later than the date on which such Option would
otherwise expire), by the person or persons (including the Optionee's estate) to
whom the Optionee's rights under such Option shall have passed by will or by the
laws of descent and distribution. Termination of continuous employment for any
other reason, including termination for cause (under the Company's then existing
personnel policies), shall result in the cancellation of the Option as of the
thirtieth (30th) day following the date of employment termination.
The terms "continuous employment" and "continuous status as an employee"
mean the absence of any interruption or termination of employment with the
Company or with any present or future Subsidiary. Employment shall not be
considered interrupted in the case of transfers between the Company and any
Subsidiary or between Subsidiaries, nor in the case of any military leave or any
approved leave of absence which the Committee, in its discretion, treats as a
period of employment.
(f) Non-transferability. No Option granted to a Key Employee under
-------------------
the Plan shall be transferable other than by will or by the laws of descent and
distribution. During the lifetime of the Optionee, an Option shall be
exercisable only by the Optionee.
(g) No Rights as Shareholder. No Optionee shall have any rights as a
------------------------
shareholder with respect to any shares of Stock subject to the Optionee's Option
prior to the date of issuance to the Optionee of a certificate or certificates
for such shares.
(h) No Rights to Continued Employment. The Plan and any Option
---------------------------------
granted pursuant to Section 3 of this Article II shall not confer upon any Key
Employee any right with respect to continuance of employment by the Company or
any Subsidiary nor shall they interfere in any way with the right of the Company
or any Subsidiary employing an Optionee to terminate the Optionee's employment
at any time.
5. Disposition of Shares by Key Employees.
--------------------------------------
4
<PAGE>
(1) With respect to shares of Stock acquired as a result of the
exercise of an Incentive Stock Option, any disposition of such shares other than
by will or by the laws of descent and distribution before the later of the
expiration of the two (2) year period beginning on the date such Incentive Stock
Option was granted or the expiration of the one (1) year period beginning on the
date of the transfer of such share pursuant to such exercise, will not be
prohibited by the Plan, but may disqualify the disposition from receiving
favorable tax treatment under Section 421(a) of the Code.
(2) No share of Stock acquired as a result of the exercise of a
Nonqualified Stock Option granted under the Plan shall be subject to any
restrictions on transferability or otherwise on account of the Plan.
6. Code Requirements for Incentive Stock Options. Each Incentive Stock
----------------------------------------------
Option Agreement shall contain such terms and provisions as the Committee may
determine to be necessary or desirable in order to qualify such Incentive Stock
Option as an Incentive Stock Option within the meaning of Section 422 of the
Code.
III. EXERCISE AND PURCHASE PROVISIONS
1. Limitation on Exercise of Options. Each Option granted under the Plan shall
----------------------------------
provide that the option may not be exercised in whole or in part by the Optionee
for less than 100 shares of Stock unless only less than 100 shares of Stock
remain subject to the Option. In addition, an Option may not be exercised for a
fractional share.
2. Payment of Purchase Price upon Exercise of Option. Each Option granted
-------------------------------------------------
under the Plan shall provide that the purchase price of the shares as to which
an Option is exercised will be paid to the Company at the time of exercise (or,
if the Optionee makes an irrevocable election to exercise, within thirty (30)
days of the date of exercise) either in cash, or in Stock already owned by the
Optionee or to be acquired by the Optionee upon exercise of the Option, and
having a total fair market value, as determined by the Committee, equal to the
purchase price, or in a combination of cash and Stock having a total fair market
value, as so determined, equal to the purchase price.
3. Procedure for Exercising Options. Each Option granted under the Plan shall
---------------------------------
be exercisable at such times and under such conditions as shall be permissible
under the terms of the Plan and the Incentive Stock Option Agreement or the
Nonqualified Stock Option Agreement, as the case may be.
An option may be exercised, subject to the applicable provisions of this Plan
relative to its termination and limitations on its exercise, from time to time
only by (i) written notice of intent to exercise the Option with respect to a
specified number of shares and, contemporaneously with delivery of each such
notice, (ii) tender of the purchase price (or delivery of the irrevocable
election) as provided in Section 2 hereof. Each such notice and payment shall be
delivered, or mailed by prepaid registered or certified mail, addressed to the
Treasurer of the Company at its executive offices.
In connection with the exercise of an option, the Optionee may complete and
sign an Option Exercise Form along with signed written instructions to the
Company instructing the Company to deliver the Stock to a broker or other party.
Upon receipt of such signed, completed Option Exercise Form, the written, signed
instructions, and full payment in cash for the Stock to be acquired, the Company
shall deliver the Stock to the broker or other party in accordance with the
written instructions.
5
<PAGE>
IV. STOCK APPRECIATION RIGHTS
1. Stock Appreciation Rights. Subject to the provisions of the Plan, the
-------------------------
Committee may grant stock appreciation rights to Key Employees from time to time
in accordance with the provisions of this Article.
2. General Terms and Conditions. Stock appreciation rights may be granted
----------------------------
by the Committee from time to time to Key Employees on such terms and conditions
as the Committee deems appropriate in each case. A stock appreciation right
granted to a Key Employee shall entitle the Key Employee to receive from the
Company an amount equal to the positive difference between the fair market value
of a share of Common Stock at the time the stock appreciation right is granted
and the fair market value of a share of Common Stock on the date of exercise of
the stock appreciation right, or some percentage of such positive difference as
the Committee may determine at the time of grant.
3. Grants. Stock appreciation rights may be granted in tandem with an
------
Option, in addition to an Option, or may be freestanding and unrelated to an
Option. With respect to Incentive Stock Options, stock appreciation rights must
be granted concurrently with the Incentive Stock Options to which they relate.
With respect to Nonqualified Stock Options, stock appreciation rights may be
granted concurrently or at any time thereafter prior to the exercise or
expiration of the Nonqualified Stock Options to which they relate.
4. Exercise.
--------
(a) No stock appreciation right shall be exercisable earlier than six
months after its grant. Additionally, no stock appreciation right may be
exercised until the Company has been subject to the applicable reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as amended,
for period of at least one year prior to the exercise of any such right.
(b) A stock appreciation right may be exercised by a Key Employee
only while the Key Employee is an employee of the Company or a Subsidiary;
provided, however, that in the event employment terminates due to the disability
or death of the Key Employee, the stock appreciation right may be exercised
within the one year period from the date of employment termination.
5. Payment. Payment by the Company may be made in shares of Common Stock
-------
valued at the then fair market value thereof, in cash, or a combination of cash
and shares of Common Stock, as determined by the Committee. In the case of
stock appreciation rights granted in tandem with Incentive Stock Options, the
Committee shall establish the form(s) of payment at the date of grant.
Additionally, no payment in the form of shares of Common Stock may be made
unless Section 83 of the Internal Revenue Code of 1986 would apply to the Common
Stock being transferred to the Key Employee.
6. Tandem Incentive Stock Option/Stock Appreciation Right. Whenever an
------------------------------------------------------
Incentive Stock Option and stock appreciation right are granted together and the
exercise of one affects the right to exercise the other, the following
requirements shall apply:
(a) The stock appreciation right shall expire no later than the
expiration of the corresponding Incentive Stock Option;
6
<PAGE>
(b) The stock appreciation right may be for no more than the
difference between the exercise price of the corresponding Incentive Stock
Option and the market price of the Common Stock subject to the Incentive Stock
Option at the time the stock appreciation right is exercised;
(c) The stock appreciation right is transferrable only when the
corresponding Incentive Stock Option is transferable, and under the same
conditions;
(d) The stock appreciation right may be exercised only when the
corresponding Incentive Stock Option is eligible to be exercised; and
(e) The stock appreciation right may be exercised only when the
market price of the Common Stock subject to the Incentive Stock Option exceeds
the exercise price of the Stock subject to such Option.
7. Non-Transferrable. The holder of a stock appreciation right may not
-----------------
transfer or assign the right otherwise than by will or in accordance with the
laws of descent and distribution. Furthermore, in the event of employment
termination the right may be exercised only within the period, if any, which the
Option to which it relates may be exercised.
V. RESTRICTED STOCK
1. Restricted Stock. Subject to the provisions of the Plan, the Committee
----------------
may grant shares of restricted Common Stock to Key Employees from time to time
in accordance with this Article.
2. Grants. At the time of making a grant of restricted Common Stock to a
------
Key Employee, the Committee shall determine the number of shares of restricted
Common Stock to be granted to the Key Employee, the duration of the restricted
period after which (and the conditions under which) all or part of the
restricted Common Stock may vest in the Key Employee, the price (if any) to be
paid for the restricted Common Stock, and any other terms and conditions which
the Committee may deem appropriate, including the establishment of criteria
which would permit the restricted Common Stock to vest on an accelerated basis.
3. Certificates and Payment. Certificates issued in respect of shares of
------------------------
restricted Common Stock shall be registered in the name of the Key Employee and
deposited by him, together with a stock power endorsed in blank, with the
Company. At the expiration of the restricted period, the Company shall deliver
to the Key Employee (or his legal representative) such certificates representing
shares which have vested.
4. Termination of Employment. In the event the Key Employee ceases to be
-------------------------
employed by the Company or a Subsidiary during the restricted period for reasons
other than death or disability, all shares of restricted Common Stock which have
not previously vested in the Key Employee shall be forfeited to the Company. In
the event employment terminates due to the Key Employee's death or disability,
all shares of restricted Common Stock shall immediately vest in the Key
Employee.
7
<PAGE>
VI. MISCELLANEOUS PROVISIONS
1. Adjustments in Event of Change in Common Stock. In the event of any change
----------------------------------------------
in the Common Stock of the Company by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination,
or exchange of shares, or rights offering to purchase Common Stock at a price
substantially below fair market value, or of any similar change affecting the
Stock, the number and kind of shares which thereafter may be optioned and sold
under the Plan pursuant to Articles II and III hereof and the number and kind of
shares subject to Option in outstanding option agreements and the purchase price
per share thereof, as well as benefits, rights and features relating to stock
appreciation rights and shares of restricted Common Stock shall be appropriately
adjusted consistent with such change in such manner as the Committee may deem
equitable to prevent substantial dilution or enlargement of the rights granted
to, or available for, participants in the Plan.
2. Compliance With Other Laws and Regulations. The Plan, the grant and
-------------------------------------------
exercise of Options thereunder the obligations of the Company to sell and
deliver shares under such Options, the grant and exercise of stock appreciation
rights and the grant of restricted Common Stock shall be subject to all
applicable federal and state laws, rules and regulations and to such approvals
by any government or regulatory agency as may be required. The Company shall not
be required to issue or deliver any certificates for shares of Stock prior to
the completion of any registration or qualification of such shares under any
federal or state law, or any ruling or regulation of any government body which
the Company shall, in its sole discretion, determine to be necessary or
advisable.
3. Modification of Options. At any time and from time to time the Board of the
-----------------------
Company may authorize the modification of any outstanding Option, provided no
such modification, extension or renewal shall confer on the holder of said
Option any right or benefit which could not be conferred by the grant of a new
Option at such time or impair the Option without the consent of the holder of
the option.
4. Amendment and Termination of the Plan. The Board of Directors of the
-------------------------------------
Company may amend, suspend or terminate the Plan except that no action of the
Board may increase (other than as provided in Section 1 hereof) the maximum
number of shares permitted to be optioned under the Plan, reduce the minimum
option price provided for in Section 4(c) of Article II or extend the period
within which Options may be exercised, unless such action of the Board shall be
subject to approval or ratification by the shareholders of the Company.
5. Effective Date of the Plan. The effective date of the Plan shall be the
---------------------------
date of its adoption by the Board of Directors of the Company, but such adoption
shall be subject to approval and ratification of a majority of the shareholders
of the Company entitled to vote within twelve (12) months of the date the Plan
is adopted.
6. Interpretation of Incentive Stock Options. The terms of this Plan which
-----------------------------------------
relate to the grant of Incentive Stock Options to Key Employees are intended to
comply with rules and regulations regarding the qualification of Incentive Stock
Options under Section 422 of the Code, and the Plan shall be interpreted and
construed accordingly. Except with respect to certain disqualifying dispositions
of Stock acquired as a result of the exercise of an Incentive Stock Option,
which are not prohibited by
8
<PAGE>
the Plan, if a provision of the Plan conflicts with any such rule or regulation,
then the provision of the Plan shall be void and of no force and effect.
7. Options and Rights in Substitution for Stock Options Granted by Other
---------------------------------------------------------------------
Corporations. Options may be granted under the Plan from time to time in
- -------------
substitution for stock options held by employees of corporations who become or
are about to become key employees of the Company or a Subsidiary as the result
of a merger or consolidation of the employing corporation with the Company or a
Subsidiary, or the acquisition by the Company or a Subsidiary of the assets of
the employing corporation, or the acquisition by the Company or a Subsidiary of
stock of the employing corporation as the result of which it becomes a
Subsidiary. The terms and conditions of the Substitute Options so granted may
vary from the terms and conditions set forth in Section 4 of Article II of this
Plan to such extent as the Board of Directors at the time of grant may deem
appropriate to conform, in whole or in part, to the provisions of the options in
substitution for which they are granted.
8. Acceleration of Exercisability on Change in Control. Upon a Change in
---------------------------------------------------
Control of the Company, all Options theretofore granted and not previously
exercisable shall become fully exercisable to the same extent and in the same
manner as if they had become exercisable by passage of time in accordance with
the provisions of the Plan relating to periods of exercisability to termination
of employment.
For purposes of the Plan, a "Change in Control" of the Company shall mean:
(i) the change in the Board of Directors of the Company during any
twenty-four (24) month period ending on or after the date of this
Agreement, if the individuals who were directors of the Company at
the beginning of the period cease during such period to constitute at
least a majority of the Board of Directors of the Company;
(ii) the acceptance and completion of a tender or offer or exchange offer
by any entity, person or group (including any affiliates of such
entity, person or group, by other than an affiliate of Company) for
twenty-five percent (25%) or more of the outstanding voting power of
all capital stock of the Company;
(iii) the acquisition by any entity, person or group (including any
affiliates of such entity, person or group) of beneficial ownership,
as that term is defined in Rule 13d-3 under the Securities Exchange
Act of 1934, of the Company's capital stock entitled to twenty-five
percent (25%) or more of the outstanding voting power of all capital
stock of the Company;
(iv) the effective time of the merger, consolidation, division, share
exchange, or any other transaction or a series of transactions
outside the ordinary course of business involving the Company (a
"Business Combination"), as a result of which (a) the holders of the
outstanding voting capital stock of the Company immediately prior to
such Business Combination, excluding any shareholder who is a party
to the Business Combination (other than the Company) or is such
party's affiliate as defined in the Securities Exchange Act of 1934,
hold less than seventy-five percent (75%) of the voting capital stock
of the surviving or resulting corporation; or
(v) the transfer of substantially all of the assets of the Company other
than to a wholly owned subsidiary of the Company.
9. Successors and Assigns. This Plan shall be binding upon the legally
----------------------
constituted successors of the Company. Upon the dissolution or merger of the
Company into a successor corporation, or any transaction resulting in the
transfer or exchange of shares involving the Company, this Plan shall be binding
upon and, if required, shall be adopted by the shareholders of said successor
entity. The obligations created under this Plan regarding adoption,
implementation and exercise under this Plan shall be binding upon said successor
entity.
IN WITNESS WHEREOF, the Company has caused this Plan to be signed by its
duly authorized officers the______day of_______, 1998.
SPECIALTY PRODUCTS & INSULATION CO.
By:___________________________________
Attest:_______________________________
9
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO.
1998 STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
THIS AGREEMENT dated as of ____________________, by and between Specialty
Products & Insulation Co. (the "Company"), and _________________________________
(the"Optionee").
1. Grant of Option. Pursuant to the provisions of the Specialty Products &
----------------
Insulation Co. 1998 Stock Option Plan (the "Plan"), the Company hereby grants to
the Optionee, subject to the applicable terms, definitions and conditions of the
Plan which are incorporated herein by reference, and subject further to the
terms and conditions herein set forth, the right and option to purchase from the
Company an aggregate of __________ shares of Common Stock of the Company
("Stock") at the purchase price of $_______ per share, such price being 100% of
the fair market value of a share of Stock on ___________, (the "Date of Grant"
as defined in the Plan) or 110% of the fair market value of a share of Stock on
the Date of Grant if at such time the Optionee owns more than 10% of the total
combined voting power of all classes of stock pursuant to Section 4(c)(2) of
Article II of the Plan. This option is intended to qualify as an incentive stock
option within the meaning of Section 422 of the Internal Revenue Code.
2. Grant of Stock Appreciation Rights. Pursuant to the provisions of the
----------------------------------
Plan, and subject to the terms and conditions herein set forth, the Company
hereby grants to the Optionee stock appreciation rights with respect to an
aggregate of _____ shares of Stock, such stock appreciation rights being granted
in tandem with the option granted in Section 1. For purposes of calculating the
value of the stock appreciation rights, the value of the Stock on the date such
rights are granted to the Optionee shall be the value described in Section 1.
In addition to the other requirements set forth in the Plan and this Agreement,
the stock appreciation rights shall be subject to the following requirements:
(i) Stock appreciation rights will expire no later than the expiration
of the option;
(ii) Stock appreciation rights may be for no more than the difference
between the exercise price of the option and the market price of the Stock
subject to the option at the time the stock appreciation rights are
exercised;
(iii) Stock appreciation rights are transferable only when the option is
transferable, and under the same conditions;
(iv) Stock appreciation rights may be exercised only when the option is
eligible to be exercised; and
(v) Stock appreciation rights may be exercised only when the market
price of the Stock subject to the option exceeds the exercise price of the
Stock subject to the option.
10
<PAGE>
2. Exercise of Option and Stock Appreciation Rights. Optionee shall be
-------------------------------------------------
entitled to first exercise the option and stock appreciation rights with respect
to the following number of shares of Stock during the following calendar years:
Number of Shares
of Stock Exercisable Calendar Year
-------------------- -------------
After shares of Stock are subject to exercise in accordance with the above
schedule, Optionee may exercise his option and stock appreciation rights with
respect to those shares in whole or in part at any time or times prior to the
expiration date as defined in Section 3 hereof. The option and stock
appreciation rights shall be exercisable in accordance with the provisions of
the Plan, in whole or in part at any time or times prior to the expiration date
as defined in Section 3 hereof.
The exercise of the option to purchase shares of Stock shall cancel
stock appreciation rights equal in number to the number of shares so purchased.
The exercise of stock appreciation rights shall cancel shares subject to the
option equal in number to the stock appreciation rights so exercised.
Notwithstanding any provision of this Agreement to the contrary, no part of
the option or stock appreciation rights may be exercised if the Stock to be
purchased is not subject to exercise in accordance with the above schedule. If
at the time that this incentive Stock option becomes first exercisable in
accordance with the above schedule, the aggregate fair market value (determined
at the time of the grant) of Stock with respect to which incentive stock options
are first exercisable during any calendar year under this Plan and all other
stock option plans of the Company and its Subsidiaries exceeds $100,000, then
the option shall be treated in part as an Incentive Stock Option and in part as
an Non-qualified Stock Option, and the Company may designate the shares of stock
that are to be treated as stock acquired pursuant to the exercise of an
incentive stock option by issuing a separate certificate for such shares and
identifying the certificate as incentive stock option shares in the stock
transfer records of the Company.
3. Expiration Date. No portion of the option or stock appreciation rights may
---------------
be exercised more than ______ years from the Date of Grant specified in Section
1 hereof, and this option and the stock appreciation rights shall expire at the
end of such year period. Additionally, except as provided in the Plan, this
option and the stock appreciation rights shall expire when the Optionee
terminates employment with the Company or a Subsidiary. This option and the
stock appreciation rights may be exercised during such period only in accordance
with the applicable provisions of the Plan and the terms of this Agreement.
11
<PAGE>
4. Limitation on Exercise. Neither the option nor the stock appreciation
-----------------------
rights may be exercised in whole or in part by Optionee for less than 100 shares
of Stock unless only less than 100 shares of Stock remain subject to the option
and stock appreciation rights.
5. Method of Exercise. The option and stock appreciation rights shall be
-------------------
exercisable by a written notice which shall:
(i) State the election to exercise the option, the number of shares of
Stock with respect to which it is being exercised, the person in whose name
the stock certificate or certificates for such shares of Stock is to be
registered, his address and Social Security Number (or if more than one,
the names, addresses and Social Security Numbers of such persons);
(ii) State the election to exercise the stock appreciation rights and
the number of shares of Stock with respect to which such rights are being
exercised;
(iii) Be signed by the person or persons entitled to exercise the
option and, if the option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to counsel for the
Company, of the right of such person or persons to exercise the option;
(iv) Be delivered in person or by registered or certified mail to the
Treasurer of the Company; and
(v) Be accompanied by signed written instructions acceptable to the
Company in the event that Optionee desires the Company to deliver the Stock
to Optionee's broker or to any party other than Optionee.
Payment of the full purchase price of the shares of Stock with respect to
which the option is being exercised shall be made on the date the option is
exercised or within thirty (30) days thereof, provided such exercise is
irrevocable under all circumstances. Payment shall be by certified or bank
cashier's check, by the surrender and delivery to the Company of certificates
representing shares of its Stock duly endorsed for transfer or accompanied by a
duly executed assignment, or by an agreement signed by the Optionee to surrender
and deliver to the Company certificates representing shares of its Stock duly
endorsed for transfer, which may be effected by means of a duly executed
assignment, transferring to the Company shares of Stock acquired through the
exercise of the Option, or by a combination of such methods of payment. The
certificate or certificates for shares of Stock as to which the option shall be
exercised shall be registered in the name of the person or persons exercising
the option.
6. Non-transferability of Option. Neither this Option nor the stock
------------------------------
appreciation rights may be transferred in any manner otherwise than by will or
the laws of descent or distribution. The option and stock appreciation rights
may be exercised during the lifetime of the Optionee only by the Optionee. The
terms of this option and the stock appreciation rights shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
12
<PAGE>
7. Adjustments. In the event of any change in the Stock of the Company by
-----------
reason of any stock dividend, recapitalization, reorganization, merger,
consolidation, splitup, combination or exchange of shares, for any rights
offering to purchase stock at a price substantially below fair market value, or
of any similar change affecting the Common Stock, then in any such event the
number and kind of shares subject to the option and stock appreciation rights
and the purchase price per share shall be appropriately adjusted consistent with
such change in such manner as the Committee appointed pursuant to Section 2 of
Article I of the Plan may deem equitable to prevent substantial dilution or
enlargement of the rights granted to Optionee hereunder. Any adjustment so made
shall be final and binding upon Optionee.
8. No Rights as Stockholder. Optionee shall have no rights as a stockholder
------------------------
with respect to any shares of Stock subject to this option (or the stock
appreciation rights) prior to the date of issuance to him of a certificate or
certificates for such shares.
9. No Right to Continued Employment. The option and stock appreciation
---------------------------------
rights shall not confer upon Optionee any right with respect to continuance of
employment by the Company or any Subsidiary, nor shall it interfere in any way
with the right of his employer to terminate his employment at any time.
10. Compliance With Law and Regulations. The stock appreciation rights,
-----------------------------------
option and the obligation of the Company to sell and deliver shares hereunder,
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency as may be required.
The Company shall not be required to issue or deliver any certificates for
shares of Stock prior to the completion of any registration or qualification of
such shares under any federal or state law, or any rule or regulation of any
government body which the Company shall, in its sole discretion, determine to be
necessary or advisable. Moreover, this option may not be exercised if its
exercise, or the receipt of shares of Stock pursuant thereto, would be contrary
to applicable law.
11. Optionee Bound by Plan. Optionee hereby acknowledges receipt of a copy of
-----------------------
the Plan and agrees to be bound by all the applicable terms and provisions
thereof.
12. Counterparts. This Agreement has been executed in two counterparts each
-------------
of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, Specialty Products & Insulation Co. has caused this
Agreement to be executed by its President or a Vice-President and Optionee has
executed this Agreement, both as of the day and year first above written.
ATTEST SPECIALTY PRODUCTS & INSULATION CO.
_________________________ By:____________________________________
13
<PAGE>
WITNESS
__________________________ ___________________________________
Optionee
14
<PAGE>
SCHEDULE 1 -- NOTATIONS AS TO EXERCISE
--------------------------------------
Number of Balance of
Date of Purchased Shares on Authorized
Exercise Shares/SARs Option/Subject Signature Notation Date
- -------- ------ ------ ---------- -------------
Exercised to SARs
15
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO.
1998 STOCK OPTION PLAN
INCENTIVE STOCK OPTION/STOCK APPRECIATION RIGHTS EXERCISE FORM
--------------------------------------------------------------
Date________________________
Treasurer
SPECIALTY PRODUCTS & INSULATION CO.
Dear Sir:
The undersigned elects to exercise his option to purchase shares of Common
Stock of Specialty Products & Insulation Co. ("the Company") under and pursuant
to the Incentive Stock Option Agreement dated _____________________, between
the Company and the undersigned and the Company's 1998 Stock Option Plan. The
undersigned elects to exercise his stock appreciation rights with respect to
_____ shares of Common Stock of the Company.
Option Price: $_______________
Payment Methods (select one or both)
(a) Certified or bank cashier's check or certificates representing shares
of said stock (duly endorsed for transfer or accompanied by a duly
executed assignment), or a combination of both, having a fair market
value equivalent to, or when combined with payment submitted under
Payment Option (b) equivalent to, the option price.
(b) Surrender and delivery to the Company of certificates representing
shares of said stock duly endorsed for transfer, which may be effected
by means of a duly executed assignment delivered herewith,
transferring to the Company shares of said stock being acquired
through the exercise of this option and having a fair market value
equivalent to, or when combined with payment submitted under Payment
Option (a) equivalent to, the option price.
Date of Payment (select one)
(a) Payment accompanies this Exercise Form
(b) Payment will be made no later than the thirtieth (30th) day following
the date this Exercise Form is delivered to the Company. By making
this selection, the undersigned acknowledges that the undersigned's
election hereunder shall be irrevocable and may not be revoked or
rescinded under any circumstances.
The name or names to be on the stock certificate or certificates and the
address and Social Security number of such person(s) are as follows:
Name_____________________________________
16
<PAGE>
Address__________________________________
Social Security Number____________________
The undersigned hereby acknowledges and agrees that all of the Common Stock
being purchased hereunder is being acquired, and the stock appreciation rights
are being exercised, pursuant to the terms and provisions of said Incentive
Stock Option Agreement and the applicable terms and provisions of said Stock
Option Plan including, without limitation, any restrictions on exercise of said
Option and stock appreciation rights.
------------------------------------
Optionee
17
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO.
1998 STOCK OPTION PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
THIS AGREEMENT dated as of ________, by and between Specialty Products &
Insulation Co. (the "Company"), and ____________ (the "Optionee").
1. Grant of Option. Pursuant to the provisions of Article III of the
----------------
Specialty Products & Insulation Co. 1998 Stock Option Plan (the "Plan"), the
Company hereby grants to the Optionee, subject to the applicable terms,
definitions and conditions of the Plan which are incorporated herein by
reference, and subject further to the terms and conditions herein set forth, the
right and option to purchase from the Company all or any part of an aggregate of
______
shares of Common Stock, $0.01 par value, of the Company ("Stock") at the
purchase price of $____________ per share. This option is not intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code.
2. Grant of Stock Appreciation Rights. Pursuant to the provisions of the
----------------------------------
Plan, and subject to the terms and conditions herein set forth, the Company
hereby grants to the Optionee stock appreciation rights with respect to an
aggregate of _____ shares of Stock, such stock appreciation rights being granted
in tandem with the option granted in Section 1. For purposes of calculating the
value of the stock appreciation rights, the value of the Stock on the date such
rights are granted to the Optionee shall be the value described in Section 1.
In addition to the other requirements set forth in the Plan and this Agreement,
the stock appreciation rights shall be subject to the following requirements:
(i) Stock appreciation rights will expire no later than the expiration
of the option;
(ii) Stock appreciation rights may be for no more than the difference
between the exercise price of the option and the market price of the Stock
subject to the option at the time the stock appreciation rights are
exercised;
(iii) Stock appreciation rights are transferable only when the option
is transferable, and under the same conditions;
(iv) Stock appreciation rights may be exercised only when the option is
eligible to be exercised; and
(v) Stock appreciation rights may be exercised only when the market
price of the Stock subject to the option exceeds the exercise price of the Stock
subject to the option.
3. Expiration Date. This option and the stock appreciation rights may not be
---------------
exercised more than _____ years from the date of grant and shall expire at the
end of such ____-year
18
<PAGE>
period. Additionally, except as provided in the Plan, this option and the stock
appreciation rights shall expire when the Optionee terminates employment with
the Company or a Subsidiary. This option and the stock appreciation rights may
be exercised during such period only in accordance with the applicable
provisions of the Plan and the terms of this Agreement.
4. Exercise of Option. This option and the stock appreciation rights shall be
-------------------
exercisable in accordance with the provisions of the Plan in whole or in part at
any time or times prior to the expiration date as defined in Section 2 hereof.
The exercise of the option to purchase shares of Stock shall cancel stock
appreciation rights equal in number to the number of shares so purchased. The
exercise of stock appreciation rights shall cancel shares subject to the option
equal in number to the stock appreciation rights so exercised.
5. Limitation on Exercise. Neither this option nor the stock appreciation
-----------------------
rights may be exercised in whole or in part by Optionee for less than 100 shares
of Stock unless only less than 100 shares of Stock remain subject to the option
and stock appreciation rights.
6. Method of Exercise. This option and the stock appreciation rights shall be
-------------------
exercisable by a written notice which shall:
(i) State the election to exercise the option, the number of shares of
Stock with respect to which it is being exercised, the person in whose
name the stock certificate or certificates for such shares of Stock is
to be registered, his address and Social Security Number (or if more
than one, the names, addresses and Social Security Numbers of such
persons);
(ii) State the election to exercise the stock appreciation rights and the
number of shares of Stock with respect to which such rights are being
exercised;
(iii) Be signed by the person or persons entitled to exercise the option
and, if the option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to counsel
for the company, of the right of such person or persons to exercise
the option;
(iv) Be delivered in person or by registered or certified mail to the
Treasurer of the Company; and
(v) Be accompanied by signed written instructions acceptable to the
Company in the event that Optionee desires the Company to deliver the
Stock to Optionee's broker or to any party other than Optionee.
Payment of the full purchase price of the shares of Stock with respect to which
the option is being exercised shall be made on the date the option is exercised
or within thirty (30) days thereof, provided such exercise is irrevocable under
all circumstances. Payment shall be by certified or bank cashier's check, by
the surrender and delivery to the Company of
19
<PAGE>
certificates representing shares of its Stock duly endorsed for transfer or
accompanied by a duly executed assignment, or by an agreement signed by the
Optionee to surrender and deliver to the Company certificates representing
shares of its Stock duly endorsed for transfer, which may be effected by means
of a duly executed assignment, transferring to the Company shares of Stock
acquired through the exercise of the Option, or by a combination of such methods
of payment. The certificate or certificates for shares of Stock as to which the
option shall be exercised shall be registered in the name of the person or
persons exercising the option.
6. Non-transferability of Option. Neither this option nor the stock
-----------------------------
appreciation rights may be transferred in any manner otherwise than by will or
the laws of descent and distribution and may be exercised during the period that
the Optionee is a Key Employee, as such term is defined in the Plan, and only by
the Optionee. The terms of this option and stock appreciation rights shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Optionee.
7. Adjustments. In the event of any change in the Stock of the Company by
------------
reason of any stock dividend, recapitalization, reorganization, merger,
consolidation, splitup, combination or exchange of shares, or any rights
offering to purchase Stock at a price substantially below fair market value, or
of any similar change affecting the Common Stock, then in any such event the
number and kind of shares subject to the option and stock appreciation rights
and their purchase price per share shall be appropriately adjusted consistent
with such change in such manner as the Committee appointed pursuant to the Plan
may deem equitable to prevent substantial dilution or enlargement of the rights
granted to Optionee hereunder. Any adjustment so made shall be final and binding
upon Optionee.
8. No Rights as Stockholder. Optionee shall have no rights as a stockholder
------------------------
with respect to any shares of Stock subject to this option (or the stock
appreciation rights) prior to the date of issuance to him of a certificate or
certificates for such shares.
9. No Rights to Continued Employment. The option and stock appreciation
---------------------------------
rights shall not confer upon Optionee any right with respect to continuance of
employment or directorship nor shall it interfere in any way with the right of
any party to terminate Optionee's employment.
10. Compliance With Law and Regulations. The stock appreciation rights, the
-----------------------------------
option and the obligation of the Company to sell and deliver shares hereunder,
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency as may be required.
The Company shall not be required to issue or deliver any certificates for
shares of Stock prior to the completion of any registration or qualification of
such shares under any federal or state law, or any rule or regulation of any
government body which the Company shall, in its sole discretion, determine to
be necessary or advisable. Moreover, this option may not be exercised if its
exercise, or the receipt of shares of Stock pursuant thereto, would be contrary
to applicable law.
20
<PAGE>
11. Optionee Bound by Plan. Optionee hereby acknowledges receipt of a copy
----------------------
of the Plan and agrees to be bound by all the applicable terms and provisions
thereof.
12. Counterparts. This Agreement has been executed in two counterparts each
------------
of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, Special Products & Insulation Co. has caused this
Agreement to be executed by its President or a Vice-President and Optionee has
executed this Agreement, both as of the day and year first above written.
ATTEST: SPECIALTY PRODUCTS & INSULATION CO.
- ------------------------ ------------------------------------
WITNESS:
- ------------------------ ------------------------------------
Optionee
21
<PAGE>
SCHEDULE 1 -- NOTATIONS AS TO EXERCISE
--------------------------------------
Number of Balance of
Date of Purchased Shares on Authorized
Exercise Shares/SARs Option/Subject Signature Notation Date
- -------- ----------- -------------- ---------- -------------
Exercised to SARs
----------- --------------
22
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO.
1998 STOCK OPTION PLAN
NONQUALIFIED STOCK OPTION/STOCK APPRECIATION RIGHTS
---------------------------------------------------
EXERCISE FORM
-------------
Date___________________________
Treasurer
SPECIALTY PRODUCTS & INSULATION CO.
Dear Sir:
The undersigned elects to exercise his option to purchase shares of Common
Stock of Specialty Products & Insulation Co. (the "Company") under and pursuant
to the Nonqualified Stock Option Agreement dated , between the Company and
the undersigned and the Company's 1998 Stock Option Plan. The undersigned
elects to exercise his stock appreciation rights with respect to _____ shares of
Common Stock of the Company.
Option Price: $_________________
Payment Methods (select one or both)
(a) Certified or bank cashier's check or certificates representing shares
of said stock (duly endorsed for transfer or accompanied by a duly
executed assignment), or a combination of both, having a fair market
value equivalent to, or when combined with payment submitted under
Payment Option (b) equivalent to, the option price.
(b) Surrender and delivery to the Company of certificates representing
shares of said stock duly endorsed for transfer, which may be effected
by means of a duly executed assignment delivered herewith,
transferring to the Company shares of said stock being acquired
through the exercise of this option and having a fair market value
equivalent to, or when combined with payment submitted under Payment
Option (a) equivalent to, the option price.
Date of Payment (select one)
(a) Payment accompanies this Exercise Form.
(b) Payment will be made no later than the thirtieth (30th) day following
the date this Exercise Form is delivered to the Company. By making
this selection, the undersigned acknowledges that the undersigned's
election hereunder shall be irrevocable and may not be revoked or
rescinded under any circumstances.
The name or names to be on the stock certificate or certificates and the
address and Social Security number of such persons are as follows:
23
<PAGE>
Name:__________________________________________
Address:_______________________________________
Social Security Number:________________________
The undersigned hereby acknowledges and agrees that all of the Common Stock
being purchased hereunder is being acquired, and the stock appreciation rights
are being exercised, pursuant to the terms and provisions of said Nonqualified
Stock Option Agreement and the applicable terms and provisions of said Stock
Option Plan, including, without limitation, any restrictions on exercise of said
Option and stock appreciation rights.
--------------------------------------
Optionee
24
<PAGE>
Exhibit 10.5
------------
FORM OF EXECUTIVE SEVERANCE AGREEMENT
This is an agreement by and between SPECIALTY PRODUCTS & INSULATION CO., a
Pennsylvania Corporation, ("Employer") and RONALD L. KING, an adult individual
("Employee").
Background
----------
Employer is currently a wholly owned subsidiary of Irex Corporation ("Irex").
Irex plans to distribute the stock of Employer to the shareholders of Irex.
Immediately thereafter, Employer plans to complete an offering of its securities
to the public. Employee is currently employed as Employer's President. Employer
recognizes that the offering of its securities to the public creates the
possibility of a change of control of Employer. Employer also recognizes that
the possibility of such a transaction raises uncertainty for Employee concerning
his continued employment and future prospects. The complete and undistracted
attention of Employee to his work on these transactions, and to the operating
business of Employer, is critical to Employer's success. As a result, Employer
has determined that it is in the best interests of Employer to provide Employee
with the severance benefits set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements of the
parties, and other good and valuable consideration, receipt of which is hereby
acknowledged, and intending to be legally bound, the parties hereby agree as
follows:
1. Effective Date. This Agreement shall be effective on the date that Irex
---------------
distributes the stock of Employer to the shareholders of Irex (the "Spin Off
Date"). If such distribution does not occur before December 31, 1998, the
Agreement will have no effect.
2. Change of Control. For the purposes of this Agreement, a "Change of
------------------
Control" occurs when any person, entity, or affiliated group thereof, which, on
the day before the Spin Off Date, owns less than five percent of Irex's voting
stock, subsequently acquires by purchase, merger, or other means, (i) a majority
of Employer's voting stock, (ii) an amount of Employer's voting stock sufficient
to elect its nominees in an election of Directors of Employer , or (iii) a
majority of Employer's assets.
3. Termination After Change of Control. If a Change of Control occurs within
------------------------------------
ten years after the Spin Off Date, Employee will receive the compensation and
benefits provided in paragraphs 4 and 5 upon a subsequent termination of
Employee's employment with Employer if the termination occurs within two years
of the Change Of Control unless such termination is because of the death or
disability of Employee, by the Employer for Cause, or by the Employee for any
reason other than Good Reason.
<PAGE>
(a) Termination by Employer for Cause means termination by the Employer
for serious and willful misconduct in the course of or connected with Employee's
employment with the Employer, for conviction of Employee of any criminal offense
higher than the degree of misdemeanor, for gross dereliction in the performance
of Employee's duties, or for rendering any services to any competitor of
Employer, or using Employee's name in a business in competition with Employer,
while Employee is employed by Employer.
(b) Termination for Good Reason means termination by Employee after (i)
the assignment to Employee of any duties adversely inconsistent with the status
of the position held by Employee on the date on which a Change of Control occurs
(the "Change of Control Date"), (ii) a substantial and adverse change in the
nature of Employee's responsibilities from those required on the Change of
Control Date, (iii) a reduction in the annual base salary of Employee in effect
on the Change of Control Date, (iv) a substantial reduction in the benefits
available to Employee from those available on the Change of Control Date, or the
failure to provide Employee with benefits, including incentive compensation, on
the same basis as they are provided to other senior managers of Employer, (v)
the relocation of the office to which Employee is assigned to a site more than
50 miles from East Petersburg, Pennsylvania, or (vi) the assignment to Employee
of duties requiring a substantial and long term increase in the amount of
Employee's travel as compared to his travel before the Change of Control.
4. Termination Compensation. Except as otherwise provided in Paragraph 3
-------------------------
above, if Employee's employment is terminated within two years after a Change of
Control which occurs within ten years of the Spin Off Date, Employer shall pay
to Employee within 30 days of the date of termination, (i) a lump sum severance
payment equal to two times Employee's annual base salary on the Change of
Control Date; (ii) an amount equal to the average of Employee's two most recent
incentive compensation payments and (iii) accrued vacation and all other unpaid
compensation owed for Employee's service prior to termination.
5. Benefits Upon Termination. Except as otherwise provided in Paragraph 3
--------------------------
above, if Employee's employment is terminated within two years after a Change of
Control which occurs within ten years of the Spin Off Date, for a period of 24
months from the date of termination Employer shall also provide to Employee
life, disability, and accident and health insurance benefits substantially
similar to those to which Employee was entitled on the Change of Control Date.
Employer shall also provide Employee with payments which equal the amount
Employer would have contributed to retirement plans on Employee's behalf during
this period had Employee remained employed by Employer.
6. Assignment. This Severance Agreement shall inure to the benefit of and be
-------------
enforceable by the personal representatives, executors, administrators and heirs
of Employee. This Agreement shall be enforceable against Employer or any
successor in interest.
7. Confidential Information. Employee agrees that in the event his
-------------------------
Employment is terminated, Employee will not disclose confidential information or
material concerning Employer's business affairs to any person, firm,
corporation, association, or other entity for any reason whatsoever, and agrees
not to make use of any such information or material to further Employee's
business or
<PAGE>
personal interests or the business or personal interests of any other person,
firm, corporation, association or entity. Employer acknowledges that this
provision applies only to information and material developed by or specific to
Employer, and does not preclude Employee from the use of knowledge acquired
through his own previous experience. In the event of Employee's actual or
threatened breach of this provision, Employer, in addition to all other
available remedies, shall be entitled to an injunction restraining Employee
therefrom.
8. Construction With Employment Agreement. Compensation and benefits due
---------------------------------------
under this Agreement shall replace any obligations of Employer under Employee's
Employment Agreement unless Employee determines, in his sole discretion, that
application of the Employment Agreement is more beneficial to him. In no event
may Employee receive compensation and benefits after a termination under both
agreements.
9. Miscellaneous. This Agreement may be modified only in a writing signed by
--------------
the parties hereto. No waiver by either party hereto of any breach by the other
party, or compliance with, any condition or provision of this Agreement shall be
deemed a waiver of any other breach, or obligation of compliance, under the
Agreement. This is the entire Agreement of the parties concerning severance
compensation in connection with a Change of Control, and supersedes any prior
agreements, representations or understandings in connection therewith. This
Agreement, however, shall not supersede or in any way limit Employee's rights
under any stock option plan, ESOP, 401(k) plan or other Employer benefit plan.
In the event Employee is required to use legal process to enforce this
Agreement, Employer shall pay all legal fees and expenses incurred by Employee.
All payments hereunder will be subject to normal tax withholding requirements.
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision. This Agreement
shall be construed according to the laws of the Commonwealth of Pennsylvania,
without regard to provisions pertaining to choice of law.
Specialty Products & Insulation Co.
- -----------------------------
Ronald L. King By:
--------------------------------
Date: Date:
------------------------ ------------------------------
<PAGE>
Exhibit 10.6
------------
FORM OF EMPLOYMENT AGREEMENT
This is an agreement by and between SPECIALTY PRODUCTS & INSULATION CO., a
Pennsylvania corporation ("Employer") and RONALD L. KING, an adult individual
(the "Employee").
Background
Employer is currently a wholly-owned subsidiary of Irex Corporation ("Irex").
Irex plans to distribute the stock of Employer to the shareholders of Irex.
Immediately thereafter, Employer plans to complete an offering of its securities
to the public. In contemplation of these transactions, Employer desires to
employ the Employee and the Employee desires to accept such employment on the
terms set forth herein.
WITNESSETH:
NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth
and intending to be legally bound, the parties hereby agree as follows:
1. Effective Date. This agreement shall be effective on the date that
--------------
Irex distributes the stock of Employer to the shareholders of Irex. If such
distribution does not occur by December 31, 1998, this agreement will have no
effect.
2. Employment and Term. The Employer hereby employs the Employee, and the
-------------------
Employee hereby agrees to work for the Employer, on the terms and conditions
hereinafter set forth, for the period ("Employment Period") commencing on the
effective date hereof and ending at the close of business on that date three
years after the effective date subject to earlier termination as hereinafter
provided. In the event that the Employee should continue to work for the
Employer following the expiration of the Employment Period, he shall have the
status of an employee at will, unless and until such time as he and the Employer
shall enter into a new written agreement.
3. Duties. The Employee shall be employed as the President of Employer.
------
During the Employment Period, the Employee shall devote his full time, energy,
and skill to the business and affairs of the Employer and to the promotion of
the interests thereof.
4. Other Activities. During the Employment Period, the Employee shall not
----------------
directly or indirectly engage in any other activities, duties, or services of a
business, professional, or commercial nature. This paragraph shall not be
construed to prevent Employee from personally, and for his own account,
investing in stocks, bonds, securities, real estate, or other forms of passive
investment for his own benefit, or from providing uncompensated service in
connection with such an investment, through, for example, participation in a
condominium association.
<PAGE>
- - 2 -
5. Compensation. As compensation for his services hereunder during the
------------
Employment Period, the Employer will pay to the Employee a salary (the "Base
Salary") at the rate of $216,000.00 per annum, payable in equal semi-monthly
----------
installments during each calendar month, together with any increase thereto
determined from time to time by the Board of Directors through application of
Employer's regular salary administration program. The Employer will also
provide the Employee with such regular incentive and benefit packages applicable
to employees of the Employer in senior management positions; provided, however,
that the Employer shall have the discretion to amend or terminate any program or
package or make distinctions between employees of similar job classifications.
6. Incentive Target. Employee will participate in SPI's regular incentive
----------------
program and shall have an incentive target of 40% of base salary per annum, or
such higher target percentage as the Board of Directors may determine.
7. Termination of the Employment Period.
-------------------------------------
A. The Employment Period shall terminate upon the earliest
of the following dates:
(i) The date three years after the effective
date.
(ii) The date of death of the Employee;
(iii) The date which shall be ninety (90) days
after the commencement and continuation of a disability of
the Employee (as hereinafter defined);
(iv) The date on which the Employer terminates
the Employee's employment for cause (as hereinafter
defined);
The Employee's right to Base Salary, incentive and
benefits shall terminate as of the date of termination of the
Employment Period, except as required by operation of law;
provided, however, the Employee will retain all of his rights in
benefits which have accrued, vested, or been purchased prior to
such date of termination.
B. As used in this Paragraph, "cause" means any of the
following:
(i) Serious and willful misconduct by the
Employee in the course of or connected with his employment
by the Employer; or
<PAGE>
- - 3 -
(ii) Rendition of any services by the Employee to
any competitor of the Employer, whether as an employee,
independent contractor, proprietor or otherwise; or
(iii) Use of the name of the Employee by or in any
business which is a competitor of the Employer; or
(iv) Conviction of the Employee for any criminal
offense higher than the degree of misdemeanor.
C. As used in this Paragraph, "disability" means as mental
or physical illness of condition rendering the Employee incapable
of performing his normal duties with the Employer.
8. Covenant Not to Compete. The Employee covenants and agrees that for a
-----------------------
period of three years from the effective date, he will not, directly or
indirectly (whether as principal, agent, proprietor, sales person, employee,
consultant, independent contractor, officer, director, investor, or otherwise),
participate in the ownership, management, operation, or control of, or have any
interest of any nature whatsoever in any organization, corporation, firm, or
other business which is engaged in or which proposes to engage in any business
which is in competition with the business now or hereafter operated and
conducted by the Employer in any geographic area where Employer has regularly
serviced customers during the Employment Period. Without limiting the
foregoing, the Employee agrees that he will not, for a period of three years
from the effective date, directly or indirectly, divert or take away or attempt
to divert or take away, by soliciting, supplying, serving, advising, or
otherwise, any customer or business entity with which the Employer did business
during the Employment Period. It will not be a violation of this provision for
Employee to own shares in a widely traded public company which competes with
Employer if the investment is entirely passive and the number of shares held is
sufficiently small that Employee cannot exercise any influence or control over
the management of the public company.
9. Covenant Not to Divulge Confidential Information. The Employee
------------------------------------------------
recognizes and acknowledges that he will, during the course of his employment by
the Employer, have access to certain proprietary material and confidential
business information concerning the business and operations of the Employer
which are valuable property of a confidential nature and which belong to the
Employer, which is not public knowledge. The Employee covenants and agrees that
he will not during the Employment Period or at any time thereafter disclose to
any person, except in the regular course of business of the Employer, or use in
competition with the Employer any such proprietary material or confidential
business information.
<PAGE>
- - 4 -
10. Effect of Termination of the Employment Period. Termination of the
----------------------------------------------
Employment Period shall not in any way relieve Employee of his obligations under
Paragraphs 8 or 9 above.
11. Specific Performance. The Employee acknowledges and agrees that the
--------------------
Employer will suffer substantial and irreparable damage, not readily
ascertainable or compensable in monetary terms, in the event of any breach of
any provision of Paragraphs 8 or 9 above. The Employee therefore agrees that,
in the event of any such breach, the Employer shall be entitled, without
limitation of any other rights or remedies otherwise available to it, to obtain
an injunction or other form of equitable relief from any court of competent
jurisdiction. In the event that any provision of this Agreement is determined
by any court to be unreasonably broad or otherwise unenforceable, it shall be
modified to the extent necessary to render it reasonable and enforceable.
12. Parties in Interest. This agreement shall be binding upon and shall
-------------------
inure to the benefit of the Employer and the Employee and their heirs, personal
representatives, successors, and assigns.
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
14. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties and supersedes any and all prior agreements, arrangements,
and understandings, oral or written, relating to the subject matter hereof.
This Agreement may be modified or amended only by written instrument signed by
both Employer and the Employee.
15. Enforcement. Should it become necessary to enforce any provision of
-----------
this Agreement through an attorney, the prevailing party shall be entitled to a
reasonable attorney's fee.
IN WITNESS WHEREOF, this Agreement is executed the day and year first above
written.
SPECIALTY PRODUCTS & INSULATION CO.
By:
Witness:
-----------------------------------
Ronald L. King
Witness:
<PAGE>
Exhibit 10.7
------------
FORM OF EXECUTIVE SEVERANCE AGREEMENT
This is an agreement by and between SPECIALTY PRODUCTS & INSULATION CO., a
Pennsylvania Corporation, ("Employer") and MICHAEL J. HUGHES, an adult
individual ("Employee").
Background
----------
Employer is currently a wholly owned subsidiary of Irex Corporation ("Irex").
Irex plans to distribute the stock of Employer to the shareholders of Irex.
Immediately thereafter, Employer plans to complete an offering of its securities
to the public. Employer has hired Employee for the position of Vice President,
Chief Financial Officer, Secretary and Treasurer in contemplation of its
separation from Irex and public offering of securities. As part of the
inducement for Employee's leaving his previous position, Employer has agreed to
provide Employee with severance benefits in the event of a termination of
employment after a change of control of Employer as provided herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements of the
parties, and other good and valuable consideration, receipt of which is hereby
acknowledged, and intending to be legally bound, the parties hereby agree as
follows:
1. Effective Date. This Agreement shall be effective April 27, 1998 (the
---------------
"Effective Date").
2. Change of Control. For the purposes of this Agreement, a "Change of
------------------
Control" occurs when any person, entity, or affiliated group thereof, which, on
the day before Irex distributes Employer's stock to the shareholders of Irex,
owns less than five percent of Irex's voting stock, subsequently acquires by
purchase, merger or other means (i) a majority of Employer's voting stock, (ii)
an amount of Employer's voting stock sufficient to allow it to elect its
nominees in an election of Directors of Employer, or (iii) a majority of
Employer's assets.
3. Termination After Change of Control. If a Change of Control occurs within
------------------------------------
ten years after the Effective Date, Employee will receive the compensation and
benefits provided in paragraphs 4 and 5 upon a subsequent termination of
Employee's employment with Employer if the termination occurs within two years
of the Change of Control unless such termination is because of the death or
disability of Employee, by the Employer for Cause, or by the Employee for any
reason other than Good Reason.
(a) Termination by Employer for Cause means termination by the Employer
for serious and willful misconduct in the course of or connected with Employee's
employment with Employer, for conviction of Employee of any criminal offense
higher than the degree of misdemeanor, for gross dereliction in the performance
of Employee's duties, or for rendering any services to any
<PAGE>
competitor of Employer, or using Employee's name in a business in competition
with Employer, while Employee is employed by Employer.
(b) Termination for Good Reason means termination by Employee after (i)
the assignment to Employee of any duties adversely inconsistent with the status
of the position held by Employee on the date on which a Change of Control occurs
(the "Change of Control Date"), (ii) a substantial and adverse change in the
nature of Employee's responsibilities from those required on the Change of
Control Date, (iii) a reduction in the annual base salary of Employee in effect
on the Change of Control Date, (iv) a substantial reduction in the benefits
available to Employee from those available on the Change of Date, or the failure
to provide Employee with benefits, including incentive compensation, on the same
basis as they are provided to other senior managers of Employer, (v) the
relocation of the office to which Employee is assigned to a site more than 50
miles from East Petersburg, Pennsylvania, or (vi) the assignment to Employee of
duties requiring a substantial and long term increase in the amount of
Employee's travel as compared to his travel before the Change of Control.
4. Termination Compensation. Except as otherwise provided in Paragraph 3
-------------------------
above, if Employee's employment is terminated within two years after a Change of
Control which occurs within ten years of the Effective Date, Employer shall pay
to Employee within 30 days of the date of termination, (i) a lump sum severance
payment equal to two times Employee's annual base salary on the Change of
Control Date; (ii) an amount equal to the average of Employee's two most recent
incentive compensation payments; and (iii) accrued vacation and all other unpaid
compensation owed for Employee's service prior to termination.
5. Benefits Upon Termination. Except as otherwise provided in Paragraph 3
--------------------------
above, if Employee's employment is terminated within two years after a Change of
Control which occurs within ten years of the Effective Date, for a period of 24
months from the date of termination Employer shall also provide to Employee
life, disability, and accident and health insurance benefits substantially
similar to those to which Employee was entitled on the Change of Control Date.
Employer shall also provide Employee with payments which equal the amount
Employer would have contributed to retirement plans on Employee's behalf during
this period had Employee remained employed by Employer.
6. Assignment. This Severance Agreement shall inure to the benefit of and be
-------------
enforceable by the personal representatives, executors, administrators and heirs
of Employee. This Agreement shall be enforceable against Employer or any
successor in interest.
7. Confidential Information. Employee agrees that in the event his
-------------------------
Employment is terminated, Employee will not disclose confidential information or
material concerning Employer's business affairs to any person, firm,
corporation, association, or other entity for any reason whatsoever, and agrees
not to make use of any such information or material to further Employee's
business or personal interests or the business or personal interests of any
other person, firm, corporation, association or entity. Employer acknowledges
that this provision applies only to information and material developed by or
specific to employer, and does not preclude Employee from the use of knowledge
acquired through his own previous experience. In the event of Employee's actual
or
<PAGE>
threatened breach of this provision, Employer, in addition to all other
available remedies, shall be entitled to an injunction restraining Employee
therefrom.
8. Miscellaneous. This Agreement may be modified only in a writing signed by
--------------
the parties hereto. No waiver by either party hereto of any breach by the other
party, or compliance with, any condition or provision of this Agreement shall be
deemed a waiver of any other breach, or obligation of compliance, under the
Agreement. This is the entire Agreement of the parties concerning severance
compensation in connection with a Change of Control, and supersedes any prior
agreements, representations or understandings in connection therewith. This
Agreement, however, shall not supersede or in any way limit Employee's rights
under any stock option plan, ESOP, 401(k) plan or other Employer benefit plan.
In the event Employee is required to use legal process to enforce this
Agreement, Employer shall pay all legal fees and expenses incurred by Employee.
All payments hereunder will be subject to normal tax withholding requirements.
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision. This Agreement
shall be construed according to the laws of the Commonwealth of Pennsylvania,
without regard to provisions pertaining to choice of law.
Specialty Products & Insulation Co.
------------------------------
Michael J. Hughes By:
---------------------------
Date: Date:
-------------------------- -------------------------
<PAGE>
Exhibit 10.8
------------
FORM OF EMPLOYMENT AGREEMENT
This is an agreement by and between SPECIALTY PRODUCTS & INSULATION CO., a
Pennsylvania corporation ("Employer") and CHARLES F. SCHATTGEN, an adult
individual (the "Employee").
Background
Employer is currently a wholly-owned subsidiary of Irex Corporation ("Irex").
Irex plans to distribute the stock of Employer to the shareholders of Irex.
Immediately thereafter, Employer plans to complete an offering of its securities
to the public. In contemplation of these transactions, Employer desires to
employ the Employee and the Employee desires to accept such employment on the
terms set forth herein.
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth
and intending to be legally bound, the parties hereby agree as follows:
1. Effective Date. This agreement shall be effective on the date that
--------------
Irex distributes the stock of Employee to the shareholders of Irex. If such
distribution does not occur by December 31, 1998, this agreement will have no
effect.
2. Employment and Term. The Employer hereby employs the Employee, and
-------------------
the Employee hereby agrees to work for the Employer, on the terms and conditions
hereinafter set forth, for the period ("Employment Period") commencing on the
effective date hereof and ending at the close of business on that date one year
after the effective date subject to earlier termination as hereinafter provided.
In the event that the Employee should continue to work for the Employer
following the expiration of the Employment Period, he shall have the status of
an employee at will, unless and until such time as he and the Employer shall
enter into a new written agreement.
3. Duties. The Employee shall be employed as Employer's Vice President
------
and Regional Manager for the Atlanta, Carolina, Florida Acoustical, and Florida
Mechanical/Fabrication Groups, or in such other position or location as the
Employer may decide. During the Employment Period, the Employee shall devote
his full time, energy, and skill to the business and affairs of the Employer and
to the promotion of the interests thereof.
4. Other Activities. During the Employment Period, the Employee shall not
----------------
directly or indirectly engage in any other activities, duties, or services of a
business, professional, or commercial nature. This paragraph shall not be con-
strued to prevent Employee from personally, and for his own account, investing
in stocks, bonds, securities, real estate, or other forms of passive investment
for his own benefit, or from providing uncompensated service in connection with
such an investment, through, for example, participation in a condominium
association.
<PAGE>
- - 2 -
5. Compensation. As compensation for the Employee's services hereunder
------------
during the Employment Period, the Employer will pay to the Employee a salary
(the "Base Salary") at the rate of $88,740.00 per annum, payable in equal semi-
---------
monthly installments during each calendar month, together with any increase
thereto determined from time to time through application of Employer's regular
salary administration program. The Employer will also provide the Employee with
such regular incentive and benefit packages applicable to employees of the
Employer in comparable positions; provided, however, that the Employer shall
have the discretion to amend or terminate any program or package or make
distinctions between employees of similar job classifications.
6. Termination of the Employment Period.
------------------------------------
A. Employment Period shall terminate upon the earliest of the
following dates:
(i) The date one year after the effective date;
(ii) The date of death of the Employee;
(iii) The date which shall be ninety (90) days after
the commencement and continuation of a disability of the
Employee (as hereinafter defined);
(iv) The date on which the Employer terminates
the Employee's employment for cause (as hereinafter
defined);
(v) Employee's voluntary termination of his
employment with Employer.
The Employee's right to Base Salary, incentive and
benefits shall terminate as of the date of termination of the
Employment Period, except as required by operation of law; provided,
how- ever, that Employee will retain all of his rights in benefits
which have accrued, vested, or been purchased prior to such date of
termination.
B. As used in this Paragraph, "cause" means any of the
following:
(i) Serious and willful misconduct by the
Employee in the course of or connected with his employment by
the Employer; or
(ii) Rendition of any services by the Employee
to any competitor of the Employer, whether as an employee,
independent contractor, proprietor or otherwise; or
<PAGE>
- - 3 -
(iii) Use of the name of the Employee by or in
any business which is a competitor of the Employer; or
(iv) Conviction of the Employee for any
criminal offense higher than the degree of misdemeanor.
C. As used in this Paragraph, "disability" means a mental
or physical illness or condition rendering the Employee incapable
of performing his normal duties with the Employer.
7. Covenant Not to Compete. The Employee covenants and agrees that for a
-----------------------
period of one year from the effective date, he will not, directly or indirectly
(whether as principal, agent, proprietor, sales person, employee, consultant,
independent contractor, officer, director, investor, or otherwise), participate
in the ownership, management, operation, or control of, or have any interest of
any nature whatsoever in any organization, corporation, firm, or other business
which is engaged in or which proposes to engage in any business which is in
competition with the business now or hereafter operated and conducted by the
Employer in any geographic area for which Employee has managerial responsibility
during the Employment Period. Without limiting the foregoing, the Employee
agrees that he will not, for a period of one year from the effective date,
directly or indirectly, divert or take away or attempt to divert or take away,
by soliciting, supplying, serving, advising, or otherwise, any customer or
business entity with which the Employer did business during the Employment
Period. It will not be a violation of this provision for Employee to own shares
in a widely traded public company which competes with Employer if the investment
is entirely passive and the number of shares held is sufficiently small that
Employee cannot exercise any influence or control over the management of the
public company.
8. Covenant Not to Divulge Confidential Information. The Employee
------------------------------------------------
recognizes and acknowledges that he will, during the course of his employment by
the Employer, have access to certain proprietary material and confidential
business information concerning the business and operations of the Employer
which are valuable property of a confidential nature and which belong to the
Employer, which is not public knowledge. The Employee covenants and agrees that
he will not during the Employment Period or at any time thereafter disclose to
any person, except in the regular course of business of the Employer, or use in
competition with the Employer any such proprietary material or confidential
business information.
9. Effect of Termination of the Employment Period. Termination of the
----------------------------------------------
Employment Period shall not in any way relieve Employee of his obligations under
Paragraphs 7 or 8 above.
<PAGE>
- - 4 -
10. Specific Performance. The Employee acknowledges and agrees that the
--------------------
Employer will suffer substantial and irreparable damage, not readily ascertain-
able or compensable in monetary terms, in the event of any breach of any
provision of Paragraphs 7 or 8 above. The Employee therefore agrees that, in
the event of any such breach, the Employer shall be entitled, without limitation
of any other rights or remedies otherwise available to it, to obtain an
injunction or other form of equitable relief from any court of competent
jurisdiction. In the event that any provision of this Agreement is determined
by any court to be unreasonably broad or otherwise unenforceable, it shall be
modified to the extent necessary to render it reasonable and enforceable.
11. Parties in Interest. This Agreement shall be binding upon and shall
-------------------
inure to the benefit of the Employer and the Employee and their heirs, personal
representatives, successors, and assigns.
12. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
13. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties and supersedes any and all prior agreements, arrangements,
and understandings, oral or written, relating to the subject matter hereof.
This Agreement may be modified or amended only by written instrument signed by
both Employer and the Employee.
14. Enforcement. Should it become necessary to enforce any provision of
-----------
this Agreement through an attorney, the prevailing party shall be entitled to a
reasonable attorney's fee.
IN WITNESS WHEREOF, this Agreement is executed the day and year first above
written.
SPECIALTY PRODUCTS & INSULATION CO.
Witness: By:
Witness:
Charles F. Schattgen
<PAGE>
Exhibit 10.9
------------
FORM OF EMPLOYMENT AGREEMENT
This is an agreement by and between SPECIALTY PRODUCTS & INSULATION CO., a
Pennsylvania corporation ("Employer") and RAYMOND J. HORAN, an adult individual
(the "Employee").
Background
Employer is currently a wholly-owned subsidiary of Irex Corporation ("Irex").
Irex plans to distribute the stock of Employer to the shareholders of Irex.
Immediately thereafter, Employer plans to complete an offering of its securities
to the public. In contemplation of these transactions, Employer desires to
employ the Employee and the Employee desires to accept such employment on the
terms set forth herein.
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth
and intending to be legally bound, the parties hereby agree as follows:
1. Effective Date. This agreement shall be effective on the date that
--------------
Irex distributes the stock of Employee to the shareholders of Irex. If such
distribution does not occur by December 31, 1998, this agreement will have no
effect.
2. Employment and Term. The Employer hereby employs the Employee, and
-------------------
the Employee hereby agrees to work for the Employer, on the terms and conditions
hereinafter set forth, for the period ("Employment Period") com mencing on the
effective date hereof and ending at the close of business on that date one year
after the effective date subject to earlier termination as hereinafter provided.
In the event that the Employee should continue to work for the Employer
following the expiration of the Employment Period, he shall have the status of
an employee at will, unless and until such time as he and the Employer shall
enter into a new written agreement.
3. Duties. The Employee shall be employed as Employer's Vice President
------
and Regional Manager for the Eastern Pennsylvania and North Jersey Groups, or in
such other position or location as the Employer may decide. During the
Employment Period, the Employee shall devote his full time, energy, and skill to
the business and affairs of the Employer and to the promotion of the interests
thereof.
4. Other Activities. During the Employment Period, the Employee shall not
----------------
directly or indirectly engage in any other activities, duties, or services of a
business, professional, or commercial nature. This paragraph shall not be
construed to prevent Employee from personally, and for his own account,
investing in stocks, bonds, securities, real estate, or other forms of passive
investment for his own benefit, or from providing uncompensated service in
connection with such an investment, through, for example, participation in a
condominium association.
<PAGE>
- - 2 -
5. Compensation. As compensation for the Employee's services hereunder
------------
during the Employment Period, the Employer will pay to the Employee a salary
(the "Base Salary") at the rate of $88,200.00 per annum, payable in equal semi-
---------
monthly installments during each calendar month, together with any increase
thereto determined from time to time through application of Employer's regular
salary administration program. The Employer will also provide the Employee with
such regular incentive and benefit packages applicable to employees of the
Employer in comparable positions; provided, however, that the Employer shall
have the discretion to amend or terminate any program or package or make
distinctions between employees of similar job classifications.
6. Termination of the Employment Period.
------------------------------------
A. Employment Period shall terminate upon the earliest of
the following dates:
(i) The date one year after the effective
date;
(ii) The date of death of the Employee;
(iii) The date which shall be ninety (90) days
after the commencement and continuation of a
disability of the Employee (as hereinafter defined);
(iv) The date on which the Employer terminates
the Employee's employment for cause (as hereinafter
defined);
(v) Employee's voluntary termination of his
employment with Employer.
The Employee's right to Base Salary, incentive and
benefits shall terminate as of the date of termination of the
Employment Period, except as required by operation of law;
provided, however, that Employee will retain all of his rights
in benefits which have accrued, vested, or been purchased prior
to such date of termination.
B. As used in this Paragraph, "cause" means any of the
following:
(i) Serious and willful misconduct by the
Employee in the course of or connected with his employment
by the Employer; or
(ii) Rendition of any services by the
Employee to any competitor of the Employer, whether as an
employee, independent contractor, proprietor or otherwise;
or
<PAGE>
- - 3 -
(iii) Use of the name of the Employee by or in
any business which is a competitor of the Employer; or
(iv) Conviction of the Employee for any
criminal offense higher than the degree of misdemeanor.
C. As used in this Paragraph, "disability" means a mental
or physical illness or condition rendering the Employee incapable
of performing his normal duties with the Employer.
7. Covenant Not to Compete. The Employee covenants and agrees that for a
-----------------------
period of one year from the effective date, he will not, directly or indirectly
(whether as principal, agent, proprietor, sales person, employee, consultant,
independent contractor, officer, director, investor, or otherwise), participate
in the ownership, management, operation, or control of, or have any interest of
any nature whatsoever in any organization, corporation, firm, or other business
which is engaged in or which proposes to engage in any business which is in
competition with the business now or hereafter operated and conducted by the
Employer in any geographic area for which Employee has managerial responsibility
during the Employment Period. Without limiting the foregoing, the Employee
agrees that he will not, for a period of one year from the effective date,
directly or indirectly, divert or take away or attempt to divert or take away,
by soliciting, supplying, serving, advising, or otherwise, any customer or
business entity with which the Employer did business during the Employment
Period. It will not be a violation of this provision for Employee to own shares
in a widely traded public company which competes with Employer if the investment
is entirely passive and the number of shares held is sufficiently small that
Employee cannot exercise any influence or control over the management of the
public company.
8. Covenant Not to Divulge Confidential Information. The Employee
------------------------------------------------
recognizes and acknowledges that he will, during the course of his employment by
the Employer, have access to certain proprietary material and confidential
business information concerning the business and operations of the Employer
which are valuable property of a confidential nature and which belong to the
Employer, which is not public knowledge. The Employee covenants and agrees that
he will not during the Employment Period or at any time thereafter disclose to
any person, except in the regular course of business of the Employer, or use in
competition with the Employer any such proprietary material or confidential
business information.
9. Effect of Termination of the Employment Period. Termination of the
----------------------------------------------
Employment Period shall not in any way relieve Employee of his obligations under
Paragraphs 7 or 8 above.
<PAGE>
- - 4 -
10. Specific Performance. The Employee acknowledges and agrees that the
--------------------
Employer will suffer substantial and irreparable damage, not readily
ascertainable or compensable in monetary terms, in the event of any breach of
any provision of Paragraphs 7 or 8 above. The Employee therefore agrees that, in
the event of any such breach, the Employer shall be entitled, without limitation
of any other rights or remedies otherwise available to it, to obtain an
injunction or other form of equitable relief from any court of competent
jurisdiction. In the event that any provision of this Agreement is determined by
any court to be unreasonably broad or otherwise unenforceable, it shall be
modified to the extent necessary to render it reasonable and enforceable.
11. Parties in Interest. This Agreement shall be binding upon and shall
-------------------
inure to the benefit of the Employer and the Employee and their heirs, personal
representatives, successors, and assigns.
12. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
13. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties and supersedes any and all prior agreements, arrangements,
and understandings, oral or written, relating to the subject matter hereof.
This Agreement may be modified or amended only by written instrument signed by
both Employer and the Employee.
14. Enforcement. Should it become necessary to enforce any provision of
-----------
this Agreement through an attorney, the prevailing party shall be entitled to a
reasonable attorney's fee.
IN WITNESS WHEREOF, this Agreement is executed the day and year first above
written.
SPECIALTY PRODUCTS & INSULATION CO.
Witness: By:
Witness:
Raymond J. Horan
<PAGE>
Exhibit 10.10
-------------
FORM OF
DEFERRED PAYMENT AGREEMENT FOR DIRECTOR
---------------------------------------
THIS AGREEMENT is hereby made this _____ day of _________________________, by
SPECIALTY PRODUCTS & INSULATION CO. (the "Employer") and ___________________
(the "Director").
W I T N E S E T H:
WHEREAS, the Employer believes that a greater interest in and loyalty to it
would result from providing to the Director an opportunity to defer director
fees in the manner set forth below; and
WHEREAS, the Board of Directors of the Employer has adopted resolutions
approving this Agreement and authorizing the officers of the Employer to execute
this Agreement.
NOW, THEREFORE, intending to be legally bound, the parties each agree as
follows:
Section 1. Deferrals.
--------- ---------
(a) In accordance with rules established by the Employer, the Director may
elect to defer all or a portion of the fees (whether in the form of cash or
Employer stock) which are due to be earned and which would otherwise be paid to
the Director for service as a Director. Cash fees so deferred will be considered
a Director's "Fee Deferrals" and fees in the form of Employer stock so deferred
will be considered a Director's "Stock Deferrals."
(b) A deferral election is made by executing and delivering to the Employer
an election form in the form acceptable to the Employer. Once made, the election
shall continue in force indefinitely, until changed by the Director on a
subsequent election form. A change to a deferral election shall be made on a
prospective basis only, and shall not be applied retroactively under any
circumstances.
Section 2. Deferral Accounts. There shall be established and maintained for
--------- -----------------
each Director a Fee Deferral Account to which shall be credited amounts equal to
the Director's Fee Deferrals, together with the deemed earnings described in
Section 3. There shall also be established and maintained for each Director a
Stock Deferral Account to which shall be credited the number of shares of
Employer stock equal to the Director's Stock Deferrals, as adjusted pursuant to
section 3(b). A Director shall always be one hundred percent (100%) vested in
his Fee Deferral Account (and the interest deemed credited thereto) and his
Stock Deferral Account.
1
<PAGE>
Section 3. Deemed Earnings/Stock Adjustments.
--------- ---------------------------------
(a) Each amount credited to a Director's Fee Deferral Account shall be deemed
to bear interest from the date it is credited to the Director's Fee Deferral
Account until the date it is distributed to the Director. The rate of interest
shall be equal to such money market (or comparable) rate as the Employer may
from time to time determine. Such interest shall be credited to the Directors'
Fee Deferral Account as of the end of each calendar year; provided, however,
that in the year in which the Director's benefit hereunder becomes payable,
interest shall be credited for that portion of the year ending on the last day
of the calendar quarter immediately preceding payment of such benefit.
(b) Amounts credited to the Director's Stock Deferral Account shall not be
credited with interest, dividends, or other earnings. Notwithstanding the
foregoing, in the event of a change in the number of issued and outstanding
shares of Employer stock resulting from a stock split, reverse stock split,
stock dividend or other change in the capital structure of the Employer, the
number of shares of Employer stock then credited to the Director's Stock
Deferral Account shall be proportionately adjusted in such manner as the
Employer, in its discretion, deems appropriate.
Section 4. Accounts. The Accounts maintained hereunder for the Director
--------- --------
shall be maintained for recordkeeping purposes only. The existence of these
Accounts shall not require any segregation of funds or issuance of shares of
Employer stock. All amounts credited to the Accounts shall constitute general
assets of the Employer and may be disposed of by the Employer at such time(s)
and for such purpose(s) as it may deem appropriate.
Section 5. Payment of Benefits. A Director's benefit shall become payable
--------- -------------------
when the Director attains age ___ or, if later, upon the termination of the
Director's service as a member of the Employer's Board of Directors for any
reason (whether by reason of death, disability, resignation, expiration of term,
or removal). The Director (or his Beneficiary) shall then be entitled to a
benefit as follows:
(a) a cash benefit equal to the amount (if any) then credited to the
Director's Fee Deferral Account; and
(b) a benefit in the form of shares of Employer stock, equal to the number of
shares of Employer stock (if any) then credited to the Director's Stock Deferral
Account.
Said benefit (less any amounts required to be withheld for tax purposes) shall
be distributed in accordance with Section 6.
2
<PAGE>
Section 6. Method of Payment.
--------- -----------------
(a) Distribution of a Director's benefit shall be made in a single, lump sum
payment on the first day of the second month following the date the benefit
becomes payable pursuant to section 5.
(b) In the event the Director dies before the payment of his benefit
commences, the Director's benefit shall be paid to his Beneficiary. For this
purpose, the term "Beneficiary" shall mean the person or persons designated by
the Director on a beneficiary designation form acceptable to the Employer or, if
there should be no designation or if the designated person(s) should predecease
the Director, the spouse, children, parents, brothers and sisters, and estate of
the Director, in the order listed.
Section 7. Rights as a Shareholder. The Director shall not have any rights
--------- -----------------------
as a shareholder with respect to any shares of Employer stock credited to the
Director's Stock Deferral Account unless and until certificates for such shares
are issued to him.
Section 8. Amendment. The Employer shall have the right to amend this
--------- ---------
Agreement at such time or times and in such manner as it deems advisable.
Notwithstanding the foregoing, no amendment shall affect the amount of the
Director's accrued but unpaid benefit (including the amount of the deemed
earnings that have accrued thereon), or the right of the Director to receive his
accrued but unpaid benefit, at the time the amendment becomes effective.
Section 9. Termination. The Employer shall have the right to terminate
--------- -----------
this Agreement at any time. No termination, however, shall affect the amount of
the Director's accrued but unpaid benefit, or the right of the Director to
receive his accrued, but unpaid benefit, prior to the termination of this
Agreement.
Section 10. No Assignment. No Director (or Beneficiary thereof) shall have
---------- -------------
the power to pledge, transfer, assign, anticipate, mortgage or otherwise
encumber or dispose of in advance any interest in amounts payable hereunder or
any of the payments provided for herein, nor shall any interest in amounts
payable hereunder or in any payments be subject to seizure for payments of any
debts, judgments, alimony or separate maintenance, or be reached or transferred
by operation of law in the event of bankruptcy, insolvency or otherwise.
Section 11. No Guarantee of Service/Director's Rights Unsecured. Nothing
---------- ---------------------------------------------------
contained in this Agreement shall be construed as a contract of service on the
Employer's Board of Directors or deemed to give any Director the right to be
retained in the service of the Employer or any equity or other interest in the
assets, business or affairs of the Employer. No Director (or his Beneficiary)
shall have a security interest in assets of the Employer used (or to be used) to
pay benefits. The right of the Director (or his Beneficiary) to receive
benefits hereunder shall be an unsecured claim against the general assets of the
Employer.
3
<PAGE>
IN WITNESS WHEREOF, the Employer and the Director have executed this Agreement
as of the day, month and year first above written.
ATTEST: SPECIALTY PRODUCTS & INSULATION CO.
By:
- --------------------- --------------------------------
WITNESS:
By:
- --------------------- --------------------------------
Director
4
<PAGE>
Exhibit 10.11
-------------
FORM OF SPECIALTY PRODUCTS & INSULATION CO.
VICE PRESIDENT AND REGIONAL MANAGER
1998 INCENTIVE PLAN
The following will outline the provisions of the SPI Vice President and Regional
Manager Incentive Plan for 1998.
The Plan will be based on three measures:
1. Regional Performance based on Return on Assets (ROA).
2. Company Performance based on Value Added.
3. Individual Objectives.
Regional Performance:
- --------------------
An incentive payment will be made based on a percentage of base salary equal to
1.5 times Region ROA up to 14%. If ROA is greater than 14%, a pool of money will
be available for the President to distribute at his discretion, not to exceed an
additional 10% of pay. The maximum payable under this section of the plan is 31%
of pay.
If the Region ROA is less than 3%, no payment will be made under this portion of
the Plan and the Company payout, detailed below, will be reduced by 25%. (Note:
Startup units will be excluded from this minimum threshold calculation
requirement for the first four financial quarters of operations. Their minimum
threshold for this period will be their respective budgets.)
SPI Performance:
- ---------------
An incentive payment will be made on the performance of SPI according to the
following schedule:
<TABLE>
<CAPTION>
SPI Value Added % of Base Salary
--------------- ----------------
<S> <C> <C>
Min ($96,000) 6%
Budget $1,698,000 14%
Max $3,940,000 20%
</TABLE>
Achievements between the minimum and the maximum will be paid on a sliding
scale.
Individual Objectives:
- ---------------------
An incentive payment will be based on structured objectives established at the
beginning of the year with a maximum of 5% of pay.
Example --
Base Salary $60,000
Regional ROA 12%
SPI Value Added $1,698,000
Individual Objectives 5%
Region
$60,000 X (12% X 1.5) = $10,800
SPI
$60,000 X 14% = $ 8,400
Individual Objectives
$60,000 X 5% = 3,000
Total Incentive Payment $22,200
% of Base 37%
<PAGE>
Exhibit 10.12
-------------
FORM OF
LOAN AGREEMENT
By and Among
SPECIALTY PRODUCTS AND INSULATION CO.
and
MELLON BANK, N.A., as Agent
AND THE LENDERS DESCRIBED HEREIN
__________________________________
Dated: June ____, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
1. DEFINITIONS 1
-----------
1.1 Accounting Terms............................................ 1
-------------------------------------------------------------
1.2 "Acquisition Documents"..................................... 1
-------------------------------------------------------------
1.3 "Acquisition Transaction"................................... 1
-------------------------------------------------------------
1.4 "Adjusted EBITDA"........................................... 1
-------------------------------------------------------------
1.5 "Advances".................................................. 1
-------------------------------------------------------------
1.6 "Affiliate"................................................. 1
-------------------------------------------------------------
1.7 "Applicable LC Fee"......................................... 1
-------------------------------------------------------------
1.8 "Applicable Usage Fee"...................................... 2
-------------------------------------------------------------
1.9 "Applicable Margin"......................................... 2
-------------------------------------------------------------
1.10 "Business Day".............................................. 2
-------------------------------------------------------------
1.11 "Capital Expenditures"...................................... 2
-------------------------------------------------------------
1.12 "Capitalized Leases"........................................ 2
-------------------------------------------------------------
1.13 "Capitalized Lease Obligations"............................. 2
-------------------------------------------------------------
1.14 "Change of Control"......................................... 2
-------------------------------------------------------------
1.15 "Commitment"................................................ 2
-------------------------------------------------------------
1.16 "Compliance Certificate".................................... 3
-------------------------------------------------------------
1.17 "Corporation"............................................... 3
-------------------------------------------------------------
1.18 "Current Assets"............................................ 3
-------------------------------------------------------------
1.19 "Current Liabilities"....................................... 3
-------------------------------------------------------------
1.20 "Defaulting Lender"......................................... 3
-------------------------------------------------------------
1.21 "EBITDA".................................................... 3
-------------------------------------------------------------
1.22 "Environmental Affiliate"................................... 3
-------------------------------------------------------------
1.23 "Environmental Cleanup Site"................................ 3
-------------------------------------------------------------
1.24 "Environmental Requirements"................................ 3
-------------------------------------------------------------
1.25 "Event of Default".......................................... 3
-------------------------------------------------------------
1.26 "Federal Funds Based Portion"............................... 3
-------------------------------------------------------------
1.27 "Federal Funds Based Rate".................................. 3
-------------------------------------------------------------
1.28 "Federal Funds Based Rate Notification"..................... 4
-------------------------------------------------------------
1.29 "Federal Funds Effective Rate".............................. 4
-------------------------------------------------------------
1.30 "GAAP"...................................................... 4
-------------------------------------------------------------
1.31 "Good Business Day"......................................... 4
-------------------------------------------------------------
1.32 "Indebtedness".............................................. 4
-------------------------------------------------------------
1.33 "Interest Coverage Ratio"................................... 4
-------------------------------------------------------------
1.34 "Interest Expense".......................................... 5
-------------------------------------------------------------
1.35 "Issuing Bank".............................................. 5
-------------------------------------------------------------
1.36 "Lender Indebtedness"....................................... 5
-------------------------------------------------------------
1.37 "Letter of Credit Advances"................................. 5
-------------------------------------------------------------
1.38 "LIBOR Based Rate".......................................... 5
-------------------------------------------------------------
1.39 "LIBOR Rate Notification"................................... 5
-------------------------------------------------------------
1.40 "LIBOR Rate Portion"........................................ 5
-------------------------------------------------------------
1.41 "LIBOR Rate Reserve Percentage"............................. 6
-------------------------------------------------------------
1.42 "Loan Documents"............................................ 6
-------------------------------------------------------------
1.43 "Maximum Amount"............................................ 6
-------------------------------------------------------------
1.44 "Material Adverse Effect"................................... 6
-------------------------------------------------------------
1.45 "Net Worth"................................................. 6
-------------------------------------------------------------
<PAGE>
1.46 "Mellon".................................................... 6
-------------------------------------------------------------
1.47 "Obligor"................................................... 6
------------------------------------------------------------
1.48 "Permitted Acquisition"..................................... 6
------------------------------------------------------------
1.49 "Person".................................................... 6
-------------------------------------------------------------
1.50 "Prime Based Rate".......................................... 6
-------------------------------------------------------------
1.51 "Prime Based Rate Notification"............................. 6
-------------------------------------------------------------
1.52 "Prime Based Portion"....................................... 7
-------------------------------------------------------------
1.53 "Prime Rate"................................................ 7
-------------------------------------------------------------
1.54 "Pro Rata Percentage"....................................... 7
-------------------------------------------------------------
1.55 "Pro Rata Share"............................................ 7
-------------------------------------------------------------
1.56 "Rate Period"............................................... 7
-------------------------------------------------------------
1.57 "Reimbursement Obligation".................................. 7
-------------------------------------------------------------
1.58 "Required Lenders".......................................... 7
-------------------------------------------------------------
1.59 "Special Materials"......................................... 7
-------------------------------------------------------------
1.60 "Subsidiary"................................................ 7
-------------------------------------------------------------
1.61 "Tangible Net Worth"........................................ 8
-------------------------------------------------------------
2. THE REVOLVER; USE OF PROCEEDS 8
-----------------------------
2.1 Revolving Credit............................................. 8
-------------------------------------------------------------
2.2 Use of Proceeds.............................................. 8
-------------------------------------------------------------
2.3 Method of Advances........................................... 8
-------------------------------------------------------------
2.4 Letter of Credit Advances.................................... 9
-------------------------------------------------------------
2.5 Settlement Among Lenders..................................... 11
-------------------------------------------------------------
3. INTEREST RATES 13
--------------
3.1 Interest Rate Options........................................ 13
-------------------------------------------------------------
3.2 Default Interest............................................. 15
-------------------------------------------------------------
3.3 Post Judgment Interest....................................... 15
-------------------------------------------------------------
3.4 Calculation.................................................. 15
-------------------------------------------------------------
3.5 Limitation of Interest to Maximum Lawful Rate................ 15
-------------------------------------------------------------
4. PAYMENTS AND FEES 15
-----------------
4.1 Interest Payments............................................ 15
-------------------------------------------------------------
4.2 Principal Payments........................................... 15
-------------------------------------------------------------
4.3 Letter of Credit Fees........................................ 16
-------------------------------------------------------------
4.4 Usage Fee.................................................... 16
-------------------------------------------------------------
4.5 Late Charge.................................................. 16
-------------------------------------------------------------
4.6 Termination of Revolver...................................... 16
-------------------------------------------------------------
4.7 Payment Method............................................... 16
-------------------------------------------------------------
4.8 Application of Payments...................................... 16
-------------------------------------------------------------
4.9 Loan Account................................................. 16
-------------------------------------------------------------
4.10 Indemnity; Loss of Margin.................................... 17
-------------------------------------------------------------
4.11 Indemnity for LIBOR Portion.................................. 18
-------------------------------------------------------------
4.12 Taxes........................................................ 18
-------------------------------------------------------------
4.13 Fees to Agent................................................ 19
/TABLE>
5. COLLECTION OF RECEIVABLES 19
-------------------------
6. REPRESENTATIONS AND WARRANTIES 19
------------------------------
2
<PAGE>
6.1 Valid Organization, Good Standing and Qualification.......... 19
-------------------------------------------------------------
6.2 Licenses..................................................... 19
-------------------------------------------------------------
6.3 Ownership Interests.......................................... 20
-------------------------------------------------------------
6.4 Subsidiaries................................................. 20
-------------------------------------------------------------
6.5 Financial Statements......................................... 20
-------------------------------------------------------------
6.6 No Material Adverse Change in Financial Condition............ 20
-------------------------------------------------------------
6.7 Pending Litigation or Proceedings............................ 20
-------------------------------------------------------------
6.8 Due Authorization; No Legal Restrictions..................... 20
-------------------------------------------------------------
6.9 Enforceability............................................... 20
-------------------------------------------------------------
6.10 No Default Under Other Obligations, Orders or
Governmental Regulations.................................... 20
-------------------------------------------------------------
6.11 Governmental Consents........................................ 21
-------------------------------------------------------------
6.12 Taxes........................................................ 21
-------------------------------------------------------------
6.13 Title to Property............................................ 21
-------------------------------------------------------------
6.14 Addresses.................................................... 21
-------------------------------------------------------------
6.15 Current Compliance........................................... 21
-------------------------------------------------------------
6.16 Pension Plans................................................ 21
-------------------------------------------------------------
6.17 Leases and Contracts......................................... 21
-------------------------------------------------------------
6.18 Intellectual Property........................................ 22
-------------------------------------------------------------
6.19 Business Interruptions....................................... 22
-------------------------------------------------------------
6.20 Year 2000 Warranty........................................... 22
-------------------------------------------------------------
6.21 Accuracy of Representations and Warranties................... 22
-------------------------------------------------------------
7. GENERAL COVENANTS 22
-----------------
7.1 Payment of Principal, Interest and Other Amounts Due........ 22
------------------------------------------------------------
7.2 Limitation on Sale and Leaseback............................ 22
------------------------------------------------------------
7.3 Limitation on Indebtedness.................................. 23
------------------------------------------------------------
7.4 Investments and Loans....................................... 23
------------------------------------------------------------
7.5 Guaranties.................................................. 23
------------------------------------------------------------
7.6 Disposition of Assets....................................... 24
------------------------------------------------------------
7.7 Merger; Consolidation; Business Acquisitions; Subsidiaries.. 24
------------------------------------------------------------
7.8 Taxes; Claims for Labor and Materials....................... 24
------------------------------------------------------------
7.9 Liens....................................................... 25
------------------------------------------------------------
7.10 Existence; Approvals; Qualification; Business Operations;
Compliance with Laws........................................ 25
------------------------------------------------------------
7.11 Maintenance of Properties, Intellectual Property............ 26
------------------------------------------------------------
7.12 Insurance................................................... 26
------------------------------------------------------------
7.13 Inspections; Examinations................................... 26
------------------------------------------------------------
7.14 Default Under Other Indebtedness............................ 27
------------------------------------------------------------
7.15 Pension Plans............................................... 27
------------------------------------------------------------
7.16 Bank of Account............................................. 27
------------------------------------------------------------
7.17 Maintenance of Management................................... 27
------------------------------------------------------------
7.18 Transactions with Affiliates................................ 27
------------------------------------------------------------
7.19 Change of Control........................................... 27
------------------------------------------------------------
7.20 Name or Address Change...................................... 27
------------------------------------------------------------
7.21 Notices..................................................... 27
------------------------------------------------------------
7.22 Additional Documents and Future Actions..................... 28
------------------------------------------------------------
7.23 Material Adverse Contracts.................................. 28
------------------------------------------------------------
7.24 Restrictions on Use of Proceeds............................. 28
------------------------------------------------------------
3
<PAGE>
8. FINANCIAL COVENANTS 28
-------------------
8.1 Indebtedness to Adjusted EBITDA.............................. 28
-------------------------------------------------------------
8.2 Indebtedness to Tangible Net Worth........................... 28
-------------------------------------------------------------
8.3 Interest Coverage Ratio...................................... 28
-------------------------------------------------------------
8.4 Current Ratio................................................ 28
-------------------------------------------------------------
8.5 Net Worth.................................................... 28
-------------------------------------------------------------
8.6 Capital Expenditures......................................... 29
-------------------------------------------------------------
8.7 Changes to Financial Covenants............................... 29
-------------------------------------------------------------
9. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS 29
----------------------------------------------------
9.1 Annual Statements............................................ 29
-------------------------------------------------------------
9.2 Operating and Capital Budget................................. 29
-------------------------------------------------------------
9.3 Quarterly Statements......................................... 30
-------------------------------------------------------------
9.4 Audit Reports................................................ 30
-------------------------------------------------------------
9.5 Reports to Governmental Agencies and Other Creditors......... 30
-------------------------------------------------------------
9.6 Requested Information........................................ 30
-------------------------------------------------------------
9.7 Compliance Certificates...................................... 30
-------------------------------------------------------------
9.8 Accountant's Certificate..................................... 30
-------------------------------------------------------------
10. ENVIRONMENTAL REPRESENTATIONS AND COVENANTS 31
-------------------------------------------
10.1 Representations............................................. 31
------------------------------------------------------------
10.2 Real Property............................................... 31
------------------------------------------------------------
10.3 Covenant Regarding Compliance............................... 31
------------------------------------------------------------
10.4 Notices..................................................... 32
------------------------------------------------------------
10.5 Indemnity................................................... 32
------------------------------------------------------------
10.6 Survival.................................................... 32
------------------------------------------------------------
10.7 Definitions................................................. 32
------------------------------------------------------------
11. CONDITIONS OF CLOSING 33
---------------------
11.1 Loan Documents.............................................. 33
------------------------------------------------------------
11.2 Representations and Warranties.............................. 33
------------------------------------------------------------
11.3 No Default.................................................. 33
------------------------------------------------------------
11.4 Proceedings and Documents................................... 33
------------------------------------------------------------
11.5 Delivery of Other Documents................................. 33
------------------------------------------------------------
12. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES 34
-----------------------------------------
12.1 Representations and Warranties.............................. 34
------------------------------------------------------------
12.2 No Default.................................................. 34
------------------------------------------------------------
12.3 Other Requirements.......................................... 35
------------------------------------------------------------
13. DEFAULT AND REMEDIES 35
--------------------
13.1 Events of Default.......................................... 35
------------------------------------------------------------
13.2 Remedies................................................... 36
------------------------------------------------------------
13.3 Set-Off.................................................... 37
------------------------------------------------------------
13.4 Delay or Omission Not Waiver............................... 37
------------------------------------------------------------
13.5 Remedies Cumulative; Consents.............................. 37
------------------------------------------------------------
13.6 Certain Fees, Costs, Expenses and Expenditures............. 37
------------------------------------------------------------
13.7 Time is of the Essence..................................... 38
------------------------------------------------------------
4
<PAGE>
13.8 Acknowledgment of Confession of Judgment Provisions........ 38
------------------------------------------------------------
14. AGENT 38
-----
14.1 Appointment of Agent....................................... 38
-----------------------------------------------------------
14.2 Holding of Collections..................................... 39
-----------------------------------------------------------
14.3 Fees....................................................... 39
-----------------------------------------------------------
14.4 Collections and Disbursements.............................. 39
-----------------------------------------------------------
14.5 Delegation of Duties; Discretion; Instructions............. 40
-----------------------------------------------------------
14.6 Nature of Duties........................................... 40
-----------------------------------------------------------
14.7 Lack of Reliance on the Agent.............................. 41
-----------------------------------------------------------
14.8 Resignation................................................ 41
-----------------------------------------------------------
14.9 Certain Rights of Agent.................................... 41
-----------------------------------------------------------
14.10 Reliance................................................... 41
-----------------------------------------------------------
14.12 The Agent in its Capacity as Lender........................ 42
-----------------------------------------------------------
14.13 Other Loans................................................ 42
-----------------------------------------------------------
14.14 Disclosure of Information; Audits.......................... 42
-----------------------------------------------------------
14.15 Actions by Agent........................................... 42
-----------------------------------------------------------
14.16 Sharing of Risk; Indemnification; Expenses................. 43
-----------------------------------------------------------
14.17 Consultation with Counsel.................................. 44
-----------------------------------------------------------
14.18 Documents.................................................. 44
-----------------------------------------------------------
14.19 Several Obligations........................................ 44
-----------------------------------------------------------
14.20 No Third Party Beneficiary................................. 44
-----------------------------------------------------------
14.21 Participations and Assignments............................. 44
-----------------------------------------------------------
15. COMMUNICATIONS AND NOTICES 45
--------------------------
15.1 Communications and Notices................................. 45
-----------------------------------------------------------
16. WAIVERS 46
-------
16.1 Waivers.................................................... 46
-----------------------------------------------------------
16.2 Forbearance................................................ 47
-----------------------------------------------------------
17. SUBMISSION TO JURISDICTION 47
--------------------------
17.1 Submission to Jurisdiction................................. 47
-----------------------------------------------------------
18. MISCELLANEOUS 47
-------------
18.1 Brokers.................................................... 47
----------------------------------------------------------
18.2 Use of Lenders' Names...................................... 47
----------------------------------------------------------
18.3 No Joint Venture........................................... 47
----------------------------------------------------------
18.4 Survival................................................... 47
----------------------------------------------------------
18.5 No Assignment.............................................. 48
----------------------------------------------------------
18.6 Binding Effect............................................. 48
----------------------------------------------------------
18.7 Severability............................................... 48
----------------------------------------------------------
18.8 No Third Party Beneficiaries............................... 48
----------------------------------------------------------
18.9 Modifications.............................................. 48
----------------------------------------------------------
18.10 Holidays................................................... 48
----------------------------------------------------------
18.11 Law Governing.............................................. 48
----------------------------------------------------------
18.12 Integration................................................ 48
----------------------------------------------------------
18.13 Exhibits and Schedules..................................... 48
----------------------------------------------------------
18.14 Headings................................................... 48
----------------------------------------------------------
18.15 Counterparts............................................... 48
----------------------------------------------------------
18.16 Waiver of Right to Trial by Jury........................... 48
---------------------------------------------------------
5
<PAGE>
SCHEDULES
---------
Schedule A Applicable Margin and Applicable Fee Definitions and
Determinations
Schedule B Pro Rata Percentages and Pro Rata Shares
Schedule 6.1 State of Incorporation of Borrower
Schedule 6.3 Pledges, etc. of Borrower
Schedule 6.4 Stock owned by Borrower
Schedule 6.7 Pending or Threatened Litigation or Proceedings Against or
Affecting Borrower
Schedule 6.14 Names (including trade names) and Addresses of Borrower
identifying chief executive offices
Schedule 6.16 Employee Pension Benefit Plan Obligations of Borrower
Schedule 6.18 Intellectual Property of Borrower
Schedule 7.2 Permitted Sale and Leaseback Transaction
Schedule 7.3 Permitted Indebtedness for Borrowed Money
Schedule 7.4 Permitted Investments and Loans
Schedule 7.9 Permitted Liens and Security Interests
Schedule 7.18 Permitted Affiliate Transactions
Schedule 9.2 Initial Budget - Borrower
EXHIBITS
--------
Exhibit "A" Form of Note
Exhibit "B" Form of Compliance Certificate
6
<PAGE>
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT (the "AGREEMENT") is made effective the ____ day of
June, 1998, among SPECIALTY PRODUCTS & INSULATION CO., a Pennsylvania
corporation ("SPI"), each of the Subsidiaries of SPI described on EXHIBIT "A"
-----------
attached hereto and made a part hereof (collectively, the "SPI SUBSIDIARIES")
MELLON BANK, N.A., a national banking association, in its capacity as agent
("AGENT"), and the financial institutions listed on SCHEDULE B attached hereto
----------
and made a part of this Agreement (as such Schedule may be amended, modified or
replaced from time to time), in their capacity as lenders (each a "LENDER" and
collectively the "LENDERS").
BACKGROUND
----------
A. SPI has requested that Lenders extend a certain credit facility to SPI
and the SPI Subsidiaries, which Lenders are willing to do on the terms set forth
herein.
B. Capitalized terms not otherwise defined herein will have the meanings
set forth therefor in SECTION 1 of this Agreement.
---------
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and of any extensions of credit now or hereafter made to or for the
benefit of SPI and the SPI Subsidiaries by Lenders, the parties hereto,
intending to be legally bound hereby, agree as follows:
1. DEFINITIONS.
- ---- -----------
The following words and phrases as used in capitalized form in this
Agreement, whether in the singular or plural, shall have the meanings indicated:
1.1 ACCOUNTING TERMS. As used in this Agreement, or any certificate, report or
- --- ----------------
other document made or delivered pursuant to this Agreement, accounting terms
not defined elsewhere in this Agreement shall have the respective meanings given
to them under GAAP.
1.2 "ACQUISITION DOCUMENTS" has such meaning as provided in SECTION 7.7.
- --- ----------------------- -----------
1.3 "ACQUISITION TRANSACTION" has such meaning as provided in SECTION 7.7.
- --- ------------------------- -----------
1.4 "ADJUSTED EBITDA" means Borrowers= actual EBITDA on a Consolidated Basis
- --- -----------------
for the applicable period plus the pro forma EBITDA for the subject of each
Permitted Acquisition provided that the Required Lenders have approved such pro
forma EBITDA and any adjustments from the actual or historical version thereof.
1.5 "ADVANCES" means any monies advanced or credit extended to Borrowers by any
- --- ----------
Lender under the Revolver, other than the face amount of all undrawn Letters of
Credit.
1.6 "AFFILIATE", as to any Person, means each other Person that directly or
- --- -----------
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, the Person in question.
<PAGE>
1.7 "APPLICABLE LC FEE" means the Applicable LC Fee determined by reference to
- --- -------------------
Borrowers' consolidated ratio of Indebtedness to EBITDA in accordance with
SCHEDULE A attached hereto. The Applicable LC Fee shall be determined initially
- ----------
as of the date hereof and shall remain in effect until delivery of a new
quarterly Compliance Certificate as required under SECTION 9.7 hereof.
-----------
1.8 "APPLICABLE USAGE FEE" means the Applicable Usage Fee determined by
- --- ----------------------
reference to Borrowers= consolidated ratio of Indebtedness to EBITDA in
accordance with SCHEDULE A attached hereto. The Applicable Usage Fee shall be
----------
determined initially as of the date hereof and shall remain in effect until
delivery of a new quarterly Compliance Certificate as required under SECTION 9.7
-----------
hereof. If the Compliance Certificate delivered by Borrowers for a quarter
indicates that the Applicable Usage Fee then in effect should be adjusted based
on the information contained in such Compliance Certificate, Agent shall adjust
the Applicable Usage Fee effective as of the first Business Day following
receipt of such Compliance Certificate.
1.9 "APPLICABLE MARGIN" means either the Applicable LIBOR Margin, the
- --- ------------------- -----------------------
Applicable Federal Funds Margin, or the Applicable Prime Margin, as applicable,
- ------------------------------- -----------------------
determined by reference to Borrowers= consolidated ratio of Indebtedness to
EBITDA in accordance with SCHEDULE A attached hereto. The Applicable Federal
---------- ------------------
Funds Margin, the Applicable LIBOR Margin and the Applicable Prime Margin shall
- ------------ ----------------------- -----------------------
each be determined initially as of the date hereof and such Applicable Margin
shall, except as hereinafter provided, remain in effect until delivery of a new
quarterly Compliance Certificate as required under SECTION 9.7 hereof. If the
-----------
Compliance Certificate delivered by Borrowers for a quarter then ended indicates
that any Applicable Margin then in effect should be adjusted based on the
information contained in such Compliance Certificate, Agent shall adjust the
Applicable Margin effective the first Business Day following receipt of such
Compliance Certificate. Should Borrowers fail to deliver to Agent any quarterly
Compliance Certificate when and as required under SECTION 9.7, Agent may, in its
-----------
discretion, immediately increase each Applicable Margin then in effect by one
quarter of one percent (1/4 of 1%).
1.10 "BORROWER" means each of SPI and any of the SPI Subsidiaries and
- ---- ----------
"BORROWERS" means all of them.
1.11 "BUSINESS DAY" means any day except a Saturday, Sunday or other day on
- ---- --------------
which commercial banks in the Commonwealth of Pennsylvania are authorized by law
to close.
1.12 "CAPITAL EXPENDITURES" means any expenditure that would be classified as a
- ---- ----------------------
capital expenditure on a consolidated statement of cash flow of Borrowers
prepared on a Consolidated Basis in accordance with GAAP.
1.13 "CAPITALIZED LEASES" means all lease obligations which have been or should
- ---- --------------------
be, in accordance with GAAP, capitalized on the books of the lessee.
1.14 "CAPITALIZED LEASE OBLIGATIONS" means all amounts payable with respect to
------------------------------
a Capitalized Lease.
2
<PAGE>
1.15 "COMMITMENT" means that certain commitment letter dated May 5, 1998 issued
- ---- ------------
by Mellon to SPI, as the same may have been amended.
1.16 "COMPLIANCE CERTIFICATE" has such meaning as provided in SECTION 9.7.
- ---- ------------------------ -----------
1.17 "CONSOLIDATED BASIS" means consolidated as to Borrowers and their
- ---- --------------------
Subsidiaries in accordance with GAAP.
1.18 "CORPORATION" means a corporation, limited liability company, partnership,
- ---- -------------
trust, unincorporated organization, association or joint stock company.
1.19 "CURRENT ASSETS" at a particular date means the aggregate amount of all
- ---- ----------------
assets of Borrowers and their subsidiaries on a Consolidated Basis which would
be classified as current assets on a consolidated balance sheet at such date, in
accordance with GAAP.
1.20 "CURRENT LIABILITIES" at a particular date means the liabilities
- ---- ---------------------
(including tax and other proper accruals) of Borrowers and their Subsidiaries on
a Consolidated Basis which would be included as current liabilities on a balance
sheet of Borrowers and their Subsidiaries on a Consolidated Basis at such date,
in accordance with GAAP, together with the outstanding principal balance under
the Revolver.
1.21 "DEFAULTING LENDER" shall have the meaning set forth in SECTION 2.5.
- ---- ------------------- -----------
1.22 "EBITDA" for any period, means the income of Borrowers and their
- ---- --------
Subsidiaries on a Consolidated Basis for such period, plus the aggregate amounts
deducted in determining such income in respect of (a) Interest Expense, (b)
income taxes for such period, (c) depreciation for such period, and (d)
amortization for such period; but excluding (i) extraordinary items such as
gains on sale of assets, (ii) earnings from discontinued businesses, and (iii)
any non-cash gains used in determining net income; all as determined in
accordance with GAAP.
1.23 "ENVIRONMENTAL AFFILIATE" means Obligors and any other Person for whom any
- ---- -------------------------
Obligor at any time has any liability (contingent or otherwise) with respect to
any claims arising out of the failure of such Obligor or such Person to comply
with all applicable Environmental Requirements.
1.24 "ENVIRONMENTAL CLEANUP SITE" shall mean any location which is listed or
---------------------------
proposed for listing on the National Priorities List, on CERCLIS or on any
similar state list of sites requiring investigation or cleanup, or which is the
subject of any pending or threatened action, suit, proceeding or investigation
related to or arising from any alleged violation of any Environmental
Requirements.
1.25 "ENVIRONMENTAL REQUIREMENTS" means any and all applicable federal, state
- ---- ----------------------------
or local laws, statutes, ordinances, regulations or standards, administrative or
court orders or decrees, common law doctrines or private agreements, relating
to (i) pollution or protection of the environment and natural resources, (ii)
exposure of employees or other Persons to Special Materials, (iii) protection of
the public health and welfare from the effects of Special Materials and their
by-products, wastes, emissions, discharges or releases, and (iv) regulation,
licensing, approval
3
<PAGE>
or authorization of the manufacture, generation, use, formulation, packaging,
labeling, transporting, distributing, handling, storing or disposing of any
Special Materials.
1.26 "EVENT OF DEFAULT" means each of the events specified in SECTION 13.1.
----------------- ------------
1.27 "FEDERAL FUNDS BASED PORTION" means at any time the part, including the
----------------------------
whole, of the unpaid principal amount of the Revolver bearing interest at such
time at the Federal Funds Based Rate.
1.28 "FEDERAL FUNDS BASED RATE" means the sum of (a) the Applicable Federal
-------------------------
Funds Margin, plus (b) the Federal Funds Effective Rate. The Federal Funds
Based Rate shall change automatically and simultaneously with any change in the
Federal Funds Effective Rate.
1.29 "FEDERAL FUNDS BASED RATE NOTIFICATION" means an irrevocable written
--------------------------------------
notice requesting the Federal Funds Based Rate which must be provided to Agent
prior to 11:00 a.m. Philadelphia time on the Business Day on which such rate is
requested to take effect, specifying:
1. the principal amount which is to accrue interest at such rate;
2. the date on which such rate is to take effect; and
3. whether such principal amount is a new Advance, a conversion from
another interest rate option or a combination thereof.
1.30 "FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a fluctuating
- ---- ------------------------------
interest rate per annum equal for each day during such period to the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve system arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of Philadelphia, or, if such rate is not so
published for any day which is a Business Day, the average of the quotations for
such day on such transactions received by Agent from three (3) federal funds
brokers of recognized standing selected by Agent.
1.31 "GAAP" means generally accepted accounting principles in the United States
- ---- ------
of America, in effect from time to time, consistently applied and maintained.
1.32 "GOOD BUSINESS DAY" means any Business Day when banks in London, England
- ---- -------------------
and Philadelphia, Pennsylvania are opened for business.
1.33 "INDEBTEDNESS", as applied to a Person, means all items (except items of
- ---- --------------
capital stock or of surplus) which in accordance with GAAP would be included in
determining total liabilities as shown on the liability side of a balance sheet
of such Person as at the date as of which Indebtedness is to be determined.
1.34 "INTEREST COVERAGE RATIO" means (a) the income of Borrowers and their
------------------------
Subsidiaries on a Consolidated Basis for such period (less extraordinary items
such as gains on
4
<PAGE>
sale of assets, earnings from discontinued business and any non-cash gains used
in determining net income), plus the aggregate amounts deducted in determining
such income in respect of (i) Interest Expense for such period and (ii) income
taxes for such period; divided by (b) Interest Expense for such period.
1.35 "INTEREST EXPENSE", as applied to Borrowers and their Subsidiaries on a
- ---- ------------------
Consolidated Basis, means for any period, the amount of interest paid on
Indebtedness by Borrower for such period, determined in accordance with GAAP.
1.36 "ISSUING BANK" means Mellon Bank, N.A. and/or such Lender or Lenders as
- ---- --------------
may, from time to time, be designated as an Issuing Bank by Agent.
1.37 "LENDER INDEBTEDNESS" shall mean all obligations and Indebtedness of
- ---- ---------------------
Borrowers, or any of them, or any other Obligor to any Lender, whether now or
hereafter owing or existing, including, without limitation, all obligations
under the Loan Documents, all obligations to reimburse any Lender for payments
made by any Lender pursuant to any Letter of Credit or any other letter of
credit issued for the account or benefit of any Borrower or any other Obligor by
such Lender, all other obligations or undertakings now or hereafter made by or
for the benefit of any Borrower or any other Obligor to or for the benefit of
any Lender under any other agreement, promissory note or undertaking now
existing or hereafter entered into by a Borrower or any other Obligor with any
Lender, including, without limitation, all obligations of a Borrower or any
other Obligor to any Lender under any guaranty, surety agreement or any swap,
collar or hedge agreement, and all obligations of a Borrower or any other
Obligor to immediately pay to any Lender the amount of any overdraft on any
deposit account maintained with such Lender, together with all interest and
other sums payable in connection with any of the foregoing.
1.38 "LETTER OF CREDIT ADVANCES" means letters of credit issued by the Issuing
- ---- ---------------------------
Bank for the account of a Borrower under the Revolver as provided in SECTION 2.4
-----------
hereof.
1.39 "LIBOR BASED RATE" for any day for any proposed or existing LIBOR Rate
- ---- ------------------
Portion of the Revolver corresponding to a Rate Period shall mean the sum of (a)
the Applicable LIBOR Margin plus (b) the per annum rate of interest determined
by Agent to be the rate per annum obtained by dividing (the resulting quotient
to be rounded upward to the nearest 1/100 of 1%) (i) the rate of interest (which
shall be the same for each day in such Rate Period) estimated in good faith by
Agent in accordance with its usual procedures and adjusted for any applicable
reserve requirements and/or regulatory assessments (which determination shall be
conclusive) to be the average of the rates per annum for deposits in United
States Dollars offered to major money center banks in the London interbank
market at approximately 11:00 a.m., London time, 2 Good Business Days prior to
the first day of such Rate Period for delivery on the first day of such Rate
Period in amounts comparable to such LIBOR Rate Portion (or, if there are no
such comparable amounts actively traded, the smallest amounts actively traded)
and having maturities comparable to such Rate Period, by (ii) a number equal to
1.00 minus the LIBOR Rate Reserve Percentage for such day.
1.40 "LIBOR RATE NOTIFICATION" means an irrevocable written notice requesting
- ---- -------------------------
the LIBOR Rate, which must be provided to Agent prior to 11:00 A.M. Philadelphia
time on a Business Day which is at least three (3) Good Business Days prior to
the date on which such rate is requested to take effect, specifying:
5
<PAGE>
1. The principal amount which is to accrue interest at such rate;
2. The date on which such rate is to take effect; and
3. Whether such principal amount is a new Advance, a conversion from
another interest rate, a renewal of another interest rate or a combination
thereof.
1.41 "LIBOR RATE PORTION" shall mean at any time the part, including the whole,
- ---- --------------------
of the unpaid principal amount of the Revolver bearing interest at such time at
the LIBOR Based Rate.
1.42 "LIBOR RATE RESERVE PERCENTAGE" for any day shall mean the percentage
- ---- -------------------------------
(rounded upward to the nearest 1/100 of 1%), as determined in good faith by
Agent (which determination shall be conclusive) as representing for such day the
maximum effective reserve requirement (including without limitation
supplemental, marginal and emergency requirements) for member banks of the
Federal Reserve System with respect to eurocurrency funding (currently referred
to as "Eurocurrency liabilities") of any maturity. Each LIBOR Based Rate shall
be adjusted automatically as of the effective date of any change in the LIBOR
Rate Reserve Percentage.
1.43 "LOAN DOCUMENTS" means this Agreement, the Notes, the letters of credit
- ---- ----------------
and applications delivered in connection with Letters of Credit issued
hereunder, the Commitment and all other documents executed or delivered by a
Borrower or any other Obligor pursuant to this Agreement, as any of them may be
amended from time to time.
1.44 "MAXIMUM AMOUNT" means Thirty Million Dollars ($30,000,000.00).
- ---- ----------------
1.45 "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
- ---- -------------------------
business, operations, property or condition (financial or otherwise) of
Borrowers taken as a whole, whether resulting from any event or occurrence of
any nature, including any adverse determination in any litigation, arbitration,
investigation or proceeding, or (b) the ability of Borrowers to timely pay the
Lender Indebtedness or perform any other obligations under the Loan Documents,
generally taken as a whole, or (c) the validity or enforceability of any of the
terms of this Agreement or any of the other Loan Documents.
1.46 "NET WORTH" shall mean, at any time, the book equity of Borrowers and
----------
their Subsidiaries on a Consolidated Basis as determined in accordance with
GAAP.
1.47 "MELLON" means Mellon Bank, N. A. in its capacity as a Lender under this
- ---- --------
Agreement.
1.48 "OBLIGOR" means Borrowers and any other Person which now or hereafter
- ---- ---------
becomes liable, directly or indirectly, for repayment of any of the Lender
Indebtedness or which now or hereafter pledges, assigns, or grants to Agent a
security interest in, as security for any Lender Indebtedness, any assets of
such Person.
1.49 "PERMITTED ACQUISITION" has such meaning as provided in SECTION 7.7.
- ---- ----------------------- -----------
6
<PAGE>
1.50 "PERSON" means an individual, a Corporation or a government or any agency
- ---- --------
or subdivision thereof, or any other entity.
1.51 "PRIME BASED RATE" means the sum of (a) the Applicable Prime Margin plus
- ---- ------------------
(b) the Prime Rate. The Prime Based Rate shall change automatically and
simultaneously with any change in the Prime Rate.
1.52 "PRIME BASED RATE NOTIFICATION" means an irrevocable written notice
- ---- -------------------------------
requesting the Prime Based Rate which must be provided to Agent prior to 11:00
A.M. Philadelphia time on the Business Day on which such rate is requested to
take effect, specifying:
1. The principal amount which is to accrue interest at such rate;
2. The date on which such rate is to take effect; and
3. Whether such principal amount is a new Advance, a conversion from
another interest rate option or a combination thereof.
1.53 "PRIME BASED PORTION" shall mean at any time the part, including the
- ---- ---------------------
whole, of the unpaid principal amount of the Revolver bearing interest at such
time at a Prime Based Rate.
1.54 "PRIME RATE" means the annual interest rate established from time to time
- ---- ------------
by Mellon and generally known by Mellon as its "prime rate," whether published
by it publicly or only for the internal guidance of its loan officers. The
prime rate is used merely as a pricing index and is not and should not be
considered to represent the lowest or best rate available to a borrower. The
Prime Rate shall change automatically and simultaneously with any change in
Mellon=s prime rate.
1.55 "PRO RATA PERCENTAGE" means, as to each Lender, the percentage set forth
- ---- ---------------------
next to such Lender's name on SCHEDULE B hereto.
----------
1.56 "PRO RATA SHARE" means, as to each Lender, the amount set forth next to
- ---- ----------------
such Lender's name on SCHEDULE B hereto.
----------
1.57 "RATE PERIOD" shall mean for any portion of the Revolver for which the
- ---- -------------
Borrowers elect the LIBOR Based Rate, the period of time for which such rate
shall apply to such principal portions. The Rate Period for the LIBOR Based
Rate shall be for periods of one, two, three, four or six months.
1.58 "REIMBURSEMENT OBLIGATION" means the obligation of Borrowers to reimburse
- ---- --------------------------
the Issuing Bank and the Lenders on account of any drawing under any Letter of
Credit.
1.59 "REQUIRED LENDERS" means, at any time, Lenders holding Pro Rata Shares
- ---- ------------------
aggregating at least sixty-six and two-thirds percent (66 2/3%) of the then
outstanding principal balance of the Revolver.
7
<PAGE>
1.60 "SPECIAL MATERIALS" means any and all materials which, under Environmental
- ---- -------------------
Requirements, require special handling in use, generation, collection, storage,
treatment or disposal, or payment of costs associated with responding to the
lawful directives of any court or agency of competent jurisdiction. Special
Materials shall include, without limitation: (i) any flammable substance,
explosive, radioactive material, hazardous materials, hazardous waste, toxic
substance, solid waste, pollutant, contaminant or any by-product of any
substance specified in or regulated by any Environmental Requirements (including
but not limited to any "hazardous substance" as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as amended or any
similar applicable state or local law), (ii) any toxic chemical or other toxic
substance from or related to industrial, commercial or institutional activities,
and (iii) asbestos, gasoline, diesel fuel, motor oil, waste and used oil,
heating oil and other petroleum products or compounds, polychlorinated
biphenyls, radon, urea formaldehyde and lead-containing materials.
1.61 "SUBSIDIARY" means a Person (a) which is organized under the laws of the
- ---- ------------
United States or any State thereof, or any other county or jurisdiction, and
(b) of which more than fifty percent (50%) of its outstanding voting stock of
every class (or other voting equity interest) is owned by a Borrower or one or
more of its Subsidiaries.
1.62 "TANGIBLE NET WORTH" shall mean, at any time, the amount by which all
-------------------
assets of Borrowers and their Subsidiaries on a Consolidated Basis, excluding
intangible assets, as that term would be defined under GAAP, exceed all
liabilities of Borrowers and their Subsidiaries on a Consolidated Basis, as
would be shown on a consolidated balance sheet of Borrowers and their
Subsidiaries prepared as of such date in accordance with GAAP.
2. THE REVOLVER; USE OF PROCEEDS.
- ---- -----------------------------
2.1 REVOLVING CREDIT.
- --- ----------------
1. Subject to the terms and conditions contained herein, each Lender will
establish for Borrowers for and during the period from the date hereof and until
June 30, 2002 (the "CONTRACT PERIOD"), a revolving credit facility (all such
revolving credit facilities shall be collectively referred to as the "REVOLVER")
pursuant to which Lenders will, from time to time, in accordance with their
respective Pro Rata Percentage, severally and not jointly, make Advances to
Borrowers in an aggregate amount not exceeding at any time the Maximum Amount
less the aggregate face amount of all Letter of Credit Advances. Within the
limitations set forth above, Borrowers may borrow, repay and reborrow under the
Revolver. The Revolver shall be subject to all terms and conditions set forth
in all of the Loan Documents, which terms and conditions are incorporated
herein. Borrowers' obligation to repay the Advances and all sums at any time
payable by Borrowers in connection with any letter of Credit Advances shall be
the joint and several obligation of each Borrower and shall be evidenced by
Borrowers' joint and several promissory notes (collectively, the "NOTES" and
individually a "NOTE") delivered to each Lender, which shall be in the
respective principal amounts of each Lender's Pro Rata Share and which shall be
in the form attached hereto as EXHIBIT "A", with the blanks appropriately filled
-----------
in.
8
<PAGE>
2. Subject to the terms and conditions of this Agreement, each Lender agrees to
lend to Borrowers an amount equal to such Lender's respective Pro Rata
Percentage of each Advance requested by Borrowers. The outstanding amount of
Advances by each Lender shall not exceed such Lender's Pro Rata Share (as such
amount may change from time to time in accordance with the terms of this
Agreement).
2.2 USE OF PROCEEDS. Borrowers agree to use Advances under the Revolver for
- --- ---------------
working capital purposes, including the finance of Permitted Acquisitions and
Capital Expenditures permitted herein.
2.3 METHOD OF ADVANCES.
- --- ------------------
1. On any Business Day, SPI may request an Advance for Borrowers by delivering
to the officer designated by Agent such request and back-up documentation as
Agent may from time to time require. Subject to the terms and conditions of
this Agreement, Agent may make the proceeds of a cash Advance available to
Borrowers by crediting or transferring, as the case may be, such proceeds to
SPI=s operating account with Agent. Each request for an Advance shall be
conclusively presumed to be made by a Person authorized by Borrowers to do so.
However, Agent may require that specified officers of SPI sign, make or confirm
any Advance request.
2. All Advances requested by Borrowers to bear interest at the Prime Based Rate
or the Federal Funds Based Rate must be requested by 11:00 A.M., Philadelphia
time, on the date such Advance is to be made. All Advances requested by
Borrowers to bear interest at the LIBOR Based Rate, or conversions of Advances
subject to the Prime Based Rate or the Federal Funds Based Rate to the LIBOR
Based Rate, must be requested by 11:00 A.M., Philadelphia time, three (3) Good
Business Days prior to the date such Advance is to be made or converted.
2.4 LETTER OF CREDIT ADVANCES.
- --- -------------------------
1. Letters of Credit. Subject to the terms and conditions contained herein,
- -- -----------------
Issuing Bank shall issue for the account of Borrowers under the Revolver standby
letters of credit (each a "LETTER OF CREDIT"). All Letters of Credit shall be
in form and content satisfactory to Issuing Bank, at its sole discretion, with a
term not to exceed the earlier to occur of (i) twelve (12) months, or (ii) the
expiration date of the Contract Period. Notwithstanding the foregoing, (1) at no
time shall the aggregate face amount of all outstanding Letters of Credit exceed
the amount of One Million Dollars ($1,000,000.00); and (2) at no time shall the
outstanding principal balance of the Revolver, plus the aggregate face amount of
all outstanding Letter of Credit, exceed the Maximum Amount.
2. Letter of Credit Documents. Borrowers will execute a Letter of Credit
- -- --------------------------
application and Letter of Credit agreement, and such other documents as may be
required by Issuing Bank in connection with the issuance of Letters of Credit
hereunder. The outstanding face amount of all Letters of Credit issued pursuant
hereto will reduce Borrowers= ability to borrow under the Revolver as if such
face amount were a cash Advance under the Revolver. In the event that Issuing
Bank pays any sums due pursuant to such Letters of Credit for any reason, such
payment shall be deemed to be an Advance under the Revolver repayable by
Borrowers pursuant to the terms hereof.
9
<PAGE>
3. Participation. Immediately upon the issuance of any Letter of Credit, and
- -- -------------
without further action on the part of Issuing Bank or any of the Lenders,
Issuing Bank is deemed to have granted to each Lender, and each Lender is deemed
to have acquired from Issuing Bank, an undivided participating interest (without
recourse to or warranty by Issuing Bank), in accordance with each such Lender's
respective Pro Rata Percentage, in all of Issuing Bank's rights and liabilities
with respect to such Letter of Credit. Each Lender shall be directly and
unconditionally obligated without deduction or setoff of any kind, and without
regard to the occurrence of an Event of Default, to Issuing Bank, according to
each Lender=s Pro Rata Percentage, to reimburse Issuing Bank for draws honored
or paid by Issuing Bank at any time (including, without limitation, following
commencement of any bankruptcy, reorganization, receivership or dissolution
proceeding with respect to any Borrower) under any Letter of Credit.
4. Reimbursement Obligation. In order to induce the Issuing Bank to issue,
- -- ------------------------
extend and renew any Letter of Credit, each Borrower hereby agrees, jointly and
severally, to reimburse or pay to the Issuing Bank, for the account of the
Issuing Bank or (as the case may be) the Lenders, with respect to each such
Letter of Credit for the account of any Borrower issued, extended or renewed by
the Issuing Bank hereunder as follows:
1. on each date that any draft presented under any such Letter of Credit is
honored by the Issuing Bank or the Issuing Bank otherwise makes payment with
respect thereto, (A) the amount paid by the Issuing Bank under or with respect
to such Letter of Credit, and (B) the amount of any taxes, fees, charges or
other costs and expenses whatsoever incurred by the Issuing Bank in connection
with any payment made by the Issuing Bank under, or with respect to, such Letter
of Credit; and
2. upon the expiration of the Contract Period, termination of the Revolver or
demand for payment thereof, an amount equal to 105% of the then aggregate face
amount of all outstanding Letters of Credit issued hereunder for the account of
a Borrower, which amount shall be held by the Issuing Bank as cash collateral
for all Reimbursement Obligations, or Borrowers shall deliver to Agent for the
benefit of Lenders such other security for the Reimbursement Obligation as the
Issuing Bank and the Required Lenders shall reasonably require.
Each such payment shall be made to the Issuing Bank at its head office in
immediately available funds. Interest on any and all amounts remaining unpaid by
the Borrowers under this SECTION 2.4 at any time from the date such amounts
-----------
become due and payable (whether as stated in this SECTION 2.4, by acceleration
-----------
or otherwise) until payment in full (whether before acceleration or otherwise)
until payment in full (whether before or after judgment) shall be payable to the
Issuing Bank, for the account of Issuing Bank or (as the case may be) the
Lenders, on demand at the Default Rate.
5. Letter of Credit Payments. If any draft shall be presented or other demand
- -- -------------------------
for payment shall be made under any Letter of Credit, the Issuing Bank shall
notify the Borrowers of the date and amount of the draft presented or demand for
payment and of the date and time when it expects to pay such draft or honor such
demand for payment, but the failure to provide such notice shall not affect
Borrowers= Reimbursement
10
<PAGE>
Obligation. The responsibility of the Issuing Bank to the Borrowers shall be
only to determine that the documents (including each draft) delivered under such
Letter of Credit in connection with such presentment shall be in conformity in
all material respects with such Letter of Credit. After the date that such draft
is paid or other payment is made by the Issuing Bank, the Issuing Bank shall
promptly notify the Lenders of the amount of any unpaid Reimbursement
Obligation. All such unpaid Reimbursement Obligations with respect to Letters of
Credit shall be deemed to be Advances. No later than 1:00 p.m. (Philadelphia
time) on the Business Day next following the receipt of such notice, each Lender
shall make available to the Agent, at the Agent=s head office, in immediately
available funds, such Lender=s Pro Rata Percentage of such unpaid Reimbursement
Obligations, together with an amount equal to the product of (i) the average,
computed for the period referred to in clause (iii) below, of the weighted
average interest rate paid by the Agent for federal funds acquired by the Agent
during each day included in such period, times (iii) a fraction, the numerator
-----
of which is the number of days that have elapsed from and including the date the
Issuing Bank paid the draft presented for honor or otherwise made payment until
the date on which such Lender=s Pro Rata Percentage of such unpaid Reimbursement
Obligation shall become immediately available to the Agent, and the denominator
of which is 360.
6. Obligations Absolute.
- -- --------------------
1. The Borrowers= Reimbursement Obligations shall be absolute and unconditional
under any and all circumstances and irrespective of the occurrence of any Event
of Default or any condition precedent whatsoever or any set-off, counterclaim or
defense to payment which Borrowers may have or have had against the Issuing
Bank, the Agent, the Lenders or any beneficiary of a Letter of Credit. Each
Borrower further agrees that the Issuing Bank, the Agent and the Lenders shall
not be responsible for, and Borrowers= Reimbursement Obligations shall not be
affected by, among other things, the validity or genuineness of documents or of
any endorsements thereon, even if such documents should in fact prove to be in
any or all respects invalid, fraudulent or forged, or any dispute between or
among Borrowers, the beneficiary of any Letter of Credit or any financing
institution or other party to which any Letter of Credit may be transferred or
any claims or defenses whatsoever of any Borrower, against the beneficiary of
any Letter of Credit.
2. The Issuing Bank, the Agent and the Lenders shall not be liable for any
error, omission, interruption or delay in transmission, dispatch or delivery of
any message or advice, however transmitted, in connection with any Letter of
Credit issued under this Agreement. Each Borrower agrees that any action taken
or omitted by the Issuing Bank, the Agent or the Lenders under or in connection
with each such Letter of Credit and the related drafts and documents, if done in
good faith, shall be binding upon such Borrower and shall not result in any
liability on the part of the Issuing Bank, the Agent or the Lenders to such
Borrower.
7. Reliance by the Issuing Bank and the Agent. The Issuing Bank and the Agent
- -- ------------------------------------------
shall be entitled to rely, and shall be fully protected in relying upon, any
Letter of Credit, draft, writing, resolution, notice, consent, certificate,
affidavit, letter,
11
<PAGE>
cablegram, telegram, telecopy, telex or teletype message, statement, order or
other document believed by it to be genuine and correct and to have been signed,
sent or made by the proper Person or Persons and upon advice and statements of
legal counsel, independent accountants and other experts selected by the Issuing
Bank or the Agent.
2.5 SETTLEMENT AMONG LENDERS.
- --- ------------------------
1. Between each Settlement Date (as hereinafter defined), Agent shall have the
discretion to request that Issuing Bank issue all Letters of Credit and that
Mellon make all Advances for the account and on behalf of the Lenders, and
Mellon or Issuing Bank may, in their sole discretion, cause such issuance and/or
make such Advances. Agent shall make a determination of each Lender's Pro Rata
Share of the Revolver (by applying each Lender's Pro Rata Percentage to the
total outstanding Advances) periodically but not less frequently than once every
week on the same day of each week, unless such day is not a Business Day, in
which event such determination shall be made the next Business Day ("SETTLEMENT
DATE"), which outstanding amount shall be calculated as of the close of the
Business Day immediately preceding each respective Settlement Date. A
Settlement Date shall occur notwithstanding any intervening Event of Default or
other occurrence, event or circumstance, including without limitation the
commencement of a bankruptcy or reorganization proceeding. Amounts of principal
paid to Agent by Borrowers from time to time shall, between Settlement Dates, be
applied to Mellon=s Pro Rata Share of the Advances, with each other Lender's
respective Pro Rata Share of the Advances to be adjusted on the next Settlement
Date. Interest shall accrue and each Lender shall be entitled to receive
interest from Borrowers at the applicable rate on the outstanding dollar amount
of the Revolver actually funded by such Lender. Agent shall then promptly issue
to each Lender a settlement schedule containing information with respect to the
status of the Advances and the relevant net positions of the Lenders and their
outstanding Pro Rata Share of the Advances as of the close of the Business Day
preceding such Settlement Date. Each settlement schedule shall show the amount,
if any, due from each Lender to Agent (for its own account or on behalf of
Mellon) or from Agent to each Lender, which amount shall be paid by federal
funds, via wire transfer to the party entitled thereto to be received on or
before (i) 3:00 P.M. Philadelphia time on the Settlement Date, provided such
settlement schedule has been delivered prior to 11:00 A.M. Philadelphia time on
the Settlement Date, or (ii) 11:00 A.M. on the next Business Day if such
settlement schedule has been delivered after 11:00 A.M. Philadelphia time on the
Settlement Date. The obligations of Lenders under this SECTION 2.5 are
-----------
unconditional, not subject to setoff, irrevocable and may not be terminated at
any time.
2. Each Lender is absolutely and unconditionally obligated, without setoff or
deduction of any kind, to remit to Agent on the Settlement Date any amount
showing to be owing to Agent or Mellon by such Lender on the settlement schedule
for such date. Agent and/or Mellon shall also be entitled to recover any and
all actual losses and damages either may incur (including without limitation,
reasonable attorneys' fees) from any Lender failing to remit payment on the
Settlement Date in accordance with this Agreement. Agent may set off the
obligations of such Lender under this paragraph against any distributions or
payments of the Lender Indebtedness to which such Lender would otherwise be
entitled at any time or Agent may withhold such distributions or payments of
such Lender Indebtedness to which such Lender would otherwise be entitled and
make such distributions or payments to Mellon in an amount equal to, and as a
repayment of,
12
<PAGE>
such Lender's Pro Rata Percentage of the Advances made by Mellon on such
Lender's behalf.
3. Except for Advances made by Mellon as provided under SUBPARAGRAPH (A) above,
----------------
Agent shall provide the Lenders with notice that Borrowers have requested an
Advance and whether such Advance shall be subject to the Prime Based Rate, the
Federal Funds Based Rate or the LIBOR Based Rate, on the same Business Day as
such request, and request each Lender to provide Agent with such Lender's Pro
Rata Percentage of such requested Advance prior to Agent's making such Advance.
Upon receipt of such notice from Agent prior to 12:00 P.M., Philadelphia time,
on the date the Advance is requested, each Lender shall remit to Agent its
respective Pro Rata Percentage of such requested Advance, prior to 2:00 P.M.
Philadelphia time, on the Business Day Agent is scheduled to make such Advance.
Neither Agent nor any other Lender shall be obligated, for any reason
whatsoever, to remit the share of any other Lender. Agent shall not be required
to make the full amount of the requested Advance unless and until it receives
funds representing each other Lender's Pro Rata Percentage of such requested
Advance, but Agent shall remit to Borrowers that portion of the requested
Advance equal to the Pro Rata Percentages of such requested Advance which it has
received from the Lenders.
4. If Agent does not receive each other Lender's Pro Rata Percentage of such
requested Advance, and Agent elects, in its sole discretion, without any
obligation at any time to do so, to make the requested Advance on behalf of
Lenders, or any of them, Agent shall be entitled to receive each Lender's Pro
Rata Percentage of each Advance, together with interest at a per annum rate
equal to the applicable interest rate set forth in SECTION 3.1 below for such
-----------
Advance during the period commencing on the date such Advance is made and ending
on (but excluding) the date Agent recovers such amount. Each Lender is
absolutely and unconditionally obligated, without deduction or setoff of any
kind, to forward to Agent its Pro Rata Percentage of each Advance made pursuant
to the terms of this Agreement. To the extent Agent is not reimbursed by such
Lender, Borrowers shall repay Agent immediately on demand, such amount. Agent
shall also be entitled to recover any and all actual losses and damages
(including, without limitation, reasonable attorneys' fees) from any Lender
failing to remit upon demand of Agent. Agent may set off the obligations of a
Lender under this paragraph against any distributions or payments of the Lender
Indebtedness which Agent would otherwise make available to such Lender at any
time. Notwithstanding the foregoing, Agent shall have no duty or obligation at
any time for any reason to make any Advance on behalf of any Lender.
5. To the extent and during the time period in which any Lender fails to
provide or delays providing its respective payment to Agent pursuant to this
SECTION 2.5 (any such Lender being referred to, during such period, as a
- -----------
"DEFAULTING LENDER"), such Lender's percentage of all payments of the Lender
Indebtedness (but not its Pro Rata Percentage of future Loans required to be
funded by such Lender) shall decrease to reflect the actual percentage which its
actual outstanding Loans under the Revolver bears to the total outstanding Loans
under the Revolver of all Lenders. In addition, notwithstanding any definition
or other provision of this Agreement to the contrary, during any period in which
a Lender is a Defaulting Lender, all calculations for voting purposes among the
Lenders shall be made as if the Defaulting Lender were not a Lender and not a
party to this Agreement.
13
<PAGE>
3. INTEREST RATES.
---- --------------
3.1 INTEREST RATE OPTIONS. Provided that no Event of Default shall have
- --- ---------------------
occurred, interest on the unpaid principal balance of the Revolver will accrue
from the date of advance until final payment thereof, at a rate or rates
selected by Borrowers from one of the three (3) interest rate options set forth
below, subject to the restrictions and in accordance with the procedures set
forth in this Agreement:
1. the Prime Based Rate;
2. the Federal Funds Based Rate; or
3. the LIBOR Based Rate.
Subject to the limitations contained herein, any one or more of the foregoing
interest rate options may be in effect at the same time with respect to
different Advances.
2. REQUEST FOR PRIME BASED RATE. If Borrowers desire that the Prime Based Rate
- -- ----------------------------
shall apply to all or part of the principal balance under the Revolver, SPI
shall give Agent a Prime Based Rate Notification. Upon delivery by SPI to Agent
of a Prime Based Rate Notification, the principal balance under the Revolver
identified in such Prime Based Rate Notification shall accrue interest at the
Prime Based Rate as follows: (i) with respect to the principal amount of any new
Advance under the Revolver, from the date of such Advance until the effective
date of another interest rate chosen for such amount in accordance with the
terms of this Agreement; and/or (ii) with respect to the principal amount of any
portion of the Revolver outstanding and accruing interest at the LIBOR Based
Rate at the time of the Prime Based Rate Notification related to such principal
amount, from the expiration of the then current Rate Period related to such
principal amount until the effective date of another interest rate option chosen
for such amount in accordance with the terms of this Agreement; and/or (iii)
with respect to the principal amount of any portion of the Revolver outstanding
and accruing interest at the Federal Funds Based Rate at the time of the Prime
Based Rate Notification related to such principal amount, from the date set
forth in such Prime Based Rate Notification until the effective date of another
interest rate chosen for such principal amount in accordance with the terms of
this Agreement.
3. REQUEST FOR LIBOR BASED RATE. If the Borrowers desire that all or part of
- -- ----------------------------
the principal balance under the Revolver accrue interest at the LIBOR Based
Rate, SPI shall give Agent a LIBOR Based Rate Notification. Upon delivery by
SPI to Agent of a LIBOR Based Rate Notification, that portion of the principal
balance outstanding under the Revolver identified in such LIBOR Based Rate
Notification shall accrue interest at the LIBOR Based Rate as follows: (i) with
respect to the principal amount of any new Advance under the Revolver, from the
date of such Advance until the end of the Rate Period specified in such LIBOR
Based Rate Notification; and/or (ii) with respect to the principal amount of any
portion of the Revolver outstanding and accruing interest at another LIBOR Based
Rate at the time of the LIBOR Based Rate Notification related to such principal
amount, from the expiration of the then current Rate Period related to such
principal amount until the end of the Rate Period specified in such LIBOR
14
<PAGE>
Based Rate Notification; and/or (iii) with respect to all or any portion of the
principal amount of the Revolver outstanding and earning interest at the Prime
Based Rate or the Federal Funds Based Rate at the time of such LIBOR Based Rate
Notification, from the date set forth in such LIBOR Rate Notification until the
end of the Rate Period specified in such LIBOR Based Rate Notification.
4. REQUEST FOR FEDERAL FUNDS BASED RATE. If the Borrowers desire that the
- -- ------------------------------------
Federal Funds Based Rate shall apply to all or part of the principal balance
under the Revolver, SPI shall give Agent a Federal Funds Based Rate
Notification. Upon delivery by SPI to Agent of a Federal Funds Based Rate
Notification, the principal balance under the Revolver identified in such
Federal Funds Based Rate Notification shall accrue interest at the Federal Funds
Based Rate as follows: (i) with respect to the principal amount of any new
Advance under the Revolver, from the date of such Advance until the effective
date of another interest rate chosen for such amount in accordance with the
terms of this Agreement; and/or (ii) with respect to the principal amount of any
portion of the Revolver outstanding and accruing interest at the LIBOR Based
Rate at the time of the Federal Funds Based Rate Notification related to such
principal amount, from the expiration of the then current Rate Period related to
such principal amount until the effective date of another interest rate option
chosen for such amount in accordance with the terms of this Agreement; and/or
(iii) with respect to the principal amount of any portion of the Revolver
outstanding and accruing interest at the Prime Based Rate at the time of the
Federal Funds Based Rate Notification related to such principal amount, from the
date set forth in such Federal Funds Based Rate Notification until the effective
date of another interest rate chosen for such principal amount in accordance
with the terms of this Agreement.
5. CERTAIN PROVISIONS CONCERNING REVOLVER INTEREST RATES. Each Borrower
- -- ------------------------------------------------------
understands and agrees that: (i) subject to the provisions of this Agreement,
the interest rates set forth in SECTION 3.1 above may apply simultaneously to
-----------
different portions of the outstanding principal of the Revolver; (ii) the LIBOR
Based Rate may apply simultaneously to various portions of the outstanding
principal of the Revolver for various Rate Periods; (iii) the LIBOR Based Rate
applicable to any portion of the outstanding principal of the Revolver may be
different from the LIBOR Based Rate applicable to any other portion of the
outstanding principal of the Revolver; and (iv) Advances under the Revolver
accruing interest at the LIBOR Based Rate must be in increments of at least One
Million Dollars ($1,000,000.00).
6. LIBOR UNLAWFUL FOR A LENDER. In the event that, as a result of any changes
- -- ---------------------------
in applicable law or regulation or the interpretation thereof, it becomes
unlawful for a Lender to maintain or fund any Advances under the Revolver at the
LIBOR Based Rate, then such Lender shall immediately notify Agent who shall
immediately notify the other Lenders and Borrowers thereof and such Lender's
obligations to make, convert to, or maintain any Advances under the Revolver at
the LIBOR Based Rate shall be suspended until such time as such Lender may again
cause the LIBOR Based Rate to be applicable to its share of any Advances under
the Revolver and, until such time, such Lender's share of Advances under the
Revolver subject to the LIBOR Based Rate shall accrue interest at the Federal
Funds Based Rate. Promptly after becoming aware that it is no longer unlawful
for such Lender to maintain or fund Advances at the LIBOR Based
15
<PAGE>
Rate, such Lender shall notify Agent who will notify Borrowers and the other
Lenders thereof and such suspension shall cease to exist.
7. FALL BACK RATE. After expiration of any Rate Period, any principal portion
- -- --------------
of the Revolver corresponding to such Rate Period which has not been converted
or renewed in accordance with the terms of this Agreement shall accrue interest
automatically at the Federal Funds Based Rate from the date of expiration of
such Rate Period until paid in full, unless and until SPI requests a conversion
to the LIBOR Based Rate or the Prime Based Rate in accordance with the terms of
this Agreement.
8. LIBOR RATE UNASCERTAINABLE OR UNAVAILABLE. If, at any time, Agent shall
- -- -----------------------------------------
determine (which determination shall be conclusive) that the LIBOR Based Rate is
unavailable or that adequate means for ascertaining the LIBOR Based Rate do not
exist, Agent shall promptly notify Borrowers and Lenders of such determination.
Upon such determination, the right of Borrowers to select, maintain and/or
convert to the LIBOR Rate shall be suspended until notice from Agent to
Borrowers and Lenders that the LIBOR Based Rate is again available or
ascertainable and, until such time, the outstanding balance under the Revolver
shall accrue interest at the Federal Funds Based Rate or the Prime Based Rate,
at Borrowers= option.
3.2 DEFAULT INTEREST. Interest will accrue on the principal balance of the
- --- ----------------
Revolver after the occurrence of an Event of Default or expiration of the
Contract Period at a rate which is two percent (2%) in excess of the non-default
rate otherwise set forth above for the Revolver (the "DEFAULT RATE").
3.3 POST JUDGMENT INTEREST. Any judgment obtained for sums due hereunder or
- --- ----------------------
under the Loan Documents will accrue interest at the Default Rate until paid.
3.4 CALCULATION. Interest will be computed on the basis of a year of 360 days
- --- -----------
and paid for the actual number of days elapsed.
3.5 LIMITATION OF INTEREST TO MAXIMUM LAWFUL RATE. In no event will the rate
- --- ---------------------------------------------
of interest payable hereunder exceed the maximum rate of interest permitted to
be charged by applicable law (including the choice of law rules) and any
interest paid in excess of the permitted rate will be refunded to Borrowers.
Such refund will be made by application of the excessive amount of interest paid
against any sums outstanding hereunder and will be applied in such order as
Agent may determine. If the excessive amount of interest paid exceeds the sums
outstanding, the portion exceeding the sums outstanding will be refunded in cash
by Agent. Any such crediting or refunding will not cure or waive any default by
Borrowers. Borrowers agree, however, that in determining whether or not any
interest payable hereunder exceeds the highest rate permitted by law, any non-
principal payment, including without limitation prepayment fees and late
charges, will be deemed to the extent permitted by law to be an expense, fee,
premium or penalty rather than interest.
16
<PAGE>
4. PAYMENTS AND FEES.
---- -----------------
4.1 INTEREST PAYMENTS. Interest on Advances under the Revolver accruing at the
- --- -----------------
Prime Based Rate or the Federal Funds Based Rate will be due and payable monthly
on the first day of each calendar month commencing on the first day of the first
calendar month after the date hereof. Interest on Advances under the Revolver
accruing at the LIBOR Based Rate will be due an payable on the earlier to occur
of the (i) last day of the Rate Period corresponding to such portion of the
Revolver, or (ii) the ninetieth (90th) day after the date of advance to
Borrowers of such portion of the Revolver, or (iii) the expiration of the
Contract Period. With respect to Advances under the Revolver accruing interest
at the LIBOR Based Rate with a Rate Period in excess of 90 days, accrued
interest shall also be due on the last day of the Rate Period.
4.2 PRINCIPAL PAYMENTS. Borrowers will pay the outstanding principal balance
- --- ------------------
of the Revolver, together with any accrued and unpaid interest thereon, and any
other sums due pursuant to the terms hereof, ON DEMAND after the occurrence of
an Event of Default or after expiration of the Contract Period.
1.1
4.3 LETTER OF CREDIT FEES. For each issuance or renewal of a Letter of Credit,
- --- ---------------------
Borrowers will pay to Agent, for the pro rata benefit of Lenders in accordance
with their respective Pro Rata Percentage, an issuance or renewal fee in an
amount equal to the Applicable LC Fee per annum, (calculated at the time of
issuance of the Letter of Credit) of the face amount of such Letter of Credit,
payable quarterly in arrears. In addition, Borrowers shall pay to Issuing Bank
for its own account, such other fees and charges in connection with the
negotiation or cancellation of each Letter of Credit as may be customarily
charged by Issuing Bank. All Letter of Credit fees shall be computed on the
basis of a year of 360 days.
4.4 USAGE FEE. So long as the Revolver is outstanding and has not been
- --- ---------
terminated, and the Lender Indebtedness has not been satisfied in full,
Borrowers shall unconditionally pay to Agent, for the pro rata benefit of
Lenders in accordance with their respective Pro Rata Percentages, a fee equal to
the Applicable Usage Fee (on a per annum basis) of the daily unused portion of
the Revolver (which shall be calculated as the difference between the Maximum
Amount (or such greater amount if the Maximum Amount is ever increased or such
lesser amount if the Maximum Amount is ever decreased), minus the outstanding
Advances (including the face amount of all outstanding Letters of Credit) under
the Revolver at the close of business on the date such calculation is made),
which fee shall be computed on a quarterly basis in arrears and shall be due and
payable on the first day of each quarter commencing on October 1, 1998. The
foregoing fee shall be calculated on the basis of a year of 360 days and paid
for the actual number of days elapsed.
4.5 LATE CHARGE. In the event that Borrowers fail to pay any principal,
- --- -----------
interest or other fees or expenses payable hereunder for a period of at least
fifteen (15) days after the date such payment is first due, in addition to
paying such sums, Borrowers will pay to Agent, for the pro rata benefit of
Lenders in accordance with their respective Pro Rata Percentage, a late charge
equal to five percent (5%) of such past due payment as compensation for the
expenses incident to such past due payment.
4.6 TERMINATION OR REDUCTION OF REVOLVER. Borrowers may terminate the Revolver
- --- ------------------------------------
upon ninety (90) days prior written notice to Agent. Borrowers may permanently
17
<PAGE>
reduce the Maximum Amount in increments of not less than One Million Dollars
($1,000,000.00) upon thirty (30) days prior written notice to Agent. Except for
such fees as may be due to Banks under SECTIONS 4.10 OR 4.11, or as otherwise
---------------------
expressly provided herein, Borrowers may make payments of Advances under the
Revolver without prepayment fee or penalty.
4.7 PAYMENT METHOD. Each Borrower irrevocably authorizes Agent to debit all
- --- --------------
payments required to be made by Borrowers hereunder or under the Revolver on the
date due, from any deposit account maintained by such Borrower with Agent or to
make a Federal Funds Based Rate Advance under the Revolver to cover such
payments. Otherwise, Borrowers will be obligated to make such payments directly
to Agent. All payments are to be made in immediately available funds. If Agent
accepts payment in any other form, such payment shall not be deemed to have been
made until the funds comprising such payment have actually been received by or
made available to Agent payments made by Borrowers to Agent fulfill Borrowers=
obligation to make such payments to Lenders hereunder.
4.8 APPLICATION OF PAYMENTS. Subject to the terms and conditions of ARTICLE 14
- --- ----------------------- ----------
below, any and all payments on account of the Revolver will be applied to
accrued and unpaid interest, outstanding principal and other sums due hereunder
or under the Loan Documents, in such order as Agent, in its discretion, elects.
If Borrowers make a payment or payments and such payment or payments, or any
part thereof, are subsequently invalidated, declared to be fraudulent or
preferential, set aside or are required to be repaid to a trustee, receiver, or
any other person under any bankruptcy act, state or federal law, common law or
equitable cause, then to the extent of such payment or payments, the obligations
or part thereof hereunder intended to be satisfied shall be revived and
continued in full force and effect as if said payment or payments had not been
made.
4.9 LOAN ACCOUNT. Agent will open and maintain on its books a loan account
- --- ------------
(the "LOAN ACCOUNT") with respect to Loans made, repayments, prepayments, the
computation and payment of interest and fees and the computation and final
payment of all other amounts due and sums paid to Agent under this Agreement.
Except in the case of manifest error in computation, the Loan Account will be
conclusive and binding on the Borrowers as to the amount at any time due to
Lenders from Borrowers under this Agreement or the Notes.
4.10 INDEMNITY; LOSS OF MARGIN. Each Borrower will indemnify Agent and each
- ---- -------------------------
Lender against any loss or expense which Agent or such Lender sustains or incurs
as a consequence of an Event of Default, including, without limitation, any
failure of Borrowers to pay when due (at maturity, by acceleration or otherwise)
any principal, interest, fee or any other amount due under this Agreement or the
other Loan Documents. Each Lender will notify Agent if such Lender sustains or
incurs any such loss or expense and will provide Agent with a brief explanation
of the calculation of the amount thereof. If Agent or any Lender sustains or
incurs any such loss or expense Agent will from time to time notify Borrowers in
writing of the amount determined in good faith by the Agent or such Lender to be
necessary to indemnify Agent or such Lender for the loss or expense. Such
amount will be due and payable by Borrowers to Agent or such Lender within ten
(10) days after presentation by Agent to Borrowers of a statement setting forth
a brief explanation of the calculation of such amount, which statement shall be
conclusively deemed correct absent manifest error. Any amount payable to the
Agent or any Lender under this SECTION 4.10 will bear interest at the Default
------------
Rate (for the Federal Funds Based Rate) from the due date until paid, both
before and after judgment.
18
<PAGE>
In the event that any present or future law, rule, regulation, treaty or
official directive or the interpretation or application thereof by any central
bank, monetary authority or governmental authority, or the compliance with any
guideline or request of any central bank, monetary authority or governmental
authority (whether or not having the force of law):
1. subjects Agent or any Lender to any tax with respect to any amounts
payable under this Agreement or the other Loan Documents by Borrowers or
otherwise with respect to the transactions contemplated under this Agreement or
the other Loan Documents (except for taxes on the overall net income of Agent or
any Lender imposed by the United States of America or any political subdivision
thereof); or
2. imposes, modifies or deems applicable any deposit insurance, reserve,
special deposit, capital maintenance, capital adequacy, or similar requirement
against assets held by, or deposits in or for the account of, or loans or
advances or commitment to make loans or advances by, or Letters of Credit issued
or commitment to issue Letters of Credit by, the Agent or any Lender; or
3. imposes upon Agent or any Lender any other condition with respect to
advances or extensions of credit or the commitment to make advances or
extensions of credit under this Agreement,
and the result of any of the foregoing is to increase the costs of Agent or such
Lender, reduce the income receivable by Agent or such Lender or impose any
expense upon Agent or such Lender with respect to any advances or extensions of
credit or commitments to make advances or extensions of credit under this
Agreement, any Lender so affected shall notify Agent (and shall provide Agent
with a statement concerning such increase in cost, reduction in income or
additional expense) and Agent shall so notify Borrowers in writing that such
Lender or the Agent, as the case may be, has been so affected. Borrowers agree
to pay Agent or such Lender the amount of such increase in cost, reduction in
income or additional expense within ten (10) days after presentation by Agent of
a statement concerning such increase in cost, reduction in income or additional
expense. Such statement shall set forth a brief explanation of the amount and
Agent's or such Lender's calculation of the amount (in determining such amount
the Agent or such Lender may use any reasonable averaging and attribution
methods), which statement shall be conclusively deemed correct absent manifest
error. If the amount set forth in such statement is not paid within ten (10)
days after such presentation of such statement, interest will be payable on the
unpaid amount at the Default Rate (for the Federal Funds Based Rate) from the
due date until paid, both before and after judgment. Each Lender agrees not to
notify Agent of any such increased costs, reduced income or increased expense
unless such Lender is seeking reimbursement for such items from other borrowers
of such Lender.
4.11 INDEMNITY FOR LIBOR PORTION. Each Borrower shall indemnify Agent and each
- ---- ---------------------------
Lender against any loss or expense (including loss of margin) which Agent or any
Lender has sustained or incurred as a consequence of (a) payment, prepayment or
conversion of any LIBOR Based Rate Portion on a day other than the last day of
the corresponding Rate Period (whether or not any such payment is pursuant to
demand by Agent and whether or not any such payment, prepayment or conversion is
consented to by Agent, unless Agent shall have expressly waived such indemnity
in writing); or (b) attempt by Borrowers to revoke in whole or in part any
irrevocable LIBOR Based Rate Notification pursuant to this Agreement.
19
<PAGE>
If any such loss is sustained, Agent shall from time to time notify
Borrowers of the amount determined in good faith by Agent or such Lender, as the
case may be (which determination shall be conclusive), to be necessary to
indemnify Agent or such Lender, as the case may be, for such loss or expense.
Such amount shall be due and payable by Borrowers on demand.
4.12 TAXES.
- ---- -----
1. If any tax, charge or payment (collectively, a "TAX") is required by law of
any nation, state or political subdivision thereof to be withheld or deducted
from, or is otherwise payable by the Borrowers in connection with, any payment
due to Agent or any Lender under this Agreement or any of the Notes, the
Borrowers shall (i) withhold or deduct the amount of such Tax from such payment
and pay such Tax to the appropriate taxing authority in accordance with
applicable law, (ii) pay to the Agent or the Lenders, as applicable, such
additional amounts as may be necessary so that the net amount received by the
Agent and Lenders with respect to such payment, after withholding or deducting
all Taxes required to be withheld or deducted, is equal to the full amount
payable under this Agreement or any of the Notes, and (iii) within 30 days after
the day of such payment, furnish to the Agent the original or a certified copy
of a receipt for such Tax from the applicable taxing authority.
2. The Borrowers shall, promptly upon request by Agent or any Lender for the
payment thereof, pay to the Agent an amount equal to the sum of (i) all Taxes
(other than taxes as are imposed on each Lender=s net income, i.e "BANK TAXES")
payable by the Agent or any Lender with respect to any payment due to Agent or
any Lender under this Agreement or any Note and (ii) all Taxes (including Bank
Taxes) payable by the Agent or any Lender as a result of payments made by the
Borrowers or any Obligor (whether made to a taxing authority or to the Agent or
any Lender) pursuant hereto.
3.
1. Each Lender that is not a "United States person" (as such term is defined
in SECTION 7701(A)(30) of the Internal Revenue Code of 1986, as amended) shall
-------------------
submit, to the extent it may legally do so, to the Borrowers and the Agent on
or before the first date on which any payment is due to it under this Agreement
or which any payment is due to it under this Agreement or any of the Notes, two
duly completed and signed copies of either (A) Form 1001 of the United States
Internal Revenue Service entitling such Lender to a complete exemption from
withholding on all amounts to be received by such Lender pursuant to this
Agreement or any Note or (B) Form 4224 of the United States Internal Revenue
Service relating to all amounts to be received by such Lender pursuant to this
Agreement or any Note. Each such Lender shall, from time to time after
submitting either such form, submit, to the extent it may legally do so, to the
Borrowers and the Agent such additional duly completed and signed copies of one
or the other such forms (or such successor forms or other documents as shall be
adopted from time to time by the relevant United States taxing authorities) as
may be (A) requested in writing by the Borrowers or the Agent and (B)
appropriate under then current United States law or regulations to avoid or
reduce United States withholding taxes on payments in respect of all amounts to
20
<PAGE>
be received by such Lender pursuant to this Agreement or any Note. Upon the
requests of the Borrowers or the Agent, each Lender that is a United States
person shall submit to the Borrowers and the Agent a certificate to the effect
that it is such a United States person.
2. If any Lender determines that it is unable to submit to the Borrowers or the
Agent any form or certificate described in the preceding paragraph, or that it
is required to withdraw or cancel any such form or certificate, or that any
such form or certificate previously submitted has otherwise become ineffective
or inaccurate, such Lender shall promptly notify the Borrower and the Agent of
such fact.
3. The provisions of this SECTION 4.12 shall survive the termination of this
------------
Agreement and the payment of the Lender Indebtedness.
4.13 FEES TO AGENT. Borrowers shall pay when due all fees payable to Agent
- ---- -------------
under the Commitment.
5. COLLECTION OF RECEIVABLES
---- -------------------------
Each Borrower will collect its accounts receivable only in the ordinary
course of business. If requested by Agent at any time following the occurrence
of an Event of Default, each Borrower will notify all of its account debtors to
forward all accounts receivable collections owed to such Borrower to a lockbox
maintained by Agent, and will execute such lockbox agreements as may be required
by Agent and will pay to Agent, as applicable, all customary fees in connection
with such lockbox arrangement.
6. REPRESENTATIONS AND WARRANTIES.
---- ------------------------------
Borrowers represent and warrant as follows:
6.1 VALID ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each Borrower is a
- --- ---------------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of its state of incorporation as described on SCHEDULE 6.1, has full power
------------
and authority to execute, deliver and comply with the Loan Documents, and to
carry on its business as it is now being conducted and is duly licensed or
qualified as a foreign corporation in good standing under the laws of each other
jurisdiction in which the character or location of the properties owned by it or
the business transacted by it requires such licensing or qualification.
6.2 LICENSES. Borrowers and their respective employees, servants and agents
- --- --------
have all licenses, registrations, approvals and other authority as may be
necessary to enable them to own and operate their business and perform all
services and business which they have agreed to perform in any state,
municipality or other jurisdiction.
6.3 OWNERSHIP INTERESTS. Each SPI Subsidiary is a wholly owned subsidiary of
- --- -------------------
SPI. There are no pledges, proxies, voting trusts, powers of attorney or other
agreements affecting the ownership or voting rights of any stock, debentures,
options, warrants, bonds and
21
<PAGE>
other securities (debt and equity) of any Borrower except as set forth on
SCHEDULE 6.3 attached hereto.
- ------------
6.4 SUBSIDIARIES. Except as set forth on SCHEDULE 6.4 attached hereto, no
- --- ------------ ------------
Borrower owns all or any material part of the shares of stock or other equity
interests in any Person, directly or indirectly (by any Subsidiary or
otherwise).
6.5 FINANCIAL STATEMENTS. All financial statements (together with the related
- --- --------------------
notes and comments) of Borrowers previously delivered to Agent, are correct and
complete, fairly present the financial condition and the assets and liabilities
of Borrowers at such dates, and have been prepared in accordance with GAAP
(subject to year end adjustments, if applicable).
6.6 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. There has been no
- --- -------------------------------------------------
material adverse change in the financial condition of Borrowers since December
31, 1997.
6.7 PENDING LITIGATION OR PROCEEDINGS. Except as set forth on SCHEDULE 6.7
- --- --------------------------------- ------------
attached hereto, there are no judgments outstanding or actions, suits or
proceedings pending or, to the best of Borrowers= knowledge, threatened against
or affecting any Borrower, at law or in equity or before or by any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign.
6.8 DUE AUTHORIZATION; NO LEGAL RESTRICTIONS. The execution and delivery by
- --- ----------------------------------------
Borrowers of the Loan Documents, the consummation of the transactions
contemplated by the Loan Documents and the fulfillment and compliance with the
respective terms, conditions and provisions of the Loan Documents: (a) have been
duly authorized by all requisite corporate action of each Borrower, (b) will not
conflict with or result in a breach of, or constitute a default (or might, upon
the passage of time or the giving of notice or both, constitute a default)
under, any of the terms, conditions or provisions of any applicable statute,
law, rule, regulation or ordinance or any Borrower=s Certificate or Articles of
Incorporation, By-Laws or other governing agreements, or any indenture,
mortgage, loan or credit agreement or instrument to which a Borrower is a party
or by which it may be bound or affected, or any judgment or order of any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, and (c) will not result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon any
of the property or assets of any Borrower under the terms or provisions of any
such agreement or instrument.
6.9 ENFORCEABILITY. The Loan Documents have been duly executed by Borrowers
- --- --------------
and delivered to Agent and constitute legal, valid and binding obligations of
each Borrower, enforceable in accordance with their terms.
6.10 NO DEFAULT UNDER OTHER OBLIGATIONS, ORDERS OR GOVERNMENTAL REGULATIONS.
- ---- ----------------------------------------------------------------------
No Borrower is in violation of its Certificate or Articles of Incorporation or
other governing agreements, nor in default in the performance or observance of
any of its obligations, covenants or conditions contained in any indenture or
other agreement creating, evidencing or securing any Indebtedness or pursuant to
which any such Indebtedness is issued and no Borrower is in violation of or in
default under any other agreement or instrument or any judgment, decree, order,
statute, rule or governmental regulation, applicable to it or by which any of
its properties may be bound or affected.
22
<PAGE>
6.11 GOVERNMENTAL CONSENTS. No consent, approval or authorization of or
- ---- ---------------------
designation, declaration or filing with any governmental authority on the part
of a Borrower is required in connection with the execution, delivery or
performance by Borrowers of the Loan Documents or the consummation of the
transactions contemplated thereby.
6.12 TAXES. Each Borrower has filed all tax returns which it is required to
- ---- -----
file and has paid, or made provision for the payment of, all taxes which have or
may have become due pursuant to such returns or pursuant to any assessment
received by them. Such tax returns are complete and accurate in all respects.
No Borrower knows of any proposed additional assessment or basis for any
assessment of additional taxes.
6.13 TITLE TO PROPERTY. All assets and property of Borrowers are and will be
- ---- -----------------
owned by Borrowers free and clear of all liens and other encumbrances of any
kind (including liens or other encumbrances upon properties acquired or to be
acquired under conditional sales agreements or other title retention devices),
excepting only and those liens and encumbrances permitted under SECTION 7.9
-----------
below. Borrowers will defend their assets and property against any claims of
all Persons.
6.14 ADDRESSES. During the past five (5) years, no Borrower has been known by
- ---- ---------
any names (including trade names) other than those set forth in SCHEDULE 6.14
-------------
attached hereto and has not been located at any addresses other than those set
forth on SCHEDULE 6.14 attached hereto. All tangible property of Borrowers and
-------------
each Borrower=s books and records pertaining thereto will at all times be
located at the addresses set forth on SCHEDULE 6.14; or such other location
-------------
determined by Borrowers after prior notice to Agent. SCHEDULE 6.14 identifies
-------------
the chief executive office of each Borrower.
6.15 CURRENT COMPLIANCE. Borrowers are currently in compliance with all of the
- ---- ------------------
terms and conditions of the Loan Documents.
6.16 PENSION PLANS. Except as disclosed on SCHEDULE 6.16 hereto, (a) Borrowers
- ---- ------------- -------------
have no obligations with respect to any employee pension benefit plan ("PLAN")
(as such term is defined in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")), (b) no events, including, without limitation, any
"Reportable Event" or "Prohibited Transaction" (as those terms are defined under
ERISA), have occurred in connection with any Plan of any Borrower which might
constitute grounds for the termination of any such Plan by the Pension Benefit
Guaranty Corporation ("PBGC") or for the appointment by any United States
District Court of a trustee to administer any such Plan, (c) all of Borrowers=
Plans meet with the minimum funding standards of Section 302 of ERISA, and (d)
no Borrower has any existing liability to the PBGC. No Borrower is subject to
or bound to make contributions to any "multi-employer plan" as such term is
defined in Section 4001(a)(3) of ERISA.
6.17 LEASES AND CONTRACTS. Borrowers have complied with the provisions of all
- ---- --------------------
material leases, contracts or commitments of any kind (such as employment
agreements, collective bargaining agreements, powers of attorney, distribution
agreements, patent license agreements, contracts for future purchase or delivery
of goods or rendering of services, bonus, pension and retirement plans or
accrued vacation pay, insurance and welfare agreements) to which it is a party
and is not in default thereunder. To Borrowers= knowledge, no other party is in
default
23
<PAGE>
under any such leases, contracts or other commitments and no event has occurred
which, but for the giving of notice or the passage of time or both, would
constitute an event of default thereunder.
6.18 INTELLECTUAL PROPERTY. Each Borrower owns or possesses the irrevocable
- ---- ---------------------
right to use all of the patents, trademarks, service marks, trade names,
copyrights, licenses, franchises and permits and rights with respect to the
foregoing necessary to own and operate its properties and to carry on its
business as presently conducted and presently planned to be conducted without
conflict with the rights of others. SCHEDULE 6.18 sets forth an accurate list
-------------
and description of all patents, trademarks, service marks, trade names,
copyrights, licenses, franchises and permits and rights with respect to the
foregoing.
6.19 BUSINESS INTERRUPTIONS. Within five (5) years prior to the date hereof,
- ---- ----------------------
neither the business, assets nor operations of any Borrower has been materially
and adversely affected in any way by any casualty, strike, lockout, combination
of workers, order of the United States of America, or any state or local
government, or any political subdivision or agency thereof, or any order or law
of any foreign jurisdiction, directed against any Borrower. There are no
pending or threatened labor disputes, strikes, lockouts or similar occurrences
or grievances against the business being operated by any Borrower.
6.20 YEAR 2000 WARRANTY. All software developed by a Borrower and used by a
- ---- ------------------
Borrower (the "SOFTWARE") and all updates thereto will, and to the best
knowledge of Borrowers, all other software used by any Borrower ("OTHER
SOFTWARE") will, prior to December 1, 1999, correctly handle the change of the
century in a standard and compliant manner, including the year 2000 and beyond
as well as the leap year and the absence of leap year, and will operate
accurately in all respects with respect to date related operations. For
purposes of this Agreement, compliance with the foregoing shall mean that the
Software and the Other Software will operate and correctly process such that (i)
calculations using dates execute utilizing a four digit year, (ii) the Software
and Other Software functionality, including, but not limited to, entry, inquiry,
maintenance, update and display (whether on-line, batch or otherwise) shall
support four digit year processing, (iii) interfaces and reports shall support
four digit year processing, (iv) successful transition to the year 2000 using
the correct system date shall occur without human intervention, (v) after
transition to the year 2000, processing with a four digit year shall occur
without human intervention, (vi) all leap years shall be calculated correctly,
(vii) correct results shall be produced in forward and backward date
calculations spanning century boundaries, including the conversion of previous
years currently stored as two digits, and (viii) the Software and Other Software
complies with industry standards regarding the change of the century and year
2000 compliance.
6.21 ACCURACY OF REPRESENTATIONS AND WARRANTIES. No representation or warranty
- ---- ------------------------------------------
by Borrowers contained herein or in any certificate or other document furnished
by Borrowers pursuant hereto or in connection herewith fails to contain any
statement of material fact necessary to make such representation or warranty not
misleading in light of the circumstances under which it was made. There is no
fact which a Borrower knows and has not disclosed to Agent, which does or may
materially and adversely affect a Borrower or any of its operations.
6.22 INTERRELATEDNESS OF BORROWERS. The business operations of each Borrower
- ---- -----------------------------
are interrelated and complement one another, and such entities have a common
business purpose and common management. To permit their uninterrupted and
continuous operations, such entities now require and will from time to time
hereafter require funds and credit accommodations
24
<PAGE>
for general business purposes. The proceeds of advances under the Revolver and
other credit facilities extended hereunder will directly or indirectly benefit
each Borrower hereunder, severally and jointly, regardless of which Borrower
requests or receives part or all of the proceeds of such advances.
7. GENERAL COVENANTS.
---- -----------------
Borrowers will comply with the following:
7.1 PAYMENT OF PRINCIPAL, INTEREST AND OTHER AMOUNTS DUE. Borrowers will pay
- --- ----------------------------------------------------
when due all Lender Indebtedness and all other amounts payable by it hereunder.
7.2 LIMITATION ON SALE AND LEASEBACK. Except as described on SCHEDULE 7.2
- --- -------------------------------- ------------
attached hereto, no Borrower will enter into any arrangement whereby it will
sell or transfer any real property or improvements thereon or other fixed assets
owned by it and then or thereafter rent or lease as lessee such property,
improvements or assets or any part thereof, or other property which a Borrower
shall intend to use for substantially the same purposes as the property sold or
transferred.
7.3 LIMITATION ON INDEBTEDNESS. No Borrower will have at any time outstanding
- --- ---------------------------
to any Person any Indebtedness for borrowed money or any Indebtedness under
Capitalized Leases, or any outstanding letters of credit (except as issued
hereunder), except:
1. Indebtedness to Lenders as contemplated in this Agreement;
2. current accounts payable incurred in the ordinary course of a
Borrower=s business, accrued expenses and other current items arising out of
transactions (other than borrowings) in the ordinary course of its business;
3. existing Indebtedness for borrowed money and Capitalized Lease
Obligations described on SCHEDULE 7.3;
------------
4. future Indebtedness in an aggregate amount not to exceed
$1,000,000.00 outstanding at any time, provided, however, that such Indebtedness
-------- -------
shall consist of (i) purchase money Indebtedness; (ii) Capitalized Lease
Obligations; (iii) unsecured demand Indebtedness or with a maturity of less than
one year; and/or (iv) unsecured Indebtedness to a seller created in connection
with a Permitted Acquisition with a maturity of less than two years; and
5. up to $300,000 in indebtedness owing to First Union National Bank
under existing corporate credit card arrangements, provided that all such
Indebtedness to First Union National Bank shall be repaid and such arrangements
terminated on or before December 15, 1998 and, if replaced, replaced with a
similar arrangement with Mellon or another Lender.
Any of such existing permitted Indebtedness may not be refinanced or
replaced without the consent of the Agent.
25
<PAGE>
7.4 INVESTMENTS AND LOANS. No Borrower will have or make any investments in
- --- ---------------------
all or a material portion of the capital stock or securities of any Person, or
any loans, advances or extensions of credit to any Person, including, without
limitation, any additional investments in or loans to any Subsidiary, except:
1. Investments in direct or indirect obligations of, or obligations
unconditionally guaranteed by, the United States of America and maturing within
twelve (12) months from the date of acquisition;
2. Investments in commercial paper of Lenders or commercial paper rated
"Prime-1" by Moody's Investors Services or "A-1" by Standard & Poor's
Corporation, or with an equivalent rating by another rating agency of nationally
recognized standing, maturing within three hundred sixty-five (365) days from
the date of acquisition;
3. Certificates of deposit maturing within twelve (12) months from the
date of acquisition issued by a Lender;
4. Existing investments and loans listed on SCHEDULE 7.4 attached
------------
hereto; and
5. Investments arising directly as a result of a Permitted Acquisition
under SECTION 7.7.
-----------
7.5 GUARANTIES. No Borrower will directly or indirectly guarantee, endorse
- --- ----------
(other than for collection or deposit in the ordinary course of business),
discount, sell with recourse or for less than the face value or agree
(contingently or otherwise) to purchase or repurchase or otherwise acquire, or
otherwise become directly or indirectly liable for, or agree (contingently or
otherwise) to supply or advance funds (whether by loan, stock purchase, capital
contribution or otherwise) in respect of, any Indebtedness, obligations or
liabilities of any Person.
7.6 DISPOSITION OF ASSETS. No Borrower will sell, lease, transfer or otherwise
- --- ---------------------
dispose of all, substantially all, or any material portion of its property or
assets, except for sales of inventory in the ordinary course for fair
consideration.
7.7 MERGER; CONSOLIDATION; BUSINESS ACQUISITIONS; SUBSIDIARIES. No Borrower
- --- ----------------------------------------------------------
will merge into or consolidate with any Person, acquire any material portion of
the stock, ownership interests, assets or business of any Person, permit any
Person to merge into it or form any new Subsidiary (each of the foregoing being
referred to herein as an "ACQUISITION TRANSACTION"); provided, however, that a
-------- -------
Borrower may enter into or become a party to an Acquisition Transaction if each
of the following conditions are satisfied as determined by Agent:
1. no Event of Default exists and no Event of Default will, upon the
delivery of notice or passage of time, arise, directly or indirectly, as a
result of the consummation of the Acquisition Transaction;
2. the total consideration paid or to be paid by Borrowers (directly or
indirectly) in connection with any one Acquisition Transaction does not exceed
26
<PAGE>
$5,000,000 and the total consideration paid or to be paid by Borrowers in
connection with all such Acquisition Transactions in any one fiscal year does
not exceed $12,500,000;
3. If requested by Agent, Borrowers deliver to Agent and Lenders copies
of all purchase, merger, sale and other documents evidencing the Acquisition
Transaction (collectively the "ACQUISITION DOCUMENTS");
4. Borrowers deliver to Agent and Lenders financial statements, in form
acceptable to Agent, projecting that Borrowers shall, after giving effect to the
Acquisition Transaction, be in compliance with the financial covenants of
SECTION 8 hereof for each of the four (4) fiscal quarters following consummation
- ---------
of the Acquisition Transaction, together with such other information regarding
the Acquisition Transaction as Agent or any Lender may reasonably request;
5. If the Acquisition Transaction involves a merger with a Borrower, the
Borrower is the surviving entity;
6. The business activities of the Person being merged into or
consolidated with a Borrower, the new Subsidiary being formed or acquired and
the assets or business acquired, as applicable, in connection with the
Acquisition Transaction, solely involve the insulation/acoustical materials
industry or complementary building material industries. The determination of
whether an industry is complementary shall be subject to the approval of the
Required Lenders;
7. If the Acquisition Transaction involves the creation of a new
Subsidiary of a Borrower, at Agent=s request, such new Subsidiary becomes a co-
borrower hereunder and becomes jointly and severally liable for all Lender
Indebtedness;
8. Any new Subsidiary of a Borrower created or acquired as a result of
the Acquisition Transaction shall become subject to all terms and conditions of
this Agreement to the same extent as Borrowers, including, without limitation,
the limitations on Indebtedness of SECTION 7.3; and
-----------
9. Borrowers reimburse Agent for all out of pocket costs, fees and
expenses, including, without limitation, attorneys= fees, incurred by Agent in
the connection with the preparation and consummation of any amendments or
supplements to the Loan Documents required by Lenders in connection with any
Permitted Acquisition.
An Acquisition Transaction which satisfies all of the Acquisition Requirements
or which is approved by the Required Lenders in writing is referred to herein as
a "PERMITTED ACQUISITION."
7.8 TAXES; CLAIMS FOR LABOR AND MATERIALS. Borrowers will pay or cause to be
- --- -------------------------------------
paid when due all taxes, assessments, governmental charges or levies imposed
upon it or its income, profits, payroll or any property belonging to it,
including without limitation all withholding taxes, and all claims for labor,
materials and supplies which, if unpaid, might become a lien or charge upon any
of its properties or assets. No Borrower will file or consent to the filing of,
any consolidated income tax return with any Person other than a Subsidiary
thereof.
27
<PAGE>
7.9 LIENS. No Borrower will create, incur or permit to exist any mortgage,
- --- -----
pledge, encumbrance, lien, security interest or charge of any kind (including
liens or charges upon properties acquired or to be acquired under conditional
sales agreements or other title retention devices) on its property or assets,
whether now owned or hereafter acquired, or upon any income, profits or proceeds
therefrom, except:
1. Liens incurred or deposits made in the ordinary course of business
(i) in connection with worker's compensation, unemployment insurance, social
security and other like laws or (ii) to secure the performance of statutory
obligations, not incurred in connection with either (A) the borrowing of money
or (B) the deferred purchase price of goods or inventory;
2. Existing liens and security interests listed on SCHEDULE 7.9
------------
attached hereto; or
3. Purchase money liens or Capitalized Leases, provided that:
1. the property subject to any of the foregoing is acquired or
leased by a Borrower in the ordinary course of its business and the lien
on any such property is created contemporaneously with such acquisition;
2. purchase money Indebtedness or Capitalized Lease Obligations
so created shall not exceed the lesser of cost or fair market value as
of the time of acquisition or lease of the property covered thereby;
3. the purchase money Indebtedness or Capitalized Lease
Obligations shall only be secured by the property so acquired or leased;
and
4. the purchase money Indebtedness or Capitalized Lease
Obligations are permitted by the provisions of SECTION 7.3.
-----------
No Borrower shall enter into any agreement with any other Person which
shall prohibit such Borrower from granting, creating or suffering to exist, or
otherwise restrict in any way (whether by covenant, by identifying such event as
a default under such agreement or otherwise) the ability of such Borrower to
grant, create or suffer to exist, any lien, security interest or other charge or
encumbrance upon or with respect to any of its assets in favor of Agent for the
pro rata benefit of Lenders and Issuing Bank.
No Borrower will apply for or obtain any letters of credit for the payment
of or to secure the payment for any inventory or other assets to be acquired by
such Borrower, except Letters of Credit issued by Issuing Bank hereunder.
7.10 EXISTENCE; APPROVALS; QUALIFICATION; BUSINESS OPERATIONS; COMPLIANCE WITH
- ---- -------------------------------------------------------------------------
LAWS. Each Borrower will (a) obtain, preserve and keep in full force and effect
- ----
its separate corporate existence and all rights, licenses, registrations and
franchises necessary to the proper conduct of its business or affairs; (b)
qualify and remain qualified as a foreign corporation in each jurisdiction in
which the character or location of the properties owned by it or the business
transacted by it requires such qualification; (c) continue to operate its
business as presently operated and, except for complementary business lines (as
approved by the Required Lenders)
28
<PAGE>
acquired through a Permitted Acquisition, will not engage in any new businesses
without the prior written consent of Agent; and (d) comply with the requirements
of all applicable laws and all rules, regulations (including environmental
regulations) and orders of regulatory agencies and authorities having
jurisdiction over it.
7.11 MAINTENANCE OF PROPERTIES, INTELLECTUAL PROPERTY. Each Borrower will
- ---- ------------------------------------------------
maintain, preserve, protect and keep or cause to be maintained, preserved,
protected and kept its real and personal property used or useful in the conduct
of its business in good working order and condition, reasonable wear and tear
excepted, and will pay and discharge when due the cost of repairs to and
maintenance of the same.
1.1
With respect to any and all trademarks, registrations, copyrights, patents,
patent rights and applications for any of the foregoing, each Borrower shall
maintain and protect the same and shall take and assert any and all remedies
available to it to prevent any other Person from infringing upon or claiming any
interest in any such trademarks, registrations, copyrights, patents, patent
rights or application for any of the foregoing.
7.12 INSURANCE. Each Borrower will carry adequate insurance issued by an
- ---- ---------
insurer acceptable to Agent, in amounts acceptable to Agent (at least adequate
to comply with any co-insurance provisions) and against all such liability and
hazards as are usually carried by entities engaged in the same or a similar
business similarly situated or as may be required by Agent, and in addition,
will carry business interruption insurance in such amounts as may be required by
Agent.
Each Borrower shall cause to be delivered to Agent the insurance policies
therefor or in the alternative, evidence of insurance and at least thirty (30)
business days prior to the expiration of any such insurance, additional policies
or duplicates thereof or in the alternative, evidence of insurance evidencing
the renewal of such insurance and payment of the premiums therefor.
7.13 INSPECTIONS; EXAMINATIONS. Each Borrower hereby irrevocably authorizes
- ---- -------------------------
and directs all accountants and auditors employed by such Borrower at any time
to exhibit and deliver to Agent copies of any and all of such Borrower's
financial statements, trial balances or other accounting records of any sort in
the accountant's or auditor's possession and copies of all reports submitted to
such Borrower by such accountants or auditors, including management letters,
"comment" letters and audit reports, and to disclose to Agent any information
they may have concerning such Borrower's financial status and business
operations. Each Borrower further authorizes all federal, state and municipal
authorities to furnish to Agent copies of reports or examinations relating to
such Borrower, whether made by such Borrower or otherwise.
The officers of Lenders, or such Persons as any of them may designate, may
visit and inspect any of the properties of Borrowers, examine (either by
Lenders= respective employees or by independent accountants) any of the assets
of Borrowers, including the books of account of Borrowers, and discuss the
affairs, finances and accounts of Borrowers, with their respective officers and
with their respective independent accountants, at such times as Lender may
reasonably request.
Agent may conduct at any time and from time to time, and Borrowers will
fully cooperate with, field examinations of the inventory, accounts receivable
and business affairs of Borrowers. After the occurrence of an Event of Default
which has not been waived by Agent in writing,
29
<PAGE>
Borrowers shall reimburse Agent for all of Agent's out-of-pocket costs and per
diem expenses (in accordance with Agent's customary practices) incurred in
connection with any such examinations.
7.14 DEFAULT UNDER OTHER INDEBTEDNESS. No Borrower will permit any of its
- ---- --------------------------------
Indebtedness to be in default. If any Indebtedness of a Borrower is declared or
becomes due and payable before its expressed maturity by reason of default or
otherwise or to the knowledge of any Borrower, the holder of any such
Indebtedness shall have the right (or upon the giving of notice or the passage
of time, or both, shall have the right) to declare such Indebtedness to be so
due and payable, Borrowers will immediately give Agent written notice of such
declaration, acceleration or right of declaration.
7.15 PENSION PLANS. Each Borrower shall (a) keep in full force and effect any
- ---- -------------
and all Plans which are presently in existence or may, from time to time, come
into existence under ERISA, unless such Plans can be terminated without material
liability to such Borrower in connection with such termination (as distinguished
from any continuing funding obligation); (b) make contributions to all of such
Plans in a timely manner and in a sufficient amount to comply with the
requirements of ERISA; (c) comply with all material requirements of ERISA which
relate to such Plans so as to preclude the occurrence of any Reportable Event,
Prohibited Transaction or material "accumulated funding deficiency" as such term
is defined in ERISA; and (d) notify Agent immediately upon receipt by such
Borrower of any notice of the institution of any proceeding or other action
which may result in the termination of any Plan and deliver to Agent, promptly
after the filing or receipt thereof, copies of all reports or notices which such
Borrower files or receives under ERISA with or from the Internal Revenue
Service, the PBGC, or the U.S. Department of Labor.
7.16 BANK OF ACCOUNT. Each Borrower will maintain its primary operating
- ---- ----------------
accounts with Mellon. At Agent=s request, Borrowers will notify Agent in
writing of all deposit accounts and certificates of deposit maintained with or
purchased from any other financial institution.
7.17 MAINTENANCE OF MANAGEMENT. Each Borrower will cause its business to be
- ---- -------------------------
continuously managed by its present executive officers and senior management or
such other Persons (serving in such management positions) as may be reasonably
satisfactory to Agent.
7.18 TRANSACTIONS WITH AFFILIATES. Except as described on SCHEDULE 7.18
- ---- ---------------------------- -------------
attached hereto, no Borrower shall enter into or conduct any transaction with
any Affiliate except on terms that would be usual and customary in a similar
transaction between Persons not affiliated with each other and except as
disclosed to Agent. Borrower will not make any loans or extensions of credit to
any of its Affiliates, shareholders, directors or officers. Borrower will cause
all of its Indebtedness at any time owed to its Affiliates, shareholders,
directors and officers to be subordinated in all respects to all present and
future Lender Indebtedness and will not make any payments thereon, except as
approved by Agent in writing.
7.19 NAME OR ADDRESS CHANGE. No Borrower shall change its name or address
- ---- ----------------------
except upon thirty (30) days prior written notice to Agent.
7.20 NOTICES. Borrowers will promptly notify Agent of (a) any action or
- ---- -------
proceeding brought against any Borrower wherein such action or proceeding
could, if determined
30
<PAGE>
adversely to such Borrower, be reasonably expected to have a Material Adverse
Effect (b) the occurrence of any Event of Default, (c) any fact, condition or
event which, with the giving of notice or the passage of time or both, could
become an Event of Default, (d) the failure of a Borrower to observe any terms
or conditions applicable to it under the Loan Documents, or (e) the occurrence
of any event or circumstance which has, or is reasonably likely to have, a
Material Adverse Effect.
7.21 ADDITIONAL DOCUMENTS AND FUTURE ACTIONS. Borrowers will, at their cost,
- ---- ---------------------------------------
take such actions and provide Agent from time to time with such agreements and
additional instruments, documents or information as the Agent may in its
discretion deem necessary or advisable to further evidence or effect the terms
of the Loan Documents.
7.22 MATERIAL ADVERSE CONTRACTS. No Borrower will become or be a party to any
- ---- --------------------------
contract or agreement which has, or is reasonably likely to have, a Materially
Adverse Effect.
7.23 RESTRICTIONS ON USE OF PROCEEDS. No Borrower will carry or purchase with
- ---- -------------------------------
the proceeds of the Revolver any "margin security" within the meaning of
Regulations U, G, T or X of the Board of Governors of the Federal Reserve
System.
8. FINANCIAL COVENANTS.
---- -------------------
Borrowers will comply with the following:
8.1 INDEBTEDNESS TO ADJUSTED EBITDA. Borrowers and their Subsidiaries shall
- --- -------------------------------
maintain a ratio of consolidated Indebtedness to Adjusted EBITDA of not more
than 3.25 to 1.0 as of the end of each fiscal quarter for the twelve month
period then ended, commencing with the fiscal quarter ending ___________, 1998.
8.2 INDEBTEDNESS TO TANGIBLE NET WORTH. At all times when Borrowers= Net Worth
- --- ----------------------------------
is less than Twenty Million Dollars ($20,000,000.00), Borrowers shall maintain a
ratio of consolidated Indebtedness to Tangible Net Worth of not more than (i)
2.75 to 1.0 as of December 31, 1998 for the fiscal year then ended; (ii) 2.5 to
1.0 as of December 31, 1999 for the fiscal year then ended; and (iii) 2.0 to 1.0
as of December 31, 2000 for the fiscal year then ended and as of each fiscal
year end thereafter.
8.3 INTEREST COVERAGE RATIO. Borrowers shall maintain an Interest Coverage
- --- -----------------------
Ratio of not less than 2.0 to 1.0 as of the end of each fiscal quarter for the
twelve month period then ended, commencing on the fiscal quarter ending
___________, 1998.
8.4 CURRENT RATIO. Borrowers shall maintain a ratio of Current Assets to
- --- -------------
Current Liabilities of not less than 1.10 to 1.0 as of the end of each fiscal
quarter, commencing on the fiscal quarter ending ____________, 1998.
8.5 NET WORTH. Borrowers shall maintain Net Worth of not less than: (i)
- --- ---------
$____________ as of the end of each fiscal quarter commencing on ______________,
1998 and continuing through September 30, 1998; (ii) as of December 31, 1998, an
amount equal to the sum of (x) $__________ plus (y) if positive, 50% of
Borrowers= consolidated net income (as determined in accordance with GAAP), for
the year ended December 31, 1998; (iii) as of the end of each fiscal quarter
ending March 31, 1999, June 30, 1999 and September 30, 1999, an amount not less
31
<PAGE>
than the minimum Net Worth required as of December 31, 1998; (iv) as of December
31, 1999, an amount equal to the sum of (x) the minimum Net Worth required as of
March 31, 1999, plus (y) if positive, 50% of Borrowers= consolidated net income
for the year ended December 31, 1999 (as determined in accordance with GAAP);
and (v) as of the end of each fiscal quarter ending each March 31, 2000, June
30, 2000 and September 30, 2000, an amount not less than the minimum Net Worth
required as of December 31, 1999; (vi) as of December 31, 2000, an amount equal
to the sum of (x) the minimum Net Worth required as of March 31, 2000, plus (y)
if positive, 50% of Borrowers= consolidated net income for the year ending
December 31, 2000; (vii) as of the end of each fiscal quarter ending March 31,
2001, June 30, 2001 and September 30, 2001, an amount not less than the minimum
Net Worth required as of December 31, 2000; (viii) as of December 31, 2001, an
amount equal to the sum of (x) the minimum Net Worth required as of March 31,
2001, plus (y) if positive, 50% of Borrowers= consolidated net income for the
year ended December 31, 2001 (as determined in accordance with GAAP); and (ix)
as of the end of each fiscal quarter ending March 31, 2002 and thereafter, an
amount not less than the Minimum Net Worth required as of December 31, 2001.
8.6 CAPITAL EXPENDITURES. Borrowers shall not cause, suffer or permit their
- --- --------------------
annual Capital Expenditures to exceed Three Million Dollars ($3,000,000.00) in
any one fiscal year.
8.7 CHANGES TO FINANCIAL COVENANTS. The Lenders may condition extension of the
- --- ------------------------------
Revolver beyond the Contract Period upon revision of the foregoing financial
covenants.
1.1
9. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS.
- ---- ----------------------------------------------------
Borrowers will maintain books of record and account in which full, correct
and current entries in accordance with GAAP will be made of all of their
dealings, business and affairs, and Borrowers will deliver to Agent and Lenders
the following:
9.1 ANNUAL STATEMENTS. As soon as available and in any event within ninety
- --- -----------------
(90) days after the end of each fiscal year of SPI:
1. the audited, consolidated and consolidating income and retained
earnings statements of Borrowers and their Subsidiaries for such fiscal year,
2. the audited, consolidated and consolidating balance sheet of
Borrowers and their Subsidiaries as at the end of such fiscal year, and
3. the audited, consolidated and consolidating statement of cash flow of
Borrowers and their Subsidiaries for such fiscal year,
setting forth in comparative form the corresponding figures as at the end of the
previous fiscal year, all in reasonable detail, including all supporting
schedules and comments, together with a copy of the SPI=s Form 10-K filed with
the Securities and Exchange Commission for such year. The foregoing statements
and balance sheets shall be prepared in accordance with GAAP and shall be
audited by independent certified public accountants of recognized standing
acceptable to Agent in the reasonable exercise of its discretion with respect to
which such accountants shall deliver their unqualified opinion.
32
<PAGE>
9.2 OPERATING AND CAPITAL BUDGET. As soon as available and in any event within
- --- ----------------------------
thirty (30) days after the end of each fiscal year of SPI, an operating and
capital budget for the Borrowers for the next succeeding twelve (12) months,
prepared by the chief financial officer of SPI. Borrowers have furnished to
Lenders an initial operating and capital budget dated as of the date hereof and
attached hereto as SCHEDULE 9.2 containing the information required by this
------------
SECTION 9.2. Borrowers represent and covenant that (a) the initial budget
- -----------
attached hereto has been and all budgets required by this SECTION 9.2 shall be
-----------
prepared by the chief financial officer of SPI and represent, and in the future
shall represent, the best available good faith estimate of Borrowers regarding
the course of the business of Borrowers for the periods covered thereby; (b) the
assumptions set forth in the initial budget are and the assumptions set forth in
the future budgets delivered hereafter shall be reasonable and realistic based
on then current economic conditions; (c) Borrowers know of no reason why
Borrowers should not be able to achieve the performance levels set forth in the
initial budgets, and Borrowers shall have no knowledge at the time of delivery
of future budgets of any reason why Borrowers shall not be able to meet the
performance levels set forth in said budgets; and (d) Borrower has sufficient
capital as may be required for its ongoing businesses and to pay its existing
and anticipated debts as they mature.
9.3 QUARTERLY STATEMENTS. As soon as available and in any event within sixty
- --- --------------------
(60) days after the end of each fiscal quarter of SPI:
1. the consolidated and consolidating income and retained earnings
statements of Borrowers and their Subsidiaries for such quarter;
2. the consolidated and consolidating balance sheet of Borrowers and
their Subsidiaries as of the end of such quarter; and
3. the consolidated and consolidating statement of cash flow of
Borrowers and their Subsidiaries for such quarter,
setting forth in corporative form the corresponding figures as at the end of the
corresponding quarter of the previous fiscal year, all in reasonable detail,
subject to year-end adjustments, and certified by the chief financial officer of
SPI to be accurate and to have been prepared in accordance with GAAP, together
with a copy of SPI=s Form 10-Q filed with the Securities and Exchange Commission
for such quarter.
9.4 AUDIT REPORTS. Promptly upon receipt thereof, one copy of each other
- --- -------------
report submitted to a Borrower or any of its Subsidiaries by independent
accountants, including management letters, "comment" letters, in connection with
any annual, interim or special audit report made by them of the books of a
Borrower or any of its Subsidiaries.
9.5 REPORTS TO GOVERNMENTAL AGENCIES AND OTHER CREDITORS. With reasonable
- --- ----------------------------------------------------
promptness: (i) copies of all such financial statements and reports which any
Borrower sends to its stockholders, and (ii) copies of all reports on Form 8-K
which SPI may make to, or file with, the Securities and Exchange Commission, and
(iii) any report or statement delivered by a Borrower to any supplier or other
creditor in connection with any payment restructuring.
33
<PAGE>
9.6 REQUESTED INFORMATION. To Agent, with reasonable promptness, all such
- --- ---------------------
other data and information, including tax returns, in respect of the condition,
operation and affairs of a Borrower as Agent may reasonably request from time to
time.
9.7 COMPLIANCE CERTIFICATES. Within the periods provided in SECTIONS 9.1 AND
- --- ----------------------- ----------------
9.3 above, a certificate of the chief financial officer of SPI; (a) stating that
- ---
Borrowers have observed, performed and complied with each and every undertaking
contained herein, (b) setting forth the information and computations (in
sufficient detail) required in order to establish whether Borrowers were
operating in compliance with the financial covenants in SECTION 8 of this
---------
Agreement, and (c) certifying that as of the date of such certification, there
does not exist any Event of Default or any occurrence or state of affairs which
with the giving of notice, passage of time or both would constitute an Event of
Default. Such certificate will be in the form of EXHIBIT "B" attached hereto.
-----------
10. ENVIRONMENTAL REPRESENTATIONS AND COVENANTS.
----- -------------------------------------------
10.1 REPRESENTATIONS. Each Borrower represents to Lenders as follows: (a) to
- ---- ---------------
such Borrower=s knowledge, the Environmental Affiliates are in compliance with
all Environmental Requirements and no Borrower has any knowledge of any
circumstances which may prevent or interfere with such compliance in the future;
(b) to Borrower=s knowledge, the Environmental Affiliates have all licenses,
permits, approvals and authorizations required under applicable Environmental
Requirements; (c) there are no pending or threatened claims against any of the
Environmental Affiliates or any of their assets related to the failure to comply
with any Environmental Requirements, or any facts or circumstances which could
give rise to such a claim; (d) no facility or property now or previously owned,
operated or leased by any Environmental Affiliate is an Environmental Cleanup
Site; (e) no Environmental Affiliate has treated, stored, transported, handled
or disposed of Special Materials at or adjacent to any Environmental Cleanup
Site; (f) there are no liens or claims for cost reimbursement outstanding or
threatened against any Environmental Affiliate or any of their assets, or any
facts or circumstances which could give rise to such a lien or claim; and (g)
there are no facts or circumstances which, under the provisions of any
Environmental Requirements, could restrict the use, occupancy or transferability
of any of the facilities owned, leased or operated by any Environmental
Affiliate.
10.2 REAL PROPERTY. Each Borrower represents and warrants to Lenders that, to
- ---- -------------
such Borrower=s knowledge, there are no Special Materials presently located on
or near any real property owned, leased or operated by any Environmental
Affiliate (collectively, "REAL PROPERTY") except for Special Materials which are
and have at all times been treated, stored, transported, handled and disposed of
in compliance with all Environmental Requirements. Each Borrower represents to
Lenders that the Real Property is not now being used nor, to the best of its
knowledge, has it ever been used in the past for activities involving Special
Materials, including but not limited to the use, generation, collection,
storage, treatment, or disposal of any Special Materials except for Special
Materials which are and have at all times been treated, stored, transported,
handled and disposed of in compliance with all Environmental Requirements.
Without limiting the generality of the foregoing, the Real Property is not being
used nor, to the best of each Borrower's knowledge, has it ever been used in the
past for a landfill, surface impoundment or other area for the treatment,
storage or disposal of solid waste (including solid waste such as sludge).
34
<PAGE>
10.3 COVENANT REGARDING COMPLIANCE. Borrowers shall take or cause all
- ---- -----------------------------
Environmental Affiliates to take, at Borrowers= and such Environmental
Affiliate's sole expense, such actions as may be necessary to comply with all
Environmental Requirements, as hereinafter defined. If any Environmental
Affiliate shall fail to take such action, Agent may make advances or payments
towards performance or satisfaction of the same but shall be under no obligation
to do so. All sums so advanced or paid, including all sums advanced or paid by
Agent in connection with any judicial or administrative investigation or
proceeding relating thereto, including, without limitation, attorney's fees,
fines, or other penalty payments, shall be at once repayable by Borrowers and
all sums so advanced or paid shall become a part of the Lender Indebtedness.
The Environmental Affiliates will maintain all licenses, permits, approvals
and authorizations required under applicable Environmental Requirements. In
connection with off-site treatment, storage, handling, transportation or
disposal of Special Materials, the Environmental Affiliates will conduct such
activities only at facilities and with carriers who operate in compliance with
all Environmental Requirements and will obtain certificates of compliance or
disposal from all contractors retained in connection with such activities.
10.4 NOTICES. In the event a Borrower becomes aware of any past, present or
- ---- -------
future facts or circumstances which have given rise or could give rise to a
claim against any Environmental Affiliate related to a failure to comply with
any Environmental Requirements, Borrowers will promptly give Agent notice
thereof, together with a written statement of an officer of Borrowers setting
forth the details thereof and the action with respect thereto taken or proposed
to be taken by the Environmental Affiliates.
10.5 INDEMNITY. Each Borrower agrees to indemnify, defend and hold harmless
- ---- ---------
Agent, Lenders and their respective parents, subsidiaries, successors and
assigns, and any officer, director, shareholder, employee, Affiliate or agent of
Agent and/or any Lender, for all loss, liability, damage, cost and expenses,
including, without limitation, attorney's fees and disbursements (including the
reasonable allocated cost of in-house counsel and staff) arising from or related
to (a) the release of any Special Materials at any facility at any time owned,
leased or operated by a Borrower or any of its Subsidiaries, (b) the release of
any Special Materials treated, stored, transported, handled, generated or
disposed of by or on behalf of Borrower or any of its Subsidiaries at any third
party owned site, (c) any claim against any Environmental Affiliate that they
have failed to comply with all Environmental Requirements, and (d) the breach by
a Borrower of any representation or covenant in this SECTION 10.
----------
10.6 SURVIVAL. The representations and covenants of Borrowers contained in
- ---- --------
this SECTION 10, including without limitation the indemnification obligation of
----------
Borrowers, shall survive the occurrence of any event whatsoever, including the
payment of the Lender Indebtedness or any investigation by or knowledge of Agent
or any Lender.
10.7 DEFINITIONS. For purposes of the foregoing:
- ---- -----------
1. "ENVIRONMENTAL AFFILIATE" means Borrowers and any other Person for
whom a Borrower at any time has any liability (contingent or otherwise) with
respect to any claims arising out of the failure of a Borrower or such Person to
comply with all applicable Environmental Requirements.
35
<PAGE>
2. "ENVIRONMENTAL CLEANUP SITE" shall mean any location which is listed
or proposed for listing on the National Priorities List, on CERCLIS or on any
similar state list of sites requiring investigation or cleanup, or which is the
subject of any pending or threatened action, suit, proceeding or investigation
related to or arising from any alleged violation of any Environmental
Requirements.
3. "ENVIRONMENTAL REQUIREMENTS" means any and all applicable federal,
state or local laws, statutes, ordinances, regulations or standards,
administrative or court orders or decrees, common law doctrines or private
agreements, relating to (i) pollution or protection of the environment and
natural resources, (ii) exposure of employees or other Persons to Special
Materials, (iii) protection of the public health and welfare from the effects of
Special Materials and their products, by-products, wastes, emissions, discharges
or releases, and (iv) regulation, licensing, approval or authorization of the
manufacture, generation, use, formulation, packaging, labeling, transporting,
distributing, handling, storing or disposing of any Special Materials.
4. "SPECIAL MATERIALS" means any and all materials which, under
Environmental Requirements, require special handling in use, generation,
collection, storage, treatment or disposal, or payment of costs associated with
responding to the lawful directives of any court or agency of competent
jurisdiction. Special Materials shall include, without limitation: (i) any
flammable substance, explosive, radioactive material, hazardous material,
hazardous waste, toxic substance, solid waste, pollutant, contaminant or any
related material, raw material, substance, product or by-product of any
substance specified in or regulated or otherwise affected by any Environmental
Requirements (including but not limited to any "hazardous substance" as defined
in the Comprehensive Environmental Response, Compensation and Liability Act of
1980 as amended or any similar state or local law), (ii) any toxic chemical or
other substance from or related to industrial, commercial or institutional
activities, and (iii) asbestos, gasoline, diesel fuel, motor oil, waste and used
oil, heating oil and other petroleum products or compounds, polycholorinated
biphenyls, radon, urea formaldehyde and lead-containing materials.
11. CONDITIONS OF CLOSING.
----- ---------------------
The obligation of Lenders to make available the Revolver is subject to the
performance by Obligors of all of their agreements to be performed hereunder and
to the following further conditions:
11.1 LOAN DOCUMENTS. Obligors and all other required Persons will have
- ---- --------------
executed and delivered the Loan Documents.
11.2 REPRESENTATIONS AND WARRANTIES. All representations and warranties of
- ---- ------------------------------
Obligors set forth in the Loan Documents will be true at and as of the date
hereof.
11.3 NO DEFAULT. No condition or event shall exist or have occurred which
- ---- ----------
would constitute an Event of Default (or would, upon the giving of notice or the
passage of time or both, constitute an Event of Default).
36
<PAGE>
11.4 PROCEEDINGS AND DOCUMENTS. All proceedings taken by Obligors in
- ---- -------------------------
connection with the transactions contemplated by this Agreement and all
documents incident to such transactions shall be satisfactory in form and
substance to Agent and Agent shall have received all documents or other evidence
which it reasonably may request in connection with such proceedings and
transactions. Each Obligor shall have delivered to Agent a certificate, in form
and substance satisfactory to Agent dated the date hereof and signed on behalf
of such Obligor by an officer or authorized representative of such Obligor,
certifying (a) true copies of the Articles of Incorporation and bylaws,
partnership agreement, operating agreement or other governing document with
respect to such Obligor in effect on such date, (b) true copies of all
authorizing actions taken by such party relative to the Loan Documents, and (c)
the names, true signatures and incumbency of the officers or authorized
representative of such Obligor authorized to execute and deliver this Agreement
and the other Loan Documents. Agent may conclusively rely on such certificate
unless and until a later certificate revising the prior certificate has been
received by Agent.
11.5 DELIVERY OF OTHER DOCUMENTS. The following documents shall have been
- ---- ---------------------------
delivered to Agent by or on behalf of Obligors:
1. GOOD STANDING AND TAX LIEN CERTIFICATES. A good standing certificate of the
- -- ---------------------------------------
Department of State of each jurisdiction where an Obligor is form or
incorporated, certifying to the good standing of such Obligor, good
standing/foreign qualification certificates from all other jurisdictions in
which an Obligor is required to be qualified to do business, and tax lien
certificates for each Obligor from each jurisdiction in which such Obligor is
required to be qualified to do business.
2. AUTHORIZATION DOCUMENTS. Evidence of authorization of each Obligor=s
- -- -----------------------
execution and full performance of this Agreement, the Loan Documents and all
other documents and actions required hereunder.
3. INSURANCE. Evidence of the insurance coverage required under SECTION 7.12.
- -- --------- ------------
4. OPINION OF COUNSEL. An opinion or opinions of counsel for Borrowers in form
- -- ------------------
and content satisfactory to Agent.
5. LIEN SEARCH. Copies of record searches (including UCC searches and
- -- -----------
judgments, suits, tax and other lien searches) acceptable to Agent.
6. NO MATERIAL ADVERSE CHANGE. Evidence satisfactory to the Agent that no
- -- --------------------------
material adverse change has occurred with respect to the Borrowers since
December 31, 1997.
7. LICENSES AND APPROVALS. Copies of all licenses, approvals, consents,
- -- ----------------------
authorizations and filings of Borrower, required or necessary for the operation
by Borrowers of their business.
8. OTHER DOCUMENTS. Such other documents as may be required to be submitted to
- -- ---------------
Agent by the terms hereof or of any Loan Document.
37
<PAGE>
9. OPENING BALANCE SHEET. A pro forma opening balance sheet of Borrowers,
- -- ---------------------
internally prepared by the chief financial officer of SPI on a Consolidated
Basis, in form approved by Agent, depicting, inter alia, the effects of the new
structure of SPI, including all required capital contributions and the initial
borrowing under the Revolver.
10. ADDITIONAL CAPITAL. Evidence satisfactory to Agent that SPI has received,
- --- ------------------
following the closing of an initial public offering of the common stock of SPI,
net proceeds available for the general use of SPI of not less than Seventeen
Million Five Hundred Thousand Dollars ($17,500,000.00).
12. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES.
- ----- -----------------------------------------
Subsequent Advances shall be conditioned upon the following conditions and
each request by Borrowers for an Advance or a Letter of Credit Advance shall
constitute a representation by Borrowers to Agent and Lenders that each
condition has been met or satisfied:
12.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of
- ---- ------------------------------
Obligors contained herein or in the Loan Documents shall be true at and as of
the date of such advance as if made on such date, and each request for an
advance shall constitute reaffirmation by Obligors that such representations
and warranties are then true.
12.2 NO DEFAULT. No condition or event shall exist or have occurred at or as
- ---- ----------
of the date of such advance which would constitute an Event of Default hereunder
(or would, upon the giving of notice or the passage of time or both, constitute
such an Event of Default).
12.3 OTHER REQUIREMENTS. Agent shall have received all certificates,
- ---- ------------------
authorizations, affidavits, schedules and other documents which are provided for
hereunder or under the Loan Documents, or which Agent may reasonably request.
13. DEFAULT AND REMEDIES.
----- --------------------
13.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following
- ---- -----------------
events shall constitute an Event or Events of Default hereunder:
1. The failure of a Borrower to pay any amount of principal or interest
on any Note, or any fee or other sums payable hereunder, or any other Lender
Indebtedness, within five (5) calendar days of the date on which such payment is
due, whether on demand, at the stated maturity or due date thereof, or by reason
of any requirement for the prepayment thereof, by acceleration or otherwise;
2. The failure of an Obligor to duly perform or observe any obligation,
covenant or agreement applicable to it contained herein or in any other Loan
Document, and such failure is not cured within fifteen (15) calendar days of
delivery by Agent to Borrowers of written notice of such failure; provided,
--------
however, that such notice and opportunity to cure is expressly inapplicable to,
- -------
and an Event of Default shall arise immediately upon the occurrence of, any of
the following: (i) any failure which is incapable of cure, (ii) any failure to
38
<PAGE>
comply with any of the covenants of SECTION 8, (iii) any failure which was
---------
willfully caused by a Borrower, and (iv) any event or circumstance which
constitutes an Event of Default under some other subparagraph of this SECTION
-------
13.1;
- ----
3. The failure of any Obligor to pay any Indebtedness for borrowed money
due to any third Person in the principal amount of $100,000.00 or more,
individually or in the aggregate, or the existence of any other event of default
under any loan, security agreement, mortgage or other agreement pertaining
thereto binding any Obligor after the expiration of any notice and/or grace
periods permitted in such documents;
4. The failure of any Obligor to pay or perform any other obligation to
any Lender under any other agreement or note or otherwise arising, whether or
not related to this Agreement, after the expiration of any notice and/or grace
periods permitted in such documents;
5. The adjudication of any Obligor as a bankrupt or insolvent, or the
entry of an Order for Relief against any Obligor or the entry of an order
appointing a receiver or trustee for any Obligor of any of its property or
approving a petition seeking reorganization or other similar relief under the
bankruptcy or other similar laws of the United States or any state or any other
competent jurisdiction or any foreign nation or political subdivision thereof,
if applicable;
6. A proceeding under any bankruptcy, reorganization, arrangement of
debt, insolvency, readjustment of debt or receivership law is filed by or,
unless dismissed within 60 days of filing, against, any Obligor or any Obligor
makes an assignment for the benefit of creditors, or any Obligor takes any
action to authorize any of the foregoing;
7. The suspension of the operation of any Obligor=s present business, or
any Obligor becoming unable to meet its debts as they mature, or the admission
in writing by any Obligor to such effect, or any Obligor calling any meeting of
all or any material portion of its creditors for the purpose of debt
restructure;
8. Assets of any Obligor with a value of Fifty Thousand Dollars
($50,000.00) or more (individually or in the aggregate) are attached, seized,
subjected to a writ or distress warrant, or levied upon, or come within the
possession or control of any receiver, trustee, custodian or assignee for the
benefit of creditors;
9. The entry of a final judgment for the payment of money in the amount
of $50,000.00 or more (individually or in the aggregate) against any Obligor
which, within ten (10) days after such entry, shall not have been discharged or
execution thereof stayed pending appeal or shall not have been discharged within
five (5) days after the expiration of any such stay;
10. Any representation or warranty of any Obligor in any of the Loan
Documents is discovered to be untrue in any material respect or any statement,
certificate or data furnished by any Obligor pursuant hereto is discovered to be
untrue in any material respect as of the date as of which the facts therein set
forth are stated or certified;
39
<PAGE>
11. Any Obligor voluntarily or involuntarily dissolves or is dissolved,
terminates or is terminated;
12. Any Obligor is enjoined, restrained, or in any way prevented by the
order of any court or any administrative or regulatory agency, the effect of
which order restricts such Obligor from conducting all or any material part of
its business;
13. A breach by any Obligor occurs under any material agreement,
document or instrument, whether heretofore, now or hereafter existing between
any Obligor and any other Person and such breach is reasonably likely to have a
Material Adverse Effect;
14. Any strike, lockout, labor dispute, embargo, condemnation, act of
God or public enemy, or other casualty loss occurs resulting in the cessation or
substantial curtailment of production or other revenue producing activities at
any facility of any Obligor for more than thirty (30) consecutive days;
15. The loss, suspension, revocation or failure to renew any license or
permit now held or hereafter acquired by any Obligor, which loss, suspension,
revocation or failure to renew will, or is reasonably likely to, have a Material
Adverse Effect;
16. Any breach by any Obligor or any creditor of its obligations under
any subordination agreement now or hereafter executed in favor of any Lender; or
17. The validity or enforceability of this Agreement, or any of the Loan
Documents, is contested by any Obligor or any Obligor denies that it has any or
any further liability or obligation hereunder or thereunder.
13.2 REMEDIES. At the option of the Agent and subject to the requirements of
- ---- --------
ARTICLE 14 below, upon the occurrence of an Event of Default, or at any time
- ----------
thereafter:
1. The entire unpaid principal of the Revolver, all other Lender
Indebtedness, or any part thereof, all interest accrued thereon, all fees due
hereunder and all other obligations of Obligors to Lenders hereunder or under
any other agreement, note or otherwise arising will become immediately due and
payable without any further demand or notice;
2. The Revolver will immediately terminate and Borrower will receive no
further extensions of credit thereunder;
3. Agent may increase the interest rate on the Revolver to the
applicable Default Rates set forth herein, without notice; and/or
4. Agent may exercise each and every right and remedy granted to it
under the Loan Documents or under any applicable law or at equity.
If an Event of Default occurs under SECTION 13.1(E) or (F), all Lender
--------------- ---
Indebtedness shall become immediately due and payable.
40
<PAGE>
13.3 SET-OFF. Without limiting the rights of Agent or Lenders under applicable
- ---- -------
law, Agent and each Lender has and may exercise a right of set-off, a lien
against and a security interest in all property of Obligors now or at any time
in Agent's or any Lender's possession in any capacity whatsoever, including but
not limited to any balance of any deposit, trust or agency account, or any other
bank account with Agent or any Lender, as security for all Lender Indebtedness.
At any time and from time to time following the occurrence of an Event of
Default, Agent and each Lender may without notice or demand, set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebtedness at any time owing by Agent or any Lender
to or for the credit of any Obligor against any or all of the Lender
Indebtedness.
If any bank account of an Obligor with any Lender is attached or otherwise
liened or levied upon by any third party, such Lender need not await the running
of any applicable grace period hereunder, but such Lender shall have and be
deemed to have the immediate right of set-off and may apply the funds or amount
thus set-off against such Obligor's respective obligations to the Lenders.
13.4 DELAY OR OMISSION NOT WAIVER. Neither the failure nor any delay on the
- ---- ----------------------------
part of Agent or any Lender to exercise any right, remedy, power or privilege
under the Loan Documents upon the occurrence of any Event of Default or
otherwise shall operate as a waiver thereof or impair any such right, remedy,
power or privilege. No waiver of any Event of Default shall affect any later
Event of Default or shall impair any rights of Agent or any Lender. No single,
partial or full exercise of any rights, remedies, powers and privileges by the
Agent or any Lender shall preclude further or other exercise thereof. No course
of dealing between Agent or any Lender and Obligors shall operate as or be
deemed to constitute a waiver of Agent's or any Lender's rights under the Loan
Documents or affect the duties or obligations of Obligor.
13.5 REMEDIES CUMULATIVE; CONSENTS. The rights, remedies, powers and
- ---- -----------------------------
privileges provided for herein shall not be deemed exclusive, but shall be
cumulative and shall be in addition to all other rights, remedies, powers and
privileges in Agent's and Lender's favor at law or in equity. Whenever the
Agent's or any Lender's consent or approval is required or permitted, such
consent or approval shall be at the sole and absolute discretion of Agent and
such Lenders.
13.6 CERTAIN FEES, COSTS, EXPENSES AND EXPENDITURES. Borrowers agree to pay on
- ---- ----------------------------------------------
demand all costs and expenses of Agent and/or Lenders, as applicable, including
without limitation:
1. all costs and expenses in connection with the preparation, review,
negotiation, execution, delivery and administration of the Loan Documents, and
the other documents to be delivered in connection therewith, or any amendments,
extensions and increases to any of the foregoing (including, without limitation,
reasonable attorney=s fees and expenses), and the cost of periodic lien searches
and tax clearance certificates, as Agent deems advisable;
2. all losses, costs and expenses incurred by Agent and/or Lenders in
connection with the enforcement, protection and preservation of the Lenders'
rights or remedies under the Loan Documents, or any other agreement relating to
any Lender Indebtedness, or in connection with legal advice relating to the
rights or responsibilities
41
<PAGE>
of Lenders (including without limitation court costs,
attorney's fees and expenses of accountants and appraisers); and
3. any and all stamp and other taxes payable or determined to be payable
by Agent and/or Lenders in connection with the execution and delivery of the
Loan Documents, and all liabilities to which Agent or any Lender may become
subject as the result of delay in paying or omission to pay such taxes.
In the event Borrowers shall fail to pay taxes, insurance, assessments,
costs or expenses which they are required to pay hereunder, or under the other
Loan Documents, or fail to keep their assets and property free from security
interests or liens (except as expressly permitted herein), or otherwise breach
any obligations under the Loan Documents, Agent in its discretion, may make
expenditures for such purposes and the amount so expended (including attorney's
fees and expenses, filing fees and other charges) shall be payable by Borrowers
on demand and shall constitute part of the Lender Indebtedness.
With respect to any amount required to be paid by Borrowers under this
SECTION 13.6, in the event Borrowers fail to pay such amount on demand, Borrower
- ------------
shall also pay to Agent for the pro rata benefit of Lenders interest thereon at
the default rate set forth herein for the Revolver (for Federal Funds Based
Advances). Borrowers= obligations under this SECTION 13.6 shall survive
------------
termination of this Agreement.
13.7 TIME IS OF THE ESSENCE. Time is of the essence in Obligors= performance
- ---- -----------------------
of their obligations under the Loan Documents.
13.8 ACKNOWLEDGMENT OF CONFESSION OF JUDGMENT PROVISIONS. BORROWERS
- ---- ---------------------------------------------------
ACKNOWLEDGE AND AGREE THAT THE NOTES AND THE LOAN DOCUMENTS CONTAIN PROVISIONS
WHEREBY AGENT MAY ENTER JUDGMENT BY CONFESSION AGAINST BORROWERS. BEING FULLY
AWARE OF THEIR RIGHTS TO PRIOR NOTICE AND HEARING ON THE QUESTION OF THE
VALIDITY OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST THEM BY AGENT AND LENDERS
UNDER THE NOTES AND LOAN DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED, BORROWERS
HEREBY WAIVE THESE RIGHTS AND AGREE AND CONSENT TO AGENT ENTERING JUDGMENT
AGAINST BORROWERS BY CONFESSION. ANY PROVISION IN A CONFESSION OF JUDGMENT IN
ANY OF THE LOAN DOCUMENTS FOR AN ATTORNEY'S COLLECTION COMMISSION SHALL IN NO
WAY LIMIT BORROWERS= LIABILITY TO REIMBURSE AGENT AND LENDERS FOR ALL LEGAL FEES
ACTUALLY INCURRED BY AGENT AND LENDERS, EVEN IF SUCH FEES ARE IN EXCESS OF THE
ATTORNEY'S COLLECTION COMMISSION PROVIDED FOR IN SUCH CONFESSION OF JUDGMENT.
14. AGENT.
----- -----
14.1 APPOINTMENT OF AGENT. Each Lender hereby designates Agent to act as Agent
- ---- --------------------
for such Lender under this Agreement and the Loan Documents. Each Lender hereby
irrevocably authorizes, and each holder of a Note by the acceptance of such Note
shall be deemed irrevocably to authorize, Agent to take such action on its
behalf under the provisions of this Agreement, the Loan Documents and any other
instruments and agreements referred to herein or therein and to exercise such
powers and to perform such duties hereunder and thereunder as are
42
<PAGE>
specifically delegated to or required of Agent by the terms hereof and thereof
and such other powers as are reasonably incidental thereto. Except as expressly
set forth in this Agreement to the contrary, Borrowers are authorized by Lenders
to deal solely with Agent in all matters which affect Lenders under this
Agreement and the other Loan Documents.
14.2 HOLDING OF COLLECTIONS. Except as otherwise permitted under the Loan
- ---- ----------------------
Agreement, Agent shall hold all payments of principal and interest, fees, costs,
expenses and collections received pursuant to this Agreement or the other Loan
Documents, for the pro rata benefit of the Lenders in accordance with their
respective Pro Rata Percentages. To the extent any other Lender from time to
time holds any of the foregoing, it shall hold the same for the pro rata benefit
of all Lenders in accordance with their respective Pro Rata Percentages.
14.3 FEES. All fees payable under this Agreement and the Loan Documents shall
- ---- ----
be for the pro rata benefit of the Lenders in accordance with their respective
Pro Rata Percentages, except as follows:
1. All confirmation fees, negotiation fees and other charges (except for
issuance and renewal fees) payable by Borrowers in connection with Letters of
Credit issued under the Loan Agreement shall be retained in full by the Issuing
Bank.
2. All structuring, arranging and agent fees described as payable to
Agent under the Commitment shall be retained by Agent.
14.4 COLLECTIONS AND DISBURSEMENTS.
- ---- -----------------------------
1. The Agent will have the right to collect and receive all payments of
the Lender Indebtedness, and to collect and receive all reimbursements for draws
made under the Letters of Credit, together with all fees, charges or other
amounts due to Agent and/or Lenders under the Loan Agreement and the other Loan
Documents. If Agent should for any reason receive less than the full amount of
the interest or other compensation due under the Loan Documents, each Lender's
share of such interest or compensation shall decrease in proportion to each
Lender's Pro Rata Percentage.
2. If any such payment received by the Agent is rescinded, determined to
be unenforceable or invalid or is otherwise required to be returned for any
reason at any time, whether before or after termination of this Agreement and
the other Loan Documents, each Lender will, upon written notice from the Agent,
promptly pay over to the Agent its Pro Rata Percentage of the amount rescinded,
held unenforceable or invalid or required to be returned, together with interest
and other fees thereon if also required to be rescinded or returned. If Agent
does not receive such sums from any Lender within one (1) Business Day after
receipt by such Lender of the written notice from Agent referred to above, Agent
shall also be entitled to receive from such Lender interest on such amount at a
per annum rate equal to the Federal Funds Effective Rate during the period
commencing on the date of receipt by such Lender of such written notice from
Agent and ending on (but excluding) the date Agent recovers such amount.
3. All payments by the Agent and the Lenders to each other hereunder or
under the Loan Documents shall be in immediately available funds. The Agent will
at all times maintain proper books of account and records reflecting the
interest
43
<PAGE>
of each Lender in the Lender Indebtedness, in a manner customary to the Agent's
keeping of such records, which books and records shall be available for
inspection by each Lender at reasonable times during normal business hours and
after reasonable prior notice, at such Lender's sole expense.
4. All payments received by Agent from Borrowers following the
occurrence of an Event of Default shall be applied, first to reasonable expenses
incurred by Agent as provided in SECTION 14.16 below, then to all sums due
-------------
Issuing Bank as set forth in SECTION 2.4 above, then to fees payable to Agent,
-----------
then to accrued but unpaid fees in accordance with each Lender's Pro Rata
Percentage (to the extent Lenders share in such fees), then to accrued but
unpaid interest on the Lender Indebtedness in accordance with each Lender's Pro
Rata Percentage, then to the principal balance of the Lender Indebtedness in
accordance with each Lender's Pro Rata Percentage and then to expenses, if any,
incurred by Lenders (to the extent subject to reimbursement by Borrowers under
the Loan Documents) in accordance with their Pro Rata Percentages.
5. To the extent necessary for each Lender's actual percentage of all
outstanding Loans to equal its applicable Pro Rata Percentage, the Lender which
obtains a greater share of any payments (by set-off or otherwise) than its
applicable Pro Rata Percentage shall acquire a participation in the applicable
outstanding balances of the Pro Rata Shares of the other Lenders as determined
by Agent in order that such Lender's percentage of outstanding Loans is equal to
its Pro Rata Percentage.
14.5 DELEGATION OF DUTIES; DISCRETION; INSTRUCTIONS. Agent may perform any of
- ---- ----------------------------------------------
its duties hereunder or under the Loan Documents by or through its agents or
employees. As to any matters not expressly provided for by the Loan Documents
or this Agreement, the Agent may exercise its discretion to take or refrain from
taking any action. If Agent is required to act or to refrain from acting under
the terms of this Agreement upon the instructions of all Lenders or the Required
Lenders, as applicable, it shall be fully protected in so acting or refraining
from acting upon the required instructions. Notwithstanding the foregoing,
Agent shall not be required to take any action which exposes Agent to liability
or which is contrary to any of the Loan Documents or applicable law. Agent may
require that it be furnished with an indemnification from each Lender for such
Lender's Pro Rata Percentage of such liability, in form reasonably satisfactory
to Agent as a condition of Agent acting or refraining from acting upon the
instructions of all Lenders or the Required Lenders, as applicable. If Agent is
one of the Lenders, an indemnification from Agent to itself will not be
required.
14.6 NATURE OF DUTIES. Agent shall have no duties or responsibilities except
- ---- ----------------
those expressly set forth in this Agreement and the Loan Documents. Neither
Agent nor any of its officers, directors, employees or agents shall be (a)
liable for any action taken or omitted by them as such hereunder or in
connection herewith, unless caused by their gross negligence or willful
misconduct, or (b) responsible in any manner to any Lender for any recitals,
statements, representations or warranties made by any Obligor or any officer or
representative thereof contained in any of the Loan Documents or in any
certificate, report, statement or other documents referred to or provided for
in, or received by Agent or any Lender under or in connection with, this
Agreement or any of the Loan Documents, or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any of the Loan Documents, or for any failure of any Obligor to perform their
obligations under the Loan Documents or for the financial condition of any
Obligor. Any liability of the Agent to the Lenders hereunder or under any of
44
<PAGE>
the Loan Documents shall be limited only to direct loss or liability suffered by
such Lender and shall not be for indirect, consequential or incidental
liability. Agent shall not be under any obligation to any Lender to ascertain
or to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any of the Loan Documents, or
to inspect the properties, books or records of any Obligor. Except as expressly
provided herein and in the Loan Documents, the duties of the Agent shall be
mechanical and administrative in nature. Agent shall not have, by reason of
this Agreement, a fiduciary relationship in respect of any Lender. Nothing in
this Agreement, expressed or implied, is intended to or shall be so construed as
to impose upon Agent any obligation in respect of this Agreement, except as
expressly set forth herein and in the Loan Documents.
14.7 LACK OF RELIANCE ON THE AGENT. Independently and without reliance upon
- ---- -----------------------------
Agent or any other Lender, each Lender has made and shall continue to make (a)
its own independent investigation of the financial condition and affairs of
Borrowers in connection with the extension of credit to the Borrowers and the
continuance of such credit facilities and the taking or not taking of any action
in connection herewith, and (b) its own appraisal of the credit worthiness of
Borrowers. Agent shall have no duty or responsibility either initially or on a
continuing basis, to provide Lenders with any credit or other information with
respect thereto, coming into its possession. Lenders acknowledge and agree that
Agent has not made any representations or warranties to any Lender regarding the
financial conditions, affairs or creditworthiness of Borrowers.
14.8 RESIGNATION. Agent may resign on thirty (30) days' prior written notice
- ---- -----------
to each of the Lenders. Upon any resignation of Agent, the Required Lenders
shall have the right to appoint a successor Agent. Upon the acceptance of the
appointment as a successor Agent, such successor Agent shall succeed to and
become vested with all rights, powers, obligations and duties of the resigning
Agent and the resigning Agent shall be discharged from all of its obligations
hereunder.
14.9 CERTAIN RIGHTS OF AGENT. If Agent shall request instructions from the
- ---- -----------------------
Lenders with respect to any act or action (including failure to act) in
connection with the Loan Documents, Agent shall be entitled to refrain from such
act or taking such action unless and until Agent shall have received
instructions from all Lenders or the Required Lenders, as applicable. Agent
shall not incur liability to any Person by reason of so refraining. Without
limiting the foregoing, no Lender shall have any right of action whatsoever
against Agent as a result of Agent acting in accordance with the written
instructions of all Lenders or the Required Lenders, as applicable. All
requests for instructions by Agent and all responses by the Lenders to such
requests must be in writing, which writing may include a telecopied
transmission.
14.10 RELIANCE. Agent shall be entitled to rely, and shall be fully protected
- ----- --------
in relying, upon any notice, writing, resolution, statement, certificate, telex,
teletype or telecopier message, cablegram, order or other document believed by
it to be genuine and correct and to have been signed, sent or made by the proper
person or entity, and, with respect to all legal matters pertaining to this
Agreement, the Loan Documents and its duties hereunder and thereunder, upon the
advice of counsel selected by it. Agent may employ agents and attorneys-in-fact
and shall not be liable for the default or misconduct of any such agents or
attorneys-in-fact selected by Agent with reasonable care.
45
<PAGE>
14.11 NOTICE OF DEFAULT. Agent shall not be deemed to have knowledge or notice
- ----- -----------------
of the occurrence of any Event of Default under the Loan Documents unless Agent
has received written notice from a Lender or Borrower referring to the Loan
Documents, describing such Event of Default and stating that such notice is a
"notice of default". In the event that any Lender shall have "actual knowledge"
of the occurrence of any Event of Default, such Lender shall promptly notify
Agent in writing. Upon such notice of the occurrence of an Event of Default,
Agent shall promptly give notice thereof to the Lenders. For purposes hereof, a
Lender shall be deemed to have "actual knowledge" if any such information is
known to an officer of such Lender responsible for the credit facilities
contemplated hereunder.
14.12 THE AGENT IN ITS CAPACITY AS LENDER. With respect to the advances and
- ----- -----------------------------------
credit accommodations made by Mellon to Borrower under the Loan Documents and
Mellon=s Note, Mellon shall have the same rights and powers hereunder as any
other Lender as if it were not performing the duties as Agent specified herein;
and the term "LENDER" or any similar terms shall, unless the context clearly
otherwise indicates, include Mellon in its individual capacity as a Lender.
14.13 OTHER LOANS. Agent may engage in other business with Obligors as if it
- ----- -----------
were not performing the duties specified herein, and may accept fees and other
consideration from Obligors for services in connection therewith without having
to account for the same to the Lenders. In the event that any Lender obtains
collateral (which does not secure the Revolver under the terms of the Loan
Documents) to secure any other loan or credit accommodation extended by such
Lender to an Obligor and such other collateral also secures any of the Lender
Indebtedness, such Lender may apply the proceeds of such other collateral
towards payment of all other obligations of such Obligor to such Lender before
applying any proceeds thereof to any Lender Indebtedness for the pro rata
benefit of the Lenders. Notwithstanding the foregoing, any items or funds
against which a Lender or Lender Affiliate exercises a right of set-off or
turnover under SECTION 13.3 of this Agreement shall be applied toward the Lender
------------
Indebtedness. In the event that any Lender extends credit accommodations to an
Obligor other than in connection with the transactions contemplated in this
Agreement, and such credit accommodations are secured by any collateral
hereafter obtained for the Revolver, such Lender agrees that all proceeds of
such collateral shall be used first to pay all Lender Indebtedness incurred in
connection with the transaction contemplated in this Agreement.
14.14 DISCLOSURE OF INFORMATION; AUDITS. Each Lender, at the request of
- ----- ---------------------------------
another Lender, will share with such other Lender such financial and other
information in the possession of the Lender regarding the Obligors as may be
reasonably requested by another Lender. Borrower consents to the disclosure of
all of such information. To the extent any Lender performs an audit of the
financial condition and operations of any Obligor or the assets of any Obligor,
such Lender shall make the results of such audit available to the other Lenders.
Notwithstanding the foregoing, no Lender shall have any liability to the other
Lenders related to the audit performed by such Lender except for errors in
connection with such audit which constitute gross negligence or willful
misconduct by the Lender or Lender's agent performing such audit.
46
<PAGE>
14.15 ACTIONS BY AGENT.
- ----- ----------------
1. Subject to the other provisions of ARTICLE 14 of this Agreement, Agent shall
----------
have the sole and exclusive right and obligation to service and administer the
Lender Indebtedness and the Loan Documents, including, without limitation, the
right to (i) exercise all rights, remedies, privileges and options under the
Loan Documents, including, without limitation, the right to determine whether
Advances are to be made hereunder and whether any Letters of Credit should be
issued, amended, extended or reinstated or whether draws should be honored
thereunder; and (ii) on behalf of Lenders, enter into or provide written
waivers, consents or elections to or under any of the Loan Documents.
2. Notwithstanding the provisions of SUBSECTION (a) above, Agent shall not,
--------------
without the prior written consent of all Lenders:
1. increase the Maximum Amount, decrease the interest rates provided in
the Loan Agreement or extend the Contract Period;
2. amend, alter or modify this SECTION 14.15(b), the definition of
----------------
"REQUIRED LENDERS"or the terms of SECTION 7.9;
-----------
3. decrease the amount or extend the payment terms of any fees required
to be paid by Borrower hereunder or under the Loan Agreement (except fees
payable solely to Agent or its Affiliates); or
4. release any Obligor from its obligations with respect to all Lender
Indebtedness except in connection with the termination of the Loan Agreement and
repayment of all Lender Indebtedness.
3. Notwithstanding the provisions of SUBSECTION 14.15(a) above, Agent shall
-------------------
not, without the prior written consent of the Required Lenders, enter into
any written amendment of, or waive any Obligor=s noncompliance with, any
covenants of such Obligor under the Loan Documents or waive any Event of
Default.
4. Any action taken in accordance with the terms of this SECTION 14.15,
-------------
including any amendment, supplement, waiver, consent or election, shall apply
equally to each of the Lenders and shall be binding upon the Lenders, the Agent
and all participants. In the case of any waiver of any Event of Default, the
Event of Default waived shall be deemed to be cured and not continuing, but no
waiver of a specific Event of Default shall extend to any subsequent Event of
Default (whether or not the subsequent Event of Default is the same as the Event
of Default which was waived), or impair any right consequent thereon.
5. After the occurrence of an Event of Default, Agent shall take such action as
may be directed by the Required Lenders, provided that until it receives such
direction, Agent shall have the sole and exclusive right, with communication (to
the extent reasonably practicable under the circumstances) with all Lenders, to
exercise or refrain from exercising any and all rights, remedies, privileges and
options under the Loan Documents and available at law or in equity as Agent
shall deem advisable in the best
47
<PAGE>
interest of the Lenders to protect and enforce the rights of the Agent and the
Lenders and collect the Lender Indebtedness, including, without limitation,
instituting and pursuing all legal actions against Obligors, or defending any
and all actions brought by any Lender or other Person, or incurring expenses or
otherwise making expenditures to protect the Lender Indebtedness.
6. To the extent Agent is required to obtain or otherwise elects to seek the
consent of Lenders to an action Agent desires to take, if any Lender fails to
notify Agent, in writing, of its consent or dissent to any request of Agent
hereunder within five (5) Business Days of such Lender's receipt of such written
request (which may include a telecopied transmission), such Lender shall be
deemed to have given its consent thereto. If any Lender will not consent to
such action, Mellon shall have the right, but not the obligation, to purchase
through itself or any Affiliate such Lender's Pro Rata Share for an amount equal
to the outstanding principal balance thereof, plus all accrued and unpaid
interest thereon.
14.16 SHARING OF RISK; INDEMNIFICATION; EXPENSES.
----- ------------------------------------------
1. To the extent Agent is not reimbursed by Obligors, the Lenders will
reimburse and indemnify the Agent in proportion to their respective Pro Rata
Percentages, for and against any and all liabilities, obligations, losses
(except the failure of the Agent to receive the fees which are to be retained by
Agent in full), damages, penalties, actions, judgments, suits, costs, expenses
or disbursements of any kind or nature whatsoever, including, without
limitation, attorneys' fees, which may be imposed on, incurred by or asserted
against Agent in performing its duties hereunder or under the Loan Documents, or
in any way relating to or arising out of this Agreement or the Loan Documents,
provided, however, that Lenders shall have no obligation to reimburse Agent for
- -------- -------
liabilities, losses or damages which have been determined by a court of
competent jurisdiction to have resulted directly from actions or omissions of
Agent which constitute gross negligence or willful misconduct.
2. All reasonable out-of-pocket costs and expenses incurred by Agent and not
reimbursed on demand by Obligors, in connection with the creation, amendment,
administration, termination and enforcement of the Lender Indebtedness and/or
the exercise of the Agent's rights and duties hereunder or under the Loan
Documents (including, without limitation, audit expenses, counsel fees and
expenditures to protect, preserve and defend Agent's and each Lender's rights
and interest under the Loan Documents) shall be shared and paid on demand by
Lenders, pro rata based on their respective Pro Rata Percentages. Any such sums
not paid on demand shall accrue interest at the Federal Funds Effective Rate
until paid.
3. Agent may deduct from payments or distributions to be made to Lenders such
funds as may be necessary to pay or reimburse Agent for the reimbursement,
indemnification and expense obligations of the Lenders described in this SECTION
-------
14.16.
- -----
14.17 CONSULTATION WITH COUNSEL. The Agent may consult with legal counsel and
- ----- -------------------------
any other profession advisors or consultants deemed necessary or appropriate and
selected by Agent and shall not be liable for any action taken or suffered in
good faith by it in accordance with the advice of such counsel.
48
<PAGE>
14.18 DOCUMENTS. The Agent shall not be under a duty to examine or pass upon
- ----- ---------
the effectiveness, genuineness or validity of this Agreement or any of the other
Loan Documents or any other instrument or document furnished pursuant hereto or
in connection therewith, and the Agent shall be entitled to assume that the same
are valid, effective and genuine and what they purport to be. In addition the
Agent shall not be liable for failing to make any inquiry concerning the
accuracy, performance or observance of any of the terms, provisions or
conditions of any other Loan Documents or other such instrument or document.
14.19 SEVERAL OBLIGATIONS. The obligation of each Lender is several, and
- ----- -------------------
neither the Agent nor any other Lender shall be responsible for any obligation
or commitment hereunder of any other Lender.
14.20 NO THIRD PARTY BENEFICIARY. The provisions of ARTICLE 14 of this
- ----- -------------------------- ----------
Agreement are intended solely for the benefit of Agent and Lenders and not for
the benefit of any third party, including without limitation, any Obligor and
any amendment to ARTICLE 14 of this Agreement shall not require the consent of
----------
any Obligor.
14.21 PARTICIPATIONS AND ASSIGNMENTS.
- ----- ------------------------------
1. Each Lender may at any time grant participations of its Pro Rata
Share in and to its interests under this Agreement (collectively,
"PARTICIPATIONS") to any other lending office of such Lender or to any other
bank, lending institution or other entity which the granting Lender reasonably
determines has the requisite sophistication to evaluate the merits and risks of
investments in Participations ("PARTICIPANTS"); provided, however, that: (i) all
-------- -------
amounts payable by the Borrowers to each Lender hereunder and voting rights of
each Lender hereunder shall be determined as if such Lender had not granted such
Participation; (ii) any agreement pursuant to which any Lender may grant a
Participation (A) shall provide that such Lender is not delegating and therefore
shall retain the sole right and responsibility to exercise all of its rights and
privileges under this Agreement, including, without limitation, the right to
approve any amendment, modification or waiver of any provisions of this
Agreement and (B) shall not release or discharge such Lender from its duties and
obligations, which shall remain absolute, hereunder, including its obligation to
make advances hereunder; and (iii) upon entering into any such Participation,
the Lender granting such participation shall give thirty (30) days prior written
notice thereof to Agent.
2. Each Lender may at any time assign up to 50% of the original portion
of its Pro Rata Share (together with its rights and obligations with respect
thereto) and its right, title and interest therein and in and to this Agreement
and the other Loan Documents to a Lender or any Affiliate of a Lender, or to any
other bank or financial institution, in each case with thirty (30) days prior
written notice to Agent and subject to the prior written consent of the Agent
which shall not be unreasonably withheld; provided, however, that (i) any
-------- -------
assignment to another Lender (which is then a party to this Agreement) or to any
other bank or financial institution shall be in the minimum amount of
$5,000,000.00; (ii) the parties to such assignment shall execute such assignment
or other documents reasonably requested by Agent and Obligors shall execute such
replacement Notes, amendments and other items as may be requested by Agent,
including, without
49
<PAGE>
limitation, amendments to SCHEDULE B of this Agreement to reflect any transfers;
----------
(iii) the parties to the assignment shall pay Agent a processing fee of
$3,500.00 at the time of providing such assignment to Agent; and (iv) at no time
shall Mellon make any assignment of its Pro Rate Share if, as a result of such
assignment, Mellon=s Pro Rata Share would be less than the Pro Rata Share then
held by PNC Bank, National Association. Provided that no Event of Default has
occurred, any assignment by a Lender of its Pro Rata Share to a Person who is
not already a Lender shall be subject to Borrower=s consent, which consent shall
not be unreasonably withheld or delayed by Borrower.
3. Notwithstanding anything to the contrary contained herein, each
Lender may at any time collaterally assign all or any portion of its rights
under this Agreement and its Note to any Federal Reserve Bank to secure
overnight deposits, provided that no such assignment shall release the assigning
Lender from its obligations hereunder.
15. COMMUNICATIONS AND NOTICES.
----- --------------------------
15.1 COMMUNICATIONS AND NOTICES. All notices, requests and other
- ---- --------------------------
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first-class mail, in all cases, with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Borrowers: c/o Specialty Products and Insulation Co.
1097 Commercial Ave.
P.O. Box 576
East Petersburg, PA 17520
Attention: Michael J. Hughes, Vice-President and CFO
Telecopier: (717) 519-4046
With a copy to: Barley, Snyder, Senft, Cohen LLC
126 E. King St.
Lancaster, PA 17602-2893
Attention: Paul G. Mattaini, Esq.
Telecopier: (717) 291-4660
To Agent: Mellon Bank, N.A.
Middle Market Banking, Commonwealth Region
10 South Second Street
P.O. Box 1010
Harrisburg, PA 17108-1010
Attention: Joseph N. Butto, Vice President
Telecopier: (717) 777-3363
50
<PAGE>
With a copy to: Wolf, Block, Schorr and Solis-Cohen LLP
350 Sentry Parkway, Building 640
Blue Bell, Pennsylvania 19422
Attention: Katherine F. Bastian, Esquire
Telecopy Number: (610) 238-0305/0374
To Lenders at their addresses set forth on SCHEDULE B hereto.
----------
16. WAIVERS.
----- -------
16.1 WAIVERS. IN CONNECTION WITH ANY PROCEEDINGS UNDER THE LOAN DOCUMENTS,
- ---- -------
INCLUDING WITHOUT LIMITATION ANY ACTION IN REPLEVIN, FORECLOSURE OR OTHER COURT
PROCESS OR IN CONNECTION WITH ANY OTHER ACTION RELATED TO THE LOAN DOCUMENTS OR
THE TRANSACTIONS CONTEMPLATED HEREUNDER, EACH OBLIGOR WAIVES:
1. all procedural errors, defects and imperfections in such proceedings;
2. all benefits under any present or future laws exempting any property,
real or personal, or any part of any proceeds thereof from attachment, levy or
sale under execution, or providing for any stay of execution to be issued on any
judgment recovered under any of the Loan Documents or in any replevin or
foreclosure proceeding, or otherwise providing for any valuation, appraisal or
exemption;
3. all rights to inquisition on any real estate, which real estate may
be levied upon pursuant to a judgment obtained under any of the Loan Documents
and sold upon any writ of execution issued thereon in whole or in part, in any
order desired by Agent;
4. presentment for payment, demand, notice of demand, notice of non-
payment, protest and notice of protest of any of the Loan Documents, including
the Notes;
5. any requirement for bonds, security or sureties required by statute,
court rule or otherwise; and
6. all rights to claim or recover attorney's fees and costs in the event
that any Obligor is successful in any action to remove, suspend or prevent the
enforcement of a judgment entered by confession.
16.2 FORBEARANCE. Subject to the provisions of ARTICLE 14 above, Agent may
- ---- ----------- ----------
release, compromise, forbear with respect to, waive, suspend, extend or renew
any of the terms of the Loan Documents, without notice to Obligors.
51
<PAGE>
17. SUBMISSION TO JURISDICTION.
----- --------------------------
17.1 SUBMISSION TO JURISDICTION. Each Borrower hereby consents to the
- ---- --------------------------
exclusive jurisdiction of any state or federal court located within the
Commonwealth of Pennsylvania, and irrevocably agrees that, subject to the
Agent's election, all actions or proceedings relating to the Loan Documents or
the transactions contemplated hereunder shall be litigated in such courts, and
each Borrower waives any objection which it may have based on lack of personal
jurisdiction, improper venue or forum non conveniens to the conduct of any
proceeding in any such court and waive personal service of any and all process
upon it and consents that all such service of process be made by mail or
messenger directed to them at the address set forth in SECTION 15.1. Nothing
------------
contained in this SECTION 17.1 shall affect the right of Agent to serve legal
------------
process in any other manner permitted by law or affect the right of Agent to
bring any action or proceeding against any Borrower or its property in the
courts of any other jurisdiction.
18. MISCELLANEOUS.
----- -------------
18.1 BROKERS. The transaction contemplated hereunder was brought about and
- ---- -------
entered into by Agent, Lenders and Obligors acting as principals and without any
brokers, agents or finders being the effective procuring cause hereof.
Borrowers represent to Agent and Lenders that Borrowers have not committed Agent
or Lenders to the payment of any brokerage fee or commission in connection with
this transaction. If any such claim is made against Agent or Lenders by any
broker, finder or agent or any other Person claiming by, through or under a
Borrower or based on any actions or agreement by a Borrower, Borrowers agrees to
indemnify, defend and hold Agent or Lenders harmless against any such claim, at
Borrowers= own cost and expense, including Agent's and/or Lenders' attorneys'
fees. Borrowers further agree that until any such claim or demand is
adjudicated in Agent's and/or Lenders' favor, the amount claimed and/or demanded
shall be deemed part of the Lender Indebtedness.
18.2 USE OF LENDERS' NAMES. No Obligor shall use Agent's or any Lender's name
- ---- ---------------------
or the name of any of Lenders' Affiliates in connection with any of its business
or activities except as may otherwise be required by the rules and regulations
of the Securities and Exchange Commission or any like regulatory body and except
as may be required in its dealings with any governmental agency.
18.3 NO JOINT VENTURE. Nothing contained herein is intended to permit or
- ---- ----------------
authorize any Obligor to make any contract on behalf of any Lender nor shall
this Agreement be construed as creating a partnership, joint venture or making
any Lender an investor in any Obligor.
18.4 SURVIVAL. All covenants, agreements, representations and warranties made
- ---- --------
by Obligors in the Loan Documents or made by or on their behalf in connection
with the transactions contemplated here shall be true at all times this
Agreement is in effect and shall survive the execution and delivery of the Loan
Documents, any investigation at any time made by Agent or any Lender on its
behalf and the making by Agent of the Loans to Borrowers. All statements
contained in any certificate, statement or other document delivered by or on
behalf of Obligors pursuant hereto or in connection with the transactions
contemplated hereunder shall be deemed representations and warranties by
Obligors.
52
<PAGE>
18.5 NO ASSIGNMENT. No Obligor may assign any of its rights hereunder and
- ---- -------------
Lenders shall not be required to lend hereunder except to Borrowers as they
presently exist.
18.6 BINDING EFFECT/JOIN AND SEVERAL LIABILITY. This Agreement and all rights
- ---- -----------------------------------------
and powers granted hereby will bind and inure to the benefit of the parties
hereto and their respective permitted successors and assigns. All obligations,
covenants, and agreements of Borrowers, or any of them, herein are and shall be
the joint and several obligation of each Borrower.
18.7 SEVERABILITY. The provisions of this Agreement and all other Loan
- ---- ------------
Documents are deemed to be severable, and the invalidity or unenforceability of
any provision shall not affect or impair the remaining provisions which shall
continue in full force and effect.
18.8 NO THIRD PARTY BENEFICIARIES. The rights and benefits of this Agreement
- ---- ----------------------------
and the Loan Documents shall not inure to the benefit of any third party.
18.9 MODIFICATIONS. No modification of this Agreement or any of the Loan
- ---- -------------
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
18.10 HOLIDAYS. If the day provided herein for the payment of any amount or
- ----- --------
the taking of any action falls on a Saturday, Sunday or public holiday at the
place for payment or action, then the due date for such payment or action will
be the next succeeding Business Day.
18.11 LAW GOVERNING. This Agreement has been made, executed and delivered in
- ----- -------------
the Commonwealth of Pennsylvania and will be construed in accordance with and
governed by the laws of such Commonwealth.
18.12 INTEGRATION. The Loan Documents shall be construed as integrated and
- ----- -----------
complementary of each other, and as augmenting and not restricting Agent's or
Lender's rights, powers, remedies and security. The Loan Documents contain the
entire understanding of the parties thereto with respect to the matters
contained therein and supersede all prior agreements and understandings between
the parties with respect to the subject matter thereof and do not require parol
or extrinsic evidence in order to reflect the intent of the parties. In the
event of any inconsistency between the terms of this Agreement and the terms of
the other Loan Documents, the terms of this Agreement shall prevail.
18.13 EXHIBITS AND SCHEDULES. All exhibits and schedules attached hereto are
- ----- ----------------------
hereby made a part of this Agreement.
18.14 HEADINGS. The headings of the Articles, Sections, paragraphs and clauses
- ----- --------
of this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement.
18.15 COUNTERPARTS. This Agreement may be executed in any number of
- ----- ------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
53
<PAGE>
18.16 WAIVER OF RIGHT TO TRIAL BY JURY. BORROWERS, AGENT AND EACH LENDER WAIVE
- ----- --------------------------------
ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a)
ARISING UNDER ANY OF THE LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF SUCH PARTIES WITH RESPECT TO ANY OF THE
LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWERS, AGENT AND EACH
LENDER AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS
AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWERS, AGENT AND EACH LENDER TO
THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. BORROWERS ACKNOWLEDGE THAT THEY
HAVE HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT
THEY FULLY UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY
AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BORROWERS:
SPECIALTY PRODUCTS & INSULATION CO.
By:
Name/Title:
Attest:
Name/Title:
By:
Name/Title:
Attest:
Name/Title:
54
<PAGE>
MELLON BANK, N.A., as Agent
By: ________________________________________
Name/Title:__________________________________
MELLON BANK, N.A., as Issuing Bank
By: ________________________________________
Name/Title:__________________________________
MELLON BANK, N.A., as Lender
By: ________________________________________
Name/Title:__________________________________
PNC BANK, NATIONAL ASSOCIATION, as Lender
By: ________________________________________
Name/Title:__________________________________
55
<PAGE>
SCHEDULE A
----------
APPLICABLE
MARGINS, APPLICABLE USAGE FEE
AND APPLICABLE LC FEE
<TABLE>
<CAPTION>
Indebtedness to
EBITDA Tier LIBOR Federal Prime Usage Letter of
Ratio Margin Funds Margin Fee % (per Credit Fee
Margin annum)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Less than or equal
to 1.00 I 0.75% 1.00% 0.25% 0.10% 0.75%
- ---------------------------------------------------------------------------------------------------------
Greater than 1.00
but less than or II 1.00% 1.25% 0.50% 0.15% 1.00%
equal to 2.00
- ---------------------------------------------------------------------------------------------------------
Greater than 2.00
but less than or III 1.50% 1.75% 0.75% 0.20% 1.50%
equal to 3.00
- ---------------------------------------------------------------------------------------------------------
Greater than 3.00
IV 2.00% 2.25% 1.00% 0.25% 2.00%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
SCHEDULE B
----------
PRO RATA PRO RATA
LENDER PERCENTAGE SHARE
- ----------------------------------------------------------------------
Mellon Bank, N.A. 58.333% [CONFIRM] $17,500,000.00
PNC Bank, National Association 41.666% $12,500,000.00
TOTAL 100.000% $30,000,000.00
======= ==============
LENDERS AND ADDRESSES
---------------------
Mellon Bank, N.A.
Middle Market Banking, Commonwealth Region
10 South Second Street
P.O. Box 1010
Harrisburg, PA 17108-1010
Attention: Joseph N. Butto, Vice President
Telecopier: (717) 777-3363
PNC Bank, National Association
4242 Carlisle Pike
Camphill, PA 17011
Attention: Tom Dilworth, Vice-President
Telecopier: (717) 730-2387
With a copy to: PNC Bank, National Association
1600 Market Street, 28th Floor
Philadelphia, PA 19103
Attention: Stephen D. Chopnick, Senior Counsel
Telecopier: (215) 585-8713
57
<PAGE>
Exhibit 11.0
------------
SPECIALTY PRODUCTS & INSULATION CO.
COMPUTATION OF PROFORMA EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Year Ended For the Three Months Ended
December 31, 1998 March 31, 1998
<S> <C> <C>
Net income - Basic and Diluted $ 3,007 $ 503
========== ==========
Shares:
Weighted average number
of shares outstanding 2,913,547 2,913,547
Number of shares whose
proceeds will be used
to pay the dividend 953,637(1) 953,637(1)
---------- ----------
Total 3,867,184 3,867,184
========== ==========
Pro Forma Earnings Per Share-
Basic and Diluted $ 0.78 $ 0.13
========== ==========
</TABLE>
(1) Assumes $11 offering price per share and a $10,490,000 dividend to be
paid to the parent company
