<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10
FILED PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
----------------
SPECIALTY PRODUCTS & INSULATION CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
PENNSYLVANIA 23-1713012
(I.R.S. Employer
(State or other Identification No.)
jurisdiction of
incorporation or
organization)
----------------
1097 COMMERCIAL AVENUE
P.O. BOX 576 17520-0576
EAST PETERSBURG, (Zip Code)
PENNSYLVANIA
(Address of principal
executive offices)
----------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (717) 569-3900
COPY TO:
THOMAS A. RALPH, ESQ.
CHRISTOPHER G. KARRAS, ESQ.
DECHERT PRICE & RHOADS
4000 BELL ATLANTIC TOWER
1717 ARCH STREET
PHILADELPHIA, PENNSYLVANIA 19103-2793
(215) 994-4000
----------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY
REFERENCE
<TABLE>
<CAPTION>
FORM 10
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- -------- ------------ ---------------------------------
<S> <C> <C>
1. Business.................... "Summary," "Business" and "Management's
Discussion and Analysis of Results of
Operations and Financial Condition."
2. Financial Information....... "Summary," "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis
of Results of Operations and Financial
Condition."
3. Properties.................. "Business."
4. Security Ownership of
Certain Beneficial Owners
and Management.............. "Principal Shareholders."
5. Directors and Executive "Management."
Officers....................
6. Executive Compensation...... "Management."
7. Certain Relationships and
Related Transactions........ "Summary," "Management," and "Separation from
Irex."
8. Legal Proceedings........... "Business" and "Separation from Irex."
9. Market Price of and
Dividends on the
Registrant's Common Equity
and Related Stockholder
Matters..................... "Dividend Policy" and "Description of Capital
Stock."
11. Description of Registrant's
Securities to be
Registered.................. "Description of Capital Stock."
12. Indemnification of Directors
and Officers................ "Management" and "Description of Capital Stock."
13. Financial Statements and
Supplementary Data.......... "Summary," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of
Results of Operations and Financial Condition"
and "Index to Financial Statements."
15. Financial Statements and
Exhibits.................... "Index to Financial Statements."
</TABLE>
<PAGE>
INFORMATION STATEMENT
IREX CORPORATION'S SPIN-OFF
OF
SPECIALTY PRODUCTS & INSULATION CO.
THROUGH A DISTRIBUTION OF COMMON STOCK
TO THE
HOLDERS OF IREX CORPORATION COMMON STOCK
This Information Statement is being furnished by Irex Corporation ("Irex")
to its shareholders in connection with the distribution (the "Distribution")
to such shareholders of one share of the common stock, par value $.01 per
share ("Common Stock"), of Specialty Products & Insulation Co. ("SPI" or the
"Company") for every fifty shares of common stock of Irex owned on the Record
Date (as defined below). To effect the Distribution, Irex is causing 100% of
the outstanding shares of SPI Common Stock (which are solely owned by Irex) to
be distributed to the holders of Irex common shares. As a result of the
Distribution, the Company will cease to be a subsidiary of Irex and Irex will
no longer own any shares of SPI Common Stock.
Immediately following the Distribution, Evercore Capital Partners L.P.,
Evercore Capital Partners (NQ) L.P. and Evercore Capital Offshore Partners
L.P. (collectively, "Evercore") will invest approximately $15.4 million in SPI
in exchange for 7,113 shares of newly-issued SPI Common Stock, and certain
officers of the Company will acquire 109 shares of newly-issued Common Stock.
Evercore's investment in the Company, together with the amounts invested by
SPI's management, shall be referred to herein as the "New Investment." As a
result of the Distribution and the New Investment, approximately 55% of SPI's
Common Stock will be owned by shareholders of Irex who are receiving stock in
the Distribution and by the Company's management, and approximately 45% of the
Common Stock will be owned by Evercore.
Certificates for the Common Stock will be mailed on or about January 15,
1999 to holders of record of Irex common stock at the close of business on
December 28, 1998 (the "Record Date"). The Company will not mail certificates
for fractional shares, but instead, will cancel such shares and issue cash in
lieu of them at a rate of $2,698.08 per share. No consideration will be paid
by Irex shareholders for shares of Common Stock.
Irex will receive an opinion of counsel to the effect that the Distribution
is not taxable to Irex and its shareholders for federal income tax purposes.
See "Separation from Irex--Federal Income Tax Consequences."
NO VOTE OF IREX SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION.
THEREFORE, WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
----------------
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 INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS INFORMATION STATEMENT IS DECEMBER 18, 1998.
<PAGE>
INFORMATION STATEMENT SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements and notes thereto appearing elsewhere in
this Information Statement. For purposes of this Information Statement, the
"Company" and "SPI"refer to Specialty Products & Insulation Co. and its
consolidated subsidiaries, unless the context otherwise requires. Unless
otherwise indicated, the information contained in this Information Statement
(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") and (ii)
gives effect to the recapitalization of each share of the Company's previously
issued common stock into 0.8636 shares of Common Stock.
THE COMPANY
The Company is a 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 58 distribution
centers, including ten fabrication facilities, at locations in 24 states.
Through this network, the Company sells approximately 25,000 stock keeping
units to more than 9,000 customers. Such customers include 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, an 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 nine months of 1998, net sales and operating
income totalled $139.9 million and $5.3 million, respectively, as compared to
$115.4 million and $5.0 million, respectively, in the first nine months of
1997.
Significant changes in the Company's markets have resulted in the emergence
of an independent distribution channel. Independent distribution has reduced
duplicative 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 small 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 benefit from the consolidation in this
industry.
Two key components of the Company's growth strategy have been acquisitions
and openings of distribution and service centers ("distribution centers"). This
strategy has enabled the Company to further penetrate existing markets, broaden
its product and service capabilities and take advantage of current industry
dynamics. For the
2
<PAGE>
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 five acquisitions and
opened three distribution centers.
The Company is committed to capitalizing on the expertise, knowledge and
experience it has developed in its 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.
3
<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 ACQUISITIONS
On March 1, 1998, the Company acquired certain assets relating to the
mechanical insulation distribution and fabrication operations of Extol of
Texas, Inc., with service centers located 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.
On June 29, 1998, the Company acquired certain assets relating to the
mechanical insulation distribution and fabrication operations of Presnell
Insulation Co., Inc. ("Presnell") for cash consideration of approximately $1.0
million. Presnell has distribution centers in Charlotte, North Carolina,
Birmingham, Alabama and Atlanta, Georgia. The acquisition was financed by
borrowings from Irex. For the year ended December 31, 1997, Presnell generated
sales of approximately $3.8 million.
On October 26, 1998, the Company acquired the outstanding common stock of
Paragon Industries, Inc. ("Paragon"), a distributor and laminator of numerous
mechanical insulation, HVAC, metal building insulation and specialty products.
The purchase price for Paragon was approximately $3.7 million (including the
assumption of $1.7 million of debt). The acquisition was financed by borrowings
from Irex. For the fiscal year ended March 31, 1998, Paragon generated sales of
approximately $15.0 million.
On December 1, 1998, the Company acquired certain assets relating to the
mechanical insulation, distribution and fabrication operations of Chempower,
Inc. ("Chempower"), located in Charleston, West Virginia, for cash
consideration of approximately $0.4 million. The acquisition was financed by
borrowings from Irex.
On December 14, 1998, the Company acquired all of the issued and outstanding
common stock of Acoustical Supply Corporation ("ASCO"), located in Bensalem,
Pennsylvania, for cash consideration of approximately $0.9 million (including
the assumption of $0.3 million of debt). The acquisition was financed by
borrowings from Irex. For the fiscal year ended March 31, 1998, ASCO generated
sales of approximately $4.0 million.
THE DISTRIBUTION AND SEPARATION FROM IREX
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. On December 16, 1998, the Company
declared a reverse stock split, whereby each share of the Company's previously-
issued common stock was converted into 0.8636 shares of Common Stock. The
reverse stock split
4
<PAGE>
reduced the Company's outstanding stock from 10,000 to 8,636 shares of Common
Stock, all of which were held by Irex. The Company is now effecting the
Separation by distributing such shares to the shareholders of Irex on the basis
of one share of SPI Common Stock for every fifty Irex common shares held. The
Company will issue certificates for such shares on or about January 15, 1999.
The Company will not issue certificates for fractional shares, but, instead,
will cancel such shares and such shares issue cash in lieu of them at a rate of
$2,698.08 per share. As a result of the Separation and the New Investment
(discussed below), all of the capital stock of the Company will be owned by the
shareholders of Irex who are receiving shares of Common Stock in the
Separation, the Company's management and by Evercore. See "Separation from
Irex."
Immediately prior to the Separation, the Company will declare a dividend of
$10.5 million to be paid to Irex, as the Company's sole shareholder. The
dividend will be paid by means of $7.0 million in cash and $3.5 million of
junior subordinated notes of SPI.
The decision to effect the Separation was based on a number of factors.
First, it will give both corporations greater managerial, operational and
financial flexibility to focus on and respond to changing market conditions in
their respective business environments. Second, the Company's ability to pursue
and finance acquisitions and other business opportunities will be enhanced by
operating independently. Third, 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 by the Company following its
Separation from Irex, rather than through financings by either Irex or the
Company while Irex continued to hold a substantial equity interest in the
Company. Fourth, 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. Finally the Separation will 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 is entering 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."
NEW INVESTMENT
On December 31, 1998 (the "Closing Date"), immediately following the
consummation of the Distribution, Evercore will invest approximately $15.4
million in the Company in exchange for 7,113 shares of Common Stock of SPI. The
purchase price per share of Common Stock will be $2,158.46. As a result of the
Distribution and such New Investment in the Company, as of the Closing Date
approximately 55% of SPI Common Stock will be owned by shareholders of Irex who
received stock in the Distribution and the Company's management, and
approximately 45% of SPI Common Stock will be owned by Evercore.
The Company and Evercore are parties to a Stock Subscription Agreement, dated
October 27, 1998 (the "Stock Subscription Agreement"), which contains certain
provisions relating to the future control of the Board of Directors of SPI. The
Stock Subscription Agreement also contains provisions restricting the Company's
business dealings with affiliates, including Evercore, and gives Evercore and
certain other owners of the Company's stock the right to demand the
registration of their Common Stock. See "New Investment."
In connection with the New Investment, the Company is adopting amended and
restated by-laws (the""By-laws") which contain certain provisions governing the
voting rights of the Board of Directors. Under the By-laws, certain actions of
the Board of Directors will require a supermajority vote of two-thirds of the
authorized Directors of the Company (but not less than five Directors). Such
actions include, but are not limited to approval of mergers, acquisitions,
dividends and the issuance of additional equity securities.
5
<PAGE>
In connection with the New Investment, SPI is entering into a Note Purchase
Agreement with Evercore (the "Evercore Note Purchase Agreement"), which,
subject to the conditions set forth therein, will provide funding for up to 25%
of the purchase price of certain acquisitions by SPI of related businesses, as
well as for general corporate purposes. The Evercore Note Purchase Agreement
provides for the immediate purchase by Evercore of $3.5 million of the
Company's Adjustable Rate Junior Subordinated Pay-in-Kind-Notes due 2007 (the
"ECP Notes"), bearing an interest rate of 11%. The proceeds of these Notes will
be used for general corporate purposes. In addition, Evercore has agreed to
purchase an aggregate additional amount of up to $20 million of the ECP Notes
over a three year period to fund up to 25% of the purchase price of
acquisitions, subject to certain conditions including a requirement that the
Company have a ratio of indebtedness under its Credit Agreement to EBITDA in
excess of 2.5 to 1.0. The Evercore Note Purchase Agreement contains a number of
restrictive covenants, including covenants which limit transactions with
affiliates and payments of dividends, and requires that the Company maintain a
certain leverage ratio. All indebtedness of the Company under the Evercore Note
Purchase Agreement will be subordinated and rank junior to all other
indebtedness of the Company, other than trade indebtedness and indebtedness of
the Company which is expressly ranked junior to the ECP Notes.
CERTAIN RISK FACTORS
See "Risk Factors" beginning on page 7 for a discussion of certain
information that should be considered by shareholders of the Common Stock.
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 New Investment occurred on
September 30, 1998. The pro forma income statement information assumes the New
Investment occurred 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 Information Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPT. 30,
-------------------------- -----------------
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 $115,381 $139,939
-------- -------- -------- -------- --------
Gross profit..................... 25,892 31,110 34,252 25,001 31,413
-------- -------- -------- -------- --------
Operating income................. 4,051 6,348 7,023 5,005 5,290
Interest expense, net............ 1,840 1,854 1,939 1,431 1,648
-------- -------- -------- -------- --------
Income before income taxes....... 2,211 4,494 5,084 3,574 3,642
Income tax provision............. 918 1,810 2,077 1,460 1,607
-------- -------- -------- -------- --------
Net income....................... $ 1,293 $ 2,684 $ 3,007 $ 2,114 $ 2,035
======== ======== ======== ======== ========
Net income per share--basic...... $ 149.72 $ 310.79 $ 348.19 $ 244.79 $ 235.64
Net income per share--diluted.... $ 149.72 $ 310.79 $ 348.19 $ 244.79 $ 235.64
Weighted average number of common
shares outstanding--basic....... 8,636 8,636 8,636 8,636 8,636
Weighted average number of common
shares outstanding--diluted..... 8,636 8,636 8,636 8,636 8,636
PRO FORMA INCOME STATEMENT DATA
(1):
Operating income................. $ 7,023 $ 5,290
Interest expense, net............ 1,753 1,443
-------- --------
Income before income taxes....... 5,270 3,847
Income tax provision............. 2,153 1,691
-------- --------
Net income....................... $ 3,117 $ 2,156
======== ========
Net income per share--basic...... $ 196.56 $ 135.96
Net income per share--diluted.... $ 196.56 $ 135.96
Weighted average number of common
shares outstanding--basic....... 15,858 15,858
Weighted average number of common
shares outstanding--diluted..... 15,858 15,858
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF SEPTEMBER 30, 1998
----------------------- -------------------------------------
ACTUAL ACTUAL PRO FORMA (3) AS ADJUSTED (4)
----------------------- ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $11,266 $10,620 $ 130 $17,591
Total assets ........... 47,651 59,812 59,812 59,812
Total debt (2).......... 26,493 31,626 31,626 28,028
Shareholder's equity.... 9,180 11,137 647 14,735
</TABLE>
- --------
(1) Gives pro forma effect to the New Investment including the subordinated
debt borrowings and the application of the estimated net proceeds therefrom
as if such transactions had occurred on January 1, 1997.
(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, and subordinated debt borrowings.
(3) Represents actual data as of September 30, 1998 as adjusted to give effect
to the $10.5 million planned dividend to Irex. Such dividend will be paid
in a combination of $7.0 million of cash and $3.5 million of junior
subordinated notes.
(4) Adjusted to reflect (i) the Separation, including the $10.5 million
dividend to Irex (in the form of cash and notes), (ii) the New Investment
private equity offering of 7,222 shares of Common Stock by the Company at
an assumed offering price of $2,158.46 per share, (iii) the application of
approximately $10.6 million of the net proceeds to the repayment of
indebtedness (both long-term and payable to affiliates) as well as the
partial repayment of indebtedness incurred in connection with the
declaration of the $10.5 million dividend to Irex, (iv) the issuance of
subordinated debt, and (v) the recapitalization of each share of the
Company's previously issued common stock into 0.8636 shares of Common
Stock.
7
<PAGE>
RISK FACTORS
Shareholders of Irex receiving shares of Common Stock as a result of the
Separation should carefully consider the following risk factors as well as the
other information set forth elsewhere in this Information Statement.
LACK OF INDEPENDENT OPERATING HISTORY
The Company has no operating history independent of Irex. Until the
Separation, the Company will have operated only as a wholly owned subsidiary
of Irex and relied on Irex for various financial, administrative and
managerial services necessary for its operations. SPI has also maintained a
minimal executive, financial and administrative staff. As a result of 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. 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." The Company may
encounter financial, administrative, managerial or other difficulties as well
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 will be limited under federal income tax
laws for a period of at least two years following consummation of the
Separation. The Company's limited ability to issue capital stock during such
period (including its limited 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. 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; INABILITY 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. In addition, 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. 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 business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Growth Strategy."
8
<PAGE>
CONTROLLING SHAREHOLDER
Following the New Investment, Evercore will beneficially own approximately
45% of the Common Stock of the Company. This concentration of ownership will
give Evercore a significant degree of influence over the affairs of the
Company. In addition, at all times prior to the third anniversary of the date
of the New Investment, the Company has agreed to support the nomination to the
Board of Directors of at least three persons recommended by Evercore (the
"Evercore Directors"), so long as Evercore owns greater than 30% of the Common
Stock. The Evercore Directors will effectively have the right to approve
certain actions of the Company, including certain mergers, the issuance of
additional securities and the declaration of dividends. Following the third
anniversary of the date of the New Investment, Evercore may also seek to elect
a majority of the Board of Directors. Circumstances may occur in which the
interests of Evercore could be in conflict with the interests of the other
shareholders of the Company.
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. There can
be no assurance that the Company will be able to maintain its relationships
with its suppliers in the future. 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 relying
increasingly 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.
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."
9
<PAGE>
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 is entering into an agreement with Irex
pursuant to which Irex will provide information system services to the Company
for at least 18 months and up to three years following the 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 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."
In addition to the above risks, the Company may be affected by the failure
of certain of its computerized equipment to function as designed as a result
of the inability of such equipment to process dates following December 31,
1999. There can be no assurance that the Company will complete its review and
testing of such equipment prior to December 31, 1999 or that qualified
computer programming personnel will be available or able to correct problems
which are identified prior to such time. 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 is entering 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. The Tax Agreement will also require the Company to
indemnify Irex (i) for certain tax liabilities attributable to the income or
operations of the Company for periods prior to the consummation of the
Separation, and (ii) for tax liabilities that may be incurred by Irex as a
result of actions that the Company may undertake following the Separation that
cause the Separation to be treated as a taxable transaction to Irex. 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 of 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. 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 the 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. See "Separation from Irex--Agreements with
Irex--Tax Sharing and Indemnification Agreement."
LACK OF ARM'S-LENGTH BARGAINING ON AGREEMENTS WITH IREX
The Company is entering into certain agreements with Irex and its
subsidiaries (the "Separation Agreements") in connection with the Separation
which set forth the terms of the Separation, the right to utilize
10
<PAGE>
Irex's information system, tax sharing and indemnification, and benefits
sharing. The terms of the Separation Agreements were fixed, in part, between
Irex and the Company when they were parent and subsidiary and not independent
parties negotiating on an arm's-length basis. Accordingly, there is no
assurance that the terms of the Separation Agreements will be as favorable to
the Company as those that might be obtained from an unaffiliated third party.
BENEFITS TO IREX AND ITS AFFILIATES AS A RESULT OF THE SEPARATION AND NEW
INVESTMENT
Irex and its affiliates other than the Company, none of which is affiliated
with the Company, are receiving the following benefits as a result of the
Separation and Offering: (i) a $10.5 million cash dividend to be declared by
the Company to Irex immediately prior to the Separation, which dividend will
be paid with $7 million in cash from the proceeds of the New Investment and
the remainder through the execution of a $3.5 million subordinated note to
Irex; (ii) payment of approximately $7.1 million of debt owed by the Company
as of September 30, 1998 to Irex or affiliates of Irex, which will be paid
with proceeds of the New Investment; and (iii) payment of approximately $24.5
million owed to Irex as of September 30, 1998 pursuant to an intercompany
account which the Company intends to pay with funds borrowed from a credit
facility which it will enter into upon receiving the New Investment. See
"Separation from Irex." The actual amounts of such intercompany accounts to be
repaid will be determined as of the date of the consummation of the New
Investment.
POTENTIAL INFLUENCE OF IREX C.E.O.
Upon completion of the New Investment and Separation, W. Kirk Liddell and
his spouse will beneficially own approximately 6.2% of the Company's
outstanding Common Stock. In addition, approximately 5.0% of the Company's
outstanding Common Stock will be held by a custodian for Mr. Liddell's minor
children. See "Principal Shareholders." Mr. Liddell serves on the Company's
Board of Directors and is President, Chief Executive Officer and a director of
Irex. As a result of his share ownership in SPI 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 interests
will be as favorable to the Company as actions taken in the absence of such
conflicts.
COMPETITION
The Company's markets are fragmented and highly competitive, and feature
numerous distribution channels, including national, regional and local
distributors; local supply houses; and direct sales by manufacturers. Many of
the Company's competitors are smaller businesses that sell to customers in a
limited geographic area; others are significant regional distributors. Certain
of the Company's competitors sell identical or equivalent products at
competitive prices. 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. 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."
11
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Company's restated articles of incorporation divide SPI's Board of
Directors into three classes, each serving a multi-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 as the Board of Directors may determine. Should the Board
of Directors elect to issue Preferred Stock, 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 the Preferred Stock. The potential issuance of Preferred
Stock could also 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
There is no public market for the Common Stock. Although the Common Stock is
registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), an active or liquid trading market in the Common Stock will
likely not develop. In addition, such registration may be terminated upon
application of the Company to the Securities and Exchange Commission (the
"Commission") if there are fewer than 300 record holders of the Common Stock.
The Company anticipates that upon the consummation of the transactions
contemplated herein, the Company will have fewer than 300 shareholders of
record and that, if this is the case, it will seek to deregister the Common
Stock under the Exchange Act. The termination of registration of the Common
Stock under the Exchange Act would substantially reduce the information
required to be furnished by the Company to holders of Common Stock and to the
Commission and would make certain provisions of the Exchange Act no longer
applicable to the Common Stock. Such termination would reduce the information
about the Company which is publicly available, and consequently, the public
market for any publicly held stock of the Company would also likely be
reduced.
12
<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 Information Statement. 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
Information Statement. The historical financial information as of and for the
years ended December 31, 1993 and December 31, 1994 and for the nine months
ended September 30, 1997 and September 30, 1998 and as of December 31, 1995
and September 30, 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 described herein and the
New Investment had been effected on the dates indicated or that may be
achieved in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPT. 30,
------------------------------------------- -----------------
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 $115,381 $139,939
------- -------- -------- -------- -------- -------- --------
Gross profit........... 18,937 21,564 25,892 31,110 34,252 25,001 31,413
Selling, general, and
administrative
expense............... 17,426 18,957 21,841 24,762 27,229 19,996 26,123
------- -------- -------- -------- -------- -------- --------
Operating income....... 1,511 2,607 4,051 6,348 7,023 5,005 5,290
Interest expense, net.. 913 1,194 1,840 1,854 1,939 1,431 1,648
------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. 598 1,413 2,211 4,494 5,084 3,574 3,642
Income tax provision... 216 655 918 1,810 2,077 1,460 1,607
------- -------- -------- -------- -------- -------- --------
Net income ............ $ 382 $ 758 $ 1,293 $ 2,684 $ 3,007 $ 2,114 $ 2,035
======= ======== ======== ======== ======== ======== ========
Net income per share-
basic................. $ 44.23 $ 87.77 $ 149.72 $ 310.79 $ 348.19 $ 244.79 $ 235.64
Net income per share-
diluted............... $ 44.23 $ 87.77 $ 149.72 $ 310.79 $ 348.19 $ 244.79 $ 235.64
Weighted average number
of common shares
outstanding--basic.... 8,636 8,636 8,636 8,636 8,636 8,636 8,636
Weighted average number
of common shares
outstanding--diluted.. 8,636 8,636 8,636 8,636 8,636 8,636 8,636
PRO FORMA INCOME
STATEMENT DATA (1):
Operating income....... $ 7,023 $ 5,290
Interest expense, net.. 1,753 1,443
-------- --------
Income before income
taxes................. 5,270 3,847
Income tax provision... 2,153 1,691
-------- --------
Net income............. $ 3,117 $ 2,156
======== ========
Net income per share--
basic................. $ 196.56 $ 135.96
Net income per share--
diluted............... $ 196.56 $ 135.96
Weighted average number
of common shares
outstanding--basic.... 15,858 15,858
Weighted average number
of common shares
outstanding--diluted.. 15,858 15,858
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 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 $10,620 $ 130 $17,591
Total assets........... 28,480 31,814 36,026 38,935 47,651 59,812 59,812 59,812
Total debt (2)......... 19,055 20,819 22,996 22,370 26,493 31,626 31,626 28,028
Shareholder's equity... 3,279 3,655 4,200 6,421 9,180 11,137 647 14,735
</TABLE>
- --------
(1) Adjusted to reflect the change 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 New Investment and the
increase in subordinated debt 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 $4,993 in 1998) and other long-term debt
($94 in 1997 and $73 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 $26,560 in
1998.
(3) Represents actual data as of September 30, 1998 as adjusted to give effect
to the planned $10.5 million dividend to Irex. Such dividend will be paid
in a combination of $7.0 million in cash and with $3.5 million of junior
subordinated notes.
(4) Adjusted to reflect (i) the Separation, including the $10.5 million
dividend to Irex (in the form of cash and notes), (ii) the New Investment
private equity offering of 7,222 shares of Common Stock by the Company at
an assumed offering price of $2,158.46 per share, (iii) the application of
approximately $10.6 million of the net proceeds to the repayment of
indebtedness (both long-term and payable to affiliates) as well as the
partial repayment of indebtedness incurred in connection with the
declaration of the $10.5 million dividend to Irex, (iv) the issuance of
subordinated debt, and (v) the recapitalization of each share of the
Company's previously issued common stock into 0.8636 shares of Common
Stock.
14
<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 Information Statement.
The Company is a national 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 58 distribution centers, including ten fabrication
facilities, at locations in 24 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 Company also 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 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 followed this strategy in regional
markets and, more recently, has begun to implement it 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. In early 1998, the
Company planned to conduct an initial public offering of its Common Stock
immediately following the Separation. However, in June 1998, due to market
conditions, the Company postponed the proposed offering. On October 27, 1998,
the Company entered into a Stock Subscription Agreement with Evercore,
pursuant to which Evercore is investing approximately $15.4 million in SPI in
return for 7,113 shares of newly-issued Common Stock. At the time of the
Evercore investment, the Company's management also will purchase 109 shares of
Common Stock. The Company believes that the Separation and such New Investment
will provide the Company with increased flexibility to fund and execute its
growth strategy of internal expansion and acquisitions.
15
<PAGE>
The Company is entering into an agreement with Irex which provides, among
other things, for Irex to continue to provide information services to the
Company for at least 18 months and up to three-years 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 NINE MONTHS
SEPTEMBER ENDED
YEAR ENDED DECEMBER 31, 30, SEPTEMBER 30,
------------------------- ------------ --------------
1995 1996 1997 1997 1998 1997 1998
------- ------- ------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 78.1% 78.1% 78.4% 78.1% 77.2% 78.3% 77.6%
------- ------- ------- ----- ----- ------ ------
Gross profit............ 21.9% 21.9% 21.6% 21.9% 22.8% 21.7% 22.4%
Selling, general and
administrative
expenses............... 18.4% 17.4% 17.2% 16.4% 19.5% 17.4% 18.6%
------- ------- ------- ----- ----- ------ ------
Operating income........ 3.5% 4.5% 4.4% 5.5% 3.3% 4.3% 3.8%
Interest expense, net... 1.6% 1.3% 1.2% 1.2% 1.2% 1.2% 1.2%
------- ------- ------- ----- ----- ------ ------
Income before income
taxes.................. 1.9% 3.2% 3.2% 4.3% 2.1% 3.1% 2.6%
Income tax provision.... 0.8% 1.3% 1.3% 1.8% 1.1% 1.3% 1.1%
------- ------- ------- ----- ----- ------ ------
Net income.............. 1.1% 1.9% 1.9% 2.5% 1.0% 1.8% 1.5%
======= ======= ======= ===== ===== ====== ======
</TABLE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997
Net Sales. Net sales for the three month period ended September 30, 1998
increased to $49.9 million, an increase of $8.4 million or 20.2% from the
comparable period in 1997. For the nine month period ended September 30, 1998,
net sales grew by $24.6 million or 21.3%. The majority of the growth was a
result of acquisitions and new center openings. Additionally, sales at
previously existing locations also increased but were offset by reduced sales
to direct exporters.
Gross Profit. Gross profit increased to $11.3 million, an increase of $2.3
million or 24.8% for the three months ended September 30, 1998 as compared to
the three month period ended September 30, 1997. For the nine month period
ended September 30, 1998, gross profit aggregated $31.4 million increasing
$6.4 million or 25.7% as compared to the comparable period of the prior year.
In the third quarter of 1998, gross profit as a percentage of net sales was
22.8% as compared to 21.9% in the third quarter of 1997. For the nine months
ended September 30, 1998, the gross margin was 22.4% in 1998 and 21.7% in
1997.
The increase in the gross profit as a percentage of sales is primarily
attributable to margin expansion in certain product categories as opposed to
change in profit mix between product categories.
16
<PAGE>
Selling, General and Administrative Expenses ("SG&A"). During the third
quarter of 1998, the Company expensed $1.1 million related to a previously
announced initial public offering ("IPO") which the Company decided not to
pursue due to unfavorable market conditions. Excluding these expenses, SG&A
expenses in the quarter increased by 26.4% and 25.1% for the nine month period
ended September 30, 1998.
As a percent of net sales (exclusive of IPO expenses), SG&A was 17.3% in the
third quarter of 1998 as compared to 16.4% in the comparable 1997 period. For
the nine month period ended September 30, 1998, this SG&A ratio was 17.9% as
compared to 17.3% for the same period in 1997.
The increase in SG&A expenses (exclusive of IPO expenses) as a percent of
sales is a result of acquisitions, new center openings, expansion of existing
facilities and an increase in the provision for losses on accounts receivable.
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
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.
In the first nine months of 1997, the condition of the receivable balance
remained fairly constant with that as of December 31, 1996. In the first nine
months 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 debt increased by
$485,000 for the nine months ended September 30, 1998. The reserve totaled
$741,000 at September 30, 1998 as compared to $466,000 at December 31, 1997.
Interest Expense. Interest expense was $0.6 million and $0.5 million,
respectively, for the third quarter ended September 30, 1998 and 1997. Year-
to-date, interest expense was $1.6 million for 1998 compared to $1.4 million
in 1997. Interest expense on the long term notes payable to affiliate
accounted for $0.1 and $0.2 million in the three months and $0.6 and $0.5
million for the nine months ended September 30, 1998 and 1997. The remainder
represented the interest charge allocated to the Company from Irex 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 from Irex.
Income Tax Provision. The Company's effective tax rate was 51.8% for the
three months and 44.1% for the nine months ended September 30, 1998, and 40.8%
for the respective periods ended September 30, 1997. The Company's tax return
is included in the consolidated tax return of Irex. 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. On March 1, 1998, the Company acquired certain assets of Extol
of Texas, Inc. ("Extol"), with service centers in Houston and Corpus Christi,
Texas, for approximately $5.6 million in cash. Extol's sales were $3.4 million
and $8.1 million, respectively, for the three months and nine months ended
September 30, 1998.
On June 29, 1998, the Company acquired certain assets of Presnell Insulation
Co., Inc. ("Presnell") for cash consideration of approximately $1.0 million.
Presnell is primarily engaged in the distribution and fabrication of
mechanical insulation products, with service centers in Midland, North
Carolina, Birmingham, Alabama and Atlanta, Georgia. Presnell's sales
aggregated were $0.8 million for the three and nine month periods ended
September 30, 1998.
The results of operations of Construction Systems, Inc. ("CSI") from which
the Company purchased certain assets on December 8, 1997 are included in the
accompanying financial statements. CSI's sales were $3.0 million for the three
months and $8.1 million for the nine months ended September 30, 1998.
17
<PAGE>
On October 26, 1998, the Company acquired all of the issued and outstanding
stock of Paragon Industries, Inc. ("Paragon"), a distributor and laminator of
numerous mechanical insulation, HVAC metal building insulation and specialty
products. The purchase price for Paragon was approximately $3.7 million
(including the assumption of $1.7 million of debt). Sales for the fiscal year
ended March 1998 were approximately $15.0 million.
IPO Expenses. During the third quarter of 1998, the Company decided not to
proceed with the initial public offering of its common stock. In total,
approximately $1.1 million in expenses related to the initial public offering
were incurred through September 30, 1998 and were expensed in the third
quarter of 1998.
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.
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.
18
<PAGE>
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
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Information Statement 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
-----------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1997 1997 1997 1997 1998 1998 1998
--------- -------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $37,689 $36,371 $36,280 $37,553 $41,548 $43,129 $42,669 $47,367 $49,903
Cost of net sales....... 29,659 27,967 28,555 29,376 32,450 33,877 33,309 36,671 38,546
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,030 8,404 7,725 8,177 9,098 9,252 9,360 10,696 11,357
Selling, general and
administrative
expenses............... 6,067 6,783 6,588 6,585 6,822 7,234 7,992 8,402 9,729
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income........ $ 1,963 $ 1,621 $ 1,137 $ 1,592 $ 2,276 $ 2,018 $ 1,368 $ 2,294 $ 1,628
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
(AS A PERCENTAGE OF NET SALES)
-----------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1997 1997 1997 1997 1998 1998 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....... 78.7 76.9 78.7 78.2 78.1 78.5 78.1 77.4 77.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 21.3 23.1 21.3 21.8 21.9 21.5 21.9 22.6 22.8
Selling, general and
administrative
expenses............... 16.1 18.6 18.2 17.5 16.4 16.8 18.7 17.8 19.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 5.2% 4.5% 3.1% 4.3% 5.5% 4.7% 3.2% 4.8% 3.3%
===== ===== ===== ===== ===== ===== ===== ===== =====
</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 six months ended June 30, 1998, net cash provided by
operating activities totalled $2.4 million as compared to $0.5 million in the
first six months of 1997. The increase was primarily a result of an increase
in accounts payable net of the increase in accounts receivable as a result of
sales. Net cash used for investing activities totalled $6.8 million in the
first six months of 1998 as compared to $0.3 million in the comparable period
in 1997. The 1998 period reflects two acquisitions which resulted in goodwill
of approximately $0.9 million which will be amortized over 15 years. The net
cash provided from financing activities in the first six months of 1998 was
primarily a result of borrowings from affiliates.
Net cash provided by operating activities totaled $1.2 million during the
year ended December 31, 1997 compared to $1.9 million during the year ended
December 31, 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.
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 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.
Except for the acquisition which occurred on October 26, 1998, as of June
30, 1998, the Company had, and as of the date of this Information Statement,
the Company has, no material commitments for capital expenditures.
In connection with the New Investment, the Company declared a dividend of
$10.5 million to Irex. This dividend will be paid with $7.0 million in cash
from the proceeds of the New Investment and by issuing a $3.5 million
subordinated note to Irex.
The Company expects to enter into a committed revolving credit facility
agreement (the "Credit Agreement") in connection with and prior to
consummation of the New Investment. The credit facility is
20
<PAGE>
expected to provide approximately $50.0 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 New Investment 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 at June 30, 1998 were approximately $5.0 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.
Concurrently with the New Investment, SPI is entering into a Note Agreement
with Irex (the "Irex Note Agreement") which provides for the immediate
issuance to Irex of $3.5 million of the Company's Junior Subordinated Pay-in-
Kind Notes due 2002 (the "Irex Notes"), bearing an interest rate of 10.5%. The
Irex Notes will constitute a portion of the $10.5 million dividend the Company
to be declared immediately prior to the Separation. All indebtedness of the
Company under the Irex Note Agreement will be subordinated to and rank junior
to all other indebtedness of the Company, other than trade indebtedness and
indebtedness of the Company which is expressly ranked junior to the Irex
Notes. Such indebtedness will rank pari passu with indebtedness under the
Evercore Note Purchase Agreement.
The Evercore Note Purchase Agreement provides for the immediate purchase by
Evercore of $3.5 million of ECP Notes. The proceeds of these Notes will be
used for general corporate purposes. In addition, Evercore has agreed commit
to purchase an aggregate additional amount of up to $20 million of the ECP
Notes over a three year period to fund up to 25% of the purchase price of
acquisitions, subject to certain conditions, including that the Company have a
ratio of indebtedness under its Credit Agreement to EBITDA in excess of 2.5 to
1.0. The Evercore Note Purchase Agreement contains a number of restrictive
covenants, including covenants which limit transactions with affiliates and
payments of dividends, and requires that the Company maintain a certain
leverage ratio. All indebtedness of the Company under the Evercore Note
Purchase Agreement will be subordinated and rank junior to all other
indebtedness of the Company, other than trade indebtedness and indebtedness of
the Company which is expressly ranked junior to the ECP Notes. Such
indebtedness will rank pari passu with indebtedness under the Irex Note
Agreement.
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
The Company has reviewed all of its current computer applications with
respect to the Year 2000 issue. The Company believes that all of the Company's
relevant applications are Year 2000 compliant following the installation of an
upgrade to the system software in November 1998. Additional Year 2000 work
will focus on testing older PC's and on testing for embedded chip issues in
equipment and property. Less than $25,000 has been spent by the Company to
date on Year 2000 compliance. The Company projects that additional Year 2000
compliance costs will not exceed $100,000. These costs will be expensed when
incurred and will be funded through the Company's operations.
The Company's most likely worst case scenario for Year 2000 is widespread
failure of external systems on which the Company relies, such as telephone and
heat. Such failures could materially lower the volume of the Company's sales
until these failures are corrected. The Company has sent questionnaires to
major suppliers requesting information on their Year 2000 compliance.
Responses received to date indicate no interruption of service, but not all
responses have been received. Customers have not yet been surveyed concerning
Year 2000 readiness. The Company believes that any Year 2000 problems
encountered with suppliers and customers can be resolved through substitution
of vendors, or through reliance on manual systems.
21
<PAGE>
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 Credit Agreement, the Evercore Note
Purchase Agreement and the Irex Note Agreement contain limitations on the
payment of cash dividends.
In connection with the Separation and the New Investment, the Company is
declaring a dividend of $10.5 million to Irex, as its sole shareholder, to be
paid immediately prior to the Separation. The Company will pay such dividend
with $7.0 million in cash and by issuing to Irex $3.5 million of junior
subordinated notes.
22
<PAGE>
BUSINESS
INTRODUCTION
Specialty Products & Insulation Co. is a 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 58
distribution centers, including ten fabrication facilities, at locations in 24
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 nine months of 1998, net sales and operating income
totalled $139.9 million and $5.3 million, respectively, as compared to $115.4
million and $5.0 million respectively, in the first nine 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 duplicative 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 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.
23
<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 Company is committed to capitalizing on the expertise, knowledge
and experience its has developed in these
24
<PAGE>
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 58 distribution centers combine warehouse and
office facilities at locations in 24 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.
25
<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.
26
<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 58 distribution centers in 24 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
27
<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 48 outside sales representatives, including
branch managers, and 68 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 58 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 and occasional sales promotions.
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
most 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 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 is entering 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 at least 18 months and up to three years following
consummation of the New Investment 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. See
"Separation from Irex--Agreements with Irex--Corporate Separation Agreement."
28
<PAGE>
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 September 22, 1998, the Company had 596 employees, including 48 outside
sales representatives, 266 distribution center, delivery, clerical and support
personnel, 149 fabrication personnel and 65 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.
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.
29
<PAGE>
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.
30
<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 Chairman of the Board of Directors
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
Raymond J. Horan........ 47 Vice President and Regional Manager
Charles F. Schattgen.... 46 Vice President and Regional Manager
Richard J. Mitchell..... 48 Vice President and Regional Manager
W. Kirk Liddell 49 Director*
John O. Shirk 54 Director*
William W. Adams 64 Director*
David G. Offensend 45 Director*
John R. Birk 47 Director*
Christopher L. Ryan 36 Director*
</TABLE>
- --------
*Messrs. Liddell, Shirk, Adams, Offensend, Birk and Ryan will be appointed
directors of the Company immediately prior to the Separation.
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. In 1998 he was 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.
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.
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.
31
<PAGE>
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.
Richard J. Mitchell became Vice President and Regional Manager in October
1998. From 1998 until joining the Company, Mr Mitchell was President of
Paragon Pacific Insulation. Prior to serving as President, Mr. Mitchell had
been a partner at Paragon Pacific Insulation.
W. Kirk Liddell will become a director of the Company in December 1998. He
has been President, Chief Executive Officer and a director of Irex since 1984.
Mr. Liddell also serves on the boards of directors of High Industries, Inc.,
the Pennsylvania Chamber of Business and Industry and the Lancaster Alliance,
and is President of the Economic Development Company of Lancaster County.
John O. Shirk will become a director of the Company in December 1998. He has
been a partner in the law firm of Barkley, Snyder, Senft & Cohen, LLP, located
in Lancaster, Pennsylvania, since 1973 and was managing partner from 1983 to
1994. 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.
William W. Adams will become a director of the Company in December 1998. Mr
Adams, a former Chairman and President of Armstrong World Industries, Inc,
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 G. Offensend will become a director of the Company in December 1998.
He is a founding partner of Evercore Partners Inc. and has been with Evercore
since October 1995. Mr. Offensend was Managing Director of Oak Hill Partners,
Inc. and its predecessor from April 1990 to September 1995; Vice President and
Director of Acadia MGP, Inc. from March 1992 to September 1995; and Vice
President of Keystone, Inc. from March 1992 to September 1995. Mr. Offensend
serves on the board of directors of Specialty Foods Corporation.
John R. Birk will become a director of the Company in December 1998 and has
been an Operating Executive of Evercore Partners, Inc. since September 1995.
From January 1995 to September 1995, Mr. Birk served as President of Ideon
Group, Inc., Chairman of Wright Express, Chairman of National Leisure Group
and President of Hotline Travel. Mr. Birk was Chief Executive Officer and a
Director of Wright Express from 1992 to 1995. Mr. Birk was President and a
Director of Advo, Inc. from 1988 to 1992. Mr. Birk serves as a Trustee of
T.O. Richardson Mutual Funds.
Christopher L. Ryan will become a director of the Company in December 1998
and has been a Managing Director of Evercore Partners, Inc. since May 1998.
Prior to joining Evercore in May 1998, Mr. Ryan was a Principal since 1997 and
Vice President since 1994 in the Mergers and Acquisitions department of Morgan
Stanley and Co. Incorporated. From 1987 to 1994, Mr. Ryan worked in the
Investment Banking Division of Lehman Brothers.
DIRECTOR COMPENSATION AND ARRANGEMENTS
The Company expects to pay directors not affiliated with the Company an
annual fee of $2,000 for serving on the Board of Directors, a fee of $500 for
attending each meeting of the Board of Directors and a fee of $500 for
attending each meeting of a committee of the Board of Directors not held
concurrently with a board meeting. Directors will be reimbursed for expenses
incurred in connection with meetings of the Board of Directors or committees
thereof. All payments of annual fees will be paid in cash following the annual
shareholders' meeting during the year for which such payment is made. In
addition, directors will be expected to participate in the Company's stock
option program, as described below.
32
<PAGE>
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:
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.
(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.
33
<PAGE>
STOCK OPTION PLAN
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 directors, officers and
other key employees (the "Key Employees") of the Company. The Plan will also
permit the Company to issue qualified stock options, stock appreciation rights
and restricted stock to the Key Employees. 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 2,905.8 shares, subject to adjustment to reflect changes in the
Company's capitalization. Approximately 1,186 of these shares will be awarded
on the basis of the Company's performance. The Company intends to award
approximately 85% 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 effective date of the
Plan.
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 and/or in the event that the Company achieves
certain performance objectives. No Option may be exercised more than 13 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, retirement
or involuntary termination due to certain reasons, options held by such
grantee or his or her estate shall be exercisable, if vested at the time of
termination of employment, for a certain period after termination.
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
In connection with the Separation, the Company has obtained 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
In connection with the Separation, the Company is entering 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 and Chief Executive Officer of the Company for a
period of three years after the date of the agreement. At each anniversary of
the effective date of the agreement, Mr. King's employment will be extended
for one additional year, unless the Company provides 90 days prior written
notice of its intent not to extend the term of Mr. King's employment. 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, incentive
compensation and other benefits in effect 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 officers of the Company, other than Michael Hughes, are similar to
the agreement with Mr. King, except that the term of each such agreement will
be extended for consecutive one year periods unless SPI gives the appropriate
executive at least sixty days notice of its intent not to continue the
agreement. Mr. Hughes' agreement has a term similar to that of Mr. King's
agreement.
34
<PAGE>
PRINCIPAL SHAREHOLDERS
Immediately following the Separation and the New Investment, all of the
Company's capital stock will be owned by the shareholders of Irex who receive
shares of Common Stock in the Separation, the Company's management and by
Evercore. See "Separation from Irex." The following table sets forth certain
information regarding the beneficial ownership of the Company's Common Stock
immediately following consummation of the Separation and the New Investment
with respect to (i) each person who is 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......................... 850 5.4%
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......................... 1,294 8.3%
W. Kirk Liddell (4)
c/o Irex Corporation
120 North Lime Street
Lancaster, Pennsylvania
17608......................... 964 6.2%
Ronald L. King **.............. 73 *
Michael J. Hughes **........... 44 *
David D. Bofinger **........... 3 *
Michael T. Conner **........... 3 *
Michael C. Feehery **.......... 3 *
Raymond J. Horan **............ 21 *
Charles F. Schattgen **........ 50 *
Richard J. Mitchell............ 9 *
John O. Shirk (5).............. 93 *
William W. Adams............... 43 *
David G. Offensend (6)......... 7,113 45.5%
Christopher L. Ryan............ -- *
John Birk...................... -- *
Evercore Partners L.L.C. (7)... 7,113 45.5%
Evercore Capital Partners L.P.
.............................. 4,730 30.2%
Evercore Capital Partners (NQ)
L.P. ......................... 1,135 7.3%
Evercore Capital Partners
Offshore Partners L.P. ....... 1,248 8.0%
All directors and executive
officers as a group (8)....... 8,410 53.0%
</TABLE>
35
<PAGE>
- --------
* Less than 1%
** Assumes purchase by the Company's management of collectively 109 shares of
Common Stock at closing of Separation.
(1) Based on beneficial ownership of Irex common stock as of September 21,
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 New Investment.
(2) Includes 70 shares with respect to which Mr. Hipolit will have sole or
share voting and investment power and a total of 780 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.
(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 465 shares with respect to which Mr. Liddell will have sole
voting and investment power and 499 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) Includes 30 shares with respect to which Mr. Shirk will have sole voting
and investment power, 11 shares held by Mr. Shirk's spouse, 2 shares held
by Mr. Shirk's spouse as custodian under the Pennsylvania Uniform
Transfers to Minors Act and 50 shares held by Barley, Snyder, Senft &
Cohen, LLP, of which Mr. Shirk is a partner.
(6) David G. Offensend is a Member of Evercore Partners L.L.C., the general
partner of each of Evercore Capital Partners L.P., Evercore Capital
Partners (NQ) L.P. and Evercore Capital Offshore Partners L.P. As such,
Mr. Offensend may be deemed to beneficially own the shares owned by such
partnerships. Mr. Offensend disclaims beneficial ownership of any of the
shares owned by such partnerships.
(7) Evercore Partners L.L.C. is the general partner of each of Evercore
Capital Partners L.P., Evercore Capital Partners (NQ) L.P. and Evercore
Capital Offshore Partners L.P. and, as such may be deemed to beneficially
own the shares owned by such partnerships.
(8) Includes 109 shares to be purchased by the Company's management at the
closing of the Separation. In connection with the Separation and the
Offering, the Company expects to grant options to purchase an aggregate of
2,905.8 shares of Common Stock to certain officers and employees of the
Company under the Company's stock option plan. 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.
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 (the "Distribution") of 100% of
the capital stock of the Company to the shareholders of Irex. On December 16,
1998, the Company declared a reverse stock split, whereby each share of the
Company's previously issued common stock was converted into 0.8636 shares of
Common Stock. The reverse stock split reduced the Company's outstanding shares
from 10,000 to 8,636 shares of Common Stock, all of which are held by Irex.
The Company will effect the Separation by distributing all of such shares to
the shareholders of Irex on the basis of one share of SPI Common Stock for
every fifty shares of Irex common stock held. The Company will issue
certificates for such shares on or about January 15, 1999. The Company will
not
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issue certificates for fractional shares, but, instead, will cancel such
shares and distribute cash in lieu of them at a rate of $2,698.08 per share.
As a result of the Separation and the New Investment, all of the capital stock
of the Company will be owned by the shareholders of Irex who received shares
of Common Stock in the Separation, the Company's management and by Evercore.
The decision to effect the Separation was based on a number of factors. The
Separation will provide both Irex and SPI with greater managerial, operational
and financial flexibility to focus on and respond to changing market
conditions in their respective business environments. For example, SPI is
occasionally viewed as a competitor of some of its customers because its
parent, Irex, competes directly with those customers. The Separation will
eliminate this concern of SPI's customers and thus promote the marketability
of SPI's products. In addition, the Separation will give each company greater
flexibility because it will eliminate the need for compatible computer
accounting systems, employee benefit plans, quality management programs and
other processes necessary as a result of common ownership or reporting. Each
organization will be free to specialize in its particular business and to
engage in operations that make the most sense without regard to possible
impacts on the other. Finally, each business will be free to capitalize itself
in a manner that best suits its respective financing needs and risks. Irex
will no longer need to find ways to finance SPI's rapid growth and it is
anticipated that SPI's 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 by the Company following its Separation from Irex, rather
than through financings 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.
Immediately prior to consummation of the Separation, the Company will
declare a dividend to Irex in the amount of $10.5 million. Such dividend will
be paid in a combination of $7.0 million in cash and $3.5 million of Irex
Notes. In connection with the Separation and the New Investment, the Company
also will pay approximately $5.0 million of debt owed by the Company to Irex
as of September 30, 1998, which will be paid with proceeds from the New
Investment, and approximately $26.6 million owed to Irex as of September 30,
1998 pursuant to an intercompany account which the Company will pay though a
combination of proceeds from the New Investment and 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.
MANNER OF EFFECTING THE DISTRIBUTION
On or about January 15, 1999 (the "Distribution Date"), Irex will deliver
certificates for the shares of Common Stock to be issued in the Distribution
to the shareholders of Irex holding fifty or more Irex common shares on the
Record Date. The Distribution will be made on the basis of one share of Common
Stock for every fifty shares of Irex common stock outstanding on the Record
Date. All such shares of Common Stock will be fully paid and nonassessable and
the holders thereof will not be entitled to preemptive rights. Certificates
for the
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Common Stock will be mailed to Irex common shareholders on or about December
28, 1998. The Company will not issue certificates for fractional shares, but,
instead, will cancel such shares and distribute cash in lieu of them at a rate
of $2,698.08 per share. The Company will mail checks for fractional shares at
the same time that it mails stock certificates.
No holder of Irex common shares will be required to pay any cash or other
consideration for the shares of Common Stock received in the Distribution, or
to surrender or exchange Irex common shares in order to receive Common Stock
of the Company.
FEDERAL INCOME TAX CONSEQUENCES
Irex has been advised by Dechert Price & Rhoads ("Tax Counsel") that, based
upon certain customary representations made by Irex and the Company, the
Distribution will qualify as a tax-free distribution under Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code"). So long as the
Distribution qualifies under Section 355 of the Code, in the opinion of Tax
Counsel, the principal federal income tax consequences of the Distribution
will be as follows:
1. No gain or loss will be recognized by, or be includable in the income
of, a holder of Irex common stock solely as a result of the receipt of
Common Stock in the Distribution, other than in respect of cash received in
lieu of fractional shares.
2. No gain or loss will be recognized by Irex with respect to the Common
Stock distributed in the Distribution.
3. Assuming that a holder of Irex common stock holds such Irex common
stock as a capital asset, such holder's holding period for the Common Stock
received in the Distribution will include the period during which such Irex
common stock was held.
4. The tax basis of Irex common stock held by Irex shareholders
immediately prior to the Distribution will be apportioned (based upon
relative fair market values at the time of the Distribution) between such
Irex common stock and the Common Stock received by such shareholder in the
Distribution.
5. Irex shareholders receiving cash on the sale of a fractional interests
in Common Stock will recognize gain or loss measured by the difference
between the amount of cash received and the tax basis of such holder's
fractional interest. Provided that the Irex common stock is held as a
capital asset, such gain or loss will be a capital gain or loss.
The foregoing discussion of the material federal income tax consequences of
the Distribution under current law does not take into account any special
circumstances that may apply to particular shareholders. Each shareholder
should consult his or her tax advisor as to the particular consequences of the
Distribution to such shareholder, including the application of state, local
and foreign tax laws, and as to possible changes in tax laws that may affect
the tax consequences described above. This summary may not be applicable to
shareholders who received their Irex common stock pursuant to the exercise of
options or otherwise as compensation or who are not citizens or residents of
the United States.
The opinion of Tax Counsel referred to above will not be binding upon the
Internal Revenue Service (the "IRS") and is subject to certain factual
representations and assumptions, including representations regarding the
continued independent conduct of the businesses of Irex and SPI following the
Distributions and the lack of any plans (a) by Irex and SPI shareholders to
dispose of their shares following the Distribution, and (b) by Irex or SPI to
engage in business combinations or other transactions (taking into account the
New Investment) that would result in a change of control of Irex or SPI. Irex
is not aware of any present facts or circumstances which should cause such
representations and assumptions to be untrue. However, certain future events
(such as a planned post-Distribution sale or other distribution of stock by
significant shareholders or an unsolicited acquisition of the Company) not
within the control of Irex or the Company could cause the Distribution not to
qualify as tax-free. If the Distribution is deemed to be taxable, then (1)
each holder of Irex common stock who receives shares of Common Stock in the
Distribution would be treated as if such shareholder received a taxable
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distribution, taxed as a dividend to the extent of such shareholder's pro rata
share of Irex's current and accumulated earnings and profits and (2) corporate
level taxes would be payable by the consolidated group of which Irex is the
common parent, based upon the excess of the fair market value of the Common
Stock on the date of the Distribution over Irex's tax basis therein. Irex
expects that the Distribution will be treated as tax-free.
Information with respect to the allocation of tax basis between SPI Common
Stock and Irex common stock will be provided to shareholders at the time of
distribution of the certificates representing shares of Common Stock.
OTHER INFORMATION
Following the Distribution, Irex will not hold any shares of Common Stock.
Irex will continue to be a corporation subject to the information reporting
requirements of Section 15(d) of the Exchange Act.
AGREEMENTS WITH IREX
In connection with the Separation and the New Investment, the Company is
entering 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. Irex and its subsidiaries (collectively, the
"Irex Companies") and SPI are entering 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.
Pursuant to the Separation Agreement, Irex will provide the Company with
access to Irex's management information systems at least 18 months and up to
three years following the Separation. Under the agreement, access to system
hardware and software and related support services maintained by Irex will be
made available on a monthly 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 January 1, 1982. 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 April 1, 1998, 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 New Investment, including attorneys' and accountants' fees and
expenses, filing fees, printing costs and similar items. Pursuant to the
Separation Agreement, intercompany accounts among Irex, Irex affiliates and
the Company will be settled shortly after the date of consummation of the
Separation. As of June 30, 1998, the settlement of those accounts would result
in a payment of $26.0 million from the Company to Irex; however, the
settlement amount will be determined on the effective date of the Separation.
Tax Sharing and Indemnification Agreement. The Company and Irex are entering
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 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 certain tax liabilities attributable to the income or
operations of the Company, (ii) 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
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nature of the Separation to Irex and (iii) the Company will be required to
indemnify Irex for (a) certain tax liabilities attributable to the income or
operations of the Company for the periods prior to the consummation of the
Separation, and (b) tax liabilities that may be incurred by Irex 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. The
Company does not expect these restrictions to materially inhibit its
operations or growth opportunities.
Irex and the Company are receiving an opinion of Dechert Price & Rhoads,
counsel to Irex and the Company, that for U.S. federal income tax purposes the
Separation will 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. The Company and Irex are entering into a
benefits sharing agreement (the "Benefits Agreement") pursuant to which assets
and liabilities under employee benefit plans and other employment-related
liabilities will be divided between them. In general, the Company is
responsible for compensation and employee benefits relating to both its active
and former employees. Irex generally remains responsible for compensation and
employee benefits relating to its active and former employees. The Company's
401(k) Plan has received 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. Prior to the Separation, Irex amended its pension plan
to cease future benefit accruals. In connection with the Separation, the
Company has made a payment to Irex for a portion of the unfunded accrued
liability under the Irex defined benefit pension plan attributable to the
Company's employees and former employees. The Company does not currently
intend to sponsor a defined benefit pension plan for periods immediately
following the Separation.
NEW INVESTMENT
On December 31, 1998 (the "Closing Date"), immediately following the
consummation of the Distribution, Evercore Capital Partners L.P., Evercore
Capital Partners (NQ) L.P. and Evercore Capital Offshore Partners L.P. will
invest approximately $15.4 million in the Company in exchange for 7,113 shares
of Common Stock of SPI. The purchase price per share of Common Stock will be
$2,158.46. In addition, immediately following the Separation, the Company's
management collectively is purchasing 109 shares of Common Stock. As a result
of the Distribution and such New Investment in the Company, as of the Closing
Date approximately 55% of SPI Common Stock will be owned by shareholders of
Irex who are receiving stock in the Distribution and SPI's management, and
approximately 45% of SPI Common Stock will be owned by Evercore.
The Company and Evercore are parties to a Stock Subscription Agreement,
dated October 27, 1998, which contains provisions relating to the subjects
discussed below. The following discussion of the Stock Subscription Agreement
is qualified in its entirety by the terms of such agreement.
BOARD OF DIRECTORS
The Board of Directors of SPI will consist of seven members until such time
as an affirmative vote of two-thirds of the authorized directors of the
Company passes a resolution to the contrary. The Company and Evercore have
entered into an agreement whereby the number of authorized directors will not
be changed until the earlier to occur of (x) the consummation of a registered
public offering, (y) such time as any person acquires at least 90% of the
Common Stock and (z) the fifth anniversary of the Closing Date.
At all times after the Closing Date, the Company has agreed to recommend to
the Board of Directors that the following number of persons selected by
Evercore be included in the slate of nominees recommended by the
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Board of Directors to shareholders for election as directors: (a) so long as
Evercore collectively owns equal to or greater than 30% of the outstanding
Common Stock, three persons; (b) so long as Evercore collectively owns equal
to or greater than 15% of the outstanding Common Stock and less than 30% of
the Common Stock, two persons; (c) so long as Evercore collectively owns equal
to or greater than 5% of the outstanding Common Stock and less than 15% of the
outstanding Common Stock, one person.
Prior to the third anniversary of the Closing Date, Evercore has agreed not
to seek or support the election of more than three representatives of Evercore
to the Board of Directors of SPI. However, following the third anniversary of
the Closing Date, Evercore will be entitled to seek the election of four
directors; following the fourth anniversary of the Closing Date, Evercore will
be entitled to seek the election of five directors; following the fifth
anniversary of the Closing Date, Evercore will be entitled to seek the
election of six directors; and following the six anniversary of the Closing
Date, Evercore will be entitled to seek the election of seven directors.
Evercore has also agreed to certain other provisions regarding the
composition of the Board of Directors of the Company. At any time prior to the
earlier to occur of (x) consummation of a registered public offering of Common
Stock and (y) such time as any Person acquires at least 90% of the Common
Stock, the Company has agreed to support the nomination of, and the Company's
nominating committee (if any) will recommend to the Board of Directors that,
the following number of candidates recommended by the Continuing Directors (as
defined below) of the Company be included in the slate of nominees recommended
by the Board of Directors for election as Directors at the annual
shareholders' meeting held for the time periods listed below:
<TABLE>
<CAPTION>
TOTAL NUMBER
ANNIVERSARY OF CLOSING DATE OF IREX DIRECTORS
--------------------------- -----------------
<S> <C>
First................................................... 3
Second.................................................. 3
Third................................................... 2
Fourth.................................................. 1
Fifth and thereafter.................................... 0
</TABLE>
As defined in the Stock Subscription Agreement, a "Continuing Director" will
include any director (who is not an officer of the Company or a person
designated by Evercore to serve as a director of the Company) who is either a
director of the Company immediately following the consummation of the New
Investment or is designated for election by the Continuing Directors or
elected by the Continuing Directors to the board of directors of the Company
with the affirmative vote of a majority of the Continuing Directors of the
Company who were directors of the Company at the time of such nomination or
election.
SALES BY EVERCORE
In the event Evercore effects any sale of Common Stock (other than sales
under certain limited exceptions), then Evercore is required as a condition to
such sale to cause the purchaser of its Common Stock to provide the benefits
of such sale to all holders of Common Stock on the same terms as provided to
Evercore.
REGISTRATION RIGHTS
Subject to the limitations described below, at any time after two years from
the anniversary of the date of the New Investment, upon the written request of
Evercore or any person or entity that acquires Common Stock from Evercore
(each an "Evercore Person") or at any time after the earlier of (x) the fourth
anniversary of the date of the New Investment or (y) the 180th day after a
registered public offering of Common Stock, upon the written request of any
group of stockholders (not including an Evercore Person) which are
collectively the beneficial holders of 10% or more of the outstanding SPI
Common Stock (each a "Shareholder Group") requesting that SPI effect the
registration under the Securities Act of 1933 (the "Securities Act") of all or
any part of the Common Stock, the Company will promptly file with the
Securities and Exchange Commission a registration statement under the
Securities Act registering the offering and sale of the securities which the
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Company has been so requested to register (a "Demand Registration"). However,
(i) the Company need not effect a Demand Registration unless such Demand
Registration shall include the lesser of (a) 5% of the shares of Common Stock
then outstanding or (b) all shares of Common Stock beneficially owned by such
Evercore Person or Shareholder Group, as the case may be, and (ii) the Company
shall not be required to effect more than one Demand Registration in any
twelve-month period. In addition, SPI shall not be required to effect more
than three Demand Registrations for requests made by Evercore Persons and one
Demand Registrations for requests made by Shareholder Groups.
LIMIT ON TRANSACTIONS WITH AFFILIATES
The Company has agreed not to and will not permit its subsidiaries to,
directly or indirectly, sell, lease or otherwise transfer any of its
properties or assets to, or purchase any property or assets from, or enter
into any contract, agreement, understanding, loan, advance or guarantee with,
or for the benefit of, Irex or any of its affiliates, Evercore, any officer,
director, holder of 5% or more of the Common Stock, or affiliate of the
Company or Evercore (each an "Affiliate Transaction") except for (i) Affiliate
Transactions which are conducted in good faith and on terms that are no less
favorable to the Company or the relevant subsidiary than those which would
have been available at such time in a transaction with an independent third
party on an arms' length basis and have been approved by a majority of the
disinterested directors of the Company, or (ii) with respect to any Affiliate
Transaction that involves (A) a change of control of the Company, (B) a
substantial change in the Company's equity ownership, (C) a Rule 13e-3
transaction as defined under the Exchange Act, (D) a sale of all or
substantially all of the Company's assets, (E) certain sales of shares by
Evercore (as described in the Stock Subscription Agreement), (F) or
transactions with substantially similar effect, Affiliate Transactions for
which the Company has obtained an opinion from a nationally recognized
investment banking firm that such Affiliate Transaction is fair to the
shareholders of the Company or such subsidiary from a financial point of view.
These arrangements do not apply to agreements between the Company and Irex or
any of its subsidiaries relating to sales of materials which are conducted in
good faith and on terms that are no less favorable to the Company or the
relevant Company subsidiary than those which would have been available at the
time in a transaction with an independent third party on an arms' length
basis. Any transaction or proposed series of transactions involving aggregate
sales or expenditures in excess of $5.0 million shall, upon the request of any
director, require the approval of the Board of Directors of the Company in
accordance with the Stock Subscription Agreement.
SUB-DEBT AND SUB-DEBT LINE
Concurrently with the New Investment, SPI is entering into the Irex Note
Agreement, which provides for the immediate issuance to Irex of $3.5 million
of Irex Notes, bearing an interest rate of 10.5%. All indebtedness of the
Company under the Irex Note Agreement will be subordinated to and rank junior
to all other indebtedness of the Company, other than trade indebtedness and
indebtedness of the Company which is expressly ranked junior to the Irex
Notes. Such indebtedness will rank pari passu with indebtedness under the
Evercore Note Purchase Agreement.
The Evercore Note Purchase Agreement will provide for the immediate purchase
by Evercore of $3.5 million of ECP Notes, bearing an interest rate of 11%. The
proceeds of the ECP Notes will be used for general corporate purposes. In
addition, Evercore will commit to purchase an aggregate additional amount of
up to $20 million of the ECP Notes over a three year period to fund a portion
of the cost of certain acquisitions, subject to certain conditions, including
the requirement that the Company have a ratio of indebtedness under its Credit
Agreement to EBITDA in excess of 2.5 to 1.0. The ECP Notes will have various
interest rates ranging from 11% to 13% (as such rates may be adjusted due to
changes in the yields of U.S. treasury obligations). The Evercore Note
Purchase Agreement contains a number of restrictive covenants, including
covenants which limit transactions with affiliates and the payment of
dividends and which require that the Company maintain a certain leverage
ratio. All indebtedness of the Company under the Evercore Note Purchase
Agreement will be subordinated and rank junior to all other indebtedness of
the Company, other than trade indebtedness and indebtedness of the Company,
which is expressly ranked junior to the ECP Notes. Such indebtedness will rank
pari passu with indebtedness under the Irex Note Agreement.
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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 Information Statement.
COMMON STOCK
The Company is authorized to issue up to 15.0 million shares of Common
Stock, par value $.01 per share ("Common Stock").
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.
In connection with the New Investment, the Company is adopting amended and
restated by-laws ("By-laws"), which contain certain provisions governing the
voting rights of the Board of Directors. Under the By-laws, certain actions of
the Board of Directors will require a supermajority vote of two-thirds of the
authorized Directors of the Company (but not less than five Directors). Such
actions include, but are not limited to, approval of any merger,
consolidation, recapitalization, sale of all or substantially all the assets
of the Company, reclassification of equity securities of the company, the
issuance of additional equity securities of the Company, and the declaration
of any dividend on or the redemption of any equity securities of the Company.
The By-laws contain provisions permitting the written consent of
shareholders in lieu of a meeting. Under the By-laws, any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting upon the written consent of shareholders who would have been entitled
to cast the minimum number of votes that would be necessary to authorize the
action at a meeting at which all shareholders entitled to vote were present
and voting. Such action is not effective until at least ten days' written
notice is provided to each shareholder entitled to vote who has not consented
already.
PREFERRED STOCK
The Company is authorized to issue up to 15.0 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
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of Preferred Stock, and the Company has no plans to issue any shares of
Preferred Stock. See "Risk Factors--Anti-Takeover Provisions."
INAPPLICABILITY OF CERTAIN PROVISIONS OF THE PENNSYLVANIA BUSINESS CORPORATION
LAW
The Company's restated articles of incorporation provide that the Company
has opted out of Subchapters C, D and E of Chapter 25 of the PBCL and, to the
extent permitted therein, Subchapters F, G and H of Chapter 25 of the PBCL.
Had these sections applied to the Company, they would have made it more
difficult for persons to acquire and exercise control over SPI. The Company's
articles of incorporation and bylaws also provide that Section 515 of Title 15
of the Pennsylvania Consolidated Statutes will not be applicable to the
Company or any directors or officers of the Company. In addition, the Company
intends to submit to its shareholders a proposal to opt out of Section 1715 of
Title 15 of the Pennsylvania Consolidated Statutes. If these provisions were
to apply to the Company, they would have allowed the Company's Board of
Directors to consider various corporate interests, including those of
employees, suppliers, clients and communities when approving corporate
actions.
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.
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 Information Statement and elsewhere in the Form 10 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 on Form 10 (the "Form 10") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
Information Statement, which constitutes a part of the Form 10, does not
contain all of the information set forth in the Form 10. Statements made in
this Information Statement 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 Form 10 and each such statement shall be deemed qualified in
its entirety by such reference. For further information, reference is made to
the Form 10 and to the exhibits and schedules filed therewith, which are
available for inspection without charge at 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 the Separation, the Company will be subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
be required to file reports and other information with the Commission. The
Company's registration with the Commission may be terminated if there are
fewer than 300
44
<PAGE>
record holders of the Common Stock. The Company anticipates that upon the
consummation of the transactions contemplated herein, there will be fewer than
300 shareholders of record in the Company and that, if this is the case, the
Company will seek to deregister the Common Stock under the Exchange Act. The
termination of registration of the Common Stock under the Exchange Act would
substantially reduce the information required to be furnished by the Company
to holders of Common Stock and to the Commission and would make certain
provisions of the Exchange Act no longer applicable to the Common Stock.
The Form 10, as well as any report 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Information Statement 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 "Certain Special
Considerations," "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 "Certain
Special Considerations."
45
<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 nine months
ended
September 30, 1997 and 1998............................................. F-16
Unaudited Condensed Consolidated Balance Sheets as of September 30, 1997
and 1998................................................................ F-17
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
months ended
September 30, 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
December 16, 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
Commitments and
Contingencies
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; 8,532
issued and
outstanding............ -- -- --
Paid-in surplus......... 1,003 1,003 1,003
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............ $ 149.72 $ 310.79 $ 348.19
============ ============ ============
Net income per share--diluted.......... $ 149.72 $ 310.79 $ 348.19
============ ============ ============
Weighted average shares outstanding--
basic................................. 8,636 8,636 8,636
============ ============ ============
Weighted average shares outstanding--
diluted............................... 8,636 8,636 8,636
============ ============ ============
</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................. $-- $1,003 $2,652
Net income............................. -- -- 1,293
Distribution to parent................. -- -- (748)
---- ------ ------
Balance, December 31, 1995............... -- 1,003 3,197
Net income............................. -- -- 2,684
Distribution to parent................. -- -- (463)
---- ------ ------
Balance, December 31, 1996............... -- 1,003 5,418
Net income............................. -- -- 3,007
Distribution to parent................. -- -- (248)
---- ------ ------
Balance, December 31, 1997............... $-- $1,003 $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 or SPI), 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 SPI 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 fourth quarter of 1998.
Concurrent with the spin off transaction described above, the Company
intends to file a Form 10 with the Securities and Exchange Commission for
purposes of registering shares of common stock.
On October 28, 1998, the Company entered into a Stock Subscription Agreement
with Evercore Capital Partners L.P., Evercore Capital Partners (NQ) L.P. and
Evercore Capital Offshore Partners L.P. (collectively, Evercore). Immediately
following the spin off described above, Evercore will acquire approximately
45% of the total outstanding shares of the Company's common stock for
approximately $15.4 million and loan $3.5 million to the Company in the form
of a 9 year subordinated note, bearing interest at 11%. In addition, Evercore
has agreed to provide a three year $20.0 million variable interest rate credit
line to the Company. In addition, the Company's management will acquire 109
shares of the 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.
F-14
<PAGE>
In conjunction with the above transactions, the Company will enter into
several agreements with Irex.
.Corporate Separation Agreement--Pursuant to this agreement, Irex will
provide management information system services to the Company. In addition,
certain indemnifications, excluding tax related items, between the Company
and Irex are defined in this agreement.
.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 declared a 0.8636 to 1
reverse stock split. The reverse stock split 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 partially repaid from the net proceeds of the New Investment.
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 New Investment. 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 $222.81 Pro forma weighted average shares outstanding on
both a basic and diluted basis was 13,496.
F-15
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
1997 1998 1997 1998
---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................ $ 41,548 $ 49,903 $ 115,381 $ 139,939
Cost of sales........................ 32,449 38,546 90,380 108,526
---------- --------- --------- ---------
Gross profit....................... 9,099 11,357 25,001 31,413
Selling, general and administrative
expenses............................ 6,823 9,729 19,996 26,123
---------- --------- --------- ---------
Operating income................... 2,276 1,628 5,005 5,290
Interest expense, net................ 506 576 1,431 1,648
---------- --------- --------- ---------
Income before income taxes......... 1,770 1,052 3,574 3,642
Income tax provision................. 724 545 1,460 1,607
---------- --------- --------- ---------
Net income......................... $ 1,046 $ 507 $ 2,114 $ 2,035
========== ========= ========= =========
Net income per share--basic.......... $ 121.12 $ 58.71 $ 244.79 $ 235.64
========== ========= ========= =========
Net income per share--diluted........ $ 121.12 $ 58.71 $ 244.79 $ 235.64
========== ========= ========= =========
Weighted average shares outstanding--
basic............................... 8,636 8,636 8,636 8,636
========== ========= ========= =========
Weighted average shares outstanding--
diluted............................. 8,636 8,636 8,636 8,636
========== ========= ========= =========
</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>
SEPT. 30,
DEC. 1998
31, SEPT. 30, PRO FORMA
1997 1998 (SEE NOTE 9)
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 345 $ 664 $ 664
Receivables, net............................... 27,635 35,273 35,273
Inventories of materials and supplies.......... 15,667 18,420 18,420
Prepaid expenses............................... 173 221 221
Deferred income taxes.......................... 1,100 1,100 1,100
------- ------- -------
Total current assets.......................... 44,920 55,678 55,678
------- ------- -------
Property and Equipment, net..................... 1,768 2,376 2,376
------- ------- -------
Other Assets.................................... 963 1,758 1,758
------- ------- -------
$47,651 $59,812 $59,812
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term notes payable to
affiliates and other
long-term debt................................ $ 1,455 $ 1,449 $ 1,449
Accounts payable............................... 7,360 10,451 10,451
Payable to affiliates.......................... 20,221 26,560 26,560
Accrued liabilities............................ 4,108 5,760 5,760
Accrued income taxes........................... 510 838 838
Dividend payable to Irex Corporation........... -- -- 10,490
------- ------- -------
Total current liabilities..................... 33,654 45,058 55,548
------- ------- -------
Long-term notes payable to affiliates, less
current portion................................ 4,742 3,557 3,557
Long-term debt, less current portion............ 75 60 60
Commitments and Contingencies
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; 8,532 issued and
outstanding................................... -- -- --
Paid-in surplus................................ 1,003 1,003 1,003
Retained earnings.............................. 8,177 10,134 (356)
------- ------- -------
Total shareholder's equity.................... 9,180 11,137 647
------- ------- -------
$47,651 $59,812 $59,812
======= ======= =======
</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 NINE
MONTHS ENDED
SEPT. 30,
----------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 2,114 $ 2,035
Reconciliation of net income to net cash provided by
operating activities
Depreciation and amortization............................. 469 721
Provision for losses on accounts receivable............... 50 535
(Gain) loss on sale of assets............................. 2 (49)
(Increase) decrease in assets--
Receivables............................................... (4,585) (6,057)
Inventories............................................... (1,272) (23)
Other prepaid expenses.................................... 281 (48)
Increase in liabilities--
Accounts payable.......................................... 3,066 3,091
Accrued income taxes...................................... 1,170 328
Accrued liabilities and other............................. 123 1,652
------- -------
Net cash provided by operating activities............... 1,418 2,185
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment......................... (391) (316)
Acquisitions of certain businesses
Assets.................................................... -- (5,640)
Intangibles............................................... -- (965)
------- -------
Net cash used for investing activities.................. (391) (6,921)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt.................................. (1,186) (1,206)
Increase in payable to affiliates........................... 321 6,261
------- -------
Net cash (used for) provided by financing activities.... (865) 5,055
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 162 319
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 78 345
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 240 $ 664
======= =======
</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)
SEPTEMBER 30, 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 $2,647,000 and $1,322,000 and $6,742,000 and
$5,286,000, in the three and nine months ended September 30, 1997 and 1998,
respectively.
Prior to March 31, 1998, Irex provided various administrative and
management services to its affiliates, including the Company. These
services included, among others, management and maintenance of the
information systems, legal, credit and risk management, cash management,
tax, accounting, and personnel administration. Irex allocated 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 statement 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. Amounts allocated to the Company in excess of the actual costs
incurred by Irex for these services were $97,000 for the three months ended
September 30, 1997 and $277,000 and $78,000 for the nine months ended
September 30, 1997 and 1998, respectively, and are considered to be a
distribution to parent.
After March 31, 1998, the administrative and management services provided
to the Company by Irex were limited to the management and maintenance of
the information systems and other miscellaneous services. Irex charges the
Company the cost of these services based on the estimated utilization of
the services provided.
The costs described in the prior two paragraphs are reflected as selling,
general and administrative expenses in the Company's consolidated
statements of income and total $646,000 and $1,888,000 for the three and
nine month periods ended September 30, 1997, respectively, and $240,000 and
$1,108,000 for the three and nine month periods ended September 30, 1998,
respectively.
F-19
<PAGE>
3. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company's state income tax payments, net of refunds, were $115,000 and
$244,000 for the three and nine month periods ended September 30, 1997,
respectively, and $62,000 and $414,000 for the three and nine months ended
September 30, 1998, respectively. Interest on the notes payable to
affiliate and the payable to affiliates account are charged to the payable
to affiliates account.
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 fourth quarter of 1998.
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.
Concurrent with the spin off transaction described above, the Company
intends to file a Form 10 with the Securities and Exchange Commission for
purposes of registering shares of common stock.
On October 28, 1998, the Company entered into a Stock Subscription
Agreement with Evercore Capital Partners L.P., Evercore Capital Partners
(NQ) L.P. and Evercore Capital Offshore Partners L.P. (collectively,
Evercore). Pursuant to the Stock Subscription Agreement, Evercore will
acquire approximately 45% of the total outstanding shares of the Company's
common stock for approximately $15.4 million and loan $3.5 million to the
Company in the form of a 9 year subordinated note, bearing interest at 11%.
In addition, Evercore has agreed to provide a three year $20.0 million
variable interest rate credit line to the Company. In addition, the
Company's management will acquire up to 109 shares of the Common Stock.
Prior to the spin-off described above, the Company declared a 0.8636 to 1
reverse stock split. The reverse stock split has been retroactively
reflected in the accompanying financial statements.
5.DEFERRED OFFERING COSTS:
On April 13, 1998, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission relating to the initial public
offering of 2,000,000 shares of the Company's Common Stock. The Company had
previously announced the planned spin off from Irex Corporation through a
pro rata distribution of all of the Company's common stock to the
shareholders of Irex Corporation. On June 17, 1998, the Company announced
the postponement of its planned spin off from Irex Corporation and the
initial public offering due to adverse market conditions. During the third
quarter of 1998, the Company decided not to proceed with the initial public
offering of its common stock. In total, approximately $1.1 million in
expenses related to the initial public offering were expensed in the third
quarter of 1998.
6. CREDIT FACILITY:
The Company has executed a letter of commitment with a syndicate of lenders
for a $50.0 million unsecured credit facility. The investment in the
Company by the group of investors, discussed above, is contingent upon the
Company securing this credit facility for working capital, acquisitions and
general corporate purposes.
7. EMPLOYEE BENEFIT PLAN:
In connection with the Separation discussed above, the Company has adopted
a defined contribution savings incentive plan covering substantially all
salaried employees. Contributions to the savings incentive plan are
F-20
<PAGE>
based on specified percentages of employee contributions to the plan. As a
result of the adoption of this plan, the Company's salaried employees no
longer contribute or participate in the defined contribution savings
incentive plan maintained by Irex.
8. 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. On June 29,
1998, the Company acquired the assets of Presnell Insulation Co., Inc.
("Presnell") for cash consideration of approximately $1.0 million. Presnell
is primarily engaged in the distribution and fabrication of mechanical
insulation products. 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 October 26, 1998, the Company acquired the outstanding common stock of
Paragon Industries, Inc. (Paragon), a distributor and laminator of numerous
mechanical insulation, HVAC, metal building insulation and specialty
products. The purchase price for Paragon was approximately $3.7 million
(including the assumption of $1.7 million of debt). Paragon had sales of
approximately $15.0 million for the fiscal year ended March 31, 1998.
On December 1, 1998, the Company acquired certain assets relating to the
mechanical insulation, distribution and fabrication operations of
Chempower, Inc. ("Chempower"), located in Charleston, West Virginia, for
cash consideration of approximately $0.4 million. The acquisition was
financed by borrowings from Irex.
On December 14, 1998, the Company acquired all of the issued and
outstanding common stock of Acoustical Supply Corporation ("ASCO"), located
in Bensalem, Pennsylvania, for cash consideration of approximately $0.9
million (including the assumption of $0.3 million of debt). The acquisition
was financed by borrowings from Irex. For the fiscal year ended March 31,
1998, ASCO generated sales of approximately $4.0 million.
9. PRO FORMA INFORMATION:
The unaudited pro forma consolidated balance sheet of the Company as of
September 30, 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 partially repaid from the net proceeds of the New
Investment. 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 New
Investment. 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 $37.57 and $150.78 for the three
months and nine months ended September 30, 1998, respectively. Pro forma
weighted average shares outstanding on both a basic and diluted basis are
13,496.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Information Statement Summary............................................. 2
Risk Factors.............................................................. 8
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Dividend Policy........................................................... 22
Business.................................................................. 23
Management................................................................ 31
Principal Shareholders.................................................... 35
Separation from Irex...................................................... 36
New Investment............................................................ 40
Description of Capital Stock.............................................. 43
Experts................................................................... 44
Additional Information.................................................... 44
Cautionary Statement Regarding Forward-Looking Statements................. 45
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF SPECIALTY PRODUCTS APPEARS HERE]
SPECIALTY PRODUCTS &
INSULATION CO.
INFORMATION STATEMENT
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not issued any unregistered securities within the past three
years.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statement Schedules:
Schedules not included herein are omitted because of the absence of the
conditions under which they are required or because the information required
by such omitted schedules is set forth in the financial statements or the
notes thereto.
(b) Exhibits:
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1* Stock Subscription Agreement among Irex, SPI and Evercore.
3.1* Restated Articles of Incorporation of the Company.
3.2* Bylaws of the Company.
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 Employment Agreement of Ronald L. King.
10.6* Form of Employment Agreement of Michael J. Hughes.
10.7* Form of Executive Employment Agreement.
10.8* Form of Evercore Note Purchase Agreement.
10.9* Form of Irex Note Agreement
10.10** Credit Facility.
21.1** Subsidiaries of the Registrant.
99.1** Consent of W. Kirk Liddell
99.2** Consent of John O. Shirk
99.3** Consent of William W. Adams
99.4** Consent of David G. Offensend
99.5** Consent of Christopher L. Ryan
99.6** Consent of John Birk
</TABLE>
- --------
*Previously filed.
**To be filed at a later date.
II-1
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Form 10 to be signed on its behalf
by the undersigned, thereunto duly authorized.
Specialty Products & Insulation Co.
/s/ Ronald L. King
By: _________________________________
Ronald L. King President and Chief
Executive Officer
Date: December 18, 1998
II-2
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Specialty Products & Insulation Co.
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
Form 10.
Arthur Andersen LLP
Lancaster, Pennsylvania
December 18, 1998
II-3
<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>
2.1* Stock Subscription Agreement among Irex, SPI and
Evercore ............................................
3.1* Restated Articles of Incorporation of the Company....
3.2* Bylaws of the Company................................
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 Employment Agreement of Ronald L. King.......
10.6* Form of Employment Agreement of Michael J. Hughes....
10.7* Form of Executive Employment Agreement ..............
10.8* Form of Evercore Note Purchase Agreement ............
10.9* Form of Irex Note Agreement .........................
10.10** Credit Facility......................................
21.1** Subsidiaries of the Registrant.......................
99.1** Consent of W. Kirk Liddell ..........................
99.2** Consent of John O. Shirk.............................
99.3** Consent of William W. Adams..........................
99.4** Consent of David G. Offensend........................
99.5** Consent of Christopher L. Ryan.......................
99.6** Consent of John Birk.................................
</TABLE>
- --------
*Previously filed.
**To be filed at a later date.
<PAGE>
Exhibit 10.4
SPECIALTY PRODUCTS & INSULATION CO.
1998 STOCK OPTION PLAN
----------------------
I. THE PLAN
1. Purpose. The purpose of this Specialty Products & Insulation Co.
-------
1998 Stock Option Plan (the "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 ("Awards") to Key
Employees, as defined below, attract and retain persons of ability as employees
and directors, 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) and directors
of the Company or of any Subsidiary, who, in the judgment of the Committee,
defined in Section 2 of this Article I, 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 (the "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. (a) The Plan shall be administered
--------------------------
by the Compensation and Benefits Committee (the "Committee") of the Board of
Directors of the Company (the "Board"). Notwithstanding the foregoing, in its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights, duties and responsibilities of the Committee under the Plan,
including, but not limited to, establishing procedures to be followed by the
Committee, except with respect to matters which under any applicable law,
regulation or rule, are required to be determined in the sole discretion of the
Committee. If and to the extent that no Committee exists which has the authority
to administer the Plan, the functions of the Committee shall be exercised by the
Board. The functions 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.
(b) The Committee shall consist of not less than two members of the
Board. Members of the Committee shall be appointed by the Board and serve at the
Board's pleasure. Appointment of Committee members shall be effective upon their
acceptance of such appointment. Each member of the Committee shall be a member
of the Board. Committee members may be removed by the Board at any time either
with or without cause, and such members may resign at any time by delivering
notice thereof to the Board. Any vacancy
<PAGE>
Page 2
occurring in the membership of the Committee shall be filled by appointment by
the Board. A majority of the members of the entire Committee shall constitute a
quorum and the actions of a majority of the members of the Committee in
attendance at a meeting at which a quorum is present, or actions by a written
instrument signed by all members of the Committee, shall be the actions of the
Committee. A member of the Committee who is eligible to receive an Award under
the Plan shall not vote on any question relating specifically to that member.
(c) 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 Options granted to Key Employees,
and make such other determinations and take such other actions as it deems
necessary or advisable. Without limiting the generality of the foregoing
sentence or paragraph (a) of this Section 2 and in addition to the powers
otherwise expressly designated to the Committee in the Plan, the Committee shall
have the exclusive right and discretionary authority to interpret the Plan and
the Award Agreements (as defined in Section 4 of Article II below); construe any
ambiguous provision of the Plan and/or the Award Agreements; decide all
questions concerning eligibility for and the amount of Awards granted under the
Plan; and establish and administer any terms, conditions, performance goals,
performance targets, restrictions, limitations, forfeiture, vesting or exercise
schedule, and other provisions of or relating to any Awards. The Committee may
establish, amend, waive and/or rescind rules and regulations and administrative
guidelines for carrying out the Plan and may correct any errors, supply any
omissions or reconcile any inconsistencies in the Plan and/or any Award
Agreement or any other instrument relating to any Awards. The Committee shall
have the authority to adopt such procedures and subplans and grant Awards on
such terms and conditions as the Committee determines necessary or appropriate
to permit participation in the Plan by individuals otherwise eligible to so
participate who are foreign nationals or employed outside of the United States,
or otherwise to conform to applicable requirements or practices of jurisdictions
outside of the United States; and take any and all such other actions it deems
necessary or advisable for the proper operation and/or administration of the
Plan. 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 Awards. The Committee shall have
full discretionary authority in all matters related to the discharge of its
responsibilities and the exercise of its authority under the Plan. Decisions,
interpretations and actions by the Committee with respect to the Plan and any
Award Agreement shall be final, conclusive and binding on all persons having or
claiming to have any right or interest in or under the Plan and/or any Award
Agreement.
(d) The Committee may consult with counsel who may be counsel to the
Company. The Committee may, with the approval of the Board, employ such other
attorneys or consultants, accountants, appraisers, brokers or other persons as
it deems necessary or appropriate. In accordance with Section 16 of Article VI,
the Committee shall not incur any liability for any action taken in good faith
in reliance upon the advice of such counsel or such other persons.
<PAGE>
Page 3
(e) In serving on the Committee, the members thereof shall be entitled
to indemnification as directors of the Company, and to any limitation of
liability and reimbursement as directors with respect to their services as
members of the Committee.
(f) Except to the extent prohibited by applicable law or the
applicable rules of a stock exchange, the Committee may, in its discretion,
allocate all or any portion of its responsibilities and powers under this
Section 2 to any one or more of its members and/or delegate all or any part of
its responsibilities and powers under this Section 2 to any person or persons
selected by it; provided, however, the Committee may not delegate its authority
to grant Awards or correct errors, omissions or inconsistencies in the Plan. Any
such authority delegated or allocated by the Committee under this paragraph (f)
shall be exercised in accordance with the terms and conditions of the Plan and
any rules, regulations or administrative guidelines that may from time to time
be established by the Committee, and any such allocation or delegation may be
revoked by the Committee at any time.
(g) Awards may be granted by the Company from time to time to Key
Employees to purchase an aggregate of [_______________] shares of Stock (subject
to adjustment hereunder). The Company shall reserve said number of shares for
Awards granted under the Plan subject to adjustment as provided in Section 1 of
Article VI. The shares issued upon the exercise of Options and stock
appreciation rights and the award of restricted Stock under the Plan may be
authorized and unissued shares or shares held by the Company in its treasury. If
any Awards granted hereunder should expire, be forfeited or become unexercisable
for any reason without having been exercised or vested in full, the unpurchased
or forfeited shares which were subject to an Award shall, unless the Plan shall
have been terminated, be available for the grant of other Awards under the Plan.
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 [________]shares
of Stock (subject to adjustment hereunder).
3. Grant of Options to Key Employees. (a) 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. A Key
Employee who has been selected, pursuant to this Section 3, to participate in
the Plan, and who has been granted an Option under the Plan in accordance with
the terms and conditions set forth in Section 4 of Article II shall be
considered an "Optionee" under the Plan. 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 19 of Article VI
hereof. Except as specifically set forth in the Award Agreement, no Option may
be
<PAGE>
Page 4
exercised prior to the third anniversary of the date of grant and such exercise
may be conditioned upon the Company achieving certain performance objectives, as
specified in each Optionee's Award Agreement.
(b) 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 of Article II hereof shall be
evidenced by an agreement with the Optionee (an "Award Agreement") in a form
approved by the Committee; however, two or more Options to a single Optionee may
be combined in a single Award Agreement. An Award Agreement shall not be a
precondition to the granting of an Option; however, no person shall have any
rights under any Option unless and until the Optionee to whom the Option shall
have been granted (i) shall have executed and delivered to the Company an Award
Agreement or other instrument evidencing the Option, unless such Award Agreement
provides otherwise, and (ii) has otherwise complied with the applicable terms
and conditions of the Option. The Committee shall prescribe the form of all
Award Agreements, and, subject to the terms and conditions of the Plan, shall
determine the content of all Award Agreements. Any Award Agreement may be
supplemented or amended in writing from time to time as approved by the
Committee; provided that the terms and conditions of any such Award Agreement as
supplemented or amended are not inconsistent with the provisions of the Plan.
Each Option and Award 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 of Article II
-------------
hereof, each Award Agreement shall specify the period of time with respect to
which the Option is granted and exercisable and/or whether the exercise of the
Option is conditioned upon the Company achieving certain performance objectives,
as determined by the Committee, and shall provide that the Option shall expire
at the end of such period. In no event shall any Incentive Stock Option be
exercisable after the expiration of ten (10) years from the date of grant
provided, however, that if the exercise price of the Incentive Stock Option is
determined pursuant to Section 4(c)(2) of Article II hereof, an Incentive Stock
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 to grant 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
<PAGE>
Page 5
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) of this Section 4(c).
(d) Exercise of Incentive Stock Option.
----------------------------------
(1) Each Award Agreement shall state whether such Option will or will
not be treated as an Incentive Stock Option. No Incentive Stock Option shall be
granted unless such Option, when granted, qualifies as an "incentive stock
option" under Section 422 of the Code. No Incentive Stock Option shall be
granted to any individual otherwise eligible to participate in the Plan who is
not an employee of the Company or any Subsidiary on the date of granting of such
Option. Any Incentive Stock Option granted under the Plan shall contain such
terms and conditions, consistent with the Plan, as the Committee may determine
to be necessary to qualify such Option as an "incentive stock option" under
Section 422 of the Code. Any Incentive Stock Option granted under the Plan may
be modified by the Committee to disqualify such Option from treatment as an
"incentive stock option" under Section 422 of the Code.
(2) Subject to subsection (3) below, the Award Agreement may provide
that the Option may be exercised in such installments as the Committee may
determine during the option period.
(3) 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 for the first time by any Key Employee during any one
calendar year (under this Plan and all other 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
<PAGE>
Page 6
shares and identifying the certificate as Incentive Stock Option shares in the
Stock transfer records of the Company.
(e) Exercise During Employment or Following Retirement, Termination,
----------------------------------------------------------------
Disability or Death. Unless otherwise provided in the terms of an Award
- -------------------
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, as determined by the Committee,
disability (as such term is defined in the Company's long-term disability plan)
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 the
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. Except as specifically set
forth in the Award Agreement, termination of continuous employment for any other
reason, other than for "cause" (as such term is defined in the Optionee's Award
Agreement), shall result in the cancellation of the Option as of the thirtieth
(30th) day following the date of employment termination. The Award Agreement
shall provide whether, and if so, to what extent, an Award may be exercised
after termination of an Optionee's employment for "cause."
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. Except as provided by the Committee, 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.
<PAGE>
Page 7
(g) No Rights as Shareholder. No Optionee or other person shall
------------------------
become the beneficial owner or have any rights to dividends or other rights of 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.
5. Disposition of Shares by Key Employees. 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 shares
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. The Committee may require an Optionee to give prompt Notice
(as such term is defined below) to the Company concerning any disposition of
shares of Stock received upon the exercise of an Incentive Stock Option within:
(i) two (2) years from the date of granting such Incentive Stock Option to such
Optionee or (ii) one (1) year from the transfer of such shares of Stock to such
Optionee or (iii) such other period as the Committee may from time to time
determine. The Committee may direct that an Optionee with respect to an
Incentive Stock Option undertake in the applicable Award Agreement to give such
notice described in the preceding sentence, at such time and containing such
information as the Committee may prescribe, and/or that the certificates
evidencing shares of Stock acquired by exercise of an Incentive Stock Option
refer to such requirement to give such notice. Notice shall mean written notice
actually received by the Company at its executive offices on the day of such
receipt, if received on or before 1:30 p.m., on a day when the Company's
executive offices are open for business, or, if received after such time, such
notice shall be deemed received on the next such day, which notice may be
delivered in person to the Company's Chief Financial Officer or sent by
facsimile to the Company, or sent by certified or registered mail or overnight
courier, prepaid, addressed to the Company at __________, Attention: Michael J.
Hughes.
6. Code Requirements for Incentive Stock Options. Each Incentive
---------------------------------------------
Stock Option Award 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 the Option is exercised will be paid to the Company at the time of
exercise: (i) in United States dollars by personal check, bank draft, money
order or wire transfer; (ii) if permitted by applicable law, with Stock, duly
endorsed for transfer to the Company, already owned by the Optionee for at
<PAGE>
Page 8
least six (6) months prior to the tender thereof and not used for another such
exercise during such six (6) month period, having a total fair market value on
the date of such exercise of the Option equal to such purchase price of such
shares of Stock, or (iii) by any combination of the consideration provided for
in the foregoing clauses (i) and (ii). Upon exercise of an Option, the Optionee
must accompany the payment of the purchase price of the Option with the full
payment of applicable taxes, if any, in accordance with Section 11 of Article VI
below.
3. Procedure for Exercising Options. (a) 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 Award Agreement.
(b) An Option may be exercised, subject to the applicable provisions
of the Plan relative to its termination and limitations on its exercise, from
time to time only by (i) Notice of intent to exercise the Option with respect to
a specified number of shares and, contemporaneously with delivery of such Notice
and (ii) tender of the purchase price as provided in Section 2 of Article III
hereof. Each such Notice and payment shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Chief Financial Officer of the
Company at its executive offices.
4. Buy-Out of Options. To the extent provided in each Optionee's
------------------
Award Agreement, the Company may purchase the Options from the Optionee in an
amount based on the difference between the fair market value of the Options (as
such term is described in Section 4(c)(1) of Article II) on the date of such
purchase and the exercise price of the Options.
IV. STOCK APPRECIATION RIGHTS
1. Stock Appreciation Rights. Subject to the provisions of the Plan,
-------------------------
the Committee may grant stock appreciation rights ("SARs") to Key Employees from
time to time in accordance with the provisions of this Article IV. Each SAR
shall be subject to all the applicable provisions of the Plan, including the
following terms and conditions, and to such other terms and conditions not
inconsistent therewith as the Committee shall determine and which are set forth
in the applicable Award Agreement.
2. General Terms and Conditions. SARs 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 SAR granted to a Key Employee shall
entitle the Key Employee to receive from the Company an amount equal to the
positive difference, if any, between the fair market value of a share of Stock
at the time the SAR is granted and the fair market value of a share of Stock on
the date of exercise of the SAR.
3. Grants. SARs 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, SARs must be granted concurrently with the Incentive
Stock Options to which they relate. With respect to Nonqualified Stock Options,
SARs may be granted concurrently or at any time thereafter or prior to the
exercise or expiration of the Nonqualified Stock Options to which they relate.
<PAGE>
Page 9
4. Exercise.
--------
(a) No SAR shall be exercisable earlier than six months after its
grant.
(b) A SAR 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 SAR 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 Stock
-------
valued at the then fair market value thereof, in cash, or a combination of cash
and shares of Stock, as determined by the Committee. In the case of SARs granted
in tandem with Incentive Stock Options, the Committee shall establish the
form(s) of payment at the date of grant.
6. Tandem Incentive Stock Option/SAR. Whenever an Incentive Stock
---------------------------------
Option and SAR are granted together and the exercise of one affects the right to
exercise the other, the following requirements shall apply:
(a) The SAR shall expire no later than the expiration of the
corresponding Incentive Stock Option;
(b) The SAR may be for no more than the difference between the
exercise price of the corresponding Incentive Stock Option and the market price
of the Stock subject to the Incentive Stock Option at the time the SAR is
exercised;
(c) The SAR may be transferred only when the corresponding Incentive
Stock Option is transferable, and under the same conditions;
(d) The SAR may be exercised only when the corresponding Incentive
Stock Option is eligible to be exercised; and
(e) The SAR may be exercised only when the market price of the Stock
subject to the Incentive Stock Option exceeds the exercise price of the Stock
subject to such Incentive Stock Option.
7. Non-Transferable. The holder of a SAR may not transfer or assign
----------------
the SAR 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.
<PAGE>
Page 10
V. RESTRICTED STOCK
1. Restricted Stock. Subject to the provisions of the Plan, the
----------------
Committee may grant shares of restricted Stock ("Restricted Stock") to Key
Employees from time to time in accordance with this Article V. All awards of
Restricted Stock shall be subject to all the applicable provisions of the Plan,
including the following terms and conditions, and to such other terms and
conditions not inconsistent therewith as the Committee shall determine and which
are set forth in the applicable Award Agreement.
2. Grants. At the time of making a grant of Restricted Stock to a
------
Key Employee, the Committee shall determine the number of shares of Restricted
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 Stock
may vest in the Key Employee, the price (if any) to be paid for the Restricted
Stock, and any other terms and conditions which the Committee may deem
appropriate, including the establishment of criteria which would permit the
Restricted Stock to vest on an accelerated basis.
3. Certificates and Payment. Each recipient of Restricted Stock
------------------------
hereunder, may, but need not, be issued one or more stock certificates in
respect of shares of Restricted Stock. Stock certificates for shares of
Restricted Stock shall be registered in the name of the recipient but shall be
appropriately legended and returned to the Company by the recipient, together
with a stock power, endorsed in blank by the recipient. As the Committee, in its
discretion, may deem appropriate, in lieu of the issuance of certificates for
any shares of Restricted Stock during the restricted period a "book entry"
(i.e., a computerized or manual entry) may be made in the records of the
- -----
Company, or its designated stock transfer agent, to evidence the ownership of
such shares of Restricted Stock in the name of the applicable recipient. Such
records of the Company or such agent shall, absent manifest error, be binding on
all recipients of Restricted Stock hereunder. At the expiration of the
restricted period, the Company shall deliver to the recipient of the Restricted
Stock (or his legal representative) stock certificates representing shares of
Restricted Stock which have vested.
4. Termination of Employment. In the event a recipient of Restricted
-------------------------
Stock 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
Stock which have not previously vested in the recipient shall be forfeited to
the Company. In the event employment terminates due to the recipient's death or
disability, all shares of Restricted Stock shall immediately vest in the
recipient.
5. Rights of Recipient of Restricted Stock. The recipient of shares
---------------------------------------
of Restricted Stock shall be entitled to vote shares of Restricted Stock and
shall be entitled to all dividends paid thereon, except that dividends paid in
Stock or other property shall be subject to the same restrictions to the extent
determined by the Committee.
<PAGE>
Page 11
VI. MISCELLANEOUS PROVISIONS
1. Adjustments in Event of Change in Stock. (a) The existence of
----------------------------------------
the Plan and the Awards granted hereunder shall not affect in any way the right
or power of the Board or the stockholders of the Company to make or authorize
any adjustment, recapitalization, reorganization or other change in the
Company's capital structure or its business, any merger or consolidation of the
Company or any Subsidiary, any issue of debt, preferred or prior preference
stock ahead of or affecting Stock, the authorization or issuance of additional
shares of Stock, the dissolution or liquidation of the Company or any
Subsidiary, any sale or transfer of all or part of its assets or business or any
other corporate act or proceeding.
(b)(i) In the event of any change in the Stock of the Company by
reason of any stock dividend, stock split, reverse stock split, subdivision,
recapitalization, reclassification, reorganization, merger, consolidation
(whether or not the Company is a surviving corporation), combination, or
exchange of shares of Stock, separation, or in the event of an extraordinary
dividend, "spin-off," liquidation, other substantial distribution of assets of
the Company or acquisition of property or stock, or rights offering to purchase
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 Award Agreements and
the purchase price per share thereof, as well as benefits, rights and features
relating to SARs and shares of Restricted 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.
(ii) Fractional shares of Stock resulting from any adjustment in
Awards pursuant to this subsection 1(b) shall be aggregated until, and
eliminated at, the time of exercise of the affected Awards. Notice of any
adjustment shall be given by the Committee to each Key Employee whose Award has
been adjusted and such adjustment (whether or not such notice is given) shall be
effective and binding for all purposes of the Plan.
2. Compliance With Other Laws and Regulations. (a) 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 SARs and the
grant of Restricted 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.
(b) If at any time counsel to the Company shall be of the opinion that
any sale or delivery of shares of Stock pursuant to an Award is or may be in the
circumstances unlawful or result in the imposition of taxes on the Company under
the statutes, rules or regulations of any applicable jurisdiction, the Company
shall have no obligation to make such sale or delivery, or to make any
application or to effect or to maintain any qualification or registration under
the
<PAGE>
Page 12
Securities Act of 1933, as amended, or otherwise with respect to shares of Stock
or Awards, and the right to exercise any Award shall be suspended until, in the
opinion of said counsel, such sale or delivery shall be lawful or will not
result in the imposition of taxes on the Company.
(c) Upon termination of any period of suspension under this Section 2,
any Award affected by such suspension which shall not then have expired or
terminated shall be reinstated as to all shares available before such suspension
and as to the shares which would otherwise have become available during the
period of such suspension, but no suspension shall extend the term of any Award.
3. Modification of Awards. At any time, and from time to time, the
----------------------
Board may authorize the modification of any outstanding Award, provided no such
modification, extension or renewal shall confer on the holder of said Award any
right or benefit which could not be conferred by the grant of a new Award at
such time or materially impair the Award without the consent of the holder of
the Award.
4. Amendment and Termination of the Plan. The Board may amend,
-------------------------------------
suspend or terminate the Plan except that no action of the Board may increase
(other than as provided in Section 1 of Article VI hereof) the maximum number of
shares of Stock 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 Awards may be exercised, unless such action of the Board shall be
subject to approval or ratification by the shareholders of the Company.
5. Interpretation of Incentive Stock Options. The terms of the 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 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.
6. No Rights to Continued Employment. The Plan and any Award granted
---------------------------------
hereunder 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 a
Key Employee to terminate the Key Employee's employment at any time.
7. No Rights to be Granted an Award. The adoption of the Plan shall
--------------------------------
not be deemed to give any employee of the Company or any Subsidiary or any other
person any right to be selected to participate in the Plan or to be granted an
Award under the Plan.
8. No Rights to Other Payments. Nothing contained in the Plan or in
---------------------------
any Award Agreement shall be deemed to give any employee the right to receive
any bonus, whether payable in cash or in Stock, or in any combination thereof,
from the Company or any Subsidiary, nor be construed as limiting in any way the
right of the Company or any Subsidiary
<PAGE>
Page 13
to determine, in its sole discretion, whether or not it shall pay any employee
bonuses, and, if so paid, the amount thereof and the manner of such payment.
9. 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 the
Plan to such extent as the Board 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.
10. Acceleration of Exercisability on Change in Control. (a) Upon a
---------------------------------------------------
Change in Control of the Company, all Options and SARs theretofore granted and
not previously exercisable and all Restricted Stock theretofore granted but
still subject to forfeiture, may, in the discretion of the Committee, become
fully exercisable, in the case of Options and SARs, or fully vested, in the case
of Restricted Stock, to the same extent and in the same manner as if they had
become exercisable or vested by passage of time or by virtue of the Company
achieving certain performance objectives in accordance with the relevant
provisions of the Plan and any Award Agreement.
For purposes of the Plan, a "Change in Control" of the Company shall
mean:
(i) a change in the Board during any twenty-four (24) month period
ending on or after the effective date of the Plan, 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;
(ii) the acceptance and completion of a tender 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, as
amended (the "Securities Act"), 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) immediately prior to 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
<PAGE>
Page 14
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 Act, 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.
(b) Notwithstanding anything set forth in Section
10(a)(i),(ii),(iii),(iv) or (v) of this Article VI, a Change in Control of the
Company shall not be deemed to have occurred by virtue of Evercore Capital
Partners, L.P. and Affiliates increasing its interest in the Company's capital
stock by any amount.
(c) The Committee may, in its discretion, provide that an Award cannot
be exercised after a Change in Control, to the extent that such Award becomes
subject to any acceleration, adjustment or conversion in accordance with Section
10(a) of this Article VI.
11. Tax Withholding Obligations. (a) The Company and/or any
---------------------------
Subsidiary are authorized to take whatever actions are necessary and proper to
satisfy all obligations of recipients of Awards under the Plan (including, for
purposes of this Section 11, any other person entitled to exercise an Award
pursuant to the Plan or an Award Agreement) for the payment of all Federal,
state, local and foreign taxes in connection with any Award (including, but not
limited to, actions pursuant to the following paragraph (b) of this Section 11).
(b) Each recipient of Awards under the Plan shall (and in no event
shall Stock be delivered to an Award recipient with respect to an Award until),
no later than the date as of which the value of the Award first becomes
includible in the gross income of the Award recipient for income tax purposes,
pay to the Company in cash, or make arrangements satisfactory to the Company, as
determined in the Committee's discretion, regarding payment to the Company of,
any taxes of any kind required by law to be withheld with respect to the Stock
subject to such Award, and the Company and any Subsidiary shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to such recipient. Notwithstanding the above, the
Committee may, in its discretion and pursuant to procedures approved by the
Committee, permit the recipient to (i) elect withholding by the Company of Stock
otherwise deliverable to such recipient pursuant to such Award (provided,
however, that the amount of any Stock so withheld shall not exceed the minimum
required withholding obligation taking into account the recipient's effective
tax rate and all applicable Federal, state, local and foreign taxes) and/or (ii)
tender to the Company Stock owned by such recipient (or by such recipient and
his or her spouse jointly) and acquired more than six (6) months prior to such
tender in full or partial satisfaction of such tax obligations, based, in each
case, on the fair market value of the Stock on the payment date as determined by
the Committee.
12. Unfunded Plan. The Plan shall be unfunded. The Company shall
-------------
not be required to establish any special or separate fund or to make any other
segregation of assets to assure the issuance of shares of Stock or the payment
of cash upon exercise or payment of any
<PAGE>
Page 15
Award. Proceeds from the sale of shares of Stock pursuant to Awards granted
under the Plan shall constitute general funds of the Company. The expenses of
the Plan shall be borne by the Company.
13. Stock Acquired for Investment Purposes. The Committee may
--------------------------------------
require each person receiving Stock in connection with any Award under the Plan
to represent and agree with the Company in writing that such person is acquiring
the shares of Stock for investment without a view to the distribution thereof.
The Committee, in its absolute discretion, may impose such restrictions on the
ownership and transferability of the shares of Stock purchasable or otherwise
receivable by any person under any Award as it deems appropriate. Any such
restrictions shall be set forth in the applicable Award Agreement, and the
certificates evidencing such shares of Stock may include any legend that the
Committee deems appropriate to reflect any such restrictions.
14. Acceptance of Plan Terms. By accepting any benefit under the
------------------------
Plan, each recipient of an Award under the Plan and each person claiming under
or through such recipient shall be conclusively deemed to have indicated their
acceptance and ratification of, and consent to, all of the terms and conditions
of the Plan and any action taken under the Plan by the Committee, the Company or
the Board, in any case in accordance with the terms and conditions of the Plan.
15. No Rights to Additional Compensation. Neither the adoption of
------------------------------------
the Plan nor anything contained herein shall affect any other compensation or
incentive plans or arrangements of the Company or any Subsidiary, or prevent or
limit the right of the Company or any Subsidiary to establish any other forms of
incentives or compensation for their employees or directors, or grant or assume
options or other rights otherwise than under the Plan.
16. Limits of Liability. (a) Any liability of the Company or any
-------------------
Subsidiary to any recipient of an Award under the Plan with respect to any Award
shall be based solely upon contractual obligations created by the Plan and the
Award Agreement.
(b) Neither the Company nor any Subsidiary nor any member of the
Committee or the Board, nor any other person participating in any determination
of any question under the Plan, or in the interpretation, administration or
application of the Plan, shall have any liability, in the absence of bad faith,
to any party for any action taken or not taken in connection with the Plan,
except as may expressly be provided by statute.
17. Governing Law. The Plan shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without regard to such
state's choice of law provisions, except as superseded by applicable Federal
law.
18. Definitions. The words "Article," "Section" and "paragraph"
-----------
shall refer to provisions of the Plan, unless expressly indicated otherwise.
Wherever any words are used in the Plan or any Award Agreement in the masculine
gender they shall be construed as though they were also used in the feminine
gender in all cases where they would so apply, and wherever
<PAGE>
Page 16
any words are used herein in the singular form they shall be construed as though
they were also used in the plural form in all cases where they would so apply.
19. Duration. Following the adoption of the Plan by the Board, the
--------
Plan shall become effective as of the date on which it is approved by the
holders of a majority of the Company's outstanding Stock which is present and
voted at a meeting, or by written consent in lieu of a meeting, which approval
must occur within the period ending twelve (12) months after the date the Plan
is adopted by the Board. The Plan shall terminate upon the earliest to occur of:
(a) the effective date of a resolution adopted by the Board
terminating the Plan;
(b) the date all shares of Stock subject to the Plan are delivered
pursuant to the Plan's provisions; or
(c) ten (10) years from the date the Plan is approved by the
Company's shareholders.
No Award may be granted under the Plan after the earliest to occur of the events
or dates described in the foregoing paragraphs (a) through (c) of this Section
19; however, Awards theretofore granted may extend beyond such date.
No such termination of the Plan shall affect the previously accrued
rights of any recipient of an Award hereunder and all Awards previously granted
hereunder shall continue in force and in operation after the termination of the
Plan, except as they may be otherwise terminated in accordance with the terms of
the Plan or an Award Agreement.
20. Successors and Assigns. The 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, the Plan shall be binding
upon and, if required, shall be adopted by the shareholders of said successor
entity. The obligations created under the Plan regarding adoption,
implementation and exercise under the Plan shall be binding upon said successor
entity.
